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Foreign Direct Investment (FDI)

1. What is FDI ………………..………………….……..……...….……..……….………42. Need of FDI ….……………………..……………….…...……………….……………53. FDI and Economic Development ………………………..………..….…….………64. FDI CASE STUDY………………….……………………..…….….……….………….85. FDI for Infrastructure ……………………………………….…………….…………..10

Indian Real estate is on the high growth path………………....….…………..10 Guidelines for FDI application in Indian real estate …….….…………..…….11

1) Minimum area ……………………….……....………………..……112) Investment ………………………….………………………………123) Time frame & rules ..………..………….…..…………………….12

FDI in Indian Real Estate and Economic Growth ……………………………..….....……12 FDI contributing to an organized Indian real estate………………..…………13 FDI in real estate on the high growth path ………………………..…………..14 Indian Economy makes headway with record FDI…………………………….15 Foreign Investments flood Indian real estate …………….……………………16 FDI inflows rise 92% in just four months ……………..…..…………………..17

6. Liberalization and FDI in India ……………………….……………….……………..18

FDI policy………….……………………….……….……………………..……….19 Automatic Route ……………………….……………….…..…………..…………20 Procedure for obtaining Government approval- FIPB…..……………………..20 FDI from NRI & for 100% EOU ……………………..….………...……..……….21 Proposals requiring Government’s approval………………...….………………21

7. Pre and Post Liberalization ..…………………………………….…………………..22

Licensing and technology transfer……………………………..…………………….23 Reciprocal distribution agreements………………………………………………….24 Joint venture and other hybrid strategic alliances…………………..……………..24 Portfolio investment……………………………………………………………………25

8. FDI – Time wise ……………………………………………………………….………259. FDI from Different Countries……………………………….…………………………25

10. India Further Opens up Key Sectors for Foreign Investment……………………..4211.Role of Foreign Investment Promotion Board………………………………..….…44

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FDI cases requiring FIPB Approval ……………..…………….…..…………...44 Changing role of FIPB ……………………………………………………..……..44 Foreign Participation - Permission & Approvals ….……………………………45 Clearance by Government ……………………………………….………………46 Lesser FIPB role in foreign-owned cos’ downstream investment likely ……46

FIPB contributes to orderly growth …………………………………..…..……..49

12.FDI for Different Sectors……………………………………………….……………5213.FDI Permitted in Various Sectors/ Activities …………………..………………….52

Hotel & Tourism: FDI in Hotel & Tourism sector in India…………………..…58 Private Sector Banking……………….………………………….……………..…59 Insurance Sector: FDI in Insurance sector in India….…………………………62 Telecommunication: FDI in Telecommunication sector……….………………62 Trading: FDI in Trading Companies in India……………………….…………..63 Power: FDI in Power Sector in India………………………….…………………65

Drugs & Pharmaceuticals …….……………………………………………..66  Roads, Highways, Ports and Harbors……………….…………….……………66 Pollution Control and Management………………………………………..……66 BPO in India………………………………………………..……………..……….67 Special Facilities and Rules for NRI's and OCB's………….………………….67

14.Guidelines for the companies in India …………………………………….........…6915.Advantages of FDI over Portfolio Investment ………………………………….…7016.Portfolio Investment – Definition .…………………………………………………. 70

17.Direct Investment vs. Portfolio Investment ……………………………………… 7118.Portfolio Investment or FII Investment ……………………….……………………71

Indian Scenario …………………………………………………………………. 7219.FDI versus Portfolio Investment ……………………………………………………72

Key Points …………………………………………………..…………….………73 Key Problems ………………………………………….……………………...….76 Key Recommendations ……………………………….………………………...76

20.Major Sectors attracting FDI in India …….…………………………………………7721.Sectors attracting highest FDI Equity Inflows (chart) ……..………………………7822.FDI Inflows (as per international best practices) …………………………….…….7923.FDI Inflows (2007-08) ……………………………………………..………………….7924. INDIA: SECTOR SPECIFIC POLICY FOR FOREIGN DIRECT INVESTMENT…..….8325.Sector-wise FDI Inflows………….………………………………………………… 8526.Benefits of FDI ……………….……………………………………….…...…………..9127. Impediments to FDI inflows in India……………………………....…………………93

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28.Policy Recommendation for FDI……………………………..……..………………10029.Chronological listing of FDI Policy reform and related areas………..…………..100

1991-92 ..................................................................................................................1001992-93 ..................................................................................................................1041993-94 ..................................................................................................................1061994-95 ..................................................................................................................1101995-96 ..................................................................................................................1141996-97 .................................................................................................................1201997-98 ..................................................................................................................1241998-99 ..................................................................................................................126

30.Annexure I….KPMG………………………………………………..........…………12931.Annexure II...Deloitte…………………………………………...................….…...13332.AnnexureIII…PWC………….……………………………….……………....……..164

India – Overview……………......……………………………..……………………166

33. Highlights of Industrial Policy ……………………………………………………..172 34. Foreign Investment in India - Routes and Authorities ………………………….176

Govt. Policy on Foreign Equity Investment……………………………………….177Govt. Policy on Foreign Technology Transfer…………………………………….180Investment by Way of Acquisition of Shares………………………………………181Investment by Foreign Institutional Investors……………………………………..182

35. Sector Specific Policy on FDI - Summary ………………………………………...185 36. Mobilisation of Funds and Significant Exchange Control Regulations…………198

Investment through GDR / ADR / FCCB………………………………………….198Mobilisation of funds through Preference Shares………………………………..199Mobilisation of funds through External Commercial Borrowings (ECBs)………200

Significant Exchange Control Regulation………………………………………….203

What is FDI

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Foreign direct investment (FDI) plays an extraordinary and

growing role in global business. It can provide a firm with new

markets and marketing channels, cheaper production facilities,

access to new technology, products, skills and financing. For a

host country or the foreign firm which receives the investment, it

can provide a source of new technologies, capital, processes,

products, organizational technologies and management skills,

and as such can provide a strong impetus to economic

development.

Foreign direct investment, in its classic definition, is

defined as a company from one country making a physical

investment into building a factory in another country.

The direct investment in buildings, machinery and

equipment is in contrast with making a portfolio

investment, which is considered an indirect investment.

In recent years, given rapid growth and change in global

investment patterns, the definition has been broadened to

include the acquisition of a lasting management interest in

a company or enterprise outside the investing firm’s home

country.

As such, it may take many forms, such as a direct

acquisition of a foreign firm, construction of a facility, or

investment in a joint venture or strategic alliance with a

local firm with attendant input of technology, licensing of

intellectual property.  In the past decade, FDI has come to

play a major role in the internationalization of business.

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Reacting to changes in technology, growing liberalization of

the national regulatory framework governing investment in

enterprises, and changes in capital markets profound

changes have occurred in the size, scope and methods of

FDI. New information technology systems, decline in global

communication costs have made management of foreign

investments far easier than in the past. The sea change in

trade and investment policies and the regulatory

environment globally in the past decade, including trade

policy and tariff liberalization, easing of restrictions on

foreign investment and acquisition in many nations, and the

deregulation and privatization of many industries, has

probably been the most significant catalyst for FDI’s

expanded role.

Need of FDI

The need for FDI is because India is at a stage where it

needs US investments, technology, and management policies to

sustain and enhance its economic growth.

The need for FDI calls for major issues and areas to be taken

into consideration, such as:

Market potential and accessibility

Political stability

Market infrastructure

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Easy currency conversion

India is the ideal country to make Foreign Direct investments in

because of its features like :

Developing economy

Low salaried employees

Low wage workers

Abundant human resources

Big private economy

There are others necessities which a larger FDI will cater to viz.,

employment generation, income generation, technology transfer,

and economic stability. Hence, the need for FDI is a pressing

situation these days in India. Foreign countries are well aware of

this, and many of them are taking extra initiative to invest in the

Indian economy.

FDI and Economic Development

Foreign direct investment has a major role to play in the

economic development of the host country. Over the years,

foreign direct investment has helped the economies of the host

countries to obtain a launching pad from where they can make

further improvements.

This trend has manifested itself in the last twenty years. Any

form of foreign direct investment pumps in a lot of capital

knowledge and technological resources into the economy of a

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country.

This helps in taking the particular host economy ahead. The fact

that the foreign direct investors have been able to play an

important role vis-a-vis the economic development of the

recipient countries has been due to the fact that these countries

have changed their economic stances and have allowed the

foreign direct investors to come in and improve their economies.

It has been observed that the foreign direct investment has been

able to improve the infrastructural condition of a country. There

is ample scope of technological development of a country as well.

The standard of living of the general public of the host country

could be improved as a result of the foreign direct investment

made in a country. The health sector of many a recipient country

has been benefited by the foreign direct investment. Thus it may

be said that foreign direct investment plays an important role in

the overall economic and social development of a country.

It has been observed that the private sector companies are not

always interested in undertaking activities that help in improving

the infrastructure of the country. This is because the gains from

these infrastructural activities are made only in the long term;

there are no short term benefits as such.

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This is where the foreign direct underdeveloped countries build

their own research and development bases that can contribute to

the technological development of the country. This is a very

crucial contribution as most of these countries are not able to

perform these functions on their own. These assistances come in

handy, especially in the context of the manufacturing and

services sector of the particular country, that are able to

enhance their productivity and ultimately advance from an

economic point of view.

At times foreign direct investment could be provided in form of

technology. Else, the money that comes in a country through the

foreign direct investment can be utilized to buy or import

technology from other countries. This is an indirect way in which

foreign direct investment plays an important part in the context

of economic development. Foreign direct investment can also be

helpful in assisting the host countries to set up mass educational

programs that help them to educate the disadvantaged sections

of the society. Such assistance is often provided by the non-

governmental organizations in the form of subsidies. The

developing countries can also tackle a number of healthcare

issues with the help of the foreign direct investment.

With different sectors opening up to add to economic growth,

India has played up to its image of being one of the most

attractive FDI destinations. The country has received upwards of

Rs.11, 460 crore of FDI in the first half of this fiscal with top-

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notch companies including DSP Merrill Lynch, Barclays Bank

and Mauritius-based TH Holdings.

Most FDI investments were in the services sector amounting to

8955.88 crore. The total investments of the top six investors

falling under this sector amounted to Rs. 7,976 crore, more than

half the total of what is labeled FDI from the service sector.

Commendable enough is the contribution of DSP Merrill Lynch

Limited, India’s leading investment bank and broking firm that

pump in more than Rs 2,230 crore between April 2006 and

October 2006.

The collective investment that got parked in real estate and

construction sector was to the tune of Rs. 1,252.79 crore. With

the whopping investment of Rs. 321.70 crore, Mauritius-based

IREO Investment Holding grabs the honor of making the highest

FDI in the sector. The company also has plans for related

projects and heavier inflows.

Manufacturing has also made its presence felt, attracting FDI

worth Rs. 1,133 crore. Mahindra & Mahindra was at the helm of

things as foreign financial investors made investments worth Rs.

260.6 crore. Barclays Bank made an investment totaling Rs

1,711.23 crore pitching itself to the second investor slot.

Mauritius-based TH Holdings was not far behind, with an

investment of Rs.1697.35 crore.

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It gives a promising picture and a heady view of times to come

for the economy of the country.

FDI CASE STUDY

case-study_Kerala.doc

FDI for Infrastructure

Foreign direct investment is also capable of upgrading the health

infrastructure of a particular country. This could be done by way

of providing high-end equipments or medicines.

Such investment is normally made by the world level

organizations in countries that are economically backward and

have no or little medical infrastructure to speak of.

Communication infrastructure is an important area where the

foreign direct investment can come in handy. The money that is

invested in a country by overseas entities can be used for the

construction of roads, railways and bridges.

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These facilities are used for establishing connections with the

remote areas of a country and for transporting important

services to these parts like medicines and aids at times of floods

or other natural disasters. A lot of construction groups are taking

active interest in developing the communicational infrastructure

of other countries.

Foreign direct investment is also used for the purpose of

educating the unskilled labor force that is present in a country.

In India during the later stages of 80s and 90s there was a

situation whereby there was a huge labor force but it was mostly

unskilled and was employed in the unorganized sector.

Foreign direct investment is also useful for executing mass

educational programs that can educate those people who remain

out of the bounds of conventional and institutional education as

they are not able to afford it or it may not be available in their

areas.

India of today can be acknowledged as the one of the fastest

growing economy in the world and in this current economic

status, real estate has emerged as one of the most appealing

investment areas for domestic as well as foreign investors. And

this high growth curve in the real estate sector owes some credit

to a booming economy and liberalized Foreign Direct

Investments (FDI) regime in the real estate sector.

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The Government of India in March 2005 amended existing norms

to allow 100 per cent FDI in the construction business. This

liberalization act cleared the path for foreign investment to meet

the demand into development of the commercial and residential

real estate sectors. It has also encouraged several large financial

firms and private equity funds to launch exclusive funds

targeting the Indian real estate sector.

Some of the foreign players who have already tied up with Indian

real estate developers are Lee Kim Tah Holdings, CESMA

International Pvt Ltd., Evan Lim, and Keppel Land from

Singapore, Salim Group from Indonesia, Edaw Ltd., from USA,

Emaar Group from Dubai, IJM, Ho Hup Construction Co., from

Malaysia etc.

Indian Real estate is on the high growth path

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of

which only 4.5% was committed to real estate sector. In 2004-05

this increased to US$ 3.75 billion of which, the real estate shares

was 10.6%.

However, in 2005-06, while total FDIs in India were estimated at

US$ 5.46 billion, the real estate share in them was around 16%.

The Study, nevertheless projects that in 2006-07, total FDIs will

touch about US$ 8 billion in which the real estate share is

estimated to be about 26.5%.

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Guidelines for FDI application in Indian real estate

The Government of India has set up certain guidelines for investors willing to apply in FDI in real estate, which has conditions like area, investment options and target for completion of a project.

1) Minimum area In case of development of serviced housing plots, 10 hectares (25

acres)

In case of construction-development projects, built-up area of 50,000 sq m.

In case of a combination project, any of the above two conditions

2) Investment Minimum capitalization

  for wholly owned subsidiaries - US$ 10 million

  for JV with Indian partners - US$ 5 million–, to be brought in

within 6 months of commencement of business

Original investment cannot be repatriated before a period of three years from completion of capitalization.

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The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).

3) Time frame & rules At least 50 per cent of the project to be developed within five years

from the date of obtaining all statutory clearances.

Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available.

FDI in Indian Real Estate and Economic Growth

With this change in the government policy on FDI, all real estate

sectors, residential, commercial and retail are currently

witnessing huge growth in demand. India, during the first half of

2005-06 fiscal has attracted more than three times foreign

investment at US$ 7.96 billion during making it amongst the

"dominant host countries" for FDI in Asia and the Pacific (APAC).

India in the next five-year period is estimated to require

investments worth US $ 25 billion with the urban housing sector.

This again has opened up opportunities for foreign investments

in the realty sector. The Central government allowed up to 100%

FDI for setting up townships in 2002. However, the flow of FDI

investments has been thwarted by the 100 acre criterion; since

acquiring such a large chunk of land was impossible in

metropolitan cities and even satellite cities and state capitals.

But a landmark decision taken by the Union government in 2005,

where the minimum land area for development by foreign

investors was lowered from the earlier floor of 100 acres to 25

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acres has thrown open the lucrative parts of the Indian realty

market to global investors. Another perceptible spin-off of the

easing of FDI policies will be the impact on quality and inevitable

acceleration in construction activities.

Foreign Direct Investments in the real estate sector in India

would also contribute towards making the sector more

organized. Besides increasing professionalism in the sector, it

would bring in advanced technology and help in the creation of

healthy and competitive market environment for both domestic

and foreign investors.

FDI contributing to an organized Indian real estate

Foreign Direct Investments (FDI) in the real estate sector in

India would contribute towards making the sector more

organized. Besides increasing professionalism in the sector, it

would bring in advanced technology and help in the creation of

healthy and competitive market environment for both domestic

and foreign investors.

India’s claim to be one of the fastest growing economies in the

world is best proved by the increasing number of countries

showing interest to invest in the country as India is considered a

stable country for investments by the overseas corporate market.

This encouraging trend is further accelerated by the

16

government’s decision to liberalize policies on the foreign direct

investments (FDI) in India in the real estate sector.

With the amendment of the Indian government in March 2005,

FDI was relaxed upto 100 per cent in the construction business.

This amendment has cleared the path for foreign investment to

meet the demand into development of the commercial and

residential real estate in India.  It has also encouraged several

large financial firms and private equity funds to launch exclusive

funds targeting the real estate sector.

FDI in real estate on the high growth path

Foreign Direct Investments (FDI) in Indian real estate is

currently on the high growth path. Study on Future of Real

Estate Investment in India brought out by The Associated

Chambers of Commerce and Industry of India (ASSOCHAM) says

real estate market in India is growing at the rate of 30% p.a.

Industry experts are of the view that, FDI’s share in domestic

real estate market will shoot up by at least 10% by March 2007

and touch about 26% level from 16% of fiscal 2005-06. This

growth comes in view of growing interest of global real estate

players into Indian real estate market and increasing demand of

office space particularly in IT & BPO sectors.

A fierce and healthy competition is also expected to emerge

between domestic and overseas investors. ASSOCHAM’s Study

on Future of Real Estate Investment in India forecasts that of

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estimated US$ 60 billion future market size of real estate

business in India, the share of foreign investments will be within

the range of US$ 25-28 billion by 2010. The overseas

investments will also be finding larger space in Indian SEZs and

increasing number of shopping malls that will naturally fatten

their share in real estate market.

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of

which only 4.5% was committed to real estate sector. In 2004-05

this increased to US$ 3.75 billion of which, the real estate shares

was 10.6%.

However, in 2005-06, while total FDIs in India were estimated at

US$ 5.46 billion, the real estate share in them was around 16%.

The Study, nevertheless projects that in 2006-07, total FDIs will

touch about US$ 8 billion in which the real estate share is

estimated to be about 26.5%.

FDI in Indian Real Estate

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Indian Economy makes headway with record FDI

India is poised as the most favorite FDI destination in South East

Asia, outpacing China. With the opening up of different sectors to

add to its economic growth, India’s FDI inflow in the first half of

this fiscal is an upwards of Rs.11, 460 crore. This includes

investments by top-notch companies including DSP Merrill

Lynch, Barclays Bank and Mauritius-based TH Holdings.

Though most FDI investments were in the services sector

amounting to 8955.88 crore; manufacturing sector had

investments FDI worth Rs. 1,133 crore. Mahindra & Mahindra

was at the helm of things as foreign financial investors made

investments worth Rs. 260.6 crore. Mauritius-based TH Holdings

was not far behind, with an investment of Rs.1697.35 crore.

But Indian real estate sector was capable of attracting

satisfactory investments, by attracting sizeable FDI. The

collective investment for real estate and construction sector was

to the tune of Rs. 1,252.79 crore. Prominent among them is the

Rs. 321.70 crore investments by Mauritius-based IREO

Investment Holding which can be considered the highest FDI in

the sector. All these give us a promising picture of large scale

growth and development for the economy of India.

Foreign Investments flood Indian real estate

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As opportunities in India grow, major asset management firms

from abroad are investing in the local Indian market. The real

estate market in India is flooded with overseas funds. Industry

sources say over 90 foreign investors are already in the country

tapping investment avenues.

Real estate Management Company, Cushman and Wakefield

confirms that figures are expected to touch $10 billion in the first

half of 2007. This comes with Ayala of the Philippines, Signature

from Dubai, Och-Ziff Capital, EurIndia and Old Lane entering

Indian real estate market shortly. FDI from Malaysia is expected

to be sizeable, and UK, US, Israel and Singapore are likely to

start their India operations soon.

Foreign institutional investment (FII) is expected to have over 75

first time investors. Signature from Dubai has a $650 million

investment plan for the UAE and India, Duetsche Asset

Management and Actis are actively setting up teams to start

investing in real estate in India. Carlyle, Blackstone, Morgan

Stanley, Trikona and Warbus Pincus are vigorously exploring

investment options too.

The latest news in Indian real estate is that 150 overseas private

equity funds have teamed up with real estate developers in India.

Moreover, a total of $10 billion has already been raised through

the same route and is expected to put into the development

process within the next two years. Real estate experts predict

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that the realty sector will witness $90 billion worth investment

by 2015.

FDI inflows rise 92% in just four months

India as the best bet for real estate investment has been

confirmed by the reports on the recent trends in investment

inflow during the last few months. Recent, liberalization of FDI in

the real estate and retail sectors has also opened up the

prospects of more and more investments into the country.

On one hand where FDI in construction in real estate has opened

up the door for developers from around the globe to invest in

real estate development in India, it has also brought about a

competitive environment in the Indian real estate market,

procuring the investors with quality constructions.

Also, FDI in retail has provided new business opportunities in

India for global brands to acquire a market share of their

products. Rationalization and liberalization measures in the FDI

policy has resulted in a surge in the inflows into such sectors

creating opportunities for foreign investors and NRIs to invest in

India.

Foreign direct investment (FDI) in India increased 259 percent in

September to $2.56 billion, compared to the same month last

year, wit h Mauritius being the largest investor

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FDI for the same month last year stood at $713 million.

The FDI inflows during April-September stood at $17.21 billion, a

growth of 137 percent over $7.25 billion witnessed in the same

period last year, an official statement said.

The services sector attracted the highest foreign investment at

$2.34 billion.

Construction activities including roads and highways attracted

$1.64 billion, followed by housing and real estate at $1.62 billion,

and computer hardware and software at $1.36 billion.

The top investing countries in terms of FDI during April to

August have been Mauritius having invested $5.27 billion,

Singapore at $1.72 billion, the US at $1.15 billion and the

Netherlands at $580 million.

Liberalization and FDI in India

Foreign direct investment (FDI) has become an integral part of

national development strategies for almost all the countries

globally. Its global popularity and positive output in augmenting

of domestic capital, productivity and employment; has made it an

indispensable tool for initiating economic growth for nations.

India is evolving as one of the ‘most favored destination’ for FDI

in Asia and the Pacific (APAC). It has displaced US as the second-

most favored destination for foreign direct investment (FDI) in

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the world after China according to an AT Kearney's FDI

Confidence Index. India attracted more than three times foreign

investment at US$ 7.96 billion during the first half of 2005-06

fiscal, as against US$ 2.38 billion during the corresponding

period of 2004-05.

FDI in India has contributed effectively to the overall growth of

the economy in the recent times. FDI inflow has an impact on

India's transfer of new technology and innovative ideas;

improving infrastructure, a competitive business environment.

Beside 100 percent relaxation of FDI in real estate, the

government policies on FDI also offer opportunities for foreign

investors to invest in different sectors. This includes 100 percent

in power trading, processing, development of new airports,

laying of natural gas pipelines, petroleum infrastructure and

warehousing of coffee and rubber. Limit for telecoms services

firms have been raised from 49 per cent to 74 per cent.

Another cap to the retailing industry in India is allowing 51% FDI

in single brand outlet. The government is now set to initiate a

second wave of reforms in the segment by liberalizing

investment norms further. And this has also brought about a

conspicuous interest by towards investments in the Indian

hospitality sector. Industry reports suggest the inflow of about

US$ 500 million into the real estate sector over the past six

months and is expected to rise to a massive $ seven to eight

billion over the next 18-30 months.

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FDI policy

FDI up to 100% is allowed under the automatic route in all

activities/sectors except the following which will require

approval of the Government :

Activities/items that require an Industrial License;

Proposals in which the foreign collaborator has a

previous/existing venture/tie up in India in the same or

allied field

All proposals relating to acquisition of shares in an existing

Indian company by a foreign/NRI investor.

All proposals falling outside notified sectoral policy/caps or

under sectors in which FDI is not permitted.

An ongoing review of the FDI policy is carried out so as to

initiate more liberalization. Change in sectoral policy/sectoral

equity cap is notified from time to time through Press Notes. This

is done by the Secretariat for Industrial Assistance (SIA) in the

Department of Industrial Policy & Promotion. Policy

announcement by SIA are subsequently notified by RBI under

FEMA.

FDI Policy permits FDI up to 100 % from foreign/NRI

investor without prior approval in most of the sectors

including the services sector under automatic route.

FDI in sectors/activities under automatic route does not

require any prior approval either by the Government or the

RBI.

24

The investors are required to notify the Regional office

concerned of RBI of receipt of inward remittances within 30

days of such receipt. They will have to file the required

documents with that office within 30 days after issue of

shares to foreign investors.

Automatic Route

Areas/sectors/activities till now not open to FDI/NRI investment

shall continue to be so unless otherwise decided and notified by

Government. An investor can make an application for prior

Government approval even when the proposed activity is under

the automatic route.

Procedure for obtaining Government approval- FIPB

The Foreign Investment Promotion Board (FIPB) considers

approving all proposals for foreign investment, which requires

Government approval. The FIPB also grants composite approvals

involving foreign investment/foreign technical collaboration.

Other than NRI Investments and 100% EOU, applications

seeking approval for FDI in form FC-IL, should be submitted to

the Department of Economic Affairs (DEA), Ministry of Finance.

FDI from NRI & for 100% EOU

25

Applications for FDI with NRI Investments and 100% EOU should

be submitted to the Public Relation & Complaint (PR&C) Section

of Secretariat of Industrial Assistance (SIA), Department of

Industrial Policy & Promotion.

Proposals requiring Government’s approval

Application for proposals requiring prior Government's approval

should be submitted to FIPB in FC-IL form. Plain paper

applications carrying all relevant details are also accepted. No

fee is payable.

All the proposals submitted to FIPB seeking FDI approval should

include the following information:

Whether the applicant has had or has any previous/existing

financial/ technical collaboration or trade mark agreement

in India in the same or allied field for which approval has

been sought;

If an applicant has any approved proposal earlier, details

thereof and the justification for proposing the new venture/

technical collaboration (including trademarks) has to be

submitted.

Applications can also be submitted with Indian Missions

abroad who will forward them to the Department of

Economic Affairs (DEA) for further processing.

26

Foreign investment proposals received in the DEA are

placed before the Foreign Investment Promotion Board

(FIPB) within 15 days of receipt.

