Foreign Direct Investment

WHAT IS Foreign Direct Investment (FDI)?

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Foreign Direct Investment (FDI) is an investment from a party in one country into the business/corporations of another country with the intention of having a “lasting interest”. Here the “lasting interest” is determined when the investing party acquires a share of at least 10% voting right in other organisation. Therefore, the element of control is the key differentiator between Foreign Direct Investment & Foreign portfolio investment (FPI).

According to the organisation of economic co-operation & development (OECD), an investment of 10% or above in the foreign country can be termed as a Foreign Direct Investment. FDI in India is regulated by the apex bank viz. Reserve bank of India (RBI) under the Foreign exchange management act, 2000 (FEMA).   

Since the liberalisation of the Indian economy in 1991, the climate of Investment has improved exponentially. This is more or else because of ease in FDI reforms across sectors. To attract a huge chunk of investors from outside, Government of India (GOI) has made policy of FDI in India in such a way that it is more transparent & easy to understand for any investors.

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FDI in India is not just restricted to the movement of capital across borders but it also includes movement of other elements such as skills, technology, process & management etc.

WHAT ARE THE TYPES OF FDI?

On the basis of Investment-

  1. Horizontal FDI: When a business expands its operational activities in the same product/service to a foreign country then it is termed as Horizontal FDI. For example: If a local manufacturer in USA opens up their manufacturing branch in India, then this is a classic case of Horizontal FDI.
  2. Vertical FDI: When the style of your business activities is changed while investing in host country as compared to your home country. This could be to provide support service to their actual business or does not relate to it at all. For example: MacDonald’s opens up a meat production house in Australia to support their actual business of food restaurants in India.
  3. Conglomerate FDI: Acquiring an unrelated business in a foreign country. This is not commonly opted for because of certain barriers which are associated with this such as i) entering in a foreign country ii) unrelated industry & market iii) leaving comfort zone.

On the basis of entry routes-

These policies are different from region to region. Considering FDI in India, these are the two routes through which one can enter into Indian market.

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1.Automatic route

Under this investment type of FDI in India, an entity does not need to take prior approval of the Government of India or the Reserve Bank of India, in all activities which are specified in the FEMA regulation number 16. This brings in convenience to the investors who are planning to invest in Indian market.

2. Government route

  • Activities which are not covered under the automatic route of Foreign Direct Investment require prior approval of the Government of India/Reserve bank of India.
  • A single point of contact for all government approval is being initiated by the government through a Foreign Investment facilitation portal (FIFP) under Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
  • Click on the link mentioned to understand the standard operating procedure (SOP) and the approval of various ministerial departments for different categories of business {http://fifp.gov.in/Forms/SOP.pdf}

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