Foreign Direct Investment (FDI) in India

Foreign Direct Investment (FDI) is one of the key components of capital inflows in globalization. India opened it’s door to FDIs in late 1990s. With liberalization of Govt policies, India was able to attract huge amount of FDI inflow in recent years. India is now considered as one of the favourite FDI destinations in the world (currently among top 20). In this page, we will discuss about definition of FDI and it’s current status in India.

Definition of FDI:

There’s no specific definition of FDI. Because various authorities and economies define FDI based on different approaches or methods. Following are the definitions of FDI provided by the Organisation for Economic Co-operation and Development (OECD), The United Nations Conference on Trade and Development (UNCTAD) and Government of India.

OECD definition:

FDI is a cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise. Ownership of at least 10% of the voting power, representing the influence by the investor, is the basic criterion used.

UNCTAD definition:

FDI is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor. FDI may be undertaken by individuals as well as business entities.

Govt of India definition:

FDI means investment by non-resident entity or person resident outside India in the capital of the Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

What about Assams.info definition? In our view, FDI can be defined as a category of cross border investment made by a resident in one economy in an enterprise located in different economy with the objective of establishing a lasting interest, maintaining a long-term relationship and influencing the management of the enterprise. The intention to exercise control over the enterprise (influence the management) is the main feature which distinguishes FDI from other foreign portfolio investments. There are two types of FDI: inward foreign direct investment and outward foreign direct investment.

FDI in India:

Indian needs foreign investments to maintain a steady rate of economic growth. FDI is considered best mode of inflow of foreign fund. Because it is less susceptible to short-term changes in market conditions. FDI can help improve financial resources for development; boost export competitiveness; generate employment; strength the skills base; enhance technological capabilities; protect environment and increase social responsibility.

Indian economy was one of the most protected domestic economies until it’s liberalization in 1991. The New Industrial Policy of 1991 led to abolition of industry licensing system and marked a radical shift in policy towards FDI. That was the beginning. With due course of time, Indian FDI policy changed drastically. Now India allows up to 100% FDI in several sectors. FDIs have given the Indian economy a tremendous boost.

FDI Entry Routes in India:

In India, a foreign investment is considered as FDI only when the investment is made in equity shares, preference shares and debentures with the pricing decided upfront as a figure or based on the formula decided upfront. Also, the partly paid equity shares and warrants issued by an Indian company in accordance with provision of Companies Act, 2013 and SEBI guidelines, are treated as eligible FDI instruments.

1. Automatic Route: the foreign investor or Indian company need not apply for approval from RBI or Government of India.
2. Government Route: the foreign investor or Indian company must get approval of Government of India.

FDI application is reviewed by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion (DIPP).

Prohibited Sectors for FDI in India:

• Atomic Energy
• Lottery Business
• Gambling and Betting
• Business of Chit Fund
• Nidhi Company
• Agricultural (excluding agro and allied sectors; Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture; cultivation of vegetables, mushrooms, etc.) and Plantations activities (other than Tea cultivation)
• Housing and Real Estate business (excluding Townships, housing, built-up infrastructure and construction development projects).
  Trading in Transferable Development Rights (TDRs).
• Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

FDI in India Data (April, 2000 to January, 2015):

Find below the top 10 FDI source nations, top 10 FDI inflow sectors and total FDI inflow to India.

FDI in India – Top 10 Countries:

Mauritius is the top source country for FDI in India. Following are the top 10 nations in terms of % FDI fund inflow to India.

1. Mauritius – 35.45 %
2. Singapore – 12.63 %
3. UK – 9.01 %
4. Japan – 7.35 %
5. Netherlands – 5.91 %
6. USA – 5.56 %
7. Cyprus – 3.27 %
8. Germany – 3.02 %
9. France – 1.84 %
10. UAE – 1.24 %

FDI in India – Top 10 Sectors:

Service sector in India attracted the most FDI. Following are the top 10 sectors in terms of % FDI fund inflow.

1. Service Sector – 17.32%
2. Construction – 9.88 %
3. Telecommunication – 6.99%
4. Computer hardware & software – 5.81%
5. Drugs & pharmaceuticals – 5.29%
6. Automobile – 4.88%
7. Chemicals (excluding fertilizer) – 4.21%
8. Power – 3.91%
9. Metallurgical industry – 3.49%
10. Tourism & hotel – 3.20%

Total FDI inflow to India:

Cumulative inflow (includes FIPB/SIA route, automatic route & acquisition of existing shares) : $ 361,320 Million
Total Inflow (excluding, remittance through RBI’s NRI Schemes): $ 243,107 Million (Rs. 1,199,386 Crore)

Data range: April, 2000 to January, 2015
Data source: Department Of Industrial Policy & Promotion, Govt of India