FDI REGULATORY FRAMEWORK
Investment is usually understood as financial contribution to the equity capital of an enterprise or purchase of shares in the enterprise. Foreign investment is investment in an enterprise by a Non-Resident irrespective of whether this involves new equity capital or re-investment of earnings. Foreign investment is of two kinds (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment.
FDI is a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) i.e. resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise. In India the lasting interest is not evinced by any minimum holding of percentage of equity capital/shares/voting rights in the investment enterprise. Direct investment allows the direct investor to gain to the access of direct investment enterprise which it might otherwise be unable to do. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise.
It is the policy of the Government of India to attract and promote productive FDI from non-residents in activities which significantly contribute to industrialization and socio-economic development. FDI is encouraged in enterprises to significantly expand employment and livelihood opportunities, enhance economic value of products, promote welfare of consumers, increase exports and/or transfer technologies in all economic activities. FDI supplements the domestic capital and technology.
The Legal basis: Foreign Direct Investments by non-resident in resident entities through transfer or issue of security to person resident outside India is a Capital account transaction and Government of India and Reserve bank of India regulate this under the FEMA 1999 and its various regulations. Keeping in view the current requirements, the Government comes up from time to time with new regulation, amends/changes in existing one through order/allied rules, Press Notes, etc. . The regulatory framework over a period of time thus consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.