Govt. policies


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Govt. policies

  1. 1. FOREIGN DIRECT INVESTMENTForeign Direct Investment (FDI) is normally defined as a form of investment madein order to gain unwavering and long-lasting interest in enterprises that areoperated outside of the economy of the shareholder/ depositor. In FDI, there is aparent enterprise and a foreign associate, which unites to form a MultinationalCorporation (MNC). In order to be deemed as a FDI, the investment must give theparent enterprise power and control over its foreign affiliate.FOREIGN DIRECT INVESTMENT IN INDIAIn India, Foreign Direct Investment Policy allows for investment only in case of thefollowing form of investments: Through financial alliance Through joint schemes and technical alliance Through capital markets, via Euro issues Through private placements or preferential allotmentsForeign Direct Investment in India is not allowed under the followingindustrial sectors: Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc FDI IN INDIA ACROSS DIFFERENT SECTORSHotel & TourismHotels include restaurants, beach resorts and business ventures providingaccommodation and food facilities to tourist. Tourism would include travel agencies,
  2. 2. tour operators, transport facilities, leisure, entertainment, amusement, sports andhealth units.100 per cent FDI is permitted for this sector through the automatic route.TradingFor trading companies 100 per cent FDI is allowed for• Exports• Bulk Imports• Cash and Carry wholesale trading.PowerFor business activities in power sector like electricity generation, transmission anddistribution other than atomic plants the FDI allowed is up to 100 per cent.Drugs & PharmaceuticalsFor the production of drugs and pharmaceutical a FDI of 100 per cent is allowed,subject to the fact that the venture does not attract compulsory licensing, does notinvolve use of recombinant DNA technology.Private BankingFDI of 49 per cent is allowed in the Banking sector through the automatic routeprovided the investment adheres to guidelines issued by RBI.Insurance SectorFor the Insurance sector FDI allowed is 26 per cent through the automatic route oncondition of getting license from Insurance Regulatory and Development Authority(IRDA).
  3. 3. Telecommunication• For basic, cellular, value added services and mobile personal communicationsby satellite, FDI is 49 per cent.• For ISPs with gateways, radio-paging and end to end bandwidth, FDI isallowed up to 74 per cent. But any FDI above 49 per cent would requiregovernment approval.Business Processing OutsourcingFDI of 100 per cent is permitted provided such investments satisfy certainprerequisites.NRIs And OCBsThey can have direct investment in industry, trade and infrastructureUP TO 100 PER CENT EQUITY IS ALLOWED IN THE FOLLOWING SECTORS• 34 High Priority Industry Groups• Export Trading Companies• Hotels and Tourism-related Projects• Hospitals, Diagnostic Centers• Shipping• Deep Sea Fishing• Oil Exploration• Power
  4. 4. • Housing and Real Estate Development• Highways, Bridges and Ports• Sick Industrial Units• Industries Requiring Compulsory Licensing• Industries Reserved for Small Scale Sector Increasing FDI in India: Does the Budget go far enough?India and China not only survived the financial crisis — over the course of thefinancial crisis their economies grew. This is the perfect time for India to attractmuch needed non-debt creating capital flows through foreign direct investment(FDI). The Indian Budget for 2010-11 has rightly proposed to simplify the FDIregime, maintaining FDI flows particularly by recognizing ownership and controlissues and liberalising the pricing and payment system for technology transfers,trademarks, and brand name and royalty payments. More importantly, the budgetshows an intention to introduce user-friendly regulations and guidelines for FDI.But while India is macro-economically well placed to attract FDI inflows, merelyshowing an intention to introduce user-friendly regulations without addressing thecore regulatory, institutional and policy issues affecting FDI may not be enough toattract the huge amounts of FDI the country needs.Economic surveys in last fewyears confirm time and again the need for concrete reforms to improve the Indianinvestment and business climate. While the 2009 „Doing Business‟ survey preparedby the World Bank showed that India‟s indicators have gotten better, India still lagsbehind China overall. China beats India in crucial indicators such as: registeringproperty, trading across borders, enforcing contracts and closing business (see thetable below). In this context, the suggestion in the budget for simplified, user-friendly regulations and guidelines would be useful — provided that after the budget
