Topic: Introduction of FDI, National FDI Policy Framework

 Introduction: Foreign direct investment (FDI) is an investment made by a

company or an individual in one country into business interests located in another
country. FDI is an important driver of economic growth.

 Foreign Direct Investment (FDI)

Any investment from an individual or firm that is located in a foreign country into a country
is called Foreign Direct Investment.
 Generally, FDI is when a foreign entity acquires ownership or controlling stake in the
shares of a company in one country, or establishes businesses there.
 It is different from foreign portfolio investment where the foreign entity merely buys
equity shares of a company.
 In FDI, the foreign entity has a say in the day-to-day operations of the company.
 FDI is not just the inflow of money, but also the inflow of technology, knowledge,
skills and expertise/know-how.
 It is a major source of non-debt financial resources for the economic development of a
country.
 FDI generally takes place in an economy which has the prospect of growth and also a
skilled workforce.
 FDI has developed radically as a major form of international capital transfer since the
last many years.
 The advantages of FDI are not evenly distributed. It depends on the host country’s
systems and infrastructure.
 The determinants of FDI in host countries are:
o Policy framework
o Rules with respect to entry and operations/functioning (mergers/acquisitions
and competition)
o Political, economic and social stability
o Treatment standards of foreign affiliates
o International agreements
o Trade policy (tariff and non-tariff barriers)
o Privatisation policy
  Types of Foreign Direct Investment (on the basis of
direction)
Foreign direct investment can be classified into horizontal, vertical, and conglomerate. The
types of FDIs are segregated on the basis of the companies that the investors are investing in.
Walk through the illustrated points to get complete details of the types of FDI.
1. Horizontal FDI: It is a type of investment in which the company makes investment
only in the company running their type of business in foreign. Example – If any
sportswear company wants to make investments, they will only invest in any other
sportswear company in another country rather than in any other sector. It’s called
horizontal investment.
2. Vertical FDI: In this type of investment, the company makes the investment in
another company dealing with a complementary type of business. For example,
Suppose company X wants to invest in any company in the form of FDI. In that case,
they will invest in a company selling raw materials required by company X, called a
vertical investment.
3. Conglomerate FDI: In this type of investment, the company could invest in any firm,
business, or startup, even if it is not from the same industry. FDI investment will
make a huge opportunity for the business to explore the new area and gain experience
in different fields.

 FDI in India
The investment climate in India has improved tremendously since 1991 when the government
opened up the economy and initiated the LPG strategies.

 The improvement in this regard is commonly attributed to the easing of FDI norms.
 Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country.
 Currently, India ranks in the list of the top 100 countries in ease of doing business.
 In 2019, India was among the top ten receivers of FDI, totalling $49 billion inflows,
as per a UN report. This is a 16% increase from 2018.
 In February 2020, the DPIIT notifies policy to allow 100% FDI in insurance
intermediaries.
 In April 2020, the DPIIT (Department for Promotion of Industry and Internal
Trade) came out with a new rule, which stated that the entity of any company that
shares a land border with India or where the beneficial owner of investment into India
is situated in or is a citizen of such a country can invest only under the Government
route. In other words, such entities can only invest following the approval of the
Government of India
 In early 2020, the government decided to sell a 100% stake in the national airline’s
Air India.
  FDI Frmework/ Routes in India
There are three routes through which FDI flows into India. They are described in the
following table:

Category 1 Category 2 Category

3

100% FDI permitted Up to 100% FDI permitted Prohibited

through Automatic Route through Government Route

1. Automatic Route FDI

In the automatic route, the foreign entity does not require the prior approval of the
government or the RBI.

Examples:

 Medical devices: up to 100%

 Thermal power: up to 100%
 Services under Civil Aviation Services such as Maintenance & Repair Organizations
 Insurance: up to 49%
 Infrastructure company in the securities market: up to 49%
 Ports and shipping
 Railway infrastructure
 Pension: up to 49%
 Power exchanges: up to 49%
 Petroleum Refining (By PSUs): up to 49%

2. Government Route FDI

Under the government route, the foreign entity should compulsorily take the approval of
the government. It should file an application through the Foreign Investment Facilitation
Portal, which facilitates single-window clearance. This application is then forwarded to
the respective ministry or department, which then approves or rejects the application after
consultation with the DPIIT.

Examples:

 Broadcasting Content Services: 49%

 Banking & Public sector: 20%
 Food Products Retail Trading: 100%
 Core Investment Company: 100%
 Multi-Brand Retail Trading: 51%
  Mining & Minerals separations of titanium bearing minerals and ores: 100%
 Print Media (publications/printing of scientific and technical magazines/speciality
journals/periodicals and a facsimile edition of foreign newspapers): 100%
 Satellite (Establishment and operations): 100%
 Print Media (publishing of newspaper, periodicals and Indian editions of foreign
magazines dealing with news & current affairs): 26%

