Foreign Direct Investment [FDI]

Foreign Direct Investment (FDI) is direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages or for special investment privileges such as tax exemptions offered by the country as an inducement to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

Foreign Direct Investment in India (FDI)

Foreign Direct Investment (FDI) is permited as under the following forms of investments

  • Through financial collaborations.
  • Through joint ventures and technical collaborations.
  • Through capital markets via Euro issues.
  • Through private placements or preferential allotments.

    • Forbidden Territories:

    FDI is not permitted in the following industrial sectors:

  • Arms and ammunition.
  • Atomic Energy.
  • Railway Transport.
  • Coal and lignite.
  • Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

    • Foreign direct investments in India are approved through two routes

    Automatic approval by RBI :The Reserve Bank of India accords automatic approval within a period of two weeks (subject to conformity of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are wide-ranging and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily occupied in exporting are given almost automatic approval by the RBI.

    The FIPB Route :Processing of non-automatic approval cases - FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is moderate for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.