CHAPTER 3

FDI POLICY IN INDIA

 CHAPTER 3

FDI POLICY IN INDIA

In Chapter 3, evolution of FDI policies in India since independence has been

examined in detail.

3.1 Origin of FDI in India

The origin of FDI in India can be traced back to 1500 A.D. when the Portuguese set
up their first textile unit in Calicut, followed by the British East India Company in
1600 A.D. and the Dutch East India Company in 1602 A.D. They came to our
country as merchants and later turned industrialists and some of them became rulers.
Fierce competition followed between these merchants and industrialists from these
countries till 1800 A.D. Finally, British East India Company emerged successful and
colonized India. Political subordination of India was the best protection for the British
and MNCs' market from Japanese competition.

The entry of FDI into India on a commercial scale began in 1875 with initial
investments in the field of mining, tea plantation, railways, insurance, generation and
distribution of electricity and wholesale and retail trade.

3.2 Evolution of FDI Policy in India

(a) Foreign Direct Investment after Independence

Up to August 1947, the policy of the Government of India was one of permitting
unconditional and unrestricted inflow of foreign capital due to political dependency.
After independence the Government of India's policy with regard to foreign capital
was formulated, for the first time, in the Industrial Policy Resolution of 6 April 1948.
The government recognized participation of foreign capital and enterprise,
particularly as regards to industrial technique and knowledge for rapid
industrialization of the economy .

^Constituent Assembly of India, Legislative Debate, V. 1, 3296-97.

46
The role of private foreign capital in India during the period since independence has
been to facilitate the drift towards monopoly and concentration of economic power in
the hands of the few. There were no restrictions on the 100 per cent ownership of
Indian subsidiaries, but the authorities exerted informed pressure on foreign
companies to sell part of their equity to local investors. The policy environment was
sufficiently unpredictable to discourage new entrants into India.

Thus from the begirming of Independence period, thrust was on manufacturing sector.
Till today, the same sector is a cause of concern for our country as far as exports from
this sector is concerned and more FDI needs to be attracted in this sector which is
discussed in detail in Chapter 5 i.e., Sectoral FDI in India.

It is also observed that private foreign capital, particularly of the direct equity type,
has a general tendency to avoid sectors such as agriculture, public utilities, social
overheads, and to go into only lucrative industries. This is not surprising because
considerations such as profit incentives and export and import incentives are generally
absent in the case of sectors like agriculture, public utilities, and social overheads.
Another reason why private capital is not attracted to these sectors is the fact that
most of the projects in these sectors have comparatively long maturity, the waiting
period being too much for private investors to bear, low return on investment, and
uncertainty of projects.

(b) FDI Policy during 1960-1980s

During this period, the FDI policy of India was more restrictive due to the need to
develop local industries. In 1973, the Foreign Exchange Regulation Act (FERA) came
into force, requiring all foreign companies operating in India, with up to 40 per cent
equity, to register under Indian corporate legislation. Government initiated the
following measures such as:

• No FDI was allowed without transfer of technology.

• Renewals of foreign collaborations were restricted.

• Foreign Exchange Regulation Act, 1973 was restricted to FDI in certain core
or high priority industries.

• Equity participation was restricted to 40 per cent.

47
The policy essentially aimed at retaining majority domestic ownership and effective
control in foreign enterprises and thus was characterised by a cautious welcome to
foreign investments. For technology transfer and royalty payment, a selective
licensing regime was followed. Technical collaborations were permitted for import
substitution, technology upgradation, and for export oriented enterprises.

Foreign collaborations were encouraged in designated protected industries which

included drugs and pharmaceutical, aluminum, heavy electrical enterprises, fertilizers,
machine tools and extensive concessions and tax advantages were offered to attract
multinational companies.

Thus, in this phase, government was trying out the outcomes of FDI on various
sectors keeping in mind the future and growth prospects of indigenous companies.

Development pattern of India during the first three decades (1950-1980) after
attaining independence in 1947 was featured by strong centralized plarming,
govenmient ownership of basic and key industries, excessive regulation and control of
private enterprise, trade protectionism through tariff and non-tariff barriers and a
cautious and selective approach towards foreign capital. It was a quota, permit, and
license regime all the way and was guided and controlled by a bureaucracy that was
trained in colonial style. This so called inward-looking, import substitution strategy of
economic development began to be widely questioned with the begiiming of 1980s.
Policy makers started realizing the drawbacks of this strategy which inhibited
competitiveness and efficiency and produced a much lower rate of growth than
expected.

