Foreign Direct Investment

Foreign Direct Investment

  • § Definition:
  •        Foreign direct investment (FDI) is basically an investment made into a company or cooperation of a country by an individual or a company located in another country either by acquiring the ownership or through joint venture for business expansion. It is a major non-debt monetary source driving the economic developments in India.

  § Why is it important ?

     Foreign Direct investment plays a vital role in economic development as

a.It acts as a bridge to fulfill the gap between investment and saving.

b.Provides access to the best and modern technology 

c.Generates new production opportunity and employment

 § Evolution of FDI in India :

  •    Prior to economic reforms of 1991, Foreign investments did exist but with utmost caution and selective approach. It was only in 1991 when it was introduced under Foreign Exchange Management Act (FEMA) by then finance minister Dr. Manmohan Singh.  Although FDI was introduced in the year 1991, it attracted very less foreign investments in the early years and it was from 2014 onwards when liberalized government policies facilitated upsurge in foreign inflows and now in the current scenario India has managed to become one of the most attractive destination for foreign investments.
  •    However there are various sectors including atomic energy, chit funds and many more in which FDI is restricted. Except the         
  •    prohibited ones, rest of the sectors are enlisted under their respective permissible routes .

 

§Routes for FDI

  § Three main types of FDI :

Horizontal FDI

Vertical FDI

Conglomerate FDI

Company or an individual

makes investment into

a same business in

another country.

Company or an individual 

makes investment into

a related  business in

another country.

Company or an individual

makes foreign investment

into a business i.e.completely

different to its existing

business.

eg. Suppose Kitkat

invests into dairy milk firm.

eg. Kitkat invests

into a sugar firm which

will be used in its

chocolate business.

eg. Kitkat company

invests into an automobile

company.

 

§ Why was FDI recently in news?

1. In May 2020, Government increased FDI in Defence manufacturing under  the automatic route from 49 per cent to 74 per cent.

2. In April 2020, the Government reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and thus amended the existing consolidated FDI Policy, 2017 as follows:

          i.  An individual or a company of any country that shares a land border with India can invest in India firms only through government route which was earlier exclusive to Pakistan and Bangladesh only.

          ii. The  amendment also applies  to “Beneficial Ownership” who are residents of a neighbouring country even though the investing company is not located in the neighbourhood.

     3. In March 2020, Govt. permitted non-resident Indians (NRIs )to acquire upto 100 per cent stake in Air India.

§ In matters of conflict Any violation of regulation under FDI falls under the purview of penal provisions under FEMA . RBI administers FEMA, Enforcement Directorate and ministry of finance holds the authority of investigation in case of any conflict /violation.

 

* FEMA – Foreign Exchange Management Act ,1999  was enacted under the Ministry of Finance by the Parliament of India for consolidation and amendment  of laws relating to  foreign exchange (FOREX) in India .

 

Sources:

PIB

Dept. for Promotion  of Industry and Internal Trade (DPIIT)

The Economic Times

Drishti IAS

 

 

 

—  Sonali Raulo

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