The decision of the Government in all cases is usually conveyed

by the DEA within 30 days of submission of the FDI proposal.

Pre and Post Liberalization

The overwhelming majority of foreign direct investment is made

in the form of fixtures, machinery, equipment and buildings. This

investment is achieved or accomplished mostly via mergers &

acquisitions. In the case of traditional manufacturing, this has

been the primary mechanism for investment and it has been

heretofore very efficient. Within the past decade, however, there

has been a dramatic increase in the number of technology

startups and this, together with the rise in prominence of

Internet usage, has fostered increasing changes in foreign

investment patterns. Many of these high tech startups are very

small companies that have grown out of research & development

projects often affiliated with major universities and with some

government sponsorship. Unlike traditional manufacturers, many

of these companies do not require huge manufacturing plants

and immense warehouses to store inventory. Another factor to

consider is the number of companies whose primary product is

an intellectual property right such as a software program or a

software-based technology or process. Companies such as these

can be housed almost anywhere and therefore making a capital

27

investment in them does not require huge outlays for fixtures,

machinery and plants.

In many cases, large companies still play a dominant role in

investment activities in small, high tech oriented companies.

However, unlike in the past, these larger companies are not

necessarily acquiring smaller companies outright. There are

several reasons for this, but the most important one is most likely

the risk associated with such high tech ventures. In the case of

mature industries, the products are well defined. The

manufacturer usually wants to get closer to its foreign market or

wants to circumvent some trade barrier by making a direct

foreign investment. The major risk here is that you do not sell

enough of the product that you manufactured. However, you

have added additional capacity and in the case of multinational

corporations this capacity can be used in a variety of ways.

High tech ventures tend to have longer incubation periods. That

is, the product tends to require significant development time. In

the case of software and other intellectual property type

products, the product is constantly changing even before it hits

the marketplace. This makes the investment decision more

complicated. When you invest in fixtures and machinery, you

know what the real and book value of your investment will be.

When you invest in a high tech venture, there is always an

element of uncertainty. Unfortunately, the recent spate of

dot.com failures is quite illustrative of this point.

28

Therefore, the expanded role of technology and intellectual

property has changed the foreign direct investment playing field.

Companies are still motivated to make foreign investments, but

because of the vagaries of technology investments, they are now

finding new vehicles to accomplish their goals.

Consider the following:

Licensing and technology transfer. Licensing and tech transfer have been essential in promoting collaboration between the academic and business communities. Ever since legal hurdles were removed that allowed universities to hold title to research and development done in their labs, licensing agreements have helped turned raw technology into finished products that are viable in competitive marketplaces. With some help from a variety of government agencies in the form of grants for R&D as well as other financial assistance for such things as incubator programs, once timid college researchers are now stepping out and becoming cutting edge entrepreneurs. These strategic alliances have had a serious impact in several high tech industries, including but not limited to: medical and agricultural biotechnology, computer software engineering, telecommunications, advanced materials processing, ceramics, thin materials processing, photonics, digital multimedia production and publishing, optics and imaging and robotics and automation. Industry clusters are now growing up around the university labs where their derivative technologies were first discovered and nurtured. Licensing agreements allow companies to take full advantage of new and exciting technologies while limiting their overall risk to royalty payments until a particular technology is fully developed and thus ready to put new products into the manufacturing pipeline.

29

Reciprocal distribution agreements. Actually, this type of strategic alliance is more trade-based, but in a very real sense it does in fact represent a type of direct investment. Basically, two companies, usually within the same or affiliated industries, agree to act as a national distributor for each other’s products. The classical example is to be found in the furniture industry. A U.S.-based manufacturer of tables signs a reciprocal distribution agreement with a Spanish-based manufacturer of chairs. Both companies gain direct access to the other’s distribution network without having to pay distributor support payments and other related expenses found within the distribution channel and neither company can hurt the other’s market for its products. Without such an agreement in place, the Spanish manufacturer might very well have to invest in a national sales office to coordinate its distributor network, manage warehousing, inventory and shipping as well as to handle administrative tasks such as accounting, public relations and advertising.

Joint venture and other hybrid strategic alliances. The more traditional joint venture is bi-lateral, that is it involves two parties who are within the same industry who are partnering for some strategic advantage. Typical reasons might include a need for access to proprietary technology that might tip the competitive edge in another competitor’s favor, desire to gain access to intellectual capital in the form of ultra-expensive human resources, access to heretofore closed channels of distribution in key regions of the world. One very good reason why many joint ventures only involve two parties is the difficulty in integrating different corporate cultures. With two domestic companies from the same country, it would still be very difficult. However, with two companies from different cultures, it is almost impossible at times. This is probably why pure joint ventures have a fairly high failure rate only five years after inception. Joint ventures involving three or more parties are usually called syndicates and are most often formed for specific projects such as large construction or public works

30

projects that might involve a wide variety of expertise and resources for successful completion. In some cases, syndicates are actually easier to manage because the project itself sets certain limits on each party and close cooperation is not always a prerequisite for ultimate success of the endeavor.

Portfolio investment. Remember our definition of foreign direct investment as it pertains to controlling interest. For most of the latter part of the 20th century when FDI became an issue, a company’s portfolio investments were not considered a direct investment if the amount of stock and/or capital was not enough to garner a significant voting interest amongst shareholders or owners. However, two or three companies with "soft" investments in another company could find some mutual interests and use their shareholder power effectively for management control. This is another form of strategic alliance, sometimes called "shadow alliances". So, while most company portfolio investments do not strictly qualify as a direct foreign investment, there are instances within a certain context that they are in fact a real direct investment.

FDI – Time wise

India_yearwise.pdf

FDI from Different Countries

What would be some of the basic requirements for companies

considering a foreign investment?

Depending on the industry sector and type of business, a foreign

direct investment may be an attractive and viable option. With

rapid globalization of many industries and vertical integration

rapidly taking place on a global level, at a minimum a firm needs

31

to keep abreast of global trends in their industry. From a

competitive standpoint, it is important to be aware of whether a

company’s competitors are expanding into a foreign market and

how they are doing that. At the same time, it also becomes

important to monitor how globalization is affecting domestic

clients. Often, it becomes imperative to follow the expansion of

key clients overseas if an active business relationship is to be

maintained.

New market access is also another major reason to invest in a

foreign country. At some stage, export of product or service

reaches a critical mass of amount and cost where foreign

production or location begins to be more cost effective. Any

decision on investing is thus a combination of a number of key

factors including:

assessment of internal resources, competitiveness, market analysis market expectations.

From an internal resources standpoint, does the firm have senior

management support for the investment and the internal

management and system capabilities to support the set up time

as well as ongoing management of a foreign subsidiary? Has the

company conducted extensive market research involving both

the industry, product and local regulations governing foreign

investment which will set the broad market parameters for any

investment decision? Is there a realistic assessment in place of

32

what resource utilization the investment will entail? Has

information on local industry and foreign investment regulations,

incentives, profit retention, financing, distribution, and other

factors been completely analyzed to determine the most viable

vehicle for entering the market (Greenfield, acquisition, merger,

joint venture, etc.)? Has a plan been drawn up with reasonable

expectations for expansion into the market through that local

vehicle? If the foreign economy, industry or foreign investment

climate is characterized by government regulation, have the

relevant government agencies been contacted and concurred?

Have political risk and foreign exchange risk been factored into

the business plan?

Making a direct foreign investment allows companies to

accomplish several tasks:

Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;

A more complete response might address the issue of global

business partnering in very general terms. While it is nice that

many business writers like the expression, “think globally, act

locally”, this often used cliché does not really mean very much to

the average business executive in a small and medium sized

33

company. The phrase does have significant connotations for

multinational corporations. But for executives in SME’s, it is still

just another buzzword. The simple explanation for this is the

difference in perspective between executives of multinational

corporations and small and medium sized companies.

Multinational corporations are almost always concerned with

worldwide manufacturing capacity and proximity to major

markets. Small and medium sized companies tend to be more

concerned with selling their products in overseas markets. The

advent of the Internet has ushered in a new and very different

mindset that tends to focus more on access issues. SME’s in

particular are now focusing on access to markets, access to

expertise and most of all access to technology.

Foreign direct investment (FDI) outflows from OECD countries in

2007 leapt to a record USD 1.82 trillion from USD 1.2 trillion in

2006 but are projected to fall sharply in 2008, according

to estimates from the OECD. If a slowdown in merger and

acquisitions observed in the first half of 2008 continues, FDI

outflows could fall to USD 1.14 trillion.

FDI inflows to OECD countries rose to USD 1.37 trillion in 2007,

up from USD 1.05 trillion in 2006 and up slightly from the

previous record of USD 1.29 trillion set in 2000. But FDI inflows

are projected to fall back in 2008 to USD 1.035 trillion.

The projected fall in FDI outflows from OECD countries in 2008

will also impact developing countries.

34

Based upon the historical relationship between developing

country inflows and OECD outflows, the projected 37% drop in

OECD outflows in 2008 could result in a decline of around 40%

for developing country inflows to around USD 276 billion from

their 2007 record of USD 471 billion.

The new records set in 2007 for OECD inflows and outflows were

helped by the fall in the US dollar against most other major

currencies. (In addition to Greenfield investment and mergers

and acquisitions, FDI includes reinvested earnings, cross-border

loans and capital transactions between related firms.)

The United States continued to hold its position as the top OECD

investor and recipient of foreign investment in 2007, with USD

333 billion in outflows and USD 238 billion in inflows.

The United Kingdom was second, with USD 230 billion in

outflows and USD 186 billion in inflows, followed by France with

inflows of USD 158 billion and outflows of USD 225 billion.

FDI inflows into Spain increased by more than 80% in 2007,

mainly due to a large Italian investment in the electricity sector.

Foreign investment in Japan was exceptionally high by historical

standards at USD 22.5 billion, largely due to major investments

in the financial sector and the capitalization of foreign

subsidiaries in Japan engaged in real estate investment.

35

FDI into developing economies reached a record USD 471 billion

in 2007, an increase of almost 30% over the previous record of

USD 368 billion set in 2006. Brazil, Russia, India, China and

South Africa accounted for approximately 50% to 60% of

developing country inflows.

Global foreign direct investment (FDI) flows grew substantially in

2005 over those in 2004. As in the late 1990s, that growth was

spurred by cross border mergers and acquisitions (M&As).

Recent increases in FDI have been concentrated in certain

sectors and regions/countries, and the level of concentration of

FDI worldwide has also risen again. Furthermore, investments by

collective investment funds (e.g. private equity and hedge funds)

– a relatively new source of FDI – have been growing. As

investments by these funds often have a shorter time horizon

than those by more conventional transnational corporations

(TNCs), current FDI growth may not be sustainable. In addition,

the way in which the rise in global FDI

flows is measured, does not necessarily translate fully into

capital formation in host economies, as data on FDI flows include

items unrelated to investment in production capacity. This

section discusses recent trends in FDI, its composition and

characteristics, as well as some issues related to FDI statistics.

As the world grows smaller it becomes increasingly necessary to

find ways to measure where and how fast globalization is taking

place.

36

The United States considers a 10% ownership in a foreign

company sufficient control in order to be considered FDI. Most

other countries do not consider anything less than 20-25%

ownership sufficient to be considered FDI.

The United States is the world's largest foreign investor,

investing much more in developed nations than developing

nations. Foreign Direct Investment to the United States has

increased dramatically over the years, most of it coming from

Europe, but also a substantial amount from Canada and Japan.

Often Foreign Direct Investment follows foreign trade. This is

due to the fact that foreign trade requires much less of an

investment than FDI. Typically a company would use an existing

company to export products into a nation. As trade increased and

the foreign product gained acceptance the exporter might set up

an export department to handle the trade.

That department may have employees and a business location. As

the exports proved profitable to the company and the cost of

doing business did not hurt the exporter’s profits in this foreign

market, the exporter might expand operations. This leads to

either acquiring an existing distributor or setting up a brand new

company.

This is Foreign Direct Investment at work. The new business may

have local owners but is typically at least partially owned by the

exporting nation. Any substantial ownership is considered FDI.

37

The recipient nation benefits through increased market activity,

a larger quality of goods and eventually a larger quality as well,

new jobs, new skills, capital flowing into the new business and

the development of supporting industries and infrastructure. For

this reason the disproportionately large amount of FDI heading

away from developing nations is a reason for concern.

There are many reasons why FDI tends to flow towards more

developed nations. One of the major reasons is that developed

nations have greater regulatory control and have systems in

place to provide labor and export services. In addition, with

countries trying to encourage FDI flow, developed nations

typically have greater resources to offer.

Foreign Direct Investment is a measure of the level of direct

investments into infrastructure, plants, supplies, and

organizations in an amount sufficient to exercise managerial

control by foreign owned interests. The Unites States is the

largest source of FDI and invests mostly in other developed

nations.

countrywise.xls

Here’s a list of countries of the world sorted by received foreign

direct investment (FDI) stock, the level of accumulated FDI in a

country. The US dollar estimates presented here are calculated

at market or government official exchange rates.

38

The first list shows UNCTAD estimates for 2007.

Rank   Country   FDI (millions of USD)  

1 United States 2,093,049

2   United Kingdom 1,347,688

3  Hong Kong, China 1,184,471

4  France 1,026,081

5  Belgium 748,110

6  Netherlands 673,430

7  Germany 629,711

8  Spain 537,455

9  Canada 520,737

10  Italy 364,839

11  Brazil 328,455

12  China (PRC) 327,087

39

13 Russian Federation

324,065

14  Australia 312,275

15  Switzerland 278,155

16  Mexico 265,736

17  Sweden 254,459

18  Singapore 249,667

19  Ireland 187,184

20  Denmark 146,632

21  Turkey 145,556

22  Poland 142,110

23  Japan 132,851

24  Austria 126,895

25  South Korea 119,630

26  Portugal 114,192

40

27  Chile 105,558

28  Czech Republic 101,074

29  Hungary 97,397

30  Norway 93,688

31  South Africa 93,474

32  Thailand 85,749

33  Finland 85,237

34  Malaysia 76,748

35  India 76,226

36  Saudi Arabia 76,146

37  New Zealand 71,312

38  Cayman Islands 69,784

39  Argentina 66,015

40  Nigeria 62,791

41  British Virgin 61,578

41

Islands

42  Romania 60,921

43  Israel 59,952

44  Indonesia 58,955

45  Colombia 56,189

46 United Arab Emirates

54,786

47  Greece 52,838

48  Egypt 50,503

49  Taiwan 48,640

50  Croatia 44,630

51 Venezuela, Bolivarian Republic of

43,957

52  Kazakhstan 43,381

53  Slovakia 40,702

42

54  Viet Nam 40,235

55  Ukraine 38,059

56  Bulgaria 36,508

57  Morocco 32,516

58  Luxembourg 30,176

59  Tunisia 26,223

60  Peru 24,744

61  Lebanon 21,121

62  Pakistan 20,086

63  Philippines 18,952

64  Cyprus 18,414

65  Estonia 16,594

66 Serbia and Montenegro

15,681

67  Lithuania 14,679

43

68  Panama 14,611

69  Jordan 14,549

70  Sudan 13,828

71 Trinidad and Tobago

13,475

72  Serbia 13,204

73  Bahrain 12,947

74  Iceland 12,269

75  Angola 12,207

76  Algeria 11,815

77  Equatorial Guinea 10,745

78  Latvia 10,493

79  Slovenia 10,350

80  Ecuador 10,310

81  Brunei 10,045

44

Darussalam

82 Syrian Arab Republic

9,684

83  Costa Rica 8,803

84  Macao 8,606

85  Jamaica 8,580

86 Dominican Republic

8,269

87  Bahamas 8,268

88  Malta 7,457

89  Qatar 7,250

90  Azerbaijan 6,598

91 Libyan Arab Jamahiriya

6,575

92  Guatemala 6,506

93 Bosnia and Herzegovina

5,990

45

94 United Republic of Tanzania

5,942

95  El Salvador 5,911

96  Oman 5,878

97  Côte d'Ivoire 5,702

98  Myanmar 5,433

99  Zambia 5,375

100  Bolivia 5,323

101 Iran, Islamic Republic of

5,295

102  Georgia 5,259

103  Chad 5,085

104  Uruguay 5,069

105  Belarus 4,500

106  Bangladesh 4,404

107  Honduras 4,328

46

108  Turkmenistan 3,928

109  Namibia 3,822

110  Cambodia 3,821

111  Congo 3,819

112  Cameroon 3,796

113  Ghana 3,634

114  Ethiopia 3,620

115  Sri Lanka 3,456

116  Mozambique 3,216

117  Macedonia 3,084

118  Nicaragua 3,083

119  Uganda 2,909

123  Morocco 2,570

120  Montenegro 2,478

47

121  Armenia 2,448

122  Yemen 2,389

124  Liberia 2,278

125  Albania 2,264

126  Paraguay 2,003

127 Antigua and Barbuda

1,986

128  Mauritania 1,905

129  Kenya 1,892

130  Madagascar 1,830

131  Moldova 1,813

132  Saint Lucia 1,669

133  Uzbekistan 1,648

134  Congo 1,512

48

135  Zimbabwe 1,492

136  Fiji 1,464

137  Gibraltar 1,406

138

 Korea, Democratic People's Republic of

1,378

139  New Caledonia 1,360

140  Mongolia 1,326

141  Mali 1,326

142  Botswana 1,300

143  Bermuda 1,291

144  Mauritius 1,249

145  Guyana 1,244

146  Aruba 1,184

147  Lao People's Democratic

1,180

49

Republic

148  Iraq 1,162

149 Saint Kitts and Nevis

1,120

150  Afghanistan 1,116

151  Tajikistan 1,046

 India Further Opens up Key Sectors for Foreign

Investment

India has liberalized foreign investment regulations in key

sectors, opening up commodity exchanges, credit information

services and aircraft maintenance operations. The foreign

investment limit in Public Sector Units (PSU) refineries has been

raised from 26% to 49%. An additional sweetener is that the

mandatory disinvestment clause within five years has been done

50

away with.

FDI in Civil aviation up to 74% will now be allowed through the

automatic route for non-scheduled and cargo airlines, as also for

ground handling activities.

100% FDI in aircraft maintenance and repair operations has also

been allowed. But the big one, allowing foreign airlines to pick

up a stake in domestic carriers has been given a miss again.

India has decided to allow 26% FDI and 23% FII investments in

commodity exchanges, subject to the proviso that no single entity

will hold more than 5% of the stake.

Sectors like credit information companies, industrial parks and

construction and development projects have also been opened up to

more foreign investment.

Also keeping India's civilian nuclear ambitions in mind, India has

also allowed 100% FDI in mining of titanium, a mineral which is

51

abundant in India.

Sources say the government wants to send out a signal that it is

not done with reforms yet. At the same time, critics say

contentious issues like FDI and multi-brand retail are out of the

policy radar because of political compulsions.

Role of Foreign Investment Promotion Board

FDI Approval in India is also done by the Foreign Investment

Promotion Board (FIPB), which processes cases of non-

automatic approval. The time taken by Foreign Investment

Promotion Board for approving the proposals for foreign direct

investment in India is between four to six weeks. The approach of

FIPB is liberal as a result of which it accepts most of the

proposals and rejects very few.

FDI cases requiring FIPB Approval

i) FIPB proposals will be considered by the reconstituted FIPB

in Department of Economic Affairs.

52

 ii) The FIPB Secretariat now receives and processes FIPB

applications and places them before FIPB for consideration. The

Secretariat would communicate to applicant’s decision of the

Government on their proposals and carry out the activities

relating to post-approval amendments.

Changing role of FIPB

The Government is keen to gradually reduce the quantum of

projects being referred to the FIPB and instead ensure that the

bulk of foreign investment proposals are approved automatically

by the RBI. The aim is to bring only selected large or sensitive

projects for clearance to the FIPB. The role of FIPB is being

altered from merely issuing clearances to carrying out policy

reviews and promotion.

Foreign Participation - Permission & Approvals

A foreign company may establish a presence in India in a number

of ways viz. by opening a branch office or a project office or a

liaison office or setting up an Indian Company. For formation of

an Indian Company the following options are available:-

53

Foreign Company setting up a 100% wholly owned Indian

subsidiary.

Foreign Company setting up a 51% owned subsidiary within

49% held by an Indian partner and the public.

Foreign Company setting up a 51% owned Indian subsidiary

with 49% widely held by the public.

Foreign Company investing in an Indian Joint Venture

Company. Government Approvals

A foreign company seeking equity participation in India or

establishing a company has to obtain Government approvals

for :-

1. Foreign investment.

2. Approval for formation and setting up of a new Indian

corporation or a business venture.

Clearance by Government

The Reserve Bank of India accords automatic approval to all

proposals including those in real estate where the foreign

54

investment in the equity capital of the Indian Company is up to

51%; and which is included in the high priority industries list.

All other proposals for foreign investment, including that of

100% equity participation and which do not fulfill any or all of

the parameters prescribed for automatic approval, are

considered for approval, on merits, by the Government.

Lesser FIPB role in foreign-owned cos’ downstream

investment likely

To attract more capital inflows via the FDI route, the government

is considering removing procedural complications involved in

downstream investments.

In a radical shift from a-decade-old approach, the government

plans to exempt 'foreign-owned Indian companies' from the

mandatory FIPB approval for investment in their subsidiaries.

This exemption would be granted for sectors where 100% FDI is

allowed and which come under the automatic route. These

include roads, ports, shipping, airports, petroleum & natural gas

and manufacturing of telecom equipment.

55

Experts working on FDI transactions note that this will be a

major relaxation, which will significantly reduce the time

involved in getting clearances. Ministry of finance and industry

department has agreed on this after consultation with industry

players and legal experts, officials confirmed. A draft on the new

guidelines has already been circulated.

"From an overall image perspective, it's definitely a welcome

step," says Sanjay Kapadia, executive director, tax and

regulatory services, PricewaterhouseCoopers. Going to FIPB

each time and to the RBI for clearance under the Foreign

Exchange Management Act is more of a 'compliance hassle' that

takes about 6-8 months, Kapadia notes.

What is creating more pain for corporate India is that companies

need to go to FIPB even in cases where downstream investments

have been made in the past. "If this dispensation comes up, it

would be a great relief to both the existing companies and those

planning fresh investments," he adds.

A senior government official said that new norms in this regard

would be issued shortly. "The FIPB is flooded with several such

56

cases, a lot of which are unnecessary," the official said. Foreign

owned holding companies need to obtain FIPB approval as per

Press Note 3 of 1997 and Press Note 9 of 1999.

Analysts say that the problem occurs as the term 'foreign owned',

which would usually indicate holding of a majority stake, has not

been defined in any these two press notes. Also, the term

'holding company' has not been defined under the FDI policy or

FEMA Act.

Gautham Gururaj, associate, Luthra & Luthra Law Offices, says

adherence to these two press notes per se is not the problem,

rather, it the 'altered' understanding of the government of a

foreign owned holding company that is an impediment to FDI. As

it now happens, so long as there is some FDI in the foreign

owned holding company (say even 1%), any downstream

investment would require prior FIPB approval.

"This issue has become a stumbling block in the way of many

listed Indian companies proposing a follow-on public offer, rights

issue and other fund raising exercises," Gururaj says. "There are

57

positive vibes coming out from the government on the subject,"

Kapadia says.

The commerce and industry ministry has targeted to attract FDI

worth $40 billion in this fiscal, up from $24.57 billion in 2007-08.

FDI analyst at Centre for Policy Research Partha Mukhopadhyay

says, "FIPB approval is mainly intended at preventing round-

tripping."

Round tripping means an investor using the tax holiday

advantage in Mauritius or some other country—with which India

has a double taxation avoidance agreement—to take money out

of India only to bring it back disguised as foreign investment.

The money is routed through firms set up in these tax havens....

FIPB contributes to orderly growth

The reconstituted Foreign Investment Promotion Board (FIPB)

now comprises secretaries from the departments of economic

affairs, industrial policy & promotion, commerce, external affairs

and overseas Indian affairs. It has evolved as an efficient and

well managed government body exercising executive powers in a

58

fair and transparent manner, promoting the inflow of foreign

direct investment (FDI). It meets regularly, does not

unreasonably delay approvals and has a strong record of

proactively encouraging FDI. The FIPB plays a critical role in the

administration and implementation of the government's FDI

policy.

The role of FIPB is mainly to approve investments in sectors

considered to be sensitive, where national security may be

implicated, in areas where certain sectoral guidelines need to be

carefully implemented and enforced, where there is absence of

stated policy, or if the investment is outside the parameters of

stated policy. These include investments in the same field,

transfer or issue of shares by way of equity swaps, post facto

approval for issue of shares, change in status from operating

company to operating-cum-holding company, investments of

more than Rs 600 crore, extension in the terms of redemption of

preference shares, investment in asset reconstruction

companies, atomic minerals, broadcasting, cigars & cigarette

manufacture and so on.

59

These are areas of investment that government policy on FDI has

mandated a role for the FIPB. As an efficient decision-making

body, it has served as a valuable source for single-window

clearance providing approval for all concerned ministries. Unlike

several developed countries, where multiple approvals are

needed from separate departments, FIPB performs the same

function with different ministries acting in unison.

If FIPB is wound up, foreign investors may need to apply to

separate ministries and departments for clearances contributing

to additional paperwork, delays and avenues of corruption,

thereby retarding economic growth.

Every country needs an organization to implement and enforce

regulations. At times where there is no policy, conflict in policy

or grey areas, FIPB has stepped in to provide solutions. In many

cases, FIPB has been instrumental in checking abuse of

government policy and in framing checks and balances. There is

probably not a single example which can be cited where the

board may have unfairly exercised its powers or discretion. If

FIPB is wound up, its role as a highly efficient, qualified and

60

experienced body providing a single-window clearance may then

have to be performed by a substantially less qualified executive

department or an already overburdened judiciary.

The winding up of FIPB will, therefore, only lead to confusion as

India will still need a regulator to enforce its policies. For

example, investors may have to lean on the courts for

interpretations, especially of Press Note 1 (2005) cases, where

setting up ventures in the same field may lead to conflict and

dispute.