FDI policy in this period was not export oriented and was restrictive in nature, which
could not result in making balance of payment situation favourable. Thus, measure
was taken as a part of structural adjustment programme to make our economy more
liberal and norms for FDI were also liberalised.

(c) FDI Policy from 1980s to 1990s

In the 1980s, as a part of the industrial policy resolutions, the attitude towards FDI
was liberalized. However, inward looking regulatory regime continued until the early
1980s. This period was the period of opening up and gradual liberalization. However,
through the new economic policy and the new industrial policy of 1991, a series of

48
policy measures were announced to liberalize the FDI environment in the country and
policies towards foreign multinationals were radically revised. Rules and procedures
regarding remittance of profits, dividends, and royalties were relaxed. A fast channel
was set up for expediting clearances of FDI proposals.

Government introduced a series of measures through 1985-industrial policy, to reduce

control on industries, particularly large ones. These measures described as New
Economic Policy, coincided with the policy framework of the Seventh Five-Year Plan
(1985-1990).

The process of economic reforms initiated in 1985 got a big boost after the
announcement of a new industrial policy on 24"^ July 1991. The new policy aimed at
competitive and market oriented economy in place of the controlled and protected
economy.

(d) FDI Policy since 1991

In July 1991, the first generation reforms created conducive environment for foreign
investment in India. This actually started the process of liberalization of FDI policy.
One of the measures undertaken was that foreign investment and technology
collaboration was welcomed to obtain higher technology, to increase exports and to
expand the production base. Many concessions were announced for foreign equity
capital in 1991-1992. The foreign equity capital limit was raised to 51 per cent. FDI
was allowed in exploration, production, refining of oil and marketing of gas.

NRIs and Overseas Corporate Bodies were allowed to invest 100 per cent equity in
high priority areas as well as in export houses, hotels and tourism related industries.

The most significant step was replacement of Foreign Exchange Regulation Act
(FERA), 1973 with Foreign Exchange Management Act, 1999 (FEMA). The object of
the Act is to consolidate and amend the law relating to foreign exchange with the
objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.

Licensing was eliminated, and firms in all but a few sectors were allowed to start
operations without government approval. The impact of de-licensing was most

49
evident in sectors like steel, automobiles, FMCG and consumer electronics which
witnessed a surge in entry of new firms.

Automatic route for FDI is permitted. Except for certain specified activities, no prior
approval from exchange control authorities i.e., Reserve Bank of India is required.
Many new sectors were throvra open for FDI.

For purpose of policy analysis, period from 1991 onwards has been bifurcated into
four phases, viz., 1991-1996,1997-1998, 1999-2001, and 2001 onwards.

First Phase (1991-1996)

Due to pressure from the international financial bodies such as World Bank and IMF,
structural changes were adopted by our country by liberalizing trade and investment
policy. The initial phase of economic reforms was marked by abolition of widespread
industrial licensing, rationalization of taxes, reduction in import tariffs and reform of
foreign exchange regulations.

(a) Except for 15 critical industries, industrial licensing was abolished in July 1991
and the number of industries reserved for public sector was opened up for the private
sector. Measures were simultaneously initiated for liberalizing policy relating to FDI
and technology transfer. Approval mechanism for FDI was made simpler and
transparent.
(b) Two approval routes i.e., automatic route and Foreign Investment Promotion
Board (FIPB) route were introduced. Many sectors were not covered under the
automatic route during the initial phase of opening up.
(c) Thirty five high priority industries were initially notified for approval under
automatic route for which foreign equity cap was pegged at 51 per cent (Govt, of
India, Department of Industrial Policy and Promotion, Press Note No. 10 (1992
series), dated 24"' June 1992).
(d) Capital account restrictions were eased to allow Indian companies to raise capital
abroad, by way of Eurobonds and GDR/ADRs, and acquire firms in other countries.
The domestic capital market was restructured with the Securities and Exchange

50
Commission and the National Stock Exchange as the driving forces, and interest rates
were liberaUzed.
(e) Foreign investment is permitted in virtually every sector, except those of strategic
concern such as defense and transport. Foreign companies are permitted to set up 100
per cent subsidiaries in India.

Second Phase (1997-1998)

(a) This phase gathered further momentum and 111 industries were expanded for
approval under automatic route.
(b) Sectoral caps were incrementally raised for specified industries/service sector up
to 50, 51 and 74 per cent respectively [Govt, of India, Department of Industrial Policy
and Promotion, Press Note No.2 (1997 series), dated 17"^ January 1997].

