Funds that are invested by a company or entity belonging to one country in a company or entity belonging to another country are referred to as Foreign Direct Investment (FDI). In India, the foreign entity could establish a wholly owned subsidiary or a joint venture under the Companies act. 1956. Alternatively, the FDI could be for establishing an office in India.
Procedure for FDI
There are two routes for FDI:
- The Automatic Route where such investment in the sectors specified in the FDI policy framed by the Government of India does not need the approval of either the Government of India or the Reserve Bank of India (RBI);
- The Government Route for sectors which are not eligible under the Automatic Route. For FDI in such sectors, the prior approval of the Foreign Investment Approval Board is mandatory.
Government of India frames the policy and the RBI is the regulatory authority for FDI. There are certain sectors / activities such as atomic energy, chit funds, lotteries, etc where FDI is prohibited
Eligible Instruments
To be eligible for classification as FDI, the funds should be invested in the form of equity shares or, preference shares or debentures that are compulsorily convertible. The methodology for conversion could be either in terms of a distinct price or a formula but should be disclosed concurrently with the issue of the instrument.