FIPB has built formidable expertise over the years in framing,

clarifying, implementing and enforcing FDI policy. There may not

be another organization that can replace it. Realistically, as

restrictions on FDI remain in some sectors in some form (as they

do even now in several developed countries), I see a clear role

for FIPB for at least another decade.

The role of FIPB, though important, has increasingly narrowed in

scope compared to the wide areas of approvals it previously

provided. However, with FDI policy being continually liberalized

the development of investment opportunities in new growth

61

areas will continue to throw up complexities. It is these

complexities that FIPB resolves so deftly, which has immensely

contributed to the orderly growth of the Indian economy.

FDI for different sectors

SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT

INVESTMENT

In the following sectors/activities, FDI up to the limit indicated

below is allowed subject to other conditions as indicated. In

Sectors/Activities not listed below, FDI is permitted up to 100% on

the automatic route subject to sectoral rules/ regulations

applicable.

India_top_sectors.pdf

FDI Permitted in Various Sectors/ Activities

62

I. FDI PROHIBITED

i. Retail trading(except Single Brand Product

retailing)

ii. Atomic energy

iii. Lottery business

iv. Gambling and betting sector

II. FDI up to 26 % allowed

i. Broadcasting

(a) FM Radio – FDI + FII investment up to 20% with prior

Government approval subject to guidelines by Ministry of

Information & Broadcasting.

(b) Uplinking news and current affairs TV Channel – up to

26% (FDI + FII) with prior FIPB approval.

ii. Print media: Publishing newspaper and periodicals

dealing with news and

current affairs - FDI up to 26% with prior Government

approval

63

iii. Defence industries - FDI up to 26% with prior

Government approval

iv. Insurance - Foreign equity (FDI+FII) up to 26% under the

automatic route

v. Petroleum and Natural Gas Sector – Refining in case of

PSUs: up to 26% with prior FIPB approval.

III. FDI up to 49 % allowed

i. Broadcasting

a. Setting up hardware facilities such as up-linking, HUB,

etc.- FDI+FII equity up to 49% with prior Government

approval subject to up-linking Policy notified by

Ministry of Information & Broadcasting.

b. Cable network- Foreign equity (FDI+FII) up to 49%

with prior Government approval subject to Cable

Television Network Rules (1994) notified by Ministry of

Information & Broadcasting.

c. DTH - Foreign equity (FDI+FII) up to 49% with prior

Government approval. FDI cannot exceed 20% subject

64

to guidelines by Ministry of Information &

Broadcasting.

ii. Domestic Scheduled Passenger Airline Sector - FDI up to

49% under the automatic route with no direct or indirect

participation of foreign airlines.

iii. Asset reconstruction companies – up to 49% (only FDI)

with prior FIPB approval.

iv. Petroleum refining by PSUs. No divestment of

domestic equity in existing PSUs would be permitted for

increasing the FDI up to 49%.

v. Commodity exchanges – FDI +FII up to 49% with a sub-

limit for FII at 23%

and for FDI at 26%.

vi. Stock exchanges - FDI +FII up to 49% with a sub-limit for

FII at 23% and for

FDI at 26%.

vii. Credit Information Companies- FDI +FII up to 49% with a

sub-limit for FII

65

at 24% in the CICs listed on the Stock Exchanges.

IV. Sectors where FDI up to 51% is allowed Single Brand

product retailing- with prior Government approval subject

to:-

a) Products being sold under the same brand

internationally.

b) Products sold being of a single brand. Retailing of

multiple products sold under different brand names,

even if produced by the same manufacturer, would

not be allowed.

c) Single Brand product retailing would cover only

such products as are branded at the manufacturing

point.

V. FDI up to 74% allowed

i. Telecommunication services: basic and cellular – FDI

up to 74% allowed. FDI up to 49% is under automatic

route. Beyond 49% and upto 74% requires FIPB

66

approval. Foreign equity includes FDI, FII, NRI,

FCCBs, ADRs, GDRs, convertible preference shares,

and proportionate foreign equity in Indian promoters/

Investing Company.

i. ISP with gateways, radio-paging, end-to-end

bandwidth – FDI up to 74% with FDI beyond 49%

requiring prior Government approval

ii. Establishment and operation of satellites - FDI up to

74% with prior Government approval.

iii. Private sector banks - Foreign equity (FDI + FII) up

to 74% under the automatic route.

iv. Non-Scheduled airlines, Chartered airlines - FDI up

to 74% under the automatic route subject to no direct

or indirect participation by foreign airlines.

v. Cargo airlines and Ground handling- FDI up to 74%

allowed under the automatic route.

viii. Private sector banks - Foreign equity (FDI + FII) up

to 74% under the automatic route

VI. FDI up to 100 % allowed subject to conditions

67

i. Development of Existing Airports – FDI up to 74%

under automatic route and beyond this under FIPB

route

ii. Exploration and mining of coal and lignite for captive

consumption – FDI up to 100% under automatic route

subject to provisions of Coal Mines (Nationalization)

Act, 1973

iii. Trading: Trading of items sourced from small scale

sector under Govt approval route

iv. Trading: Test marketing of such items for which a

company has approval for manufacture under Govt

approval route

v. Courier services for carrying packages, parcels and

other items which do not come within the ambit of the

Indian Post Office Act, 1898.- prior Government

approval subject to existing laws and subject to

existing laws and exclusion of activity relating to

distribution of letters, which is exclusively reserved for

the State.

68

vi. Tea Sector, including tea plantation – prior

Government approval subject to divestment of 26%

equity within five years

vii. Non Banking Finance Companies – FDI up to 100%

under the automatic route subject to minimum

capitalization norms

viii. Construction Development projects- FDI up to 100%

on the automatic route subject to minimum

capitalization norms; minimum area development and

lock-in on original investment.

ix. ISP without gateway, infrastructure provider

providing dark fibre, right of way, duct space, tower

(Category I); electronic mail and voice mail – FDI up to

49% under automatic route. Beyond 49% and upto

100% subject to FIPB approval subject to divestment of

26% equity in 5 years if the investing companies are

listed in other parts of the world.

x. Domestic Scheduled/ Non-Scheduled & Chartered

airlines/Air transport services – NRI investment up to

69

100% permitted under the automatic route with no

direct or indirect participation of foreign airlines.

xi. Power trading –upto 100% subject to compliance with

Regulations under the Electricity Act, 2003;

xii. Cigars & Cigarettes – up to 100% with prior FIPB

approval and Subject to industrial license under the

Industries (Development & Regulation) Act, 1951.

xiii.Alcohol distillation and brewing - 100% FDI under

automatic route subject to licence by appropriate

authority.

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic

route.

The term hotels include restaurants, beach resorts, and other

tourist complexes providing accommodation and/or catering and

food facilities to tourists. Tourism related industry include travel

70

agencies, tour operating agencies and tourist transport operating

agencies, units providing facilities for cultural, adventure and

wild life experience to tourists, surface, air and water transport

facilities to tourists, leisure, entertainment, amusement, sports,

and health units for tourists and Convention/Seminar units and

organizations.

For foreign technology agreements, automatic approval is

granted if

i. up to 3% of the capital cost of the project is proposed to be

paid for technical and consultancy services including fees

for architects, design, supervision, etc.

ii. up to 3% of  net turnover is payable for franchising and

marketing/publicity support fee, and up to 10% of gross

operating profit is payable for management fee, including

incentive fee.

Private Sector Banking:

71

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route

subject to guidelines issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC

activities shall be as per levels indicated below:

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

xiv. Housing Finance

72

xv. Foreign Exchange Brokering

xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be

brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out

of which US $ 7.5 million to be brought up front and the

balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in

respect of all permitted non-fund based NBFCs with foreign

investment.

73

    d.   Foreign investors can set up 100% operating subsidiaries

without the condition to disinvest a minimum of 25% of its equity

to Indian entities, subject to bringing in US$ 50 million as at b)

(iii) above (without any restriction on number of operating

subsidiaries without bringing in additional capital)

    e.  Joint Venture operating NBFC's that have 75% or less than

75% foreign investment will also be allowed to set up

subsidiaries for undertaking other NBFC activities, subject to the

subsidiaries also complying with the applicable minimum capital

inflow i.e. (b)(i) and (b)(ii) above.

   f.   FDI in the NBFC sector is put on automatic route subject to

compliance with guidelines of the Reserve Bank of India.  RBI

would issue appropriate guidelines in this regard.

74

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the

automatic route subject to obtaining licence from Insurance

Regulatory & Development Authority (IRDA)

Telecommunication: FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile

personal communications by satellite, FDI is limited to 49%

subject to  licensing and security requirements and

adherence by the companies  (who are investing and the

companies in which investment is being made) to the

license conditions for foreign equity cap and lock- in period

for transfer and addition of equity and other license

provisions.

ii. ISPs with gateways, radio-paging and end-to-end

bandwidth, FDI is permitted up to 74% with FDI, beyond

75

49% requiring Government approval. These services would

be subject to licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.

iv. FDI up to 100% is allowed for the following activities in the

telecom sector :

a. ISPs not providing gateways (both for satellite and

submarine cables);

b. Infrastructure Providers providing dark fiber (IP

Category 1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following

conditions:

e. FDI up to 100% is allowed subject to the condition that

such companies would divest 26% of their equity in

favor of Indian public in 5 years, if these companies

are listed in other parts of the world.

f. The above services would be subject to licensing and

security requirements, wherever required.

76

Proposals for FDI beyond 49% shall be considered by FIPB on

case to case basis.

Trading: FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51%

provided it is primarily export activities, and the undertaking is

an export house/trading house/super trading house/star trading

house. However, under the FIPB route:-

i. 100% FDI is permitted in case of trading companies for the

following activities:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% is

for procurement and sale of goods and services among the

companies of the same group and not for third party use or

onward transfer/distribution/sales.

77

ii. The following kinds of trading are also permitted, subject to

provisions of EXIM Policy:

a. Companies for providing after sales services (that is not

trading per se)

b. Domestic trading of products of JVs is permitted at the

wholesale level for such trading companies who wish to

market manufactured products on behalf of their joint

ventures in which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after

sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under

which, based on technology provided and laid down quality

specifications, a company can market that item under its

brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has

approval for manufacture provided such test marketing

78

facility will be for a period of two years, and investment in

setting up manufacturing facilities commences

simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to

the condition that such companies would divest 26% of their

equity in favor of the Indian public in five years, if these

companies are listed in other parts of the world. Such companies

would engage only in business to business (B2B) e-commerce

and not in retail trading.

Power: FDI in Power Sector in India

Up to 100% FDI allowed in respect of projects relating to

electricity generation, transmission and distribution, other than

atomic reactor power plants. There is no limit on the project cost

and quantum of foreign direct investment.

79

Drugs & Pharmaceuticals  

FDI up to 100% is permitted on the automatic route for

manufacture of drugs and pharmaceutical, provided the activity

does not attract compulsory licensing or involve use of

recombinant DNA technology, and specific cell / tissue targeted

formulations.

FDI proposals for the manufacture of licensable drugs and

pharmaceuticals and bulk drugs produced by recombinant DNA

technology, and specific cell / tissue targeted formulations will

require prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects

for construction and maintenance of roads, highways, vehicular

bridges, toll roads, vehicular tunnels, ports and harbors.

Pollution Control and Management

80

FDI up to 100% in both manufacture of pollution control

equipment and consultancy for integration of pollution control

systems is permitted on the automatic route.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions. 

 

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's  are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital

and dividends in the following sectors:

 

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

81

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

xiii. Industries Reserved for Small Scale Sector

 

3. Up to 40% Equity with full repatriation: New Issues of

Existing Companies raising Capital through Public Issue up

to 40% of the new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any

Proprietary or Partnership engaged in Industrial,

Commercial or Trading Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the

Paid up Value of the equity Capital or Convertible

Debentures of the Company by each NRI. Investment in

82

Government Securities, Units of UTI, National Plan/Saving

Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an

Indian Company, through a General Body Resolution, up to

24% of the Paid Up Value of the Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on

Income arising from Shares or Debentures of an Indian

Company.

Certain terms and conditions do apply. 

Guidelines for the companies in India

In order to help us serve you better and expeditiously, all

applicants filing fresh proposals for consideration by FIPB

are requested to ensure that following information/

documents are available in their application form Check

List of Documents to be attached with and information to

be provided in each set of

83

the Application Form for consideration of fresh proposal

by FIPB

(copy to be attached with each set of the application)

guidelines_investors.pdf

Details of Proposals considered in the Foreign Investment

Promotion Board (FIPB) Meeting held on 18.11.2008

Following 32 (Thirty two) cases have been approved.

cases26112008.pdf

Advantages of FDI over Portfolio Investment

Portfolio Investment

Portfolio Investment represents passive holdings of securities

such as foreign stocks, bonds, or other financial assets, none of

which entails active management or control of the securities'

issuer by the investor; where such control exists, it is known as

84

foreign direct investment. Generally, this means the investor

holds less than 10% of the total shares or less than the amount

needed to hold the majority vote.

Some examples of portfolio investment are:

Purchase of shares in a foreign company.

Purchase of bonds issued by a foreign government.

Acquisition of assets in a foreign country.

Factors affecting international portfolio investment:

tax rates on interest or dividends (investors will normally

prefer countries where the tax rates are relatively low)

interest rates (money tends to flow to countries with high

interest rates)

exchange rates (foreign investors may be attracted if the

local currency is expected to strengthen)

Portfolio investment is part of the capital account on the balance

of payments statistics.

85

Direct Investment vs. Portfolio Investment (U.S. $ million)

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1997-98(April-Dec)

1998-99(April-Dec)

Direct Investment

129 315 586 1314 2133 2696 3197 2511 1562

Portfolio Investment

4 224 3567 3824 2748 3312 1828 1742 -682

Total foreign investment

133 559 4153 5138 4881 6008 5025 4253 880

Portfolio Investment or FII Investment

The major constituents of Portfolio investment (FII investment) in India are:

Fund flows and resource mobilization by Indian companies through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). These inflows are indicative of robustness of Indian capital market and overall macroeconomic conditions.

IndianScenario

86

After the economic reforms of 1991, FII investment or portfolio investment started to gain momentum in India. Within the 15 years of span FII investment multiplied by leaps and bounds. The pace of investment started to gear up in 1993 and in 2004-05 it shot up rapidly. In 2005-06, the inflow of foreign investment was US$68.1 billion whereas the outflow of this investment was US$55.6 billion. Thus India recorded net portfolio inflow of US$12.5 billion. The flows through GDRs/ ADRs and others, reached the level of US$2.6 billion in 2005-06.

Whereas FDI increased in 2006-07, the net portfolio investment declined from US$5.4 billion in April-September 2005 to US$1.6 billion in April-September 2006. This is due to the fact that while thee portfolio investment increased by US$21.2 billion (from US$27.5billion to US$48.7 billion), outflows increased even more by US$25.0 billion (from US$22.1 billion to US$47.1 billion), during the reference period. Thus the decline of FII investment was more than the increased FDI thereby resulting in a decline in foreign investment inflows between the first half of the previous year and current year.

As FII is one of the major instruments for attracting foreign investment in India, government is trying hard to persuade foreign investors to invest in India. With GDP growing over 8%, foreign investors too are making India as a preferred destination for investment. Government’s policy regarding investment policy is meant to make procedure simpler to attract FIIs.

case study_PI.pdf

FDI versus Portfolio Investment

FDI figures show India narrowing the gap with china whose direct investment levels are flattening out. Foreign direct investment in India has surpassed portfolio investment by almost $5.6bn in 2006-07, marking a significant change from past trends.

87

Incoming FDI was recorded at $21.19bn in 2006-07, while portfolio investments stood at $15.62bn, according to a Reserve Bank of India report on the international investment position (IIP) of India. The report compiles the annual IIP of India as of the end of March 2007 and is the official statement of the stock of external financial assets and liabilities of the country.The ratio of net IIP of India to GDP (at current price) has improved from -6.59% as of end-March 2006 to -5.28% as of end-March 2007.

But the increase in FDI compared with portfolio investment was the most noteworthy finding in the report. India has lagged behind competitor China in attracting Greenfield investment projects, with portfolio flows accounting for a much larger share of India’s inward investment than as with China. However, India shows some signs of narrowing the gap somewhat with a steady rise in direct investment as China’s levels off.

During 2003-04 and 2004-05, portfolio investments in India were much higher than FDI inflows. According to the IIP report, FDI inflow during 2003-04 was $6.32bn as against portfolio investment of $12.01bn. Likewise, in 2004-05, FDI inflows were lower at $6.64bn as compared with portfolio investment of $8.94bn.

The cumulative portfolio investment of $80.25bn at the end of March 2007 was higher than the FDI inflows which totaled $72.33bn, the report said. The net IIP of India has improved by about $2.68bn to -$45.33bn as of end-March 2007 from a level of -$48.01bn as of end-March 2006, said the bank.

Among external financial assets, reserve assets registered an increase of about $47.56bn as of end-March 2007 over end-March 2006, followed by direct investment abroad, which had witnessed an increase of about $11bn during the same period. The report further pointed out that the total reserve assets of the country at the end of March 2007 exceeded the entire external debt (about $155bn) by $44.15bn.

88

Key Points

During the last decade there has been a dramatic increase

in PI to the world’s emerging economies.

Many economists claim that PI induces an efficient flow of

finance to economies facing capital shortages. But PI is

associated with deep structural problems, including

increased risk of a financial crisis following a sudden

erosion of investor confidence.

Far from being anomalous, the Asian and Mexican crises

illustrate the costs of failing to control PI.

Since the mid-1980s, there has been a dramatic increase in the

magnitude of international flows of portfolio investment (PI),

especially from countries in the North to emerging market

economies across the South. PI entails the purchase of bonds and

corporate stock without acquisition of a controlling interest by

the investor. North-South PI flows have been heralded as a

relatively safe, efficient means of transferring capital to those

countries where it is needed most. But this view has been

challenged by the series of financial crises across the South,

from Mexico in 1994 to Southeast Asia in 1997-98. Many

economists have argued that these crises are anomalous,

reflecting exceptional circumstances. But a closer look reveals

that the unregulated international flow of PI, especially into

emerging market economies, is fraught with deep structural

problems.

89

Net PI inflows into emerging market economies totaled $800

million 1987 but soared to $7.2 billion in 1991 and $45.7 billion

in 1996. U.S. portfolio investors were drawn to emerging

economies for two reasons. First, these investors faced an

apparent decline in investment opportunities in the U.S.

following the 1987 stock market plunge and the concomitant

reduction in U.S. interest rates. Second, at the insistence of the

U.S., and especially the IMF during the 1980s, many developing

countries deregulated their financial systems through domestic

financial liberalization programs, which precipitated a flourishing

of new markets and investment instruments and eliminated

controls on capital inflows and outflows (through external

financial liberalization).

The Southeast Asian financial crisis that erupted in Thailand in

July 1997 took investors by surprise. Through late 1996,

Southeast Asia experienced huge inflows of private capital.

Indeed, in that year Indonesia, Malaysia, and Thailand received

the third, fourth, and sixth largest shares of foreign capital

inflows (respectively) in the world, for a total of $47 billion.

But IMF economists were equally startled by the crisis. Indeed,

this crisis occurred after the IMF had implemented what was

regarded as an important new set of safeguards embodied in the

Special Information Dissemination Standard in April 1996,

following the Mexican crisis. Banking naively on investor

rationality, IMF officials embraced the view that better

90

information would suffice to prevent speculative excesses and

crises.

The Asian crisis has eclipsed the Mexican financial crisis of 1994

in most respects. The $57-billion bailout of South Korea in

December 1997 single-handedly exceeded the Mexican bailout of

$50 billion in early 1995, formerly the largest financial rescue in

history. In addition, the IMF negotiated relief packages of $4

billion for the Philippines in July, $17 billion for Thailand in

August, and $43 billion for Indonesia in November, for a 1997

total of $121 billion.

Of all the types of private capital to enter emerging economies,

PI has the greatest potential to destabilize the recipient

economy. This is because of the liquidity of PI and the short time

horizon associated with such investments. For example, in the

current crisis a reversal in conventional wisdom among investors

regarding Southeast Asian prospects (initially with regard to

Thailand) precipitated the sudden liquidation of portfolios and

the dumping of currency holdings. This rapid exit depressed

stock prices and undermined the ability of Southeast Asian

governments to maintain the value of their currencies.

Depreciation, in turn, exacerbated the problem of investor flight

and induced a debt crisis as domestic institutions faced rapidly

rising costs associated with hard currency-denominated foreign

obligations. The lesson of this crisis (and the earlier Mexican

crisis) is that while uncontrolled PI flows do not themselves

91

cause financial crises, they render emerging economies

vulnerable to a collapse that can be triggered by a large-scale

exit of PI.

Moreover, emerging-market financial crises are contagious. The

prudent investor, knowing the speed with which a financial crisis

can unfold, may flee from all emerging markets immediately

when trouble arises in any one of them. The investor who moves

too slowly in the face of a general investor flight can suffer

catastrophic losses instantaneously.

International PI does introduce the opportunity for an emerging

economy to secure more capital than is available domestically.

But the excessive liquidity of unregulated PI flows leaves

receiving nations vulnerable to rapid financial outflows due to

fickle investor sentiments.

Key Problems

U.S. and IMF efforts to open emerging economies to PI

have contributed to their vulnerability to financial crises.

Current IMF bailout conditions, which mandate even

greater openness and liberalization, increase the likelihood

that current financial history will repeat itself.

Through U.S. financial support for the IMF, taxpayers are

financing bailouts that will not prevent new rises, that

socialize the risks of PI, and that may result in U.S. job

losses.

92

Key Recommendations

Portfolio investment must be carefully managed to

maximize its benefits and minimize its drawbacks.

There exist promising and economically feasible policy tools

for managing PI. These measures include capital controls

(like the “Chilean model”) and Tobin transaction taxes.

The only serious obstacles to the implementation of such

management techniques are political and ideological, not

technical. These could be overcome through U.S.

leadership.

Major Sectors attracting FDI in India

The average FDI inflows per year during the 9th Plan were $ 3.2

billion and during the 10th Plan it increased manifold to stand at

$ 16.33 billion the annual average being $ 6.16 billion. The top

five sectors attracting FDI in fiscal 2007-08 included Services

sector; Housing and Real Estate; Construction activities;

Computer Software & hardware; and Telecommunications. The

infrastructure sector that offers massive potential to attract FDI

witnessed marked increase in FDI inflows during this five-year

period. The extant policy for most of the infrastructure sectors

permits FDI up to 100 percent on the automatic route. From $

93

1902 million in fiscal 2001-02 the foreign investment in India's

infrastructure sector  increased to $ 2179 million in 2006-07. But

fiscal 2007-08 witnessed significant increase in the FDI inflows in

the infrastructure. In first nine months till December 2007 of

fiscal 2007-08 stood at $ 4095 million. From 2000-01 to

December 2007, total FDI in India's infrastructure sector stood

at $ 10575 million.

Sectors attracting highest FDI Equity Inflows (In Rs crore) 

SECTOR2005-

062006-

072007-

08

2008-09 (April-July)

Cumulative

(Apr.2000- July 2008)

% of total

inflows*

Services (Financial & non-financial)

2399(543)

21047(4664)

26589(6615)

6684(1602)

62381(14659)

20.97%

Computer Software & Hardware

6172(1375)

11786(2614) (1410)

4642(1092)

36809(8370)

12.37%

Telecommunications

2776(624)

2155(478)

5103(1261)

1295(315)

18043(4157)

6.065

Construction 667

(151)4424(985)

6989(1743)

6224(1483)

19606(4646)

6.59%

Automobile630

(143)1254(276)

2697(675)

1792(441)

11648(2678)

3.92%

Housing and Real estate

171(38)

2121(467)

8749(2179)

5480(1315)

16642(4026)

5.59%

94

Power386(87)

713(157)

3875(967)

2124(520)

11754(2725)

3.95%

Metallurgical6540(147)

7866(173)

4686(1177)

3208(766)

10556(2528)

3.55%

Chemicals (Other than fertilizers)

1731(390)

930(205)

920(229)

1261(301)

7401(1686)

2.49%

Petroleum & Natural Gas

64(14)

401(89)

5729(1427)

263(62)

8509(2043)

2.86%

Figures in bracket are in US$ million* In terms of Rs.

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India

FDI Inflows (as per international best practices) 

FISCAL YEAR (APRIL-MARCH)

EQUITY

Reinvested

earnings+

Other capita

l+

Total FDI

inflows

YOY growth (%)

FIPB Route/ RBI's Automatic Route/ Acquisition Route

Equity capital of unincorporated bodies#

       

1991(August)-2000 (March)

15483 - - - 15483 -

95

2000-01 2339 61 1350 279 4029 -

2001-02 3904 191 1645 390 6130 (+) 52

2002-03 2574 190 1833 438 5035 (-) 18

2003-04 2197 32 1460 633 4322 (-) 14

2004-05 3250 528 1904 369 6051 (+) 40

2005-06 5540 435 2760 226 8961 (+) 28

2006-07 (P)* 15585 897 5091 506 22079(+) 153

2007-08 (P)* 24574 500 4476 343 29893 (+) 35

2008-09(April-May)

7681       7681 -

Cumulative Total (From August 1991-May 2008)

83127 2834 20519 3184109664

-

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India

FDI Inflows (2007-08)

Of the total FDI amounting to $ 56450 million in first 11

months of fiscal 2007-08, direct investment stood at $ 25455

million. of this, equity investment accounts for the major share

with $ 20636 million. Portfolio investments totaled $ 30995

million.

India: Foreign Investment Inflows (Fiscal 2007-08)(In US$ Million)

SEGMENT

MONTH

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Apr. to Fe

96

b

A. Direct Investment(I+II+III)

1643

2120

1238

705

831

713

2027

1864

1558

1767

5670

25455

1. Equity (a+b+c+d+e)

1643

2120

1238

705

831

713

2027

1864

1558

1767

5670

20636

a. Govt. (SIA/FIPB)

76 847

177

177

76 117

95 82 127

221

259

2254

b. RBI 699

1050

912

515

512

201

1710

965

1385

884

4704

13537

c. NRI - - - - - - - - - - - -

d. Acquisition of shares.

