The document discusses foreign direct investment (FDI) in India before and after economic reforms in 1991. It provides details on: - FDI inflows were low pre-reform due to distrust of foreign capital and complex regulations. Top source countries were Germany, US, UK, Japan. Top sectors were industrial machinery, chemicals, electronics. - Post-1991 reforms liberalized FDI policies and increased inflows. Top source countries are now Mauritius, Singapore, US. Top sectors switched to services, software, telecom. - FDI can enter India through various routes, and sectors like defense, media require government approval while others allow automatic approval. Key hurdles to increasing FDI

1. Foreign Direct Investment
FDI in India, Hurdles for FDI in India

2. FDI in India

3. FDI INFLOWS IN PRE-REFORM PERIOD:
 At the time of independence, the attitude towards foreign capital was one of fear and
distrusts due to previous exploitative role played by the Britishers.
 The legal and constitutional framework governing FDI in India consisted of a complex
jumble of legislative enactment and policy directions designed primarily for the regulation
of domestic investment.
 The government exercised complete discretion and authority in interpreting and applying
these legal and policy provisions to shape and control the FDI.

4.  After independence the cautious FDI policy was resulted in a low level of FDI inflow in
India.
 The amount of FDI increased from US$ 79 million in 1980 to reach a peak level US $ 252
million in 1989 thereafter it declined US $ 237 million in 1990
 The overall FDI inflow during 1980 to 1990 was fluctuating
 FDI increased three times during the period of 1980-1990 and the CAGR (Compound
Annual Growth Rate)(actual) was19.05% during the same period of time.

5. COUNTRY-WISE BREAK-UP OF FDI FLOWS
DURING PRE-REFORM PERIOD
 There was almost a fluctuating trend during the 1981 to 1990. The important feature is that
except Germany almost all the countries have positive trend in FDI in inflows in India. In the
year 1981 the top five investing countries were Germany, USA, UK, Japan and Switzerland
and together they accounted for 86% of total FDI inflows. In 1990, the top five investing
countries are USA, Switzerland, Germany, UK and Italy and together, they accounted
nearly 57% of FDI inflows

7. SECTOR-WISE BREAK-UP OF FDI INFLOW
DURING PRE-REFORM PERIOD:
 The top five sectors which have attracted the bulk of FDI were industrial machinery,
chemicals, mechanical engineering, electrical and electronics and metallurgy and
together they accounted for 54.87% in the year 1981. In 1990, the top five sectors were
electrical and electronics, chemicals, industrial machinery, mechanical engineering and
metallurgy and together they accounted 68.14% of the total FDI inflows

9. FDI INFLOWS IN POST-REFORM PERIOD:
SINCE 1991:
 After mid 1990 the political disturbances along with other economic problem gave rise to
severe financial crisis in the Indian economy
 The high rate of inflation, fiscal deficit and political instability downgraded the
international credit of the country. This resulted in the erosion of the international
community's confidence on our economy

10.  The outflow of deposits especially by NRIs, a virtual stoppage of remittances from Indian
workers in the Gulf countries and a sudden break out of Gulf war in January 1991
exacerbated the balance of payments crisis.
 The foreign exchange became so scanty that, it was insufficient to pay even for one week
imports
 As a result the economic liberalization process was introduced under Structural
Adjustment Programme (SAP) with the support of IMF and the World Bank

11.  This culminated into a series of economic reforms in 1991 along with a host of industrial
policy reforms. NIP 1991 recognized the role of FDI in the process of industrial development
in India in terms of bringing greater competitiveness and efficiency and also
modernization, technological upgradation, creation a sound base for export promotion
and above all integrating India with rest of the world

12. The major highlights of NIP 1991 changes
are as followings
 Abolition of industrial licensing system except for 18 industries
 Ceiling of 40 percent foreign equity under FERA was done away with.
 Removal of registration under MRTP Act.
 Foreign investment promotion board (FIPB) was established and has been authorized to
provide a single window clearance for all project proposals regarded by it.
 Introduction of the dual approval system for FDI proposals viz. (i) through an automatic
approval channel for FDI in 35 priority sectors by RBI upto equity participation 51 percent
and (ii) through formal government of India channel via FIPB/SIA

