The Future Outlook of India’s FDI Caps

October 27, 2014 Posted by India Briefing Reading Time: 4 minutes

Earlier this month, reports emerged that foreign direct investment (FDI) into India had fallen by 10 percent over the previous year, representing the lowest figures for the past eight months. Whilst other industries were making advances– such as foreign inflows, which saw growth of more than 40 percent over last year – the foreign investment figures came as a blow to the Indian government, who have made greater FDI a key focus area of policy.

However, new FDI caps that are due to soon come into effect may change the future outlook for India’s foreign investment rates.

Amendments in Indian FDI policy last year opened a number of key business sectors to increased foreign investment and, in several instances, eliminated the need for foreign investors to obtain approval from the Indian government before investing. These changes had a profound influence on FDI trends in India.

2013’s amendments are now being further augmented under the new Narendra Modi administration, with several sectors significantly increasing the amount of foreign investment permitted. Of particular interest are the hikes that will be seen in the insurance and railway sectors; the former rising from 26% to 49%, and the later from 0% to a massive 100%.

Once these new policies are fully implemented, India’s revised list of FDI caps will look something like this:

FDI-caps-chart4

In the same way that 2013’s changes did, these new policies may serve to improve upon this month’s disappointing results in both the short and long-term future.

What is the Difference Between the Government and Automatic Route?

When foreign entities directly invest in India, their investment will fall under one of two FDI routes, which will determine the amount they are able to invest in the sector in question:

• Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB).

• Automatic Route: For investment in business sectors that do not require prior approval from the government, but the filing of a notification after the incorporation of the company and issue of initial shares.

Foreign Investment Forms

The form that an investment takes is important for interpreting the changes in foreign investment policy, as foreign investment caps and approval routes often vary by both industry and investor. Foreign investment takes one of two principal forms:

• Foreign Direct Investment (FDI): The acquisition of shares or other securities in an Indian company.

• Foreign Institutional Investment (FII): Investment by foreign institutional investors (such as hedge funds, insurance companies, or mutual funds) registered with the Securities and Exchange Board of India (SEBI).

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