Sector FDI Entry Route

limit
Banking- Public 20% Government
Banking- Private 74% 49%- Automatic. Above 49-
74%- Government
Insurance 74% Automatic
Asset Reconstruction Companies 100% Automatic
Credit Information Companies 100% Automatic
White Label ATMs 100% Automatic
Pension sector 49% Automatic
Agriculture & Animal Husbandry 100% Automatic
Plantation sector 100% Automatic
Mining 100% Automatic
Petroleum & Natural gas refining 100% Automatic
Defence manufacturing 100% Automatic upto 49%. Above
49% under Government route.
Broadcasting teleports 100% Automatic
Broadcasting content services 49% Government
Print media, dealing with news 26% Government
Publishing/printing of scientific and technical 100% Government
magazines/specialty journals
Civil aviation- Airports 100% Automatic
Civil aviation- Air transport services 100% Automatic up to 49% Above
49% under Government route.
Telecom 100% 49%- Automatic. Above 49%-
Government
Railways 100% Automatic
Financial services’ activities regulated by 100% Automatic
RBI, SEBI, IRDAI, other regulator
Pharmaceuticals (Greenfield) 100% Automatic
Pharmaceuticals (Brownfield) 100% Automatic upto 74%, above 74%
under Government
Power exchanges 49% Automatic
Construction development 100% Automatic
Industrial parks 100% Automatic
Satellites 100% Government
E-commerce activities 100% Automatic
Private security agencies 74% Automatic up to 49%. Above
49%- 74% under Government
Single brand retail trading 100% Automatic up to 49%. Above
 49% under Government
Multi-brand retail trading 51% Government
Duty-free shops 100% Automatic
Food products manufactured or produced in 100% Government
India
Cash & carry wholesale trading 100% Automatic
Biotechnology 100% Automatic
Electricals machinery and system 100% Automatic
Food processing 100% Automatic
Ports and shipping 100% Automatic
Textiles and garments 100% Automatic
Tourism and hospitality 100% Automatic

3. Sectors where FDI is prohibited

There are some sectors where any FDI is completely prohibited. They are:

 Agricultural or Plantation Activities (although there are many exceptions like

horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
 Atomic Energy Generation
 Nidhi Company
 Lotteries (online, private, government, etc.)
 Investment in Chit Funds
 Trading in TDR’s
 Any Gambling or Betting businesses
 Cigars, Cigarettes, or any related tobacco industry
 Housing and Real Estate (except townships, commercial projects, etc.)

 Notable foreign investments in India in crucial companies

In the past decade, there has been a constant influx of FDI in India. Foreign investors
in India have practically invested in every sector, including pharmaceuticals,
automobiles, textiles, and railways. FDI in India has led to advancements in
infrastructure, job creation, increased exports, and substantial support for the formal
sector.

 Here are a few noteworthy instances of recent foreign

investments in India-
1. In July 2023, Walt Disney explored various strategies to help its Star India
business grow and reduce expenses, which may involve a joint venture or sale.
2. In July 2023, Havas's Indian arm, a French advertising and public relations
company, declared its acquisition of PivotRoots.
 3. In June 2023, Private equity investors, including Blackstone Inc., BPEA EQT,
CVC Capital Partners, and General Atlantic Service Company, were competing to
acquire Mumbai-based Indira IVF Hospital Pvt. Ltd.
4. In February 2023, Singapore Airlines purchased a 25.1 percent stake in the Air
India group for $267 million.
5. In January 2023, the rural economy-focused technology startup VilCart secured
$18 million in funding from Asia Impact SA, Nabventures Fund, and Texterity
Pvt Ltd to expand its operations.
6. In December 2022, the data science and AI solutions company Tredence raised
$175 million in a series B funding round led by Advent International.
7. On October 31, 2022, the Software-as-a-Service (SaaS) company Icertis raised
$150 million in funding from Silicon Valley Bank.
8. In October 2022, Byju's obtained $250 million from its lead investor, Qatar
Investment Authority (QIA).
9. In August 2022, the ed-tech unicorn upGrad raised $210 million in a funding
round led by ETS Global, Kaizen Management Advisors, and Bodhi Tree, valuing
the company at $2.25 billion.

 New FDI Policy

1. According to the new FDI policy, an entity of a country, which shares a land
border with India or where the beneficial owner of investment into India is
situated in or is a citizen of any such country, can invest only under the
Government route.
2. A transfer of ownership in an FDI deal that benefits any country that shares a
border with India will also need government approval.
3. Investors from countries not covered by the new policy only have to inform the
RBI after a transaction rather than asking for prior permission from the relevant
government department.
4. The earlier FDI policy was limited to allowing only Bangladesh and Pakistan via
the government route in all sectors. The revised rule has now brought companies
from China under the government route filter.

 Benefits of FDI

FDI brings in many advantages to the country. Some of them are discussed below.

 Economic Boost: FDI brings in capital, technology, and expertise, stimulating

economic growth and creating employment opportunities.
 Local Business Development: FDI promotes competition, access to new markets,
and managerial practices, fostering the growth and competitiveness of domestic
firms.
 Technology Transfer: FDI transfers advanced technology and know-how,
enhancing the host country’s industrial capabilities and competitiveness.
 Human Capital Development: FDI provides training and skill development,
improving the knowledge and expertise of the local workforce.
 International Integration: FDI integrates the host country into global value
chains, opening up opportunities for export-oriented industries and diversification.
  Poverty Reduction: FDI contributes to economic growth, job creation, and higher
incomes, leading to improved living standards and reduced poverty rates.