13. The major highlights of NIP 1991
 Existing companies were allowed to hike their foreign equity upto 51 percent in priority
sector
 Dilution of dividend balancing conditions and its related exports obligation except in case
of 22 consumer goods industries.
 Removal of restrictions of FDI in low technology sectors.
 Automatic permission for technology agreement in high priority industries.
 Removal of condition for FDI with necessary technology agreements etc.

14.  Foreign investment was introduced in 1991 under Foreign Exchange Management Act
(FEMA), driven by then finance minister Manmohan Singh
 As Singh subsequently became the prime minister, this has been one of his top political
problems

15.  Besides these in August 1999 government of India set up Foreign Investment
Implementation Authority (FIIA) within the ministry of industry to facilitate quick translation
of FDI approvals into implementation by providing a pro-active one step after care service
to foreign investor like helping them obtain necessary approvals and sorting their
operational problems
 FIIA is assisted by Fast Track Committee which has been established in 30
Ministries/Departments of Government of India for monitoring and resolution of difficulties
for sector specific projects

16.  The steering committee on FDI was set up by the planning commission in August 2001
under Chairmanship of N.K. Singh which submitted its report in September 2002 to the
Prime Minister
 These policy changes intended for making India an investors, friendly destination‟ for FDI
has undergone more than a decade's experience
 On the other hand, some FDI restrictions have been imposed by the government of India
in order to protect the interest of the country. Sectors such as atomic energy, lottery
business and gambling and betting are prohibited

17. COUNTRY-WISE BREAK-UP OF FDI INFLOWS
DURING POST-REFORM PERIOD
 During the period 1992 to 2008 percentage shares of FDI inflows from top ten countries
underwent a compositional shift in favour of Mauritius, Singapore and the USA comprising
45.12%, 10.04% and 9.92% of the total inflows of FDI worth US$ 72718 million. With share of
the UK 5.8%, Germany 3.3%, and Netherlands 4.3% and so on. Together they account for
nearly 84.9% of total FDI inflows

19. SECTOR-WISE BREAK-UP OF FDI INFLOWS
DURING POST-REFORM PERIOD:
 During 1992-2000 engineering sector was the top most sector for receiving FDI with 20.4%
followed by electronics & electrical equipment (12.5%), chemicals and allied product
(11.7%), services (9.4%), Finance (7.6%), computers (5.8%), food and dairy products (5.8%)
and pharmaceuticals (2.6%) of the total worth US$ 13485 Their share together stood at
76.32%. C
 conversely during 2000 to 2010 service sector has attracted the largest amount of FDI with
a percent share of 20.35 followed by computer software with 8.5%, telecommunications
7.9% etc.

21. What are the forms in which business can
be conducted by a foreign company in
India?
A foreign company planning to set up business operations in India may:
 Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly
Owned Subsidiary.
 Set up Representative Office or a Project Office or a Branch Office of the foreign
company which can undertake activities permitted under the Foreign Exchange
Management (Establishment in India of Branch Office or Other Place of Business)
Regulations, 2000.

22. India has already marked its presence as one of the fastest growing economies of the world.
It has been ranked among the top 3 attractive destinations for inbound investments. Since
1991, the regulatory environment in terms of foreign investment has been consistently eased
to make it investor-friendly.

23. What is the procedure for receiving
Foreign Direct Investment in an Indian
company?
An Indian company may receive Foreign Direct Investment under the two routes as given
under:
 Automatic Route
 Government Route

24. Automatic Route
 FDI is allowed under the automatic route without prior approval either of the Government
or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI
Policy, issued by the Government of India from time to time.