868

223

149 13

243

395

222

817 46

662

707

4345

e. Equity capital of unincorporated bodies#

- - - - - - - - - - - 500

Reinvested earnings+

- - - - - - - - - - - 4476

Other capital ++

- - - - - - - - - - - 343

B. Portfolio Investment (a+b+c)

1974

1852

3664

6713

-2875

7081

9564

-107

5294

6739

-8904

30995

a. GDRs/ADRs##

11 5300

2028

448 1

2731

158

2708

249 87

8726

b. FIIs**1963

1847

3279

4685

-3323

7057

6833

-265

2396

6490

-8991

21971

c. Offshore funds & others

- - 85 - - 23 - -190 - - 298

Total (A+B)

3617

3972

4902

7418

-2044

7794

11591

1757

6852

8506

-3234

56450

* : Relates to acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999.  Data on such

97

acquisitions have been included as part of FDI since January 1996.** : Represents inflow of funds (net) by Foreign Institutional Investors (FIIs).# : Figures for equity capital of unincorporated bodies for 2006-07 and 2007-08 (April-December) are estimates.# # : Represents the amount raised by Indian Corporates through Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).+ : Data for 2006-07 and 2007-08 are estimated as average of previous two years.   ++: Data pertain to inter company debt transactions of FDI entities.‡ : Include swap of shares of US $ 3.1 billion.Notes : 1. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices.2. These data, therefore, are not comparable with FDI data for previous years. Also see ‘Notes on Tables ‘of Table No 42&43.3. Monthly data on components of FDI as per expanded coverage are not available. 

In recent times transnational corporations from many

developing and transition economies have become very

important investors in developed as well as less developed

countries either through M&A route or through Greenfield

investments. According to a reserve Bank of India report, TNCs

from economies like China, Brazil, India, Russia and South

Africa have emerged as global leaders in manufacturing and

services sectors. The UNCTAD's World Investment Report 2007

revealed that global outward FDI amounted to $ 1216 billion in

2006 registering significant growth in last 17 years from $ 230

billion in 1990.

98

India: Foreign Investment Inflows (Fiscal 2007-08) (In US$ Million)

SEGMENT 

 

YEAR

1995-96

1996-97

1997-98

1998-99

1999-

2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

A. Direct Investment(I+II+III)

2144

2821

3557

2462

2155

4029

6130

5035

4322

6051

8961

22079

1. Equity (a+b+c+d+e)

2144

2821

3557

2462

2155

2400

4095

2764

2229

3778

5975

16482

a. Govt. (SIA/FIPB)

1249

1922

2754

1821

1410

1456

2221

919 928 1062

1126

2156

b. RBI 169 135 202 179 171 454 767 739 534 1258

2233

7151

c. NRI 715 639 241 62 84 67 35 - - - - -

d. Acquisition of shares.

11 125 360 400 490 362 881 916 735 9302181

6278‡

e. Equity capital of unincorporated bodies#

- - - - - 61 191 190 32 528 435 897

Reinvested earnings+

- - - - - 1350

1645

1833

1460

1904

2760

5091

Other capital ++

- - - - - 279 390 438 633 369 226 506

B. Portfolio Investment (a+b+c)

2748

3312

1828 -61

3026

2760

2021 979

11377

9315

12492

7003

a. GDRs/ADRs##

6831366 645 270 768 831 477 600 459 613

2552

3776

b. FIIs** 2009

1926

979 -390 2135

1847

1505

377 10918

8686

9926

3225

c. Offshore funds & others

56 20 204 59 123 82 39 2 - 16 14 2

Total (A+B)

4892

6133

5385

2401

5181

6789

8151

6014

15699

15366

21453

29082

* : Relates to acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999.  Data on such acquisitions have been included as part of FDI since January 1996.** : Represents inflow of funds (net) by Foreign Institutional Investors (FIIs).# : Figures for equity capital of unincorporated bodies for

99

2006-07 and 2007-08 (April-December) are estimates.# # : Represents the amount raised by Indian Corporates through Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).+ : Data for 2006-07 and 2007-08 are estimated as average of previous two years.   ++: Data pertain to inter company debt transactions of FDI entities.‡ : Include swap of shares of US $ 3.1 billion.Notes : 1. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices.2. These data, therefore, are not comparable with FDI data for previous years. Also see ‘Notes on Tables ‘of Table No 42&43.3. Monthly data on components of FDI as per expanded coverage are not available.

INDIA: SECTOR SPECIFIC POLICY FOR FOREIGN DIRECT INVESTMENT

Sector/ActivityFDI Cap/Equity

Entry Route

Other Conditions

Airports

(a) Greenfield projects 100%

Automatic

Subject to sectoral regulations notified by Ministry of Civil Aviation

(b) Existing projects 100% FIPB beyond

Subject to sectoral regulations

100

74%notified by Ministry of Civil Avation

Construction Development projects including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships

100%Automatic

Subject to conditions notified vide Press Note 2 (2005 Series) including a minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 millionfor joint venture. The funds would have to be brought within six months of commencement of business of the Company

Petroleum & Natural Gas

(a) Other than Refining and including market study and formulation; investment/financing; setting up infrastructure for marketing in Petroleum & Natural Gas sector)

100%Automatic

Subject to sectoral regulations issued by Ministry of Petroleum and Natural Gas; and in the case of actual trading and marketing of petroleum products, divestment of 26% equity in favour of India partner/public within 5 years.

(b) Refining

26% in case of PSUs

100% in case of Private companies

FIPB

Automatic

Subject to sectoral policy

101

Telecommunication

(a) Basic and cellular; Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services

74% (including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters/investing Company

Automatic upto 49%

FIPB beyond 49%

Subject to guidelines notified in the PN 5/2005 Series

(b) ISP with gateways, radio-paging, end-to-end bandwidth

74%

Automatic up to 49%

FIPB beyond 49%

Subject to licencing and security requirements notified by the Department of Telecommunication 

(c) ISP without gateway, infrastructure provider providing dark fibre, electronic mail and voice mail

100%

Automatic up to 49%

FIPB beyond 49%

Subject to the condition that such companies shall divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. Also subject to licensing and security requirements, where required.

(d) Manufacture of telecom equipment 100%

Automatic

Subject to sectoral requirements

Power including     Subject to

102

generation ( Except Atomic energy); regulations transmission, distribution and Power Trading

provisions of the Electricity Act 2003

Ports 100%Automatic

Subject to sectoral regulations

Roads & Highways 100%Automatic

Subject to sectoral regulations

Shipping 100%Automatic

Subject to sectoral regulations

       

Sector-wise FDI Inflows

Sector-wise FDI Inflows ( From April 2000 to July 2008)

SECTOR

 

AMOUNT OF FDI INFLOWS PERCENT

OF TOTAL FDI INFLOWS (In terms of Rs)

 

In Rs Million

In US$ Million

Services Sector 623808.97 14659.48 20.97

Computer Software & hardware

368091.46 8369.51 12.37

Telecommunications 180426.68 4156.92 6.06

Construction Activities 196092.19 4646.26 6.59

Automobile 116479.17 2677.52 3.92

Housing & Real estate 166417.79 40262.8 5.59

Power 117536.59 2725.31 3.95

Chemicals (Other than Fertilizers)

74008.90 1685.91 2.49

Ports 62154.33 1528.25 2.09

Metallurgical industries 105562.25 2528.04 3.55

103

Electrical Equipments 51143.69 1187.93 1.72

Cement & Gypsum Products

68804.72 1577.41 2.31

Petroleum & Natural Gas 85089.26 2043.44 2.86

Trading 58053 1388.76 1.95

Consultancy Services 41242.49 950.40 1.39

Hotel and Tourism 44768.54 1049 1.50

Food Processing Industries

31853.51 706.73 1.07

Electronics 32333.63 715.54 1.09

Misc. Mechanical & Engineering industries

25527.50 590.33 0.86

Information & Broadcasting (Incl. Print media)

38238.17 909.61 1.29

Mining 20814.21 514.57 0.70

Textiles (Incl. Dyed, Printed)

24134.07 557.38 0.81

Sea Transport 17059.88 390.26 0.57

Hospital & Diagnostic Centres

25481.17 608.56 0.86

Fermentation Industries 26778.09 637.58 0.90

Machine Tools 9627.04 219.52 0.32

Air Transport ( Incl. air freight)

9043.64 209.84 0.30

Ceramics 9929.15 234.61 0.33

Rubber Goods 8354.47 183.17 0.28

Agriculture Services 7778.15 185.11 0.26

Industrial Machinery 11739.04 275.02 0.39

Paper & Pulp 9640.58 227.37 0.32

Diamond & Gold Ornaments

7735.65 178.37 0.26

Agricultural Machinery 6626.94 147.85 0.22

Earth Moving Machinery 5661.09 132.41 0.19

104

Commercial, Office & Household Equipments

5791.40 132.59 0.19

Glass 5628.13 125.32 0.19

Printing of Books (Incl. Litho printing industry)

5609.27 126.43 0.19

Soaps, Cosmetics and Toilet Preparations

4809.40 110.66 0.16

Medical & Surgical Appliances

5208.93 116.50 0.18

Education 4789.79 112.01 0.16

Fertilizers 4279.74 96.54 0.14

Photographic raw Film & Paper

2580.20 63.90 0.09

Railway related components

3067.95 70.67 0.10

Vegetable oils and Vanaspati

2163.30 49.25 0.07

Sugar 1728.24 39.35 0.06

Tea & Coffee (Processing & warehousing coffee & rubber)

2360.81 55.19 0.08

Leather, Leathergoods & Piackers

1570.26 35.70 0.05

Non-conventional energy 3243.16 78.11 0.11

Industrial instruments 599.87 13.60 0.02

Scientific instruments 475.84 10.81 0.02

Glue and Gelatine 385.80 8.44 0.01

Boilers & steam generating plants

238.67 5.40 0.01

Dye-Stuffs 350.28 8.35 0.01

Retail Trading (Single brand)

814.79 19.47 0.03

Coal Production 614.10 15.42 0.02

Coir 50.17 1.12 0.00

Timber products 78.81 1.85 0.00

105

Prime Mover (Other than electrical generators

17.24 0.41 0.00

Defence Industries 2.37 0.05 0.00

Mathematical, Surveying & drawing instruments

50.35 1.27 0.00

Misc. industries 170046 3944.06 5.75

Sub Total 2974981.14 69444.96 100.00

Stock Swapped (from 2002 to 2008)

145466.35 3391.09 5.24

Advance of Inflows (from 1999 to 2004)

89622.22 1962.82  

RBI's NRI Schemes 5330.60 121.33  

Grand Total 3215400.31 74830.18  

Sector wise FDI inflows data reclassified, as per segregations of data from April 2000 onwards

Though the services sector in India constitutes the largest share

in the Gross Domestic Product, still it has failed to some extent in

attracting more funds in the forms of investments.

Important sectors of the Indian Economy attracting more

investments into the country are as follows:

Electrical Equipments (Including Computer Software &

Electronic)

Telecommunications (radio paging, cellular mobile, basic

telephone service)

Transportation Industry

Services Sector (financial & non-financial)

Fuels (Power + Oil Refinery)

106

Chemical (other than fertilizers)

Food Processing Industries

Drugs & Pharmaceuticals

Cement and Gypsum Products

Metallurgical Industries

Amount of foreign direct investment in the major sectors

of India from August, 1991 to September, 2005:

The amount of foreign direct investment in the sector of

electrical equipments was US$ 4,266 million

Foreign direct investment in the sector of transportation

industry was US$ 3,070 million

FDI in the service sector was US$ 2,840 million

The amount of foreign direct investment in the sector of

telecommunications stood at US$ 2,730 million

The amount of foreign direct investment in the sector of

fuels that included oil refinery and power came to US$

2,505 million

Foreign direct investment in the sector of chemicals was

US$ 1,818 million

The amount of foreign direct investment in the sector of

food processing industries came to US$ 1,172 million

FDI to drugs and pharmaceuticals was US$ 936 million

The amount of foreign direct investment in the sector of

cement and gypsum products came to US$ 715 million

107

Foreign direct investment in the sector of metallurgical

industries was US$ 544 million

Various countries investing in India are:

Japan USA UK Singapore Switzerland France Mauritius Netherlands South Korea Germany

Education sector poised to attract FDI

Even foreign private equity investors are eying educational institutions to invest in.

“By the end of fiscal 2009, education sector will have received total FDI of Rs 1,000 crore. Investors from US, Middle East and EU still believe in India’s long term growth potential and they are on the lookout for right entities to invest in,” said Sunil Shirole, managing director, YEN Management Consultants, who is instrumental in striking such deals and was recently on a world tour to meet investors to gauge their sentiment.

Recently, Qatar-based Altanmiya group struck a multi-million dollar deal with Thane based Prolific Systems & Technologies, which is into vocational training in industrial automation and has ambitious expansion plans both onshore and offshore.

“This investment shows our confidence in the Indian economy,

108

the viability of human capital as a profitable business, and its necessity for progressive success both economically and socially,” commented Eugene Koshy, COO of Altanmiya, who refused to disclose the deal value.

Altanmiya expects 15 per cent internat rate of return on their investment in Prolific Systems.

According to Shirole, other foreign players are also looking at investing in education sector. These include US-based Leaw Sterling Partners (having total asset base of $1.5 billion), Qatar based Educational Holding group (corpus $2 billion), CDC group (assets of $4 billion), a semi UK government owned PE fund, and many others.

With the pace of growth, industries will keep requiring a large number of trained professionals who should be endowed with quality education in specialised streams. This has added immensely to the growth potentials of all educational institutions in India.

“Some big educational institutes are approaching me to arrange FDI for them to meet their mega expansion plans. All of them have plans to go for public fund raising in the later stage,” added Shirole.

Benefits of FDI

Foreign direct investment (FDI) is an integral part of an open

and effective international economic system and a major catalyst

to development. Yet, the benefits of FDI do not accrue

automatically and evenly across countries, sectors and local

109

communities. National policies and the international investment

architecture matter for attracting FDI to a larger number of

developing countries and for reaping the full benefits of FDI for

development. The challenges primarily address host countries,

which need to establish a transparent, broad and effective

enabling policy environment for investment and to build the

human and institutional capacities to implement them.

One of the advantages of foreign direct investment is that it

helps in the economic development of the particular country

where the investment is being made.

This is especially applicable for the economically developing

countries. During the decade of the 90s foreign direct investment

was one of the major external sources of financing for most of

the countries that were growing from an economic perspective.

It has also been observed that foreign direct investment has

helped several countries when they have faced economic

hardships.

An example of this could be seen in some countries of the East

Asian region. It was observed during the financial problems of

1997-98 that the amount of foreign direct investment made in

these countries was pretty steady. The other forms of cash

inflows in a country like debt flows and portfolio equity had

suffered major setbacks. Similar observations have been made in

Latin America in the 1980s and in Mexico in 1994-95.

110

Foreign direct investment also permits the transfer of

technologies. This is done basically in the way of provision of

capital inputs. The importance of this factor lies in the fact that

this transfer of technologies cannot be accomplished by way of

trading of goods and services as well as investment of financial

resources. It also assists in the promotion of the competition

within the local input market of a country.

The countries that get foreign direct investment from another

country can also develop the human capital resources by getting

their employees to receive training on the operations of a

particular business. The profits that are generated by the foreign

direct investments that are made in that country can be used for

the purpose of making contributions to the revenues of corporate

taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a

particular country. It also helps in increasing the salaries of the

workers. This enables them to get access to a better lifestyle and

more facilities in life. It has normally been observed that foreign

direct investment allows for the development of the

manufacturing sector of the recipient country.

Foreign direct investment can also bring in advanced technology

and skill set in a country. There is also some scope for new

research activities being undertaken.

111

Foreign direct investment assists in increasing the income that is

generated through revenues realized through taxation. It also

plays a crucial role in the context of rise in the productivity of the

host countries. In case of countries that make foreign direct

investment in other countries this process has positive impact as

well. In case of these countries, their companies get an

opportunity to explore newer markets and thereby generate

more income and profits.

It also opens up the export window that allows these countries

the opportunity to cash in on their superior technological

resources. It has also been observed that as a result of receiving

foreign direct investment from other countries, it has been

possible for the recipient countries to keep their rates of interest

at a lower level.

It becomes easier for the business entities to borrow finance at

lesser rates of interest. The biggest beneficiaries of these

facilities are the small and medium-sized business enterprises.

Impediments to FDI Inflows in India

THE World Investment Report (WIR) 2000: `Cross-border

mergers and acquisitions and development' released by the

United Nations Conference on Trade and Development (Unctad)

should once again make the Indian policy makers introspect on

112

the continuing chasm between the promise of foreign direct

investment (FDI) and its actual performance.

The Report says that FDI inflows to India declined to $2.2 billion

in 1999 from $2.6 billion in 1998, though it expects this flow to

improve with acceleration of the liberalization process. What

makes the picture more disappointing is that FDI inflows in to

India had increased from $2.4 billion in 1996 to $3.6 billion in

1997. Thereafter they declined during the next two years.

Though there are indications that there will be some pick up in

FDI this year, the fact remains that the FDI inflows into India

have remained much below the expectations and its actual

potential over the past few years.

In 1996, the then Finance Minister, Mr. P. Chidambaram, had set

a target of attracting FDI inflows of $10 billion per annum by the

start of the new millennium. However, the country is nowhere

near this target despite the efforts made by successive

Governments and the impressive rise in global inflows of FDI in

recent years.

In 1998, there was a massive 40 per cent rise in global FDI

inflows to $644 billion. The year 1999 has witnessed a further

rise of 27 per cent in these inflows to reach $865 billion.

Unfortunately, India's share in the growing FDI flows has

actually declined.

113

The major driving force in the rising FDI inflows in recent years

has been the cross-border mergers and acquisitions (M&As) over

the past decade rather than Greenfield investment. The inference

is that Indian companies will have to opt for this route if they

want to grow at a faster pace and attract more FDI.

The WIR makes a reference to several cross-border mergers and

acquisitions (M&As) involving Indian firms. For instance, the

main reason for Tata Tea to acquire Tetley of the UK was to

obtain access to a global brand name and distribution network.

Reaching the same objective through organic growth would have

been more or less impossible, it says.

While the fall in FDI over the last two years appears to have been

triggered to some extent by India's nuclear explosion and the

confusion on the policy front, much needs to be done to minimise

the procedural and bureaucratic delays.

The real problem in India is not related to FDI policy but the

actual implementation of the projects already approved. India

has now emerged as the second most-sought-after FDI

destination in Asia after China but the actual inflows into India

are less than a tenth of those received by that country.

Total FDI approvals between 1991 and 1999 were to the tune of

$58 billion. However, the actual inflows amounted to just 31 per

cent of this amount.

114

Over the past few months, the Government has announced a

series of measures to further liberalize the country's FDI policy.

These include, allowing offshore venture capital funds and

companies to invest in domestic venture capital undertakings as

well as in all other companies through automatic route; allowing

100 per cent FDI for all manufacturing activities in Special

Economic Zones (SEZs); permission for FDI through automatic

route in companies providing Internet services, and so on.

While the liberalization of FDI policies is no doubt welcome, the

real hurdle at the moment is the big investment slowdown in

infrastructure and the manufacturing sectors. The recent Mid-

term Appraisal of the Ninth Five Year Plan has drawn attention

to major slip pages in public sector investments without any

commensurate increase in private sector investments.

The country's manufacturing sector is passing through a period

of crisis with unprecedented slowdown in new investments and

declining confidence levels because of growing internal and

external competition and demand recession.

Special efforts are therefore needed to step up domestic and

foreign investments in infrastructure sectors and to assist the

manufacturing industries to improve their efficiency levels. FDI

can play an important role in both these areas.

In addition to India’s poor performance in terms of

competitiveness, quality of infrastructure, and skills and

115

productivity of labor, there are several other factors that make

India a far less attractive ground for direct investment than the

potential she has. Given that India has a huge domestic market

and a fast growing one, there is every reason to believe that with

continued reforms that improve institutions and economic

policies, and thereby create an environment conducive for

private investment and economic growth that substantially large

volumes of FDI will flow to India. We list some of the major

deterrents below:

1. Restrictive FDI regime

The FDI regime in India is still quite restrictive. As a

consequence, with regard to cross border ventures, India ranks

57th in the GCR 1999. Foreign ownership of between 51 and 100

percent of equity still requires a long procedure of governmental

approval. In our view, there does not seem to be any justification

for continuing with this rule. This rule should be scrapped in

favor of automatic approval for 100-percent foreign ownership

except on a small list of sectors that may continue to require

government authorization. The banking sector, for example,

would be an area where India would like to negotiate

116

reciprocal investment rights. Besides, the government also needs

to ease the restrictions on FDI outflows by non-financial Indian

enterprises so as to allow these enterprises to enter into joint

ventures and FDI arrangements in other countries. Further

deregulation of FDI in industry and simplification of FDI

procedures in infrastructure is called for.

2. Lack of clear cut and transparent sectoral policies for

FDI

Expeditious translation of approved FDI into actual investment

would require more transparent sectoral policies, and a drastic

reduction in time-consuming red-tapism.

3. High tariff rates by international standards

India’s tariff rates are still among the highest in the world, and

continue to block India’s attractiveness as an export platform for

labor-intensive manufacturing production. On tariffs and quotas,

India is ranked 52nd in the 1999 GCR, and on average tariff rate,

India is ranked 59th out of 59 countries being ranked. Much

greater openness is required which among other things would

include further reductions of tariff rates to averages in East Asia

(between zero and 20 percent). Most importantly, tariff rates on

imported capital goods used for export, and on imported inputs

117

into export production, should be duty free, as has been true for

decades in the successful exporting countries of East Asia.

4. Lack of decision-making authority with the state

governments

The reform process so far has mainly concentrated at the central

level. India has yet to free up its state governments sufficiently

so that they can add much greater dynamism to the reforms. In

most key infrastructure areas, the central government remains in

control, or at least with veto over state actions. Greater freedom

to the states will help foster greater competition among

themselves. The state governments in India need to be viewed as

potential agents of rapid and salutary change. Brazil, China, and

Russia are examples where regional governments take the lead

in pushing reforms and prompting

further actions by the central government. In Brazil, it is São

Paulo and Minais Gerais which are the reform leaders at the

regional level; in China, it is the coastal provinces, and the

provinces farthest from Beijing, in the lead; in Russia, reform

leaders in Nizhny Novgorod and in the Russian Far East have

been major spurs to reforms at the central level.

5. Limited scale of export processing zones

118

The very modest contributions of India’s export processing zones

to attracting FDI and overall export development call for a

revision of policy. India’s export processing zones have lacked

dynamism because of several reasons, such as their relatively

limited scale;

the Government’s general ambivalence about attracting FDI;

the unclear and changing incentive packages attached to the

zones;

and the power of the central government in the regulation of the

zones, in comparison with the major responsibility of local and

provincial government in China. Ironically, while India

established her first EPZ in 19654 compared with China’s initial

efforts in 1980, the Indian EPZs never seemed to take off -- either

in attracting investment or in promoting exports.

6. No liberalization in exit barriers

While the reforms implemented so far have helped remove the

entry barriers, the liberalization of exit barriers has yet to take

place. In our view, this is a major deterrent to large volumes of

FDI flowing to India. An exit policy needs to be formulated such

that firms can enter and exit freely from the market. While it

would be incorrect to ignore the need and potential merit of

certain safeguards, it is also important to recognize that

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safeguards if wrongly designed and/or poorly enforced would

turn into barriers that may

adversely affect the health of the firm. The regulatory

framework, which is in place, does not allow the firms to

undertake restructuring.

7. Stringent labor laws

Large firms in India are not allowed to retrench or layoff any

workers, or close down the unit without the permission of the

state government. While the law was enacted with a view to

monitor unfair retrenchment and layoff, in effect it has turned

out to be a provision for job security in privately owned large

firms. This is very much in line with the job security provided to

public sector employees. Most importantly, the continuing

barrier to the dismissal of unwanted workers in Indian

establishments with 100 or more employees paralyzes firms in

hiring new workers5. With regard to labor regulations and hiring

and firing practices, India is ranked 55th and 56th respectively in

the GCR 1999.

Labor-intensive manufacturing exports require competitive and

flexible enterprises that can vary their employment according to

changes in market demand and changes in technology, so India

remains an unattractive base for such production in part because

of the continuing obstacles to flexible management of the labor

force.

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8. Financial sector reforms

Reform of India’s financial sector is crucial for large FDI flows

into India. However, only some partial steps have been

undertaken and these are by no means going to make any

meaningful changes to the existing system. India’s banking and

insurance companies were nationalized more than two decades

ago. While a number of countries had undertaken such actions in

the 1970s and early 1980s, for instance Mexico, France, and

Chile, however, they have almost completely reversed this policy

by now. Be that as it may, India still continues to rely on a state-

owned, state-run banking system and the insurance sector till

very recently remained a government monopoly. This as one

would expect has had highly adverse results, both in terms of

availability of funds for investment and a negligible presence of

foreign banks and no presence of foreign insurance companies in

the country.

9. High corporate tax rates

Corporate tax rates in East Asia are generally in the range of 15

to 30 percent, compared with a rate of 48 percent for foreign

companies in India. High corporate tax rate is definitely a major

121

disincentive to foreign corporate investment in India. With

respect to tax evasion, India is ranked 48th in the GCR 1999.

Policy Recommendation for FDI

Chronological listing of FDI Policy reform and related

areas.

1991-92 As against the previous policy of considering all

foreign investment on a

case by case basis and that too within a normal

ceiling of 40% of total equity investment, new policy

provides for automatic approval of FDI up to 51% of

equity in a specified list of 34 specified high-priority,

capital intensive, hi-technology industries, provided

the foreign equity covers the foreign exchange

involved in importing capital goods and outflows on

account of dividend payments are balanced by export

earnings over a period of 7 years from the

commencement of production. Foreign technology

agreements are also liberalized for the 34 industries

with firms left free to negotiate the terms of

technology transfer based on their own commercial

judgment and without the need for government

approval for hiring of foreign technicians and foreign

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testing of indigenously developed technologies. This

only subject to a registration procedure with the

Reserve Bank of India.

