This article on ‘Foreign Direct Investment in India – A Brief Overview‘ was written by Swaroopa Royadu, an intern at Legal Upanishad.
Foreign Direct Investment (FDI) is one of the best international investments for a country’s economic growth. Foreign Direct Investment help to hold long-term relations with the host countries. Through Foreign Direct Investment one can establish a business in another country and acquire ownership or control of such business. This article elaborates on Foreign Direct Investment, its features, legislation governing FDI in India, how FDI flows in India, the advantages of FDI, problems India is facing because of FDI, and other related information on Foreign Direct Investment.
Foreign investment means investing in another country’s assets, shares, debentures, land, etc to gain profit over some time. Foreign investment can be made by individuals, firms, or companies. With globalization, the scope of foreign investment has achieved new heights. Foreign investment has provided new opportunities for investors all over the world to invest in shares or debentures or to have manufacturing or production plant in another country and to make the best use of the available resource. Types of Foreign investment are:
- Foreign Direct Investment: The investor makes an investment in another country in the form of purchasing land, plant, machines, tools, companies/ factories, or through acquisition and mergers, by entering into joint ventures business, or by establishing subsidiaries, etc.
- Foreign Portfolio Investment: This is also called indirect investment. The investor makes an investment in another country in the form of purchasing shares, bonds, securities, etc.
Foreign Direct Investment:
FDI means making investments in another country either by acquiring ownership, controlling the stakes in the share of the company, or establishing a business in another country. The country where the investment is made is called the host country and the country that is investing is called the home country. FDI happens through:
- acquisition or merges
- setting up a business in another country
- Entering Joint venture
- Establishing subsidiaries, branches
History of FDI:
Earlier the government imposed several restrictions on FDI. In the year 1969, the government defined 3 groups to encourage FDI in India, those groups included FDI without technical collaboration, FDI with technical collaboration, and FDI with no foreign participation, this had limitations. In the year 1974, Foreign Exchange Regulation Act came into force.
The Act defined the list of industries in which foreign firms could participate with or without FDI. This Act became incompatible with pro-liberalization policies. With the introduction of the Industrial policy statement (1980 and 1982), and Technology Policy Statement (1983) government begin liberalizing FDI. It was only in the mid 90’s FDI was regarded as an important route of mobilizing financial resources over the old loan method.
Features of Foreign Direct Investment:
- FDI is the main source of the non-debt financial resources of the country.
- It involves the purchase of Physical assets.
- FDI are investments made for the long term rather than for the short term
- FDI may also include controlling and managing the business in the host country.
- FDI makes use of the available natural resource, labor, and technology of the host country.
- FDI is made in a country that has the prospect of growth and which provides a suitable environment for the home country to make profits.
Legislation Governing Foreign Direct Investment In India:
Foreign investment is regulated by government policies, sector-specific regulations, International Agreements, and codified Foreign Exchange regulations. Regulatory bodies for Foreign Direct Investment are
- Foreign Exchange Management Act (1999)
- Department for Promotion of Industry and Internal Trade.
- The Competition Commission of India scrutinizes Foreign Investment under the provisions of the Companies Act, 2002.
- The consolidation of Foreign Direct Investment Policy, 2000.
- Rules issued by Central Government.
- Regulations issued by the Reserve Bank of India under the Foreign Exchange Management Act, which is together called FDI Regulation.
- Ministry of Home Affairs.
- Foreign Exchange Management (Non-Debt instrument rule 2019) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instrument) give instructions on the mode of payment, remittance of sale, etc.
- Rules of Companies Act, 2013 are incorporated while setting up a Company.
- Companies operating through Joint ventures, subsidiaries, and holding companies are regulated by Foreign Direct Investment Policy and Foreign Exchange Management (Non-Debt Instrument Rules).
- Establishing a branch, liaison office, and project office for business in India is governed by Foreign Exchange Management (Establishment in India of a branch office or Liaison office or project office or any other place of business) Regulation, 2016.
- Regulation for Acquisition or transfer of immovable property is governed by Foreign Exchange Management (Non-Debt Instrument rule 2019)
How Foreign Direct Investment Mobilise in India?
Foreign Direct Investment can be done through:
- Automatic Route: This is the method under which investment from foreign investors can be made directly without the prior approval of the Indian government and Reserve Bank of India. 100% investment is allowed under automatic route for selected sectors. The main purpose of this route is to reduce the procedural time in taking approval However, the investors are bound to inform RBI about the amount they are investing within the stipulated time. Sectors covered under automatic route are Medical devices, Thermal power, etc.
- Government Route: This is the method where the investor has to take prior permission from Government. Sectors covered under the government route are Banking and public sector, Broadcasting content service sector, etc.
Foreign Direct Investment has increased the economic structure of our country. Because of globalization, the entire world has come in connection. Liberalization of Foreign Direct Investment has led to a larger inflow of foreign funds, which in turn has reduced the problem of unemployment and contributed to an increased standard of living for people.
Foreign Direct Investment also bought foreign technology to the country at a lower price. The continued inflow of foreign currency has helped the Reserve Bank of India to have reserves for foreign exchange. For the financial year 2021-2022, India has received the highest FDI inflow of $83.57 billion. Foreign Direct Investment is one of the boon to India as the country is receiving the maximum return from such investments.
- “Types of foreign investment in India” available at https://www.indiafilings.com/learn/foreign-investments-in-india/
- “Types of investment” available at https://trade.ec.europa.eu/access-to-markets/en/content/types-investment
- Manoj Pant and Deepika Srivastava, “ FDI in India: History, policy and Asian perspective” available at https://rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3623#:~:text=Thus%2C%201970%E2%80%9380%20was%20considered,Technology%20Policy%20Statement%20in%201983.
- Rudra Kumar Pandey, Srinivas Anirudh et.al., 21/October/2022 “The Foreign Investment Regulation Review: India” available at https://thelawreviews.co.uk/title/the-foreign-investment-regulation-review/india
- 02/Jan/2020, “What is Foreign Direct Investment” available at https://dpiit.gov.in/sites/default/files/FAQApproved-FDIPolicy-19November2020.pdf
- Fusion Law School, 07/Feb/2017, “Lecture on routes of FDI” available at https://www.google.com/search?q=routes+of+fdi&sxsrf=ALiCzsYBVNQBhbM4Q5iXO3KlOse7JR_-ag:1668842225262&ei=8YJ4Y664D8CF4-EPl9O8wAE&start=20&sa=N&ved=2ahUKEwju9Jbg2bn7AhXAwjgGHZcpDxgQ8tMDegQIARAG&biw=1280&bih=601&dpr=1.5#fpstate=ive&vld=cid:b7e4223b,vid:pf3JkNbzS8w
- Sanchi Padai, (12/June/2019) “Advantages of FDI” available at https://www.investindia.gov.in/team-india-blogs/advantages-foreign-direct-investment
- “Disadvantage of FDI in India” available at https://accountlearning.com/disadvantages-of-foreign-direct-investment-in-india/
- Shishir Gupta, (20/May/2022) “India reported the highest FDI inflow worth $83 billion in 2021-22: center” available at https://www.hindustantimes.com/india-news/india-reported-highest-fdi-inflow-worth-83-billion-in-2021-2022-centre-101653049532939.html
- “Foreign Direct Investment In India” available at https://www.investindia.gov.in/foreign-direct-investment