Origin of Investment in India under FEMA ( Foreign Direct Investment )

May 5, 2022

Origin of Investment in India under FEMA ( Foreign Direct Investment )

ACADEMIC YEAR: 2021—22

SUBJECT: FOREIGN DIRECT INVESTMENT ACT

TOPIC: ORIGIN OF INVESTMENT IN INDIA UNDER FEMA

SUBMITTED TO:

ADVOCATE AISHWARYA SANDEEP

SUBMITTED FROM:

CHAURASIA MAMTA RAMROOP PREMADEVI.

CLASS: STUDENT OF S.Y.LL.B (3YEARS)

TABLE OF CONTENT

SR. No.	CONTENT	PAGE NO.
1.	Declaration	3.
2.	Introduction	4.
3.	What is FDI under FEMA? History of Investment in India WHY INVEST IN INDIA? ROUTES OF FDI IN INDIA	5-7.
4.	Bibliography	8.

DECLARATION

I, MAMTA RAMROOP CHAURASIA PREMADEVI,STUDENT OF THAKUR RAMNARAYAN COLLEGE OF LAW, IN SECOND YEAR OF LAW (3YEARS) MUMBAI, DO HEREBY DECLARE THAT THIS ARTICLE BEING SUBMITTED TO ADVOCATE AISHWARYA SANDEEP FOUNDER OF SECOND INNINGS CONSULTANCY, IS AN ORIGINAL WORK ON THE BASIS OF THE RESEARCH UNDERTAKEN BY ME. I HEREBY CONFIRM THAT THE NECESSARY ACKNOWLEDEMENT AND REFERENCES HAVE BEEN GIVEN AT THE RELEVANT PLACES ALL THROUGH OUT THIS ARTICLE.

DATE : 28-04-2022

PLACE : MUMBAI

NAME OF STUDENT : MAMTA RAMROOP CHAURASIA PREMADEVI

INTRODUCTION

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. The origin of the investment does not impact the definition, as an FDI: the investment may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.

Foreign direct investment is an investment made by an entity living outside the country where the investment is being made by either buying a company there or expanding its business in the domestic country. Foreign direct equity inflows are significant drivers of economic growth and are generally preferred over other means of external finance because FDI inflows do not create debt, are non-volatile and their returns depend on the performance of the projects financed by the foreign investors. FDI, apart from contributing to the economic growth of a country, also facilitates the inflow of new technology, managerial expertise, new ideas, skills, knowledge, more employment, and improved infrastructure. Foreign direct investment (FDI) in India was introduced in the 1991 under the Foreign Exchange Management Act (FEMA) implemented by the then finance minister, Dr. Manmohan Singh. It commenced with the baseline of 1 billion dollars in 1990. India, today is considered as an important destination for foreign direct investment. The major sectors that attract overseas investment are telecommunications, construction activities, and computer software and hardware.[1]

Growth of a nation is functionally related to the rate of investment and associated commerce. With stagnant funds within the country, investment by foreign entities becomes a matter of utmost importance. India has been recording sustained trade deficits since 1980 mainly due to high growth of imports. To correct this, India liberalized its policies and opened its economy from 1991 onwards. According to the Balance of Payment Manual released by the International Monetary Fund, Foreign Direct Investment (FDI) refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise.[2]

What is FDI under FEMA?

Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside India:

(a) in an unlisted Indian company; or

(b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

The Central Government of India formulated an act to encourage external payments and across the border trades in India known as the Foreign Exchange Management Act. FEMA (Foreign Exchange Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign Exchange Regulation Act).

History of Investment in India

The history of investment banking in India traces back to when European merchant banks first established trading houses in the region in the 19th century. Since then, foreign banks (non-Indian) have dominated investment and merchant banking activities in the country.

In the 1970s, the State bank of India entered the business by creating the Bureau of Merchant Banking and ICICI Securities became the first Indian financial institution to offer merchant banking services.

By 1980, the number of merchant banks had risen to more than 30. This growth in the financial services industry included the rapid expansion of commercial banks and other financial institutions.[3]

WHY INVEST IN INDIA?

India is gradually becoming an investor’s paradise for the following reasons:-

A Successful Economy: – India is the third largest economy in the world and is projected to grow at 7 % as per the latest World Bank reports in FY 2017 . The growth rate has been largely stable throughout the decade and is going to grow consistently in the coming decades.
High Domestic Demand: India, with a population of 1.2 billion offers a fertile ground for the demand and supply of goods and services. The per capita of India is remarkable which stands at 5,350 PPP dollars as per World Bank reports.
Governance: – India has a stable political environment and the current government is taking proactive measures under the ‘Make in India’ programme to encourage investment. An independent Indian judiciary upholds the rights of investors to a great extent.
Location Advantage: –India due to its geographical location offers easy access to other South Asian, Middle east and European countries.
Cheap Labour
Less procedural requirements: – The government in recent years has made strenuous efforts to reduce red tapism in the country thereby simplifying the procedures to procure a license
Easy availability of Financial Support: -India is a homeland to a large number of financial institutions with over 130 different banks, 50,000 bank branches ensuring diversified financial support and easy availability of funds.[4]

ROUTES OF FDI IN INDIA

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes: –

Automatic Route: – Under this route, neither the foreign investor nor the Indian company has to take prior approval from the government or RBI for the investment. The FDI policy permits FDI up to 100% without any kind of approval from the authorities. The only requirement is that the investors must notify the Regional office of the RBI of the receipt of the remittance within 30 days and necessary documents with respect to the issue of shares to foreign investors must be filed with the RBI. It must be noted that where the investment is not in conformity with the government policies then the investors must seek specific approval form the government.
Government Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (This Board will be abolished with effective from financial year 2017-2018 as per Financial Bill, 2017 ) for the investment.

Government approval is needed in the following circumstances: –

Where foreign control is involved i.e., where an Indian company is being established with foreign investment and is not owned by a resident entity or when an Indian company is being established with foreign investment and is not controlled by resident company.
When control or ownership is transferred to foreign entity. The control of an existing Indian company is transferred to a non-resident entity by way of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/ demerger, acquisition etc.[5]

BIBLIOGRAPHY

[1] (WHO INTRODUCED FDI IN INDIA? 2019)

[2] (FOREIGN DIRECT INVESTMENT IN INDIA 2017)

[3] (Investment Banking in India 2022)

[4] (FOREIGN DIRECT INVESTMENT IN INDIA 2017)

[5] (FOREIGN DIRECT INVESTMENT IN INDIA 2017)

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May 5, 2022