Foreign Direct Investment

FDI stands for “Foreign Direct Investment”. It is an investment by foreign individual(s) or company(ies) into business, capital markets or production in the host country. FDI plays an important role in the economic development of a country. The capital inflow of foreign investors allows strengthening infrastructure, increasing productivity and creating employment opportunities in the Host country.

Foreign Direct Investment in India

Foreign direct investment policy in India is regulated under the Foreign Exchange Management Act (FEMA) 2000 administered by the Reserve Bank of India (RBI). India is one of the top five attractive location for investment. Japan bank of international cooperation continues to rate India as topmost promising country for overseas business operations.

The Government has put in place a policy framework on FDI which is transparent, Predictable, and easily comprehensible. The framework is embodied in circular which may be update.

How FDI works?

Foreign direct investments are commonly made in open economies that offer a skilled workforce and above average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over the decision-making of a foreign business.

Who can invest in India?

A non-resident can invest in India subject to FDI policy except in those sectors which are prohibited. An FII or FPI may invest in the capital of an Indian economy under the portfolio investment schemes which limits the individual holding FII or FPI below 10% of the capital of the Company. The aggregate limit of investment is 24% of the capital of the company. The aggregate limit can be increased to the sectorial cap as applicable by Indian company concerned through a resolution by its bord of director followed by special resolution to that effect and subject to prior intimation to RBI. However, a citizen of Bangladesh or an entity established in Bangladesh can invest only under government route.

* Recent amendments in FDI policy.

1. The amendments in FDI policy is to discourage opportunistic investment in Indian companies by neighbouring countries like china during the COVID-19 pandemic. 2. Recent China’s central bank has increased stake to 1.01% in HDFC bank via automatic route. 3. Revised FDI policy – Any entity of a country which shares land borders with India or where the beneficial owner of investment into India is Situated or is citizen of any such country can invest only under a Government Route.

Why Do We Need FDI?

1. Helps in balancing international payment:- FDI is the major source of foreign exchange inflow in the country. It offers a supreme benefit to country’s external borrowings as the government needs to repay the international debt with the interest over a particular period of time.

2. FDI boosts development in various fields:- For the development of an economy, it is important to have new technology, proper management and new skills. FDI allows bridging of the technology gap between foreign and domestic firms to boost the scale of production which is beneficial for the betterment of Indian economy.

3. FDI & Employment:- FDI allows foreign enterprises to establish their business in India. The establishment of these enterprises in the country generates employment opportunities for the people of India. Thus, the government facilitates foreign companies to set up their business entities in the country to empower Indian youth with new and improved skills.

4. FDI promotes exports from host country:- Foreign companies carry a broad international marketing network and marketing information which helps in promoting domestic products across the globe. Hence, FDI promotes the export-oriented activities that improve export performance of the country.

The Indian government has initiated steps to promote FDI as they set an investor-friendly policy where most of the sectors are open for FDI under the automatic route (meaning no need to take prior approval for investment by the Government or the Reserve Bank of India). The FDI policy is reviewed on a continuous basis with the purpose that India remains an investor-friendly and attractive FDI destination. FDI covers various sectors such as Defence, Pharmaceuticals, Asset Reconstruction Companies, Broadcasting, Trading, Civil Aviation, Construction and Retail, etc.

we can say that FDI plays a crucial role in the growth of Indian economy as it helps to bring new technologies, employment generation and improvement in business operations, etc.