Foreign Direct Investment in India (FDI)
Foreign Direct Investment (FDI) is defined as “cross border investment made by a resident in one economy in an enterprise to another economy, with the objective of establishing a lasting interest in the investee economy.” This definition is analogous to the popular definition of FDI which states “investment into the business of a country by a company of another country”. It is often compared to another mode of investment, known as Foreign Institutional Investment (FII), which constitutes majority of the stock markets. FDIs, as compared to FIIs, are considered more stable and beneficial to Indian economy as the investors bringing FDI are more committed to boost India’s foreign currency reserves, whereas, FIIs are like migratory birds that fly from one exchange to another to book profits. The Finance minister of India, during his budget speech of 2013-14 clarified the definition of foreign investments by distinguishing FIIs from FDIs. Those who held a stake higher than 10 percent were classified as FDIs and those with less than 10 percent as FIIs. India forms an attractive destination for FDI because of its large market, rising disposable income and spending power. The estimated size of the Indian retail market is about $450 billion.
How can Foreign Direct Investment be made in India?
Investments can be made by non-residents, through two routes:
1. The Automatic Route: Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment.
2. The Government Route: Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance. Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. Decision of the FIPB is usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the Reserve Bank of India.
Who can Invest in India under the FDI route?
- A non-resident entity can invest in India, subject to the FDI Policy.
- A citizen of Pakistan or an entity incorporated in Pakistan can invest in India under the FDI Policy, only under the Government route in sectors/ activities other than Defence, Space& Atomic Energy and sectors prohibited for foreign investors
- A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only under the Government route.
- NRI’s resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.
The Government has put in place a policy framework on FDI, which is transparent, predictable and easily comprehensible. This framework is embodied in the Circular on Consolidated FDI Policy, which may be updated every year, to capture and keep pace with the regulatory changes, effected in the interregnum. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India makes policy pronouncements on FDI. The authorities involved in dealing with FDI in India are:
(a) Foreign Investment Promotion Board (popularly known as 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;
(e) Project Approval Board; and
Instruments for Receiving Investments through FDI in India:
Foreign investment is reckoned as FDI only if the investment is made in equity shares, fully and mandatory convertible preference shares and fully and mandatory convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments.
Foreign Direct investment in different sectors
As embodied in the Circular on Consolidated FDI Policy dated 5th April, 2013, which subsumes and supersedes all Press Notes/ Releases/ Clarifications/ Circulars, which were in force as on April 04, 2013.
(A) 26% FDI is permitted in:
2. Print media (Publishing of Newspaper and periodicals dealing with news and current affairs, publication of Indian editions of foreign magazines dealing with news and current affairs)
3. Petroleum refining
4. Pension sector (allowed in October, 2012 as per cabinet decision)
5. Up-linking of ‘News & Current Affairs’ TV Channels. (Government Route)
6. Insurance (Automatic Route)
(B) 49% FDI is permitted in:
2. Cable network (Automatic Route)
3. DTH (FDI component not to exceed 20%)(Automatic Route)
4. Infrastructure investment
5. Telecom(Automatic Route)
6. Insurance (Enhanced from 26% to 49% in October, 2012)
7. 49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26% and an FII limit of 23% of the paid-up capital is now permissible. [Permitted in September, 2012]
(C) 51% is permitted in:
1. Multi-Brand Retail (Since September, 2012)
(D) 74% FDI is permitted in:
1. Atomic Minerals
2. Science Magazines /Journals
3. Telecom (Government route)
4. Teleports, DTH Services, Cable networks, Mobile TV (Government Route)
(E) 100% FDI is permitted in:
1. Single Brand Retail (Increased to 100% from 51% in December, 2011).
2. Agriculture & Animal Husbandry
4. Coal & Lignite
7. Non-Banking Finance Companies (NBFC)
8. Industrial parks
9. Petroleum exploration
12. Wholesale trading
WHERE IS FDI NOT PERMITTED?
FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors as per the RBI’s official website (www.rbi.org.in):
1. Atomic Energy
2. Lottery Business
3. Gambling and Betting
4. Business of Chit Fund
5. 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)
6. Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification)
7. Trading in Transferable Development Rights (TDR’s).
8. Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
AMOUNT OF FDI IN INDIA
The top countries investing in India according to the data mentioned by the Ministry of External Affairs, Government of India, Investment and Technology Promotion (ITP) Division on their website updated by FICCI are:
1. Mauritius (38%)
2. Singapore (10%)
3. UK (9%)
4. Japan (7%)
5. U.S.A (6%)
6. Netherlands (5%)
7. Cyprus (4%)
8. Germany (3%)
9. France (2%)
10. UAE (1%)
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