FDI Compliance on Investment
For encouraging new Start-ups and their innovative ideas, the Indian government has brought out many relaxations on the inflow of foreign direct investment (FDI) in India. This has resulted in many Companies venturing new business in India.
We advise and assist Start-ups and other Corporates with the complete procedure of Foreign Direct Investment (FDI) in India complying with all the requirements of Indian law.
Get Free Consultation
Deliverables
Our Deliverables
Advice on the procedure for getting FDI in the country.
Advice on the various routes for transfer in foreign investment in India.
Advice on how foreign investment is brought in to India through the approval route.
Advice on the kinds of investments that may be created by foreign investors and NRI.
Compliance related to DIPP, RBI, foreign exchange management act and ROC (Registrar of Companies).
Monitoring your application concerning the approval route method.
Compliances
FDI Compliances
Under FDI Compliances, overseas money, either by an individual or entity, is invested in an Indian organization.
An investment made through a company or person in one country for business interests in another country, in the form of either setting up business operations or through obtaining business resources in the other country, for example, ownership or controlling interest in a foreign organization.
There are two kinds of FDI which stands for the flow of money.:
Inward FDI
Inward happens when foreign capital is invested in local resources. This results in tax breaks and low-interest rates.
Outward FDI
Outward FDI is the opposite flow of inward FDI Compliances and is also known as “direct investment abroad”.
About
What is Foreign Direct Investment (FDI)
Foreign direct investment (FDI) is when a company takes controlling ownership in a business entity in another country. With FDI, foreign companies are directly involved with day-to-day operations in the other country.
Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.
Where is FDI made?
Foreign Direct Investments are commonly made in open economies that have skilled workforce and growth prospect. FDIs not only bring money with them but also skills, technology and knowledge.
FDI in India
FDI is an important monetary source for India's economic development. Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country. India, today is a part of top 100-club on Ease of Doing Business (EoDB) and globally ranks number 1 in the Greenfield FDI ranking.
Routes through which India gets FDI
Automatic route: The non-resident or Indian company does not require prior nod of the RBI or government of India for FDI.
Government route: The government's approval is mandatory. The company will have to file an application through Foreign Investment Facilitation Portal, which facilitates single-window clearance. The application is then forwarded to the respective ministry, which will approve/reject the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT will issue the Standard Operating Procedure (SOP) for processing of applications under the existing FDI policy.
Industry/ Sectors are categorized for the routes through which India gets FDI
Sectors which come under the ' 100% Automatic Route' category are
Automobiles, Auto components, Agriculture and Animal husbandry, Airports (Greenfield and Brownfield), Air transport services (non-scheduled), Air transport services (Helicopter service and seaplane services).
Broadcast Services (both the Up-linking and down-linking of TV channels), Broadcasting Carriage Services, and Biotechnology (Greenfield).
Capital Goods, Cash & Carry Wholesale Trading Chemicals, Coal & Lignite, Construction Development, hospital construction, Credit Information entities.
Duty-Free Shops, E-commerce Activities, Electronic equipment, Food Processing sector, Gems, and Jewellery.
Industrial Parks, IT & BPM, Leather Industry, Manufacturing, Mining & Exploration of metals & non-metal ores, health care.
Civil Aviation Services such as Maintenance and Repair Organizations, Petroleum and Natural gas, Plantation sector, Ports and Shipping, Railway Infrastructure development, Renewable Energy, pharmaceuticals.
Textiles, Garments, Thermal Power generation, single-brand retail trade, Tourism, Hospitality, and White Label ATM Operations.
Government route
Under the government route, the foreign investor and the Indian company should get approval from the RBI or Indian government before the investment.
Similarly, the FDI policy of India also categorized all the sectors, which are bound to obtain this approval.
The approval body differs according to the nature of the sector and investment.
Policy
FDI policy: Sectors which require the approval of the government are
Up To 100% Of Government Approval
Mining works and mineral separation of titanium bearing minerals and ores.
Food product retail trading.
Printing & publishing of scientific magazines/journals/periodicals.
Publication of facsimile edition of foreign newspapers.
Satellite (both establishment and operations).
Beyond 49% Of Approval
Defense
Air transport service ( scheduled).
Telecom sector
Banking - private sector
Private security agencies
An investment made by foreign airlines
Broadcasting services
FM radio
News and current affairs TV channels
Upto 26% of Approval:
Printing Media - Publishing of newspapers and periodicals dealing with news and current affairs.
