What is a 'Foreign Direct Investment - FDI'

Foreign direct investment (FDI) is an investment made by a company or

individual in one country in business interests in another country, in the
form of either establishing business operations or acquiring business
assets in the other country, such as ownership or controlling interest in a
foreign company. Foreign direct investments are distinguished from
portfolio investments in which an investor merely purchases equities of
foreign-based companies. The key feature of foreign direct investment is
that it is an investment made that establishes either effective control of,
or at least substantial influence over, the decision making of a foreign
business.

BREAKING DOWN 'Foreign Direct Investment - FDI'

Foreign direct investments are commonly made in open economies,
as opposed to tightly regulated economies, that offer a skilled
workforce and above average growth prospects for the investor.
Foreign direct investment frequently involves more than just a
capital investment. It may include provision of management or
technology as well.

Foreign direct investment in India

Foreign direct investment (FDI) in India is the major monetary source for
economic development in India. Foreign companies invest directly in fast
growing private Indian businesses to take benefits of cheaper wages and
changing business environment of India. Economic liberalisation started
in India in wake of the 1991 economic crisis and since then FDI has
steadily increased in India.[1][2] It were Manmohan Singh and P. V.
Narasimha Rao who brought FDI in India, which subsequently generated
more than one crore jobs. According to the Financial Times, in 2015 India
overtook China and the US as the top destination for the Foreign Direct
Investment. In first half of the 2015, India attracted investment of $31
billion compared to $28 billion and $27 billion of China and the US
respectively.
Apart from being a critical driver of economic growth, foreign direct
investment (FDI) is a major source of non-debt financial resource for the
economic development of India. Foreign companies invest in India to
take advantage of relatively lower wages, special investment privileges
such as tax exemptions, etc. For a country where foreign investments
are being made, it also means achieving technical know-how and
generating employment.

The Indian government’s favourable policy regime and robust business

environment have ensured that foreign capital keeps flowing into the
country. The government has taken many initiatives in recent years such
as relaxing FDI norms across sectors such as defence, PSU oil
refineries, telecom, power exchanges, and stock exchanges, among
others.

India has already marked its presence as one of the fastest growing economies of the world. It
has been ranked among the top 10 attractive destinations for inbound investments. Since
1991, the regulatory environment in terms of foreign investment has been consistently eased
to make it investor-friendly.
The measures taken by the Government are directed to open new sectors for foreign direct
investment, increase the sectoral limit of existing sectors and simplifying other conditions of
the FDI policy. FDI policy reforms are meant to provide ease of doing business and
accelerate the pace of foreign investment in the country.

Routes
There are two routes by which India gets FDI.[7]

 Automatic route: By this route FDI is allowed without prior approval by

Government or Reserve Bank of India.[7]
 Government route: Prior approval by government is needed via this
route. The application needs to be made through Foreign Investment
Facilitation Portal, which will facilitate single window clearance of FDI
application under Approval Route. The application will be forwarded to
the respective ministries which will act on the application as per the
standard operating procedure.[8] Foreign Investment Promotion Board
(FIPB) w which was the responsible agency to oversee this route was
 abolished on May 24, 2017. It held its last meeting on 17th April, which
was the 245th meeting of the Board.

Automatic Route:

 Under this route no Central Government permission is required.

Government Route:

 Under this route applications are considered by the Foreign Investment

Promotion Board (FIPB). Approval from Cabinet Committee on Security is
required for more than 49% FDI in defence. The proposals involving
investments of more than USD 769.23 million are considered by Cabinet
committee on economic affairs.
 The Indian company receiving FDI either under the automatic route or the
government route is required to comply with provisions of the FDI policy
including reporting the FDI and issue of shares to the Reserve Bank of India.
The details can be seen from Q.6 of Section I of the following link- Quarter 6 of
Section I.

Sectors
During 2014–15, India received most of its FDI from Mauritius, Singapore,
Netherlands, Japan and the US. [14] On 25 September 2014, Government of
India launched Make in India initiative in which policy statement on 25 sectors
were released with relaxed norms on each sector.[15] Following are some of
major sectors for Foreign Direct Investment.