Framework for FDI in India and Foreign Investment Policy

8/6/2019 Framework for FDI in India and Foreign Investment Policy

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FRAMEWORK FOR FDI IN INDIA

AND FOREIGN INVESTMENT

POLICY

Presented By:

NEENU .T.HARINEETHU SUNNY

NESRIN.K.A REEBA MARYJOSE

SAJISH.V.S



FOREIGN DIRECT INVESTMENT (FDI)

�FDI is a long ±term investment by a foreign direct investor in an enterprise resident in an economy other than that in

which the investor is based.

�FDI relationship consists of a parent enterprise and a foreignaffiliate, which together form a Transnational Corporation.



TYPES OF FDIy Greenfield Investment

y Merger & Acquisitions

y Horizontal FDI

y Vertical FDIy Backward Vertical FDI

y Forward Vertical FDI





1900-1918

y Until the end of First World War, 1918, the foreign investment in India was

totally dominated by the British companies.

y Trading and Services sectors were the major areas of foreign investments

y 11 manufacturing companies from UK, Europe, USAy British manufacturing companies like Unilever, ITC, Glaxo, ICI, GEC,

Goodlass Nerolac, and Britania Biscuits

y American companies like Chicago Pneumatics and Ludlow Jute, the Dutchcompany, Margarine Unie

y

Japanese company, Densoy Stable colony with abundant natural and mineral resources

y India ranked eighth as a host to foreign investments in 1914



1919-1942

y The USA and Japan emerged as powerful nations after the World War-I

y Trade and investment from the USA increased in India during this period.

y American companies General Motors, Ford Motors, and Colgate Palmolive.

y Trade investments from Japan increasedy Japan exported more than half (57 %) of its cotton yarn and 28% of its piece

goods to India in 1932.

y It also imported as much as 47% of its raw cotton requirement from India in1928, but the volume increased to more than half (51%) in 1937



1943-1961

y Local industries largely favored the flow of foreign technology and

foreign capital from around the world.

y Germany and the United Kingdom set up large-scale

industrial projects in India.y amount of FDI and the number of foreign joint ventures in

India increased

y With India becoming free from the British rule in 1947,

the opportunity for companies from Europe and America arose.

y Share of FDI in manufacturing sector also increased significantly during thisperiod, due to the FDIpolicy guidelines of the Government of India





1978-1990

y The year 1978 marked liberalization and globalization

process of FDI in India. GOI made a series of changes in the export andimport policies in India during this period

y

USA emerged to be the biggest contributor to the number of joint ventures inIndia.

y Germany was the second largest contributor

y The total number of joint ventures also increased from 307 in 1978 to 703 in1990.

y FDI rose from 89 million INR to 1238 million INR, an increase of over 13 times

y The year 1991 marks a new growth phase of FDI in India with an all time high

flow of FDI.



1991-2000

y Following the Industrial Policy (1991) 145 foreign companies registered in India

within a span of 10 years from 1991-2000.

y Companies like GM, Ford, and IBM divested from India in the 1950s and 1970s

reentered India

y Asian companies like Daewoo Motors, Hyundai Motors and LG Electronics

y S. Korea: MatsushitaTelevision and Honda.

y IMF and World Bank provide loans to India on the conditions that India will makemajor changes to liberalize trade and investments in India

y GOI replaced FERA, 1973 that regulated all foreign exchange

transactions with

Foreign Exch

ange Management Act (FEMA), 1999.y The objectives of FEMA : facilitate external trade and payments and to promote orderly

development and maintenance of foreign exchange market

y The total number of foreign collaborations increased from 976 in the year 1991

to 2144 in the year 2000.

y amount of FDI increased from 5156 million INR to 3737 million INR



Present Picturey India: Fourth largest economy in terms of Purchasing

Power Parity

y T

enth

most industrialized economy y GDP growth rate of 8.1% - Second highest in the world.

y FDI inflows 1.74 bn in Nov 2009

y Financial institutional investors(FII) inflows:y

For th

e period, July 2003 Jan 2004 FII inflowh

asexceeded USD 7 bn, which is more than the cumulativeFII inflow in the last five years.



