Recently the World Bank has announced the ‘Ease of Doing Business’ rankings of various countries for the year 2019. India has jumped 23 places up to the rank of 77.  Various reforms in regulatory environment for businesses in India would certainly be helpful to attract foreign investment in our country.  The saga of foreign investment in corporate sectors, started since adoption of LPG (Liberalisation-Privatisation-Globalisation) policy in 1991, has played a pivotal role in economic growth of our country. The knowledge of foreign investment is especially of great help to every citizen of India, especially the personnel associated with manufacturing or service sector. In this article, we shall focus on various aspects of foreign investments, in order to keep us updated on the issue of foreign investments in India.

Concept of FDI & FII – Foreign investment is a vital part of any open economy of the world and acts as a major promoter to the development. The confusion in the minds of investors related to exact definitions of FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment) was clarified by Arvind Mayaram panel in year 2013. FDI can be in listed or unlisted Indian companies whereas FII is only allowed in listed companies. The investment of 10% or more by a foreign investor in any listed Indian company is termed as FDI.  Foreign investment in any unlisted company, irrespective of the threshold limit is also considered as FDI. The investment by a foreign investor in any listed Indian Public limited company below the limit of 10% is termed as FII (Foreign Institutional Investment).

FDI is usually a long-term relationship of a foreign firm with Indian company whereas FII is a short-term relationship with the Indian company. As the FII can leave the country within a short period, it is also termed as ‘hot money’ or ‘flight money’. In order to invest as a Foreign Institutional Investor, a FII firm has to be registered as a sub-account holder FII with SEBI (Securities Exchange Board of India) as per SEBI Rules, 1995 and should submit all necessary documents for the same. The total indirect investment done by the foreign investors in Indian company either in terms of FII or QFI (Qualified Foreign Investment) is termed as FPI (Foreign Portfolio Investment). A QFI has to be KYC (Know Your Costumer) compliant with SEBI and there is no need to complete the procedures for registration with SEBI, as being done in case of FII. The maximum limit for FII is 10%, QFI is 5% and total FPI in any company could be the tune of 24% of total capital of that company. In order to circumvent the procedure for registration and identification with SEBI, few of the foreign investors prefer to invest in Indian share market through the registered FII firm via the route of ‘Participatory Notes’. These     ‘P-Notes’ act as a conduit for round tripping of black money from India and thus act as a big threat to the national security as well as economic growth.   ‘P-Notes’ evade the tax net of Indian tax authorities and are also responsible for the loss to public exchequer in terms of Capital Gains Tax (CGT) invasion.

Routes of FDI – The FDI can be invested in India through two routes- Automatic route or Government approval/FIPB route. In Automatic route of FDI, a foreign investor need not take any prior sanction from SEBI or RBI for investing in an Indian company whereas in case of FIPB route (Foreign Investment Promotion Board route) a foreign investor need to take prior sanction from FIPB before investing. The sanction for foreign investment upto 5000 crore Rupees is given by FIPB whereas sanction for investment above that limit is given by CCEA (Cabinet Committee on Economic Affairs), in addition to defence or any security clearance, as and when required. The recent FDI sector reforms are opening up the Indian economy for foreign investors. Opening up of defence sector, civil aviation sector and broadcast sector to the tune of 100% to the foreign investors is an example of the same and is an important component of ‘Make In India’ programme of Government of India. Routinely, the controversy arises whenever FDI is liberalised in India.

The proponents of FDI policy believe that FDI policy would be beneficial for India in terms of bringing in more capital, latest technology, new managerial practices in our country as well as increasing our exports to other countries due to its association with global brands. On the other hand, the critics of FDI policy are sceptical about the advantages of FDI policy and fear that FDI would compromise with economic sovereignty of our nation and also fear about its negative impact on domestic industries as well as its negative externalities on environment.

(The author of this article ,Lt Col (Dr) Satish Dhage, is an ex Army officer and has been qualified for IPS (Indian Police Services) through IPS LCE 2012. Presently, he is Director, MGM Institute of Competitive Exams Aurangabad. For any queries or feedback, he can be contacted on email id : drsatishdhage@gmail.com)