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FOREIGN DIRECT INVESTMENT IN INDIA

Updated: Jun 16

Written by Tanushree Jaiswal, University of Allahabad

Meaning & Eligibility:

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999.

Generally FDI in two form are allowed Joint venture or wholly owned subsidiary.

Meaning of FDI: FDI means investment made by non-resident entity or person resident outside India (PROI) in capital of Indian company or Indian entity.

Who can Make FDI :

1. Any person who is PROI can make FDI.

2. If that PROI is citizen of Pakistan or entity incorporated in Pakistan they can make FDI only under approval route in sectors other than Defence, Space and Atomic energy.

3. PROI who is citizen of Bangladesh and entity of Bangladesh can make FDI with C.G. approval.

4. NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis,

5. Foreign Institutional Investor (FII) and Foreign Portfolio Investors (FPI) may in terms of Schedule 2 and 2A of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, as the case may be respectively invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit or FII/FPI investment to 24% of the capital of the economy.

6. This aggregate limit of 24% can be increased to the sectorial cap/statutory ceiling, as applicable, by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII/FPI investment, individually or in conjunction with other kinds of Foreign investment, will not exceed sectoral/statutory cap.

ENTRY ROUTES FOR INVESTMENT IN INDIA:

Foreign Direct Investment (FDI) can be made under two routes:

1. Automatic Route, and

2. Government Route

INDUSTRIAL POLICY TOWARDS FDI:

Foreign Direct Investment may be by way of investment in equity shares, fully compulsorily convertible preferences shares, fully compulsorily convertible debentures ADR/GDR and FCCB.

Foreign Investment in shares in any industry up to 100% is permitted except the following:

1. Proposals falling under Compulsory Industrial Licensing

2. Investment in Defense Sector: FDI beyond 49% has now permitted through Government Approval Route.

3. Investments in Small Scale Industrial Units: A Foreign Investor can invest in an Indian company which is a Small Scale Industrial Unit provided if is not engaged in any activity which is prohibited under the FDI policy. Such investments are subject to a limit of 24% of paid- up capital of the Indian Company/ SSI Unit.


PROHIBITION ON INVESTMENT IN INDIA:

1. Lottery Business including Government/ Private lottery, online lotteries, etc.

2. Gambling and Betting including casinos etc.

3. Chit funds

4. Nidhi company

5. Trading in Transferable Development Rights (TDRs)

6. Real Estate Business or Construction of Farm Houses

7. Real estate businesses shall not include development of townships, construction of residential/ commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.

8. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

9. Activities/sectors not open to private sector Investment e.g. -

a) Atomic Energy and

b) Railway operations (other than permitted activities).

FDI - PERMITTED SECTORS:

1. Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions;

2. Development and Production of seeds and planting material;

3. Animal Husbandry (including breeding of dogs), Pisiculture, Aquaculture, under controlled conditions; and

4. Services related to agro allied sectors

5. Tea sector including tea plantations

6. Mining and Exploration of metal and non-metal ores

7. Coal & Lignite

8. Petroleum & Natural Gas

9. Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)

10. Defense Industry subject to Industrial license under Industries (Development & Regulation) Act, 1951

11. Broadcasting Carriage Services

12. Broadcasting Content Services

13. Print Media

14. Civil Aviation

15. Airports

16. Air Transport Services

17. Courier services

18. Construction Department: Townships, Housing, Built- up Infrastructure

19. Industrial Parks

20. Satellites- establishment and operation

21. Private Security Agencies

22. Telecom Services

23. Cash & Carry Wholesale Trading/Wholesale Trading

24. E- commerce activities

25. Single Brand product retail trading

26. Multi Brand Retail Trading

27. Railway Infrastructure

28. Asset Reconstruction Companies

29. Banking- Private Sector

30. Banking- Public Sector

31. Commodity Exchanges

32. Credit Information Companies (CIC)

33. Infrastructure Company in the Securities Market

34. Insurance

35. Non- Banking Finance Companies (NBFC)

36. Pharmaceuticals

37. Power Exchanges

CONCLUSION:

Foreign Direct Investment (FDI) in India is a major monetary source for economic development in India.

In 2018- 19, total FDI into the country stood at USD 62 billion, an increase from USD 60.1 billion in 2017- 18.

Foreign companies invest directly in fast growing private Indian businesses to take benefits of Cheaper wages and Changing business environment of INDIA.



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