Third Phase (1999-2001)

(a) In this phase, the focus shifted to opening of infrastructure, insurance and service
sector, liberalizing royalty payment regime and permitting royalty on trademarks and
brand names.
(b) Foreign equity was permitted up to 100 per cent in roads, ports, harbors, bridges,
and high ways in 1999.
(c) Guidelines for FDI in Non-Banking Financial Companies (NBFCs) for non-fiind
based activities were spelt out and minimum capitalization norm of US $ 0.5 million
was prescribed for all activities permitted with foreign investment (Govt, of India,
Dept. of Industrial Policy and Promotion, Press Note No. 14 (1999 series).
(d) In 2000, most of the activities were placed under the automatic route with 100 per
cent foreign equity participation, except a few.

Fourth Phase (2001 onwards)

In this current phase, policy thrust for opening up service, financial and key
infrastructure sectors has been sustained. With changes in sectoral cap, total
dimension of FDI inflows are now concentrated in tertiary sector which offers very

51
lucrative returns to foreign investors. Some of the important features are noted liere
followed by the sector specific policy.

(a) The dividend balancing condition was removed. To make the investment in India
attractive, investment and returns on them are made freely repatriable, except where
the approval is subjected to specific conditions such as lock-in period on original
investment, dividend cap, foreign exchange neutrality, etc. as per the notified sectoral
policy. The condition of dividend balancing that was applicable to FDI in 22 specified
consumer goods industries stands withdrawn for dividends declared after 14th July
2000 (Govt, of India, DIPP, and Press Note No. 7 of 2000 series).
(b) FDI is freely allowed in all sectors including the services sector, except a few
sectors where the existing and notified sectoral policy does not permit FDI beyond a
ceiling.
(c) FDI for virtually all items/activities can be brought in through the Automatic
Route under powers delegated to the Reserve Bank of India (RBI), and for the
remaining items/activities through Government approval. Government approvals are
accorded on the recommendation of the Foreign Investment Promotion Board (FIPB)
(Source: SIA, Manual on FDI, Policy and Procedures, Govt, of India, May 2003).
(d) Foreign equity up to 100 per cent has been permitted for operating subsidiaries by
NBFCs. (Govt, of India, Dept. of Industrial Policy and Promotion, Press Note No. 2
(2001 series), dated 17"" April 2001.
(e) For drugs and pharmaceutical, hotels and tourism sectors, foreign equity is
permitted up to 100 per cent under the automatic route.
(f) For internet service providers with gateways, radio paging and end to end
bandwidth, equity capital has been raised from 49 per cent to 74 per cent, subject to
approval by FIPB (Govt, of India, Dept. of Industrial Policy and Promotion, Press
Note No. 4 (2001 series), dated 21'' May 2001.)
(g) For integrated township, housing and built up infrastructure, 100 per cent foreign
equity was allowed under the automatic route in 2005 (Govt, of India, Dept of
Industrial Policy and Promotion, Press Note No. 2 (2005 series), dated 3"* March
2005.
(h) In the year 2000, a paradigm shift occurred, wherein, except for a negative list, all
the remaining activities were placed under the automatic route (Govt, of India, DIPP,
Press Note 2 of 2000).
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(i) The insurance and defense sectors were opened up to a cap of 26 per cent (Press
Note 10 of 2000, 4 of 2001 and 2 of 2002). In the case of Insurance services, there is
the main issue of 26 per cent cap on foreign investment besides restrictions like
minimum capitalization norms, funds of policy holders to be retained within the
country, compulsory exposure to rural and social sectors and backward classes. For
the defense sector, the entry of foreign investor will be allowed depends on the "State
of Art".
()) The cap for telecom services were increased from 49 per cent to 74 per cent (press
Note 5 of 2005).
(k) FDI was allowed up to 51 per cent in single brand retail (Press Note 3 of 2006).
(1) Limits on payment of royalty were removed (Press Note 8 of 2009).
(m) Government has allowed FDI, in Limited Liability Partnerships (Press Note 1 of
2011).
(n) In March 2005, the government announced a revised FDI policy, an important
element of which was the decision to allow FDI up to 100 per cent foreign equity
under the automatic route in townships, housing, built-up infrastructure and
construction-development projects. The year 2005 also witnessed the enactment of the
Special Economic Zones Act, which entailed a lot of construction and township
development that came into force in February 2006.
(o) FDI up to 100 per cent is permitted under the automatic route for the
establishment of SEZs. Proposals not covered under the automatic route require
approval by FIPB. FDI up to 100 per cent is permitted under the automatic route for
setting up 100 per cent Export Oriented Units (EOUs), subject to sectoral policies.
(p) FDI up to 100 per cent is permitted under the automatic route for the
establishment of Industrial Parks. Proposals for FDI/NRI (Non-Residents Indian)
investment in Electronic Hardware Technology Park (EHTP) and Software
Technology Park (STP) units are eligible for approval under the automatic route,
subject to certain parameters listed by the government.

