Foreign Direct Investment

Foreign direct investment is investment made by a foreign individual or company in productive

capacity of another country. It is the movement of capital across national frontiers in a manner
that grants the investor control over the acquired asset.

Types of FDI
There are two types of FDI:

 Greenfield investment : It is the direct investment in new facilities or the expansion of

existing facilities. It is the principal mode of investing in developing countries.
 Mergers and Acquisition : It occurs when a transfer of existing assets from local firms
takes place.

Forbidden Territories:
FDI is not permitted in the following industrial sectors:

 Arms and ammunition.

 Atomic Energy.
 Railway Transport.
 Coal and lignite.
 Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Investment in India
Government of India recognizes the key role of Foreign Direct Investment (FDI) in economic
development not only as an addition to domestic capital but also as an important source of
technology and global best practices. The Government of India has put in place a liberal and
transparent FDI policy.

FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI policy in
India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI
up to 100 % from foreign/NRI investor without prior approval in most of the sectors including
the services sector under automatic route. FDI in sectors/activities under automatic route does
not require any prior approval either by the Government or the RBI.

 India is now the third most favoured destination for Foreign Direct Investment (FDI),
behind China and the USA, according to an AT Kearney survey that tracked investor
confidence among global executives to determine their order of preferences.
 India’s share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in 1997.
 FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008
million in 1996-97 because of a decline in portfolio investment. Although foreign direct
investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.
$ 3,197 million in 1997- 98
 International developments continue to affect capital flows into India in 1998-99 as well.
 Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997-
98. U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI.
  S. Korea increased its flow of investment in India from a meagre U.S.$ 6.3 million in
1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per cent
share).
 There has been a sharp rise in the number of FDIs approved in 2004.
 During the first seven months of 2004, between January and July, Rs 5,220 crore worth
of FDI was approved.
 Almost a third share of the investment in India is by NRI.
 According to the latest Reserve Bank of India figures, outflows through various NRI
deposits schemes amounted to $903 million since May 2004, as against net inflows of
$1.2 billion in the corresponding period last year.

Understanding Foreign Direct Investment

(FDI)
Definition
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can
provide a firm with new markets and marketing channels, cheaper production facilities, access to new
technology, products, skills and financing. For a host country or the foreign firm which receives the
investment, it can provide a source of new technologies, capital, processes, products, organizational
technologies and management skills, and as such can provide a strong impetus to economic development.
Foreign direct investment, in its classic definition, is defined as a company from one country making a
physical investment into building a factory in another country. The direct investment in buildings,
machinery and equipment is in contrast with making a portfolio investment, which is considered an
indirect investment. In recent years, given rapid growth and change in global investment patterns, the
definition has been broadened to include the acquisition of a lasting management interest in a company
or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct
acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic
alliance with a local firm with attendant input of technology, licensing of intellectual property,   In the
past decade, FDI has come to play a major role in the internationalization of business. Reacting to
changes in technology, growing liberalization of the national regulatory framework governing investment
in enterprises, and changes in capital markets profound changes have occurred in the size, scope and
methods of FDI. New information technology systems, decline in global communication costs have made
management of foreign investments far easier than in the past. The sea change in trade and investment
policies and the regulatory environment globally in the past decade, including trade policy and tariff
liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the
deregulation and privitazation of many industries, has probably been been the most significant catalyst for
FDI’s expanded role.

The most profound effect has been seen in developing countries, where yearly foreign direct
investment flows have increased from an average of less than $10 billion in the 1970’s to a
yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in
1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global
FDI.. Driven by mergers and acquisitions and internationalization of production in a range of
industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998
(Source: UNCTAD)

Proponents of foreign investment point out that the exchange of investment flows benefits both
the home country (the country from which the investment originates) and the host country (the
destination of the investment). Opponents of FDI note that multinational conglomerates are able
to wield great power over smaller and weaker economies and can drive out much local
competition. The truth lies somewhere in the middle.

