World Investment Report 2006
The content of this fact sheet, released in conjunction with WIR06, must not be quoted, or summarized in the press, radio, or on television before:
FDI flows
EMBARGO
Foreign direct investment (FDI) overview, selected years
17:00 hrs GMT on 16 October 2006.
(Millions of dollars and percentages)
FDI stocks
CONFÉRENCE DES NATIONS UNIES SUR
LE COMMERCE ET LE DÉVELOPPEMENT
UNITED NATIONS CONFERENCE
ON TRADE AND DEVELOPMENT
Country fact sheet: India
as a percentage of gross fixed capital formation
1990-2000 2002 2003 2004 2005 1990-2000 2003 2004 2005
(Annual average) (Annual average)
India
Inward 1 705 5 627 4 585 5 474 6 598 1.9 3.4 3.1 3.5
Outward 121 1 679 1 325 2 024 1 364 - 1.0 1.1 0.7
Memorandum
China
Inward 30 104 52 743 53 505 60 630 72 406 11.3 8.6 8.0 9.2
Outward 2 195 2 518 - 152 1 805 11 306 1.0 - 0.2 1.4
Pakistan
Inward 463 823 534 1 118 2 183 5.1 4.2 7.5 13.0
Outward 5 28 19 56 44 - 0.1 0.4 0.3
South Asia
Inward 2 533 6 982 5 729 7 301 9 765 2.3 3.5 3.4 4.3
Outward 124 1 722 1 378 2 092 1 456 - 0.8 1.0 0.6
Asia and Oceania
Inward 76 616 96 244 110 489 157 328 199 951 8.0 7.7 9.4 11.1
Outward 37 352 34 726 18 995 83 446 83 584 3.9 1.4 5.0 4.7
Developing economies
Inward 134 670 163 583 175 138 275 032 334 285 8.9 9.3 10.7 12.8
Outward 56 580 49 742 35 566 112 833 117 463 3.3 1.6 4.8 5.1
World
Inward 495 391 617 732 557 869 710 755 916 277 7.6 7.3 7.7 9.4
Outward 492 566 539 540 561 104 813 068 778 725 7.7 7.4 9.3 8.3
as a percentage of gross domestic product
1980 1990 2000 2004 2005 1990 2000 2004 2005
India
Inward 452 1 657 17 517 38 676 45 274 0.5 3.8 5.7 5.8
Outward 78 124 1 859 7 080 9 569 - 0.4 1.0 1.2
Memorandum
China
Inward 1 074 20 691 193 348 245 467 317 873 5.4 17.9 14.9 14.3
Outward .. 4 455 27 768 35 005 46 311 1.2 2.6 2.1 2.1
Pakistan
Inward 691 1 892 6 919 8 218 10 401 3.6 9.8 8.8 8.8
Outward 40 245 489 731 775 0.5 0.7 0.8 0.7
South Asia
Inward 1 699 4 602 28 414 52 499 61 982 1.1 4.7 6.0 6.2
Outward 118 423 2 503 8 037 10 617 0.1 0.4 0.9 1.1
Asia and Oceania
Inward 58 668 193 774 1 066 419 1 310 910 1 555 076 9.0 26.5 23.9 23.2
Outward 16 351 68 230 614 605 755 520 874 305 3.3 15.3 13.8 13.0
Developing economies
Inward 137 147 370 314 1 756 394 2 349 348 2 756 916 9.8 26.3 27.9 27.0
Outward 72 307 148 715 871 040 1 120 008 1 273 612 4.1 13.0 13.3 12.5
World
Inward 561 403 1 789 303 5 802 933 9 544 887 10 129 739 8.5 18.3 23.3 22.7
Outward 571 228 1 791 092 6 471 435 10 325 240 10 671 889 8.6 20.5 25.2 23.9
Source: UNCTAD, World Investment Report 2006 ; www.unctad.org/wir or www.unctad.org/fdistatistics
For details, see "definitions and sources" in annex B and annex tables B. 1-3 in WIR06.
FDI from developing and transition economies:
implications for development
Division on Investment, Technology and Enterprise Development
World Investment Report 2006
The content of this fact sheet, released in conjunction
with WIR06, must not be quoted, or summarized in the
press, radio, or on television before:
FDI flows
EMBARGO
Foreign direct investment (FDI) overview, selected years
17:00 hrs GMT on 16 October 2006.
(Millions of dollars and percentages)
FDI stocks
CONFÉRENCE DES NATIONS UNIES SUR
LE COMMERCE ET LE DÉVELOPPEMENT
UNITED NATIONS CONFERENCE
ON TRADE AND DEVELOPMENT
Investment in India - Foreign Direct Investment –
Introduction
Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Foreign Investment through GDRs (Euro Issues)
Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from ministry of finanace.
Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
Restrictions
However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.
Investment in India - Foreign Direct Investment - Approval
Foreign direct investments in India are approved through two routes:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:
foreign equity up to 50% in 3 categories relating to mining activities (List 2).
foreign equity up to 51% in 48 specified industries (List 3).
foreign equity up to 74% in 9 categories (List 4).
where List 4 includes items also listed in List 3, 74% participation shall apply.
