FAQs on FDI

What does FDI stands for?

Foreign Direct Investment.  

What does FDI mean?

FDI means “cross border investment” made by a resident of one economy in another economy, either by buying a company in the target country or by expanding operations of an existing business in that country.  

Why Countries Seek FDI?

Countries seek FDI when domestic capital is insufficient for economic escalation. Foreign capital is essential, as a temporary measure, during the period when the capital market is in the process of development. Foreign capital usually brings it with other scarce productive factors like technical knowhow, business expertise and knowledge.

What are the major benefits of FDI?

·         Improves forex position of the country;

·         Generate  employment and increase production ;

·         Help in capital formation by bringing fresh capital;

·         Helps in transfer of new technologies, management skills, intellectual property;

·         Increases competition within the local market and thus brings higher efficiencies;

·         Helps in increasing exports;

·         Increases tax revenues.

Why FDI is opposed by localities?

·         Domestic companies fear that they may lose their ownership to overseas company.

·       Small enterprises fear that they cannot compete with world class companies and ultimately will be rimed out of business;

·         Global business giants try to monopolise and take over the highly profitable sectors;

·         Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

·         Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

How Companies in India can receive FDI? 

Companies in India may receive FDI under two routes. Firstly, under the Automatic Route where FDI is allowed without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. Secondly, under the Government Route where activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

What are the scopes of FDI in India? 

India is the 3rd largest economy in the world in terms of purchasing power parity and thus looks attractive to the world for FDI.   Even Government of India,  has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lots of opposition from local Indians / Indian companies.

Some of the major economic sectors where India can attract investment are Telecommunications, Apparels, Information Technology, Pharma, Auto parts, Jewelry, Chemicals.

In last few years, foreign investments in India have shown an upward trend because of its liberal policies and set to become one of the major recipients of FDI in the Asia-Pacific. India has technical expertise and skilled managers and a growing middle class market of around 300 million people and this represents an attractive market for foreign investors.

Which are the sectors where FDI is not allowed in India?

In India FDI is prohibited both under the Government Route and Automatic Route in the following sectors; Atomic Energy, Lottery Business, Gambling and Betting, Business of Chit Fund, Nidhi Company, Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations), Housing and Real Estate business (except development of townships, construction of residen­tial/commercial premises, roads or bridges to the extent specified in notification, Trading in Transferable Development Rights (TDRs, manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes).

How is foreign investment regulated in India?

Foreign investment in India is primarily regulated by industrial policy, press note issued by Ministry of Commerce and Industry, Government of India, FEMA and notifications issued by RBI.

Who are the authorities dealing with Foreign Investment in India?

FIPB (Foreign Investment Promotion Board), SIA (Secretariat for Industrial Assistance) FIIA (Foreign Investment Implementation Authority), Investment Commission, Project Approval Board and Reserve Bank of India and the dealing authorities for foreign investment in India.

What are the instruments for receiving Foreign Direct Investment in an Indian company?

Foreign investment is reckoned as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which gives an option to the investor to convert or not to convert it into equity or does not involve upfront pricing of the instruments a date would be reckoned as ECB and would have to comply with the ECB guidelines.

The FDI policy provides that the price/conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

What are the different ways in which a foreign company can conduct business in India?

A foreign company planning to set up business operations in India may incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary or, Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company

What are the total inflows of FDI in India?

$22.4 in 2012-2013 [as per Department Of Industrial Policy & Promotion (DIPP)]

What are the limits for FDI in different Sectors?

         I.            26% FDI is permitted in defense, newspaper and media, pension sector (since October 2012), courier services (through automatic route), tea plantation (upto 49% through automatic route and remaining through FIPB).

      II.            49% FDI is permitted in banking, cable network, DTH, infrastructure investment
telecom, insurance (raised from 26% to 49% in July 2013 subject to parliamentary approval), petroleum refining (49% under automatic route), power exchanges (49% under automatic route), stock exchanges, depositories (under automatic route upto 49%), 49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital. [Since September 2012].

   III.            51% is Permitted in Multi-Brand Retail (Since September 2012), Petro-pipelines.

   IV.            74% FDI is permitted in, Atomic minerals, Science Magazines /Journals, Petro marketing, Coal and Lignite mines, Credit information companies (raised from 49% to 74% since July, 2013).

      V.            100% FDI is permitted in Single Brand Retail (49% through automatic route and remaining through FIPB), advertisement, airports, cold-storage, BPO/call centres, E-commerce, energy (except atomic), export trading house, films, hotel, tourism, metro train, mines (gold, silver), petroleum exploration, pharmaceuticals, pollution control, postal service, roads, highways, ports, township, wholesale trading, telecom (raised from 74% to 100% in July, 2013), asset reconstruction companies (increased from 74% to 100 in July, 2013. 49% through automatic route and remaining through FIPB).

Which country tops in inflow of FDI in India?

Country	Inflow in % age terms	Inflows in absolute Terms (million US dollars)
Mauritius	42%	50164
Singapore	9	11275
USA	7	8914
UK	5	6158
Netherlands	4	4968

Brief Latest Developments on FDI (all sectors including retail):-

 2012 – October:  In the second round of economic reforms, the government cleared amendments to raise the FDI cap

(a)    in the insurance sector from 26% to  49%;

(b)    in the pension sector it approved a 26 percent FDI;

Now, Indian Parliament will have to give its approval for the final shape,"

2012 - September : The government approved the

(a)    Allowed 51% foreign investment in multi-brand retail,

(b)     Relaxed FDI norms for civil aviation and broadcasting sectors. – FDI cap in Broadcasting was raised to 74% from 49%;

(c)    Allowed foreign investment in power exchanges

2011 – December  :

(i)                Government removed 51% cap on FDI into single-brand retail outlets and thus opened the market fully to foreign investors by permitting 100 percent foreign investment in this area.

