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Foreign Direct Investment In India


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What is FDI? Why FDI is needded? Sectoral history? Approval rout of FDI? Inflows and Out flows of FDI

Published in: Economy & Finance, Business
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Foreign Direct Investment In India

  1. 1. FDI IN INDIA
  2. 2. WHAT IS FDI ? <ul><li>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. </li></ul><ul><li>Include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. </li></ul>
  3. 3. <ul><li>Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are </li></ul><ul><li>Usually preferred over other forms of external finance because they are </li></ul><ul><li>Non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. </li></ul><ul><li>FDI also facilitates international trade and transfer of knowledge, skills and technology. </li></ul>
  4. 4. <ul><li>The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). </li></ul><ul><li>In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. </li></ul><ul><li>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. </li></ul>
  5. 5. <ul><li>Foreign Direct Investment (FDI) is permitted as under the following forms of investments- </li></ul><ul><li>Through financial collaborations. </li></ul><ul><li>Through joint ventures and technical collaborations. </li></ul><ul><li>Through capital markets via Euro issues. </li></ul><ul><li>Through private placements or preferential allotments. </li></ul>
  7. 7. <ul><li>Foreign Company has the following options to set up business operations in India : </li></ul><ul><ul><li>By incorporating a company under the Companies Act, 1956 </li></ul></ul><ul><ul><ul><li>A wholly owned subsidiary </li></ul></ul></ul><ul><ul><ul><li>Joint venture company - existing company or new company with domestic partner </li></ul></ul></ul><ul><ul><li>As an unincorporated entity </li></ul></ul><ul><ul><ul><li>Liaison Office </li></ul></ul></ul><ul><ul><ul><li>Project Office </li></ul></ul></ul><ul><ul><ul><li>Branch Office </li></ul></ul></ul>
  8. 8. LIAISON OFFICE <ul><li>Liaison office not permitted to undertake any commercial/trading/industrial activity </li></ul><ul><li>The role of the liaison office is limited to </li></ul><ul><li>Collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers </li></ul>
  9. 9. <ul><li>Acting as a communication channel between the parent company and Indian Companies. </li></ul><ul><li>It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India </li></ul><ul><li>Approval for establishing a liaison office in India is granted by RBI </li></ul>
  10. 10. PROJECT OFFICE <ul><li>General permission to foreign entities to establish Project / Site Offices (temporary in nature) </li></ul><ul><li>Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project </li></ul><ul><li>General permission also for remitting surplus funds after completion of project on production of the following documents: </li></ul>
  11. 11. BRANCH OFFICE <ul><li>Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes </li></ul><ul><li>Branch Offices are established with the approval of RBI </li></ul><ul><li>Permitted to remit outside India profit of the branch </li></ul>
  12. 12. FOREIGN INVESTMENTS THROUGH GDRs (Euro Issues) <ul><li>Foreign Investment through GDRs is treated as Foreign Direct Investment </li></ul>
  13. 13. CLEARANCE FROM FIPB <ul><li>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 . </li></ul><ul><li>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% </li></ul><ul><li>or </li></ul><ul><li>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. </li></ul>
  14. 14. USE OF GDRs <ul><li>The proceeds of the GDRs can be used for- </li></ul><ul><li>Financing capital goods imports, </li></ul><ul><li>Capital expenditure including domestic purchase/installation of plant, </li></ul><ul><li>Equipment and building and </li></ul><ul><li>Investment in software development, </li></ul><ul><li>Prepayment or scheduled repayment of earlier external borrowings, and </li></ul><ul><li>Equity investment in JV/WOSs in India. </li></ul>
  15. 15. WHY FDI ? <ul><li>1. Gain a foothold in a new geographic market. </li></ul><ul><li>2. Increase a firm’s global competitiveness and positioning. </li></ul><ul><li>3. Fill gaps in a company’s product lines in a global industry. </li></ul><ul><li>4. Reduce costs in areas such as R&D, production, and distribution. </li></ul>
  16. 16. FACTORS REQUIRED TO ATTRACT FDI <ul><li>Low cost BUT Qualified, Educated/Skilled Labor Pool. </li></ul><ul><li>Long-term Market Potential OR Yields greater than can be achieved Domestically. </li></ul><ul><li>Access to Natural Resources. </li></ul><ul><li>Geography </li></ul><ul><li>Stability of the economic and Political Environment. </li></ul>
