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Fdi in india


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foreign direct investment

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Fdi in india

  1. 1. NATIONAL LAW SCHOOL OF INDIA UNIVERSITY BANGALORE PROJECT ON “FDI policy in India after 2002” SUBJECT: Investment & Securities law TRIMESTER-IV 2013-14 UNDER THE SUPERVISION OF Prof. N.L. Mitra National Law School of India University, Bangalore SUBMITTED BY:-Ronak Karanpuria LL.M. (Business Law) Student ID No.: 534
  2. 2. Acknowledgement I express my deep sense of obligation and gratitude to Prof. N. L. Mitra, National Law School of India University, Bangalore, for his invaluable guidance and persistent encouragement in the preparation of this project work. I am deeply indebted to all the Indian and foreign writers and judges whose writings and decisions have been duly cited in this work and have given me inspiration and light during preparation of this work. At last, it is my sincere duty to express my deep obligation towards my respected seniors for their kindness, grace and many sided benevolence. Ronak Karanpuria
  3. 3. INDEX S. No. Particulars 1 Introduction 2 Foreign Investment Policy & Regulation 3 Changing Dynamics of Foreign Investment 5 Impact of Government policies towards foreign capital 6 Issues & Problem : FDI in India
  4. 4. INTRODUCTION In 1991, India was under great debt, to overcome such financial crisis Indian government open the gates of foreign investment, to invest in India. This led to the economic development, stability & foreign money which overcomes the economic depression & capital crisis. This step boost the government to inflow the money through various sectors like industry, health, infrastructure, service etc. to process development in a planned manner & not depend only on the tax payers money which can be improvise through liberal fiscal & monetary policy & also to improve the condition of banking sector. To put India at the forefront, improve GDP & to generate employment opportunities with better diagnostic techniques. In the 1970s there was almost no foreign investment, with little in 1980, with liberalisation in 1991 and in year 1996 inflow to India exceed $6billion. Though dampened by globalfinancial crises after 1997, net direct investment flows to India remain positive. India similar to international market in different economy permit foreign investment and open gates through RBI route or through Government approval route. With the rapid economic development & changing scenario of market, India also permit foreign investment in various sectors like energy, power, health, education, media, aircraft, telecom etc. through either mode foreign direct investment, foreign portfolio investment scheme, foreign venture capital investment, investment in government securities by NonResident Indian, Person of Indian origin, Foreign entity in partnership firm, companies, LLP etc. through various investment securities like issues of shares, debentures etc. Due to foreign investment, it supplement domestic market, enable high growth rate, generate employment, improvise technology & more importantly at macro-economic level it relax potential balance of payment requirement, inflexible demand of foreign debt, foreign investment, presence of foreign firms reduces market concentration & promotes a more competitive market with consumer driven economy.
  5. 5. FOREIGN INVESTMENT POLICY With an intent, as government also put in place a policy framework on Foreign Direct Investment, which is transparent, predictable and easily comprehensible. This framework is embodied in the Circular on Consolidated FDI Policy, first issued on 2005 & then on 2013 which may be updated every year, to capture and keep pace with the regulatory changes. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000). This can be done through introduction of dual route of approval of FDI – RBI’s automatic route and Government’s approval The Foreign Investment Promotion Board (FIPB) route, automatic permission for technology agreements in high priority industries and removal of restriction of FDI in low technology areas as well as liberalisation of technology imports, permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors. Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. In sectors/activities with caps, including inter-alia defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites, Government approval/FIPB approval would be required in all cases where: (i) An Indian company is being established with foreign investment and is not owned by a resident entity or (ii) An Indian company is being established with foreign investment and is not controlled by a resident entity or (iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc. or (iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of
