Foreign Direct Investment In India


When a firm invests in a business entity in another nation, it is known as foreign direct investment (FDI). Foreign enterprises engaging in FDI are directly involved in the day-to-day activities of the other country. This implies they're contributing more than just money; they're also bringing knowledge, skills, and technology.
 

WHAT IS FDI?

Foreign Direct Investment is any investment made into a country by a person or company based in another country.

•    FDI occurs when a foreign entity obtains ownership or a controlling stake in a company's shares in another nation, or opens a business there.
 
•    It differs from a foreign portfolio investment, in which a foreign firm simply purchases a company's equity shares.
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•    In FDI, the foreign entity has a say in the company's day-to-day operations.
 
•    FDI encompasses not just monetary inflows, but also inflows of technology, knowledge, skills, and expertise/know-how.
 
•    It is a significant source of non-debt financial resources for a country's economic development.
 
•    FDI usually occurs in an economy that has the potential for growth as well as a trained workforce.
 
•    Since the previous few years, FDI has grown dramatically as a major mode of international capital transfer.
 
•    The benefits of FDI are not dispersed equitably. It is dependent on the systems and infrastructure of the host country.
 

The following factors influence FDI in host countries:

Foreign Direct Investment In India
•    Policy framework
•    Rules with respect to entry and operations/functioning (mergers/acquisitions and competition)
•    Political, economic and social stability
•    Treatment standards of foreign affiliates
•    International agreements
•    Trade policy (tariff and non-tariff barriers)
•    Privatisation policy
 

HOW DOES FDI WORK?

Companies considering a foreign direct investment usually look for firms in open economies that can provide a qualified workforce and above-average development prospects. Government regulation that isn't overbearing is also favoured.
 
Foreign direct investment typically involves more than just capital. It could also entail providing management, technology, and equipment.
 
One of the most important characteristics of foreign direct investment is that it gives the investor effective control over the foreign company, or at the very least significant influence over its decision-making.
 
The COVID-19 epidemic caused a global drop in foreign direct investment in 2020, according to the United Nations Conference on Trade and Development. Global investment totaled $859 billion, down from $1.5 trillion the previous year.
 

LATEST FDI STATISTICS

•    In addition, China will overtake the United States as the leading source of overall investment in 2020, garnering $163 billion compared to $134 billion in the United States.
 
•    Singapore was the leading investor, accounting for nearly a third of all investments, followed by the United States, which accounted for 23% of FDI, and Mauritius, which accounted for 9% of all foreign capital flows.
 
•    Saudi Arabia has the fastest growth rate among the top ten FDI-origin countries.
 
•    The amount of money invested increased from $90 million in 2019-20 to $2.8 billion in 2020-21.
 
•    When compared to 2019-20, FDI equity flows from the United States more than doubled, while investments from the United Kingdom increased by 44%.
 

FDI INFLOW IN INDIA

•    India expects a 10% increase in Foreign Direct Investment (to $82 billion) in the fiscal year 2020-21. (FDI). Foreign direct investment in equity has increased by 19% to $60 billion.
 
•    In the fiscal year 2019-20, India received $74.39 billion in FDI, with about $50 billion in equity investments.
 
•    From April through August 2020, a total of USD 35.73 billion in foreign direct investment was received. It's the highest for the first five months of a fiscal year ever. FDI inflows have surged despite the fact that GDP growth in the first quarter was just 23.9 percent (April-June 2020).
 
•    The amount of FDI received in the first five months of 2020-21 (USD 35.73 billion) is 13% greater than in the same period in 2019-20. (USD 31.60 billion).
 
•    Gujarat was the most popular FDI destination in 2020-21, receiving 37 percent of all foreign equity inflows, followed by Maharashtra, which received 27 percent.
 
•    Another 13% of the equity investments were made in Karnataka (3rd).
 
•    India is now ranked in the top 100 countries in terms of ease of doing business.
 
•    According to a UN report, India was among the top ten recipients of FDI in 2019, with $49 billion inflows. This represents a 16 percent increase over the previous year.
 
•    The DPIIT announces a policy to allow 100 percent FDI in insurance intermediaries in February 2020.
 
•    The DPIIT issued a new rule in April 2020, stating that any company with a land border with India, or if the beneficial owner of an investment in India is located in or is a citizen of such a nation, can only invest through the government route. To put it another way, such corporations can only invest with the sanction of the Indian government.
 
 
•    The government planned to sell a 100 percent ownership in the national airline, Air India, in early 2020.
Foreign Direct Investment in India: Year-wise
 
S. No.    Financial Year    Total FDI Inflow (in US$ billion)
1    2014-15    45.14
2    2015-16    55.56
3    2016-17    60.22
4    2017-18    60.97
5    2018-19    62.00
6    2019-20    73
 

WHICH ARE THE ENTITIES WHICH CAN INVITE FDI IN INDIA?

•    Indian Company
•    Partnership Firm
•    Proprietary Concern
•    Trusts
•    Limited Liability Partnerships (LLPs)
•    Investment Vehicle
•    Startup Companies
 

HOW CAN A COMPANY IN INDIA GET FOREIGN INVESTMENT?

Foreign investment in India is mostly 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. Automatic Route is managed by the Reserve Bank of India.
 
Government Consent Route: The Government Approval Route necessitates approval from the Indian government prior to investment. Proposals for foreign direct investment through the government route are reviewed by the administrative ministry/department in question.
 
Note: Previously, the Foreign Investment Promotion Board (FIPB) and the Secretariat for Industrial Assistance (SIA) were in responsibility of promoting non-automated Foreign Direct Investment (FDI). In 2017, the FIPB was decommissioned, and its powers were transferred to the respective Administrative Ministries/Departments.
 
Note that FDI includes the purchase of shares and the remittance of funds through the RBI's NRI Schemes.
 

FOREIGN DIRECT INVESTMENT IN INDIA: TOP COUNTRIES (2000-2019)

•    Mauritius (31%)
•    Singapore (20%)
•    Japan (7.2%)
•    Netherlands (6.7%)
•    USA (6.2%)
 
Latest trends (2019-20): Singapore> Mauritius > Netherlands > Cayman Islands > USA
 

SECTOR-WISE FDI INFLOWS: TOP SECTORS (2000-2019)

Foreign Direct Investment In India
•    Services (17.6%)
•    Computer Software and Hardware (9.5%)
•    Telecommunications (8.1%)
•    Trading (5.8%)
•    Construction Development (5.5%)
 
Latest trends (2019-20): Manufacturing> Communication Services > Retail & Wholesale Trade > Financial Services > Computer Services
 

HOW FDI IS DIFFERENT FROM FPI?

Any investment made on a repatriable basis in capital instruments of an Indian firm or in the capital of an LLP by a person residing outside India is referred to as foreign investment. Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI) are two types of foreign investment (FPI).
 
Foreign Direct Investment (FDI) is the investment of a person who is not a resident of India in capital instruments.
 
(a) in an unlisted Indian company OR (b) in a listed Indian company
 
(b) in a fully diluted basis, 10% or more of a listed Indian company's post-issue paid-up equity capital.
 
'Foreign Portfolio Investment' refers to any capital instrument investment made by a person residing outside of India that is –
 
(a) less than ten percent of a listed Indian company's fully diluted post-issue paid-up share capital OR
 
(b) less than 10% of the paid-up value of each series of a listed Indian company's capital instrument.

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