New FDI Rule – Economics – Free PDF Download

• The Government of India has made its approval for Foreign Direct Investment (FDI) by neighbouring countries mandatory.
• This revised FDI policy aims to curb opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic.

DETAILS

• FDI in India:
• FDI is allowed under two modes – automatic route, for which companies don’t need government approval,
• government route, for which companies need a go-ahead from the centre.

New FDI policy

• An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
• A transfer of ownership in an FDI deal that benefits any country that shares a border with India will also need government approval.
• India shares land borders with Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar.
• Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.
• Impact
• The earlier FDI policy was limited to allowing only Bangladesh and Pakistan via the government route in all sectors.
• The revised rule has now brought companies from China under the government route filter.
• China’s footprint in the Indian business space has been expanding rapidly, especially since 2014.

Chinese investment in India

• The net Chinese investment in India, which was $1.6 billion in 2014, shot up five-folds to at least $8 billion (Rs 60,800 crore) in the next three years — with a noticeable shift from state-driven to market-driven investment from the Chinese private sector.
• Official figures underestimate the amount of investment.
• They neither account for all Chinese companies’ acquisitions of stakes in the technology sector nor investments from China routed through third-party countries, such as Singapore.
• For instance, a $ 504-million investment from the Singapore arm of the mobile firm Xiaomi would not figure in official statistics because of how investments are measured.
• It has been seen that the Chinese firms have escaped the kind of scrutiny in India that their investments have attracted in the West despite several high-profile investments and acquisitions.
• Another concern is that there is no clear separation between the Chinese state and private business. They work closely in pursuing many goals.

Foreign Direct Investment

• FDI is an investment from a party in one country into a business or corporation in another country
• Intention – establishing a lasting interest.
• Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.
• Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.

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