Investment above 51% equity is also permitted on the

basis of case by case approvals given by a specifically

constituted Foreign Investment Promotion Board

(FIPB) charged with expeditious processing of

governmental approvals.

The procedure for Indian companies to invest abroad

and develop global linkages in this way was also

streamlined.

The Foreign Exchange Regulation Act (FERA) was

amended to remove a number of constraints earlier

applicable to firms with foreign equity operating in

India and also to make it easier for Indian businesses

to operate abroad.

India signed the Multilateral Investment Guarantee

Agency (MIGA)

Convention and became a member of MIGA along with

many other developing countries interested in

promotion foreign investment.

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Restrictions placed in March 1991 on sale of foreign

exchange for import of capital goods, which were

allowed initially only under foreign lines of credit

available with financial institutions. Subsequently, in

November 1991, this policy was relaxed permitting

such imports up to a limited extent against suppliers'

credit. Import of capital goods up to a value of Rs. 50

lakhs was also permitted against free foreign exchange

and up to a value of Rs. 100 lakhs if the importer could

arrange suppliers' credit for 360 days. Import of

capital goods would be also be allowed (i) against a

matching inflow of foreign equity,

(ii) against release of free foreign exchange up to 15%

of the cost of import up to a limit of Rs. 100 lakhs

where 85% of the cost is financed by external

commercial borrowing, (iii) for export oriented

entities against borrowings for a minimum period of

two years provided the borrowings are liquidated out

of the net foreign exchange earnings of the borrowing

unit.

LERMS system introduced in March 1992. LERMS

(Liberalized Exchange Rate System) replaced the

previous eximscrips system. Under the LERMS system,

virtually all capital goods and raw materials and

components are made freely importable subject to

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tariff protection as long as foreign exchange to pay for

the imports is obtained from the market.

Earlier prohibition against use of foreign brand name

or trademark in goods sold in the domestic market

withdrawn

Abolished all industrial licensing, irrespective of the

level of investment for certain industries related to

security and strategic concerns, concerns related to

safety and overriding environmental issues, and

manufacture of products of a hazardous nature.

Certain locational guidelines remain designed to

discourage the clustering of industries, particularly the

polluting industries in the periphery of major urban

centers. Existing

industries also free to expand according to their

market needs without obtaining prior expansion or

capacity clearance from the government.

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Abolition of industrial capacity licensing permits firms

to freely manufacture any article in response to

market demand (except those subject to compulsory

licensing). Phased manufacturing programs which

allow for the enforcement of strict local content

requirements are abolished.

Mandatory convertibility clause allowing financial

institutions to convert part of their loans into

equity if felt necessary by their management is waived.

MRTP act amended removing the threshold limits of

assets in respect of

MRTP and dominant undertakings. Prior approval for

investment in de-licensed industries from the

government is no longer required. As ended, the MRTP

act gives more emphasis to the prevention and

control of monopolistic, restrictive and unfair trade

practices.

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1992-93 Many more industries delicensed. Competition

promoted by the opening up of many areas

previously reserved for the public sector to private and

foreign investment. Policies put in place to attract

foreign direct and portfolio investment. Amendment of

SICA to ermit public enterprises to be examined by

BIFR. Financial Sector reforms.

The previous dividend balancing condition applicable

to 51% equity is removed, except for consumer goods

industries.

The list of high-priority industries was rationalized and

revised including new industries and adding software.

Existing companies with foreign equity can raise it to

51% subject to certain prescribed guidelines. FDI is

also allowed in exploration, production and refining of

oil and marketing

of gas. Captive coal mines can also be owned and run

by private investors in power. NRIs and overseas

127

corporate bodies (OCBs) predominately owned by them

are also permitted to invest up to 100% of equity in

high-priority industries with repatriability of capital

and income. NRI investment up to 100% of equity is

also allowed in export houses, trading houses, star

trading houses, hospitals, EOUs, sick industries, hotels

and tourism related industries and without the right of

repatriation in the previously excluded areas of real

estate, housing and infrastructure. Foreign citizens of

Indian origin are now permitted to acquire house

property without permission of the Reserve Bank of

India.

Disinvestment of equity by foreign investors no longer

needs to be at prices determined by the Reserve Bank.

It has been allowed at market rates on stock exchanges

from September 15, 1992 with permission to repatriate

the proceeds of such disinvestment.

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India signed the Multilateral Investment Guarantee

Agency Protocol for the protection of foreign

investments on April 13,1992.

Provisions of the Foreign Exchange Regulation Act

(FERA) are liberalized through ordinance dated

January 9, 1993 as a result of which companies with

more than 40% of foreign equity are now also treated

on par with fully owned Indian companies.

Investment Promotion and Project Monitoring cell set

up in the Department of Industrial Development to

provide information and guidance to entrepreneurs

regarding licensing policy, tariffs, corporate laws,

current status of applications pending with the

Department, infrastructure facilities and incentives

available at state levels for setting up industries, etc.

Peak import tariff brought down from a maximum of

150% to 100%. Rates for import duties on project

imports, capital goods and general machinery were

129

reduced. The Export Promotion Capital Goods (EPCG)

Scheme made capital goods importable at 25% and

15% duty as long as the importers agreed to fulfill a

stipulated export commitment.

Taxation of capital gains restructured to allow for

inflation accounting. Double taxation of partnership

firms abolished and financial assets such as equities

and debentures are exempted from the wealth tax.

1993-94 States began exercising the initiative given to them by

the Center's 1991 reforms. States in the vanguard of

reform included Gujarat, Kerala, Maharashtra, Uttar

Pradesh and Andhra Pradesh. Liberalization efforts

undertaken include:

· Committees appointed to review laws relating to

various aspects of

liberalization.

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· Private participation in development of ports, power

stations and desalination of water supplies, etc.

· Restructuring of District Industries Centers (DICs) in

progress.

· Walk-in-system for financial assistance by Gujarat

Industries and

Investment

Corporation (GIIC) and Gujarat State Finance

Corporation (GSFC).

· Green channel scheme introduced to expedite

industrial clearance.

· A state level agency set up to deal with Board of

Industrial and Financial

Reconstruction (BIFR) cases of state-owned Public

Sector Enterprises

(PSEs).

High-level development committees set up to

investigate offers for taking over 10 PSEs listed for

disinvestment in Kerala.

131

· District Collectors' permission to convert agricultural

land into industrial use no longer required.

· Industrial location policy revised to permit setting up

of non-polluting,

non-hazardous and high-tech industries within the

municipal zone of

Greater Mumbai.

· Private participation encouraged in power projects

and establishment of

Industrial estates.

· Committee set up under State Chief Secretary for

expeditious decision

on NRI and Foreign Direct Investment.

· District and Division level Authorized Committees with

substantial decision-making powers set up to

strengthen single-window clearance system.

· Simplification of inspection system by departments.

· Privatization/closure of loss-making public sector

industrial

undertakings and corporations.

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· Involvement of private sector in development and

management of

industrial estates, generation and distribution of

power.

· Special facilities to NRIs and foreign industrialists.

· Various aspects and procedures for obtaining power

connection

streamlined.

· Power Purchase Agreements have been signed with

private developers

for setting up of Power Projects. The offers received,

for undertaking projects, from private parties are

being evaluated in AP.

Specific Center initiated reforms include: 13 minerals

earlier reserved for the public sector were opened to

the private sector in March 1993. Consequently, the

number of industries reserved for the public sector is

reduced to 6 (defense, atomic energy, coal and lignite,

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mineral oils, railway transport, minerals specified in

the schedule to the Atomic Energy Order of 1953).

Motorcar and white goods industries were delicensed

effective April 28, 1993. Raw hides and skins, leather

and patent leather, excluding chamois leather, also

delicensed. Overall number of items in respect to

compulsory licensing is reduced to 15. Manufacture

of readymade garments (formerly reserved for small-

scale units) now open to large scale enterprises as of

July 29. 1993. This is subject to an export of 50% and

investment and assets in plant and machinery of the

large unit to not more than Rs. 3 crore.

The Development Commissioners for Export Promotion

Zones (EPZs) were delegated some specific powers for

100% Export Oriented Units (EOUs) and EPZs. These

powers earlier rested with Zonal Authorities under the

Ministry of Commerce. This brings down the level at

which clearances are required.

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Excise duties on capital goods are rationalized and

import duties are reduced further to lower capital

costs and stimulate investment.

Five-year tax holiday for new industries in industrially

backward States and UTs and for power generation

anywhere in India is introduced.

Export credit refinance limits are augmented; 90% of

refinance credit is now available in US Dollars.

The limit for compulsory consortium lending is raised

from Rs. 5 crore to Rs. 50 crore. This gives greater

flexibility to corporate investors to choose their bank

and take advantage of increased competition.

CRR and SLR are reduced to 14% and 34.75%

respectively to make more credit available for the

commercial sector.

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Minimum lending rate for the highest credit slab is

reduced to 15%

Sick Industrial Companies (Special Provision) Act,

1985 (SICA) amended in December 1993 to facilitate

early detection of sickness in companies and speedy

enforcement of remedial measures.

1994-95 Efforts made to facilitate private entry into

infrastructure areas including natural resource sectors

and non-tradable infrastructure services such as

electricity, internal transport and

telecommunications.

Specific developments included in this area include:

· National Mineral Policy revised and the Mines and

Mineral Development Act amended to open up the

sector to private and foreign investment. Ten minerals

were de-reserved for exploitation by the private sector.

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· RBI based automatic approval policy for foreign

investment made applicable to mining (except atomic

materials and mineral fuels), subject to a limit of 50%

on foreign equity.

· The new power sector policy framework attracted 138

private proposals for creating 58, 745 megawatts of

capacity with an investment of Rs. 219,927 crore. Of

these, 41 proposals are from foreign investors or joint

ventures with foreign partners. Thirteen were cleared

at the end of 94-95 fiscal year.

· National Telecom Policy of 1994 allows for private

provision of basic telecom services. For value added

services, government permits a maximum of 51%

equity. Basic services, cellular mobile and radio

paging limit is 49%. Open system of tendering/bidding

of licenses is concluded.

· Enables private Air Taxi companies to operate as

regular domestic airlines.

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· Development and maintenance of airport

infrastructure and material handling areas, etc.,

opened up to private participation.

· National Highway Act amended to enable toll

collection on National Highway users. Further

amendments are foreseen to permit private

participation in construction, Maintenance and

operation of roads on a Build-Operate-Transfer (BOT)

basis.

· Further private participation in the infrastructure is

encouraged in the leasing of port equipment, operation

and maintenance of container terminals, cargo

handling terminals, creation of warehouse and storage

facilities, transportation within ports, setting up

private berths by coastal based industries, ship repairs

and maintenance.

· India took a major step toward current account

convertibility in March 1993 when the exchange rate

was unified and transactions on trade account were

freed from exchange control. The determination of the

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exchange rate of the rupee was left to the market. The

RBI on February 28, 1994 announced the liberalization

of exchange control regulations up to a specified limit

relating to:

(a) exchange earners foreign currency accounts;

(b) basic travel quota;

(c) gift remittances;

(d) donations; and

(e) payments of certain services rendered by foreign

parties.

· Industrial licensing for almost all bulk drugs

abolished.

· Automatic approval of foreign investment up to 51%

and foreign

technology agreements permitted for all bulk drugs

and formulations, barring only a few.

· Import duties reduced to 15% on export related

capital goods, 25% for project imports and most capital

goods, and continuation of concessional duties at 20%

for power projects, and 0% for fertilizer projects.

139

· MODVAT extended to capital goods and petroleum

products.

· Corporate tax reduced from 45% for widely held

companies and 50%

for closely held companies to 40% for domestic

companies. And from 65% to 55% for foreign

companies.

· Five-year tax holiday to new industrial undertakings

that was initially allowed for industrially backward

states in the 93-94 budget now extended to all

backward areas notified by the Department of

Revenue.

· Major overhaul of the excise tax structure, including

rationalization of rates, elimination of most end-use

exemptions and a general shift from specific to ad

valorem duties.

· Continued reform in customs duties, including

reduction of the peak tariff rate, elimination of most

end-use exemptions and removal of exemptions from

countervailing duties.

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Foreign Investment allowed for NRIs and persons of

Indian origin in a wide range of construction and real

estate related activities. Foreign investment also

allowed in constructing and operating highways,

expressways and bridges on a toll tax system,

generating electricity on Build-Operate Own (BOO)

basis, basic telephone services and certain operations

in railways on Build-Operate-Lease-Transfer (BOLT)

basis. Without prior approvals, foreign investors can

now own up to 24% equity in any Indian firm and up to

20% in new private banks.

1995-96 Under zero duty import of capital goods scheme, which

is available for imports of capital goods of at least Rs.

20 crore, there are now two windows to fulfill export

obligation on FOB (free on board) or NFE (net foreign

exchange earnings) basis.

141

Advance licenses have been made transferable after

the export obligation has been fulfilled and the Bank

Guarantee/LUT (letter of undertaking) redeemed.

The concept of a back to back letter of credit has been

introduced to enable an advance license holder to

source his inputs from domestic suppliers.

The list of sensitive items has been pruned after taking

into account the reduction in customs duties and

excise duties. Besides, flexibility has been provided to

the exporter for using un-utilized c.i.f. value of

sensitive items for importing non-sensitive items.

Realization of export proceeds is no longer a condition

for availing of facilities, including transferability of

the duty exemption licenses or the goods imported

under such licenses.

142

The Software Technology Park (STP) scheme and the

Electronic Hardware Technology Park (EHTP) scheme

are amended in several respects, including value

addition norms and DTA (domestic tariff area) sales.

Definition of consumer goods is changed to suit needs

of importers, so as to allow them to freely import parts,

components and spares of consumer goods as well.

These were earlier restricted to the extent to the

extent they could only be imported by the actual user.

With these changes, any person can import parts or

components of consumer durables freely without a

license and without actual user condition.

List of freely importable consumer goods is further

expanded to include 78 items, including natural

essential oils, instant coffee, refrigerated trucks, etc.

Additionally, import of 90 consumer items is

permitted by all persons against the freely transferable

special import licenses (SILs) that are granted to the

143

export and trading houses. The SILs are tradable in the

open market at a premium to be determined by the

market forces.

List of goods permitted to be imported against the

freely transferable import licenses which are granted

to the export houses/trading houses/star trading

houses and super star trading houses, has been

expanded to include items, inter alia, electric drilling

machines, blank 8mm video tapes/cassettes, bar code

readers, electronic diaries, ropeway systems, cable

cars, electric shavers, powered mowers for lawns,

parks or sports grounds, marine containers, video

monitors, and certain types of hand tools.

Newsprint including glazed newsprint, has been made

freely importable, by all persons.

Import of mandatory spares up to 5% of the c.i.f. value

of the license has been allowed.

144

An alternative route of the Pass Book scheme, for some

categories of exporters, has been opened. Basic

customs duty credit may be utilized for payment of

customs duty against import of goods of a non-negative

nature.

The Harmonized System (HS) of commodity

classification, developed by the CCC (Customs

Cooperation Council), Brussels has been in use the

world over since the late eighties.

India has adopted the system for Customs, Excise,

Drawback and compilation of foreign trade statistics

purposes. The first attempt to introduce the same

system in the Trade sector was made with the

publication of "Import Licensing Policy" in two volumes

in October 1991. However, the sweeping changes

which took place with the liberalization in the EXIM

Policy, 1992-97, reduced the utility of the document.

145

The entire exercise was thereafter taken up afresh at

the eight digit extended level, and the new Indian

Trade Classification (ITC) has now been brought out

with the objectives of:

i) Greater transparency in the import and export

licensing policy.

ii) Compatibility with the system of classification

followed by Customs,

Central

Excise and the DGCI & S on Harmonized System (HS)

of Commodity

Classification.

iii)Reduction in discretionary controls and areas of

ambiguity and

disputes on import policy matters.

iv) Development of the basic module for

computerization and Electronic Data Interchange

(EDI).

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During the Uruguay Round of negotiations at the WTO,

India sought under the GATS agreement to offer entry

to foreign services providers in services sectors in

which entry was considered to be advantageous in

terms of capital inflows, technology and employment.

In return, India sought greater access for its skilled

personnel to the markets of its major trading partners.

Broadly speaking, India's commitments cover a limited

offer in the insurance sector as per existing practice.

In the banking sector, India permits entry of eight new

licenses per year both for new entrants and existing

banks, subject to a maximum share of assets in India

both on and off balance sheets of foreign banks not

exceeding 15% of the banking system as a whole. As

far as commitments in other financial services, such as

merchant banking, financial leasing, factoring, venture

capital, financial consultancy etc., all envisage locally

incorporated joint venture companies with foreign

147

equity not exceeding 51% except for stock brokering

where the limit is 49%.

Several reforms in the Industrial sector relating to FDI

include:

· The number of items, in respect to industrial licensing

requirements is

reduced to 15.

These industries account for only 15% of the value

added in the manufacturing sector.

· Number of industries reserved for the public sector is

reduced to 6, viz.

Defense products, atomic energy, coal and lignite,

mineral oils, railway transport, minerals specified in

the schedule to the Atomic Energy Order 1953. Private

participation in some of these sectors is also permitted

on a case by case basis.

· More private initiative is encouraged in development of

infrastructure like power, roadways,

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telecommunication, shipping and ports, airports and

civil aviation etc.

· The manufacture of readymade garments - an item

reserved for exclusive manufacture by the

ancillary/small scale industrial undertakings opened to

large scale undertakings, subject to an export

obligation of 50% and investment limit of Rs. 3 crore.

· Automatic approval of foreign investment up to 51%

and foreign technology agreements permitted for 35

priority industries which account for 50% value added

in the manufacturing sector.

Foreign investment has also been liberalized in many

sectors, including:

a) 35 high-priority industries

b) Export/Trading/Star trading houses

c) Hotels & Tourism related industry

d) 100% EOUs and units in FTZ and EPZ

e) Sick industries

f) Mining

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g) Telecommunications

h) Power

i) Medical clinics, Hospitals, Shipping, Oil exploration,

Deep sea fishing,

Ind. With licenses.

j) Industries reserved for SSI

k) Housing, real estate, business centers &

infrastructure facilities.

l) Portfolio investment (Inv. In shares & debentures).

m) Government securities

n) Units in UTI

o) Public sector mutual funds

p) Private sector mutual funds

1996-97 The Foreign Investment Promotion Council is set up.

The Foreign Investment Promotion Board (FIPB) is

streamlined and

made more transparent.

150

First ever guidelines are announced by the government

for consideration of foreign direct investment

proposals by the FIPB which are not covered under the

automatic route in January of 1997. Priority areas

addressed in the guidelines include infrastructure,

industries having export potential, large scale

employment potential particularly for rural areas,

items with linkages to the farm sector, social sector

projects like hospitals, health care and medicines, and

proposals that lead to introduction of technology and

infusion of capital. FDI approvals, are however subject

to sectoral caps; 20 % (40% for NRIs) in banking; 51%

in non-banking financial companies without any special

conditions (100% with specified minimum levels of

foreign investment); 100% in power, roads, ports,

tourism and venture capital funds; 49% (not to be

offset against the FDI in an investment

holding/company where there is a cap of 49%) in

telecommunications (basic, cellular, paging

services); 40% (100% for NRIs) in domestic air-taxi

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operations/airlines; 24% in small scale industries; 51%

in drugs/pharma industry for bulk drugs; 100% in

petroleum; and 50% in mining except for gold, silver,

diamonds and precious stones.

The FIPB allows 100% foreign equity in cases where

the foreign company cannot find a suitable Indian joint-

venture partner, subject to the condition that the

foreign investor divests at least 26% of its equity

within three to five years.

New guidelines also allow foreign companies to set up

100% companies on the basis of these criteria:

(a) where only holding operation is involved and all

downstream investments to be carried out need prior

approval;

(b) where proprietary technology is sought to be

protected or sophisticated technology is proposed to

be brought in;

(c) where at least 50% of production is exported;

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(d) consultancy proposals; and

(e) projects in power, roads, ports and industrial towns

and estates.

The FIPB will also allow proposals for 100% trading

firms for exports, bulk imports, cash-and-carry

wholesale trading and other import of goods and

services provided that at least 75% is for procurement

and sale of goods and services among group firms.

The list of industries eligible for automatic approval of

up to 51% foreign equity is expanded, including three

industries relating to mining activity for foreign equity

up to 50%.

An additional 13 industries for foreign equity of up to

51% are included. These 13 I industries include a wide

range of industrial activities in the capital goods and

metallurgical industries, entertainment electronics,

food processing, and the service sectors having

significant export potential.

153

Foreign Institutional Investors (FIIs) are allowed to

invest in unlisted companies and in corporate and

government securities.

External commercial borrowing (ECB) guidelines are

liberalized and made more transparent.

In December, 1996, the government allows automatic

approval of FDI up to 74% by the RBI in nine

categories of industries, including electricity

generation and transmission, non-conventional energy

generation and distribution, construction and

maintenance of roads, bridges, ports, harbors,

runways, waterways, tunnels, pipelines, industrial and

power plants, pipeline transport except for POL and

gas, water transport, cold storage and warehousing for

agricultural products, mining services except for gold,

silver and precious stones and exploration and

production of POL and gas, manufacture of iron ore

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pellets, pig iron, semi-finished iron and steel and

manufacture of navigational, meteorological,

geophysical, oceanographic, hydrological and

ultrasonic sounding instruments and items based on

solar energy.

1997-98 To increase the growth rate of industrial production,

which had fallen to 7.1% in 1996-97 from 12.1% in

1995-96, the government

a) cut personal and corporate income tax rates across

the board;

b) excise duties on intermediate goods and customs

duties on imported

raw materials brought down;

c) "infrastructure" broadened to include

telecommunications, oil exploration and industrial

parks, to enable these sectors to avail of fiscal

incentives such as tax holidays and concessional

duties;

155

d) Bank rate and Cash Reserve Ratio (CRR) reduced in

the Credit policies announced during 1997-98;

e) Banks given freedom in assessing credit

requirement for borrowers by

withdrawing restrictions on maximum permissible

bank finance.

The list of industries eligible for foreign direct equity

investment under the automatic approval route by the

RBI increased in 1997-98. Equity investment up to

100% by NRIs/OCBs has been permitted in high

priority industries in metallurgical and infrastructure

sectors.

Number of industries subject to compulsory industrial

licensing reduced from 14 to 9. Investment ceiling on

plant and machinery for small scale industrial

undertakings enhanced from Rs. 60 lakh/Rs. 75 lakh to

Rs. 3 crore and for tiny units to Rs. 25 lakh from Rs. 5

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lakh. 15 items reserved for manufacture in the small

sector are de-reserved.

1998-99 Projects for electricity generation, transmission and

distribution and construction and maintenance of

roads, highways, vehicular tunnels and vehicular

bridges, ports and harbors are permitted foreign

equity participation up to 100% under the automatic

route.

Automatic route is subject to a ceiling of Rs. 1500

crore on foreign equity.

FDI permissible under Non-banking Financial Services

now includes

"Credit Card

Business" and "Money Changing Business".

Multilateral financial institutions are allowed to

contribute equity to the extent of shortfall in NRI

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holdings, and within the overall permissible limit of

40% in private sector banks.

FDI up to 49% equity is allowed subject to license, in

the companies providing Global

Mobile Personal Communication by Satellite (GMPCS)

services.

Unlisted companies are permitted to float Euro issues

under certain conditions.

End use restrictions on GDR/ADR issue proceeds have

been removed except those on investment in stock

markets and real estate.

India companies permitted to issue GDRs/ADRs in the

case of Bonus or Rights issue of shares, or on genuine

business reorganizations duly approved by the High

Court.

158

Delicensed coal and lignite, petroleum (other than

crude) and its distillation products and bulk drugs.

Delicensed sugar

De-reservation of coal and lignite and mineral oils

Companies permitted to buy-back their own shares

subject to restriction of buy-back to

25% of paid up capital and free reserves.

National Task Force on IT and Software Development

submitted 108 point Action Plan in July 1998.

Recommendations accepted by government and

directions for their implementation given to concerned

parties.

Patent bill approved by Rajya Sabha and subsequently

promulgated through ordinance.

159

Number of items, including some farm implements and

tools, are removed from products reserved for

exclusive manufacture by SSI sector.

April 1998 Exim policy further delicensed 340 items of

import moving them from restricted list to OGL.

India unilaterally removed all quantitative restrictions

on imports of around 2300 items from SAARC

countries effective August 1, 1998.

Further encouragement of private sector participation

and investment in infrastructure continues.

New Telecom policy is under preparation.

ANNEXURE – I

KPMG

India to see largest FDI growth: KPMG

160

A significant amount of investment into India in the next

five years is expected from first time investors.

As investments go global, the smart money is expanding its reach

to Brazil, Russia, India and China (Bric)nations. However, India

is likely to see the largest growth in its share of foreign

investment in the manufacturing sector.

“The more recently recognized India opportunity is reflected in

the fact that a significant amount of investment into India in the

next five years is expected from first time investors,” KPMG CEO

Russell Parera said.

He said that the expected increase of Indian investment in the

Middle East reflects the proximity and the opportunity created

from the oil price led wealth effect and added that India must

continue to build on its investment climate to monetize this

sentiment.

161

According to a KPMG survey, the investment opportunity has

shifted from the traditional investment countries such as the US,

Japan, Singapore and the UAE to the Bric countries.

Commenting on the findings of the survey, KPMG India Tax and

Regulatory Services Head Sudhir Kapadia said, “This trend-

setting survey validates anecdotal evidence suggesting a major

shift of capital flows from the US, Japan and other European

countries to the BRIC countries in the next five years.”

It is significant to note while 10 per cent of the companies

surveyed expect to invest in India currently that number will go

up to 18 per cent in five years—the biggest gainer amongst all

other Bric countries.

New entrants will contribute 64 per cent of the investment to the

country, with maximum flow of investments into industrial

products and manufacturing in India.

162

“It is clear that India has the potential to play an even more

influencing role in flow of capital and it's a great opportunity for

India to further improve the economic and fiscal climate and

proactively attract and retain investments in her growing

economy,” he added.

