Foreign Direct Investment is usually into production or business in a country by another country. This is not the purchase of shares, but rather buying a company or expanding existing operations.
Foreign investment was introduced in India in 1991 under the Foreign Exchange Management Act. India has been cited as the second most important FDI destination after China thanks to inflows into services, telecommunication, construction and computer software by countries such as Mauritius, Singapore and the United Kingdom.
India is promoting itself as among the most liberal and transparent policies on FDI among the emerging economies. FDI can be automatic and up to 100% barring certain activities which require government approval such as activities that require an industrial license. So if FDI is allowed under the automatic rule it should be applied for approval through the Reserve Bank of India, but if it requires approval from the Central Government then this should be applied for and granted by the Foreign Investment Promotion Board.
The Department of Industrial Policy and Promotion released their latest edition of consolidated FDI Policy on the 6th April 2013 incorporating the changes made in the regulations. India had revised its FDI Policy in an effort to minimise layers of caps and clearly define the break-up of FDI and foreign institutional investment sub-limits. One of the areas focused on is the distinction between brown filed and green filed investment and the distinction between the automatic route and the approval route referred to above which are considered too complicated.
India has brought in these recent proposals to FDI investment to attract further investment into the country in order to finance its account deficit.
Several of the larger reforms include allowing 51% FDI in Multi-Brand retail and 49% in aviation. FDI in broadcasting was raised from 49% to 74%. Investment is now also allowed in power exchanges and government approval is no longer required for investing up to 23% in commodity exchanges.
India already has favourable demographics and growth opportunities which make it favourable for mergers and acquisition. So the reforms are encouraging for investors everywhere.