FDI (Foreign Direct Investment) means investment made in the instruments attributing to the capital of an Indian Company. Such investment must be made by a person who is residing outside India.
FEMA refers to Foreign Exchange Management Act. It is an Act introduced by the Parliament of India to regulate the process of FDI in India.
FDI is a crucial monetary source attributing to the economic development of India. Thus, in order to increase FDI, the Ministry of Finance and RBI issues various circulars and directions from time to time.
Routes of FDI
There are two routes through which India gets FDI:
Automatic Route: where the investor does not require prior approval of RBI or the Government of India for FDI.
Government Route: where prior approval of Government or RBI is required to make FDI.
Changes in FDI policy
Recently, many changes have been introduced in the FDI policy by the RBI. The key changes have been described below.
Introduction of FIFP
The Foreign Investment Facilitation Portal’ is a replacement for the Foreign Investment Promotion Board. FIFP facilitates single window clearance and will help to boost the inflow of FDI. FIFP will also act as a mechanism to transmit the guidelines and notifications issued by the FDI to its investors.
LLPs in FDI:
FDI is now permitted in LLPs under the automatic route. Now, any LLP can be converted into a company and vice versa if it is engaged in such activities where:
- 100% FDI is allowed through the automatic route,
- there are no FDI-linked performance conditions
- FDI in the manufacturing sector:
Earlier, the FDI policy allowed any manufacturer to sell its products through any mode without the approval of the Government. The new FDI policy does not contain any such provision and had eliminated this provision.
- FDI in broadcasting:
As far as broadcasting carriage services and cable networks is considered, earlier FDI up to 49% was permitted under the automatic route. FDI above 49% required Government approval. Now 100% FDI under automatic route is permitted.
- FDI in NBFCs and CIC:
Now, if the investor wants to make FDI in any of the following companies:
- Investing companies not registered as NBFCs with the RBI,
- Core Investment Companies,
then prior approval of Government is required.
However, FDI under 100% automatic route is allowed if the investment is made in Non-Banking Financial Company.
- FDI in real estate broking:
A new clause has been inserted in the updations made in the FDI policy. The new clause clarifies that services of real estate broking do not contribute to the real estate business. Thus, 100% FDI is permitted under the automatic route in such services.
- FDI in air transport services:
For the air transport services, FDI under automatic route is allowed without for up to 49%. Government approval is required beyond 49%. However, for Non-Resident Indians, 100% FDI under automatic route is permitted.
- FDI in power exchange:
Earlier, investment in registered power exchanges was permitted only under the Government route. Now investors can invest under the primary route, i.e automatic route also.
- Joint audit in Investee Company:
If the person making FDI in India specifies a particular audit firm with an international network, then a joint audit of such Indian Investee Company should not be done by the auditors forming part of the same network.
- FDI in establishment of offices:
If any branch, liaison or project office is established and the principal business of the applicant is:
Private security or information,
then approval of RBI is not necessary if approval is granted by the Government or the concerned Ministry.