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Things to know about FDI

Things to know about FDI


(The importance of FDI is explained in this article in questions and answers format. The questions are like What way FDI is useful to domestic economy?,  Why overseas entities invest in other countries?, Why India attracts FDI?, Why shop-keepers, businessmen and some political parties in India oppose FDI?, Is there any restriction for FDI?, What is a negative list in FDI?, When an investment is treated as FDI,)

The Government of India introduced major changes in FDI policy on Monday, Jun 18, 2016, bringing most sectors and activities under the automatic approval route. The changes introduced now simplifies the regulations governing foreign investments, increases sectoral caps with a small negative list. These amendments are the second sweeping changes in FDI policy after changes announced in November 2015. In the first amendment, the Indian companies are allowed receiving FDI under automatic route without any prior approval of the Reserve Bank of India at any stage and they are only required to subsequently report the capital inflow and the issue of shares to the Reserve Bank in prescribed formats.

The importance of FDI including changes in the latest amendments is explained below in questions and answers format.

What way FDI is useful to domestic economy?

The overseas investor brings his business expertise and knowledge in a particular field with latest technical know-how along with his capital investment. This helps the investee country getting the transfer of new technologies, management skills, and intellectual property. The foreign investment comes in the form of foreign currency which improves the foreign exchange position of investee country. As much as domestic capital is inadequate for economic growth, the large inflow of additional capital boost the capital market and speed up the growth of the domestic economy. As the economy grows, more employment opportunities will be created. The FDI also helps increase in tax revenues to the Government.

Why overseas entities invest in other countries?

There may be many reasons behind their planning to invest in other countries. Normally cheaper wages at investee country, availability of cheaper raw materials, availability skilled manpower, availability of good infrastructure, availability of the good market for their produce, peace-loving population, other privileges like low tax / no tax and so on attracts foreign investments in that country.

Why India attracts FDI?

India with its bulging population stands at the 3rd largest economy India with its bulging population stands at the 3rd largest economy. India with its bulging population stands at the 3rd largest economy India with its bulging population stands at the 3rd largest economy of the world in terms of purchasing power parity. Further, India is in possession of large number of technical expertise, skilled managers and over 300 million middle class consumers. Hence, availability of skilled work force and readily available consumers for the products represents India an attractive market. In view of opportunities to do good business in India, many foreign companies have planning to set up business operations in India. The Insurance, Retail sector, Civil Aviation, Telecommunications, Apparels, Information Technology, Pharmacy, Auto parts, Jewelry and Chemicals are the major sectors where foreign investors evinced interest in India.

Why shop-keepers, businessmen and some political parties in India oppose FDI?

The domestic businessmen have a fear that they may not be able to compete with international giants who can make a huge investment and bring world class technologies with them. In such an event the locals may lose their ownership to foreign companies or edge out from their business. The foreign companies may establish the monopoly over the highly profitable business in India by virtue of their investment capacity. Their investment need not necessarily create job opportunities, as those companies invest more in technology and intellectual properties so that they can run their unit by employing a very few people.

Is there any restriction for FDI in India?

Permission to FDI is not uniform for all sectors in India. Some sectors are opened up for 100%  and in some sectors it is allowed only up to 26%, 49% or 51%, and in some sectors are fully prohibited. As per the latest amendment dated Jun 20, 2016   the following sectors are opened up for FDI to the extent mentioned below.

  • Defence Sector – up to 100%
  • Brownfield Pharmaceuticals under automatic route – up to 74%
  • Brownfield airport project under automatic route – up to 100%
  • Civil aviation – under automatic route – up to 49% beyond 49% up to 100% through Government approval.
  • Cable networks, DTH under automatic route – up to 100%

What is a negative list in FDI?

Foreign Direct Investment is fully prohibited in the following sectors, these sectors called as the sector under negative list for FDI. They are  i) Atomic Energy ii) Lottery Business iii) Gambling and Betting iv) Business of Chit Fund v) Nidhi Company vi) 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) vii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification viii) Trading in Transferable Development Rights (TDRs).ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

When the investment is treated as FDI?

FDI (Foreign Direct Investment) can be described as  the investment made by an overseas investor, in a domestic economy, with an objective of establishing business activities in that country. The investment is treated as FDI only when the investor invests either as  the foreign collaborator or foreign equity holder, or mandatory holder of fully convertible preference shares or mandatory holders of fully convertible debenture with the pricing being decided upfront as a figure or based on the formula that is decided upfront. The price at the time of conversion cannot be inferior to the fair value worked out, at the time of issuance of such instruments as per FEMA regulation. The investment with a provision either to convert or not to convert the investment into equity or conversion does not involve upfront pricing on a proposed date, such investments can be classified as External Commercial Borrowings but not as FDI.

Related article: FDI in insurance sector permitted up to 49% with immediate effect (Category: banking news)

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