For small and medium sized companies, FDI represents an opportunity to become more actively involved
in international business activities. In the past 15 years, the classic definition of FDI as noted above has
changed considerably. This notion of a change in the classic definition, however, must be kept in the
proper context. Very clearly, over 2/3 of direct foreign investment is still made in the form of fixtures,
machinery, equipment and buildings. Moreover, larger multinational corporations and conglomerates still
make the overwhelming percentage of FDI. But, with the advent of the Internet, the increasing role of
technology, loosening of direct investment restrictions in many markets and decreasing communication
costs means that newer, non-traditional forms of investment will play an important role in the future.  
Many governments, especially in industrialized and developed nations, pay very close attention to foreign
direct investment because the investment flows into and out of their economies can and does have a
significant impact.  In the United States, the Bureau of Economic Analysis, a section of the U.S.
Department of Commerce, is responsible for collecting economic data about the economy including
information about foreign direct investment flows.  Monitoring this data is very helpful in trying to
determine the impact of such investments on the overall economy, but is especially helpful in evaluating
industry segments. State and local governments watch closely because they want to track their foreign
investment attraction programs for successful outcomes.

How Has FDI Changed in the Past Decade? 

As mentioned above, the overwhelming majority of foreign direct investment is made in the
form of fixtures, machinery, equipment and buildings. This investment is achieved or
accomplished mostly via mergers & acquisitions. In the case of traditional manufacturing, this
has been the primary mechanism for investment and it has been heretofore very efficient. Within
the past decade, however, there has been a dramatic increase in the number of technology
startups and this, together with the rise in prominence of Internet usage, has fostered increasing
changes in foreign investment patterns. Many of these high tech startups are very small
companies that have grown out of research & development projects often affiliated with major
universities and with some government sponsorship. Unlike traditional manufacturers, many of
these companies do not require huge manufacturing plants and immense warehouses to store
inventory. Another factor to consider is the number of companies whose primary product is an
intellectual property right such as a software program or a software-based technology or process.
Companies such as these can be housed almost anywhere and therefore making a capital
investment in them does not require huge outlays for fixtures, machinery and plants.

In many cases, large companies still play a dominant role in investment activities in small, high tech
oriented companies. However, unlike in the past, these larger companies are not necessarily acquiring
smaller companies outright. There are several reasons for this, but the most important one is most likely
the risk associated with such high tech ventures. In the case of mature industries, the products are well
defined. The manufacturer usually wants to get closer to its foreign market or wants to circumvent some
trade barrier by making a direct foreign investment. The major risk here is that you do not sell enough of
the product that you manufactured. However, you have added additional capacity and in the case of
multinational corporations this capacity can be used in a variety of ways.

High tech ventures tend to have longer incubation periods. That is, the product tends to require
significant development time. In the case of software and other intellectual property type
products, the product is constantly changing even before it hits the marketplace. This makes the
investment decision more complicated. When you invest in fixtures and machinery, you know
what the real and book value of your investment will be. When you invest in a high tech venture,
there is always an element of uncertainty. Unfortunately, the recent spate of dot.com failures is
quite illustrative of this point.

Therefore, the expanded role of technology and intellectual property has changed the foreign direct
investment playing field. Companies are still motivated to make foreign investments, but because of the
vagaries of technology investments, they are now finding new vehicles to accomplish their goals.
Consider the following:

Licensing and technology transfer. Licensing and tech transfer have been essential in promoting
collaboration between the academic and business communities. Ever since legal hurdles were removed
that allowed universities to hold title to research and development done in their labs, licensing
agreements have helped turned raw technology into finished products that are viable in competitive
marketplaces. With some help from a variety of government agencies in the form of grants for R&D
as well as other financial assistance for such things as incubator programs, once timid college
researchers are now stepping out and becoming cutting edge entrepreneurs. These strategic alliances
have had a serious impact in several high tech industries, including but not limited to: medical and
agricultural biotechnology, computer software engineering, telecommunications, advanced materials
processing, ceramics, thin materials processing, photonics, digital multimedia production and
publishing, optics and imaging and robotics and automation. Industry clusters are now growing up
around the university labs where their derivative technologies were first discovered and nurtured.
Licensing agreements allow companies to take full advantage of new and exciting technologies while
limiting their overall risk to royalty payments until a particular technology is fully developed and thus
ready to put new products into the manufacturing pipeline.

Reciprocal distribution agreements. Actually, this type of strategic alliance is more trade-based, but in
a very real sense it does in fact represent a type of direct investment. Basically, two companies,
usually within the same or affiliated industries, agree to act as a national distributor for each other’s
products. The classical example is to be found in the furniture industry. A U.S.-based manufacturer of
tables signs a reciprocal distribution agreement with a Spanish-based manufacturer of chairs. Both
companies gain direct access to the other’s distribution network without having to pay distributor
support payments and other related expenses found within the distribution channel and neither
company can hurt the other’s market for its products. Without such an agreement in place, the Spanish
manufacturer might very well have to invest in a national sales office to coordinate its distributor
network, manage warehousing, inventory and shipping as well as to handle administrative tasks such
as accounting, public relations and advertising.