Under the study, corporate investment strategists from over 300

of the largest multinational companies in

15 major economies were surveyed and asked their plans to

invest in the next 12 months and in five years' time.

According a new study of future global capital flows, China is

expected to overtake the US as the world's leading recipient of

corporate investment in the next five years.

The report further added that China would become the most

influential country in IT and telecoms, industrial products and

mining.

163

China would receive significant investments from 24 per cent in

2013-14, up from 17 per cent this year, while Russia can expect

investments from 19 per cent in five years, up from 12 per cent

this year and Brazil from 14 per cent, up from 10 per cent.

“By contrast, the US share of investments is expected to fall by

four per cent to 23 per cent, still a very high proportion of global

investment, but placing it behind China,” the report said.

Speaking at KPMG's 2008 EMEA Tax Summit in Barcelona,

KPMG's EMA Region Tax Head Sue Bonney said that the

majority of the people surveyed saw the next five years as a

return to more normal patterns of investment, after a period

when the US has had a disproportionately high share of global

investment funds.

“But a return to the market conditions of, say, 2003 does not

explain the shift in influence that these strategists expect

towards the Bric economies. This does look like the beginnings of

164

a fundamental change in the balance of economic power,”

Bonney added.

The report stated that the UK would remain the most popular

developed economy outside the US, increasing its share of

investment by three per cent to 17 per cent.

ANNEXURE – II

DELOITTE

India Services Group

165

As a fast growing market, India has become an attractive target

for foreign direct investment, with capital inflows of USD 23

billion in FY07. This trend continued in early FY08, with gross

FDI inflows reaching USD 11.2 billion in the first six months.

Following the Vodafone Hutchison Essar deal in early 2007,

which was the single largest foreign investment in India’s

history, other retail giants such as Marks and Spencer and Tesco

have signed agreements to commit high levels of investment in

the Indian sub-continent.

Opportunities for companies in the software, business process

outsourcing, automotive component, construction and real estate

sectors are especially strong in the region. UK Private Equity

houses and fund managers are also investing heavily in India.

Deloitte in India draws upon a pool of experts specializing in a

variety of industries such as manufacturing, consumer business,

technology, energy and resources. The Indian practice comprises

166

over 120 partners and 8,500 professionals spread across 13

cities. Our unparalleled global relationships and in-depth

understanding of the Indian economy allow us to deliver value-

adding solutions to our clients, however complex the transaction.

For Indian companies with global strategic aims, London offers

unparalleled access to capital markets. Deloitte’s offices across

the UK serve international companies, large national enterprises,

public institutions and the SME market.

Deloitte’s India Services Group (ISG) brings together all the right

specialists from across these regions and industries to meet your

needs.

Indian Real Estate Market Investment to Increase

to US $20 Billion by2010, says Deloitte

SEBI Real Estate Mutual Fund and REIT Regulations to

Boost Local Market Growth

167

According to Deloitte, investments in the Indian real estate

market are expected to increase to US $20 billion by 2010. The

sector, which is growing at an annual rate of 30 per cent and

currently worth US $12 billion, will get a further boost from the

Securities and Exchange Board of India’s (SEBI) Real Estate

Mutual Fund (REMF) and the Real Estate Investment Trust

(REIT) regulations.

The Indian real estate industry’s development has been propelled

by economic advancements, favorable demographics and the

liberalized foreign direct investment (FDI) regime. Moreover, the

recently introduced regulations will play a critical role in

positioning India as a key destination for investors worldwide.

“The Indian real estate sector has emerged as one of the most

appealing industries for both, domestic and foreign investors and

is presently the second-largest employing sector linked to about

250 ancillary industries,” said Jayesh Kariya, Partner, Deloitte

Haskins & Sells. “Currently, investments of over US $1400

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billion are being made by REITs globally and we expect a these

investors to start looking at Indian realty.”

SEBI’s REMF regulations, existing mutual funds are eligible to

launch real estate mutual funds. The report details basic

objectives of both REIT and REMF investment vehicles which

aim to channelize private investments into real estate in a

professional manner through the institutional mechanism. This

will help investors reap benefits of the growing real estate sector

without the risk of managing realty properties.

“The REMF regulations provide for similar vehicles for collective

investment for the real estate sector, but it provides a much

larger and liberal canvas to REMFs as compared to REIT

regulations,” said Mr. Lakshminarayananan, National Director,

Tax, Deloitte in India. “Although the broad structure of REIT and

REMF is similar, there are certain critical differences in the way

both schemes are managed and regulated. The REMF seems to

be more preferred vehicle in view of beneficial tax treatment and

ability of foreign investors to invest in the schemes of REMF.”

169

The regulations will provide the real estate sector with the much

desired alternate source of raising funds for development

considering the increasing restrictive scenario for generating

income. They will also present alternate avenues to mutual fund

players to expand their product range and diversify their

portfolio.

About Deloitte

Deloitte provides professional services to public and private

clients spanning multiple industries. With a globally connected

network of member firms in 140 countries, Deloitte brings world-

class capabilities and deep local expertise to help clients succeed

wherever they operate. Deloitte's 150,000 professionals are

committed to becoming the standard of excellence.

Deloitte's professionals are unified by a collaborative culture that

fosters integrity, outstanding value to markets and clients,

commitment to each other, and strength from cultural diversity.

They enjoy an environment of continuous learning, challenging

experiences, and enriching career opportunities. Deloitte's

professionals are dedicated to strengthening corporate

170

responsibility, building public trust, and making a positive impact

in their communities.

Deloitte in India is spread across 13 locations and its

professionals take pride in their ability to deliver to clients the

right combination of local insight and international expertise.

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a

Swiss Verein, and its network of member firms, each of which is

a legally separate and independent entity

Globalizatio

n

171

Divided?

Global Investment Trends of U.S.

Manufacturers

A Deloitte Research Global Manufacturing Study

Global investment trends

of U.S. manufacturers

172

Amid prolonged global economic slowdown and recession in

many parts of the world, U.S. manufacturers’ foreign direct

investment (FDI) dropped just 1 percent from about US$30

billion in 2002 to US$29 billion in 2003; down more than 32

percent from a high of US$43 billion in 2000 (Figure 1).1 The

lower levels of FDI flows since 2000 may in part be explained by

a drop in outward U.S. manufacturing cross border M&A activity,

which declined from nearly US$53 billion in 1999 to less than

US$16 billion in 2002; recovering to US$28 billion in 2003

(Figure 2).2 Another contributing factor may be a decrease in

reinvested earnings (a measure of retained profits) at foreign

affiliates, which have fallen

gradually since they peaked in 2000.

Figure No. 1 Page no. 72 fdi report pdf

Figure No. 2 Page no. 72 fdi report pdf

Globalization divided?

173

The slowdown in overseas manufacturing investments by U.S.-

based multinationals, however, has been anything but

uniformly spread around the world. Our research suggests an

emerging global investment “divide.” While FDI into high wage

countries has remained fairly steady between 1999 and 2002

(the last four years for which data are available for following

comparative analysis), hovering near US$25 billion per year,

global investments to low-wage countries totaled a mere US$2

billion in 2002, a drop of 83 percent from US$12 billion in 1999

(Figure 3).3

Figure no. 3 page no. 73 fdi report pdf

In our analysis, developed markets continue to get an ever larger

share of investments – now standing at nearly 84 percent based

on 2002 data, and up from 61 percent in 2000 (Figure 4). This

shows the continuing presence of what we call the “high-wage

paradox” (identified in our previous publications on U.S. global

174

investments), which is in sharp contrast with the current

perception of the role of FDI as a means for wholesale re-location

of manufacturing production, sourcing, and engineering

activities to low-wage locations.

Figure no. 4 page no. 73 fdi report pdf

This is not a phenomenon reserved for just a few global

industries. In industries as diverse as chemicals and

pharmaceuticals, computers and electronics products, and

transportation equipment, we see similar patterns of divergence

in global investments.

Most U.S. manufacturers are putting their investment bets on

the developed markets of Western Europe, North America

(Canada), and Asia-Pacific (including Australia and Singapore),

and are making only limited direct investments in emerging, low-

cost locations where outsourcing and joint ventures, which

175

require less capital commitments, are becoming the order of the

day. For example, U.S. manufacturing FDI into China fell to just

US$500 million in 2002, down nearly 70 percent from US$1.6

billion in 2001.

One reason for the dramatic slowdown in manufacturing FDI into

low-wage locations may be that companies increasingly are using

arm’s length, contractual means to source in those locations,

rather than, say, establishing (through green-field investments)

or acquiring their own facilities, including plants, equipment,

distribution facilities, and office buildings.

While this trend towards outsourcing more and more of the value

added in manufacturing companies to suppliers is a long-

standing one, it seems to have had a more dramatic impact on

low-wage, emerging market FDI. This may be due in particular to

the perceived and real challenges and risks in those markets

from such differences as currency, legal protection, culture, and

language. What’s more, arm’s length transactions through

outsourcing and spot purchasing allow for an easier switch to

176

another supplier should anything go wrong or new opportunities

appear. And, because of the increasing standardization of

business processes as well as widespread improvements in

communications technology that include lower prices and higher

quality, operating global networks through contractual means is

becoming relatively more attractive.

The long-term implications for U.S. manufacturing multinationals

and their competitiveness in global markets, however, are worth

considering. As the hub of global manufacturing is moving

towards low-wage nations in general and the Asia-Pacific region,

including China in particular, innovation in product and process

capabilities and technology is likely to move along as well.4

Without a strong foothold in those capabilities, many U.S.

multinationals are risking their future competitiveness to short-

to medium-term cost savings. Without more direct control and

influence over a greater share of their manufacturing capabilities

in low-wage nations, they are in effect creating competitors on a

massive scale. Not only are these competitors fast learning the

ropes of global competition, they are also headquartered in areas

177

that are likely to remain global low-cost locations for years to

come – in particular, due to continued access to lower-cost,

highly skilled, and abundant labor resources. On the marketing

and sales side, lower direct investments into emerging, but fast-

growing economies could mean losing out on future growth

opportunities and the possibility of learning effectively from

leading customer groups in those markets to drive innovation

efforts.

Global industry trends

According to our preliminary estimates for 2003, the food and

kindred products, chemicals and pharmaceuticals, industrial

machinery, primary and fabricated metals, and transportation

equipment industries all experienced decreases in FDI by U.S.

manufacturers (Figure 5). The only bright spots were in the high

tech segment and “other manufacturing” segments.

178

Global investments in the computer and electronic products

industry, after suffering two consecutive drops from a record

high of US$17 billion in 2000 to US$8.7 billion in 2001 and just

US$900 million in 2002, are expected to have regained some

momentum to US$4.6 billion during 2003 as the global high-tech

recession is bottoming-out and showing signs of recovery.

Consolidation continued to be strong in 2003 as high-tech

companies strived to gain market share in an industry of fewer

and more powerful companies. This included 3M’s acquisition of

the Sumitomo 3M Ltd unit of Japan-based NEC Corp. in a deal

worth US$380 million.5 Intel also engaged in significant M&A

activity in 2003 and contributed to increased global FDI

investments through its purchases of Canada-based optical

networking chip maker, West Bay Semiconductor, as well as the

high-performance computing division of Pallas, a German

software development tools and services company.6

After dropping from a peak of US$2.1 billion in 2000, foreign

direct investment into the electrical equipment, appliances,

and components sector is expected to have recovered

179

somewhat in 2003, rebounding to over US$460 million from its

lowest level thus far of US$60 million in 2002. General Electric

contributed in part to this rebound with its acquisition in 2003 of

Belgium’s Agfa Gevaert NV (a photographic and optical

equipment manufacturer) for US$450 million.7

Moreover, global investments in “other manufacturing” (a

category that includes the beverages, paper, petroleum and coal,

plastics and rubber, and medical equipment and supplies

sectors) industries are expected to have increased 15 percent

from US$9.3 billion in 2002 to a high of US$10.6 billion in 2003.

In the face of divestments such as Pfizer’s sale of its Adams

confectionary business unit to U.K.-based Cadbury Schweppes

for US$4.3 billion,8 U.S. manufacturers’ overseas investments in

this sector have remained strong, such as Constellation Brands’

purchase of Australia’s BRL Hardy LTD for US$1.1 billion.9

After steadily increasing since 1999, FDI in the food sector is

expected to show its first decline from US$3.9 billion in 2002 to

US$3.1 billion in 2003. U.S. manufacturing FDI into the global

180

chemicals and pharmaceuticals industries captured the bulk

of manufacturing investments overseas in 2003. According to our

estimates, investments slowed 12 percent to US$8.9 billion in

2003, down from US$10.1 billion in 2002. M&A activity in the

chemicals and pharmaceuticals industries remains an important

factor as companies are fine-tuning their new product pipelines

and ensuring the R&D, production, and distribution capabilities

to sustain them.

Figure no. 5 page no. 74 fdi report pdf

Highlights of the cross-border M&A activity in these industries

include Merck & Co. Inc.’s acquisition of Banyu Pharmaceutical

Co. Ltd. (Japan) for US$1.5 billion;10 Du Pont (EI) de Nemours &

Co.’s purchase of 24 percent of DuPont Canada Inc. in a deal

worth US$977 million;11 and King Pharmaceuticals Inc.

obtaining the Primary Care business unit of Ireland-based Elan

Corp. PLC for US$900 million.12 Other major overseas

acquisitions impacting net FDI flows in this sector include Chiron

181

Corp.’s acquisition of Powderjet Pharmaceuticals PLC (UK) in a

deal worth US$810 million;13 Huntsman Holdings LLC’s

purchase of Luxembourg’s Vantico Group SA for US$720

million;14 Northern Ireland’s Galen Holding PLS’ acquisition of

Estrostep Loestrin & Femhrt Businesses of Pfizer Inc for

US$484 million;15 and Switzerland-based Synthes-Stratec AG’s

purchase of Spine Solutions Inc. for US$350 million.16

In addition to the weakening global investments into the food

and chemicals and pharmaceuticals sectors, our preliminary

2003 estimates indicate significant declines in FDI by U.S.

manufacturers into the industrial machinery, metals, and

transportation equipment industries. Investment flows in

machinery, after increasing 119 percent

to US$200 million in 2002 from a negative US$800 million in

2001, are expected to have plummeted again to a negative

US$200 million in 2003 (effectively a reduction in FDI stock).

After increasing 45 percent from US$1.3 billion in 2001 to

US$1.8 billion in 2002, foreign direct investment into the metals

sector is projected to have decreased in 2003 to its lowest level

yet, a negative US$1.0 billion, as companies experienced higher

182

input cost and shortages of steel and scrap metals. FDI in the

transportation equipment industry is shown to have continued

its decline to US$2.7 billion in 2003, down from US$3.2 billion in

2002 and nearly US$8 billion in 2000. M&A activity in this

industry appears to be slowing as automakers and suppliers

struggle to remain profitable in overseas locations.17

Regional trends

Preliminary 2003 data is not available by region and country, so

here we will analyze actual 2002 results, the latest year for

which such detailed data on the destination of FDI is available.

U.S. manufacturing FDI into most regions fell in 2002 (Figure 6).

Europe remained the top destination for U.S. manufacturing FDI

despite a decline in investments from US$17.7 billion in 2001 to

US$15.7 billion in 2002. Canada became the largest country

recipient of U.S.

manufacturing FDI in 2002. U.S. manufacturing investments into

Canada rose nearly 84 percent from US$4.9 billion in 2001 to a

high of US$9 billion in 2002 (Figure 7). The United Kingdom was

183

not far behind as the second major destination of U.S.

manufacturing FDI, making its strongest showing since 1999

with global investments of US$6.8 billion in 2002. For the second

straight year, the Netherlands came in third place worldwide

with US$3.8 billion in U.S. manufacturing FDI (Figures 7 and 8).

Figure no. 6 page no. 75 fdi report pdf

Figure no. 7 page no. 76 fdi report pdf

Figure no. 8 page no. 76 fdi report pdf

Foreign direct investment into Europe in 2002 was driven by

continued high levels of investments in the chemicals and

pharmaceuticals sectors as well as in the “other manufacturing”

sector (Figure 9). Increases in the

transportation equipment, food, and machinery industries also

contributed significantly to FDI into Europe (Figure 9). The

biggest drop in FDI into Europe was a 123 percent fall in FDI in

the computer and electronics segment – from US$6.6 billion in

2001 to a negative US$1.5 billion in 2002. After falling

184

drastically by 58 percent in 2001 from its high of US$12.9 billion

in 2000, FDI into Asia-Pacific further decreased 24 percent to

US$4.1 billion in 2002 (Figure 6). Australia made a strong

comeback from a negative US$600 million in 2001 to US$1.1

billion in 2002, becoming the top destination for FDI in the Asia-

Pacific region and the only major bright spot on the map (Figure

10). FDI into Malaysia increased more than 300 percent from its

2001 low of US$200 million to US$890 million in 2002, barely

inching past Singapore to hold the spot as the second-largest

destination for FDI in the region. Singapore came in third with

US$887 million in U.S. manufacturing FDI, a 67 percent

decrease from its lead of US$2.7 billion the previous year.

Figure no. 9 page no. 77 fdi report pdf

Figure no. 10 page no. 77 fdi report pdf

From an industry perspective, the metals industry showed the

most significant increase, from a negative US$1.3 billion in 2001

185

to US$1.2 billion in 2002, becoming the leading industry in the

Asia-Pacific region (Figure 11). In addition to the food industry

which gained slightly to reach nearly US$200 million in 2002,

the transportation equipment industry experienced an increase

in the region as automakers and suppliers continue their pursuit

of new, fast-growing markets and cheaper sources of supply.

Meanwhile, investments into the computer and electronic

products industry fell drastically, from US$2.5 billion in 2001 to

just US$600 million in 2002.

Figure no. 11 page no. 78 fdi report pdf

U.S. manufacturing FDI into Latin America, which has been

steadily declining since its high of US$8.2 billion in 1999, fell by

another 67 percent in 2002 to just US$600 million (Figure 6).

Venezuela was the only country to demonstrate an increase,

doubling investments to US$400 million in 2002 (Figure 12).

Global investments were the highest in “other manufacturing,”

186

increasing 104 percent to US$2.1 billion in 2002, and the lowest

in the computer and electronic products industry, falling to a

negative US$1.5 billion in 2002 (Figure 13).

Figure no. 12 page no. 79 fdi report pdf

Figure no. 13 page no. 79 fdi report pdf

In the Middle East and Africa region, Israel and South Africa

both experienced significant decreases in U.S. manufacturing

FDI from 2001 to 2002 – with a 66 percent drop in Israel and a

128 percent decline in South Africa (indicating a net outflow of

investment). (Figure 14.) After a significant 87 percent decline of

FDI into Central and Eastern Europe in 2001, investment

picked up, reaching US$372 million in 2002 as manufacturers

started to prepare for the accession of many Central and Eastern

European countries to the European Union on May 1, 2004

(Figure 15).

187

Figure no. 14 page no. 80 fdi report pdf

Figure no. 15 page no. 80 fdi report pdf

Conclusion

While FDI flows dipped slightly to US$29 billion in 2003, the

overseas FDI stock of U.S. manufacturers (the value of

investment flows accumulated over time) continued its upward

march, reaching nearly US$422 billion (very

conservatively estimated) at the beginning of 2004. (See

Appendix.) Given the enormous size of existing investments

overseas, U.S. manufacturing FDI flows are poised to continue

their long-term upward trend as foreign affiliates regain their

profitability and as economic slowdowns and recessions give way

to growth and rising investments (Figure 1). Nevertheless, the

globalization of U.S. manufacturing is at a crossroad. Are

188

manufacturers going to leave investment opportunities in

emerging markets to foreign competitors and indigenous firms

and concentrate their investment spending in tried and true

markets in the developed world, as our analysis suggests they

are starting to do? Or, will they start tosee the opportunities they

may be missing and take a riskier – but potentially more strategic

– course and redirect FDI to the fast-growing, low-wage

economies of South and Southeast Asia, Latin America, and

Central and Eastern Europe that are capturing an increasing

share of global manufacturing output

and consumption?

With the surging wave of outsourcing and companies that are on

the lookout for opportunities everywhere, these two major

choices will play out in the coming years. While an “asset light”

investment strategy for low-wage economies may be an

attractive option for manufacturers seeking to increase their

return on assets, minimize fixed costs, and increase flexibility, it

also presents a challenge for companies to retain their global

competitiveness against a new wave of manufacturers rooted in

very dynamic, low-cost, and fast-growing markets which are

189

likely to foster a strong breeding ground for new technologies

and new business models. Missing out on those opportunities

may come at a very high cost – the long-run loss of competitive

advantage. Managing those opportunities more proactively

through

greater investments and involvement may mean more complex

operations and more assets committed; however, as

we have seen from recent research across both North American

and Western European multinationals, the payoff

can be significant if the capabilities to master global complexity

are in place.18

Endnotes

1 Preliminary estimate by Deloitte Research based on data

from the U.S. Department of Commerce, Bureau of

Economic Analysis. With this study, the classification of

industries for the years 1999 to 2003 is based on the North

American Industry Classification System (NAICS) rather

190

than the previously used Standard Industry Classification

(SIC) system. Due to this change in the industry

classification of data, the results in this year’s study are not

directly comparable to those of prior years in which

industry classification was based on the SIC system.

2 Cross-border M&A activity may have a delayed impact on

FDI flows as international capital flows associated with the

deals may occur in a period of time after the initial deal

date. Thus, rising cross-border M&A activity in 2003 may

show up in the relevant FDI flows in subsequent years.

3 High-wage economies are defined as those with average

hourly manufacturing wages above US$10.00 in 1995 as

measured by the U.S. Department of Labor, Bureau of

Labor Statistics (BLS) and annually adjusted by the BLS

inflation calculator. Low-wage economies are defined as

those with hourly wages at US$10.00 and below in 1995

with similar annual adjustments. High-wage economies

include Australia; Austria; elgium; Canada; Denmark;

191

Finland; France; Germany; Ireland; Israel; Italy; Japan;

Luxembourg; Netherlands; New Zealand; Norway; Spain;

Sweden; Switzerland; and the United Kingdom. Low-wage

economies include Brazil; China; Greece; Hong Kong;

Korea; Mexico; New Zealand; Portugal; Singapore; Spain;

Sri Lanka; and Taiwan.

4 For evidence from North American and Western European

companies’ shift of sourcing, manufacturing, and

engineering to low-cost locations over the next three years,

see Deloitte Research, Mastering Complexity in Global

Manufacturing: Powering Profits and Growth through Value

Chain Synchronization (New York and London: Deloitte,

2003).

5 “Letter from Japan - 3M acquisition,” Design Engineering,

March 10, 2003.

6 “The 10 most powerful companies in networking,” Network

World, December 22, 2003. The terms of both deals were

not disclosed.

192

7 “Agfa unit sale to support core business, expansion,”

Reuters News, December 23, 2003.

8 “Bars and stripes,” Marketing Week, November 6, 2003.

9 “Constellation Brands Inc.: Net rises 29% on strong sales of

wine, favorable beer prices,” The Wall Street Journal,

January 7, 2004.

10 “Merck, a textbook case of pharmaceutical industry woes,”

Drug Week, January 2, 2004.

11 “E.I. du Pont de Nemours finishes DuPont Canada takeover

bid,” National Post, September 10, 2003.

12 “Highlights of pharmaceutical mergers and acquisitions

during 2003,” Pharma Marketletter, January 5, 2004.

13 Steven Syre, “Biotech for believers,” The Boston Globe,

May 29, 2003.

193

14 “Vantico-Huntsman merger gets go-ahead,” Agence Europe,

June 24, 2003.

15 “Drugs purchase drives Galen sales,” Yorkshire Post,

November 11, 2003.

16 “Synthes-Stratec agrees to acquire Spine Solutions, Inc., a

leading developer of total spine disc replacement,” Business

Wire, February 6, 2003.

17 Retained earnings fell from US$2.9 billion in 2000 down to

just US$.3 billion in both 2001 and 2002.

18 See Deloitte Research, Mastering Complexity in Global

Manufacturing: Powering Profits and Growth through Value

Chain Synchronization (New York and London: Deloitte,

2003). While only 7 percent of manufacturers studied could

be defined as “complexity masters,” they were up to 73

194

percent more profitable than all other groups of companies

studied.

Author

Peter Koudal

Director

Deloitte Research

Tel: +1 212 492 4275

E-mail: pkoudal@deloitte.com

Acknowledgments

Deloitte Research is grateful for the contributions to this global

study by Nadine Trinh.

About Deloitte Research

Deloitte Research identifies, analyzes, and explains the major

issues driving today’s business dynamics and shaping

195

tomorrow’s global marketplace. From provocative points of view

about strategy and organizational change to straight

talk about economics, regulation, and technology, Deloitte

Research delivers innovative, practical insights companies

can use to improve their bottom line performance. Operating

through a network of dedicated research professionals, senior

consulting practitioners, and academic and technology partners,

Deloitte Research exhibits deep industry knowledge, functional

expertise, and a commitment to thought leadership. In

boardrooms and business journals,

Deloitte Research is known for bringing new perspective to real-

world concerns.

For more information about Deloitte Research, please contact

the Global Director, Ajit Kambil, at + 617 437 3636

or via e-mail: akambil@deloitte.com.

Recent Thought Leadership

196

_ Mastering Complexity in Global Manufacturing:

Powering Profits and Growth Through Value Chain

Synchronization

_ The Challenge of Complexity in Global Manufacturing:

Critical Trends in Supply Chain Management

_ Profiting From Continuous Differentiation in the

Global Chemicals Industry

_ Globalization on Hold? Global Investment Trends of

U.S.Manufacturers

_ Integrating Demand and Supply Chains in the Global

Automotive Industry

_ The High-Tech Industry and the Relationship

Portfolio: A Strategic Approach to Dynamic Partnering

_ Global Manufacturing 100

_ Performance Amid Uncertainty in Global

Manufacturing: Competing Today and Positioning for

Tomorrow

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_ Digital Loyalty Networks: e-Differentiated Supply Chain

and Customer Management

Please visit www.deloitte.com/research for our

latest thought leadership or contact us at:

delresearch@deloitte.com.

