Foreign controlling interest in a foreign company”1. There are

Foreign Direct investment (FDI)
is a significant term in any growing economy as it a great tool by which it can
share a platform with developed economy or a company for technological
development, financial development, infrastructural development etc. resulting
in development of the economy. FDI is also used by developed economic countries
and companies as a Business Investment for its own development. From both the
investors and beneficiary point of view FDI is a win-win situation when rightly
done as it benefits both the parties.

                                                                                                                                                       
I.           
INTRODUCTION

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“Foreign
direct investment (FDI) is an investment made by a company or individual in one
country in business interests in another country, in the form of either
establishing business operations or acquiring business assets in the other
country, such as ownership or controlling interest in a foreign company”1.
There are various rules and regulations pertaining to FDI in every country
which an investor should follow to make an investment in that country. Also
depending on the country the FDI is restricted to certain sectors and the
investment cap is also determined for certain sectors as to which an investor
or the investing company should keep note on.

                                                                                                         
II.       
Objective

 

·        
To discuss Automatic
and the Approval Routes of FDI in India.

·        
To give a brief
scenario of Foreign Direct Investment (FDI) in India.

·        
Discussing about
Automatic route of FDI in India and list those sectors that are allowed through
this route.

·        
Discussing about
Approval route of FDI in India and list those sectors that should come through
this route.

·        
This essay does not
discuss in detail those sectors that are listed.

·        
Discussing about FDI
in Defense sector in India.

 

 

 

 

1.     
Foreign Direct Investment – FDI article in https://www.investopedia.com/terms/f/fdi.asp ( Dec. 28, 2017).

 

 

 

 

 

 

                                                           
III.       
Foreign Direct Investment (FDI) in India

Post 1991 economic
reformation of India witnessed a great transformation of the policies themed in
liberalization of economy opening up India for global exposure and to give a
boost for the economy. One such reformation was to open up many business
sectors for Foreign Investment that was previously restricted b the Government
of India. A Foreign company can make investment or operate in India by any of
the following ways:

§ 
Opening a Representative
/ Liaison office or

§ 
Opening a Project
Office or

§ 
Opening a Branch
Office or

§ 
Opening a 100%
wholly owned subsidiary  or

§ 
 Joint Venture

By opening a Representative
/ Liaison Office in India a Foreign National Company can explore the
market potential to know if the country is suitable for their product or
services. By the laws of Government of India this should be winded up within Three
years.  After three years of
exploration and testing the company can choose whether or not to come into
India. The Representative or Liaison office operations are restricted and can
act as only a communication channel for the head office and cannot
do any business activity and earn income in India.

A Project
Office is allowed o be opened up in India after the overseas company
has a contract from an Indian company to do a
project in India.

A Branch
Office is one which does the same operations as of the parent company
within India. The Branch office also has certain restrictions such as it is not
allowed to perform any kind of Retail Trading, cannot do any manufacturing or
processing activities. The profits earned can be reemitted to the
parent company after paying of the taxes.

A Wholly
owned subsidiary can be formed by registering or incorporating a
business following the rules and regulations of India.

A Joint
Venture can be done by an overseas company by collaborating with an Indian
company and incorporating a joint venture company for business operations
in India.

 

 

Reference:

        
i.           
Reserve Bank of
India website https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9861 (Dec. 29, 2017).

 

 

 

 

                                                                    
IV.       
Restricted Sectors for FDI in India

There are certain
sectors in which FDI cannot be done. The sectors where FDI is prohibited are:


Lottery Business
including Government/private lottery, online lotteries, etc.


Gambling and Betting
including casinos etc.


Chit funds


Nidhi company2


Trading in
Transferable of Development Rights (TDRs)


Real Estate Business
or Construction of Farm Houses


Manufacturing of
cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes


Activities/sectors
not open to private sector investment like Atomic energy, Railways etc.