The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.
Opening an office in India
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.
The FIPB Route:
Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Total foreign investment and FDI
Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The government is likely to double FDI inflows within two years. Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia.
Foreign institutional investors
Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992.
FII investments
FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets.
Large outflows of capital
Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998.
Openness to Foreign Investment | Foreign Investment-Policy
Investment in India - Foreign Investment - Openness to Foreign Investment
Openness to Foreign Investment
Post-independence scenario
India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.
New policies
The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic approval for foreign equity investments of up to 51 percent, so long as these investments are made in one of 35 "high priority" industries that account for the lion's share of industrial activity.
Hassles earlier
Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.
Constraints: too many
The government on occasion has denied requests for a foreign equity stake exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with NRI majority ownership) may hold 100 percent ownership in all industries except those reserved for the public sector.
These reserved industries are:
arms,
ammunition and defense equipment;
atomic energy;
mineral oils;
minerals used in atomic energy; and
railway transport.
Improved conditions
To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and OCBs may invest on a repatriable basis in new issues of shares/debentures only of industrial or manufacturing companies
Investment in India - Foreign Investment - Foreign Investment- Policy & Legal Procedures
Foreign Investment Policy:
The Ministry of Industry has expanded the list of industries eligible for automatic approval of foreign investments and, in certain cases, raised the upper level of foreign ownership from 51 percent to 74 percent and further in certain cases to 100 percent. In January 1998, the RBI announced simplified procedures for automatic FDI approvals. The announcement further provided that Indian companies will no longer require prior clearances from the RBI for inward remittances of foreign exchange or for the issuance of shares to foreign investors.
Facilitating foreign investment
In the recent budget, the finance minister announced the government's commitment to a 90-day period for approving all foreign investments. Government officers will be assigned to larger foreign investment proposals and will facilitate Central and State clearances in a time-bound manner. Unlisted companies with a good 3 year track record, have been permitted to raise funds in international markets through the issue of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).
A number of recent policy changes have reduced the discriminatory bias against foreign firms.
The government has amended exchange control regulations previously applicable to companies with significant foreign participation.
The ban against using foreign brand names/trademarks has been lifted.
The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65 percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.
The long-term capital gains rate for foreign companies was lowered to 20 percent; a 30 percent rate applies to domestic companies.
The Indian Income Tax Act exempts export earnings from corporate income tax for both Indian and foreign firms.
Other policy changes have been introduced to encourage foreign direct and foreign institutional investment.
For instance, the Securities and Exchange Board of India (SEBI) recently formulated guidelines to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional Investors (FII's). These brokers can now open foreign currency-denominated or rupee accounts for crediting inward remittances, commissions and brokerage fees.
Relaxation
The condition of dividend balancing (offsetting the outflow of foreign exchange for dividend payments against export earnings) has been eliminated for all but 22 consumer goods industries. A 5-year tax holiday is extended to enterprises engaged in development of infrastructural facilities. Even without a registered office in India, foreign companies are allowed to start multimodal transport services in India.
The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the construction of roads/bridges. The peak custom duty rate was reduced to 50 percent from 65 percent in the March 1995 budget. Import regime changes included enhancement of the scope of Special Import License (SIL) programs, and the expansion of freely importable items on the Open General License (OGL) list to include some consumer goods.
Dispute Settlement
Currently, there are no investment disputes over expropriation or nationalization. Government demands for penalty payments for alleged overcharging by pharmaceutical companies during the 1980's could lead to de-facto expropriation of some foreign drug companies' assets in India.
In pharmaceutical sector
A committee has been named to study these longstanding disputes, but the failure of successive governments to produce a swift and transparent resolution has led to a virtual standstill in foreign investment in India's pharmaceutical sector. Indian courts provide adequate safeguards for the enforcement of property and contractual rights.
Case backlogs
However, case backlogs frequently lead to long procedural delays. India is not a member of the International Center for the Settlement of Investment Disputes, nor of the New York Convention of 1958. Commercial arbitration or other alternative dispute resolution (ADR) methods are not yet popular ways of commercial dispute settlement in India. The recent introduction in Parliament of a new Arbitration Bill signals the importance now accorded to this matter by the GOI.
Investment in India - Foreign Investment Promotion Board - Introduction
Introduction
The government of India has set up a special Board known as the Foreign Investment Promotion Board. This specially empowered Board in the office of the Prime Minister, is the only agency dealing with matters relating to FDI as well as promoting investment into the country. It is chaired by Secretary Industry (Department of Industrial Policy & Promotion).
Objective
Its objective is to promote FDI into India by undertaking investment promotion activities in India and abroad by facilitating investment in the country through international companies, non-resident Indians and other foreign investors.
Clearance of Proposals
Early clearance of proposals submitted to it through purposeful negotiation and discussion with potential investors. Reviewing policy and put in place appropriate institutional arrangements and transparent rules and procedures and guidelines for investment promotion and approvals.
The FIPB is expected to meet every week to ensure quick disposal of the cases pending before it. It endeavours to ensure that the Government's decisions on FDI proposals are communicated to the applicant within six weeks. Foreign Investment proposals recieved by the board's secretariat should be put up to the Board within 15 days of reciept and the Administrative Ministries must offer their comments either prior to and/or in the meeting of the FIPB. It would function as a transparent effective and investor friendly single window providing clearance for investment proposals.