Joint venture and other hybrid strategic alliances. The more traditional joint venture is bi-lateral, that
is it involves two parties who are within the same industry who are partnering for some strategic
advantage. Typical reasons might include a need for access to proprietary technology that might tip
the competitive edge in another competitor’s favor, desire to gain access to intellectual capital in the
form of ultra-expensive human resources, access to heretofore closed channels of distribution in key
regions of the world. One very good reason why many joint ventures only involve two parties is the
difficulty in integrating different corporate cultures. With two domestic companies from the same
country, it would still be very difficult. However, with two companies from different cultures, it is
almost impossible at times. This is probably why pure joint ventures have a fairly high failure rate only
five years after inception. Joint ventures involving three or more parties are usually called syndicates
and are most often formed for specific projects such as large construction or public works projects that
might involve a wide variety of expertise and resources for successful completion. In some cases,
syndicates are actually easier to manage because the project itself sets certain limits on each party and
close cooperation is not always a prerequisite for ultimate success of the endeavor.

Portfolio investment. Yes, we know that you’re paying attention and no we’re not trying to trip you up
here. Remember our definition of foreign direct investment as it pertains to controlling interest. For
most of the latter part of the 20th century when FDI became an issue, a company’s portfolio
investments were not considered a direct investment if the amount of stock and/or capital was not
enough to garner a significant voting interest amongst shareholders or owners. However, two or three
companies with "soft" investments in another company could find some mutual interests and use their
shareholder power effectively for management control. This is another form of strategic alliance,
sometimes called "shadow alliances". So, while most company portfolio investments do not strictly
qualify as a direct foreign investment, there are instances within a certain context that they are in fact a
real direct investment.
  

Why is FDI important for any consideration of going

global?
The simple answer is that making a direct foreign investment allows companies to accomplish several
tasks:

Avoiding foreign government pressure for local production.

Circumventing trade barriers, hidden and otherwise.

Making the move from domestic export sales to a locally-based national sales office.

Capability to increase total production capacity.

Opportunities for co-production, joint ventures with local partners, joint marketing arrangements,
licensing, etc;

A more complete response might address the issue of global business partnering in very general terms.
While it is nice that many business writers like the expression, “think globally, act locally”, this often
used cliché does not really mean very much to the average business executive in a small and medium
sized company. The phrase does have significant connotations for multinational corporations. But for
executives in SME’s, it is still just another buzzword. The simple explanation for this is the difference in
perspective between executives of multinational corporations and small and medium sized companies.
Multinational corporations are almost always concerned with worldwide manufacturing capacity and
proximity to major markets. Small and medium sized companies tend to be more concerned with selling
their products in overseas markets. The advent of the Internet has ushered in a new and very different
mindset that tends to focus more on access issues. SME’s in particular are now focusing on access to
markets, access to expertise and most of all access to technology.

What would be some of the basic requirements for companies

considering a foreign investment?

Depending on the industry sector and type of business, a foreign direct investment may be an
attractive and viable option. With rapid globalization of many industries and vertical integration
rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends
in their industry. From a competitive standpoint, it is important to be aware of whether a
company’s competitors are expanding into a foreign market and how they are doing that. At the
same time, it also becomes important to monitor how globalization is affecting domestic clients.
Often, it becomes imperative to follow the expansion of key clients overseas if an active business
relationship is to be maintained.
New market access is also another major reason to invest in a foreign country. At some stage,
export of product or service reaches a critical mass of amount and cost where foreign production
or location begins to be more cost effective. Any decision on investing is thus a combination of a
number of key factors including:

assessment of internal resources,

competitiveness,

market analysis

market expectations.

From an internal resources standpoint, does the firm have senior management support for the
investment and the internal management and system capabilities to support the set up time as
well as ongoing management of a foreign subsidiary? Has the company conducted extensive
market research involving both the industry, product and local regulations governing foreign
investment which will set the broad market parameters for any investment decision? Is there a
realistic assessment in place of what resource utilization the investment will entail? Has
information on local industry and foreign investment regulations, incentives, profit retention,
financing, distribution, and other factors been completely analyzed to determine the most viable
vehicle for entering the market (greenfield, acquisition, merger, joint venture, etc.)? Has a plan
been drawn up with reasonable expectations for expansion into the market through that local
vehicle? If the foreign economy, industry or foreign investment climate is characterized by
government regulation, have the relevant government agencies been contacted and concurred?
Have political risk and foreign exchange risk been factored into the business plan?

Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market.

All other differences flow from this primary difference. FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides
increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the
stock exchanges and provides a better price discovery process for the scrips.

Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby puling down not only our share prices but also wrecking havoc with the
Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment
is an investment that a parent company makes in a foreign country. On the contrary, FII or
Foreign Institutional Investor is an investment made by an investor in the markets of a foreign
nation.

In FII, the companies only need to get registered in the stock exchange to make investments. But
FDI is quite different from it as they invest in a foreign nation.

The Foreign Institutional Investor is also known as hot money as the investors have the liberty to
sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words,
FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and
exit that easily. This difference is what makes nations to choose FDI’s more than then FIIs.
FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign
investment for the whole economy.

Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises
capacity or productivity or change its management control. In an FDI, the capital inflow is
translated into additional production. The FII investment flows only into the secondary market. It
helps in increasing capital availability in general rather than enhancing the capital of a specific
enterprise.

The Foreign Direct Investment is considered to be more stable than Foreign Institutional
Investor. FDI not only brings in capital but also helps in good governance practises and better
management skills and even technology transfer. Though the Foreign Institutional Investor helps
in promoting good governance and improving accounting, it does not come out with any other
benefits of the FDI.

While the FDI flows into the primary market, the FII flows into secondary market. While FIIs
are short-term investments, the FDI’s are long term.

Summary
1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is
an investment made by an investor in the markets of a foreign nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter
and exit that easily.
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability
in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional
Investor

