FOREIGN DIRECT INVESTMENT (FDI)

FOREIGN DIRECT INVESTMENT (FDI)

FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

FOREIGN DIRECT INVESTMENT (FDI)

It is a direct investment to the production or business in a country by an individual or company in another country. It can be either by buying a company in the targeted country or by expanding operations for the existing business in that country.
 

BENEFITS OF FOREIGN DIRECT INVESTMENT (FDI)

  • Economic growth
  • Trade
  • Employment and skill levels
  • Technology diffusion and knowledge transfer
  • Linkages and spillover to domestic firm
     

FORMS OF Foreign Direct Investment (FDI)

  1. Green field Investment.
  2. Merger and acquisitions (M&A).
  3. Brown field Investments.
     
GREEN FIELD INVESTMENT

* It is done through making investment in the equity capital of the host country firm or through opening branches in host countries.
* If the parent hosts the entire equity of the host country firm, the late is called wholly owned subsidiary of the parent.
* If it is more than half, it is known as subsidiary or an affiliate
 

MERGER AND ACQUISITION (M&A)
  • They are either purchase of a running company in abroad or an amalgamation with a running foreign company.
  • For the case of Merger, the acquiring company maintains its existence and the target company loses its existence.
  • In the case of Amalgamation, both loses their existence in the favor of a new company.
  • Merger and acquisition are Horizontal or vertical conglomerate.
  • When two or more firms engaged in similar activities combine, it is horizontal.
  • When two firms involved in different stages of production of a single final product combine, it is vertical.
     
BROWN FIELD INVESTMENT

* It is a combination of green field and M&A and then make huge investment for replacing plant and machinery in the target company;

Benefits of Foreign Direct Investment (FDI)

Benefits to the Host country

  • Availability of scare factors of production
  • Improvement in balance of payments through export and export substitution.
  • Building of economic and social infrastructure.
  • Fostering of economic linkages.
  • Strengthening of the government budget
  • Stimulation of nation economy.  Trans- National Corporations (TNCs) subsidiaries , which bring the vast portion of FDI , are estimated to produce around a third of total global exports.

Benefits to the Home country

  • Availability of raw material;
  • Improvement in balance of payments;
  • Revenue to the government;
  • Employment generation;
  • Improved political relations.
  • Cost to the Home country
  • Cultural and political interference;
  • Un Healthy Competition;
  • Over utilization of local resources (Both natural and human resources);
  • Violation of human rights; 
  • Threat to indigenous technology;
  • Threat to local products;
  • Investment abroad takes away employment opportunities;
  • It takes away capital;
  • Outflow of factors of production.
     

PROCEDURE FOR FDI IN INDIA

India has the most transparent and liberal policies on FDI among the other economies. Up to 100% FDI is allowed under the automatic route in all sectors except the following ones, where prior approval of the Government is required:-

  •  Sectors which are prohibited for FDI
  •  Activities or things that require an industrial license ; 
  • Proposals in which the foreign collaborator has an existing financial or technical collaboration in India in the same field ;
  • Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (SEBI) regulations, 1997 is attracted ;
  • All proposals falling outside notified sectoral policy or CAPS under sectors in which FDI is not permitted;

Most of the sectors comes under the automatic route for FDI. Investment could be made without approval of the central government in these sectors. Investment requires prior approval of the Central Government for the sectors that are not in the automatic route. Foreign Investment Promotion Board (FIPB) grants the approval. In few sectors, FDI is not allowed.

After taking necessary regulatory approvals to form the state governments and local authorities for construction of the building, water, environmental clearance, etc, it could take place.
 

PROCEDURE UNDER NORMAL ROUTE 

Under normal route, it is only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors by the investors.
 

PROCEDURE UNDER GOVERNMENT APPROVAL

An approval of the proposals which includes composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all the FDI cases  should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs) which  should be presented to SIA in Department of Industrial Policy and Promotion.

The Application can be made in Form FC-IL. Plain paper applications which carries all the relevant details are also accepted. It is non- payable.
 

EDITED BY DHIVYA A

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