Foreign Direct Investment

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times.India disallowed overseas corporate bodies (OCB) to invest in India.India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.

It refers to the investment made in foreign currency by foreign investors with a view to spread their business and to earn profit. Broadly foreign investment is of two type:
(1). Foreign Direct Investment i.e. FDI
(2). Portfolio Investment

A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.

FDI is the net inflow of investment to enquire a lasting management interest in an enterprise operating in an economy other than that of investor. It usually involves participation in management, joint ventures, transfer of technology and expertise. It it the best form of foreign investment given its longevity, stability and far reaching objectives. In long term it brings growth, generate employment and fuels economic activities.

FDI has also three categories:
(1) Green Feild FDI : When it is made in new projects.
(2) Brown Field FDI : When it is made in vender develop or under utilised projects.

Types of FDI
Horizontal FDI- arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
Platform FDI -Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.
Vertical FDI -takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country

Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of “control”.

Recent FDI Developments in India(Important from exam point)

• Government eases FDI norms in 15 major sectors.
• Townships, shopping complexes & business centres – all allow up to 100% FDI under the auto route. Conditions on minimum capitalisation & floor area restrictions have now been removed for the construction development sector.
• India’s defence sector now allows consolidated FDI up to 49% under the automatic route. FDI beyond 49% will now be considered by the Foreign Investment Promotion Board. Govt approval route will be required only when FDI results in a change of ownership pattern.
• Private sector banks now allow consolidated FDI up to 74%.
• Up to 100% FDI is now allowed in coffee/rubber/cardamom/palm oil & olive oil plantations via the automatic route.
• 100% FDI is now allowed via the auto route in duty free shops located and operated in the customs bonded areas.
• Manufacturers can now sell their products through wholesale and/or retail, including through e-commerce without Government Approval.
• Foreign Equity caps have now been increased for establishment & operation of satellites, credit information companies, non-scheduled air transport & ground handling services from 74% to 100%.
• 100% FDI allowed in medical devices
• FDI cap increased in insurance & sub-activities from 26% to 49%
• FDI up to 49% has been permitted in the Pension Sector.
• Construction, operation and maintenance of specified activities of Railway sector opened to 100% foreign direct investment under automatic route.
• FDI policy on Construction Development sector has been liberalised by relaxing the norms pertaining to minimum area, minimum capitalisation and repatriation of funds or exit from the project. To encourage investment in affordable housing, projects committing 30 percent of the total project cost for low cost affordable housing have been exempted from minimum area and capitalisation norms.
• Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.
• Composite caps on foreign investments introduced to bring uniformity and simplicity is brought across the sectors in FDI policy.
• 100% FDI allowed in White Label ATM Operations.