  6. 6. transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc. (v) It is clarified that these guidelines will not apply to sectors/activities where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route. (vi) It is also clarified that Foreign investment shall include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and fully, mandatorily & compulsorily convertible preference shares/debentures, regardless of whether the said investments have been made under Schedule 1, 2, 3 and 6 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations. CHANGING DYNAMICS OF FOREIGN INVESTMENT Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for which could be the global situation that prevailed during that time frame.Although services sector remain the sector attracting the highest FDI inflows since 2006-07 its share has been constantly declining.The FDI flows into computer hardware and software has been downward ever since 2005-06. It has drastically gone down from 24.8 per cent in 2005-06 to 4.0% in 2010-11.Housing & Real Estate have shown an upward trend in terms of their share in FDI inflows.Investments in chemicals and metallurgical industries have been erratic as no clear trend could be observed for the time period 2005-06 to 2010-11.Citizens of Pakistan or an entity incorporated in Pakistan are permitted to invest in India, under the Government approval route. FDI in Civil Aviation Sector by foreign airlines has been permitted upto 49% (cumulative of investment vide FDI and foreign institutional investors). FDI in multi-brand retail trading sector upto 51% under government approval route.Policy of the Indian Government related to SEZ is mainly responsible for the FDI inflows. It is because government announced the SEZ Act, SEZs scheme was launched with the specific intend of providing an internationally competitive and hassle free environment for exports. Mauritius has been the largest direct investor in India. Mauritius has low rates of taxation and an agreement with Indian double tax avoidance regime. The United States (US) is the second largest investor in India. To take advantage of double tax avoidance regime, many companies have set up dummy companies in Mauritius before infesting to India. Since 2000, India signed many regional arrangement & agreements like ASEAN, Gulf Cooperation Council,
  7. 7. BIMSTEC, South Asia Free Trade Agreements, Bilateral Investment Treaty, SAARC. Tax Holiday for companies who are involved in R&D having commercial application. There were list of sectors in which FDI is prohibited such as (a) Lottery Business including Government /private lottery, online lotteries, etc. (b) Gambling and Betting including casinos etc. (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights (TDRs) (f) Real Estate Business or Construction of Farm Houses (g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Similar to that there are sectors in which FDI is permitted like in Agriculture where 100% foreign investment with automatic approval with general conditions attached to it like complying with compliance with environmental laws & conditions laid down in notifications issued under Foreign Trade (Development & Regulation ) Act, 1992 Similarly for different sectors separate policy is made to with different conditions like tea plantations, mining, media, telecommunication, service sector etc. with the general or specific conditions attached to it either through automatic or government approval route. In 2012 India attractiveness survey was carried out at a time when the dialogue among business leaders about the leaders about the economic crisis was at its peak and investors were in “caution” mode. Regardless of today's crisis, a strong increase in the number of foreign direct investment (FDI) projects in India is a clear indication that global investors view the country as an attractive investment destination.
  8. 8. India Inc witnessed an increase of 25 per cent year-on-year (y-o-y) to record US$ 2.32 billion of FDI in April 2013. Sectors that attracted highest levels of FDI include hotels and tourism sector (US$ 2.32 billion), followed by pharmaceuticals (US$ 987 million), services (US$ 238 million), chemicals (US$ 51 million) and construction sector (US$ 32 million). Singapore alone infused FDI flows worth US$ 1.29 billion in April 2013, followed by Mauritius, the Netherlands and the US with FDI inflows worth US$ 355 million, US$ 173 million and US$ 149 million respectively. FDI inflows aggregated at US$ 22.42 billion in 2012-13. India's foreign exchange (forex) reserves stood at US$ 280.167 billion for the week ended July 5, 2013, according to data released by the central bank. The value of foreign currency assets (FCA) - the biggest component of the forex reserves – stood at US$ 252.103 billion, according to the weekly statistical supplement released by the Reserve Bank of India (RBI). Private equity (PE) firms upped their investments in India Inc by a hefty 42 per cent to US$ 5.4 billion through 197 deals during the first half of 2013; major deal being the US$ 1.2 billion-Bharti Airtel deal, according to a report by EY India (formerly Ernst & Young). Meanwhile, Merger and acquisition (M&A) activity in India was also quite intense pril-June 2013 period. The deal tally stood at US$ 10.9 billion across 130 transactions, according to global deal tracking firm Mergermarket. IMPACT OF GOVERNMENT POLICIES TOWARDS FOREIGN CAPITAL India measures to control inflation, fiscal consolidationwill improve investor climate, India’s economic growth slowed downin 2008-09 in the wake of the internationalfinancial crisis. But the recovery wasrapid; the economy grew at 8% in 2009-10and at 8.5% in 2010-11. There are fearsthat the Indian economy may grow ata slower rate in the current fiscal.India remained very attractive for FDI in2011. FDI projects increased by 20% inIndia in 2011, attracting 932 projects,which created an estimated 255,416 jobs.This is despite a global economic growththat had not fully recovered from thefinancial crisis of 2008–09 and has begunto slow again, from over 5% in 2010down to a projected 3.3% through 2012. Investors came to India to find growthopportunities for their business and thepossibility to operate at lower cost. Fiftypercent of our panel claims that India’smassive and growing domestic market istheir number one draw and 45% of themsee India as a highly cost-competitivelocation.