  5. 5. institutions are designed to enforce commercial contracts, in order to reassureinvestors. In fact, it was expected that the budget would not only demonstrate anintention to simplify FDI rules and regulations, but also propose a proper frameworkof action for achieving this.India‟s high trade and transaction costs are mainly due to the country‟s lack ofquality infrastructure. This lack of infrastructure discourages resource-seeking andexport-oriented FDI to use India as their base as they do with China.China‟s unmatched average growth rate of 10 per cent for more than a decade isdue to consistent improvements in physical infrastructure. The 2010-11 Budgetdoes focus on infrastructure development, allocating substantial general funds,which constitutes 46 per cent of the total plan allocation, and doubling planallocation to power sector and improved allocation for renewable energy inparticular. Moreover, some of the budget‟s announcements—like allocating coalblocks for captive mining and a proposal to set up a Coal Regulatory Authority toensure greater transparency—are welcome steps.The public sector cannot cover the USD150 billion per annum required for themaintenance and creation of infrastructure. India invests around 5 to 6 per cent ofGDP on infrastructure whereas China invests 14.4 per cent of GDP. The gapbetween infrastructure investments in China and India is widening not only as shareof GDP, but also in absolute levels given that India‟s GDP is only one third that ofChina. Hence, the private sector must participate substantially in infrastructuredevelopment in India. One way of improving the environment for infrastructuredevelopment is through public-private partnerships. These require a more stableand secure policy framework; particularly ensuring the protection of property rightsand consistency in pricing and subsidy policies. Infrastructure projects needmaximum clearances and approvals that sometimes run into innumerable disputes.Therefore, there should be an institutional mechanism for speedy disputeresolution. The politically acceptable cost-recovery based pricing is a must forattracting private investment into the infrastructure sector. Infrastructure projectsare capital intensive. A special federal investment law should be formulated to
  6. 6. consolidate the many sets of State laws, rules and regulations covering theinfrastructure sector. Infrastructure also needs stable financing. Because of this theRs 20,000 income tax exemption for investment on infrastructure bonds is awelcome step. But the government could do more by allowing financialintermediaries to invest in reasonably rated infrastructure projects and by giving aguarantee to use pension funds, insurance and FII‟s to invest in infrastructureprojects.The Budget 2010 intends to simplify and introduce user-friendly regulations andguidelines for FDI but these are mostly at the central government level. However,actual implementation of projects will take place at the state level. Bureaucratichassles, mainly at the state level, are obstacles to the realisation of FDI. Some ofthe major issues related to project implementation such as land acquisition, landuse change, power connection, building plan approval are at the state level Thisdivision of political responsibility creates a delay in implementation. Therefore, aconcerted effort is required for better co-ordination between the central and stategovernments on this issue. An institutional mechanism may be set up for gettingclearances of FDI projects from both central and state governments within astipulated time.Another way of attracting FDI is by following the Chinese special economic zone(SEZ) model. This is large with state of the art infrastructure facilities and properinfrastructure connectivity to the market. To attract FDI SEZs in India should bedesigned as China‟s are, with proper infrastructure connectivity to domestic andexternal markets. If necessary, the private sector should be encouraged to set upprivate airports and ports to service the SEZs through automatic routes and 100per cent FDI equity. Since it‟s hard to connect different kinds of transportationinfrastructure in India, SEZs should be established in the coastal regions like inChina to make transportation easier. The Budget 2010-11 should have addressedsome of these measures to attract FDI much needed by the economy.While foreign equity participation has increased in most sectors, there are stillsectors where there is huge potential for FDI inflows. Further increases in FDI