Investment in India - Foreign Investment Promotion Board - Composition
The Board will comprise the core group of secretaries to Government and would have the following composition :-
i) Industry Secretary - Chairman, (Secretary Department of Industrial Policy and Promotion), Government of India.
ii) Finance Secretary, Government of India.
iii) Commerce Secretary, Government of India.
iv) Secretary (Economic Relations),
Ministry of External Affairs, Government of India.The Board may coopt other Secretaries to the Government of India and top officials of financial institutions, banks and professional experts of Industry and Commerce, as and when necessary.
Investment in India - Foreign Investment Promotion Board - Functions
The main functions of the Board will be as follows:
a) to ensure expeditious clearance of the proposals for foreign investment;
b) to review periodically the implementation of the proposals cleared by the Board;
c) to review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the Administrative Ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investment in various sectors;
d) to undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects;
e) to interact with the Industry Association/Bodies and other concerned government and non-government agencies on relevant issues in order to facilitate increased inflow of FDI;
f) to identify sectors into which investment may be sought keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts;
g) to interact with the Foreign Investment Promotion Council (FIPC) being constituted seperately in the Ministry of Industry; and
h) to undertake all other activities for promoting and facilitating foreign direct investment, as considered necessary from time to time. The Board will submit its recommendations to the Government for suitable action.
Investment in India - Approvals by Foreign Investment Promotion Board
Approvals
The recommendations of FIPB in respect of the project-proposals each involving a total investment of Rs.600 crores or less would be considered and approved by the Industry Minister.
The recommendations in respect of the projects each with a total investment of above Rs 600 crores would be submitted to the Cabinet Committee on Foreign Investment (CCFI) for decision. The CCFI would also consider the proposals which may be referred to it or which have been rejected by the Industry Minister.
The approval letters in all cases will be issued by the Secretariat of FIPB. The FIPB has accorded approval to the investments of a large number of corporations such as McDonalds, General Electric, Coca-Cola and Fujitsu in the recent past. It normally processes applications within 6 weeks.
Investment in India - Investing in India - Venturing into the Indian Market
Investment in Indian market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
Success in India
Success in India will depend on the correct estimation of the country's potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Entering India's marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
Lack of enthusiasm among investors
The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a sea change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges.
Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India.
Foreign Direct Investment 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 Licence;
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.
1.2 FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes 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. All Press Notes are available at the website of Department of Industrial Policy & Promotion.
1.3 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. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors.
1.4 Automatic Route
All activities which are not covered under the automatic route according to para 2.1 above, prior Government approval for FDI/NRI shall be necessary. Areas/sectors/activities hitherto 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.
1.5 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.
For seeking the approval for FDI other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted to the Department of Economic Affairs (DEA), Ministry of Finance.
1.6 The guidelines for consideration of FDI proposals by the FIPB are at Annexure-I. The sector specific guidelines for FDI and Foreign Technology Collaborations are at Annex II.
1.7 FDI from NRI & for 100% EOU
FDI applications 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.
1.8 Proposals requiring Govt'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. The following information should form part of the proposals submitted to FIPB: -
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; and
If so, details thereof and the justification for proposing the new venture/ technical collaboration (including trademarks).
Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing.
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.
1.9 FDI Prohibited
FDI is not permissible in Gambling and Betting, or Lottery Business, Business of chit fund, Nidhi Company, Housing and Real Estate business, Trading in Transferable Development Rights (TDRs), Retail Trading, Atomic Energy Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations)
1.10 General permission of RBI under FEMA
RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.
The companies are, however, required to notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.
1.11 Besides new companies, automatic route for FDI/NRI investment is also available to the existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements include:
the increase in equity level resulting from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/foreign investors,
the money to be remitted should be in foreign currency and
proposed expansion programme should be in the sector(s) under automatic route. Otherwise, the proposal would need Government approval through the FIPB. For this a Board Resolution of the existing Indian company must support the proposal.
1.12 For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are
that they are engaged in the industries under automatic route;
the increase in equity level must be from expansion of the equity base and
the foreign equity must be in foreign currency.
1.13 The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
1.14 Equity participation by international financial institutions such as ADB, IFC,
CDC, DEG, etc. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI
1.15 ADR/GDR
An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time
The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring
Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.
There is no limit upto which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.
1.16 A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.
1.17 Foreign currency convertible Bonds
FCCBs are issued in accordance with the scheme [the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993] and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments;
1.18 Eligibility
The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is given as under:
An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt
Can issue FCCBs upto USD 50 Million under the Automatic route,
From USD 50 -100 Million, the companies have to take RBI approval,
From USD 100 Million and above, prior permission of the Department of Economic Affairs is required.
1.19 Preference Shares
Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be, as per the following guidelines:
Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap.
Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares structured without such conversion option fall outside the foreign direct equity cap.
Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement whichever is less.
The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.
