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The investments that are made by Foreign Corporates, Foreign Nationals, as well as Non-Resident
of the nation would fall into the category of Foreign Investment. Any investment that is made in
India with the source of funding that is from outside of India is a foreign investment.
Funds from foreign country could be invested in shares, properties, ownership / management or
collaboration. Based on this, Foreign Investments are classified as below.
FDI is an investment made by a company or individual who us an entity in one country, in the
form of controlling ownership in business interests in another country. FDI could be in the form
of either establishing business operations or by entering into joint ventures by mergers and
acquisitions, building new facilities etc.
Foreign Portfolio Investment (FPI) is an investment by foreign entities and non-residents in Indian
securities including shares, government bonds, corporate bonds, convertible securities,
infrastructure securities etc. The intention is to ensure a controlling interest in India at an
investment that is lower than FDI, with flexibility for entry and exit.
Foreign direct investment (FDI) is when a foreign company or individual makes an investment in
India that involves either
(ii) Acquiring business assets, including controlling interests, in an already existing Indian
company. (Known as brown-field FDI)
FDI is distinguished from FII in the sense it establishes a long-term relationship and involves
substantial control over the decision making of the company.
As per the Companies Act 2013, if a foreign investor owns more than 10 % shares in a listed
company, it will be treated as FDI. The rationale behind the rule is that the higher equity
ownership will result in substantial control over the decision-making of the company.
Types of FDI
1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same
value chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination country
for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.
Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:
FII is when foreign institutional investors invest in the shares of an Indian company, or in bonds
offered by an Indian company. So, if a foreign investor buys shares in Reliance, it is an FII.
Only institutional investors like Investment companies, Insurance funds etc. are allowed to
invest in Indian stock market directly. Hence the term foreign institutional investor. These
investors have to get a license from SEBI.
However, if foreign individuals want to invest in India’s markets, they have to get themselves
registered as a sub-account of an FII. The FII will buy shares/ bonds from the India markets on
their behalf.
India allows only wealthy foreign individuals or high net worth individuals (HNIs) who have a
minimum net worth of $50 million to be registered as a sub-account of a foreign institutional
investor (FII).
FII’s are mostly adapting High Frequency Trading. It is a computational trading system that uses
powerful super computers to place buy/sell orders in fraction of seconds. These super
computers analyze gigabytes of data across various sectors and timeframe to arrive at the best
possible trading decision. A pre-defined trading algorithm(s) needs to be fed into these
computers before making it live. Some HFT systems also have artificial intelligence capabilities
to learn and optimize the trading algorithms. Speed is a key factor for the success of HFT
systems. Typically, the traders with the fastest execution speeds will be more profitable than
traders with slower execution speeds.
Although there are no pre-defined rules to select strategies for HFT, but there are few popular
strategies which are more popular than others and used by most of the HFT trading firms.
Below High frequency trading strategies are complied from various sources:
Foreign institutional investors are also known as ‘hot money’ because it is not stable in nature.
The FIIs can pull out money from a country’s stock market/ bond market overnight.
As we know, foreign individuals cannot invest directly in India’s markets without sub-accounts
with an FII.
As an alternative, QFI was introduced in the year 2002. A Qualified Foreign Investor can invest in
India without sub-account.
However, they have to open a Demat account and Trade account with a depository participant
in India.
In the Indian context, FIIs (along with sub-accounts with FIIs) and QFIs can be collectively
classified as Foreign Portfolio Investment (FPI).
Financial incentives. Host countries offer businesses a combination of tax incentives and
loans to invest. Home-country governments may also offer a combination of insurance,
loans, and tax breaks in an effort to promote their companies’ overseas investments. The
opening case on China in Africa illustrated these types of incentives.
Infrastructure. Host governments improve or enhance local infrastructure—in energy,
transportation, and communications—to encourage specific industries to invest. This also
serves to improve the local conditions for domestic firms.
Administrative processes and regulatory environment. Host-country governments
streamline the process of establishing offices or production in their countries. By reducing
bureaucracy and regulatory environments, these countries appear more attractive to
foreign firms.
Invest in education. Countries seek to improve their workforce through education and
job training. An educated and skilled workforce is an important investment criterion for
many global businesses.
Political, economic, and legal stability. Host-country governments seek to reassure
businesses that the local operating conditions are stable, transparent (i.e., policies are
clearly stated and in the public domain), and unlikely to change.
The Indian Government is keen on increasing foreign investment in India and has taken various
policy decisions to encourage FDI. The FDI Policy in India is regulated by the Department of
Industrial Policy and Promotions (DIPP), Ministry of Commerce and Industry. A consolidated
circular issued by the DIPP services as an important policy note on FDI and the latest FDI
Circular was issued 17-4-2014.
As per regulations, FDI means investment by non-resident entity/person resident outside India
and includes all types of foreign investment in India including investment by FIIs, investment by
NRI, investment by foreigners or foreign entities, etc.,
FDI in Private Limited Company is allowed for non-resident entities, subject to the FDI Policy and
sectoral caps. FDI in a Private Limited Company falls under two categories, automatic route or
approval route. FDI is permitted upto 100% in most of the sectors other than those sectors which
are capped or restricted. In cases where automatic approval is not allowed, prior approval from
the Foreign Investment Promotion Board (FIPB) of the Government of India must be obtained
prior to the investment. Further, citizens or entities of Bangladesh or Pakistan can invest in India,
only under the approval route.
