FOREIGN DIRECT INVESTMENT

Subject: Economy

Context: Foreign direct investment (FDI) inflows into India in the first five months of 2020-21 have hit a record high, despite a sharp 60% contraction in the first quarter.

Concept:

Foreign Direct Investment

• FDI is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest.
• Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.
• Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.
• FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills and expertise/know-how
• FDI in India is allowed under two modes – either through the automatic route, for which companies don’t need government approval, or through the government route, for which companies need a go-ahead from the centre.

New FDI Policy:

• An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
• A transfer of ownership in an FDI deal that benefits any country that shares a border with India will also need government approval.
• Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.