Foreign Direct

Investment
Meaning and importance of FDI

 Foreign direct investment (FDI) is an investment from a party in one country

into a business or corporation in another country with the intention of
establishing a lasting interest.
 However, as it involves changes in ownership interest, the government, by laying down
regulations, has put certain checks to ensure that the provisions are in line with the
national interest.
 The primary difference between FDI and portfolio investment is the ‘lasting
element of control’ or actively managing/ influencing a foreign firms’s
operations.
Beginning of FDI in India
 Before 1991, in India, there was no foreign direct investment and India was
more of a closed economy which was trying to shape up its economy after
gaining independence from British rule
 Part of series of reforms made in 1991 by opening of the economy, was to
attract high foreign investment in India which is beneficial for businesses and
also development of the nation
 FDI has over the years become a very important element of the Indian
economy and has been booming since the past decade.
Advantages of FDI in India

 The Indian startup economy got its wings through foreign direct
investments as they were looking for capital investments for their ventures.
 Various innovations, technology, and software advancements have come
into the country through FDI
 employment opportunities
 increase in the buying capacity of India makes India the perfect destination
for the establishment of the manufacturing units and the consumer market
for the goods
high employment opportunities, rural development, technological
development, and economic development
Entry options for FDI

• Automatic Route: Under this route, the foreign investor or the Indian Company is not
required to take prior approval of the RBI or the government before making
investments. Textiles & Garments, Agriculture, E-commerce, healthcare, manufacturing
are some of the industries covered under the automatic route.

• Approval / Government Route: Here, prior approval of the Government of India,

Foreign Investment Promotion Board (FIPB), or the Ministry of Finance is mandatory.
Consideration by the respective ministry or department is taken into account in the
approval route. Key industries include banking, public sector, core investment
companies, etc.
Regulatory framework of FDI in India

 FDI in India is in the protection of the Department for Promotion of

Industry and International Trade, Ministry of Commerce & Industry.
 The prohibited activities for FDI in India are atomic energy, railway
operations, gambling and betting, chit funds, real estate, manufacture of
tobacco products, etc.
 Such prohibitions are placed to secure national security and defense.
 The Foreign Exchange Management Act, 1999 is in accordance with the
framework of the World Trade Organization and it carved the
establishment of the Prevention of Money Laundering Act, 2002
FEMA 1999

OBJECTIVES
FEMA 1999 was enacted to encourage foreign trade and payments and assist in the
development of the Indian Foreign Exchange Market
It advocates a balance of payment as the true record of dealings in goods, services, and
assets between citizens of two countries
Salient features of FEMA

 Authorized personnel- Reserve Bank of India cannot carry forward all transactions
on its own.
 This is why the RBI delegates its powers to what it refers to as “Authorised Personnel”
or any authorized person under Sec 10
 Section 2 (c), any individual authorized under Section 10 (1) such as an offshore
banking unit, money changer, or the authorised dealer has the jurisdiction to deal in
foreign securities and foreign exchange of the country.
 authorizes four categories of personnel to deal with foreign securities. These include
state banks, co-op banks, FFMCs, RRBs, financial institutions, and more.
 SECTION 3 - Prohibits dealings in foreign exchange except through an authorised person.
 "foreign exchange" and "foreign security" are defined in sections 2(n) and 2(o)
 SECTION 4 - Restrains any person resident in India from acquiring, holding, owning, possessing or
transferring any foreign exchange, foreign security or any immovable property situated outside India
except as specifically provided in the Act. 
 SECTION 7 - deals with export of goods and services. Every exporter is required to furnish to the
RBI or any other authority, a declaration, etc., regarding full export value.
 SECTION 8 - casts the responsibility on the persons resident in India who have any amount of
foreign exchange due or accrued in their favour to get the same realised and repatriated to India
within the specific period and the manner specified by RBI..
 SECTIONS 10 and 12 - deals with duties and liabilities of the authorized persons.
 SECTIONS 13 and 15 - of the Act deal with penalties and enforcement of the orders of Adjudicating
Authority as well power to compound contraventions under the Act.
ROLE OF ENFORCEMENT
DIRECTORATE
 The Directorate of Enforcement is mainly concerned with the enforcement of
the provisions of the Foreign Exchange Management Act and Rules and
Regulation issued there under to serve the objectives of the Act.
 The officers of the Directorate perform adjudication function so as to impose
penalty on persons for contravention of the Act.