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Foreign direct investment (FDI) is when a business invests in a commercial entity in another nation. Foreign enterprises engaged in FDI are deeply involved in the company’s daily activities in which they have invested.
FDI comes into the scene when an investor develops overseas business operations or acquires foreign business assets such as purchasing ownership or control of an oversea company. So we can say that FDI is not just about sharing and transferring funds. It is more about holding the ownership of the overseas company or asset.
Now, FDI in India is performed under two main categories
Government or Approval Route:- Banking Public Sector(20%), Broadcasting Content Services(49%), Core Investment Company(100%), etc., comes under Government Sector.
Automatic Route:- Insurance(upto 49%), Pension(49%), Power Exchange(49%), all these come under Automatic Route and are explained below.
What is an Automatic Route, and how does it work?
To fulfil the potential of FDI, firstly, the overseas or foreign investor needs to take the permission of the Indian Government, but as we know that now Indian Government made a way of Automatic Route in which Foreign investor of Indian company does not need to look up for the prior agreement from the main bank head of India, i.e., RBI (Reserve Bank of India) or the Government of India under the announcement of Automatic Route.
FDI through the approval method is permitted in all sectors and activities included in the Consolidated FDI Policy. Another advantage of the automatic way is that overseas investors only have to notify the RBI thirty days after bringing their money into the country and thirty days after issuing any shares. The majority of FDI is now permitted under the automated procedure.
The foreign investor or Indian company does not need to seek prior approval from the Reserve Bank or the Government of India under the Automatic Route. Through all the approval processes, FDI is authorised in all sectors of an economy and industrial branches included in the Consolidated Provisions. Another perk of the automated manner is that international buyers only have to inform the RBI within thirty days after bringing their funds into the country and thirty days after issuing any shares.
An investor planning to invest in India should be known that there are three Categories of FDI:
Vertical Capital Investing:-Vertical investment comes into the scene when a company grows within another country by upgrading to upwards steps of the supply chain. The company engages in a range of different overseas activities, and those are related to the main business.
Investing Capital Horizontally:-The company increases its oversea operation in another country by horizontal investment. The company here engages in the same activities but in a different land of nations.
Investment in Conglomerates:-The business is working out unrelated business activities in a foreign land under the Conglomerate Investment as an investment is unusual because it entails entering a new country and an entirely new market.
FDI Permitted Under Sectors as per FDI Policy 2020
Infrastructure Company in the Securities Market (49%):- In the securities market, an infrastructure company’s foreign direct investment is limited to 49 per cent. RBI and SEBI make these decisions jointly. Foreign financial firms and foreign portfolio dealers (FPIs) are only entitled to invest through secondary trading activity.
Insurance( up to 49%):- Transmit shares or senior subordinated notes of an Indian financial company.
Medical Devices(100%):- Medical devices fall under the pharma sector, which allows for 100% FDI through the automatic route only in the case of new ventures. Brownfield investment—the acquisition of existing businesses—requires the Foreign Investment Promotion Board (FIPB).
Pension (49%):- Foreign investment in pension funds is permitted under the Pension Fund Regulatory and Development Authority (PFRDA) 2013. Foreign investment in private pensions will be subject to the condition that worldly beings bringing in foreign ownership stake as per Section 24 of the PFRDA Act obtain necessary registration from the PFRDA and comply with other necessities as per the PFRDA Act, 2013 and Rules and Regulations presented under it for participating in Pension Fund Management activities in India.
Petroleum Refining (By PSUs) (49%):- In the oil marketing sector, FDI of up to 74% is currently permitted in the establishment of infrastructure related to marketing and the marketing of petroleum products. A minimum of 26% Indian equity is required over five years for actual trading and marketing, and a 100% wholly-owned subsidiary is permitted for market research. However, none of these activities has an automatic route.
Power Exchanges(49 %):-Power exchanges are online communities that connect generators and consumers to determine prices based on the demand-and-supply system. India has two operating exchanges: the Financial Technologies-backed India Energy Exchange, which controls approximately 93 per cent of the market, and Power Exchange India Ltd, co-sponsored by the NSE and NCDEX. The two exchanges trade 2% of the country’s total output of 800 billion units.
Conclusion
Thus the Indian Government, which issued an Automatic Route policy, is much more beneficial and easy for the investors, which can help lessen their work and make it easy for oversea investment in a business or other firms and companies. Still, they have to inform the RBI(Reserve Bank of India) within 30 days when they receive the money from FDI.
An Indian Company issues equity instruments to individuals living outside the country without seeking prior approval from the Government of India, subject to the given a prescription FDI caps, sectoral regulations, and licensing requirements applicable to different sectors. The above-mentioned sector-by-sector list of industries where fully automated entry is permitted is explained.
