The Explainer: Foreign Direct Investment
Starting today, every Friday, I will blog on 'explaining' crucial issues, including issues of economic and political nature. This feature will be titled 'The Explainer'. Most of these Explainers will be in the form of Question & Answer (Q&A), with minimal jargon.
I will start this series with 'Foreign Direct Investment', or FDI, as it is more popularly known.
The language and interpretation are mine; the data have been taken from here.
What is FDI?
FDI refers to the capital invested by a foreign company in an existing or new domestic company. This way, by directly acquiring a 'stake' (by contributing to capital) in the domestic business, the foreign company becomes a shareholder.
(Please note that FDI does not relate to the funds invested by a foreign company in the share market; such investment is called Foreign Institutional Investment (FII).)
For example, if Prudential, a British company, invests in ICICI Prudential Life Insurance, by way of capital, such investment is termed FDI.
In what way can a company bring in FDI?
FDI can be brought in through direct injection of funds into the capital of the company, subject to government rules.
What are the advantages of FDI?
A foreign partner (the one who brings in FDI) may come with better technology, technology transfer, expertise in executing large and complex projects (like airports), global reputation, financial leverage, access to markets elsewhere, etc.
How much FDI did India receive between April 2000 and March 2011?
Between April 2000 and March 2011, India received a cumulative FDI of U.S.$194.81 billion.
How much FDI did India receive in the last financial year (2010-11)?
Let me bring to you a snapshot of FDI limits in some major sectors as laid down by the Government of India.
An example: In telecom, the FDI limit is 74%. What it means is that in a telecom company like Uninor (a joint venture between Unitech, an Indian company, and Telenor, a company based in Norway), the maximum that Telenor can contribute to the capital base of the company is 74%. The rest of the capital (also called equity) should be held by an Indian company or a clutch of Indian investors.
Jargon decoded:
I have tried to keep it simple. This is meant for a reader who is not comfortable with economic jargon. I have deliberately skipped putting in some real tough terms, like capital gains tax, while explaining DTAA with Mauritius.
Do you like this new feature - The Explainer? Please select your reaction to this new feature and to this post by selecting the relevant check boxes below.
I will start this series with 'Foreign Direct Investment', or FDI, as it is more popularly known.
The language and interpretation are mine; the data have been taken from here.
What is FDI?
FDI refers to the capital invested by a foreign company in an existing or new domestic company. This way, by directly acquiring a 'stake' (by contributing to capital) in the domestic business, the foreign company becomes a shareholder.
(Please note that FDI does not relate to the funds invested by a foreign company in the share market; such investment is called Foreign Institutional Investment (FII).)
For example, if Prudential, a British company, invests in ICICI Prudential Life Insurance, by way of capital, such investment is termed FDI.
In what way can a company bring in FDI?
FDI can be brought in through direct injection of funds into the capital of the company, subject to government rules.
What are the advantages of FDI?
A foreign partner (the one who brings in FDI) may come with better technology, technology transfer, expertise in executing large and complex projects (like airports), global reputation, financial leverage, access to markets elsewhere, etc.
How much FDI did India receive between April 2000 and March 2011?
Between April 2000 and March 2011, India received a cumulative FDI of U.S.$194.81 billion.
How much FDI did India receive in the last financial year (2010-11)?
In 2010-11, India received U.S.$19.42 billion in FDI. This figure is 25 per cent less than the FDI inflow of U.S.$25.83 billion received in 2009-10.
Which sectors attracted the highest FDI in 2010-11?
Which sectors attracted the highest FDI in 2010-11?
The top three sectors (in order of highest) are: Services (21% of all FDI), Computer Hardware & Software (8%), and Telecom (8%).
Which were the top investing countries in India in 2010-11?
Which were the top investing countries in India in 2010-11?
Mauritius (42% of all FDI came via this island country), Singapore (9%), and the U.S. (7%).
How is it that the tiny island nation of Mauritius is the biggest foreign investor in India?
How is it that the tiny island nation of Mauritius is the biggest foreign investor in India?
India has a Double Taxation Avoidance Agreement (DTAA) with Mauritius. Without getting into complex tax jargon, if a company based in Mauritius is paying tax there, it will not be asked to pay tax in India. Since the tax rates are either nil or extremely low in Mauritius, companies prefer to route their investments into India through Mauritius.
Sector | % of FDI Cap / Equity |
Agriculture & related fields like Aquaculture | 100 |
Mining | 100 |
Defence | 26 |
Airports (Greenfield & Existing) | 100 |
Banking – Private Sector | 49 through automatic route 74 via Govt. approval |
Banking – Public Sector | 20 (both FDI & FII) |
In Broadcasting - Terrestrial FM - Cable Network - Direct-to-Home | 20 49 (incl FDI, FII, & NRI) 49 (incl FDI, FII, & NRI) |
Commodity Exchange | 49 (includes 23% for FII) |
Insurance | 26 |
Petroleum & Gas Sector (exploring & refining) - by private sector companies - by public sector companies | 100 49 |
In Print Media - Current Affairs & News - Scientific & Technical journals - Facsimile edition of foreign newspapers | 26 100 100 |
Telecom | 49 through automatic route 74 via Govt. approval |
Internet Service Providers | 49 through automatic route 74 via Govt. approval |
Trading - Wholesale Cash & Carry - Single Brand Retail | 100 51 |
Jargon decoded:
- Greenfield: Any project that is not constrained by prior or existing project. In short, a brand new project. For example, the building of the Hyderabad International Airport is a greenfield project. The developers were not constrained by existing infrastructure. Now contrast this with the Indira Gandhi International Airport in New Delhi. It was built in and around the existing old airport, and the developers were constrained by the existing infrastructure in developing it.
- Automatic Route: Any FDI under the automatic route does not require prior approval either by the Government of India or the Reserve Bank of India (RBI).
- Government Approval: Any FDI that is NOT under the automatic route requires prior approval by the Government of India.
I have tried to keep it simple. This is meant for a reader who is not comfortable with economic jargon. I have deliberately skipped putting in some real tough terms, like capital gains tax, while explaining DTAA with Mauritius.
Do you like this new feature - The Explainer? Please select your reaction to this new feature and to this post by selecting the relevant check boxes below.