The raising of sectoral caps in services sector from 2004-2005 has resulted in services
sector attracting more FDI inflows. One of the prime reasons for attracting FDI
towards the services was growth potential and quick returns available to foreign
investors in our country.

53
The changes in the policies are well reflected in FDI inflows. The policy changes
initiated during the second decade of reforms were very effective to attract more
quantum of FDI.

Table 3.1 presents the inflows data for the 10-year period 2000-01 to 2009-10 which
does not suffer from comparison problems. The change in the reporting practice
which introduced new items, especially reinvested earnings of the already established
ones, did contribute significantly to the reported higher total inflows. India adopted
the international practice of reporting FDI inflows data and started giving out the
information for the year 2000-01 onwards. Till then reinvested earnings and other
capital provided by foreign direct investors were not being reported as part of the
inflows data. Thus the reported inflow figures have better comparability from 2000-01
onwards and the earlier figures suffer from a degree of underestimation. This was
introduced following the recommendations of the RBI Committee on Compilation of
Foreign Direct Investment in India, October 2002.

This DIPP fact sheet shows that during 2000-2001 total FDI inflows were US $ 4029
million. The FDI inflows kept on rising year wise. It touched US $ 8961 million in
2005-2006; which means that FDI inflow increased by US $ 4932 million therefore
rose by 122.4 per cent between 2000 and 2005.

In 2006-2007 it galloped to US $ 22826 million, means in a year it showed

tremendous increase in FDI inflows. This is due to more liberalizing FDI policy
towards the infrastructure and services sector. From 2004 onwards government has
allowed 100 per cent FDI in infrastructure and most of the tertiary sector which has
been reflected in getting more than double FDI in 2006-2007. The same policy
continued further and reflected in rise FDI up to US $ 37763 million during 2009-
2010. The year 2010 received US $ 27024 million, a reduction in FDI inflows. So,
during the ten years i.e. from 2000 to 2010, FDI inflow amount rose by US $ 22995
million. (US $ 27024 million - US $ 4029 million). Thus it shows that FDI was
increased by 570.73 per cent.

54
Table 3.1: Reported FDI Inflows to India and their Main Components
(As per best international practices)
(US $ mn)
Main Components
Financial Year Equity Equity Capital Re-invested Other Total Share of New
(April-March) Inflows of Eamings+ Capital + FDI Items in the
(FIPB/SIA, Unincorporated Inflows Total
Automatic Bodies ** [(3)+(4)+(5)]/
& (6)xl00
Acquisition
Routes)*
1 2 3 4 5 6 7
2000-0 i 2,339 61 1,350 279 4,029 41.95
2001-02 3,904 191 1,645 390 6,130 36.31
2002-03 2,574 190 1,833 438 5,035 48.88
2003-04 2,197 32 1,460 633 4,322 49.17
2004-05 3,250 528 1,904 369 6,051 46.21
2005-06 5,540 435 2,760 226 8,961 38.18
2006-07 15,585 896 5,828 517 22,826 31.72
2007-08 24,573 2,291 7,679 292 34,835 29.46
2008-09 27,329 702 9,030 777 37,838 27.77
2009-10(P) (+)(++) 25,609 1,540 8,669 1,945 37,763 32.18
2010-11(P)(+) 19,430 657 6,703 234 27,024 28.10
Memorandum Items
1991-92@-1999-00 15,483 - - - 15,483
2000-01 to 2004-05 14,264 1,002 8,192 2,109 25,567 44.21
2005-06 to 2009-10 98,636 5,864 33,966 3,737 1,42,223 30.63
2000-01 to 2009-10 1,12,900 6,866 42,158 5,846 1,67,790 32.70
Source: Based on DIPP, "Fact Sheet on Foreign Direct Investment (FDI)", March 2011.
@ August 1991 to March 1992.
"+" (?) All figures are provisional and data in respect of 'Re-invested earnings' and 'Other capital' for the years 2009-2010 and
2010-11 are estimated as averages of previous two years.
++ Data on equity capital of unincorporated bodies, reinvested earnings and other capital pertains to the period from April 2009
to December 2009.
# Hereafter referred to as FDI Equity Inflows.
## Figures for equity capital of unincorporated bodies for 2009-10 are estimates.

