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Topic of the Day

1st June, 2020


Santosh Sir
All 6 CSE Prelims Qualified

If I can do it, you can too

asksantoshsir@gmail.com, https://t.me/asksantoshsir

Foreign Direct Investment

What is FDI?

 Foreign direct investment or FDI is an important factor that facilitates economic


development of a country.
 FDI is an investment from an entity residing outside the country where the
investment is to be made.
 It is characterized by a controlling ownership in a business of the domestic country
by the entity based in another country. This ‘controlling ownership’ is what
distinguishes foreign direct investment from foreign portfolio investment.
 A prerequisite of FDI is giving the foreign investor at least 10 per cent voting rights
in the day to day functions of the business.

Why FDI?

Apart from being a critical driver of economic growth, FDI also bring in managerial know
how,

 new job opportunities,


 an inflow of new technology,
 tech expertise and
 results in improved infrastructure.
 Investors can expand their business in another country in many ways.
 They can also acquire voting stocks of a business based outside their country.

Below outlined are ways in which foreign investors can invest in a business based in India.

 Obtaining voting stocks in a company that is based in another country


 Acquisitions and Mergers
 Joint ventures with a business placed in another country
 Commencing a subsidiary of a domestic firm in another country

How FDI is comes into India?


Foreign direct investment in India can be done under two routes.

1. Automatic Route
Under this route, foreign direct investment up to 100 per cent is allowed in all sectors and
activities except the following. The services listed below require prior approval of the
government.

 Where more than 24 per cent foreign equity is proposed to be received for manufacture of
items reserved for the Small Scale sector.
 FDI in sectors or activities to the amount permitted under Automatic Route does not
require any previous approval either by the government or the Reserve Bank of India.
 The overseas investors are only required to notify the Regional Office concerned of the
Reserve Bank of India within 30 days of receipt of inward remittances and file the required
documents along with form FC-GPR with that Office within 30 days of issue of shares to
the non-resident investors.
 Where provisions of Press Note 1 (2005 Series) issued by the Government of India are
attracted.

2. Government Route
Sectors and activities that do not come under the automatic route necessitate a sanction
from the Government of India and its concerned ministries

Although, the FDI is allowed through automatic route in most of the sectors, certain areas
such as defence, telecom, media, pharmaceuticals and insurance, government approval is
required for foreign investors.

Under the government route, the foreign investor has to take prior approval of the
respective ministry/department. Through the automatic approval route, the investor just
has to inform the RBI after the investment is made.

Sectors prohibited to receive FDI

There are nine sectors where FDI is prohibited that includes lottery business, gambling
and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars,
cheroots, cigarillos and cigarettes using tobacco.

Recent Trends:
India was among the top 10 recipients of Foreign Direct Investment (FDI) in 2019,
attracting $49 billion in inflows, a 16% increase from the previous year, driving the FDI
growth in South Asia. The majority went into services industries, including information
technology.

 The total Foreign Direct Investment (FDI) inflow into India grew 18 per cent in
2019-20 to $73 billion. The total FDI has doubled since 2013-14 from $36 billion to
$73 billion now.