FDI operations in India

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans“. FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company).

Types of Foreign Direct Investment

There are mainly two types of FDI: Horizontal and Vertical. However, two other types of FDI have emerged- Conglomerate and Platform FDI.

1. HORIZONTAL FDI: Under this type of FDI, a business expands its inland operation to another country. The business undertake the same activities but in foreign country.
2. VERTICAL FDI: In this case, a business expands into another country by moving to a different level of supply chain. Thus business undertakes different activities overseas but these activities are related to main business.
3. CONGLOMERATE FDI: Under this type of FDI, a business undertakes unrelated business activities in a foreign country. this type is uncommon as it involves the difficulty of penetrating a new country and an entirely new market.
4. PLATFORM FDI: Here, a business expands into another country but the output from the business is then exported to a third country.

Routes

There are two routes by which India gets FDI.

1. Automatic route: By this route FDI is allowed without prior approval by Government or Reserve Bank of India.
2. Government route: Prior approval by government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure. Foreign Investment Promotion Board (FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017. It held its last meeting on 17 April, which was the 245th meeting of the Board. On 24 May 2017, Foreign Investment Promotion Board was scrapped by the Union Government. Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and FEMA, shall now be handled by the concerned Ministries/Departments in consultation with the Department for Promotion of Industry and Internal Trade(DPIIT) , Ministry of Commerce, which will also issue the Standard Operating Procedure (SOP) for processing of applications and decision of the Government under the extant FDI policy