India- Advantages as a destination

for FDI�Young Demographic Profile- 54% population below 25

years

�Abundant availability of Skilled Human Resources

�Adequate natural resources and raw materials

�Large and growing domestic market

� Established rule of law and a vibrant three tiered

democracy



ROUTES FOR FOREIGN DIRECT

INVESTMENT Three types:

� Automatic

�FIPB Route�CCFI Route




INVESTMENT Routes available for FDI:

1st route:

Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral capsspecified for the listed activities. Only filings have to be made

by the Indian company with the concerned regional office of the Reserve Bank of India (³RBI´) within 30 days of receipt of remittance and within 30 days of issuance of shares



THE ENTRY PROCESS:

AUTOMATIC ROUTE All items/activities for FDI investment up to 100% fallunder the Automatic Route except the following:

All proposals that require an Industrial License.

All proposals in which the foreign collaborator has aprevious venture/ tie up in India

All proposals relating to acquisition of existing sharesin an existing Indian Company by a foreign investor.

All proposals falling outside notified sectoral policy/

caps or under sectors in which FDI is not permitted.




INVESTMENT IN INDIA2nd Route:

FIPB Route ±

Investment proposals falling outside the automatic route would

require prior Government approval. Foreign Investment requiring

Government approvals are considered and approved by the Foreign

Investment Promotion Board (³FIPB´). Decision of the FIPB

usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI



FIPB APPROVAL For all activities, which are not covered under the AutomaticRoute

Composite approvals involving foreign investment/ foreigntechnical collaboration

Published Transparent Guidelines vs. Earlier Case by CaseApproach

Downstream Investment




INVESTMENT 3rd Route:

CCFI Route:

Investment proposals falling outside the automatic route andhaving a project cost of Rs. 6,000 million or more wouldrequire prior approval of Cabinet Committee of ForeignInvestment (³CCFI´). Decision of CCFI usually conveyedin 8-10 weeks. Thereafter, filings have to be made by the

Indian company with the RBI- Investment proposals falling within the automatic routeand having a project cost of Rs. 6,000 million or more donot require to be approved by CCFI



List of Industries in which Automatic Route

Not Availabley 1. Petroleum Sector (except for private sector oil refining)/ Natural

Gas/LNG, Pipelines

y 2. Investing companies in Infrastructure & Services Sector

y

3. Defence and Strategic Industriesy 4. Atomic Minerals

y 5. Print Media

y 6. Broadcasting

y 8. Postal services

y 9. Courier Servicesy 10. Establishment and Operation of satellite

y 11. Development of IntegratedTownship

y 12. Tea Sector



List of activities or items for which FDI is

prohibited.y Gambling and Bettingy Lottery Businessy Business of chit fund or Nidhi Company y

Housing and Real Estate business except for thedevelopment of townships, housing, built-upinfrastructure and construction development project

y Retail Tradingy Atomic Energy y

Agriculture (excluding Floriculture, Horticulture,Development of Seeds, Animal Husbandry, Piscicultureand Cultivation of Vegetables, Mushrooms etc. undercontrolled conditions and services related to agro andallied sectors) and Plantations (other than Teaplantations)





FDI Scheme- FEMA Regulations FDI includes investment by

� a non-resident;

� a non-resident incorporated entity (foreign company),� a non-resident Indian,

� Person of Indian Origin,

FDI includes investment through

� Issue of Preference shares

� American Deposit Receipts (ADR)/Global Deposit

Receipts (GDR)

� Foreign Currency Convertible Bonds



FDI Policy - Salient featuresIndustrial sector-

� Manuf acturing- permitted up to 100% on the automatic route in all

manufacturing activities except for cigarettes ; defence related

items; and items reserved for SSI sector.

� Mining Sector -100% is permitted on the automatic routeexploration and mining of diamonds, precious stones, gold, silver

and minerals. 100% in coal and lignite mining for captive

consumption by power projects, and iron and steel, cement

production and other activities permitted under the Coal Mines

(Nationalisation) Act, 1973.� Electricity Sector- 100% is permitted on the automatic route in

generation, transmission, distribution of electricity and also power

trading subject to the provisions of the Electricity Act, 2003



FDI Policy - Salient features

(contd.)

