What Is The Foreign Direct Policy Of India

Investments made by individuals, companies or financial institutions in a foreign country to acquire business assets are termed as foreign direct investment or FDI. The investor takes up a substantial share in the paid-up equity capital of a company to acquire a controlling stake. Foreign investment in Indian company is categorized as FDI if the investor acquires 10% or more equity stake in the company.

Foreign direct investment can be made through partnerships or joint ventures with a local partner to establish a new project, by taking up a controlling stake in an existing company, mergers and acquisitions, or by setting up a Greenfield project, that is, establishing completely new business set up as a subsidiary of the parent company.

Countries, especially the developing ones, need foreign investment to fund their growth plans. Global investors, on the other hand, have the opportunity to earn higher returns on their investment. With liberalization and opening up of the economy, India has been attracting substantial foreign investment which has given fillip to its economic growth. Along with the domestic financial measures and policy changes, foreign investment has helped India consistently clock around 7% annual GDP growth rate over the last two decades.

FDI Policy in India

Though foreign investment is vital for the growth of the Indian economy, it is equally important to protect the interest of the domestic industry. With this consideration in mind, the government has put in place certain rules and regulations that govern foreign investment in India. At the same time the government also provides several incentives and benefit to foreign investment in select industrial sectors. The essence of FDI is to foster long term committed relationship for sustainable economic growth.

With the constant growth and evolution of the Indian economy, the need for foreign investment has also increased considerably. The government regularly takes steps to modify and simplify the FDI policy. Recently, the government announced its intention to make India a $5 trillion economy in the next five years. The huge amount of investment is needed to achieve this ambitious goal. Apart from domestic capital, substantial foreign investment will be required. To this effect, the government has brought about several changes in the FDI policy to attract more foreign investment in Indian company. Several restrictions have been removed or modified and investment norms have been simplified across industries to make it more attractive for foreign companies to invest in India.  Many incentives and benefits have also been extended to foreign investors.

Restrictions on Foreign Direct Investment

With regard to FDI, the industrial sector in India is broadly divided into three categories-prohibited, restricted, and unrestricted. As the name suggests, FDI is not allowed in the sectors that come under the prohibited category. In the restricted category, caps on maximum foreign direct investment in different sectors have been specified. The investment cap varies from 26% up to 74% depending on the type of industry. As it is obvious from the name, in the unrestricted category foreign investors are free to acquire as much stake as they want.

FDI Routes in India

There are basically two ways in which foreign investment can be made in India-the automatic route and the government route.

In the automatic route, there is no need for any approval from the government or the RBI for foreign companies to invest in India. The investor can invest in any company it wishes to, subject to fulfilling other terms and conditions that apply to that industry type.

The second one is the government route where government approval is compulsory. No foreign investment can be made without approval from the government.

In certain sectors, foreign investment is allowed only through the government route, whereas in some other sectors, the automatic route is allowed without any restrictions. However, there are few sectors where the automatic route of investment is permitted only up to a certain level, beyond which government approval is necessary to increase the stake further.

Examples of sectors that come under different FDI routes are mentioned below.

Automatic Route: Infrastructure, Insurance, Medical Devices, Pension, Petroleum Refining and Natural Gas, Commodity Exchanges, etc.

Government Route: Public sector Banking, Broadcasting Content Services, Print Media, Mining, etc.

Sectors which have a mix of both, automatic and government route include Telecom and Related Services, Asset Reconstruction Companies, Civil Aviation and Airports, Private Sector Banking, etc. In these sectors, an investment beyond a certain percentage requires government approval.

Sectors, where FDI is completely prohibited, include Atomic Energy, Lotteries, Chit Funds, Agriculture and Plantations, Tobacco and Allied Industry, etc.

The FDI policy in India is regularly modified and updated to cater to the changing demands of the global economy as well as India’s own economic environment. Recently, several changes were made in the foreign direct investment policy, which was notified through a press note dated September 18, 2019. These changes are aimed at easing the FDI norms, particularly in Coal and Lignite Mining, Contract Manufacturing, Single Brand Retail, and Digital Media. 

As foreign investment in Indian companies continues to grow, we can expect to achieve the ambitious goal of India becoming a $5 trillion economy.

About Author:

Hi, I am Amy Johnes, a legal expert at Ahlawat & Associates - Best corporate law firms in India.