Foreign Direct Investment In India

FDI IN INDIA

WHAT IS FDI ?

Foreign direct investment ( FDI ) in its classic form is defined as a company from one country making a physical investment into building a factory in another country.

Include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are

Usually preferred over other forms of external finance because they are

Non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors.

FDI also facilitates international trade and transfer of knowledge, skills and technology.

The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC).

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.

The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Foreign Direct Investment (FDI) is permitted 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.

ENTRY STRATEGIES FOR FOREIGN INVESTOR

Foreign Company has the following options to set up business operations in India :

By incorporating a company under the Companies Act, 1956

A wholly owned subsidiary

Joint venture company - existing company or new company with domestic partner

As an unincorporated entity

Liaison Office

Project Office

Branch Office

LIAISON OFFICE

Liaison office not permitted to undertake any commercial/trading/industrial activity

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

Acting as a communication channel between the parent company and Indian Companies.

It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India

Approval for establishing a liaison office in India is granted by RBI

PROJECT OFFICE

General permission to foreign entities to establish Project / Site Offices (temporary in nature)

Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project

General permission also for remitting surplus funds after completion of project on production of the following documents:

BRANCH OFFICE

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes

Branch Offices are established with the approval of RBI

Permitted to remit outside India profit of the branch

FOREIGN INVESTMENTS THROUGH GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment

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.

WHY FDI ?

1. Gain a foothold in a new geographic market.

2. Increase a firm’s global competitiveness and positioning.

3. Fill gaps in a company’s product lines in a global industry.

4. Reduce costs in areas such as R&D, production, and distribution.

FACTORS REQUIRED TO ATTRACT FDI

Low cost BUT Qualified, Educated/Skilled Labor Pool.

Long-term Market Potential OR Yields greater than can be achieved Domestically.

Access to Natural Resources.

Geography

Stability of the economic and Political Environment.

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.

Lottery Business

Agricultural or plantation activities

Housing and Real Estate Business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

F D I - APPROVAL

Foreign direct investments in India are approved through three routes:

Automatic approval by RBI.

The FIPB Route.

CCFI Route

AUTOMATIC ROUTE

No need of Prior Approval From FIPB,RBI,GOI.

BUT

The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances.

AND

File the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.

AUTOMATIC ROUTE

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 .

foreign equity up to 51% in 48 specified industries.

foreign equity up to 74% in 9 categories .

THE FIPB ROUTE

FDI in activities not covered under the automatic route require prior government approval.

Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of FIPB.

Application for all FDI cases, except NRI investments and 100% EOUs, should be submitted to the FIPB Unit,DEA, Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion (DIPP).

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted.

No fee is payable.

CCFI ROUTE

Investment proposals falling outside the automatic route.

And

Having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (“CCFI”).

Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI.

MAJOR BODIES CONSTITUTED FOR FDI

1991- Foreign Investment Promotion Board FIPB

1996- Foreign Investment Promotion Council FIPC

1999- Foreign Investment Implementation Authority FIIA

2004- Investment Commission

Secretariat for Industrial Assistance (SIA)

ADVANTAGES OF FDI

Increase in Domestic Employment/Drop in unemployment

Investment in Needed Infrastructure.

Positive Influence on the Balance of Payments.

New Technology and “Know How” Transfer.

Increased Capital Investment.

Targeted Regional and Sectoral Development.

DISADVANTAGES OF FDI

Industrial Sector Dominance in the Domestic Market.

Technological Dependence on Foreign Technology Sources.

Disturbance of Domestic Economic Plans in Favor of FDI-Directed Activities.

“ Cultural Change” Created by “Ethnocentric Staffing” The Infusion of Foreign Culture , and Foreign Business Practices

FDI SECTORAL GUIDELINES

AIRPORTS

Foreign Investment up to 100% is allowed in green field projects under automatic route

Foreign Direct Investment is allowed in existing projects

- up to 74% under automatic route

- beyond 74% and up to 100% subject to Government approval

TELECOM

FDI in basic and cellular, unified access services, national/ international long distance , V-Sat, public mobile radio trunk services , global mobile personal communications services

- Automatic up to 49%

- FIPB beyond 49% but up to 74%

Manufacture of telecom equipments - Automatic up to 100%.

DOMESTIC AIRLINES

FDI up to 49% (40%) permitted under automatic route

Automatic Route is not available

However, a foreign airlines are not allowed to have any direct or indirect equity participation

100% investment by NRIs/OCB’s

DRUGS & PHARMA

FDI up to 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position)

FDI up to 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations would be covered under automatic route.

FDI above 74% for manufacture of bulk drugs will be considered by the Government on case to case basis

INSURANCE

FDI up to 26% allowed on the automatic route

However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained

There is a proposal to increase this limit to 49%

MINING

Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production - Automatic up to 100%

Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

PETROLEUM

Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100%

For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and up to 26% FDI is permitted in Public Sector Undertakings with Government approval

PRIVATE SECTOR BANKING

Foreign Investment up to 74% is permitted from all sources under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

TRADING

Wholesale / cash & carry trading - Automatic upto 100%

Trading for exports - Automatic upto 100%

Trading of items sourced from small scale sector - 100% with Government approval

Single Brand product retailing - 51% with Government approval

PRINT MEDIA

FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals

FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs.

All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

BROADCASTING

FDI permitted for setting up hardware facilities such as up-linking, HUB, etc up to 49% under Government approval route

FDI permitted in Cable Network up to 49% under Government approval route

Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20%

FDI permitted in FM radio up to 20% under Government approval route

INFRASTRUCTURE

100% FDI is permitted for the following activities:

Electricity Generation (except Atomic energy)

Electricity Transmission

Electricity Distribution

Mass Rapid Transport System

Roads & Highways

Toll Roads

Vehicular Bridges

Ports & Harbors

Hotel & Tourism

SPECIAL INVESTMENT AVENUES

ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS

100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports.

Eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc.

EXPORT ORIENTED UNITS

100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (“EOUs”) even if it is manufacturing an item reserved for the small scale sector