  17. 17. FORBIDDEN TERRITORIES <ul><li>FDI is not permitted in the following industrial sectors: </li></ul><ul><li>Arms and ammunition. </li></ul><ul><li>Atomic Energy. </li></ul><ul><li>Railway Transport. </li></ul><ul><li>Coal and lignite. </li></ul>
  18. 18. <ul><li>Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. </li></ul><ul><li>Lottery Business </li></ul><ul><li>Agricultural or plantation activities </li></ul><ul><li>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). </li></ul>
  19. 19. F D I - APPROVAL <ul><li>Foreign direct investments in India are approved through three routes: </li></ul><ul><li>Automatic approval by RBI. </li></ul><ul><li>The FIPB Route. </li></ul><ul><li>CCFI Route </li></ul>
  20. 20. AUTOMATIC ROUTE <ul><li>No need of Prior Approval From FIPB,RBI,GOI. </li></ul><ul><li>BUT </li></ul><ul><li>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. </li></ul><ul><li>AND </li></ul><ul><li>File the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors. </li></ul>
  21. 21. AUTOMATIC ROUTE <ul><li>The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving: </li></ul><ul><li>foreign equity up to 50% in 3 categories relating </li></ul><ul><li>to mining activities . </li></ul><ul><li>foreign equity up to 51% in 48 specified industries. </li></ul><ul><li>foreign equity up to 74% in 9 categories . </li></ul>
  22. 22. THE FIPB ROUTE <ul><li>FDI in activities not covered under the automatic route require prior government approval. </li></ul><ul><li>Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of FIPB. </li></ul>
  23. 23. <ul><li>Application for all FDI cases, except NRI investments and 100% EOUs, should be submitted to the FIPB Unit,DEA, Ministry of Finance. </li></ul><ul><li>Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion (DIPP). </li></ul><ul><li>Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. </li></ul><ul><li>No fee is payable. </li></ul>
  24. 24. CCFI ROUTE <ul><li>Investment proposals falling outside the automatic route. </li></ul><ul><li>And </li></ul><ul><li>Having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (“CCFI”). </li></ul><ul><li>Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI. </li></ul>
  25. 25. MAJOR BODIES CONSTITUTED FOR FDI <ul><li>1991- Foreign Investment Promotion Board FIPB </li></ul><ul><li>1996- Foreign Investment Promotion Council FIPC </li></ul><ul><li>1999- Foreign Investment Implementation Authority FIIA </li></ul><ul><li>2004- Investment Commission </li></ul><ul><li>Secretariat for Industrial Assistance (SIA) </li></ul>
  26. 26. ADVANTAGES OF FDI <ul><li>Increase in Domestic Employment/Drop in unemployment </li></ul><ul><li>Investment in Needed Infrastructure. </li></ul><ul><li>Positive Influence on the Balance of Payments. </li></ul><ul><li>New Technology and “Know How” Transfer. </li></ul><ul><li>Increased Capital Investment. </li></ul><ul><li>Targeted Regional and Sectoral Development. </li></ul>
  27. 27. DISADVANTAGES OF FDI <ul><li>Industrial Sector Dominance in the Domestic Market. </li></ul><ul><li>Technological Dependence on Foreign Technology Sources. </li></ul><ul><li>Disturbance of Domestic Economic Plans in Favor of FDI-Directed Activities. </li></ul><ul><li>“ Cultural Change” Created by “Ethnocentric Staffing” The Infusion of Foreign Culture , and Foreign Business Practices </li></ul>
  29. 29. AIRPORTS <ul><li>Foreign Investment up to 100% is allowed in green field projects under automatic route </li></ul><ul><li>Foreign Direct Investment is allowed in existing projects </li></ul><ul><li>- up to 74% under automatic route </li></ul><ul><li>- beyond 74% and up to 100% subject to Government approval </li></ul>
  30. 30. TELECOM <ul><li>FDI in basic and cellular, unified access services, national/ international long distance , V-Sat, public mobile radio trunk services , global mobile personal communications services </li></ul><ul><li>- Automatic up to 49% </li></ul><ul><li>- FIPB beyond 49% but up to 74% </li></ul><ul><li>Manufacture of telecom equipments - Automatic up to 100%. </li></ul>
  31. 31. DOMESTIC AIRLINES <ul><li>FDI up to 49% (40%) permitted under automatic route </li></ul><ul><li>Automatic Route is not available </li></ul><ul><li>However, a foreign airlines are not allowed to have any direct or indirect equity participation </li></ul><ul><li>100% investment by NRIs/OCB’s </li></ul>
  32. 32. DRUGS & PHARMA <ul><li>FDI up to 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position) </li></ul><ul><li>FDI up to 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations would be covered under automatic route. </li></ul><ul><li>FDI above 74% for manufacture of bulk drugs will be considered by the Government on case to case basis </li></ul>