For Further Information,

Please Contact

Global

Richard Gabrys

Tel: +1 313 396 3251

e-mail: rgabrys@deloitte.com

Ed Carey

Tel: +1 312 374 3048

e-mail: ecarey@deloitte.com

198

Igal Brightman

Tel: +972 3 608 5500

e-mail: ibrightman@deloitte.co.il

Americas

Doug Engel

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Europe, Middle East and Africa

Wim Vaessen

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199

Tel: +44 20 73038648

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Asia Pacific

Ted Lee

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e-mail: tedlee@deloitte.com

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Tel: +852 3416 2721

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About Deloitte

Deloitte, one of the nation’s leading professional services firms,

provides audit, tax, financial advisory services and consulting

through nearly 30,000 people in more than 80 U.S. cities. Known

as an employer of choice for innovative human resources

programs, the firm is dedicated to helping its clients and its

people excel. “Deloitte” refers to the associated partnerships of

Deloitte & Touche USA LLP (Deloitte & Touche LLP and Deloitte

Consulting LLP) and subsidiaries. Deloitte is the US member firm

of Deloitte Touche Tohmatsu. For more information, please visit

Deloitte’s web site at www.deloitte.com/us. Deloitte Touche

Tohmatsu is an organization of member firms devoted to

excellence in providing professional services and advice. We are

focused on client service through a global strategy executed

locally in nearly 150 countries. With access to the deep

intellectual capital of 120,000 people worldwide, our member

firms, including their affiliates, deliver services in four

professional areas: audit, tax, financial advisory services and

consulting. Our member firms serve more than one-half of the

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world’s largest companies, as well as large national enterprises,

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growing global growth companies. Deloitte Touche Tohmatsu is a

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by the member firms and not by the Deloitte Touche Tohmatsu

Verein. For regulatory and other reasons certain member firms

do not provide services in all four professional areas listed above.

202

ANNEXURE – III

INDIA:

FOREIGN DIRECT

INVESTMENT

203

Policy and Procedures

PRICEWATERHOUSECOOPERS

PricewaterhouseCoopers Pvt. Ltd., India (PwC) is one of the

largest and most reputed professional services network in the

country, providing industry-focused services to public and

private clients. PwC specialists connect their thinking,

experience and solutions to build public trust and enhance value

for clients and their stakeholders. PwC in India has offices in

angalore, Kolkata, Chennai, Hyderabad, Mumbai, New Delhi,

Bhubaneswar and Pune. The Inward Investment Advisory Group

of PricewaterhouseCoopers in India works with international

204

companies, regulators and policy making authorities to provide

focused solutions and assistance for setting up operations in

India.

For further information, please contact:

Vivek Mehra, Executive Director

PricewaterhouseCoopers Pvt. Ltd.

Sucheta Bhawan, 11-A, Vishnu Digamber Marg

New Delhi - 110 002

Ph: +91 11 2321 0542

Email: vivek.mehra@in.pwc.com

India - Overview

IMPORTANT STATISTICS

Size: 3.3 Million sq kms. World’s 7th largest

nation

Population: Over 1 Billion people, World’s 2nd most

populous

nation

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Political set up: Parliamentary democracy since

independence

from British rule in 1947

Written Constitution: Preamble: “Justice - social, economic

and

political, liberty of thought, expression,

belief, faith and worship, equality of status

and opportunity, and to promote among

them fraternity assuring the dignity of

individual and the unity of the Nation”.

Fundamental Rights: Guaranteed by the Constitution.

State Religion: Secular State - there is no state religion

Directive principles of: Promotion of peoples’ welfare in a

social

State Policyorder

Union of India: 28 Federal States and 7 Union Territories.

Parliament: Two Houses - Lok Sabha (Lower House)

and Rajya

Sabha (Upper House).

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Head of State: President

Head of Government: Prime Minister

Independent Judiciary:

Supreme Court - highest judicial authority in India

High Court - head of judicial hierarchy in the

State.

Language: Official language is Hindi, but

English is used for official

purposes and is widely read and

spoken.

IMPORTANT LAWS GOVERNING BUSINESS

India has an exhaustive legal framework governing all aspects of

business. Some of the important ones include:

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Corporate

Companies Act, 1956: Governs all Corporate Bodies.

Competition Act, 2002: Law to ensure free and fair

competition

in the market.

Consumer Protection Act, 1986: Law relating to

protection of

consumers from unscrupulous

traders/manufacturers.

Environment Protection Act, 1986: Provides framework for

seeking environmental clearances.

Foreign Exchange Management

Act, 1999: Regulates foreign exchange

transactions

including foreign investment.

Labour

Factories Act, 1948: Law regulating labour in factories.

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Industrial Disputes Act &

Workmen Compensation Act

Labour laws dealing with disputes: Industries (Development &

Regulation) Act, 1951

Governs all industries.

Dispute Settlement

Arbitration and Reconciliation

Act, 1996: Law relating to alternate

redressal of disputes

amongst parties.

Taxation

Central Excise Act, 1944: Governs duty levied on

manufacture.

Customs Act, 1962: Deals with import regulations.

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Customs Tariff (Amendment)

Act, 2003: The Act puts in place a

uniform commodity classification code

based on globally adopted

nomenclature system for use in all

trade-related transactions.

Income Tax Act, 1961: Governs direct taxes on income of

all

persons, both corporate and non-

corporate as well as residents and non-

residents.

Sales Tax Act, 1948: Governs the levy of tax on sales.

Sector Specific

Electricity Act 2003: Regulates generation,

transmission,

distribution, trading and use of

electricity and generally for taking

measures conducive to development of

electricity industry, promoting

competition therein, protecting

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interests of consumers and supply of

electricity to all areas.

Securitisation and Reconstruction of

Financial Assets and Enforcement of

Security Interest Act, 2002 Seeks to put in place securitisation

and asset foreclosure laws creating a

legal framework for establishment of

Asset Reconstruction Companies.

Other Laws

Information Technology

Act, 1999: Law governing E-commerce

transactions.

Money Laundering Act: Prevents money laundering and

provides

for confiscation of property derived

from, or involved in, money laundering.

Patents Act, Copyright Act,

Trade Marks Act: Protect intellectual property

rights.

Special Economic Zones

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Act, 2005: A comprehensive Act : Provides for the

establishment, development and

management of the Special Economic

Zones for the promotion of exports and

for matters connected therewith or

incidental thereto.

Provides for fiscal and economic incentives for developer of /

units in SEZ.

HIGHLIGHTS OF INDUSTRIAL POLICY

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The Industrial Policy Resolution of 1956 and the Statement on

Industrial Policy of 1991 provides the basic framework for the

overall industrial policy of the Indian Government. In fact, the

process of liberalisation started in India with the Statement on

Industrial Policy of 1991. We outline below those aspects of the

Industrial Policy which are of interest and relevance for a first-

time investor into India.

Licensing

Since 1991 the Government has substantially removed

bureaucratic control on industry. Licensing has been completely

abolished except in :

• Two (2) Units reserved for public sector - atomic energy and

railways

• Five (5) industries in which Industrial Licensing is compulsory

viz., hazardous chemicals, industrial explosives, distillation and

brewing of alcoholic drinks, all types of electronic aerospace and

defence equipment, cigarettes;

• Manufacture of items reserved for Small Scale Sector;

• Proposals attracting locational restrictions.

• The exemption from Licensing also applies to all substantial

expansion of existing units.

• Procedure for Obtaining Industrial Licence

• All industrial undertakings subject to compulsory industrial

licensing are required to submit an application in the prescribed

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format, i.e. FC-IL, to the Entrepreneurial Assistance Unit of SIA,

Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry, Udyog Bhawan, New Delhi – 110011.

• The application should be submitted along with a crossed

demand draft of US$ 55 (INR 2500/-) drawn in favour of the Pay

& Accounts Officer, Department of Industrial Policy and

Promotion, Ministry of Commerce & Industry, payable at State

Bank of India, Nirman Bhawan, New Delhi.

• Approvals are generally given within 4-6 weeks of filing the

application.

Industrial Entrepreneurs Memorandum (IEM)

Industrial undertakings exempt from industrial licence, including

existing units undertaking ubstantial expansion, are required to

file an IEM in Part A with the SIA, Department of Industrial

Policy and Promotion, Government of India, and obtain an

acknowledgment. No further approval is required. Immediately

after the commencement of commercial production, Part B of

IEM has to be filed in the prescribed format. The facility for

amendment of existing IEMs has also been provided.

Procedure

(a) The IEM can be submitted to the EAU of the SIA in person or

by post along with a crossed demand draft of INR 2,000/-

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(approx. US$ 20) drawn in favour of “The Pay & Accounts

Officer, Department of Industrial Policy & Promotion, Ministry of

Commerce & Industry”, payable at New Delhi for up to 10 items

proposed to be manufactured in the same unit. For more than 10

items, an additional fee of INR 250 (approx. US$ 5-6) for up to 10

additional items needs to be paid

through crossed demand draft.

(b) A computer acknowledgement containing the SIA

Registration Number (for future reference) is issued across the

counter immediately, if delivered in person, or sent by post, if

received through post. No further approval from SIA is required.

(c) All Industrial undertakings also need to file information in

Part ‘B’ of the IEM at the time of commencement of commercial

production to EAU in SIA. No fee is required for filing part B. All

industrial undertakings whether exempt or not from compulsory

industrial licensing, are required to submit a monthly production

return in the proforma at the following address every month, so

as to reach the Industrial Statistics th Unit (ISU) by the 10 of the

following month, along with a copy to the concerned

Administrative Ministry/ Department Authorities.

Joint Director

Industrial Statistics Unit (ISU)

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Department of Industrial Policy & Promotion

Room No. 326, Udyog Bhawan

New Delhi – 110 011

Fax: + 91 - 11 - 2301 4564

This information is used to compile the Index of Industrial

Production (IIP).

Details and the prescribed format are available at the website:

http://dipp.nic.in.

In the case of small scale industrial undertakings, the monthly

production return should be submitted to the appropriate State

Government or Commissioner of Industries and to the

Department of Small Scale and Agro & Rural Industries,

Government of India along with a copy to the Small Industries

Service Institute.

(e) An IEM would be cancelled/deleted from the SIA records if,

on scrutiny, it is found that the proposal contained in the IEM is

licensable.

Location

Industrial Approval is required from the Central Government for

industries proposed to be located in cities with a population of

more than one million (as per 1991 census).

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• Industries of polluting nature may be located outside 25 km of

the periphery of cities with opulation of more than one million, or

in prior designated Industrial Areas. Local zoning, land use

regulations and environmental regulations also apply.

• Industries like Electronics, Computer software and Printing are

exempt from such locational restriction.

Policy relating to Small-Scale Undertakings

A small-scale industrial (SSI) unit is an industrial undertaking

having an investment of less than INR 10 million (approx. US$

0.22 million) in plant and machinery.

• Equity from an industrial undertaking (either foreign or

domestic) up to 24% is permitted in the small-scale sector. SSI

status is lost if equity from another company (including foreign

equity) exceeds 24% unless the Industrial Undertaking

undertakes an export obligation of 50%.

• There are 506 items reserved for the small-scale sector ranging

from food and allied industry to glass and ceramic products.

• Manufacture of items reserved for the small-scale sector

requires an industrial licence.

• SSI units enjoy a number of concessions, privileges and

preferences such as excise duty exemption / concession up to

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specified limits on turnover, inapplicability of some labour laws,

concessional finance from scheduled banks, etc.

Procedure for Obtaining Carry on Business Licence

A small scale unit manufacturing small scale reserved item(s), on

exceeding the small scale investment ceiling in plant and

machinery by virtue of natural growth, needs to obtain a

Carryon-

Business (COB) Licence. No export obligation is fixed on the

capacity for which the COB licence is granted. However, if the

units expands its capacity for the small scale reserved item(s)

further, it needs to apply for and obtain a separate industrial

licence.

The application for COB licence should be submitted in revised

form “EE”, which can be downloaded from the web site

(http://dipp.nic.in) along with a crossed demand draft of INR

2,500 (approx. US$ 55) drawn in favour of the Pay & Accounts

Officer, Department of Industrial Policy & Promotion, Ministry of

Commerce & Industry, payable at New Delhi.

The cities with population of more than one million (as per 1991

census) are as under:

1. Greater Mumbai U.A

7. Ahmedabad U.A 13. Jaipur U.A 19. Madurai U.A

2. Kolkata, U.A 8. Pune U.A 14. Kochi U.A 20. Bhopal M.C3. Delhi U.A 9. Kanpur U.A 15. Coimbatore U.A 21. Visakhapatnam

U.A

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4. Chennai U.A 10. Nagpur U.A 16. Vadodara U.A 22. Varanasi U.A5. Hyderabad U.A 11. Lucknow U.A 17. Indore U.A 23. Ludhiana M.C6. Bangalore U.A 12. Surat U.A 18. Patna U.A

Note: U.A = Urban Area M.C = Municipal Corporation

Foreign Investments in India -Routes and Facilitating Authorities

The Indian Government’s attitude towards foreign investment has changed significantly during the past decade. Until the 1980s, foreign investment was permitted only in cases where a desiredtechnology was not obtainable on any other terms. With the introduction of the Statement on Industrial Policy of 1991, the government began taking a more liberal attitude. Automatic approval was granted in specified high-priority industries for up to 51 per cent direct foreign investment and in trading companies engaged primarily in export activities. In 2000, the Foreign Direct Investment (FDI) policy was further liberalised and now foreign investment up to 100 per cent for new and existing companies / firms, is permitted under the automatic route (i.e. without requiring prior approval) for all items/activities except for a few specific sectors.

Government Policy on Foreign Equity Investment

Foreign investment is allowed in all areas other than the following sectors in which foreign investment is prohibited:• Retail Trading• Atomic Energy• Lottery Business/ Gambling & Betting• Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture and cultivation of vegetables, mushrooms etc.)• Plantations (excluding Tea plantation) For all other sectors, there are two approval routes forforeign investment in India:

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• automatic route under delegated powers exercised by the Reserve Bank of India (RBI),• approval by the Government through the Foreign Investment Promotion Board (FIPB) under the Ministry of Finance.

Automatic RouteForeign Direct Investments (FDI)

• FDI up to 100 per cent for new and existing companies/joint ventures /firms, is permitted under the automatic route for all items/activities except the following:

– proposals that require compulsory industrial licensing– where the foreign collaborator has an existing venture/tie-up in India in the same field (‘same field’means 1987 NIC code) as on January 12, 2005, with the exception of following cases which would not require prior FIPB approval :– Investment by a Venture Capital Fund registered with 1 SEBI– Existing joint venture has less than 3% investment by either party– Existing joint venture is defunct or sick– acquisition of shares held by resident shareholders of an existing Indian company in the following cases :– Indian company is engaged in financial services sector;– Where SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 is triggered.– proposals falling outside notified sectoral policy/caps or sectors in which FDI is not permitted (please refer to Chapter 4 for details)• Downstream investment Subsequent investment in India by foreign-owned Indian holding companies (commonly referred to as “Downstream investments”) are allowed in accordance with the FDIguidelines mentioned above. Prior approval of FIPB is required to act as a holding company. Domestic funds cannot be leveraged by the foreignowned Indian holding company for downstream investments.• Procedure for Automatic Route

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The foreign investor is not required to obtain any prior approval. Only a post facto filing is required to be made by the company in India which is receiving the foreign investment. This filing entails submission of notifications to the concerned regional office of RBI in the prescribed form within 30 days of receipt of inward remittances and within 30 days after issue of shares by the Indian company to the foreign investor.

Investment by Non Resident Indians (NRIs)

• For all sectors excluding those falling under Government Approval, NRIs (which also includes Persons of Indian Origin - PIOs) are eligible to bring investment through the automatic route of RBI. The Government through the FIPB considers all other proposals, which do not fulfill any or all of the criteria for automatic approval.

• Further, under the non-repatriation scheme (i.e. capital is not repatriable outside India), NRIs are permitted to invest even in those sectors where sectoral caps are prescribed under the FDI policy. NRIs are also permitted to purchase and sell shares/convertible debentures under the portfolio investment scheme through a branch designated by an authorised dealer for the purpose and duly approved by the RBI, subject to fulfillment of certain conditions.

· The total holding by each NRI cannot exceed 5% of the total paid up equity capital or 5% of the paid up value of each series of convertible debentures issued by an Indian company. Further, the total holdings of all NRIs put together cannot exceed 10% of paid up equity capital or paid up value of each series of convertible debentures. This limit of 10% may be increased to 24% by the concerned Indian company by sanction of the shareholders through a special resolution.

FIPB Route

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• For all cases of Foreign Investment where the project does not qualify for automatic approval, as given above, prior approval is required from the FIPB under the Ministry of Finance.

• The proposal for foreign investment is decided on a case-tocase basis depending upon the merits of the case and in accordance with the prescribed sectoral policy (please refer to Chapter 4 for details).

• Generally, preference is given to projects in high priority industries, infrastructure sector, those having export potential, large-scale employment opportunities, linkages with agro sector, social relevance or relating to infusion of capital and induction of technology.

• Dividends are freely repatriable (i.e. without any foreign exchange neutrality conditions).

• Procedure for FIPB Route

Applications should be submitted in either Form FC-IL or a plain paper giving all necessary details of the proposal. No fee is payable. The proposal submitted to FIPB should include information on whether the applicant has had or has any existing financial / technical collaboration or trade markagreement in India in the same field for which approval has been sought along with details and justification for proposing the new venture.

Decision of the FIPB is conveyed within 30 days of submitting the application. For a review of the factors that FIPB takes into account for granting FDI approvals, please refer to Annexure 1.

Government Policy on Foreign Technology Transfer

For promoting an industrial environment which accords priority to the acquisition of technological capability, foreign technology induction is encouraged both through FDI and through foreign

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technology collaboration agreements. Foreign collaboration agreements are permitted either through the automatic approval route or with prior approval from the Government.

Automatic Approval

No prior approval is required in respect of all those foreigntechnology agreements, which involve:

• a lump sum payment of up to US$ 2 million

• royalty payable up to 8 per cent on exports and 5 per cent 2 on net domestic sales , subject to a total payment of 8 per cent on sales over a 10 year period, without any restriction on the duration of royalty payments

• Within the overall cap of 8 per cent / 5 per cent as above, royalty is payable up to 2 per cent for exports and 1 per cent for domestic sales on use of trademarks and brand name of 3 the foreign collaborator without technology transfer.

Procedure

A post-facto filing of the foreign technology collaboration agreement is required to be made to the concerned regional office of RBI.

Government Approval

Government approval from the Ministry of Industry is necessary for the following categories of foreign technical collaboration agreements:• Proposals attracting compulsory licensing (please refer to Chapter 2 for details)• Items of manufacture reserved for the small-scale sector• Proposals where the foreign collaborator has an existing venture/tie-up in India in the same field (‘same field’ means 1987

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NIC code) as on January 12, 2005, (certain exceptions have been outlined earlier)• Proposals not meeting any or all of the parameters for automatic approval• It is permissible for a Company registered in India to issue equity shares against lumpsum fee and royalty in convertible foreign currency already due for payment / repayment, subject to meeting all applicable tax liabilities and procedures.

Procedure

Applications in respect of such proposals should be submitted in Form FC-IL to the Secretariat for Industrial Assistance, Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi. After due consideration by the Project Approval Board, the decision is conveyed within 4 to 6 weeks of filing the application.

Hiring of Foreign Technicians / Personnel

Indian firms/companies may engage the services of foreign nationals on short-term assignments without prior approval of RBI. However, the following conditions should be satisfied:• The foreign national rendering services in India holds a valid visa i.e. employment, business, tourist etc. (a valid employment visa is essential in case the stay of foreign national in India exceeds three months).

• The amount of remittance sought for such services is in accordance with the terms of contract entered into by the applicant firm/company with the foreign national/company.

Foreign nationals/ Indian citizens who are not permanently resident in India and have been deputed by a foreign company to its office / branch / subsidiary / JV in India are allowed to make recurring remittances abroad for family maintenance up to 100% of their net salary. Further, up to 75% of salary of a foreign national/ Indian citizen deputed by a foreign company to its Indian office / branch / subsidiary / JV can be paid abroad by the

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foreign company subject to the foreign national / Indian citizen paying applicable taxes in India.

Investment by Way of Acquisition of Shares

Foreign investors looking at acquiring equity in an existing Indian company through stock cquisitions can do so without obtaining approvals except in financial services sector, provided (i) such investments do not trigger off the takeover provisions under SEBI’s (Substantial Acquisition of Shares and Takeover) Regulations, 1997 and (ii) the non-resident shareholding after transfer complies with sectoral limits under FDI policy.

As per RBI valuation norms, acquisition price should not be lower than• Prevailing market price, in case of listed companies• Fair market value as per Controller of Capital Issues (CCI) valuation guidelines, in case of unlisted companies

Acquisitions may be made from an existing Indian company which is either a privately held company or a company in which public is interested i.e., a company listed on stock exchange, provided a resolution to this effect has been passed by the Board of Directors of the Indian Company.

Acquisition of shares of a public listed company is subject to SEBI guidelines and requires prior approval from FIPB. SEBI’s Take-Over Code Regulations require that any person acquiring 15 per cent or more of the voting capital in a public listed company should make a public offer to acquire aminimum 20 per cent stake from the public.

Investment by Foreign Institutional Investors

A registered Foreign Institutional Investor (FII) may, through SEBI, apply to RBI for permission to purchase the shares and convertible debentures of an Indian company under Portfolio Investment Scheme.

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FIIs are permitted by RBI to purchase shares/convertible debentures of an Indian company through registered brokers on recognised stock exchanges in India. They are also permitted to purchase shares/convertible debentures of an Indian company through private placement/ arrangement.

The total holding by each FII / SEBI approved sub-account of FII cannot exceed 10 per cent of the total paid-up equity capital or 10 per cent of the paid-up value of each series of convertibledebentures issued by an Indian company. Further, the total holdings of all FIIs/sub-accounts of FIIs put together cannot exceed 24 per cent of paid-up equity capital or paid-up value of each series of convertible debentures. This limit of 24 per cent may be increased to the specified sectoral cap / statutory ceiling, as applicable, by the Indian company concerned by passing a Board of Directors’ resolution followed by sanction of the shareholders through a special resolution to that effect.

The FIPB (which functions under the Ministry of Finance) is the nodal agency for all matters concerning Foreign Direct Investment (FDI) as well as its promotion into the country. It maintainsflexibility of purposeful negotiations with investors and considers project proposals in totality, with a view to maximising FDI into the country. The FIPB meets once every week ensuring speedy disposal of applications and communicates the Government’s decision to the applicant within 6 weeks. The main functions of FIPB, inter-alia include:

• Ensuring expeditious clearance of the proposals for foreign investment• Periodically reviewing the implementation of proposals cleared earlier• Reviewing the general and sectoral policy guidelines and in consultation with Administrative Ministries, incorporating a set of transparent rules for each of these sectors• Undertaking investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in appropriate projects.

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The FIPB comprises of:• Secretary, Department of Economic Affairs – Chairman• Secretary, Department of Industrial Policy and Promotion – Member• Secretary, Department of Commerce – Member• Secretary (Economic Relations), Ministry of External Affairs – MemberOther Secretaries and top officials of financial institutions, banks, and professional experts of industry and commerce, are co-opted onto the FIPB as and when necessary.For more details, visit the website athttp://finmin.nic.in/the_ministry/dept_eco_affairs/fipb/fipb_index.htm

Secretariat for Industrial Assistance (SIA)

The SIA, functioning with the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, acts as a gateway to industrial investment in India. It provides a single window clearance for Entrepreneurial Assistance and facilitates the processing of investors’ applications requiring government approval. Broadly SIA:

• Assists entrepreneurs and investors in setting up projects and monitors the implementation of these projects;• Liaises with State Governments and other governmental bodies for seeking necessary clearances;• Notifies all Government policy relating to investment and technology.

For more details, visit the website at http://dipp.nic.inThis web site has the facility of online chat between 4.00 pm to 5.00 pm (Indian Standard Time: GMT+5 ½ hrs; summer time: 4½ hrs) on all working days where investors can ask questions relatingto FDI Policies and related issues

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. Foreign Investment Implementation Authority (FIIA)

The FIIA is also constituted within the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. FIIA aims at facilitating:• Quick implementation of FDI approvals;• Resolution of operational difficulties faced by foreign investors, in consultation with the concerned Ministries/State Governments (for this purpose Fast Track Committees have been set up in 30 Ministries / Departments – details of these Committees are available at the website http:/dipp.nic.in).

Direct Contact with Investors

FIIA periodically writes to the approval holders of FDI mega projects (with investment of US$ 21 million or more), which are under implementation to get a direct feedback on any difficulties being faced by them in the implementation of their projects, which can be followed by FIIA with respective Ministries/State Governments. All fresh FIPB approvals issued since September 2001 contain information on FIIA and its e-mail address (fiia@ub.nic.in) for investors to approach FIIA in case of any difficulties. Investors experiencing difficulties in the implementation of their projects can also approach FIIA through the website (http://dipp.nic.in)

Investment Commission

Investment Commission was established in 2004 for attracting domestic and foreign investors to India. The Commission is delegated broad powers authorising it to engage in, discuss and invite both domestic and foreign businesses to invest in the country. The Commission acts as the single window facilitator for investors coming into India.

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Reserve Bank of India (RBI)The RBI, India’s central bank, was established on April 1, 1935 and nationalised on January 1, 1949. Its basic purpose is to secure monetary stability and develop India’s financial structure in line with national socio-economic objectives and policies. The main functions of RBI are as follows :

• Formulate, implement and monitor the monetary policy to ensure flow of credit to productive sectors.• Prescribe parameters of banking operations within the country’s banking and financial system functions.• Administer external trade and payment, for promoting orderly development and maintenance of foreign exchange market in India.The RBI also acts as a banker to Central/State Governments, commercial banks, state cooperative banks and some financial institutions. Further, RBI acts as an agent of the Government in respect of India’s membership of International Monetary Fund.