25. FDI up to 100% is allowed under the automatic route in all activities/sectors except the
following which require approval of the government:
 Activities/items that require an Industrial License
 Proposals in which the foreign collaborator has an existing venture/tie up in India in the
same field
 Proposals for acquisition of shares in an existing Indian company in some cases
 All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is
not permitted

26. Government Route
 FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance.

27. FDI Prohibited Sectors
 Atomic Energy
 Lottery business including government lottery and online lottery (even foreign collaboration,
franchise, trademark, brand name, management contract is prohibited)
 Gambling and betting including casino (even foreign collaboration, franchise, trademark,
brand name, management contract is prohibited)
 Business of chit funds
 Nidhi Company
 Trading in transferable development rights
 Real estate business or construction of farm house (except development of townships, roads or
bridges, city and regional infrastructure, etc.,)
 Manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco
substitutes
 Activity / sector not opened to private sector investment [e.g. Atomic energy and Railway
Transport (other than Mass Rapid Transport Systems)].

28. RECENT POLICY MEASURES
 100% FDI allowed in medical devices
 FDI cap increased in insurance & sub-activities from 26% to 49%
 FDI up to 49% has been permitted in the Pension Sector
 FDI limit of 26% in defense sector raised to 49% under Government approval route
 Foreign Portfolio Investment up to 24% permitted under automatic route.
 FDI beyond 49% is also allowed on a case to case basis with the approval of Cabinet
Committee on Security.

29.  Construction, operation and maintenance of specified activities of Railway sector opened
to 100% foreign direct investment under automatic route.
 FDI policy on Construction Development sector has been liberalized by relaxing the norms
pertaining to minimum area, minimum capitalization and repatriation of funds or exit from
the project. To encourage investment in affordable housing, projects committing 30
percent of the total project cost for low cost affordable housing have been exempted
from minimum area and capitalization norms.
 Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons
Resident Outside India) Regulations will be deemed to be domestic investment at par with
the investment made by residents.

30.  Composite caps on foreign investments introduced to bring uniformity and simplicity is
brought across the sectors in FDI policy.
 100% FDI allowed in White Label ATM Operations.

31. SECTORS REQUIRING CENTRAL
GOVERNMENT APPROVAL
 Tea sector, including plantations – 100%.
 Mining and mineral separation of titanium-bearing minerals and ores, its value addition
and integrated activities -100%.
 FDI in enterprise manufacturing items reserved for small scale sector – 100%.
 Defence – up to 49% under FIPB/CCEA approval, beyond – 49% under CCS approval (on a
case-to-case basis, wherever it is likely to result in access to modern and state-of-the-art
technology in the country)

32.  Teleports (setting up of up-linking HUBs/Teleports), Direct to Home (DTH), Cable Networks
(Multi-system operators operating at National or State or District level and undertaking
upgradation of networks towards digitalisation and addressability), Mobile TV and
Headend-in-the Sky Broadcasting Service(HITS) – beyond 49% and up to 74%.
 Broadcasting Content Services: uplinking of news and current affairs channels – 26%,
uplinking of non-news and current affairs TV channels – 100%.
 Publishing/printing of scientific and technical magazines/specialty journals/periodicals –
100%

33.  Print media: publishing of newspaper and periodicals dealing with news and current
affairs- 26%, Publication of Indian editions of foreign magazines dealing with news and
current affairs- 26%.
 Terrestrial Broadcasting FM (FM Radio) – 26%.
 Publication of facsimile edition of foreign newspaper – 100%
 Airports – brownfield – beyond 74%.
 Non-scheduled air transport service – beyond 49% and up to 74%.
 Ground-handling services – beyond 49% and up to 74%.

34.  Satellites – establishment and operation - 74%.
 Private securities agencies – 49%
 Telecom-beyond 49%
 Single brand retail – beyond 49%.
 Asset reconstruction company – beyond 49% and up to 100%.
 Banking private sector (other than WOS/Branches) – beyond 49% and up to 74%, public
sector – 20%.
 Insurance - beyond 26% and up to 49%.
 Pension Sector - beyond 26% and up to 49%.
 Pharmaceuticals – brownfield – 100%.