Printing Media - Publication of Indian editions of foreign magazines dealing with news and current affairs.
Other Approval % :
Banking - public sector - (up to 20% of approval)
Multi-Brand Product Retail Trading - (up to 51% approval).
Pharmaceuticals (Brownfield) - (above 74% approval).
Sectors where FDI is Prohibited
There are certain sectors where the FDI is completely prohibited;
- Nidhi company
- Investments made in chit funds
- Energy generation (Atomic)
- Gambling or any similar business
- Lottery business (private, government, online)
- Housing and real estate (apart from townships and commercial projects)
- Cigarettes and any similar tobacco industries
- TDR standing for Transferable Development Rights
- Agriculture and plantation activities (despite exceptions like pisciculture, horticulture, fisheries, animal husbandry, tea plantations).
FDI inflow
During the fiscal ended March 2019, India received the highest-ever FDI inflow of $64.37 billion. The FDI inflows were $45.14 billion during 2014-15 and $55.55 billion in the following year.
Methods
Methods of Foreign Direct Investment
As mentioned above, an investor can make a foreign direct investment by expanding their business in a foreign country. Amazon opening a new headquarters in Vancouver, Canada would be an example of this.
Reinvesting profits from overseas operations, as well as inter company loans to overseas subsidiaries, are also considered foreign direct investments.
Finally, there are multiple methods for a domestic investor to acquire voting power in a foreign company. Below are some examples: Acquiring voting stock in a foreign company, Mergers and acquisitions, Joint ventures with foreign corporations, Starting a subsidiary of a domestic firm in a foreign country
Benefits
Benefits of Foreign Direct Investment
Foreign direct investment offers advantages to both the investor and the foreign host country. These incentives encourage both parties to engage in and allow FDI.
Benefits for businesses:
Market diversification
Tax incentives
Lower labor costs
Preferential tariffs
Subsidies
Benefits for the host country
Economic stimulation
Development of human capital
Increase in employment
Access to management expertise, skills, and technology
For businesses, most of these benefits are based on cost-cutting and lowering risk. For host countries, the benefits are mainly economic.
Disadvantages of Foreign Direct Investment
Despite many benefits, there are still two main disadvantages to FDI, such as:
Displacement of local businesses
The entry of large firms, such as Walmart, may displace local businesses. Walmart is often criticized for driving out local businesses that cannot compete with its lower prices.
Profit repatriation
In the case of profit repatriation, the primary concern is that firms will not reinvest profits back into the host country. This leads to large capital outflows from the host country.
As a result, many countries have regulations limiting foreign direct investment.
However, two other forms of FDI have also been observed: conglomerate and platform FDI.
Conglomerate: a business acquires an unrelated business in a foreign country. This is uncommon, as it requires overcoming two barriers to entry: entering a foreign country and entering a new industry or market. An example of this would be if Virgin Group, which is based in the United Kingdom, acquired a clothing line in France.
Platform: a business expands into a foreign country but the output from the foreign operations is exported to a third country. This is also referred to as export-platform FDI. Platform FDI commonly happens in low-cost locations inside free-trade areas. For example, if Ford purchased manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in the EU.
Types
Different types of foreign investments
1. Horizontal FDI
The most common type of FDI is Horizontal FDI, which primarily revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. Here, a company invests in another company located in a different country, wherein both the companies are producing similar goods. For example, the Spain-based company Zara may invest in or purchase the Indian company Fab India, which also produces similar products as Zara does. Since both the companies belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI.
2. Vertical FDI
Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. As such, when vertical FDI happens, a business invests in an overseas firm which may supply or sell products. Vertical FDIs are further categorized as backward vertical integrations and forward vertical integrations. For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations in countries such as Brazil, Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the supply chain, this type of FDI is known as backward vertical integration. Conversely, forward vertical integration is said to occur when a company invests in another foreign company which is ranked higher in the supply chain, for instance, a coffee company in India may wish to invest in a French grocery brand.
3. Conglomerate FDI
When investments are made in two completely different companies of entirely different industries, the transaction is known as conglomerate FDI. As such, the FDI is not linked directly to the investors business. For instance, the US retailer Walmart may invest in TATA Motors, the Indian automobile manufacturer.
4. Platform FDIM
The last types of foreign direct investment is platform FDI. In the case of platform FDI, a business expands into a foreign country, but the products manufactured are exported to another, third country. For instance, the French perfume brand Chanel set up a manufacturing plant in the USA and export products to other countries in America, Asia, and other parts of Europe.