Context
- Recent data released by the Reserve Bank of India (RBI) for February 2026 shows that Net Foreign Direct Investment (FDI) into India has turned positive, reaching $4.6 billion. This marks a significant recovery after a six-month period of negative net inflows, representing the highest level since May 2022.
1. Key Highlights from the February 2026 Data
- Negative net FDI: India experienced negative net FDI for six consecutive months (August 2025 – January 2026) due to high outflows. February 2026 reversed this slump.
- Gross FDI Surge: Gross inflows grew by 61.6% to reach nearly $9 billion, a seven-month high.
- Reduced Outflows: A primary driver for the net increase was a sharp decrease in “repatriation and disinvestment” by foreign companies, which fell to $1.7 billion (a 30% year-on-year drop).
- Sectoral Leaders: Manufacturing, computer services, financial services, and communication services accounted for over two-thirds of total equity inflows in FY 2025-26.
- Source Countries: Singapore, the U.S., Mauritius, Japan, and the Netherlands remain the top sources, accounting for roughly 75% of total inflows.
- Greenfield Projects: While the RBI maintains India is an attractive destination for new (Greenfield) projects, data shows a slight 11% dip in project announcements for the April-January period compared to the previous year.
2. Understanding Foreign Direct Investment (FDI)
I. What is FDI?
- FDI is an investment made by a firm or individual in one country into business interests located in another country.
- In India, it generally involves establishing business operations or acquiring business assets, including establishing ownership or controlling interest in a foreign company.
- Regulatory Framework: Governed by the FDI Policy 2020 and FEMA rules, primarily regulated by DPIIT. RBI also plays a key role by enforcing the FDI Rules.
- FDI Prohibition in India: FDI is strictly prohibited in sectors like atomic energy generation, gambling and betting, lotteries, chit funds, real estate, and the tobacco industry.
- FDI Trend: The services sector emerged as the top recipient of FDI equity in FY 2024–25, attracting 19% of total inflows, followed by computer software and hardware (16%) and trading (8%).
- Maharashtra accounted for the highest share (39%) of total FDI equity inflows in FY 2024–25, followed by Karnataka (13%) and Delhi (12%).
II. Routes of FDI in India:
- Automatic Route: The non-resident investor or the Indian company does not require any prior arrival from the Government of India or the RBI.
- Government Route: Prior approval from the government is required. Proposals are considered by the respective Administrative Ministry/Department.
III. FDI vs. FPI: Key Differences
| Feature | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
| Definition | Investment in physical assets/infrastructure or significant stake in a company. | Investment in financial assets like stocks and bonds. |
| Control | Investor typically gains a degree of management control. | Investor has no direct control over the company’s operations. |
| Nature | Long-term and stable (“Lasting Interest”). | Short-term and volatile (“Hot Money”). |
| Entry/Exit | Difficult to exit quickly (low liquidity). | Easy to enter and exit (high liquidity). |
| Impact | Leads to technology transfer, job creation, and infrastructure. | Enhances capital market liquidity but can lead to market volatility. |
| Threshold | In India, any investment of 10% or more of the post-issue paid-up equity capital is treated as FDI. | Any investment below 10% of the post-issue paid-up equity capital is treated as FPI. |
IV. Some core Concepts
- Greenfield FDI: Greenfield Foreign Direct Investment (FDI) is a type of investment where a parent company creates a new subsidiary in a foreign country, constructing new facilities—such as offices, plants, or infrastructure—from scratch.
- Brownfield FDI: Brownfield Foreign Direct Investment (FDI) involves a foreign company investing in or acquiring existing, pre-built production facilities and infrastructure, rather than building from scratch. It is a popular, faster market-entry strategy offering lower setup costs, existing supply chains, and trained staff. Common examples include mergers, acquisitions, or leasing existing plants.
- Net FDI Formula: Net FDI = (Gross Inflows) – (Repatriation/Disinvestment + Outward FDI by Indians).
- Repatriation: The process of converting foreign currency back into the currency of one’s own country (e.g., foreign companies sending profits back home).
Consider the following statements:
1. In India, an investment of 10% or more of the post-issue paid-up equity capital is classified as Foreign Direct Investment (FDI).
2. Greenfield Foreign Direct Investment involves acquiring or leasing existing production facilities in the host country.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: A
Explanation:
• Statement 1 is Correct: In the Indian context, an investment is classified as Foreign Direct Investment when a foreign investor acquires 10% or more of the post-issue paid-up equity capital in an Indian company. This threshold reflects a lasting interest and potential management influence, distinguishing FDI from portfolio investment.
• Statement 2 is Incorrect: Greenfield FDI refers to establishing new business operations from the ground up, such as building new factories or offices.
The statement incorrectly describes Brownfield FDI, which involves acquiring or leasing existing facilities for faster market entry.