These sectors are
prohibited for investment of FDI as that sector may be illegal entity in the
country or it may be prohibited to protect the domestic companies or to avoid
an overseas investment from interfering with the interest of domestic business
entity in the same field as that of the investment. There are also certain
sectors like Atomic energy, Railway transportation that has been prohibited
from FDI as they are government controlled and do not allow any private
entities to take control.

 

                                                                         
V.       
Automatic Route of FDI in India

The Automatic Route
of Foreign Direct Investment (FDI) in India is where the Foreign Investment is
allowed directly without any approval of the Government of India. However the
amount that is being invested should be intimated to the Reserve Bank of India
(RBI) within a stipulated period of time. This route is a liberal and a less
restricted route for Foreign Investment. This route has been formulated for
easier and a quicker flow of Foreign Investment there by reducing the time being
consumed for approval by the government agencies. There is an Investment cap
specified for every sector, when it is par with it or within the cap the
Foreign Investment can be done through the Automatic Route.

 

 

 

 

2.     
Nidhi Company is
defined as a company that carries out a business of lending and depositing
amount from and to their members.

                                          

 

 

 

The following data
has been taken from Government of India’s website of Department of Industrial
Policy and Promotion http://www.dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy
(Dec. 28, 2017) .

The sectors3
that have been approved with 100% of
Foreign Direct Investment in India are:

v  Agriculture

v  Plantation Sector

v  Mining of metal and non-metal
ores

v  Mining – Coal & Lignite

v  Manufacturing

v  Food Product Retail Trading

v  Broadcasting Carriage Services ( Teleports, DTH, Cable
Networks, Mobile TV, HITS)

v  Content Service – Up-linking of Non-‘News &
Current Affairs’ TV Channels/Down-linking of TV Channels

v  Airports – Greenfield

v  Airports – Brownfield

v  Air Transport Service –
Non-Scheduled

v  Broadcasting Air Transport Service – Helicopter
Services/ Seaplane Services

v  Ground Handling Services

v  Maintenance and Repair organizations; flying training  institutes; 
and  technical  training institutions

v  Construction Development

v  Industrial Parks -new and
existing

v  Trading – Wholesale

v  Trading – B2B E-commerce

v  Duty Free Shops

v  Railway Infrastructure

v  Asset Reconstruction Companies

v  Credit Information Companies

v  White Label ATM Operations

v  Non-Banking Finance Companies

v  Pharma – Greenfield

v  Petroleum & Natural Gas – Exploration activities
of oil and natural gas fields

 

 

 

3.     
For the readers who
are interested to know in detail about the sectors mentioned above can refer to
Government of India’s Department of Industrial Policy and Promotion website http://www.dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy (Dec. 30, 2017) where the FDI Policy circular
of 2017 is available for downloading

 

 

 

The sectors that
have been approved up to 49% Foreign
Direct Investment (FDI) are:

v  Petroleum refining by PSUs

v  Infrastructure Company in the Securities Market

v  Commodity Exchanges

v  Insurance

v  Pension

v  Power Exchanges

 

                                                                         
VI.       
Approval Route of FDI in India

The Approval Route
or Government Route of Foreign Direct Investment (FDI) in India is where either
the Foreign Investor or the Indian company should get a prior approval from
certain governmental agencies before the investment is being done. The approval
agencies for approving the proposal of investment in India are:

§ 
Cabinet Committee on
Economic Affairs (CCEA)

§ 
Cabinet Committee on
Securities (CCS)

§ 
Respective
Ministries related to the sector of investment

In certain cases the
Cabinet Committee on Economic Affairs (CCEA) and Cabinet Committee on
Securities (CCS) are assisted by government agencies such as Department of
Economic Affairs and Department of Industrial Policy and Promotion for deciding
upon the approval of the investment being proposed.

The following data
has been taken from Government of India’s website of Department of Industrial Policy
and Promotion http://www.dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy (Dec. 28, 2017) .