FDI in EOUs/SEZs/Industrial Park/EHTP/STP
1.20 Special Economic Zones
100% FDI is permitted under automatic route for setting up of Special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB. The procedure mentioned in para 1.8 will be applicable for seeking requisite approval.
1.21 Export Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB. The procedure mentioned in para 1.8 will be applicable for seeking requisite approval.
1.22 Industrial Park
100% FDI is permitted under automatic route for setting up of Industrial Park. The procedure mentioned in Para 1.3 will be applicable.
1.23 Electronic Hardware Technology Park (EHTP) Units All proposals for FDI/NRI investment in EHTP Units are eligible for approval under automatic route subject to parameters listed in Para 1.1. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in Para 1.8.
1.24 Software Technology Park Units
All proposals for FDI/NRI investment in STP Units are eligible for approval under automatic route subject to parameters listed in Para 1.1. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in Para 1.8.
Capitalization of Import Payables
1.25 FDI inflows are required to be under the following modes:
By inward remittances through normal banking channels or
By debit to the specified account of person concerned maintained in an authorized dealer/authorized bank. Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible.
However, Issue of equity shares against lump sum fee, royalty payable and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.
ENTRY OPTIONS FOR FOREIGN INVESTOR
2.1 Entry options
A foreign company planning to set up business operations in India has the following options:
Incorporated Entity
i) By incorporating a company under the Companies Act,1956 through
Joint Ventures; or
Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
Unincorporated Entity
i) As a foreign Company through
Liaison Office/Representative Office
Project Office
Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of branch or office of other place of business) Regulations,2000.
2.2 Incorporation of company
For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
For details please visit the website of Ministry of Company Affairs at : http://dca.nic.in
2.3 Liaison Office/ Representative Office
The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
2.4 Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
2.5 Branch Office
Foreign companies engaged in manufacturingand trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
Export/Import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is engaged.
Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
Representing the parent company in India and acting as buying/selling agents in India.
Rendering services in Information Technology and development of software in India.
Rendering technical support to the products supplied by the parent/ group companies.
Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer.
Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
2.6 Branch office on 'stand alone basis' in SEZ
Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
Application for setting up Liaison Office/ Project Office/ Branch Office may be submitted in form FNC 1 (available at RBI website at www.rbi.org.in)
2.7 Investment in a firm or a propriety concern by NRIs
A non-resident Indian or a person of Indian origin resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided
Amount is invested by inward remittance or out of NRE/FCNR/NRO account maintained with AD
The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income there from.
Amount invested shall not be eligible for repatriation outside India NRIs/PIO may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval of Government /RBI.
2.8 Investment in a firm or a propriety concern by other than NRIs
No person resident outside India other than NRIs/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The RBI may, on an application made to it, permit a person resident outside India to make such investment subject to such terms and conditions as may be considered necessary.
EXCHANGE CONTROL MANAGEMENT
3.1 FEMA
The Reserve Bank of India's Exchange Control Department, administers Foreign Exchange Management Act, 1999, (FEMA) which has replaced the earlier act , FERA, with effect from June 1, 2000. The new legislation is for "facilitating external trade" and "promoting the orderly development and maintenance of foreign exchange market in India". FEMA extends to the whole of India. Under FEMA an Indian company with foreign equity participation is treated at par with other locally incorporated companies. Accordingly, the exchange control laws and regulations for residents apply to foreign-invested companies as well.
3.2 FDI in Indian Company
In terms of Section 6(3)(b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3,2000
GENERAL PERMISSION UNDER FEMA
3.3 Issue of Rights/ Bonus Shares
General permission is available to Indian companies to issue Right/Bonus shares subject to certain conditions.Entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.
3.4 Issue of shares under merger/amagamation
Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank
3.5 Issue of shares under ESOS scheme
A company may issue shares under this Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the SEBI; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company.
3.6 Issue of shares under merger/amagamation
An Indian corporate can raise foreign currency resources abroad through the issue of ADRs or GDRs. Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing GDRs and/ or ADRs, subject to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time
The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.
3.7 Repatriation of investment Capital and profits Earned in India
All foreign investments are freely repatriable except for the cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorised Dealer.
Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through a bank the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/tax clearance certificate issued by Income Tax authorities.
For sale of shares through private arrangements, Regional offices of RBI grant permission for recognized units of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/2000 RB dated 3rd May 2000. The sale price of shares on recognised units is to be determined in accordance with the guidelines prescribed under Regulation 10B(2) of the above Notification.
Profits, dividends, etc. (which are remittances classified as current account transactions) can be freely repatriated.
3.8 Transfer of shares/debentures
A person resident outside India ( Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India ( including NRIs); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India in same field or allied field
NRI or OCB may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India in the same field or allied field
The person resident outside India may transfer any security to a person resident in India by way of gift.
A person resident outside India may sell the shares and convertible debentures of an Indian company on a ecognized Stock Exchange in India through a registered broker.
3.9 Current Account transactions
Prior approval of the RBI is required for acquiring foreign currency above certain limits for the following purposes:
Holiday travel over US$ 10,000 p.a.
Gift / donation over US$ 5,000 / US$ 10,000 per beneficiary p.a.