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by
them, to complement and supplement domestic investment. To make the investment in India
attractive, investment and returns on them are freely repatriable, except where the approval is
10
subject to specific conditions such as lock -in period on original investment, dividend cap, foreign
exchange neutrality, etc. as per the notified sectoral policy. The condition of dividend balancing
that was applicable to FDI in 22 specified consumer goods industries stands withdrawn for
dividends declared after 14th July 2000, the date on which Press Note No. 7 of 2000 series was
issued.
2.1 Foreign direct investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
FDI for virtually all items/activities can be brought in through the Automatic Route under powers
delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
2.2 All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route
except those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the
automatic route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the
notified sectoral policy and equity caps and RBI will ensure compliance of the same. The
National Industrial Classification (NIC) 1987 shall remain applicable for description of activities
and classification for all matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so
unless otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.
(b) Existing Companies
2.3 Besides new companies, automatic route for FDI/NRI/OCB investment is also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are that (i) the increase in equity level must
result from the expansion of the equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign
currency and (iii) proposed expansion programme should be in the sector(s) under automatic
11
route. Otherwise, the proposal would need Government approval through the FIPB. For this the
proposal must be supported by a Board Resolution of the existing Indian company.
2.4 For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2.5 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 per cent of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
2.6 The automatic route for FDI and/or technology collaboration would not be available to those
who have or had any previous joint venture or technology transfer/trade mark agreement in the
same or allied field in India.
2.7 Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc.
in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
2.8 In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route
without obtaining prior approval from RBI. Investors are required to notify the Regional Office
concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file
required documentation within 30 days of issue of shares to Foreign Investors. This facility is
available to NRI/OCB investment also. [For procedure relating to automatic approval, refer toFOREIGN
DIRECT INVESTMENT
Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by
them, to complement and supplement domestic investment. To make the investment in India
attractive, investment and returns on them are freely repatriable, except where the approval is
10
subject to specific conditions such as lock -in period on original investment, dividend cap, foreign
exchange neutrality, etc. as per the notified sectoral policy. The condition of dividend balancing
that was applicable to FDI in 22 specified consumer goods industries stands withdrawn for
dividends declared after 14th July 2000, the date on which Press Note No. 7 of 2000 series was
issued.
2.1 Foreign direct investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
FDI for virtually all items/activities can be brought in through the Automatic Route under powers
delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
2.2 All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route
except those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the
automatic route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the
notified sectoral policy and equity caps and RBI will ensure compliance of the same. The
National Industrial Classification (NIC) 1987 shall remain applicable for description of activities
and classification for all matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so
unless otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.
(b) Existing Companies
2.3 Besides new companies, automatic route for FDI/NRI/OCB investment is also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are that (i) the increase in equity level must
result from the expansion of the equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign
currency and (iii) proposed expansion programme should be in the sector(s) under automatic
11
route. Otherwise, the proposal would need Government approval through the FIPB. For this the
proposal must be supported by a Board Resolution of the existing Indian company.
2.4 For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2.5 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 per cent of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
2.6 The automatic route for FDI and/or technology collaboration would not be available to those
who have or had any previous joint venture or technology transfer/trade mark agreement in the
same or allied field in India.
2.7 Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc.
in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
2.8 In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route
without obtaining prior approval from RBI. Investors are required to notify the Regional Office
concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file
required documentation within 30 days of issue of shares to Foreign Investors. This facility is
available to NRI/OCB investment also. [For procedure relating to automatic approval, refer toFOREIGN
DIRECT INVESTMENT
Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by
them, to complement and supplement domestic investment. To make the investment in India
attractive, investment and returns on them are freely repatriable, except where the approval is
10
subject to specific conditions such as lock -in period on original investment, dividend cap, foreign
exchange neutrality, etc. as per the notified sectoral policy. The condition of dividend balancing
that was applicable to FDI in 22 specified consumer goods industries stands withdrawn for
dividends declared after 14th July 2000, the date on which Press Note No. 7 of 2000 series was
issued.
2.1 Foreign direct investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
FDI for virtually all items/activities can be brought in through the Automatic Route under powers
delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
2.2 All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route
except those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the
automatic route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the
notified sectoral policy and equity caps and RBI will ensure compliance of the same. The
National Industrial Classification (NIC) 1987 shall remain applicable for description of activities
and classification for all matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so
unless otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.
(b) Existing Companies
2.3 Besides new companies, automatic route for FDI/NRI/OCB investment is also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are that (i) the increase in equity level must
result from the expansion of the equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign
currency and (iii) proposed expansion programme should be in the sector(s) under automatic
11
route. Otherwise, the proposal would need Government approval through the FIPB. For this the
proposal must be supported by a Board Resolution of the existing Indian company.
2.4 For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2.5 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 per cent of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
2.6 The automatic route for FDI and/or technology collaboration would not be available to those
who have or had any previous joint venture or technology transfer/trade mark agreement in the
same or allied field in India.
2.7 Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc.
in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
2.8 In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route
without obtaining prior approval from RBI. Investors are required to notify the Regional Office
concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file
required documentation within 30 days of issue of shares to Foreign Investors. This facility is
available to NRI/OCB investment also. [For procedure relating to automatic approval, refer toFOREIGN
DIRECT INVESTMENT
Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by
them, to complement and supplement domestic investment. To make the investment in India
attractive, investment and returns on them are freely repatriable, except where the approval is
10
subject to specific conditions such as lock -in period on original investment, dividend cap, foreign
exchange neutrality, etc. as per the notified sectoral policy. The condition of dividend balancing
that was applicable to FDI in 22 specified consumer goods industries stands withdrawn for
dividends declared after 14th July 2000, the date on which Press Note No. 7 of 2000 series was
issued.
2.1 Foreign direct investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
FDI for virtually all items/activities can be brought in through the Automatic Route under powers
delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
2.2 All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route
except those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the
automatic route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the
notified sectoral policy and equity caps and RBI will ensure compliance of the same. The
National Industrial Classification (NIC) 1987 shall remain applicable for description of activities
and classification for all matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so
unless otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.
(b) Existing Companies
2.3 Besides new companies, automatic route for FDI/NRI/OCB investment is also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are that (i) the increase in equity level must
result from the expansion of the equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign
currency and (iii) proposed expansion programme should be in the sector(s) under automatic
11
route. Otherwise, the proposal would need Government approval through the FIPB. For this the
proposal must be supported by a Board Resolution of the existing Indian company.
2.4 For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2.5 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 per cent of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
2.6 The automatic route for FDI and/or technology collaboration would not be available to those
who have or had any previous joint venture or technology transfer/trade mark agreement in the
same or allied field in India.
2.7 Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc.
in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
2.8 In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route
without obtaining prior approval from RBI. Investors are required to notify the Regional Office
concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file
required documentation within 30 days of issue of shares to Foreign Investors. This facility is
available to NRI/OCB investment also. [For procedure relating to automatic approval, refer toFOREIGN
DIRECT INVESTMENT
Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country.
Government is , therefore, making all efforts to attract and facilitate FDI and investment from Non
Resident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by
them, to complement and supplement domestic investment. To make the investment in India
attractive, investment and returns on them are freely repatriable, except where the approval is
10
subject to specific conditions such as lock -in period on original investment, dividend cap, foreign
exchange neutrality, etc. as per the notified sectoral policy. The condition of dividend balancing
that was applicable to FDI in 22 specified consumer goods industries stands withdrawn for
dividends declared after 14th July 2000, the date on which Press Note No. 7 of 2000 series was
issued.
2.1 Foreign direct investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.
FDI for virtually all items/activities can be brought in through the Automatic Route under powers
delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through
Government approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
2.2 All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route
except those covered under (i) to (iv) of para 2.9.
Whenever any investor chooses to make an application to the FIPB and not to avail of the
automatic route, he or she may do so.
Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the
Automatic Route. Investment under the Automatic Route shall continue to be governed by the
notified sectoral policy and equity caps and RBI will ensure compliance of the same. The
National Industrial Classification (NIC) 1987 shall remain applicable for description of activities
and classification for all matters relating to FDI/NRI/OCB investment:
Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so
unless otherwise decided and notified by Government.
Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion.
(b) Existing Companies
2.3 Besides new companies, automatic route for FDI/NRI/OCB investment is also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are that (i) the increase in equity level must
result from the expansion of the equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign
currency and (iii) proposed expansion programme should be in the sector(s) under automatic
11
route. Otherwise, the proposal would need Government approval through the FIPB. For this the
proposal must be supported by a Board Resolution of the existing Indian company.
2.4 For existing companies without an expansion programme, the additional requirements for
eligibility for automatic approval are (i) that they are engaged in the industries under automatic
route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the
foreign equity must be in foreign currency.
2.5 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on
preferential basis shall not be transferable in any manner for a period of 5 years from the date of
their allotment has now been modified to the extent that not more than 20 per cent of the entire
contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
2.6 The automatic route for FDI and/or technology collaboration would not be available to those
who have or had any previous joint venture or technology transfer/trade mark agreement in the
same or allied field in India.
2.7 Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc.
in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and
sector specific cap on FDI.
2.8 In a major drive to simplify procedures for foreign direct investment under the “automatic
route”, RBI has given permission to Indian Companies to accept investment under this route
without obtaining prior approval from RBI. Investors are required to notify the Regional Office
concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file
required documentation within 30 days of issue of shares to Foreign Investors. This facility is
available to NRI/OCB investment also. [For procedure relating to automatic approval, refer to
………………………………………………………………………………………………………………………………………………………………….
Foreign Direct Investment