  7. 7. ceilings in sectors such as telecom, civil aviation, power generation, food retailing,insurance, banking, investing companies and the real estate sector will be requiredto achieve this potential. Most of these sectors need to be opened up further withindependent regulatory systems to control market distortions and allow faircompetition. Though the budget recognizes the importance of ownership andcontrol issues for FDI, no concrete steps have been announced or proposed.The investment climate can be improved through increasing foreign and privateownership in different sectors, simplifying rules and regulations and developingindependent regulatory bodies. But India can only succeed in actually creating aconducive business environment and getting more investment both from privateand foreign investors if it focuses on providing quality physical infrastructure. Thisunion budget has done the right thing by allocating USD37 billion for infrastructureupgrades in both rural and urban areas. However, mere allocation is not enough asinfrastructure projects are complicated and actual outcomes are quite different fromthe proposals.Private sector participation, both domestic and foreign, needs to be encouraged toenable infrastructure development. Though an emphasis on infrastructuredevelopment in the 2010-11 Budget would certainly help in achieving more FDIrealization, we also need to work on other important issues related to labour laws,centre-state coordination, better SEZ schemes and proper institutional mechanismsto attract more FDI in future. Foreign direct investment (FDI), which is vital toIndia‟s growth, has lacked a proper policy document and has been administeredprimarily through a series of press notes over many years. According to the critics,the 177 existing press notes have created new areas of ambiguity while trying toresolve the existing ones. Doing away with the press notes approach will go a longway in making India‟s FDI policy transparent and friendly to investors.India is becoming increasingly attractive to foreign investors. The reforms proposedin this year‟s Budget will simplify regulations and guidelines for FDI and make themmore user-friendly, paving the way for a better investment climate and sustainablegrowth. But in India there is huge gap between proposals for reforms, and their
  8. 8. implementation. Bipartisan cooperation will help to ensure that reforms areimplemented, allowing India to attract FDI and progress toward double digitgrowth. FOREIGN DIRECT INVESTMENTIndia has been ranked at the third place in global foreign direct investments in2009 and will continue to remain among the top five attractive destinations forinternational investors during 2010-11, according to United Nations Conference onTrade and Development (UNCTAD) in a report on world investment prospects titled,World Investment Prospects Survey 2009-2011 released in July 2009.The 2009 survey of the Japan Bank for International Cooperation released inNovember 2009, conducted among Japanese investors continues to rank India asthe second most promising country for overseas business operations, after China.A report released in February 2010 by Leeds University Business School,commissioned by UK Trade & Investment (UKTI), ranks India among the top threecountries where British companies can do better business during 2012-14.According to Ernst and Youngs 2010 European Attractiveness Survey, India isranked as the 4th most attractive foreign direct investment (FDI) destination in2010. However, it is ranked the 2nd most attractive destination following China inthe next three years.Moreover, according to the Asian Investment Intentions survey released by the AsiaPacific Foundation in Canada, more and more Canadian firms are now focussing onIndia as an investment destination. From 8 per cent in 2005, the percentage ofCanadian companies showing interest in India has gone up to 13.4 per cent in2010.India attracted FDI equity inflows of US$ 2,214 million in April 2010. Thecumulative amount of FDI equity inflows from August 1991 to April 2010 stood atUS$ 134,642 million, according to the data released by the Department ofIndustrial Policy and Promotion (DIPP).
