Foreign Direct Investment in India

Foreign Direct Investment in India

Over the years, India has become one of the most attractive destinations for foreign direct investment in the world.

Post liberalization of economy in the year 1991, India has open up its economy for foreign players for making investment in India and since then, year after year, there has been increase in Foreign Direct Investment in India.

This has led to many foreign companies setting up business in India in one form or the other.

Although foreign companies have multiple options of business set up in India, however, one of the most popular form of entity registration by foreign companies are subsidiary company registration in India or wholly owned subsidiary.

Currently, India is one of the fastest growing economies in the world. Some of the reasons for increase in FDI is India are as under:

  1. Availability of large pool of skilled and unskilled manpower and human resource.
  2. It is the second highest English speaking population in the world. Making it linguistically more variable.
  3. It has a large consumer base mainly from the middle class category.
  4. Favorable government policies for stimulating FDI in India like ease of doing business, make in India initiative, PLI scheme etc are attracting foreign players to make investment in India.
  5. India is pioneer in Information Technology and ITEs services.
  6. Huge opportunity in E commerce, Telecom, Retail, Healthcare and automobile sector in India.

Sectors attracting highest Foreign Direct Investment (FDI) in India:

Here are the top 10 sectors that have been attracting the highest share of FDIs in India in the recent years with share percentage from highest to lowest-

  1. Services- 17%
  2. Information Technology- 12%
  3. Telecom- 7%
  4. Trading- 6%
  5. Construction Development- 5%
  6. Automobile- 5%
  7. Chemicals- 4%
  8. Infrastructure- 3%
  9. Pharmaceuticals- 3%
  10. Tourism- 3%

Highest investing Countries in India: 

Here are the top 10 countries that have the maximum share and contribution of Foreign Direct Investment in India with share percentage-

  1. Mauritius- 29%
  2. Singapore- 21%
  3. USA- 7%
  4. Netherlands- 7%
  5. Japan- 7%
  6. United Kingdom (UK)- 6%
  7. Germany- 2%
  8. Cyprus-2%
  9. France- 2%
  10. Cayman Islands- 2%

Foreign Direct Investment policies in India:

Government of India formulates the policies related to the Foreign Direct Investments (FDIs). Every year, a consolidated circular and notification is released by the government to clarify the policy framework of the FDIs in India.

This is updated regularly with regulatory changes, if any. It is important for foreign organizations desiring to setup their business operations in India, to properly comply with the FDI policy, Industrial policies and the Foreign Exchange Management Act (FEMA). 

Routes for FDIs in India:

Various routes of making investment in India are as mentioned below:

  • Automatic Route

Almost 90% of the FDI is received through the automatic route. India has liberalized its FDI policy and now, 100% FDI is allowed in most of the sectors, without any prior approval from the government or the Reserve Bank of India (RBI). Once an organization receives an investment through this route, RBI needs to be intimated about receipt of such FDI by filing some statutory forms with RBI.

  • Government Approval Route

In case investment is proposed to be made in certain specified sectors which are not covered under automatic route, prior approval is to be taken for such investment by the Government. Also, if any FDI is being received from the land locked nations surrounding the Indian territorial boundaries, then, such investments would fall under government approval route and prior approval of the government is to be mandatorily taken.

  • Partial Automatic and Partial Government Approval route

There are certain sectors where the foreign investors can only invest up to some percentage or share. For instance in sectors related to defense, one van invest only about 74% FDI through automatic route. Share more than that requires government approval as well.

Prohibited Sectors for FDI in India:

As per the FDI policy, investment in following eight sectors are prohibited in India,

Atomic Energy

  1. Chit funds
  2. Gambling and betting
  3. Lottery business
  4. Manufacturing of tobacco or tobacco substitutes such as cigars, cheroots, cigarillos, cigarettes etc.
  5. Nidhi company
  6. Real Estate
  7. Trading in Transferable Development Rights (TDRs)

Thus, it is important for any foreign company which propose to make investment in India to have an overall look on FDI policy of India and sectors in which prior approval of government is required for making investment and also the sectors in which investments are prohibited.