For more details, visit the website at www.rbi.org.in

Investment Facilitation ChannelsBusiness Ombudsperson

To facilitate expeditious redressal of grievances and attend to complaints relating to delays in grant and implementation of industrial approvals and facilitate their disposal, the Government has appointed the Additional Secretary & Financial Adviser, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi- 110011, as BUSINESS OMBUDSPERSON [e mail: nc@ub.nic.in].

Grievances Officer-cum Joint Secretary

Grievances and complaints are received by the Grievances Officer-cum-Joint Secretary, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi-110011, either through post or through the mail box. Any such communication is handled speedily and appropriate steps are taken to redress the grievance.

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Summary of Guidelines for Foreign

Direct Investment in Specific Sectors

Prior to 2000, foreign direct investment (FDI) was allowed up to

specified percentages (50 per cent, 51 per cent and 74 per cent)

in certain specific sectors only and all other sectors were closed

to FDI. In 2000, with a view to promoting foreign investment and

aligning the Indian economy with the global economy, the FDI

policy was inversed to permit FDI in all sectors with the

exception of a few sectors in which FDI is either prohibited or

restricted.

The prevailing FDI limits for different sectors are as follows.

Advertising and Films

Advertising industry: FDI is permitted up to 100 per cent

through the automatic route.

Film industry: FDI in all film-related activities, such as film

financing, production, distribution, exhibition, marketing etc., is

230

permitted up to 100 per cent for all companies under the

automatic route.

Agriculture (including plantation)

No FDI/NRI/OCB investment is permitted in agriculture, other

than in Tea sector (including tea plantations), wherein 100 per

cent FDI is allowed. Proposals for FDI in tea plantations, require

prior approval of the FIPB and are subject to the following

conditions

• Compulsory disinvestment of 26 per cent equity in favour of an

Indian partner/Indian public within a period of five years

• Prior approval of the State Government is required for any

future change in land use.

Atomic Energy

Under this sector, the following three activities are permitted to

receive FDI/NRI investments after approval from the FIPB:

• Mining and mineral separation,

• value addition per se to the mining and mineral separation

products,

• Integrated activities (comprising of both the above).

FDI up to 74 per cent is permitted in both pure value addition

and integrated projects.

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For pure value addition projects as well as integrated projects

with value addition up to any intermediate stage, FDI is

permitted up to 74 per cent through joint venture companies

with

Central/State PSUs in which equity holding of at least one PSU is

not less than 26 per cent. However, in exceptional cases, FDI

beyond 74 per cent will be permitted subject to clearance of the

Atomic Energy Commission before FIPB approval.

Banking

74 per cent from all sources on automatic route in private sector

banks, subject to RBI guidelines. (Also refer Annexure 2)

Broadcasting

TV software production

100per cent FDI permitted subject to:

• All future laws on broadcasting and no claim of privilege or

protection by virtue of approval accorded

• Not undertaking any broadcasting from Indian soil without

Government approval

Setting up hardware facilities such as Uplinking Hubs, etc.

FDI limit up to 49 per cent inclusive of both FDI & Portfolio

Investment to set up linking hub (teleports) for leasing or hiring

out their facilities to the broadcasters.

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Cable Networks

FDI limit up to 49per cent inclusive of both FDI & Portfolio

Investment. Companies with minimum 51per cent of paid up

share capital held by Indian citizens, are eligible for providing

cable TV services under the Cable Television Network Rules

(1994).

Direct-To-Home

Maximum 49 per cent foreign equity including FDI/ NRI//FII.

Within the foreign equity, FDI component should not exceed

20per cent.

Terrestrial Broadcasting FM

Licensee has to be a company registered in India under the

Companies Act. No direct investment is allowed by foreign

entities and NRIs. Limited portfolio investments by FII / NRI /

PIO is permitted, subject to such ceiling as may be decided from

time to time; at present the prescribed ceiling is 20 per cent.

Terrestrial TV

No private operator is permitted.

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Note : 26 per cent cap is imposed for purposes of uplinking from

India with respect to all forms of foreign investment in TV

channels devoted to news and current affairs. The investment

cap does not apply to pure entertainment channels.

Cigarettes

Up to 100 per cent foreign equity is allowed subject to industrial

licensing. Automatic route is not available.

Civil Aviation

In the Domestic Airlines sector, FDI up to 49 per cent is

permitted. However, no direct or indirect equity participation by

foreign airlines is allowed. NRI investment is permitted upto 100

per cent, but the automatic route is not available.

In case of Airports, FDI is permitted up to 100 per cent (FDI

beyond 74 per cent requires FIPB approval).

Coal and Lignite

FDI is permitted up to 100 per cent for private Indian companies,

which set up or operate power projects and coal or lignite mines

for captive consumption.

A company setting up coal processing plants is allowed FDI up to

100 per cent subject to compliance with the condition that it will

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not do coal mining and supply the washed or sized coal to parties

supplying raw coal to coal processing plants instead of selling it

in the open market.

Exploration or mining of coal or lignite for captive consumption

permits FDI up to the limit of 74 per cent.

FDI is permitted up to 50 per cent under the automatic route in

all the above cases subject to the condition that such investment

shall not exceed 49 per cent of the equity of a PSU.

Drugs and Pharmaceuticals

FDI up to 100 per cent in the case of bulk drugs, their

intermediates and formulations thereof, is allowed under the

automatic route.

However, FIPB approval is required for manufacture of bulk

drugs by the use of recombinant DNA technology and specific

cell/tissue targeted formulations and those that require

compulsory licensing.

Defence

FDI, including NRI investment, in this sector is permitted up to

26 per cent subject to prior approval of the government and

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compliance with the security and licensing requirements and

guidelines issued by the Ministry of Defence.

According to the guidelines for production of arms and

ammunitions, the management of the applicant company/

partnership should be in Indian hands with majority

representation on the Board as well as the Chief Executive being

resident Indians. Further, there would be a three year lock-in

period for transfer of equity from one foreign investor to another

foreign investor.

Hotels and Tourism

FDI in this sector is permitted up to 100 per cent on the

automatic route. For foreign technology agreements, automatic

approval is granted if:

• Up to 3 per cent of the capital cost of the project is proposed to

be paid for technical and consultancy services

• Up to 3 per cent of the net turnover is payable for franchising

and marketing/publicity fee, and

• Up to 10 per cent of gross operating profit is payable for

management fee, including incentive fee.

Insurance

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FDI in the insurance sector is permitted up to 26 per cent under

the automatic route subject to obtaining license from the

Insurance Regulatory & Development Authority (IRDA).

Lottery Business, Gambling & Betting

FDI / foreign technical collaboration in any form is prohibited in

Lottery Business, Gambling & Betting.

Mass Rapid Transport System

FDI up to 100 per cent is allowed under the automatic route in

mass rapid transport systems, including associated real estate

development, in all metropolitan cities.

Mining

FDI is allowed up to 100 per cent under the automatic route for

activities such as exploration and mining of gold and silver (and

minerals other than diamonds and precious stones), metallurgy

and processing.

For exploration and mining of diamonds and precious stones, FDI

is allowed up to 74 per cent under the automatic route. For

companies which seek to set up 100 per cent wholly owned

subsidiaries in the mining sector, permission may be given

subject to the condition that the applicant has no existing joint

venture for the same area and/or the particular mineral.

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Non-banking Financial Services

FDI/NRI investments allowed in 19 specified activities subject to

minimum capitalisation norms indicated below: (i) Merchant

Banking (ii) Underwriting (iii) Portfolio Management services (iv)

Investment Advisory Services (v) Financial Consultancy (vi)

Stock Broking (vii) Asset Management (viii) Venture Capital (ix)

Custodial Services (x) Factoring (xi) Credit Reference Agencies

(xii) Credit Rating Agencies (xiii) Leasing and Finance (xiv)

Housing Finance (xv) Forex Broking (xvi) Credit Card Business

(xvii) Money Changing Business (xviii) Micro Credit (xix) Rural

Credit.

Minimum Capitalisation Norms (Foreign Equity

• US$ 0.5 million upfront - where the foreign equity is upto 51

per cent .

• US$ 5 million upfront - where the foreign equity is more than

51per cent but upto 75 per cent.

• US$ 50 million (US $ 7.5 million upfront and US $ 42.5 million

in 24 months) - where the foreign equity is more than 75 per

cent.

For non-fund based NBFCs, the minimum capitalisation norms

has been fixed at US $ 0.5 million.

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Foreign investors bringing in at least US $ 50 million have now

been permitted to set up 100 per cent operating subsidiaries

without having to disinvest a minimum of 25 per cent of its

equity to Indian entities. Joint Venture operating NBFCs, having

up to 75 per cent foreign investment, have been allowed to set

up subsidiaries for undertaking other NBFC activities, subject to

the subsidiaries complying with the minimum capitalisation

norms.

FDI in this sector is permitted under the automatic route subject

to compliance with the guidelines issued by RBI.

Petroleum

Other than Refining

100per cent FDI is permitted under the automatic route in

respect of the following: -

• Oil Exploration in small and medium sized fields subject to the

government policy on private participation in exploration of oil

and the discovered fields of national oil companies.

• Petroleum Product Pipeline Sector

• Petroleum Products Marketing

• In case of Natural Gas / LNG Pipeline, 100per cent FDI is

permitted under the non-automatic route.

Refining

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In case of a Public Sector Units (PSUs), FDI is limited to 26 per

cent (26 per cent being held by PSUs and balance 48 per cent by

public). In case of private Indian companies, FDI up to 100 per

cent is permitted under the automatic route.

Pollution Control and Management

For activities like manufacture of pollution control equipment

and consultancy for integration of pollution control systems, FDI

is permitted up to 100 per cent under the automatic route.

Ports and Harbours

Up to 100 per cent FDI is allowed through the automatic route

for construction and maintenance of ports and harbours (BOT

projects).

Postal Services

FDI up to 100 per cent is permitted for courier services

excluding distribution of letters, subject to grant of prior

approval by the government.

Power

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FDI in the power sector is permitted up to 100 per cent, in

respect of projects relating to electricity generation,

transmission and distribution, other than atomic reactor power

plants. There is no limit on the project cost and quantum of the

FDI.

Print Media

In the non-news / non-current affairs category and speciality

publication entities, FDI up to 74 per cent is allowed. This would

allow publication of Indian editions of foreign scientific, technical

and specialty magazines / periodicals / journals. In the case of

scientific and technical journals, FDI up to 100 per cent is

permitted.

In the news and current affairs category, for instance

newspapers, FDI has been allowed up to 26 per cent. However,

this is further subject to certain conditions:

• The largest shareholder must hold at least 51per cent equity;

• Three – fourth (3/4) of directors and all executive and editorial

staff have to be resident Indians.

Real Estate

FDI up to 100% under the automatic route is permitted in :

• Townships

• Housing

• Built-up infrastructure

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• Construction-development projects (including but not

restricted to – Housing, Commercial premises, Hotels, Resorts,

Hospitals, Educational institutions, Recreational facilities, City

and regional level infrastructure).

subject to certain conditions (such as minimum area to be

developed, minimum capitalisation to be US$ 10 million for a

wholly owned subsidiary and US$ 5 million for a JV with an

Indian partner – minimum 3 years lock-in from the completion of

capitalisation).

However, investment by NRIs is permitted in the following

additional activities:

• Investment in manufacture of building material, which is also

open to FDI.

• Investment in participatory ventures in the above activities,

and

• Investment in housing finance institutions (which is also open

to FDI as NBFC).

Roads and Highways

Investment by the private sector, including FDI, is permitted up

to 100 per cent through the automatic route for the construction

and maintenance of roads, highways, vehicular bridges and

tunnels and toll roads.

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Satellite

FDI up to 74 per cent with prior FIPB approval is permitted for

establishment and operation of satellites.

Telecommunications

FDI is permitted up to

· 74 per cent in basic, cellular, paging, value-added services and

global mobile personal communication by satellites, subject to

grant of licence from Department. of Telecommunications.

· 74 per cent for telecom activities such as ISPs with gateways,

radio-paging and end-to-end bandwidth,.

· 100 per cent in ISPs not providing gateways, Infrastructure

Providers providing dark fibre, electronic mail and voice mail,

subject to the condition that such companies would divest 26 per

cent of their equity in favour of the Indian public in 5 years

(provided these companies are listed in other parts of the world).

Proposals beyond 49 percent shall be considered by FIPB on a

case-to-case basis. These services would be subject to licensing

and security requirements, wherever required.

· FDI up to 100 per cent is allowed in the manufacturing sector

under the automatic route.

Trading

Foreign investment for trading can be approved through the

automatic route up to 51per cent provided it is primarily export

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activities, and the undertaking is an export house/trading house/

super trading house/ star trading house registered under the

provisions of the Export Import Policy (EXIM) in force. 100per

cent FDI is also permitted subject to FIPB approval, for the

following activities:

• Exports

• Bulk imports with ex-port/ex-bonded warehouse sales

• Cash and carry wholesale trading

• Other import of goods/services foreign equity subject to the

condition that at least 75per cent is for procurement and sale of

goods and services among the companies of the same group and

not for third party use or onward transfer/distribution/sales

• Domestic wholesale trading of products manufactured by the

foreign investor’s existing joint venture(s) in India

• Providing after sales services (provide the same does not entail

import of spare parts/components and supplying the same

domestically)

• Trading of hi-tech items, items requiring specialised after sales

services, hi-tech medical and diagnostic items, and items for

social sector;

• Domestic sourcing of products for exports

• Test marketing of items for which company has approval for

manufacture subject to a time period of 2 years, provided

investment in setting up manufacturing facilities commences

simultaneously with test marketing

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• Trading of items sourced from small scale sector under which,

based on technology provided and laid down specifications, a

company can market that item under its brand name.

FDI up to 100 per cent is permitted for E-commerce activities

subject to the conditions that such companies, if listed in other

parts of the world, divests 26 per cent of their equity in favour of

the Indian public in five years and that these companies engage

only in business-to-business (B2B) e-commerce.

Venture Capital Fund (VCF) and Venture Capital Company (VCC)

Offshore venture capital funds / companies are allowed to invest

in domestic venture capital funds / companies subject to SEBI’s

investment norms and other regulations.

Mobilisation of Funds and Significant

Exchange Control RegulationsInvestment through Global Depository Receipts

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(GDRs) / American Depository Receipts (ADRs) /Foreign

Currency Convertible Bonds (FCCBs)

Indian companies are permitted to raise capital in the

international market through the issue of GDRs/ADRs/FCCBs,

subject to certain restrictions. Foreign investment through

GDRs/ADRs/FCCBs is also treated as FDI.

Issue of ADRs / GDRs does not require any prior approvals (from

Ministry of Finance / FIPB or RBI) except where the FDI after

such issue would exceed the sectoral caps (as specified under

Automatic Route on page10), in which case prior approval from

FIPB would be required.

Issue of FCCBs up to the following ceilings to a person resident

outside India is allowed under the automatic route without

requiring any prior approval from the Government or RBI: -

• US$$ 20 million with minimum average maturity of 3 years

• US$ 500 million with minimum average maturity of 5 years

Mobilisation of Funds through Preference Shares

Companies registered in India can mobilise foreign investment

through issue of preference shares for financing their projects /

industries. Foreign investment through preference shares is

treated as FDI. All preference shares have to be redeemed out of

accumulated profits / fresh capital within a period of 20 years as

246

per Indian Company Law. The proposals are processed either

through the automatic route or FIPB route as the case may be.

The following guidelines apply:

• Foreign investment in preference shares is considered as part

of share capital and falls outside the External Commercial

Borrowings (ECB) guidelines/ caps. Issue of preference shares is

permissible only as rupee denominated instrument in accordance

with Indian Companies Act.

• Preference shares, carrying a conversion option, are

considered as foreign direct equity for purposes of sectoral caps

on foreign equity. If the preference shares are structured without

conversion option, they fall outside the FDI cap.

• The dividend rate should not exceed the limit prescribed by the

Ministry of Finance (currently fixed at 300 Basis Points above

State Bank of India’s Prime Lending Rate)

• Duration for conversion shall be as per the maximum limit

prescribed under the Companies Act (20 years) or what has been

agreed to in the shareholders’ agreement, whichever is less.

• Issue of preference shares should conform to guidelines

prescribed by SEBI (in case of listed Indian companies), RBI and

other statutory requirements.

Mobilisation of Funds through External Commercial

Borrowings (ECBs)

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Companies registered in India (other than financial

intermediaries ) are allowed to raise ECBs from any

internationally recognised source such as banks, Financial

Institutions, export credit agencies, suppliers of equipment,

foreign collaborators, foreign equity holders.

Non-Government Organisations (NGOs) engaged in micro finance

activities are eligible to avail ECB subject to prescribed

conditions. Overseas organisations and individuals may provide

ECB to such NGOs subject to prescribed safeguards.

ECB can be raised from Foreign Equity holders holding the

prescribed minimum level of equity in the Indian borrower

company.

• ECB up to USD 5 million – minimum equity of 25% held directly

by the lender;

• ECB more than USD 5 million – minimum equity of 25% held

directly by the lender and debt-equity ratio not exceeding 4:1

(i.e. the proposed ECB not exceeding four times the direct

foreign equity holding).

A Company can issue equity shares against ECBs in convertible

foreign currency already due for payment / repayment, subject to

meeting all applicable tax liabilities and procedures.

The prevailing ECB policy stipulates certain end-use restrictions.

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• ECB proceeds can only be utilised for – Investment (import of

capital goods, new projects,

modernisation / expansion) in real sector - industrial sector and

infrastructure sector – in India

– Overseas acquisition by Indian Companies

– First stage acquisition of shares in disinvestment process and

in the public offer stage under the Government’s disinvestment

programme.

• ECBs are not permitted for working capital/on-lending /

investment in capital market / in real estate (excluding

integrated townships).

• Utilisation of ECB proceeds is not permitted for on-lending or

investment in capital market or acquiring a company (or a part

thereof) in India by a corporate.

ECBs should be compliant with the prescribed minimum average

maturities:

Minimum 3 years average maturity for ECBs equal to or less

than US$ 20 million equivalent, otherwise 5 years

‘All-in-cost ceiling’ has also been prescribed as given below.

• 3-5 years maturity200 basis points over 6-month LIBOR

• > 5 years maturity350 basis points over 6-month LIBOR

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Guarantees / standby letter of credit by financial intermediaries

are not permitted.

The approval requirements for ECBs have been significantly

liberalised. No prior approvals are required in respect of ECBs

complying with the prescribed minimum maturity and “all-in-

cost”

ceilings. All other ECBs require prior approval from an

empowered committee of RBI.

Indian corporates raising ECBs have to retain the funds abroad

until the time of their utilisation.

The current guideline for prepayment of ECBs states that

prepayment up to US$ 200 million can be done without any

approvals, subject to compliance with the minimum average

maturity of the loan.

Significant Exchange Control Regulations

Exchange control is regulated under the Foreign Exchange

Management Act (FEMA), 1999. The Indian Rupee is fully

convertible for current account transactions, subject to a

negative list of transactions that are prohibited / require prior

approval.

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A foreign-invested Indian company is treated on par with other

locally incorporated companies. Accordingly, the exchange

control laws and regulations for residents apply to foreign-

invested companies as well.

Under the FEMA, foreign exchange transactions have been

divided into two broad categories - current account transactions

and capital account transactions. Transactions that alter the

assets

or liabilities outside India of a person resident in India or in

India, of a person resident outside India have been classified as

capital account transactions. All other transactions would be

current

account transactions.

Current Account Transactions

Prior approval of the RBI is required for acquiring foreign

currency above certain limits for the following purposes:

• Holiday travel over USD 10,000 per person p.a.

• Gift over USD 5,000 / donation over USD 10,000 per remitter /

donor p.a.

• Business travel over USD 25,000 per person per visit

• Foreign studies as per estimate of institution or USD 100,000

per academic year, whichever is higher

• Consultancy services procured from abroad over USD

1,000,000 per project

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• Remittance for purchase of Trade Mark / Franchise

• Reimbursement of pre incorporation expenses over USD

100,000 In certain specified cases, prior approval of the

concerned ministry is needed for drawal of foreign exchange,

such as: -

• Remittance of freight of vessel chartered by a PSU,

• Payment of import through ocean transport by a Government.

Department or a PSU on C.I.F basis

• Multi-modal transport operators making remittance to their

agents abroad Certain specified remittances are prohibited:

• Remittance out of lottery winnings

• Remittance of income from racing / riding etc. or any other

hobby

• Remittance for purchase of lottery tickets, banned / prescribed

magazines, football pools, sweepstakes etc

• Payment of commission on exports made towards equity

investments in Joint Ventures/ Wholly Owned subsidiaries abroad

of Indian Companies.

• Payment of commission on exports under the Rupee State

Credit Route

• Payment related to “Call Back Services” of telephones

Capital Account Transactions

Repatriation of Capital

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Capital account transactions can be undertaken only to the

extent permitted. RBI has prescribed a list of capital account

transactions, which inter alia include the following:

• transfer or issue of any foreign security by a resident/ security

by a non resident;

• borrowing/ lending in foreign exchange;

• export/ import of currency;

• transfer / acquisition of immovable property in / outside India;

• remittances exceeding USD 25,000 p.a. (over and above

ceilings prescribed for other remittances mentioned above) by a

resident individual for any current account or capital account

transaction.

Repatriation of Capital

Foreign capital invested in India is generally repatriable , along

with capital appreciation, if any, after the payment of taxes due

on them, provided the investment was on repatriation basis

Acquisition of immovable property in India: Generally foreigners

are not permitted to acquire immovable property except in

certain cases, where the property in required for the business of

the Indian branch / office / subsidiary of the foreign entity.

NRI/PIOs are also permitted to acquire certain properties.

253

Royalties and Technical Know-how Fees: Indian companies that

enter into technology transfer agreements with foreign

companies are permitted to remit payments towards know-how

and royalty

under the terms of the foreign collaboration agreement, subject

to limits (Please refer to Chapter 3).

Dividends: Dividends are freely repatriable after the payment of

Dividend Distribution Tax by the Indian company declaring the

dividend. No permission of RBI is necessary for effecting

remittance, subject to specified compliances

Other Remittances: No prior approval is required for remitting

profits earned by Indian branches of companies (other than

banks) incorporated outside India to their Head Offices outside

India. Remittances of winding-up proceeds of a branch / liaison

office of a foreign company in India are permitted subject to RBI

approval. Remittances of winding-up proceeds of a project office

of a foreign company in India are permitted under the automatic

route subject to fulfillment of necessary compliances.

Netting

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The RBI does not permit netting of payments for remittances and

requires that all accruals from overseas be repatriated into the

country.

Outbound Investment Regulations

Direct Investment by Indian parties in Joint Ventures (JVs) and

Wholly Owned Subsidiaries (WOS) abroad is encouraged. Such

overseas investment by Indian parties can be made by way of

setting up wholly owned subsidiaries, taking up equity in a joint

venture company or for acquisition of overseas business,

provided the overseas JV or WOS is engaged in a bona fide

business activity.

Resident corporates and registered partnership firms can invest

in a joint venture/wholly owned subsidiary abroad on an

automatic basis, without prior reference to RBI up to a total

value of

investment not exceeding 200 per cent of its net worth (as on the

date of last audited balance sheet of the investing company) in a

single financial year provided:

• Investment is in a bona fide business activity;

• Investment is not in a foreign entity engaged in real estate or

banking business.

255

• The funding of such investments can be by one or a

combination of the following sources:

• Balances in EEFC accounts of investing companies; · Other

domestic resources including loans, equity and other contingent

liabilities like guarantees;

• Proceeds of ADR/GDR issues by investing company;

· Proceeds of ECB raised by the investing company.

The investment ceiling of 200 per cent of net worth does not

apply where investment is made out of EEFC account balance or

ADR/GDR proceeds.

Proposals for overseas investment not falling under the

automatic route as given above, have to be referred to the RBI

for prior approval.

Entity Options in India

A foreign company looking at setting up operations in India has

the following alternative options for formulating its entry

strategy: Through:

Operating as an Indian Company

• Wholly owned subsidiaries

• Joint Ventures

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A foreign company can set up a wholly owned subsidiary

company in India for carrying out its activities. Such subsidiary is

treated as an Indian resident and an Indian Company for all

Indian

regulations (including Income Tax, FEMA and Companies Act),

despite being 100per cent foreign owned. At least two

shareholders are mandatory.

Joint Venture with an Indian Partner preferably with majority

equity participation

Though a wholly owned subsidiary has been the most preferred

option, foreign companies have also been setting up shop in India

by forging strategic alliances with Indian partners. The trend in

this

respect is to choose a partner who is in the same field/area of

activity and has sufficient experience and expertise in his line of

activity.

The foreign investment guidelines for setting up an Indian

subsidiary company or participating in a joint venture company

with an Indian partner have been discussed in Chapter 3.

Incorporation of a Company

Incorporation of a company with the Registrar of Companies

(“RoC”) is a two-step process:

257

1. Obtaining approval from RoC for the name of the Indian

Company. Minimum 4 alternative names are required to be given

for consideration. The name of the company should clearly

reflect the main objects of the company.

2. Drafting Memorandum and Articles of Association of the

Company and obtaining Certificate of Incorporation.

Operating as a Foreign Company

Through:

• Liaison Office

• Project Office

• Branch Office

Setting up a liaison or representative office is a common practice

for foreign companies seeking to enter the Indian markets. Prior

approval from RBI is required for setting up a Liaison Office

followed by registration with the RoC. The role of such offices is

limited to collecting information about the possible market and

providing information about the company and its products to

prospective Indian customers. Such offices act as “Listening and

transmission posts” and provide a two-way information flow

between the foreign company and the Indian customers. A liaison

office is not allowed to undertake any business activity other

than liaison activities in India and cannot, therefore, earn any

income in India, in terms of the approval granted by RBI.

Project Office

258

Foreign companies planning to execute specific projects in India

can set up temporary project /site offices in India for this

purpose. RBI has granted general permission to a foreign entity

for setting up a project office in India, subject to fulfillment of

certain conditions. The foreign entity only has to

furnish a report to the jurisdictional Regional Office of RBI giving

the particulars of the project / contract and register the Project

Office with the RoC.