Business travel over US$ 25,000 per person
Foreign studies as per estimate of institution or US$ 100,000 per academic year
Architectural / consultancy services procured from abroad over US$ 1,000,000 per project
Remittance for purchase of Trade Mark / Franchise
Reimbursement of pre incorporation expenses over US$ 100,000
Remittances exceeding US$ 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.
In certain specified cases, prior approval of the ministry concerned is needed for withdrawal of foreign exchange, such as: -
Remittance of freight of vessel chartered by a PSU,
Payment of import through ocean transport by a Govt. Department or a PSU on C.I.F basis,
Multi-modal transport operators making remittance to their agents abroad.
3.10 Acquisition of Immovable propert by Non-resident
A person resident outside India, who has been permitted by Reserve Bank to establish a branch, or office, or place of business in India( excluding a Laison Office), has general permission of Reserve Bank to acquire immovable property in India , which is necessary for, or incidental to, the activity. However, in such cases a declaration , in prescribed form (IPI), is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable property.
Foreign nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank can not transfer such property without prior permission from the Reserve Bank of India.
3.11 Acquistion of Immovable property by NRI
An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house.He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India.
PORTFOLIO INVESTMENT SCHEME
4.1 PIS
Foreign Institutional Investors(FIIs) registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account
4.2 Foreign Institutional Investors (FIIS)
FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies.
4.3 Regulations Governing PIS
Investment by Foreign Institutional Investors( FIIs) is regulated under SEBI (FII) Regulations , 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3,2000. SEBI acts as the nodal point in the entire process of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate.. RBI approval is also required under FEMA to enable an FII to buy/sell securities on Stock Exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.
4.4 Policy on FII Investments
Main features of the policy on investment by FII are
FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments.
FIIs can buy/sell securities on Stock Exchanges. They can also invest in listed and unlisted securities outside Stock Exchanges where the price has been approved by RBI.
No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company.
All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company.
Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body in terms of Press Release dated Sept.20,2001 and FEMA Notification No.45 dated Sept. 20,2001.
No permission from RBI is needed so long as the FIIs purchase and sell on recognized stock exchange. All non-stock exchange sales/purchases require RBI permission.
4.5 Portfolio Investments by NRIs
NRIs/PIOs are permitted to purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All the sale/purchase transaction are routed through the designated branch.
An NRI can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs taken together cannot purchase more than 10% of the paid up value of the company. This limit can be increased by the Indian company to 24% by passing a General Body resolution.
Investment can be made both on repatriation basis or non-repatriation basis The sale of shares will be subject to payment of applicable taxes.
For details regarding portfolio investment scheme visit the website of RBI at www.rbi.org.in and Security & Exchange Board of India(SEBI) at www.sebi.gov.in.
Foreign Investment
Investment in India - Investing in India - Venturing into the Indian Market
Investment in Indian market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
Success in India
Success in India will depend on the correct estimation of the country's potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Entering India's marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
Lack of enthusiasm among investors
The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a seachange, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges.
Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India.
Developing a basic understanding or potential of the Indian market
The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms.But there is still cause for worries-
Infrastructural hassles.
The rapid economic growth of the last few years has put heavy stress on India's infrastructural facilities. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country's roads are surfaced), low telephone penetration (1.4% of population).
Indian Bureaucracy.
Although the Indian government is well aware of the need for reform and is pushing ahead in this area, business still has to deal with an inefficient and sometimes still slow-moving bureaucracy.
Diverse Market .
The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from beginning to end --performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.
Developing up-front takes:
Market Study
Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competi
Check on Economic Policies
The general economic direction in India is toward liberalization and globalization. But the process is slow. Before jumping into the market, it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns which should be taken into account.
FDI Report
Investment in India - Foreign Direct Investment - Introduction
Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Foreign Investment through GDRs (Euro Issues)
Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
Restrictions
However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.
Investment in India - Foreign Direct Investment - Approval
Foreign direct investments in India are approved through two routes:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:
foreign equity up to 50% in 3 categories relating to mining activities (List 2).
foreign equity up to 51% in 48 specified industries (List 3).
foreign equity up to 74% in 9 categories (List 4).
where List 4 includes items also listed in List 3, 74% participation shall apply.
The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.
Opening an office in India
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.
The FIPB Route:
Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Total foreign investment and FDI
Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The government is likely to double FDI inflows within two years. Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia.
Foreign institutional investors
Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992.
FII investments
FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets.
Large outflows of capital
Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998.
GUIDELINES FOR THE CONSIDERATION OF FOREIGN DIRECT INVESTMENT (FDI) PROPOSALS BY THE FOREIGN INVESTMENT PROMOTION BOARD (FIPB)
(The Guidelines are meant to assist the FIPB to consider proposals in an objective and transparent manner. These would not in any way restrict the flexibility or bind the FIPB from considering the proposals in their totality or making recommendation based on other criteria or special circumstances or features it considers relevant. Besides these are in the nature of administrative Guidelines and would not in any way be legally binding in respect of any recommendation to be made by the FIPB or decisions to be taken by the Government in cases involving Foreign Direct Investment (FDI). These guidelines are issued without prejudice to the Government's right to issue fresh guidelines or change the legal provisions and policies whenever considered necessary.)
