Foreign Direct Investment is an investment to own a stake or control ownership in a business based in one country, made by an individual or company from another country. Don’t get this confused with foreign portfolio investment, where an investor merely purchases equities in a foreign company.
FDI offers direct control either ‘organically’- where a company expands the operations of its business in a foreign country, or ‘inorganically’ where a company buys a company in a foreign country. The two aforementioned methods are carried out mainly in the form of—mergers and acquisitions, reinvesting overseas profit, opening a subsidiary or associate company in the foreign country and building new facilities.
FDI was first introduced in India under the period of radical economic change, the year 1991, where India saw its economy open under Liberalisation Privatisation and Globalisation with Manmohan Singh as the Finance Minister. It was introduced under the Foreign Exchange Management Act (FEMA) and has since been a very important monetary source for economic development and business expansion.
There are two routes by which India gets FDI—automatic route, where FDI is allowed without prior approval by the government or RBI, and government route, where a prior approval is required and the Foreign Investment Promotion Board (FIPB) oversees this route.
In 2014, under Prime Minister Modi’s Make in India initiative, the FDI policy for 25 sectors was liberalised. In defence, FDI beyond 49% and up to 100% has been permitted through the government approval route. There is 100% FDI under the government route for trading, including e-commerce. The government has permitted 74% FDI under automatic route in existing pharmaceutical ventures, after which an approval will be required to continue beyond 74% and up to 100%. To get more funds in the aviation sector, the government has allowed 100% FDI in India-based airlines, but a foreign carrier can only own up to 49% stake in the venture and the rest can come from private investors including those overseas.
Last year’s budget allowed 100% foreign investment in processed food retailing on the condition that it was manufactured in India. This meant, more retail outlets from the likes of Walmart, Tesco, IKEA and Marks & Spencer for us. Apart from food retail, the Budget 2016 eased FDI in the insurance and pension sectors through the automatic route, from 26% to up to 49%.
Currently, infrastructure, automobile, services, railway, pharmaceuticals, telecom, aviation, computer hardware and software are some major sectors for FDI.
Source: dnaindia.com