Foreign Investment Policies in India

Foreign Investment Policies are for investing directly into production or business in a country by a company or an individual of another country. Investing may be buying a company in another country or expanding operations of the existing business in that country.

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Foreign Investment in India is governed by the FDI (Foreign Direct Investment) of the GOI (Government of India) and the Foreign Exchange Management Act 1999.

The two main concerns of the FDI policy framework are:

  • To sustain India's impressive economic growth, foreign investments are necessary
  • Protection of sectors that are of strategic interest such as defense and telecommunications

What Is Foreign Direct Investment?

When a company or investor takes ownership of another company in a land other than their own (foreign land), it is known as Foreign Direct Investment.

In layman’s terms, Foreign Direct Investment is the decision of a company or an investor to acquire a certain amount of shares of another company in some other country to expand their existence in a foreign land. 

How Does It work?

The government has now allowed Foreign Institutional Investors (FII) and Non-Resident Indians (NRIs) to invest in the Insurance sector through an automatic route within the 26% cap on FDI (Foreign Direct Investment). A senior official at DIPP (Department of Industrial Policy and Promotion) said that foreign investment was already allowed in third-party administrators, insurance, insurance brokers as per the Insurance Act but now it has been defined in FDI policy. This shall attract more investors to the market. 

Previous Policy 

Revised Policy

26% (FDI)

26% (FDI+FII)

The foreign investors would have to obtain the necessary license from IRDA (Insurance Regulatory and Development Authority) for undertaking the activities of Insurance. Private sector banking FDI norms would be applicable for bank-promoted insurance companies. 74% FDI including investments by FIIs in private sector banks has been allowed by Banking sector FDI norms. In this sector, the government route is followed from 49% to 74%, and the automatic route is followed up to 49%. 

Most of the Insurance companies in the country are joint ventures between foreign and Indian companies. Due to political opposition, the government is unable to raise the FDI limit in the sector to 49%. The limit in the case of the Insurance sector is mentioned in the law so it would need to be raised through the parliamentary process, unlike most sectors where limits are mentioned in the policy of FDI. 

It is a long-term commitment to invest in India as these changes have raised certain issues which need to be resolved further like a broader FDI policy and the narrow definition of ownership. The stability in government for the next five years signified by the near majority win by the ruling UPA government is a piece of good news on the Indian front. To further liberalize the FDI policy over the next five years, the current government will continue its economic reform agenda.

Written By: PolicyBazaar - Updated: 09 November 2021

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