  9. 9. The number of FDI projects increased by 20% in 2011 reaching 932 projects, supported by the consumer demand, the easy access to financing and the increased approvals by the FIPB. Investment ratio declined in 2009 and 2010, following the financial crisis, but returned in 2011. Projects have also decreased in value; in 2007, the average project was worth US$73 million and, in 2011, it was worth US$63 million. Despite the uncertain global economy and the slight majority of businesses that are putting their investment projects on hold, there was not only an increase inthe number of FDI projects in India from 2010 to 2011, but the value also increased by 12% and the number of jobs by 15%. Investors perceive that India presents value and promising growth dynamics in this increasingly unstable global economy. With a rapidly expanding middle class to consume products and the presence ofa large, well-trained labor force keeping costs down, India presents opportunities both to investors who want to produce and to investors who want to sell. During 2011, investors committed US$58,261 million in India, 71% of which went into the manufacturing sector, creating 320 projects and 144,449 jobs (57% of the total jobs), and producing an average of 451 jobs per project. @**@Since 2007 the attractiveness profile of India has evolved. Although industry was always important, it has grown from supplying 47% of every FDI job in India in 2007 to 57% of every FDI job in 2011. At the same time, services jobs have fallen from creating 36% of every FDI job in India in 2007 to creating 31% in 2011.
  10. 10. Issues & Problem: FDI in India 1. Restrictive FDI regime The FDI regime in India is still quite restrictive. As a consequence, with regard to cross border ventures. Foreign ownership of between 51 and100 percent of equity still requires a long procedure of governmental approval. In ourview, there does not seem to be any justification for continuing with this rule. This ruleshould be scrapped in favor of automatic approval for 100-percent foreign ownershipexcept on a small list of sectors that may continue to require government authorization. 2. Lack of clear cut and transparent sectorial policies for FDI Expeditious translation of approved FDI into actual investment would require moretransparent sectorial policies, and a drastic reduction in time-consuming red-tapism. 3. High tariff rates India’s tariff rates are still among the highest in the world, and continue to block India’s attractiveness as an export platform for labour-intensive manufacturing production. On tariffs and quotas, India is ranked 52nd in the 1999 GCR, and on average tariff rate, India is ranked 59th out of 59 countries being ranked. Much greater openness is required which among other things would include further reductions of tariff rates to averages in EastAsia. 4. Lack of decision-making authority with the state governments The reform process so far has mainly concentrated at the central level. India has yet tofree up its state governments sufficiently so that they can add much greater dynamism tothe reforms. In most key infrastructure areas, the central government remains in control,or at least with veto over state actions. Greater freedom to the states will help fostergreater competition among themselves. The state governments in India need to beviewed as potential agents of rapid and salutary change. Brazil, China, and Russia areexamples where regional governments take the lead in pushing reforms and promptingfurther actions by the central government. 5. Limited scale of export processing zones The very modest contributions of India’s export processing zones to attracting FDI and overall export development call for a revision of policy. India’s export processing zones have lacked dynamism because of several reasons, such as their relatively limited scale.