FDI in a Private Limited company can be through various equity instruments. Indian companies
can issue equity shares, preference shares and convertible debentures, subject to the norms and
guidelines. The equity shares of a private limited company issued under FDI must as at fair value.
However, in case of a newly incorporated entity or subscription to the Memorandum of
Association during Company Incorporation by a NRI or Foreigner, the shares can be issued at
face value.
Illustration of FDI in Private Limited Company
FDI Prohibited Sectors
Atomic Energy
Lottery business including government lottery and online lottery (even foreign
collaboration, franchise, trademark, brand name, management contract is prohibited)
Gambling and betting including casino (even foreign collaboration, franchise, trademark,
brand name, management contract is prohibited)
Business of chit funds
Nidhi Company
Trading in transferable development rights
Real estate business or construction of farm house (except development of townships,
roads or bridges, city and regional infrastructure, etc.,)
Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco
substitutes
Activity / sector not opened to private sector investment [e.g. Atomic energy and Railway
Transport (other than Mass Rapid Transport Systems)].
FDI in Private Limited Company under the automatic route is not permitted for the following
sectors. Hence, prior approval of the FIPB is required.
Petroleum sector (except for private sector oil refining), Natural gas/LNG Pipelines
Investing companies in Infrastructure & Service Sector
Defense and strategic industries
Atomic minerals
Print media
Broadcasting
Postal services
Courier services
Establishment or operation of satellite
Development of integrated township
Tea sector
Asset Reconstruction Company
In case the activity proposed to be undertaken by the foreign or non-resident entity in India,
doesn’t fall under the FDI prohibited or approval category, FDI under the automatic route is
permissible. Under automatic route, an application for FDI in the Private Limited Company is not
required, if the investment is within the FDI cap. Download sector wise FDI cap in India.
Under the automatic route, no prior permission of the FIPB or RBI is required for FDI in a Private
Limited Company. The Company must only file certain filings relating to the FDI with the Reserve
Bank of India after receipt of the share subscription money from the foreign or non-resident
investor and issuance of shares. Further, under the automatic route, the investment cannot be
made in a company which required an industrial license under the Industries Act, 1951 or for
acquisition of another Indian companies existing shares or for financing an expansion.
It is important to note that, majority of the sectors in India are eligible for 100% FDI under the
automatic route, wherein a FDI report has to be filed only after issuance of shares for the foreign
or non-resident entity. Therefore, the process for starting a business in India for Foreign Nationals
and Non-Resident Indians is very smooth and easy.
In August 2018, Bharti Airtel received approval of the Government of India for sale of 20
per cent stake in its DTH arm to an America based private equity firm, Warburg Pincus,
for around $350 million.
In June 2018, Idea’s appeal for 100 per cent FDI was approved by Department of
Telecommunication (DoT) followed by its Indian merger with Vodafone making Vodafone
Idea the largest telecom operator in India
In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a consideration of US$
16 billion.
In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million)
in the state of Maharashtra to set up multi-format stores and experience centres.
In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore (US$
612-765 million) in the state of North-East region of India.
In December 2017, the Department of Industrial Policy and Promotion (DIPP) approved
FDI proposals of Damro Furniture and Supr Infotech Solutions in retail sector, while
Department of Economic Affairs, Ministry of Finance approved two FDI proposals worth
Rs 532 crore (US$ 81.4 million).
The Department of Economic Affairs, Government of India, closed three foreign direct
investment (FDI) proposals leading to a total foreign investment worth Rs 24.56 crore
(US$ 3.80 million) in October 2017.
Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore (US$ 155.97
million) in India by 2020 in its food and beverage business, stated Mr Varun Choudhary,
Executive Director, CG Corp Global.
International Finance Corporation (IFC), the investment arm of the World Bank Group, is
planning to invest about US$ 6 billion through 2022 in several sustainable and renewable
energy programmes in India.
Government Initiatives
Government of India is planning to consider 100 per cent FDI in Insurance intermediaries in India
to give a boost to the sector and attracting more funds.
In January 2018, Government of India allowed foreign airlines to invest in Air India up to 49 per
cent with government approval. The investment cannot exceed 49 per cent directly or indirectly.
No government approval will be required for FDI up to an extent of 100 per cent in Real Estate
Broking Services.
In September 2017, the Government of India asked the states to focus on strengthening single
window clearance system for fast-tracking approval processes, in order to increase Japanese
investments in India.
The Ministry of Commerce and Industry, Government of India has eased the approval mechanism
for foreign direct investment (FDI) proposals by doing away with the approval of Department of
Revenue and mandating clearance of all proposals requiring approval within 10 weeks after the
receipt of application.
The Government of India is in talks with stakeholders to further ease foreign direct investment
(FDI) in defence under the automatic route to 51 per cent from the current 49 per cent, in order
to give a boost to the Make in India initiative and to generate employment.
In January 2018, Government of India allowed 100 per cent FDI in single brand retail through
automatic route.
Road ahead
India has become the most attractive emerging market for global partners (GP) investment for
the coming 12 months, as per a recent market attractiveness survey conducted by Emerging
Market Private Equity Association (EMPEA).
Annual FDI inflows in the country are expected to rise to US$ 75 billion over the next five years,
as per a report by UBS.
The World Bank has stated that private investments in India is expected to grow by 8.8 per cent
in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the
growth in India's gross domestic product (GDP) in FY 2018-19.