Foreign Direct Investment [FDI]

By : Neha Dhyani

Updated : May 31, 2022, 6:16

The term Foreign Direct Investment [FDI], refers to an investment made through capital instruments by a person not a resident of India.

  • In an unlisted Indian firm or
  • Ten per cent or more of a listed Indian company's post-issue paid-up equity capital on a fully diluted basis.

Components of Foreign Direct Investment [FDI]

  • The purchase of shares in a company in a country other than one's own by a foreign direct investor is known as equity capital.
  • Profits not dispersed as dividends by affiliates or earnings not remitted to the direct investor are referred to as "reinvested earnings." Affiliates reinvest their reserved gains.
  • Intra-company loans are short- and long-term borrowing and lending transactions between direct investors (or firms) and affiliate enterprises.

How Indian Companies Receive Foreign Direct Investment [FDI]

Foreign Direct Investment [FDI] in India is mainly made through two channels:

  • The Automatic Route eliminates the need for a non-resident investor or an Indian corporation to seek Government of India clearance for their investment. The Reserve Bank of India manages Automatic Route.
  • Government Consent Route: The Government Approval Route necessitates approval from the Indian government before investment. The administrative ministry/department in question reviews proposals for Foreign Direct Investment [FDI] through the government route are reviewed by the administrative ministry/department in question.

Government Initiatives to attract Foreign Direct Investment [FDI]

  • Invest India's national investment promotion and facilitation agency was established in 2009. This is a non-profit venture run by the Ministry of Commerce and Industry's Department for Promotion of Industry and Internal Trade. Invest India focuses on sector-specific investor targeting and the formation of new partnerships to facilitate long-term investment in India.
  • The Make in India initiative was launched with FDI in liberalised manufacturing norms.
  • In certain sectors, the FDI ceiling has been raised.
  • To promote FDI influx, the Indian government changed its FDI policy.
  • The Financial Industry Regulatory Authority (FIRB) was disbanded.

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Sectors in which Foreign Direct Investment [FDI] is Prohibited

  • Government and private lotteries and internet lotteries are all part of the lottery business, and no FDI is allowed in all of these lotteries.
  • Casinos, gambling, and betting are all examples of gambling and betting and hence are not open for Foreign Direct Investment [FDI].
  • Funds for chits
  • Nidhi is a corporation based in India and is not open to an FDI
  • Transferable Development Rights (TDRs)
  • Construction of Farm Houses or Real Estate Business
  • Manufacturing tobacco or tobacco substitutes for cigars, cheroots, cigarillos, and cigarettes
  • Activities/sectors that are not open to private sector investment, such as (I) atomic energy and (II) Railway operations, are two examples (other than permitted activities).
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Key Facts about the Foreign Direct Investment [FDI]

FDI Equity: FDI equity inflows increased by 112 per cent year over year in the April-July period of FY 2021-22 (USD 20.42 billion).

Top Sectors: The Automobile Industry has emerged as the leading sector, accounting for 23% of total FDI Equity inflow, followed by Computer Software & Hardware (18%) and the Services Sector (9%).

Leading the FDI Recipient States: Karnataka was the top recipient state during the period, accounting for 45 per cent of overall FDI Equity inflows, followed by Maharashtra (23%) and Delhi (2%). (12 per cent).

Foreign Direct Investment [FDI] is an essential part of India's economy. It boosts the financial economy and brings a mix of cultures into the country. Several factors like demographics, availability of the internet, etc., facilitate Foreign Direct Investment [FDI].

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FAQs on Foreign Direct Investment [FDI]

Q.1. Which department facilitates the Foreign Direct Investment [FDI] if the companies or individuals take the Government route?

The Department for Promotion of Industry and Internal Trade administers all the Foreign Direct Investment [FDI]s that come through the Government route.

Q.2. What are the two routes that one can follow in the case of Foreign Direct Investment [FDI]s in India?

The two routes that one can follow for Foreign Direct Investment [FDI]s are:

  • Automatic Route
  • Government Route

Q.3. What are the three components of Foreign Direct Investment [FDI]?

The three components of Foreign Direct Investment [FDI] are:

  • Equity Capital
  • Reinvested Earnings
  • Intra-Company Loans

Q.4. Which state is the top recipient of Foreign Direct Investment [FDI] in India?

Karnataka is the state that tops the list of recipients of Foreign Direct Investment [FDI] in India.