Now, let us have a look at the sector wise cap limit on FDI. Table 3.2 represents the
sector specific cap limit for FDI in India and its entry route. As it is evident from the
following Table, most sectors of the economy are now open to foreign investments
through automatic route of approval with 100 per cent equity participation. A few
sectors which are considered to be sensitive like defense production, broadcasting,
and banking and insurance require government approval through FIPB.

55
Table 3.2: Sector Specific Cap Limit and Entry R oute for FDI in I ndia
Sector Specific Policy for Foreign nvestment
Sr.No. Sector/Activity FDI Cap/Equity Entry Route

1 Agriculture 100% Automatic

2 Tea Plantation 100% FIPB

3 Mining 100% Automatic

4 Coal and Lignite 100% Automatic

5 Manufacturing
5.1 Alcohol 100% Automatic
5.2 Coffee, Rubber 100% Automatic
5.3 Defense Production 26% FIPB
5.4 Chemicals 100% Automatic
5.5 Industrial Explosives 100% Automatic
5.6 Drugs and Pharmaceuticals 100% Automatic
6 Power 100% Automatic
Services Sector
7 Airport
7.1 Greenfield Projects 100% Automatic
49-74% FDI
7.2 Other Services Automatic
100%forNRl
8 Asset Reconstruction Company 49% FIPB
49%:Automatic
9 Banking - Private Sector 74%
49-74%: FIPB
10 Banking - Public Sector 20% FIPB
11 Broadcasting
11.1 FM Radio 20% FIPB
11.2 Cable Network 49% FIPB
11.3 DTH 49% FIPB
11.4 Other Services 26-100% FIPB
12 Commodity Exchanges 49% FIPB
13 Development of Townships etc. 100% Automatic
14 Courier Services 100% FIPB
15 Infrastructure Companies in Securities Markets 49% FIPB
16 Industrial Parks 100% Automatic
17 Insurance 26% Automatic
18 Investing Companies in Infrastructure/Services Sector 100% FIPB
19 NBFCs 100% Automatic
49%:PFU FIPB
20 Petroleum and Natural Gas
100%:Private Automatic
21 Print Media 26% FIPB

Contd.

56
Table 3.2: Sector Specific Cap Limit and Entry Route for FDI in India
Sector Specific Policy for Foreign Investment
Sr.No. Sector/Activity FDI Cap/Equity Entry Route

22 Telecommunication
49%:Automatic
22.1 Telecom Services 74%
49-74%: FIPB

49%:Automatic
22.2 ISP with Gateway 74%
49-74%: FIPB

49%:Automatic
22.3 ISP without Gateway 100%
49-100%: FIPB

22.4 Telecom Equipment Manufacturing 100% Automatic

23 Trading
23.1 Cash & Carry 100% Automatic
23.2 Trading for Exports 100% Automatic
23.3 E-commerce Activities 100% Automatic
23.4 Single Brand Retailing 100% Automatic
Source: Govt, of India Consolidated FDI Policy (Dept. of Industrial Policy and Promotion), October
2010.

As a result of the various steps that have been taken, India's FDI policy is now quite
open and comparable to many countries.

Caps on FDI shares are now applicable to only a few sectors, mainly in the services
sector. Barring attempts at protecting Indian entrepreneurs with whom the foreign
investors had already been associated with either as joint venture partners or
technology licensors, it has been a case of progressive liberalization of the FDI policy
regime. Simultaneously, the government has continuously strived to remove the
hurdles in the path of foreign investors both at the stage of entry and later in the
process of establishing the venture, in order to maximize FDI inflows.

Much of the foreign investment can now take advantage of the automatic approval
route seeking prior permission of the Central Government. These include air transport
services, ground handling services, asset reconstruction companies, private sector
banking, broadcasting, commodity exchanges, credit information companies,
insurance, print media, telecommunications and satellites and defense production.

