Foreign Investment Policies In India


Under the current circumstances, one cannot ignore the impact and influence of the foreign investment policies for the healthy and thriving economy of any particular country. India is no exception to this rule. 

Broadly speaking, foreign investment policies are meant for direct investment into the business or production of the country by any individual of another country or any foreign company. Investment may result in buying a company altogether in any foreign land or simply expansion of its operations of the existing investments and businesses in that particular foreign country.

In India, the foreign investment is directly administered and managed by the Foreign Exchange Management Act, 1999 and  Foreign Direct Investment of the Government of India.

The two most vital concerns of the FDI policy are as follows:

  1. To sustain the healthy and sustainable economic growth of India, foreign investments are an indispensable part
  2. Providing necessary protection of the strategic interest sectors like telecommunications and defence

The Indian government has recently allowed Non-resident Indians or NRIs and the Foreign Institutional Investors or FIIs to directly invest in the insurance sector. This investment is done through the automatic route maintaining the 26% cap towards Foreign Direct Investment or FDI. Previously foreign investment was allowed in third party administrators, insurance brokers, insurance based on the Insurance Act. But now this is being regulated by the revised FDI policy as an advanced attracting tool amongst the potential investors prevalent in the market.

The foreign investors are liable to obtain the relevant license from the Insurance Regulatory and Development Authority to undertake the investments related to insurance. For the insurance companies promoted by the banks, the private sector banking norms by FDI are applicable. Under this sector, the automatic route is followed to 49% while the government route ranges from 49% to 74%.

When critically observed, it is evident that most of the popular insurance companies currently functioning in India are in foreign collaboration. There have been several political issues because of which the government has remained unsuccessful until now to raise the limit of FDI in that sector to 49% from 26%. In the case of the insurance sector, the law mentions that the limit cannot be elevated through the normal parliamentary proceeds. This approach is different from most of the other sectors where the percentage of limits remains mentioned in the FDI policy.

Types and classifications of FDI

Foreign Direct Investments can be broadly classified into four types. These are as follows:

  1. Horizontal FDI

This is the commonest form of foreign direct investment. This chiefly revolves around the investment of funds in a foreign company that belongs to the same industry as the one owned and/or operated by the concerned FDI investor. Under this system, the concerned company invests in a second company situated in a foreign land. But, both companies must be necessarily producing or dealing with similar goods. For example, if an apparel producing company invests in another foreign apparel producing company, it will be regarded as horizontal FDI. 

  1. Vertical FDI

The instance of vertical FDI happens when investment happens within a supply chain of a particular company without any compulsion of it belonging to the same industry. In the case of vertical FDI, any particular business invests in a foreign firm which may sell and/or supply products. Vertical FDIs have been further classified into forwarding vertical integrations and backward vertical integrations. For instance, if the famous Swiss coffee-producing company invests in coffee plantations of countries like Vietnam, Brazil, Columbia. As the investing firm buys a supplier belonging to the supplier chain, this sort of FDI is termed as backward vertical FDI. On the other hand, forward vertical FDI happens when a concerned company invests in another overseas company that ranks higher in the supply chain, for instance, an Indian coffee company willing to invest in a German grocery product.

  1. Conglomerate FDI

Conglomerate FDI happens when two entirely different companies dealing with absolutely different industries invest for the sake of business growth. In this case, the FDI is not directly linked with the business of the investor. For instance, the famous US retailer Walmart may choose to invest in Tata Motors, an Indian automobile manufacturing company.

  1. Platform FDI

In the case of platform FDI, business expansion occurs in a foreign country, but the manufactured products get exported to another third country. For instance, the world-famous French perfume brand Chanel sets up one of its units in the US and exports the manufactured goods to other countries like Europe, USA, Asia, etc.

Prohibited sectors

  • Betting and gambling
  • Lottery business including online lotteries, private lotteries, government lotteries, etc.
  • Sectors/activities that are not open to private sector investment like railways, atomic energy
  • Retails trading
  • Chit fund business
  • Nidhi company
  • Real estate businesses or farmhouse construction
  • Transferable development rights trading
  • Manufacturing of all sorts of tobacco products and tobacco substitutes including cheroots, cigarettes, cigars, etc.
  • Agriculture with exceptions in floriculture, apiculture, horticulture, cultivation of vegetables and mushrooms under controlled conditions, animal husbandry, viticulture, apiculture, etc.

Types of Foreign Investments in India

Funds sourced from foreign sources can be invested in shares, collaboration or ownership/management. On the basis of this, foreign investments can be classified into three basic subdivisions. These are as follows:

  1. Foreign Direct Investment (FDI)
  2. Foreign Portfolio Investment (FPI)
  3. Foreign Institutional Investment (FII)

Foreign Direct Investment (FDI)

This type of investment is made by an individual or company who possesses an entity in one particular country, in the form of controlling ownership towards business interests in a different country. FDI could be in the form of either establishing various sorts of business operations or through the entrance into joint ventures through acquisitions, mergers, setting up of new facilities, etc. 

Foreign Portfolio Investment (FPI)

This is the type of investment in foreign entities and NRIs in Indian securities which involves government bonds, convertible securities, shares, corporate bonds, infrastructure securities, etc. The primary intention of this sort of investment is to establish a controlling interest in India at an investment that is lower than FDI and with entry and exit flexibility.