 Disadvantages of FDI

However, there are also some disadvantages associated with foreign direct investment.
Some of them are:

1. It can affect domestic investment, and domestic companies adversely.

2. Small companies in a country may not be able to withstand the onslaught of MNCs in
their sector. There is the risk of many domestic firms shutting shop as a result of
increased FDI.
3. FDI may also adversely affect the exchange rates of a country.

 Government Measures to increase FDI in India

1. Government schemes like production-linked incentive (PLI) scheme in 2020 for

electronics manufacturing, have been notified to attract foreign investments.
2. In 2019, the amendment of FDI Policy 2017 by the government, to permit 100% FDI
under automatic route in coal mining activities enhanced FDI inflow.
3. FDI in manufacturing was already under the 100% automatic route, however, in 2019,
the government clarified that investments in Indian entities engaged in contract
manufacturing is also permitted under the 100% automatic route provided it is
undertaken through a legitimate contract.
4. Further, the government permitted 26% FDI in digital sectors. The sector has
particularly high return capabilities in India as favourable demographics, substantial
mobile and internet penetration, massive consumption along technology uptake
provides great market opportunity for a foreign investor.
5. Foreign Investment Facilitation Portal (FIFP) is the online single point interface of the
Government of India with investors to facilitate FDI. It is administered by the
Department for Promotion of Industry and Internal Trade, Ministry of Commerce and
Industry.
6. FDI inflow is further expected to increase –

o as foreign investors have shown interest in the government’s moves to allow

private train operations and bid out airports.
o Valuable sectors such as defence manufacturing where the government
enhanced the FDI limit under the automatic route from 49% to 74% in May
2020, is also expected to attract large investments going forward.

 Regulatory Framework for FDI in India

In India, there are several laws regulating FDI inflows. They are:
 Companies Act
 Securities and Exchange Board of India Act, 1992 and SEBI Regulations
 Foreign Exchange Management Act (FEMA)
 Foreign Trade (Development and Regulation) Act, 1992
 Civil Procedure Code, 1908
 Indian Contract Act, 1872
 Arbitration and Conciliation Act, 1996
 Competition Act, 2002
 Income Tax Act, 1961
 Foreign Direct Investment Policy (FDI Policy)

 Important Government Authorities in India concerning FDI

 Foreign Investment Promotion Board (FIPB)

 Department for Promotion of Industry and Internal Trade (DPIIT)
 Reserve Bank of India (RBI)
 Directorate General of Foreign Trade (DGFT)
 Ministry of Corporate Affairs, Government of India
 Securities and Exchange Board of India (SEBI)
 Income Tax Department
 Several Ministries of the GOI such as Power, Information & Communication, Energy,
etc.

 Factors affecting FDI in India:

1. Economic Stability: A stable economic environment is crucial for attracting FDI.
Investors prefer countries with a stable and growing economy. Factors such as low
inflation, reasonable fiscal policies, and a stable currency contribute to economic
stability.
2. Policy Framework: Clear and consistent government policies regarding foreign
investment are essential. Investors look for transparent and investor-friendly policies
that provide a clear roadmap for doing business.
3. Regulatory Environment: A favourable regulatory environment that simplifies
procedures, reduces bureaucratic hurdles, and ensures ease of doing business is
crucial for attracting FDI.
4. Infrastructure: Adequate infrastructure, including transportation, communication,
and energy facilities, is essential for the smooth operation of businesses. Investors are
attracted to countries with well-developed infrastructure.
5. Taxation System: A transparent and predictable taxation system is important for
foreign investors. Investors seek a reasonable and stable tax regime to minimize
uncertainties and risks.
6. Political Stability: Political stability is a significant factor for FDI. Investors prefer
countries with stable political environments to minimize the risks associated with
political instability.
7. Legal Framework: A strong and reliable legal system is crucial for protecting the
rights of investors. Investors look for a legal framework that ensures contract
enforcement and resolution of disputes in a fair and timely manner.
8. Labor Force: The availability of a skilled and trainable workforce is important for
foreign investors. Labor laws that strike a balance between worker rights and business
flexibility are also critical.
9. Market Size and Potential: The size of the market and its growth potential are
attractive to foreign investors. India's large consumer base makes it an appealing
destination for businesses looking to expand.
10. FDI Policies: Specific FDI policies and regulations that govern foreign investment in
various sectors influence investor decisions. Policies that allow for higher levels of
foreign ownership and control can attract more FDI.
11. Technology and Innovation: Access to advanced technology and innovation is
attractive to foreign investors. Countries that encourage research and development
and have a conducive environment for innovation can attract technology-driven FDI.
12. Bilateral Agreements: Bilateral investment treaties and trade agreements between
India and other countries can provide additional incentives for foreign investors by
offering protections and advantages.
13. Global Economic Conditions: Global economic conditions and trends also impact
FDI. Economic downturns or uncertainties in major economies may affect investment
decisions.