3.3 Prohibition on FDI in India

Though FDI is considered as the best option for long term development, our
Government has not allowed FDI haphazardly in each and every sector. Government

57
has not allowed FDI in those sectors which are not desired for the rational growth of
the society and which may invoke people to undertake illegal activities, in sectors
which are not in the national interest. FDI restrictions have also been imposed in order
to allow the domestic companies to make more profits with less competition, than that
of in the presence of rivalry international firms.

Thus, it is clear from the govenmient policies that FDI is not allowed in activities like
gambling, casinos, business of chit funds, Nidhi Company. At the same time, atomic
energy sector is also not welcomed for FDI in order to protect the security and
sovereignty of our country. In case of defense sector, government has allowed 26 per
cent FDI, in order to initiate investment process, but the stake and permission is
restricted and depends on 'state of art' so far. It is also well understood that
agriculture is the backbone of our economy so to protect the livelihood of our half of
the citizens who depend on agriculture; government has not allowed FDI in actual
farming and cuhivation process. But to boost the agricultural exports, FDI in agro
processing industries is allowed. Therefore, regulatory authorities such as RBI, DIPP,
and SIA have allowed FDI, taken into account the various repercussions on our
economy as a whole. The various Indian Sectors having restrictions of FDI are given
below.

Foreign investment in any form is prohibited in a company or a partnership firm or a

proprietary concern or any entity, whether incorporated or not (such as trusts) which
is engaged or proposes to engage in the following activities

1. Business of chit fund, or

2. Nidhi company,
3. Agriculture or plantation activities, or
4. Real estate business, or construction of farm houses, or
5. Trading in Transferable Development Rights (TDRs).
6. Atomic energy
7. Lottery business including government/private lottery, online lotteries etc.
8. Gambling and betting including casinos
9. Activities and sectors not opened to private sector investments
10. Agriculture (excluding floriculture, horticulture, development of seeds, animal
husbandry, pisciculture and cultivation of vegetables, mushrooms etc. under

58
 controlled conditions and services related to agro and allied sectors) and
plantations (other than tea plantation).
11. Manufacturing of cigars, cheroots, cigarillos, cigarettes, of tobacco or of
tobacco substitutes
12. Besides foreign investments in any form, foreign technology collaboration in
any form including licensing for franchise, trademark, brand name,
management contract is also completely prohibited for lottery business and
Gambling and Betting activities.
13. Foreign investment in trusts other than investment by SEBI registered FVCIs
in domestic VCF under Schedule 6 to FEMA Notification No.20 is not
permitted".

Chart 3.1: FDI Policies for Last Two Decades could be Summarised below.

Pre 1991: FDI allowed selectively upto 40%

1991: Automatic route introduced. FDI upto 51% allowed in 35 priority sectors.

1997: FDI upto 100% allowed in some sectors, FDI through automatic route upto
74% allowed in 111 sectors.

2000: FDI through automatic route upto 100% allowed in most sectors. Only a
small negative list.

2001 and Onwards: New sectors opened for FDI. FDI limits increased. Procedures
further simplified.

Source: Compiled by researcher.

3.4 Recent Development in FDI Policies -2010 onwards

• The changes in FDI policies after 2010 are also discussed here to know the
latest development happening in our economy. Mostly government has relaxed
the caps in various sectors. FDI in sectors like Telecom and Defence has been

DIPP. Ministry of Commerce and Industry. GOI. Consolidated FDI policy. April 2013. '^'

59
^•^fipi I
 relaxed. One hundred per cent Foreign Investment is allowed in Telecom and
Defense on case by case basis. The 100 per cent FDI in defense is only for the
state of the art technology coming to India and Ministry of Defense will
decide what the state of the Art is.
• The DIPP has taken into account the basic nature of Foreign Institutional
Investors (FIIs) investments and done away with the requirement of getting
prior consent from the FIPB. But, the FDI investments will continue to happen
through approval.
• This new rule is in line with the FDI policies for infrastructure companies that
are active in the securities markets like stock exchanges, clearing corporations,
and depositories.
• Investment by Foreign Venture Capital Investors (FVCIs)

From now on, FVCIs registered with SEBI will be permitted to invest in securities
being traded at a well knovm stock exchange such as the following:

• Equity, Indian Venture Capital Undertaking debentures (IVCU), Equity linked

instruments, Venture Capital Fund debentures. Debt, Units of VCF schemes,
Debt instruments, Units of VCF funds.

They can buy these through a third party or participate through private purchase or
arrangement.

• Investment by Qualified Foreign Investors (QFIs)

The union government has allowed QFIs to invest in equity shares and Depository
Participants (DPs) of listed companies. They can also invest in equity shares of
organizations that have been offered publicly according to regulations and
guidelines laid down by the SEBI.

