FDIs refer to investments made through equity instruments by a resident outside of India in a company that is not listed in India, or in a listed Indian company that owns at least 10% of the post-issue paid-up equity capital on a fully diluted basis.
Foreign portfolio investment and foreign direct investment differ in the percentage stake that the foreign investor holds. A “Foreign Portfolio Investment” refers to an investment made by a resident outside India through equity instruments in which such investment is less than ten percent of the post-issue paid-up share capital of a listed Indian company or less than ten percent of each series of equity instruments of that listed Indian company.
Indian FDIs works as follows:
For example, XYZ INC, a US-based technology company, buys ABC Pvt. Ltd. to expand its research and development efforts. Market diversification, local expertise, reduced labor costs, tax incentives, and many other benefits are among the factors that encourage foreign investors to invest in FDI.
Apart from foreign investors, Foreign Direct Investment (FDI) is a major driver of economic growth and an important source of non-debt finance for the development of the economy.
In India, foreign investors can invest through the following methods:
- Association Memorandum (MoA) subscription
- Allotments based on preferences/Private placements/Private arrangements
- Purchasing shares from Indian companies and residents
- Issuance of rights/bonuses
- Converting convertible notes
- Capital instruments are swapped.
India offers two investment routes to overseas investors:
An automatic route for FDI is an entry route where investments made by residents outside India are not subject to Government or Reserve Bank approval.
Government Route: An entry route for FDI, wherein investments by residents outside India require the Government’s approval before they are made. The foreign investment received through this route shall be subject to the conditions specified on the approval form. Investors can apply on the Foreign Investment Facilitation Portal (FIFP), an online portal designed to facilitate FDI approvals. The Department of Industrial Policy and Promotion and the Ministry of Commerce and Industry is responsible for managing this portal.
What are the advantages of foreign direct investment?
India offers the following advantages to foreign direct investment
The development of the economy is stimulated by FDI
In India, foreign direct investment stimulates large-scale economic growth. It is one of the main sources of foreign capital as well as increased revenue. country of investment, in which some Local equipment, whether it is labor or materials, is utilized. People leading better lives and improving their standard of living benefit from large-scale employment. The process is repeated according to the level of skill of the employees. People of this kind also start paying taxes, which are then invested in the nation’s development.
When foreign direct investment increases in a nation, especially a developing one, its service, and manufacturing sectors are boosted, which, in turn, results in the creation of jobs. Employment, in turn, creates income sources for many. Then, people spend their incomes, increasing the purchasing power of a nation.
The development of human resources is a result of FDI
Employees, also called human capital, are given adequate training and skills, which help boost their knowledge on a wide scale. Foreign direct investment helps with the development of human resources. The development of human resources, however, improves a country’s human capital quotient when considering its overall impact on the economy. By acquiring skills, resources can train others, which will ripple throughout the economy.
Frequently Asked Questions (FAQs)
FDI: What is it and why is it important?
In an FDI, a resident outside India invests through equity instruments in an unlisted Indian company, or in at least ten percent of the post-issue paid-up equity capital, on a fully diluted basis, of a listed Indian company. As well as market diversification, local expertise, lower labor costs, and tax incentives, foreign investors are encouraged to invest in foreign direct investments.
Can I apply for/invest in an FDI?
Since the definition of FDI itself implies foreign investment into India, applying for FDI in India is not a question about FDI.
How would you define a foreign direct investment?
A US-based technology company invests and acquires a majority stake in an Indian company – ABC Pvt. Ltd. to boost its R&D.A US-based technology company invests and acquires a majority stake in an Indian company – ABC Pvt. Ltd. to boost its R&D.