  33. 33. INSURANCE <ul><li>FDI up to 26% allowed on the automatic route </li></ul><ul><li>However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained </li></ul><ul><li>There is a proposal to increase this limit to 49% </li></ul>
  34. 34. MINING <ul><li>Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production - Automatic up to 100% </li></ul><ul><li>Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100% </li></ul>
  35. 35. PETROLEUM <ul><li>Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100% </li></ul><ul><li>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 </li></ul>
  36. 36. PRIVATE SECTOR BANKING <ul><li>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. </li></ul>
  37. 37. TRADING <ul><li>Wholesale / cash & carry trading - Automatic upto 100% </li></ul><ul><li>Trading for exports - Automatic upto 100% </li></ul><ul><li>Trading of items sourced from small scale sector - 100% with Government approval </li></ul><ul><li>Single Brand product retailing - 51% with Government approval </li></ul>
  38. 38. PRINT MEDIA <ul><li>FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals </li></ul><ul><li>FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs. </li></ul><ul><li>All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting </li></ul>
  39. 39. BROADCASTING <ul><li>FDI permitted for setting up hardware facilities such as up-linking, HUB, etc up to 49% under Government approval route </li></ul><ul><li>FDI permitted in Cable Network up to 49% under Government approval route </li></ul><ul><li>Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20% </li></ul><ul><li>FDI permitted in FM radio up to 20% under Government approval route </li></ul>
  40. 40. INFRASTRUCTURE <ul><li>100% FDI is permitted for the following activities: </li></ul><ul><ul><li>Electricity Generation (except Atomic energy) </li></ul></ul><ul><ul><li>Electricity Transmission </li></ul></ul><ul><ul><li>Electricity Distribution </li></ul></ul><ul><ul><li>Mass Rapid Transport System </li></ul></ul><ul><ul><li>Roads & Highways </li></ul></ul><ul><ul><li>Toll Roads </li></ul></ul><ul><ul><li>Vehicular Bridges </li></ul></ul><ul><ul><li>Ports & Harbors </li></ul></ul><ul><ul><li>Hotel & Tourism </li></ul></ul>
  42. 42. ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS <ul><li>100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports. </li></ul><ul><li>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. </li></ul>
  43. 43. EXPORT ORIENTED UNITS <ul><li>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 </li></ul><ul><li>EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till 31.03. 2009 </li></ul>
  44. 44. <ul><li>Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme </li></ul><ul><li>Not applicable in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc. </li></ul><ul><li>Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors. </li></ul><ul><li>. </li></ul>
  45. 45. SPECIAL ECONOMIC ZONE <ul><li>Special Economic Zone (“SEZ”) is deemed to be foreign territory for the purposes of trade operations and duties and tariffs </li></ul><ul><li>No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from industrial licensing </li></ul><ul><li>An SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and rendering of services </li></ul>
  47. 47. <ul><li>Most manufacturing activities </li></ul><ul><li>Drugs and pharmaceuticals </li></ul><ul><li>Food processing </li></ul><ul><li>Electronic hardware </li></ul><ul><li>Software development </li></ul><ul><li>Film industry </li></ul><ul><li>Advertising </li></ul><ul><li>Hospitals </li></ul><ul><li>Pollution control and management </li></ul><ul><li>Management consultancy </li></ul><ul><li>Computer related Services </li></ul><ul><li>Research and Development Services </li></ul><ul><li>Construction and related Engineering Services </li></ul><ul><li>Pollution Control and Management Services </li></ul><ul><li>Health related & Social Services </li></ul><ul><li>Travel related services </li></ul>
  48. 48. ADVANTAGES OF INDIA <ul><li>Stable democratic environment over 60 years of independence </li></ul><ul><li>Large and growing market </li></ul><ul><li>World class scientific, technical and managerial manpower </li></ul><ul><li>Cost-effective and highly skilled labor </li></ul><ul><li>Abundance of natural resources </li></ul>
  49. 49. <ul><li>Well-established legal system with independent judiciary. </li></ul><ul><li>Developed banking system and vibrant capital market . </li></ul><ul><li>India among the top three investment hot spots and one of the fastest growing economies in the world. </li></ul><ul><li>Large English speaking population </li></ul>
  50. 50. <ul><li>FDI EQUITY INFLOW </li></ul>
  51. 55. <ul><li>FDI INFLOWS </li></ul><ul><li>FINANCIAL YEAR-WISE DATA </li></ul>
  52. 57. <ul><li>FOREIGN TECHNOLOGY TRANSFER </li></ul>
  53. 61. ?
  54. 62. THANK YOU