• Other Changes

The new FDI policy has brought about some provisions that had been previously
approved. Some of them may be mentioned as below:

• Allowing investment by international Venture Capital and Private Equity

firms in secondary deals

60
 • Liberalized policy for transferring convertible debentures and shares of
financial services companies.

3.5 FDI Routes in India

FDI can come into India in two ways i.e. is Automatic Route and Government
Approval Route.

Automatic Route: According to the current policy, FDI can come into India
in two ways. Firstly FDI up to 100 per cent is allowed under the automatic
route in all activities/sectors except a small list that require approval of the
Government. FDI in sectors/activities under automatic route does not require
any prior approval either by the Government or RBI. The investors are
required to notify the Regional office concerned of RBI within 30 days of
receipt of inward remittances and file the required documents with that office
within 30 days of issue of shares to foreign investors.
• Government Approval Route: In some specified sectors, prior approval of
government is required in a time bound and transparent manner by the Foreign
Investment Promotion Board (FIPB). For all activities that are not covered
under the automatic route, government approval through the FIPB is
necessary. The foreign direct investments under the Automatic approvals and
Government approval are regulated by the Foreign Exchange Management
Act, 1999 (FEMA).
All proposals for foreign investment requiring Government approval are
considered by the Foreign Investment Promotion Board (FIPB). The FIPB also
grants composite approvals involving foreign investment/foreign technical
collaboration."*

FIPB ensures a single-window approval for the investment and acts as a screening
agency. FIPB approvals are normally received in 30 days. RBI introduced automatic
approval system in 1992 to facilitate more convenient entry to foreign investors. From
1996, FDI inflows on acquisition of shares have also been included and have been

' Department of Industrial Policy and Promotion (2005), Foreign Direct Investment-Policy and
Procedures, New Delhi: Government of India. p.2., Available at
http://dipp.nic.in/manual/manual_03_05.pdf Internet.
' Ibid.

61
rising continuously since 2004 whereas FDI Inflows through NRI's route have been
declining especially since 2002.

However, during post-policy period, the actual investment flows through the
automatic route of the RBI against total FDI flows remained rather insignificant. This
was partly due to the fact that crucial areas like electronics, services and minerals
were left out of the automatic approval route. Another limitation was the ceiling of 51
per cent on foreign equity holding was imposed on these sectors. An increasing
number of proposals were cleared through the FIPB route while the automatic
approval route was relatively unimportant. However, since 2000 automatic approval
route has become significant and accounts for a large part of FDI inflows as a result of
opening of above mentioned sectors for FDI.

3.6 FDI Related Institutions

There are three primary institutions in India that handle FDI related issues. These are:
1) The Foreign Investment Promotion Board (FIPB)
2) The Secretariat for Industrial Assistance (SIA)
3) The Foreign Investment Implementation Authority (FIIA)

1. Foreign Investment Promotion Board (FIPB), 1991

The Foreign Investment Promotion Board (FIPB), Department of Economic Affairs

(DEA), Ministry of Finance is the nodal single window agency for all matters relating
to FDI as well as promoting investment in the country. It considers and recommends
FDI proposals, which do not come under the automatic route. Its objectives are to
promote FDI by undertaking and facilitating investment promotion activities in our
country and abroad.

2. Secretariat for Industrial Assistance (SIA)

It has been set up by the Government of India in the Department of Industrial Policy
and Promotion in the Ministry of Commerce and Industry to provide a single window
for entrepreneurial assistance, investor facilitation, receiving and processing all
applications which require Government approval, conveying Government decisions

62
on applications filed, assisting entrepreneurs and investors in setting up projects
(including liaison with other organizations and State Governments) and in monitoring
implementation of projects.

3. Foreign Investment Implementation Authority (FIIA), 1999

The Government of India has set up the Foreign Investment Implementation

Authority (FIIA) to facilitate quick translation of FDI approvals into implementation.
It functions for assisting the FDI approval holders in obtaining various approvals and
resolving their operational difficulties. FIIA has been interacting periodically with the
FDI approval holders and following up their difficulties for resolution with the
concerned Administrative Ministries and State Governments.

Legal Framework

Foreign Direct Investment under Automatic Approval and Government Approval are
regulated by the Foreign Exchange Management Act, 1999 (FEMA vide Reserve
Bank's Notification FEMA.20/2000- RBI DATED May 3, 2000 as amended from
time to time).