Last Updated: February 2011

India has been ranked at the second place in global foreign direct investments in 2010 and will continue to remain among the top five attractive destinations for international investors during
2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-
2012'.

The 2010 survey of the Japan Bank for International Cooperation released in December 2010, conducted among Japanese investors, continues to rank India as the second most promising
country for overseas business operations.

A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies
can do better business during 2012-14.

According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010. However, it is ranked the
2nd most attractive destination following China in the next three years.

Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more Canadian firms are now focusing on India as an investment
destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010.

India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according
to the data released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December 2010,
while telecommunications including radio paging, cellular mobile and basic telephone services attracted second largest amount of FDI worth US$ 1,327 million during the same period.
Automobile industry was the third highest sector attracting FDI worth US$ 1,066 million followed by power sector which garnered US$ 1,028 million during the financial year April-December
2010. The Housing and Real Estate sector received FDI worth US$ 1,024 million.

During April-December 2010, Mauritius has led investors into India with US$ 5,746 million worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI equity
inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with US$ 1,055 million, according to data released by DIPP.

Investment Scenario

In the year 2010, India has assumed a notable position on the world canvas as a key international trading partner, majorly because of the implementation of its consolidated FDI policy. The
consolidation, first undertaken in March 2010, pulls together in one document all previous acts, regulations, press notes, press releases and clarifications issued either by the DIPP or the
Reserve Bank of India (RBI) where they relate to FDI into India.

According to the modified policy, foreign investors can inject their funds though the automatic route in the Indian economy. Such investments do not mandate any prior government permission.
However, the Indian company receiving such investment would be required to intimate the RBI of any such investment.

The FDI rules applicable to such sectors are, therefore, fairly clear and unambiguous