  9. 9. The services sector comprising financial and non-financial services attracted 21 percent of the total FDI equity inflow into India, with FDI worth US$ 4.4 billion duringApril-March 2009-10, while construction activities including roadways and highwaysattracted second largest amount of FDI worth US$ 2.9 billion during the sameperiod. Housing and real estate was the third highest sector attracting FDI worthUS$ 2.8 billion followed by telecommunications, which garnered US$ 2.5 billionduring the financial year 2009-10. The automobile industry received FDI worth US$1.2 billion while power attracted FDI worth US$ 1.4 billion. during April-March2009-10, according to data released by DIPP.In April 2010, the telecommunication sector attracted the highest amount of FDIworth US$ 430 million, followed by services sector at US$ 355 million and computerhardware and software at US$ 172 million, according to data released by DIPP.During the financial year 2009-10, Mauritius has led investors into India with US$10.4 billion worth of FDI comprising 43 per cent of the total FDI equity inflows intothe country. The FDI equity inflows in Mauritius is followed by Singapore at US$ 2.4billion and the US with US$ 2 billion, according to data released by DIPP.During April 2010, Mauritius invested US$ 568 million in India, followed bySingapore which invested US$ 434 million and Japan that invested US$ 327 million,according to latest data released by DIPPInvestment ScenarioIn May 2010, the government cleared 24 foreign investment proposals, worth US$304.7 million. These include: Asianets proposal worth US$ 91.7 million to undertake the business of broadcasting non-news and current affairs television channels. Global media magnate Rupert Murdoch-controlled Star India holdings investment of US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky. AIP Power will set up power plants either directly or indirectly by promotion Sembcorp Utilities, of joint ventures at an investment of US$ 24.4 million.
  10. 10. A COMPANY BASED IN SINGAPORE, has picked up 49 per cent stake inthe 1,320 mega watt (MW) coal-fired plant of Thermal Powertech CorporationIndia Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, forUS$ 235.1 million.CINEPOLIS, a Mexico-based multiplex operator, is looking at expanding itsfootprint in India. The company which started operations in India last yearplans to invest US$ 350 million in the next five years to operate 500 screensin 40 cities.According to a study released by global consultancy BAIN & COMPANY,private equity (PE) and venture capital (VC) investments are projected toreach US$ 17 billion in 2010. The report includes a survey conducted acrossleading PE investors globally. The survey revealed number of respondentsplanning to invest in the range of US$ 200-500 million in 2011 has risennearly four-fold to 27 per cent. Further, as per figures released by GrantThornton, the food processing and agri-based companies have attracted US$300 million PE investments during January-June 2010. In 2009, PEinvestments in these sectors were about US$ 398 million.IL&FS Investment Managers (IIML) plans to invest US$ 300 million, in realestate and urban infrastructure projects by the end of 2010.“We are in the advance stages of finalizing 3-4 deals in residential real estateand urban infrastructure space like roads and hospitality,” said ShahzaadDalal, Vice-Chairman and MD, IIML.Investments by French companies in India is expected to touch US$ 12.72billion by 2012, and would focus on automobile, energy and environmentsectors among others, according to Jean Leviol, Minister Counselor forEconomic, Trade and Financial Affairs, French Embassy in India.Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million inIndia to expand its manufacturing capacity and research capabilities. Theinvestment will be used for increasing the manufacturing capacity of ActivePharmaceutical Ingredients (APIs) and product research at the EisaiKnowledge Centre in Visakhapatnam.
  11. 11. Japans Kobelco Cranes, a subsidiary of Kobe Steel, is planning to investUS$ 12.7 million to set up a plant near Chennai to produce crawler cranes.The plant will begin production in 2011.Franco-American telecom equipment maker, Alcatel-Lucent plans toshift its global services headquarters to India. The headquarters would needabout US$ 500 million in investments over three years, according to BenVerwaayen, Chief Executive Officer, Alcatel-LucentPOLICY INITIATIVESThe Government of India has released a comprehensive FDI policy documenteffective from April 1, 2010. The Circular 1 of 2010 consolidates into onedocument all the prior policies/regulations on FDI which are contained inFEMA, 1999; RBI Regulations under FEMA, 1999 and Press Notes/PressReleases/Clarifications issued by DIPP and reflects the current policyframework on FDI.Furthermore, the government has allowed the Foreign Investment PromotionBoard (FIPB), under the Ministry of Commerce and Industry, to clear FDIproposals of up to US$ 258.3 million. Earlier all project proposals thatinvolved investment of above US$ 129.2 million were put up before theCabinet Committee of Economic Affairs (CCEA) for approval. The relaxationwould expedite FDI inflow, according to Mr. P Chidambaram, Union HomeMinister.EXCHANGE RATE USED: 1 USD = 47.07 INR (AS ON JULY 2010)