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BE/U5 Topic 7 FDI Policy

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is one of the most important sources of non-debt foreign investment flows in developing countries like India. After the announcement of New Industrial Policy, 1991 and the current policies of liberalization, India has been experiencing an acceleration in the flow of foreign investment into the country.

FDI Policy of Government of India

Government of India has taken various effective steps to simplify the Foreign Direct investment policy. The Foreign Direct Investment Policy (FDI Policy) of the Government of India prescribes the foreign investment cap in specified industrial sectors. But in the recent times many activities have been transferred to unrestricted sectors in which 100% Foreign Direct investment is permitted. Broadly, the industrial sectors are categorized as:

  • Restricted
  • Prohibited
  • Unrestricted Sectors (Up to 100% foreign ownership)

All the sectors other than those mentioned below subject to terms and conditions in the FDI policy come under unrestricted sectors for example:

  • Mining (except Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities)
  • Manufacturing related commercial activities
  • Information Technology related activities
  • E-commerce (permitted in marketplace model and not the inventory based model. Also, it applies only to Business to Business e-commerce and not business to consumer e-commerce)

The Government of India embarked upon major economic reforms since mid-1991 with the intension of integrating with the world economy and to emerge as a significant, player in the globalization process. As a part of economic reforms, the government made necessary promotion of foreign direct investment.

As part of extant policy, FDI up to 100 per cent is allowed, under the automatic route, in most of the sectors or activities. FDI under the automatic route does not require prior approval either by the government or the RBI. Investors are only required to notify the regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

Under the government approval route, approvals for FDI proposals, other than Non-resident Indians, and proposals for FDI in ‘Singh Brand’ product retailing, and Multi-Brand Retail Trading (MBRT) are received in the Department of Economic Affaires.

Proposals for FDI in ‘Singh Brand’ product retailing, MB and by NRIs are received in the Department of Industrial Policy and Promotion. These proposals are then considered by the Foreign Investment Promotion Board (FIPB) which is housed in the Department of Economic Affaires.

Foreign investments in equity capital of an Indian Company under the port-folio Investment scheme are governed by separate regulations of RBI/securities and Exchanges Board of India (SEBI). The FDI policy has been extensively liberalized progressively through review of the policy on an ongoing basis and allowing FDI in more sectors under the automatic route. Three major reviews were undertaken on the year 2000, 2006 and 2007-08. A major policy stance defining indirect foreign investment was taken in 2009.

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