Foreign Direct Investment (FDI) Led Investment Models

Context: The Commerce and Industry Ministry has started consultations with e-commerce giants (Amazon, Walmart-Flipkart) and Indian MSMEs to explore models to boost e-commerce exports.

Foreign Direct Investment (FDI)

• Investment made by a non-resident in an Indian company through capital instruments (shares, convertible debentures, preference shares).
• Conditions:
  • Unlisted company → any equity investment by a foreigner.
  • Listed company → investment of 10% or more of post-issue paid-up equity capital (on a fully diluted basis)
• Nature: Long-term, non-debt-creating capital flow.
• Not the same as Foreign Portfolio Investment (FPI), which is <10% equity, short-term, and volatile.

What Instruments Count as FDI?

Included in FDI:

• Foreign Currency Convertible Bonds (FCCBs) → when converted into equity.
• Foreign Institutional Investment (FII) → if it meets FDI conditions (≥10% in listed equity).
• Global Depository Receipts (GDRs) / American Depository Receipts (ADRs) → if converted into underlying Indian equity shares.

Not FDI:

• Non-Resident External (NRE) deposits → These are bank deposits, not capital/equity investment → counted under External Commercial Borrowings (ECB)/capital account flows, not FDI.

Routes of FDI in India

• Automatic Route: No prior approval; only RBI reporting.
  • Examples: Agriculture, Air Transport Services, Automobiles, Greenfield Biotech, Renewable Energy, Construction Development, etc.
• Government Route: Prior approval is needed from the concerned ministry.
  • Examples: Banking (Public Sector), Multi-Brand Retail, Food Products Retail Trading, Uploading/Streaming of digital news, Print Media, Defence (beyond 74%).

Prohibited Sectors for FDI

• Atomic Energy generation.
• Gambling & betting, Lotteries.
• Chit funds, Nidhi companies.
• Real estate business (except construction).
• Manufacturing of cigars/cigarettes/tobacco.

FDI-led Models of E-commerce

• Inventory-based Model: E-commerce entity owns the inventory of goods and sells directly to consumers.
• Marketplace Model: E-commerce entity provides a digital platform (marketplace) where independent sellers list their goods. The platform acts only as a facilitator between buyer and seller.

Which Model is Available in India?

• Allowed: Marketplace Model (100% FDI permitted).
  • Reason: To prevent online giants from unfairly dominating small retailers by controlling inventory.
• Prohibited: Inventory-based Model.

Regulation of FDI in India

Legal Framework

• Foreign Exchange Management Act (FEMA), 1999 → umbrella law governing foreign exchange and cross-border investments.
• FEMA (Non-Debt Instruments) Rules, 2019 → lays down specific rules for FDI, FPI, LLP investment, depository receipts, etc.
• Consolidated FDI Policy, 2020 → issued by DPIIT (Dept. for Promotion of Industry & Internal Trade); updated periodically.

Regulatory Authorities

• The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, is the main regulator of FDI in India.
• RBI also plays a key role by enforcing the FDI Rules.

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