The sectors4
that have been brought under Approval Route are:

v  Mining and mineral separation of titanium
bearing minerals and ores

v  Defense

v  Food Product Retail Trading

v  Publishing/printing  of 
scientific  and  technical magazines/specialty journals/
periodicals

v  Publication 
of  facsimile  edition 
of  foreign newspapers

v  Print 
Media  –  Publishing 
of  newspaper  and periodicals dealing with news and current
affairs

v  Publication of Indian editions of foreign
magazines dealing with news and current affairs

v  Print Media – Air Transport Service – Scheduled,
and Regional Air Transport Service 

 

 

4.     
For the readers who
are interested to know in detail about the sectors mentioned above can refer to
Government of India’s Department of Industrial Policy and Promotion website http://www.dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy (Dec. 30, 2017) where the FDI Policy circular
of 2017 is available for downloading.

                                                     

v  Broadcasting Content Service

v  Investment by Foreign Airlines

v  Satellites- establishment and
operation

v  Telecom Services

v  Trading – SBRT

v  Pharma – Brownfield

v  Banking- Private Sector

v  Banking- Public Sector

v  Private Security Agencies

v  Broadcasting Content Service  

a)      FM Radio

b)      Uplinking of ‘News & Current Affairs’ TV
Channels

v  Trading – MBRT

 

                                                                        
VII.       
FDI in Defense sector of India

This essay would
like to discuss upon the Foreign Direct investment (FDI) in the Defense sector
of India especially because defense is one of the most sensitive sectors of any
country where high secrecy has to be maintained and also is the sector in India
where both the Automatic rote and the Approval route are involved and
comes into practice. According to ‘Consolidated
FDI Policy 2017’ published by Government of India Foreign Direct Investment
(FDI) is allowed up to 49% through Automatic route into
India, beyond 49%  and up to
100% of FDI investment has to be through the Approval route with an
approval from the Government of India. This has been carefully set by the government.

Through the
Automatic route 49% of FDI is allowed into the India firm. This has been
decided so that the Indian firm will have a majority stake in the venture and
will dictate the terms so that it remains safe within the dictated terms of
India and won’t cause any security concern. For example any new technology
developed b the venture would be staying in India and will be an India
manufactured technology which will be a boost to the Indian economy in case it
is chosen to be sold to any of the firms. And also Indian company enjoys a
sharing of state of the art technology and a global exposure it this field.

Through the Approval
route any FDI investment beyond 49% should have been get approved by the
Government of India. It is to be noted that 100% of FDI is allowed into defense
sector through the Approval route. This is done by the government so as to
protect the local markets in the defense sector and will give an approval only
to a very necessary project with certain terms and conditions. If suppose this
sector is not scrutinized the reliable local producers like TATA groups, and
India’s one of the finest research wings such as DRDO would suffer when global corporate
enters resulting in self destruction kind of move. Hence this is carefully monitored
and only very necessary projects are being approved in to India through the
Approval route beyond 49% on FDI.

                                                                                                
VIII.       
Conclusion

Though there are a
lot of pros and cons regarding Foreign Direct Investment (FDI) and the amount
of FDI caps that has been set by the government into every sector, a personal thought
has to be given into it whether it is good or not. For a developing economy
like India FDI would be a boon to boost its economy for achieving its ambition
of being a global economic leader. FDI would result in sharing of technologies,
building of infrastructure etc. that would result in increase of employment, growth
of industrial standards, to a highly populated country like India which would
result in eradication of poverty, low living standards of many people. But on
the other hand a line has to be drawn to where the FDI should stand so as the
overseas company doesn’t affect the local businesses of Indians. On a personal
opinion, FDI beyond certain limits would affect and hit the local production,
research, business very hardly. For example If the FDI is too much liberalized
and allowed into sectors like railways, the corporate railway system would be
focused more on profits rather than fair services which would affect the entire
population of India. That is why FDI has been addressed in this essay as a tool.
This tool has to be used only when and where it is required and should be kept
aside (reduction of caps in FDI or complete prohibition of FDI in certain
sectors, in this case) when not required as it would hinder the existing process
which would become a disadvantage on a long term.