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Foreign Direct Investment

Foreign direct investment (FDI) refers to investment made by a company or entity located in one country into business interests located in another country. FDI provides benefits to both the investing and receiving countries through increased jobs, infrastructure development, and higher living standards in the receiving country as well as profits and returns for investors. Common types of FDI include outward investment by a country into other nations and inward investment into a country from foreign entities. While most sectors allow up to 100% foreign ownership under an automatic approval route, some sectors require government approval and certain industries are prohibited from FDI.

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113 views2 pages

Foreign Direct Investment

Foreign direct investment (FDI) refers to investment made by a company or entity located in one country into business interests located in another country. FDI provides benefits to both the investing and receiving countries through increased jobs, infrastructure development, and higher living standards in the receiving country as well as profits and returns for investors. Common types of FDI include outward investment by a country into other nations and inward investment into a country from foreign entities. While most sectors allow up to 100% foreign ownership under an automatic approval route, some sectors require government approval and certain industries are prohibited from FDI.

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Srivatsav Bhoopathy
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Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire

a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an
economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other
long-term capital, and short-term capital as shown in the balance of payments. It usually involves
participation in management, joint-venture, transfer of technology and expertise
FDI is any investment made by a foreign country in another country. FDI usually happens in developing
countries by countries that have surplus liquid money in hand.
BENEFITS OF FDI
The country which accepts FDI will benefit by increased job opportunities, higher standards of living and
better infra structure. The investing country or company usually has a 10% stake in the enterprise making
it eligible to multiply the money invested. Investors prefer FDI as there is always a higher chance that the
FDI investment will return higher than any investment made in the home country.
EXAMPLE
The Maruti-Suzuki collaboration is a successful example of FDI in India. The Suzuki corporation funded
Maruti to build factories and do research on cars in India. The maruti is entirely an Indian company and it
operates completely in India. The Suzuki enjoys a huge share of profit earned by car sales in India.
TYPES OF FDI
A country in general has two types of FDI- outward FDI and inward FDI. Any investment made by your
country in other countries will account for outward FDI. Whereas, all the FDIs invested by other
countries in your country are called inward FDI.
Policy on FDI
FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which
require approval of the Government :
Activities/items that require an Industrial Licence
Proposals in which the foreign collaborator has an existing venture/tie up in India in the same field
Proposals for acquisition of shares in an existing Indian company in the :
o Financial services sector and
o Where SEBI (Substantial Acquisition of Shares and Takeovers )Regulations, 1997 is attracted; and
All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted
Procedure for FDI under Automatic Route
FDI up to 100 % is allowed under the automatic route from foreign/NRI investor without prior approval
in most of the sectors including the services sector. FDI in sectors/activities under automatic route does
not require any prior approval either by the Government or RBI. The investors are required to notify the
Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required
documents with that office within 30 days of issue of shares to foreign investors.

Guidelines for consideration of FDI proposals by FIPB (Foreign Investment Promotion Board)
Governments decisions on FDI Proposals would be communicated by the FIPB within a time frame of
thirty (30) days. While considering proposals, FIPB can prioritize the following:
Proposals for infrastructure sector.

Proposals having export potential.


Proposals with large scale employment potential especially for rural areas.
Proposals that are directly or indirectly related to agro business/farm sector.
Proposals having greater social relevance such as hospitals, human resource development, life
saving drugs and equipment.
Proposals resulting in induction of technology or infusion of capital.

FDI prohibited
The extant policy does not permit FDI in the following cases:
Gambling and Betting, or
Lottery Business, or
Business of chit fund
Nidhi Company (It is a non-banking finance company doing the business of lending and
borrowing with its members or shareholders)
Housing and Real Estate business except for the development of townships, housing,
built-up infrastructure and construction development project
Trading in Transferable Development Rights (TDRs)
Retail Trading
Atomic Energy
Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms
etc. under controlled conditions and services related to agro and allied sectors) and
Plantations(other than Tea plantations)

Penalty
FDI is a capital account transaction and thus any violation of FDI is covered by the penal provisions of
the FEMA(Foreign Exchange Management Act). Any contravention of FDI Regulations including any
press note / press release / guidelines / direction issued by the Government shall be liable for a penalty as
provided under FEMA which could be thrice the sum involved in such contraventions where such amount
is quantifiable, or up to Rupees 200,000 where the amount is not quantifiable, and where such
contraventions is a continuing one, further penalty which may extend to Rupees 5,000 for every day
during which the contraventions continues may be imposed.

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