A Foreign Direct Investment (FDI) is an investment in the form of controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.
According to Grazia Ietto-Gillies (2012), prior Stephen Hymer’s theory regarding direct investment in the1960s, the reason behind foreign direct investment and multinational corporations were explained by neoclassical economics based on macroeconomic principles. These theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost production as a motive for a firm’s foreign activity. For example, Joe S. Bain only explained the internationalization challenge through three main principles: absolute cost advantage, product differentiation advantages and economies of scale.
According to OECD, an investment of 10% or above from overseas is considered as FDI. In India, foreign direct investment policy is regulated under the Foreign Exchange Management Act, 2000 governed by the RBI. One can invest in India either under Automatic Route which does not require approval from RBI or under Government Route, which requires prior approval from the concerned Ministries/Departments via a single window- Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India.
Foreign Investment was introduced in 1991 under FEMA, driven by then finance minister Manmohan Singh. As Mr. Singh subsequently became the prime minister, this has been one of his top political problems, even in current times. Current FDI in aviation and insurance sectors is limited to a maximum of 49%.
The term “foreign investment” has been defined under Regulation 2(xviii) of the TISPRO Regulation to mean “any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP”. PIO resident outside India are allowed to contribute to the capital of a partnership firm. Except for the prohibited sectors, foreign investors are allowed to invest in small –scale industrial unit operating in various sectors. The investment is limited to 24% of paid-up capital of an SSI unit.
FDI is a capital account transaction and any violation of its regulations attracts penal provisions under Section 2 of FEMA. RBI administers FEMA and Directorate of Enforcement, Ministry of Finance – Government of India has the authority to investigate in case of any violation of its rules.
All dealing in foreign exchange or security can be done only through an authorized person if permitted by FEMA, rules & regulations framed there under, or by general or special permission of the RBI. Further no payments can be made by a resident to a non-resident unless permitted under FEMA (section 3).
If any person contravenes any provisions, rules, regulations etc. the penalty imposed may be 3 times the amount involved in contravention; and if the amount of contravention is not ascertainable, penalty can be up to Rs. 2,00,000.
The officers of the Directorate have powers to investigate contraventions referred to in section 13.
The powers and limitations of these officers are the same as those conferred on Income-tax Authorities under the Income-tax Act, 1961. An authorized officer can, if he has reason to believe any foreign exchange, foreign security or immoveable property, situated outside India, of the aggregate value exceeding the threshold prescribed, is suspected to have been held in contravention of section 4, seize value equivalent situated in India. The aggrieved person can appeal to the Appellate Tribunal. This is not compoundable.
Considering the above points, we may conclude that FDI is one of the core features of globalization and grew at an unprecedented pace and even faster than world output and trade. This is based on secondary data. The required data have been collected from various sources which are available in many national and international publications, reports and documents, i.e., IMF, WTO, UNCTAD, NBER etc. FDI brings certain benefits to national economies by making contribution to Gross Domestic Product (GDP) and Gross Fixed Capital Formation. More than 50% of the total FDI inflows received by India, came from Singapore and the USA. But foreign investor never adopts environment friendly technique to maximize their profits. These investments met the financial requirement for building up the basic and essential infrastructure industries of priority sector. But the highest amount of FDI is gone to financing sector, Real estate and Business services which is 33.05% of total cumulative inflow of FDI in study period in India. It’s a serious matter in context of foreign direct investment objectives. Main reason of this sifting is high risk and low profit in concern sectors. Because the FDI are associated with various types of risk which are expected to provide various linkages in the development of Indian Economy. But there is an upward trend in the flow of foreign investment particularly in study period. We should provide a better environment for attracting the foreign investment through direct as well as indirect methods. We should welcome inflow of foreign investment in such way that it should be convenient and favorable for Indian economy and enable us to achieve our cherished goal like rapid economic development, removal of property, internal personal disparity in the development and making our Balance of Payment favorable.
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