Background and Recent Developments for FDI in Retail Sector which has raised lot of controversies in political circles :

 As part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps:

1995 : World Trade Organisation’s (WTO) General Agreement on Trade in Services, which includes both wholesale and retailing services, came into effect

1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route;

2006 : FDI in cash and carry (wholesale) was brought under automatic  approval route;   Upto 51% investment in single brand  retail outlet permitted, subject to Press Note 3 (2006 series)

2011 : 100% FDI in Single Brand Retail allowed’

2012 :  On Sept. 13, Government approved the allowance of 51 percent foreign investment in multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]’

FDI Equity Inflows from 2000-2012

S. No	Financial Year (April – March)	Amount of  FDI Inflows		%age growth over previous year (in terms of US $)
		In Rs,  crores	In US$ million
1	2000-01	10733	2463	-
2	2001-02	18654	4065	( + ) 65 %
3	2002-03	12871	2705	( - ) 33 %
4	2003-04	10064	2188	( - ) 19 %
5	2004-05	14653	3219	( + ) 47 %
6	2005-06	24584	5540	( + ) 72 %
7	2006-07	56390	12492	(+ )125 %
8	2007-08	98642	24575	( + ) 97 %
9	2008-09 ‘*’	142829	31396	( + ) 28 %
10	2009-10 #	123120	25834	( - ) 18 %
11	2010-11 #	88520	19427	( - ) 25 %
12	2011-12 # (April - January 2012)	122307	26192	-
CUMULATIVE TOTAL (from April 2000 to January 2012)		723367	160096	-

(a)    including amount remitted through RBI‟s-NRI Schemes (2000-2002).
(ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of monthly average rate provided by RBI (DEAP), Mumbai.
(iii) Variation in equity inflows reported in above Table II-A & II-B for 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 is due to difference in reporting of inflows by RBI in their monthly report to DIPP & monthly RBI bulletin.
(IV) # Figures for the years 2009-10, 2010-11 & 2011-12 are provisional subject to reconciliation with RBI.
(V) „*‟ An additional amount of US$ 4,035 million pertaining to the year 2008-09, since reported by RBI, has been included in FDI data base from February 2012.

 Majority of the foreign direct investment comes through Mauritius as it enjoys several tax advantages, which works well for the international investors.

Who are the authorities dealing with Foreign Investment in India?

(a)    FIPB (Foreign Investment Promotion Board), responsible for expeditious clearance of FDI proposals and review of the implementation of cleared proposals.  It also undertake investment promotion activities and issue and review general and sectoral policy guidelines;

(b)   SIA (Secretariat for Industrial Assistance): It acts as a gateway to industrial investment in India and assists the entrepreneurs and investors in setting up projects.  SIA also liaison with other government bodies to ensure necessary clearances;

(c)   FIIA (Foreign Investment Implementation Authority):  The authority works for quick implementation of FDI approvals and resolution of operational difficultieis faced by foreign investors;

(d)   Investment Commission

(e)    Project Approval Board

(f)    Reserve Bank of India

What are the total inflows of FDI in India?

a.       For the FY 2012-13 (for the month of July, 2012) was US$ 1.47 billion.

b.      Amount of FDI equity inflows for the financial year 2012-13 (from April 2012 to July 2012) stood at US$ 5.90 billion.

c.       Cumulative amount of FDI (from April 2000 to July 2012) into India stood at US$ 176.76 billion

**  Note / Caution :   The below  is only broad categorization and may need fine tuning and updations, For example in Civil Aviation and Broadcasting there are subcategories with different %ag of FDI allowed.    These needs to be checked for further and updated knowledge. 

(a) News About Civil Aviation and Broadcasting can be read from this link.

 (b) Second Link for the details can be checked by clicking here

What are the limits for FDI in different Sectors?

(A)          26% FDI is permitted in

·        Defence (In July 2013, there has been no change in FDI limit but higher investment may be considered in state of the art technology production by CCS)

·        Newspaper and media  **

·        Pension sector (allowed in October 2012 as per cabinet decision)

• Courier Services (through automatic route)
•  Tea Plantation (upto 49% through automatic route;  49-100% through FIPB route)

 (B) 49% FDI is permitted in :

Banking
Cable network**
DTH **
Infrastructure investment
Telecom

Insurance (in July 2013 it was raised to 49% from 26% subject to Parliament approval)

Petroleum Refining (49% allowed under automatic route)

Power Exchanges (49% allowed under automatic route)

Stock Exchanges, Depositories allowed under automatic route upto 49%

 49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible. [Permitted in September 2012]

(C) 51% is Permitted in

Multi-Brand Retail (Since September 2012)

Petro-pipelines

(D) 74% FDI is permitted in

 Atomic minerals
Science Magazines /Journals
Petro marketing
Coal and Lignite mines
Credit information comanies (raised from 49% to 74% in July, 2013)

(E) 100% FDI is permitted in Single Brand Retail (100% FDI allowed in single brand retail; 49% through automatic route;  49-100% through FIPB)

Advertizement
Airports
Cold-storage
BPO/Call centres
E-commerce
Energy (except atomic)
export trading house
Films
Hotel, tourism
Metro train
Mines (gold, silver)
Petroleum exploration
Pharmaceuticals
Pollution control
Postal service
Roads, highways, ports.
Township
Wholesale trading

Telecom (raised from 74% to 100% in July, 2013 by GoI)

Asset Reconstruction Companies (increased from 74% to 100 in July, 2013. Out of this 49% will be under automatic route