In contemporary times Foreign Direct Investment has become a major source of transfer of money between nations both developed and developing. This is when an investor (an individual or a company) invests in a foreign business by “establishing business operations or acquiring business assets, such as ownership or controlling interest in a foreign company.”
Types of Foreign Direct Investment?
There are two types of Foreign Direct Investment which represent the flow of money:
1) Inward FDI- Inward FDI happens when foreign capital is invested in local resources. This results in tax breaks and low-interest rates.
2) Outward FDI- Outward FDI is the opposite flow of inward FDI and is also called “direct investment abroad”. This net inflow is also called the “stock of foreign direct investment.”
Recent Policy Measures of Foreign Direct Investment
Some of the significant policy changes that have impacted India’s investment flows are following:
- Reserve Bank of India (RBI) Notification No. FEMA.40/2001RB; 2 March 2001
- a) The 3 years profitability condition requirement has been eliminated for Indian companies making overseas investments under the automatic direction.
- b) Overseas investments are opened to registered partnership firms and companies that render professional services. The least net worth of Rs. 150 million for Indian firms engaged in financial sector activities in India has been removed for investment overseas in financial sector
- RBI Notification No. FEMA.49/2002RB; 2 March 2001
- a) An Indian company which has exhausted the limit of $100 million in a year may apply to the RBI for a block allocation of foreign exchange subject to such terms and conditions as may be required
- RBI Notification No. FEMA.49/2002RB; 19 January 2002
- a) Indian firms in Special Economic Zones can freely make an overseas investment up to any amount without the limitation of the $100 million ceiling under the automatic route, rendered the funding is done out of the Exchange Earners Foreign Currency Account Balances.
- RBI Notification No. FEMA.53/2002RB; 1 March 2002 and FEMA.79/2002RB;10 December 2002
- a) The yearly limit on overseas investment has been increased to $100 million
- RBI Notification No. 83/RB 2003; 1 March 2003
- a) Indian organizations can make overseas investments by market purchases of foreign exchange without earlier approval of the RBI up to 100% of their net worth; up from the prior limit of 50%
- In the fiscal year 2003-2004
- a) Indian companies are allowed to undertake agricultural activities, which was earlier restricted, either directly or through an overseas branch
- In 2005, banks were allowed to lend money to Indian companies for acquisition of equity in overseas joint ventures, wholly owned subsidiaries or in other overseas companies as a strategic investment.
- In 2006, the automatic route of disinvestments was further improved. Indian companies are now authorized to disinvest without prior approval of the RBI in select categories.
- In 2007, the ceiling of investment through Indian entities was revised from 100 percent of the net worth to 200 percent of the net worth of the investing company under the automatic route of overseas investment.
- The aggregate ceiling for overseas investment by mutual funds, registered with SEBI, was enhanced from US$ 4 billion to US$ 5 billion in September 2007.
- Registered Trusts and Societies which have set up a hospital(s) in India have been allowed in August 2008 to make an investment in the same sector(s) in a JV/WOS outside India, with the previous approval of the Reserve Bank.
The Department of Industrial Policy and Promotion Ministry of Commerce and Industry published the “Consolidated FDI Policy” which is effective from June 2016 which lists out sectors that requires Government approval such as defense, print media, air transport service, etc.
The Consolidated Foreign Direct Investment Policy also lists out sectors that are under automatic route such as plantation sector, agriculture, duty-free shops, etc.