These guidelines stand modified to the extent changes have been notified by Secretariat for Industrial Assistance from time to time.
The following Guidelines are laid-down to enable the Foreign Investment Promotion Board (FIPB) to consider the proposals for Foreign Direct Investment (FDI) and formulate its recommendations.
All applications should be put up before the FIPB by the SIA (Secretariat for Industrial Assistance) within 15 days and it should be ensured that comments of the administrative ministries are placed before the Board either prior to/or in the meeting of the Board.
Proposals should be considered by the Board keeping in view the time frame of 30 days for communicating Government decision (i.e. approval of C&IM/CCEA or rejection as the case may be).
In cases in which either the proposal is not cleared or further information is required, in order to obviate delays presentation by applicant in the meeting of the FIPB should be resorted to.
While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-a-vis the proposal(s).
FIPB would consider each proposal in totality (i.e. if it includes apart from foreign investment, technical collaboration/ industrial licence) for composite approval or otherwise. However, the FIPB's recommendation would relate only to the approval for foreign financial and technical collaboration and the foreign investor will need to take other prescribed clearances separately.
The Board should examine the following while considering proposals submitted to it for consideration:
Whether the items of activity involve industrial licence or not and if so the considerations for grant of industrial licence must be gone into;
Whether the proposal involves technical collaboration and if so:- (a) the source and nature of technology sought to be transferred.
Whether the proposal involves any mandatory requirement for exports and if so whether the applicant is prepared to undertake such obligation (this is for items reserved for small scale sector as also for dividend balancing, and for 100% EOUs/SEZ units);
Whether the proposal involves any export projection and if so the items of export and the projected destinations;
Whether the proposal has concurrent commitment under other schemes such as EPCG Scheme etc.
In the case of Export Oriented Units (EOUs) whether the prescribed minimum value addition norms and the minimum turn over of exports are met or not;
Whether the proposal involves relaxation of locational restrictions stipulated in the industrial licensing policy;
Whether the proposal has any strategic or defence related considerations, and
Whether the proposal has any previous joint venture or technology transfer/trademark agreement in the same or allied field in India, the detailed circumstance in which it is considered necessary to set-up a new joint venture/enter into new technology transfer (including trade mark), and proof that the new proposal would not in any way jeopardize the interest of the existing joint venture or technology/trade mark partner or other stake holders.
While considering proposals the following may be prioritised.
Items/activities covered under automotive route (i.e. those, which do not qualify under automatic route).
Items falling in infrastructure sector.
Items which have an export potential
Items which have large scale employment potential and especially for rural people.
Items, which have a direct or backward linkage with agro business/farm sector.
Item which have greater social relevance such as hospitals, human resource development, life saving drugs and equipment.
Proposals, which result in induction of technology or infusion of capital.
The following should be especially considered during the scrutiny and consideration of proposals:
The extent of foreign equity proposed to be held (keeping in view sectoral caps if any - e.g. 24% for SSI units, 40% for air taxi/airlines operators, 49% in basic/cellular/paging in Telecom sector etc).
Extent of equity with composition of foreign/NRI (which may include OCB)/resident Indians.
Extent of equity from the point of view whether the proposed project would amount to a holding company/wholly owned subsidiary/a company with dominant foreign investment (i.e. 75% or more) joint venture.
Whether the proposed foreign equity is for setting up a new project (joint venture or otherwise) or whether it is for enlargement of foreign/NRI equity or whether it is for fresh induction of foreign equity/NRI equity in an existing Indian company.
In the case of fresh induction of foreign/NRI equity and/or cases of enlargement of foreign/ NRI equity in existing Indian companies whether there is a resolution of the Board of Directors supporting the said induction/ enlargement of foreign/NRI equity and whether there is a shareholders agreement or not.
In the case of induction of fresh equity in the existing Indian companies and/or enlargement of foreign equity in existing Indian companies, the reason why the proposal has been made and the modality for induction/ enhancement [i.e. whether by increase of paid up capital/authorised capital, transfer of shares (hostile or otherwise) whether by rights issue, or by what modality].
Cases pertaining to FIPB approvals, which involve increase in the non-resident equity within the approved percentage of non-resident equity in a joint venture company and enhancement of paid-up capital in a wholly owned subsidiary do not require FIPB approval provided the intent for increase in the amount of foreign equity is duly notified to SIA and formal documentation by way of intimation is made to SIA within 30 days of receipt of funds and allotment of shares (to non-resident shareholders).
Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines.
Whether the activity is an industrial or a service activity or a combination of both.
Whether the item of activity involves any restriction by way of reservation for the small scale sector.
Whether there are any sectoral restrictions on the activity (e.g. there is ban on foreign investment in real estate while it is not so for NRI investment).
Whether the item involves only trading activity and if so whether it involves export or both export and import, or also includes domestic trading and if domestic trading whether it also includes retail trading.
Whether the proposal involves import of items which are either hazardous, banned or detrimental to environment (e.g. import of plastic scrap or recycled plastics).
In respect of activities to which equity caps apply, FIPB may consider recommending higher levels of foreign equity as compared to the prescribed caps, keeping in view the special requirements and merits of each case.
