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Foreign direct investment
In simple terms, foreign direct investment refers to the investment made by an entity (generally a company) in an enterprise located in a different country. By virtue of making this investment, the investor gains a certain degree of influence or control over the management of the enterprise. It is generally believed that to qualify as FDI, the investor should be in possession of at least 10% of the shares of the company and have access to voting power in the company.
FDI can be both outward and inward. In the case of inward FDI, the investor can enter the country by incorporating a company, either by getting into a joint venture with an Indian company or setting up a wholly owned subsidiary. Alternatively, he could retain the status of a foreign company and simply set up a liaison, project or branch office in India. However, it is generally expected that FDI signals long-term commitment on the part of the investor as there is a lot of physical investment included.
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What are the benefits of FDI?
FDI comes with benefits for both the investor and the economy where the investment in made. For the investor, this could be a chance to tap markets where he could make profits. The investors are wooed with techniques such as tax breaks, easier regulations, low interest rate on loans and so on. For the economy, FDI has provided a muchneeded push in terms of injecting liquidity apart from bringing in better technology, creating more job opportunities and so on.
Are there any regulations on FDI?
The Government has laid down rules both on the basis of the sector as well as the nature of activity that is meant to be undertaken with the FDI. For instance, FDI in an activity like mining for diamonds and precious stones does not require prior permission. A notification simply needs to be sent to RBI within 30 days of receiving the remittances and documents needs to be submitted in a period of 30 days after the shares are issued to the foreign investor. However, in certain other sectors like broadcasting, the proposal needs to be sent and approved by the Foreign Investment Promotion Board (FIPB). There are also caps on the amount of foreign investment in particular sectors and in certain cases, this is inclusive of both FDI and FII investment.
What is the difference between FDI and FIIs?
The most visible difference would be that while FDI includes investment directly into a particular company, Foreign Institutional Investors (FIIs) are known to invest either in the primary or secondary markets, in stocks, mutual funds or via instruments such as participatory notes, dated government securities, commercial papers etcetera. There is also a greater perception of stability that is associated with FDI. In periods of market instability, FIIs are known to beat a hasty retreat leaving the market in a lurch.