Foreign companies can benefit from investing in India and avail unique advantages such as reduced costs of labour, tax exemptions, etc., through automatic and government foreign direct investment routes. This article explains the meaning of FDI and investment routes.

When it comes to growing your wealth through market investments, the opportunities are innumerable. You can invest in stocks, mutual funds, government bonds and securities, commodities, currencies are several other assets. However, you need to assess your risk appetite before investing and ensure that you diversify your investments. You can invest in companies in India and abroad. The same is possible for people living abroad and hoping to invest in India. This article explains one such investment opportunity, i.e. foreign direct investment in India, in detail.

Foreign direct investment – meaning and explanation

A foreign direct investment, often abbreviated as FDI, is simply an investment made by a company or an individual in one country into a business or company located in a foreign land. FDIs typically occur when either international business operations are established in another country or when an international company acquires a business in an offshore company.

When an FDI transaction takes place, the investing company mostly takes controlling ownership in the offshore business or company in which the investment is made. The investing company is directly involved in the day-to-day operations of the business in a foreign company. FDI brings with it, money along with knowledge, skills and technology. It is common in open economies having a skilled workforce as well as a growth prospect.

FDI in India – The routes for investments

Having defined foreign direct investment, let’s understand its role and investment routes in India.

FDI is considered as a significant source of investment that aids India’s economic development. India started witnessing economic liberalisation in the wake of the economic crisis of 1991, after which FDI increased steadily in the country.

Routes through which FDI occurs in India

There are two common routes through which India gets Foreign Direct Investments.

1. The automatic route

The automatic route is when an Indian company or Non-Resident does not need any prior permission from the RBI or the Indian government for foreign investment in India. Several sectors come under the 100 per cent automatic route category. The most common ones include industries such as agriculture and animal husbandry, airports, air-transport services, automobiles, construction companies, food processing, jewellery, health care, infrastructure, electronic systems, hospitality, tourism, etc. There are also a few sectors in which 100 per cent automatic route foreign investments are not permitted. These include insurance, medical devices, pension, power exchanges, petroleum refining, and security market infrastructure companies.

2. The government route

The second route through which FDIs occur in India is through the government route. If FDI occurs through the government route, the company intending to invest in India must seek prior government approval mandatorily. Such companies are required to fill and submit an application form through the Foreign Investment Facilitation portal, which enables them to obtain single-window clearance. The portal then forwards the foreign company’s application to the respective ministry that holds the discretion to approve or reject the application. The ministry consults the Department for Promotion of Industry and Internal Trade or DPIIT before accepting or rejecting the foreign investment application. Once approved, the DPIIT issues the Standard Operating procedure as per the existing FDI policy, paving the path for foreign direct investment in India.

Like the automatic route, the government route also permits up to 100 per cent FDI. Here is a sector and per cent wise break-up as permitted under the government route

FDI Sector FDI Per cent in India
Public Sector Banks 20 per cent
Broadcasting Content Services 49 per cent
Multi-brand retail trading 51 per cent
Print Media 26 per cent

Apart from the sectors mentioned above, 100 per cent FDIs can also occur through government sectors such as core investment companies, food products, retail trading, mining, and satellite establishments and operations.

Sectors in which FDI is prohibited in India

While foreign direct investments are permitted through several sectors, as mentioned above, there are specific sectors and industries wherein FDI is strictly prohibited, irrespective of the automatic or government route. These include:

1. Atomic Energy Generation

2. Gambling, betting businesses and lotteries

3. Chit fund investments

4. Agricultural and plantation activities (excluding fisheries, horticulture and pisciculture, tea plantations, and animal husbandry)

5. Real estate and housing (excluding townships and commercial projects)

6. TDR trading

7. Products manufactured by the tobacco industry such as cigarettes and cigars

Final note:

Foreign direct investments prove beneficial to both, the foreign company investing in India as well as to the country in which the investment is made. For the investing country, FDI translates to reduced costs whereas the country enabling the FDI can develop human resources, skills and technologies. Common FDI examples include mergers and acquisitions, logistics, retail services and manufacturing. If you need information on foreign investment opportunities in India, you can reach out to an Angel Broking Investment advisor.