In respect of other industries/activities the Board may consider recommending 51 per cent foreign equity on examination of each individual proposal. For higher levels of equity up to 74 per cent the Board may consider such proposals keeping in view considerations such as the extent of capital needed for the project, the nature and quality of technology, the requirements of marketing and management skills and the commitment for exports.
FIPB may consider recommending proposals for 100 percent foreign owned holding/subsidiary companies based on the following criteria:
where only "holding" operation is involved all subsequent/downstream investments to be carried out would require prior approval of the Government;
where proprietary technology is sought to be protected or sophisticated technology is proposed to be brought in;
where at least 50% of production is to be exported;
proposals for consultancy; and
proposals for industrial model towns/industrial parks or estates.
In special cases, where the foreign investor is unable initially to identify an Indian joint venture partner, the Board may consider and recommend proposals permitting 100 per cent foreign equity on a temporary basis on the condition that the foreign investor would divest to the Indian parties (either individual, joint venture partners or general public or both) at least 26 per cent of its equity within a period of 3-5 years.
Similarly in the case of a joint venture, where the Indian partner is unable to raise resources for expansion/ technological upgradation of the existing industrial activity the Board may consider and recommend increase in the proportion/percentage (up to 100 per cent) of the foreign equity in the enterprise.
In respect of trading companies, 100 per cent foreign equity may be permitted in the case of the activities involving the following:
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.
In respect of the companies in the infrastructure/services sector where there is a prescribed cap for foreign investment, only the direct investment should be considered for the prescribed cap and foreign investment in an investing company should not be set off against this cap provided the foreign direct investment in such investing company does not exceed 49 per cent and the management of the investing company is with the Indian owners.
No condition specific to the letter of approval issued to a foreign investor would be changed or additional condition imposed subsequent to the issue of a letter of approval. This would not prohibit changes in general policies and regulations applicable to the industrial sector.
Where in case of a proposal (not being 100% subsidiary) foreign direct investment has been approved up to a designated percentage of foreign equity in the joint venture company the percentage would not be reduced while permitting induction of additional capital subsequently. Also in the case of approved activities, if the foreign investor(s) concerned wished to bring in additional capital on later dates keeping the investment to such approved activities, FIPB would recommend such cases for approval on an automatic basis.
As regards proposal for private sector banks, the application would be considered only after "in principle" permission is obtained from the Reserve Bank of India (RBI).
The restrictions prescribed for proposals in various sectors as obtained, at present, are given in the annexure - IV and these should be kept in view while considering the proposals.
Opening up of door policies adopted by the Government of India through its new economic policies has attracted more investments in to the country. Indian Industries have gone global and in the same direction the inflow of FDI in to the country has increased at a faster rate.
The Inflow of FDI into the country over various years is as follows:
Year (April-March) Amount of FDI inflows (In US$ million)
1991-1992 (Aug-March) 167
1992-1993 393
1993-1994 654
1994-1995 1,374
1995-1996 2,141
1996-1997 2,770
1997-1998 3,682
1998-1999 3,083
1999-2000 2,439
2000-2001 2,908
2001-2002 4,222
2002-2003 3,134
2003-2004 2,634
2004-2005 3,755*
2005-2006 (Upto March 2006) 5,549
SECTOR ATTRACTING FDI
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)
Chemical (other than fertilizers)
Food Processing Industries
Drugs & Pharmaceuticals
Cement and Gypsum Products
Metallurgical Industries
Sector - wise FDI Inflows from August 1991 to December 2005
(Amount US$ million)Ranks Sector Amount of FDI inflows % age of total inflows
1 Electrical Equipments(Including computer software & electronics) 4,885.88 16.5
2 Transportation Industry 3,143.09, 10.34
3 Services Sector 2,971.66 ,9.64
4 Telecommunications 2,890.12, 9.58
5 Fuel (Power & Oil Refinery) 2,521.49, 8.41
6 Chemicals (Other than Fertilizers) 1,889.51, 5.86
7 Food Processing Industries 1,173.18, 3.67
8 Drugs and Pharmaceuticals 948.54 ,3.18
9 Cement and Gypsum Products 746.79 ,2.54
10 Metallurgical Industries 627.32, 2.12
11 Consultancy Services 444.4,8 1.59
12 Miscellaneous Mechanical & Engineering 491.45, 1.51
13 Textiles (Include Dyed, Printed) 430.07 1.32
14 Trading 374.23 1.16
15 Paper and Pulp including paper product 363.46 1.1
16 Hotel Goods 308.51 1.04
17 Glass 255.59 0.81
18 Rubber Goods 233.3 0.77
19 Commercial, Office & Household Equipment 231.67 0.66
20 Industrial Machinery 204.84 0.65
21 Machine Tools 155.43 0.52
22 Agricultural Machinery 135.5 0.43
23 Timber Products 107.12 0.37
24 Medical and Surgical Appiances 101.68 0.35
25 Soap, Cosmetics and Toilet Preparations 88.74 0.31
26 Caramics 89.7 0.27
27 Earth-moving Machinery 73.91 0.26
28 Fertilizers 78.22 0.26
29 Fermentation Insdustries 76.52 0.25
30 Leather, Leather Goods and Pickers 51.84 0.15
31 Glue and Gelatin 36.04 0.12
32 Vegetable Oils and Vanaspati 35.14 0.11
33 Prime movers other than Electrical 30.61 0.08
34 Industrial Instruments 21.7 0.06
35 Sugar 17.27 0.06
36 Scientific Instruments 14.85 0.05
37 Photographic Raw Film and Paper 15.25 0.05
38 Dye-stuffs 16.01 0.05
39 Boilers and Steam Generating Plants 5.01 0.01
40 Mathematical, Surveying and Drawing 0 0
41 Miscellaneous Industries 4,166.86 13.79
Total 30,452.58 100
42 Advance of Inflows (from 1999 to 2004) 2,178.72 -
Following India's growing openness, the arrival of new and existing models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers all have stirred the demand for vehicles and a strong growth of the Indian automobile industry.