35. ENTRY STRUCTURES
 INCORPORATING A COMPANY IN INDIA:
It can be a private or public limited company. Both wholly owned & joint ventures are
allowed. Private limited company requires minimum of 2 shareholders.
 LIMITED LIABILITY PARTNERSHIPS:
Allowed under the Government route in sectors which has 100% FDI allowed under the
automatic route and without any conditions.
 SOLE PROPRIETORSHIP/PARTNERSHIP FIRM:
Under RBI approval. RBI decides the application in consultation with Government of India.

36.  EXTENSION OF FOREIGN ENTITY:
Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the
activities specified by the RBI. Approvals are granted under the Government and RBI route.
Automatic route is available to BO/PO meeting certain conditions.
 OTHER STRUCTURES:
Foreign investment or contributions in other structures like not for profit companies etc. are
also subject to provisions of Foreign Contribution Regulation Act (FCRA).

37. STEPS INVOLVED IN INVESTMENT
 Identification of structure
 Central Government approval if required
 Setting up or incorporating the structure
 Inflow of funds via eligible instruments and following pricing guidelines
 Meeting reporting requirements of RBI and respective Act
 Registrations/obtaining key documents like PAN etc.
 Project approval at state level

38.  Finding ideal space for business activity based on various parameters like incentives, cost,
availability of man power etc.
 Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM),
some of the industries may also require industrial license
 Construction/renovation of unit.
 Hiring of manpower.
 Obtaining licenses if any.
 Other state & central level registrations.
 Meeting annual requirements of a structure, paying taxes etc.

39. Hurdles for FDI in INDIA
 Federal Challenge: Very important among the major challenges facing larger FDI, is the
need to speed up the implementation of policies, rules, and regulations. The vital part is to
keep the implementation of policies in all the states of India at par. Thus, asking for equal
speed in policy implementation among the states in India is important

40. Political Challenge: The support of the political structure has to be there
towards the investing countries abroad. This can be worked out when foreign
investors put forward their persuasion for increasing FDI capital in various
sectors like banking, and insurance. So, there has to be a common ground
between the Parliament and the Foreign countries investing in India. This
would increase the reforms in the FDI area of the country.

41. Equity challenge: India is definitely developing in a much faster pace now
than before but in spite of that it can be identified that developments have
taken place unevenly. This means that while the more urban areas have been
tapped, the poorer sections are inadequately exploited. To get the complete
picture of growth, it is essential to make sure that the rural section has more or
less the same amount of development as the urbanized ones. Thus, fostering
social equality and at the same time, a balanced economic growth

42. Resource challenge: India is known to have huge amounts of resources. There
is manpower and significant availability of fixed and working capital. At the
same time, there are some underexploited or unexploited resources.
The resources are well available in the rural as well as the urban areas.
The focus is to increase infrastructure 10 years down the line, for which the
Requirement will be an amount of about US$ 150 billion. This is the first step to
overcome challenges facing larger FDI.

43. Road ahead
 According to United Nations Conference on Trade and Development (UNCTAD) World
Investment Report 2015, India acquired ninth slot in the top 10 countries attracting highest
FDI in 2014 as compared to 15th position last year.
 The report also mentioned that the FDI inflows to India are likely to exhibit an upward trend
in 2015 on account of economic recovery.
 India also jumped 16 notches to 55 among 140 countries in the World Economic Forum’s
Global Competitiveness Index that ranks countries on the basis of parameters such as
institutions, macroeconomic environment, education, market size and infrastructure
among others.

44.  India will require around US$ 1 trillion in the 12th Five-Year Plan (2012–17), to fund
infrastructure growth covering sectors such as highways, ports and airways. This would
require support from FDI flows
 During 2014, foreign investment was witnessed in sectors such as services,
telecommunications, computer software and hardware, construction development,
power, trading, and automobile, among others.