Inf rastructure sector- 100% is permitted on the

automatic route in roads and highways, ports and greenfieldAirport projects. FDI up to 100% is permitted in existing

airport project but the same requires prior approval for FDI

beyond 74%.

Services sector - Many of the activities under the

Services sector attract caps on foreign equity and are subjectto sectoral regulations.



FDI Policy - Salient features(contd.) Services Sector- Caps26 %cap in Print media: Publishing newspaper and

periodicals dealing with news and current affairs; and in

Insurance

49 %in Broadcasting; Air transport services and Stock

Exchanges

51% in single brand product retailing

74% in Telecommunication services; ISP with gateways,radio-paging, end-to-end bandwidth; Establishment and

operation of satellites; and Private sector banks



FDI Policy - Salient features

(contd.) AGR ICULTURE- FDI is not allowed in agriculture and

plantation activities except tea plantation. In the tea sector FDI

is allowed up to 100% with prior Government approval.

FDI is allowed in certain activities up to 100% on the

automatic route. These are Floriculture, Horticulture,

Development of Seeds, Animal Husbandry, Pisciculture, and

Cultivation of Vegetables, Mushrooms under controlled

conditions and services related to agro and allied sectors.

REAL ESTATE -FDI is not permitted in Real Estate business

i.e. buying and selling of properties.



METHODS

y The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:

y

by incorporating a wholly owned subsidiary or company y by acquiring shares in an associated enterprisey through a merger or an acquisition of an unrelated

enterprisey participating in an equity joint venture with another

investor or enterprisey derogation from regulations (usually for very large projects)



FOREIGN DIRECT INVESTMENT INCENTIVES MAY

TAKE THE FOLLOWING FORMS:

y low corporate tax and income tax rates

y tax holidaysy other types of tax concessions

y preferential tariffs

y

special economic zonesy investment financial subsidies

y soft loan or loan guarantees



y free land or land subsidies

y relocation & expatriation subsidies

y job training & employment subsidiesy infrastructure subsidies

y R&D support



ADVANTAGESy it helps in the economic development of the particular

country where the investment is being made.

y

used for the purpose of making contributions to therevenues of corporate taxes of the recipient country

y helps in the creation of new jobs in a particularcountry

y assists in increasing the incomey opens up the export window

y borrow finance at lesser rates of interest



FDI SECTORAL GUIDELINESy AIRPORTS

y TELECOM

y DOMESTIC AIRLINES

y DRUGS & PHARMACEUTICALS

y INSURANCE

y MINING

y PETROLEUM

y

PRIVATE SECTOR BANKING:y PRINT MEDIA

y BROADCASTING

y INFRASTRUCTURE:



DETERMINANTSy For a TNC to invest successfully abroad it must possess

advantages which no other firm posses (O), the country it wishesto invest in should offer location advantages (L), and it must be

capable of internalizing operations (I). Internalization issynonymous with the ability of firms to exercise control overoperations essential for the exploitation of ownership andlocation advantages.

y It is location advantages that form the core of much of the

discussion on the determinants of FDI in developing countries.The two other attributes necessary for FDI are taken as givenfrom the perspective of developing countries.



CONCLUSION OF THESE STUDIES

* Host countries with sizeable domestic markets, measured by gross domestic product (GDP) per capita and sustained growth,

measured by growth rates of GDP, attract relatively large volumesof FDI.

* Resource endowments of host countries, including naturalresources and human resources are a factor of importance in theinvestment decision process of TNCs.

* Infrastructure facilities (including transportation andcommunication networks) are an important determinant of FDI.

* Macroeconomic stability, signified by stable exchange rates andlow rates of inf lation, is a significant factor in the FDI decisions

of TNCs.



Contdy Political stability in the host countries is a significant factor in

the investment decision process of TNCs.

y A stable and transparent policy framework towards FDI is

attractive to potential investors.



Documents

Framework for FDI in India and Foreign Investment Policy