Foreign Institutional Investment (FII)

Foreign Institutional Investor implies an institution that is incorporated or established outside the boundaries of India. It proposes to invest in Indian securities. These are registered as FIIs in Section 2(f) of the SEBI Regulations, 1995. However, FII as a separate category has recently become non-existent. FPI came to take over its place. 

Market Size

As per the records and statistics of DPIIT, the Indian equity inflow was US$500.12 billion between April 2000 and September 2020.  This indicates that the efforts undertaken by the respective government for easing out the business protocols and relaxation of the FDI norms have impacted positively. 

Between April 2020 and September 2020, the Indian FDI equity inflow was US$ 30.0 billion indicating the fact that the computer hardware and software sector have attracted the maximum FDI equity inflow of US$17.55 billion. This is closely followed by the service sector at US$ 2.25 billion, trading at US$949 million while chemicals excluding the fertilisers at US$437 million.

Between the period of April 2020 and September 2020, Gujarat received maximum FDI inflow of US$16.0 billion. This is closely followed by Maharashtra at US$3.61 billion, Karnataka at US$3.66 billion and Delhi at US$2.66 billion.

As per the data of the Reserve Bank of India, the Outward Foreign Direct Investment of India in the loan, guaranteed issue and equity stood at US$1.06 billion in November 2020 which was US$3.51 billion in October 2020.

In December 2020, the government proposed to bring changes in the prevalent guidelines of the DTH services. This proposal has been approved by the Union cabinet that will result in enabling 100% FDI towards the DTh broadcasting service market.

Road Ahead

By 2025, India is expected to attract foreign direct investors worth US$120-160 billion per year, as per the EY and CII reports and studies. Within a span of 10 years, India has already witnessed an average rise of 6.8% in GDP with FDI increasing to GDP at 1.8%.

FDI Investment Routes

There are two basic routes to make foreign direct investments:

  1. The automatic route:
    Where the Indian companies remain engaged in different types of industries is eligible for issuing shares to the foreign investors up to 100% of their respective paid-up capital towards Indian companies.
  2. Government Approval Route: 
    Is where certain activities which are uncovered under the automatic route need prior Government approval for successful FDIs.

Category 1: These are the sectors where FDI is permitted up to 100% under the automatic route.

Category 2: These are the sectors where FDI is permissible up to 100% under the government route

Category 3: These are the sectors in which FDI is permissible beyond a certain fixed limit with the government

Category 4:These are the sectors where FDI is permissible up to a particular fixed limit under both the automatic route as well as the government route and are subject to certain applicable regulations/laws, security and other conditions. 

Procedure of Government Approval for FDI

The new online interface of the Indian Government is Foreign Investment Facilitation Portal (FIFP). It has been established to facilitate the process of foreign direct investment. After the abolition of the Foreign Investment Promotion Board by the concerned government, the job of granting the necessary government approval to the foreign investments has been entrusted upon the concerned Administrative departments and ministries following the FDI policy and the FEMA regulations. Eleven sectors require such government approvals. These are as follows:

  1. Mining. Defence/cases related to FDI in small arms
  2. Broadcasting
  3. Print media
  4. Civil aviation
  5. Satellites
  6. Private security agencies
  7. Trading (single, food products and multi-brand)
  8. Financial services that are regulated or not regulated by multiple regulators as per the prevalent FDI policy
  9. Pharmaceuticals

FDI Reporting Requirements

The prevalent protocol states that within 30 days of the receipt of the funds from the foreign investor, the Indian company is liable to inform the respective regional office of the Reserve bank Of India. Within 30 days, from the date of the issue of the shares, a report in Form FC-GPR along with the following documents attached must be duly filed at the regional RBI office:

  1. Certificate from the Secretary of the concerned company accepting investment from the foreign source
  2. Certificate of the Chartered Accountant or Statutory Auditors mentioning the arrival of the price of the shares issued to the concerned foreign investor.

In this context, it must be kept in mind that the government of India has revised the existing FDI policy by incorporating certain amendments for blocking the “opportunistic” strategies of the Chinese firms taking over the Indian firms. 

Guidelines/rules/acts that regulate FDI in India:

  1. Foreign Contribution (Regulation) Act, 2010
  2. Foreign Contribution (Regulation) Rules, 2011
  3. Occasional issue of the orders and other relevant notifications
  4. FCRA, 1976 repealed after the advent of FCRA, 2010

FDI has significantly affected the overall growth and maintenance of the healthy economy of the country. Moreover, with the current approaches, India will reap even better benefits in future. There are many investment opportunities for investors. The countrymen will witness all-round development that will positively affect their daily lives and Workfront with enhanced prospects and better opportunities. Our country is already enriched with both natural as well as human resources, along with a strong banking system, liberal foreign investment policies that make it a lucrative destination for foreign investments from across the globe. 

Some of the major advancements that the country has witnessed through successful FDIs are rural development, enhanced employment opportunities, economic development, technological development. The combined effects of several innovations, software advancements and technology that have traversed the country through FDIs have impacted the overall economic growth of India. Previously, the employment opportunities were fixed, rigid, still and bleak. But currently, there have been significant enhancements in employment opportunities and rates as FDI has generated plenty of job prospects thus ensuring the prosperity of the countrymen.

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