Is the Magnitude of Foreign Direct Investment an indicator of Economic Growth?


Prof Soman Nambiar ( School of Management) , Presidency University


Is the Magnitude of Foreign Direct Investment an indicator of Economic Growth?.. a review in the light of the recent Government norms on FDI in the  E-commerce Companies following the marketplace model ……


To comprehend this aspect, one needs to have a basic knowledge of the mechanics of FDI in India.  Let’s begin with this blog on the basic framework, to be followed


Foreign Direct Investment [FDI] is an investment made by a business or investing entity located in one country, into any company or entity based in another country. FDI   is distinct from Foreign Indirect Investments in that, in the case of the latter, foreign institutions invest in Equity Market of the destination nation. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. It has been generally found that nations with skilled workforce and significantly good growth prospects tend to a witness larger inflow of FDI as compared against more controlled economies.


The Investing Company may make its overseas investment in a number of ways – either by setting up a subsidiary in the foreign country, by acquiring shares of an overseas company, or through a    Merger or Joint Venture. Alternatively it can set up a Liaison Office / Representative Office or a Project Office or a Branch Office which can undertake activities permitted under the Foreign Exchange Management Act


Foreign Direct Investment into Indian Companies can flow under one of the following approved routes.:

  1. Automatic Route ii. Government Route

FDI is allowed under the Automatic Route [without recourse to prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, as in force from time to time] FDI in activities not covered under the automatic route requires prior approval of the Government. Such approval is granted by the Foreign Investment Promotion Board [FIPB], Department of Economic Affairs, Ministry of Finance, after due diligence. The Indian company having received FDI either under the Automatic Route or the Government Route is required to comply with provisions of the FDI Policy, as prevalent.


Foreign investment is legally acceptable as a FDI only if the investment is made in the Equity Shares, Fully and Mandatorily Convertible Preference Shares and Fully and Mandatorily Convertible Debentures with the pricing being decided upfront as a lumpsum figure or being based on the formula that is decided upfront. Partly-paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI Guidelines, as applicable.


But any foreign investment into an instrument issued by an Indian company which -gives an option to the investor to convert or not to convert it into equity or  does not involve upfront pricing of the instrument as a date,  would be reckoned as ECB  ( External Commercial Borrowings) and would have to comply with the ECB Guidelines.


The FDI policy provides that the price conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [i.e valuation as per any internationally accepted pricing methodology on arm’s length basis for the unlisted companies and valuation in terms of SEBI (IC


Consideration under the FDI Policy of the country shall be received by  Indian company issuing shares /convertible debentures, can be received either as an inward remittance through normal banking channels, under debit to NRE / FCNR account of a person concerned maintained with an Authorised Dealer[AD] Category I Bank or by] conversion of royalty / lump sum / technical knowhow fee due for payment or conversion of ECB, [with the approval of FIPB] etc


But it needs mention here that FDI is prohibited  in India [either under  the Automatic Route or the Government Route] in certain sectors i] Atomic Energy, ii] Lottery Business iii] Gambling and Betting, iv]  Business of Chit Fund, v] Nidhi Company and vi[ Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.


This blog will continue …….