Foreign Direct Investment Divya Raman Corporate Department
Introduction ‘Foreign investment’ is investment in an enterprise by a Non-Resident irrespective of whether this involves new equity capital or re-investment of earnings. Foreign investment is of two kinds – (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment. (As per Consolidated FDI Policy April 1, 2010)
LEGAL BASIS Foreign Direct Investment by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and Government of India and Reserve Bank of India regulate this under the FEMA, 1999 and its various regulations.
Consolidated fdi policy april 1, 2010 Circular issued by Department of Industrial Policy and Ministry of Commerce and Industry. This circular consolidates into one document all the prior policies/regulations on FDI which are contained in FEMA, 1999, RBI Regulations under FEMA, 1999 and Press Notes/Press Releases/Clarifications issued by DIPP and reflects the current ‘policy framework’ on FDI.
HISTORY A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.
ELIGIBILITY OF FDI IN RESIDENT ENTITIES Indian companies including those which are micro and small enterprises can issue capital against FDI. FDI is allowed in a Partnership or Proprietary concern on a Non-Repatriation basis. FDI in Trusts other than VCF is not permitted. FDI in resident entities other than those mentioned above is not permitted.
Two modes of fdi Automatic Route: FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.
Governmental Approval: FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).
Automatic route All items/activities for investment up to 100% except those that require Government approval. Investment in public sector units including SEZ, STPI, EOU.
Governmental approval All proposals that require an industrial license under any law in force in India. All proposals in which the foreign collaborator has a previous venture/tie up in India. All proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
Conditions on issue/transfer of shares Capital instruments to be issued within 180 days of receipt of the inward remittance. In case of Listed Companies, issue price for shares shall be on the basis of SEBI guidelines. In case of unlisted Companies, valuation of shares shall be done by a Chartered Accountant. The Share subscription amount received by the Company shall be kept Foreign Currency Account, with the prior written approval of RBI.
Caps on investments Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as provided/permitted in the FDI policy. Thus while investment are prohibited in some sectors/activities, there are restrictions/conditions/caps on the investment in certain other sector/activities.
Prohibition of investment in india FDI is prohibited in the following activities/sectors:
Retail Trading (except single brand product retailing)
Lottery Business including Government /private lottery, online lotteries,etc.
Gambling and Betting including casinos etc.
Business of chit fund
Trading in Transferable Development Rights (TDRs)
Real Estate Business or Construction of Farm Houses
Activities / sectors not opened to private sector investment.
Conditions on investment Entry Conditions like norms for minimum capitalization, lock-in period etc. Conformity to all sectoral laws, regulations, rules etc. Compliance with the national security/internal security related conditions. Compliance with the respective State/Union territory regulations.
Advantages of fdi Economic Growth Trade Employment and skill levels Technology diffusion and knowledge transfer Linkages and spillover to domestic firms.
Disadvantages of fdi Inflation may increase slightly. Domestic firms may suffer if they are uncompetitive. If there is a lot of FDI in to one industry, the country may become too much dependent on that industry which might be risky for the country.
Conclusion Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.