Foreign direct investment (FDI)

What is the meaning of FDI?

According to the IMF, “FDI refers to an investment made to acquire lasting or long-term interest in enterprises

operating outside of the economy of the investor". The investment is direct because the investor, which could be

a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over

the foreign enterprise. It does not include foreign investment into the stock markets. Foreign direct investment is

thought to be more useful to a country than investments in the equity of its companies because equity

investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and

generally useful whether things go well or badly.

Multinational Enterprises (MNE) may make a direct investment by creating a new foreign enterprise, which is

called a Greenfield investment, or by the acquisition of a foreign firm, either called an acquisition or Brownfield

investment. Such investments can take place for many reasons, including to take advantage of cheaper wages,

special investment privileges (e.g. tax exemptions) offered by the country.

Why Is FDI Important?

FDI is a major source of external finance which means that countries with limited amounts of capital can receive

finance beyond national borders from wealthier countries. Exports and FDI have been the two key ingredients in

China's rapid economic growth. According to the World Bank, FDI and small business growth are the two

critical elements in developing the private sector in lower-income economies and reducing poverty.

Why Countries Seek FDI?

Domestic capital is inadequate for purpose of economic growth;

Foreign capital is usually essential, at least as a temporary measure, during the period when the capital

market is in the process of development;

Foreign capital usually brings it with other scarce productive factors like technical knowhow, business

expertise and knowledge.

What are the major benefits of FDI?

Improves forex position of the country;

Employment generation and increase in production ;

Help in capital formation by bringing fresh capital;

Helps in transfer of new technologies, management skills, intellectual property;

Increases competition within the local market and this brings higher efficiencies;

Helps in increasing exports;

Increases tax revenues.

Why FDI is opposed by local people or disadvantages of FDI?

Domestic companies fear that they may lose their ownership to overseas company;

Small enterprises fear that they may not be able to compete with world class large companies and may

ultimately be edged out of business;

Large giants of the world try to monopolise and take over the highly profitable sectors;

Such foreign companies invest more in machinery and intellectual property than in wages of the local

people;

Government has less control over the functioning of such companies as they usually work as wholly owned

subsidiary of an overseas company;

Advantages and Disadvantages: A Matter of Perspective

In the context of FDI, advantages and disadvantages are often a matter of perspective. An FDI may provide

some great advantages for the MNE but not for the foreign country where the investment is made. On the other

hand, sometimes the deal can work out better for the foreign country depending upon how the investment pans

out. Ideally, there should be numerous advantages for both the MNE and the foreign country, which is often a

developing country.

FDI & India

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then

finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his

top political problems, even in the current times. India disallowed overseas corporate bodies (OCB) to invest in

India. India imposes cap on equity holding by foreign investors in various sectors, current FDI limit in aviation

sector is maximum 49%.

Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD (United Nations Conference on Trade

and Development) survey projected India as the second most important FDI destination (after China) for

transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were

services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore,

USA and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a

drop of 43% from the first half of the last year.

Routes of FDI in India:

There are three routes through which FDI is permitted in India:

1. Automatic route:

Under this route foreign investors can straightaway brings in the investment in India. All they need to do is

inform RBI within 30 days.The government has notified the sectors which are open to foreign investors under

the automatic route e.g.infrastructure.

2. Foreign Investment Promotion Board (FIPB):

FIPB was set up in 1992. A foreign investor requires prior approval from FIPB in the sectors which are not

listed under automatic route.

3. Cabinet Committee on Foreign Investment (CCFI):

The prior approval of Cabinet Committee on Foreign Investment (CCFI) is required before the foreign

investment if:

*The sector is not is not notified in the automatic route.

* The cost of project is Rs 6000 million or more.

Explain the forms in which business can be conducted by a foreign company in India.

A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign

company which can undertake activities permitted under the Foreign Exchange Management

(Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

What is the procedure for receiving Foreign Direct Investment in an Indian company?

An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic Route: FDI is allowed under the automatic route without prior approval either of the

Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI

Policy, issued by the Government of India from time to time.

ii. Government Route: FDI in activities not covered under the automatic route requires prior approval of the

Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of

Economic Affairs and Ministry of Finance.

Name the sectors where FDI is not allowed in India, both under the Automatic Route as well as

under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i) Atomic Energy ii) Lottery Business iii) Gambling and Betting iv) Business of Chit Fund v) Nidhi Company

vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture

and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and

allied sectors) and Plantations activities (other than Tea Plantations. vii) Housing and Real Estate business

(except development of townships, construction of residential/commercial premises, roads or bridges). viii)

Trading in Transferable Development Rights (TDRs). ix) Manufacture of cigars, cheroots, cigarillos and

cigarettes, of tobacco or of tobacco substitutes.

Name the authorities dealing with Foreign Investment.

(a) Foreign Investment Promotion Board (FIPB): The Board is responsible for expeditious clearance of FDI

proposals and review of the implementation of cleared proposals. It also undertakes investment promotion

activities and issue and review general and sectoral policy guidelines;

(b) Secretariat for Industrial Assistance (SIA): It acts as a gateway to industrial investment in India and assists

the entrepreneurs and investors in setting up projects. SIA also liaison with other government bodies to ensure

necessary clearances;

(c) Foreign Investment Implementation Authority (FIIA): The authority works for quick implementation of

FDI approvals and resolution of operational difficulties faced by foreign investors;

(d) Investment Commission (e) Project Approval Board (f) Reserve Bank of India

What are the Limits for FDI in different sectors?

26% FDI is permitted in

· Defence (In July 2013, there has been no change in FDI limit but higher investment may be

considered in state of the art technology production by CCS)

· Newspaper and media **

· Pension sector (allowed in October 2012 as per cabinet decision)

· Courier Services (through automatic route)

· Tea Plantation (upto 49% through automatic route; 49-100% through FIPB route)

(B)49% FDI is permitted in :

Banking

Cable network**

DTH **

Infrastructure investment

Telecom

Insurance (in July 2013 it was raised to 49% from 26% subject to Parliament approval)

Petroleum Refining (49% allowed under automatic route)

Power Exchanges (49% allowed under automatic route)

Stock Exchanges, Depositories allowed under automatic route upto 49%

49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission

(Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent

of the paid-up capital is now permissible. [Permitted in September 2012]

(C ) 51% is Permitted in

Multi-Brand Retail (Since September 2012)

Petro-pipelines

(D) 74% FDI is permitted in

Atomic minerals

Science Magazines /Journals

Petro marketing

Coal and Lignite mines

Credit information comanies (raised from 49% to 74% in July, 2013)

(E)100% FDI is permitted in

Single Brand Retail (100% FDI allowed in single brand retail; 49% through automatic route; 49-

100% through FIPB)

Advertizement

Airports

Cold-storage

BPO/Call centres

E-commerce

Energy (except atomic)

export trading house

Films

Hotel, tourism

Metro train

Mines (gold, silver)

Petroleum exploration

Pharmaceuticals

Pollution control

Postal service

Roads, highways, ports.

Township

Wholesale trading

Telecom (raised from 74% to 100% in July, 2013 by GoI)

Asset Reconstruction Companies (increased from 74% to 100 in July, 2013. Out of this upto 49% will

be under automatic route)