Foreign Direct Investment Policies in India

Making doing business in India simple has been a priority for the Indian government (GoI). In recent years, the idea of ease of doing business has gained momentum.
The Foreign Exchange Management Act (FEMA) of 1999’s laws and the government of India’s FDI policy govern foreign investment in India. The FDI policy lays out the rules and regulations under which foreign investment in India is supervised and controlled. Foreign investment in India is now governed by the “Consolidated FDI Policy (effective from October 15, 2020)”. In this article we will have a brief about Foreign Direct Investment Policies in India .

What is Foreign Direct Investment?

The Foreign Exchange Management Act (FEMA) of 1999’s laws and the government of India’s FDI policy govern foreign investment in India. Investments made through capital instruments by a person residing outside of India are referred to as “foreign direct investments” (or “FDI”). Investments are made in:

• Unlisted Indian Company.
• 10 % or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

The term “investment” refers to the subscription, acquisition, holding, or transfer of any security or unit issued by a person residing in India. Equity shares, debentures, preference shares, and share warrants issued by the Indian firm are all considered capital instruments.

What Benefits Does India’s Foreign Direct Investment Policy Offer?

The benefits of having an Foreign Direct Investment Policies in India are as follows:

• It draws in non-debt financial resources for advancing the economy.
• New technology, abilities, knowledge, and possibilities are brought forth through FDI.
• It increases competition in the corporate environment.
• Living standards and the calibre of goods and services both rise.
• It supports domestic investment and growth.
• It improves international ties between countries.

What Are the Disadvantages of India’s Foreign Direct Investment Policy?

The disadvantages of an FDI policy in India include the following:

• It has a negative impact on domestic businesses and investments.
• It’s possible that small businesses can’t compete with MNCs. the possibility of closing because of an increase in FDI.
• The nation’s exchange rates can be impacted.
• Demand for domestic goods and services is declining while demand for goods and services offered internationally is increasing.
• By introducing a new culture, it undermines the country’s present culture.

Foreign Direct Investment Entry Routes

Nearly all sectors in India are open to foreign investment, and the remaining ones only require a permission. Four routes through which FDI can flow into India are:

• Automatic Route: Under the Automatic Route, the Indian company or the foreign investor does not require any approval from Government of India or RBI for the investment.

• Government Route: Under the Government Route, prior clearance from the Foreign Investment Promotion Board (FIPB) of the Government of India is necessary.
• FDI beyond a specific limit requires Government Approval.
• FDI is permitted under both routes subject to a limit.

Prohibited Sectors for Foreign Direct Investment

The following sectors are prohibited by current policy from receiving foreign direct investments (FDI): Betting and gambling.

• Lotteries (including those conducted by the government, privately, and online).
• Activities/sectors that are off-limits to investments from the private sector (such as railroads/atomic energy). 
• Chit fund business.
• Nidhi company.
• Real estate or farmhouse building.
• Trading in transferable development rights.
• Production of cigarettes, cigars, cheroots, cigarillos, and other tobacco alternatives
• For Lottery Business, Gambling and Betting activities, foreign technological partnership in any form, including licensing for franchise, trademark, brand name, and management contracts, is also forbidden.

Foreign Direct Investment Eligible Investors

These are the eligible investors for FDI:

• A non-resident entity may invest in India, except for those industries or pursuits that are forbidden. However, a country’s entity that has a land border with India, where the beneficial owner of an investment in India is located, or whose citizenry falls under one of those categories can only invest through the government route.
• NRIs with residence in Nepal and Bhutan are allowed to engage in the capital of Indian enterprises on a repatriation basis, as are citizens of Nepal and Bhutan.
• As of September 16, 2003, OCBs were no longer recognized as a class of investors in India.
• A business, trust, or partnership that was formed outside of India and is owned and controlled by NRIs is eligible to invest in India under the special dispensation provided under the FDI Policy for NRIs. 
• Foreign Portfolio Investors (FPI) may invest in accordance with Schedule II of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and subject to the terms and circumstances outlined therein.
• Through a registered broker, registered FPIs and NRIs can invest in or trade on the capital of recognized Indian Stock Exchanges.
• The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019’s Schedule VII specifies the manner and terms and conditions under which a Foreign Venture Capital Investor (FVCI) may make investments. 
• The National Pension System is managed and supervised by the Pension Fund Regulatory and Development Authority (PFRDA), which is open to both NRIs and OCIs.

Who are eligible investee entities for Foreign Direct Investment?

These are the eligible investee entities for FDI:

• Every registered Indian company.
• Partnership Business or Private Company.
• Trusts that are registered as “Venture Capital Funds” and are overseen by SEBI.
• Limited liability partnerships.
• Investing Tool.
• New Businesses.

Government Measures to increase Foreign Direct Investment

Following are the measures taken by Government:

• 100% of FDI was allowed through automatic pathways in coal mining activities under the 2019 FDI Policy in India. India has many resources for extracting coal, hence FDI influx increased.
• In addition to allowing 100% FDI through the automated route in manufacturing, the government also permitted firms involved in contract manufacturing to invest 100% through the automatic route in 2019.
• In the digital industry, which is currently the one that is growing the fastest, the government permitted 26% FDI.
• The Government has simplified the procedural requirements for FDI. The Foreign Investment Facilitation Portal (FIFP) is the sole single-point gateway for facilitating investments. The Ministry of Commerce and Industry’s Department for Promotion of Industry and Internal Trade oversees the FIFP.
• To draw foreign direct investment, the government also introduced the production-linked incentive (PLI) scheme for electronics manufacturing in 2020.
• Furthermore, since the government has permitted investment in private airport bids and train operations, FDI is anticipated to rise.
• To entice significant investments, the government raised the FDI ceiling via the automatic method in May 2020 from 49% to 74%.
• To increase investment through an enhanced trade partnership, the UK and India engaged into a bilateral bond in 2021.
• The Government raised the FDI ceiling in the insurance and telecom sectors from 49% to 100% and up to 74%, respectively.

Takeaway

FDI is a significant component of non-debt financial investment in a nation and a driver of economic expansion. Therefore, it is important to support a strong and simple FDI policy. Like how India’s FDI Policy has simplified and streamlined the FDI procedure there. Just as India discovered after changing its policies in recent years, an easy and liberal FDI policy leads to higher investments.