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Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment

into building a factory in another country.

Include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are
Usually preferred over other forms of external finance because they are

Non-debt creating, non-volatile and their returns depend on the

performance of the projects financed by the investors.

FDI also facilitates international trade and transfer of knowledge, skills

and technology.

The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC).

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.

The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

Foreign Company has the following options to set up business operations in India :
By incorporating a company under the Companies Act, 1956

A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner

As an unincorporated entity

Liaison Office Project Office Branch Office

Liaison office not permitted commercial/trading/industrial activity




The role of the liaison office is limited to

Collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers

Acting as a communication channel between the parent company and Indian Companies.

It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India

Approval for establishing a liaison office in India is granted by RBI

General permission to foreign entities to establish Project / Site Offices (temporary in nature)
Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project General permission also for remitting surplus funds after completion of project on production of the following documents:

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes
Branch Offices are established with the approval of RBI

Permitted to remit outside India profit of the branch

There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year .
A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or Which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

1. Gain a foothold in a new geographic market.

2. Increase a firms global competitiveness and positioning. 3. Fill gaps in a companys product lines in a global industry.

4. Reduce costs in areas such as R&D, production, and distribution.

Low cost BUT Qualified, Educated/Skilled Labor Pool. Long-term Market Potential OR Yields greater than can be

achieved Domestically.

Access to Natural Resources. Geography Stability of the economic and Political Environment.

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold,

diamonds, copper, zinc.

Lottery Business

Agricultural or plantation activities

Housing and Real Estate Business (except development of

townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

Foreign direct investments in India are approved through three routes:

Automatic approval by RBI.

The FIPB Route.

CCFI Route

1991- Foreign Investment Promotion Board FIPB 1996- Foreign Investment Promotion Council 1999- Foreign Investment Implementation 2004- Investment Commission Secretariat for Industrial Assistance (SIA) FIPC Authority FIIA

Increase in Domestic Employment/Drop in unemployment Investment in Needed Infrastructure.

Positive Influence on the Balance of Payments.

New Technology and Know How Transfer. Increased Capital Investment. Targeted Regional and Sectoral Development.

Industrial Sector Dominance in the Domestic Market.

Technological Dependence on Foreign Technology Sources.

Disturbance of Domestic Economic Plans in Favor of FDI-Directed

Cultural Change Created by Ethnocentric Staffing The Infusion of

Foreign Culture , and Foreign Business Practices

Foreign Investment up to 100% is allowed in green field projects under automatic route
Foreign Direct Investment is allowed in existing projects up to 74% under automatic route - beyond 74% and up to 100% subject to Government approval

FDI in basic and cellular, unified access services, national/ international long distance , V-Sat, public mobile radio trunk services , global mobile personal communications services
- Automatic up to 49% - FIPB beyond 49% but up to 74% Manufacture of telecom equipments - Automatic up to 100%.

FDI up to 49% (40%) permitted under automatic route

Automatic Route is not available

However, a foreign airlines are not allowed to have any direct or indirect equity participation 100% investment by NRIs/OCBs

FDI up to 100% is permitted under the automatic route for

manufacture of drugs and pharmaceuticals (The following is the current position)

FDI up to 74% in the case of bulk drugs, their intermediates

Pharmaceuticals and formulations would be covered under automatic route.

FDI above 74% for manufacture of bulk drugs will be considered by

the Government on case to case basis

FDI up to 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained There is a proposal to increase this limit to 49%

Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production - Automatic up to 100%

Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100% For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and up to 26% FDI is permitted in Public Sector Undertakings with Government approval

Foreign Investment up to 74% is permitted from all sources under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

Wholesale / cash & carry trading - Automatic upto 100% Trading for exports - Automatic upto 100% Trading of items sourced from small scale sector - 100% with Government approval

Single Brand product retailing - 51% with Government approval

FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs. All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

FDI permitted for setting up hardware facilities such as uplinking, HUB, etc up to 49% under Government approval route
FDI permitted in Cable Network up to 49% under Government approval route Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20% FDI permitted in FM radio up to 20% under Government approval route

100% FDI is permitted for the following activities:

Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbors Hotel & Tourism