The role of Foreign Direct Investment in the present world is noteworthy. It acts as the lifeblood in the growth of the developing nations. Flow of the FDI to the countries of the world truly reflects their respective potentiality in the global scenario. Flow of FDI truly reflects the country's both economic and political scenario. The flow of FDI over the Globe is as follows:
FDI in the financial sector among market economies
Opening up of doors by many countries of the world has resulted foreign participation in the financial sectors of emerging market economies (EMEs) during the 1990s. It has continued to expand so far in this decade, on balance - although its pace fell somewhat following problems in Argentina in 2002 and the global slowdown in mergers and acquisitions. It is seen that banks accounted for the majority of financial sector foreign direct investment (FSFDI). In a number of countries in Latin America and central and eastern Europe (CEE), foreign banks now account for a major share of total banking assets. In Asia, the share of foreign banks is, overall, much lower, but still substantial
. The integration of EME financial firms into the global market has resulted a wider diversity of financial institutions operating in EMEs and given greater emphasis on risk-adjusted profitability. These include expansion into local retail banking and securities markets, where elements such as client relationships and reputation are important components of the franchise value of operations. Such factors have tended to raise the costs of exiting a country and hence increased the permanence of FSFDI.
FSFDI was fostered by financial liberalization and market-based reforms in many EMEs. The liberalization of the capital account and financial deregulation paved the way for foreign acquisitions and the integration of EME financial firms into an expanding global market for corporate control. This is the character of FSFDI as part of a broader trend towards consolidation and globalization in the financial industry. In some cases competition in traditional markets increased pressure on major international banks to find new areas for growth. Financial institutions in advanced economies increasingly searching for profit opportunities at the customer and product level, FSFDI offered a means of access to EME markets with attractive strategic opportunities to expand.
Local financial infrastructure is growing which reduces the risks of conducting business in EMEs.but events such as the Russian default in 1998 and Argentine actions in 2002 also made financial institutions more sensitive. Thus, financial institutions in industrial countries now tend to evaluate country risk separately.
An important benefit of FSFDI is its effect on financial sector efficiency that arises from local banks' exposure to global competition.
Host countries benefit from the technology transfers and innovations in products and processes commonly associated with foreign bank entry. Foreign banks exert competitive pressures and demonstration effects on local institutions. This results better risk management, more competitive pricing and in general a more efficient allocation of credit in the financial sector as a whole. Foreign banks presence help to achieve greater financial stability in host countries. Host countries benefit immediately from foreign entry. The better capitalization and wider diversification of foreign banks, along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system to local business cycles and changing financial market conditions. Their use of risk-based credit evaluation tends to reduce concentration in lending and in times of financial distress, fosters prompter recognition of losses and more timely resolution of problems.
The growing involvement of foreign firms in the financial systems of EMEs has given rise to a situation where majorities of EME banking assets have become foreign owned.
The growing involvement of foreign firms in the financial systems of EMEs has given rise to a situation where majorities of EME banking assets have become foreign owned.
Accordingly, developing pertinent technical skills is considered be an important area of cooperation between authorities in advanced and EME countries. In some markets, foreign-owned banks have been prominent in the rapid expansion of consumer lending and foreign currency lending to both households and businesses.
Appropriate supervision is needed to assess such credit managed by banks, and authorities in charge of financial stability. Accordingly, public policy should be focused on maximizing these benefits by continuing to encourage diversity and competition in financial systems not only between foreign and domestic banks but also between banks and other financial institutions.
One essential component among host country policy is commitment for growth and stability. Another is the protection of property rights and equal treatment of banks irrespective of ownership. From this point of view a more extensive implementation of the internationally recognized set of financial standards and codes can help to reduce country risk. Strengthening of legal frameworks act as a parameter for reducing country risk. Smooth functioning of the market for corporate control would be assisted by greater international compatibility of accounting standards, takeover rules, and insolvency codes.
Regional integration among EME financial systems, often within a framework for broader economic integration in the region, is another complementary approach to this objective. There is substantial evidence of major benefits from regional compacts such as those of the European Union and NAFTA. In the case of very poor countries where there is some special support for FSFDI may be merited provided political risk insurance if properly designed, could be useful.