Chart 3.2: Foreign Investments in India

Schematic Representation of foreign investments in India is given below. It shows the

various forms through which foreign investments come in our country.

Foreign
Investments

Fo,„Bn venture • | other Investments I I '""straentson

,n.er.'nts I IG-Sec, .CDs,e,c, i ^ - Z r ' ^

BI ~ l SEBI registered

I\
I I I I

I\
I I

I\
NRls.PIO I

I
I
• VCF, IVCFs
1 I

Source; ( rbi/2011-12/15) RBI chart annex-1, part-1, section 1. Para 7 (a).

63
3.7 Worldwide FDI Trends

Following table gives the information about the worldwide FDI inflows.
Table 3.3: Worldwide FDI Flow since 1980s
Region, Inward Inflows Millions of US Dollars
Country or
Territory
1980 1990 2000 2005 2008 2009 2010 2011
World 54078 207455 1400541 980727 1790706 1197824 1309001 1524422
Developing 7429 34853 255506 327248 650017 519225 616661 684399
Economies
Transition 24 75 7038 30854 121041 72386 73755 92163
Economies
Developed 46576 172526 1137996 622625 1019648 606212 618586 747860
Economies
Source: LTNCTAD- Handbook of Statistics Manual, 2012.

The above Table shows the worldwide FDI trends since 1980s. It is seen that FDI is
gaining importance throughout the world economies whether it is developed economy
or developing economy or economy in transition. Together the world FDI flow has
shown positive trend, it was US $54078 million in 1980s and in 2010 it touched US $
1309001 million.

Developing economies and economies in transition are gaining the maximum

quantum of FDI when compared with developed economies. Developing economies
such as Africa, South American countries, Asian countries including India, Oceania
etc. could attract only US $ 7429 million FDI in 1980s and gradually got momentum
in 1990s to US $34853 million and showed a steady growth over a period of time
such as in 2000, it touched to US $ 255506 million, in 2005 it rose to US $ 327248
million, in 2010 it almost got doubled to US $ 616661 million. In 2011 it was US $
684399 million. Even the economies in transition such as Albania, Belarus, Croatia,
Serbia, and Ukraine show the same positive trend in FDI shares. In 1980s, it was just
US $ 24 million, in 1990s it slowly raised to US $ 75 million, in 2000 it could attract
a major chunk as US $ 7038 million, further rose to US $ 30854 million in 2005, in
2010 got more than doubled to US $ 73755 million. The trend was similar to
developing countries.

Both the developing and transition economies have experienced the positive trend in
attracting world FDI due to their potential and unutilized resources of these countries.
While the developed economies such as U.S.A, Japan, European countries like
Austria, Denmark, France, Germany, Italy, Sweden, U.K attracted FDI in 1980s only.

64
These countries could grab US $ 46576 million in 1980s, in 1990s it rose to US $
172526 million, in 2000 it climbed US $ 1137996 million i.e., the maximum FDI in
those countries, while in 2005 it came down to US $ 622625 million. Again it
galloped to US $ 1019648 million in 2008 but came down heavily up to US $ 618586
million in the year 2010. So it is seen from the above figures that FDI in developed
countries are shifting towards the other developing or transition economies, which has
tremendous potential in various sectors.

3.8 FDI and India

Till now, FDI policy of India is explained. After accepting LPG policy since 1991, it
is interesting to know the India's share in world FDI, as our country has liberalized
the economy for foreign investors. The following chart shows the details.

India's Share in the World FDI Net Inflows

The data of FDI net inflows for India and World have been taken from the Balance of
Payment Table given in the database of World Bank Data Bank from 1995-2011
(Table 3.4). Source of the FDI, net inflows (BOP, current US $) is World Bank,
International Debt Statistics, and World Bank and OECD GDP estimates. Data are in
current U.S. dollars. To analyze the position of India in different year's scenario,
shares of India in the World FDI inflows have been calculated from 1995-2011.

Table 3.4: Share of India in World FDI, Net Inflows

Year FDI, Net Inflows (BoP, Current US $ million) % Share of India in World FDI Net
World India Inflows (BoP, current US $)
1995 3.19892E+11 2143628110 0.67%
1996 3.63614E+11 2426057022 0.67%
1997 4.61163E+11 3577330042 0.78%
1998 6.79539E+11 2634651658 0.39%
1999 9.6188E+11 2168591054 0.23%
2000 1.31934E+12 3584217307 0.27%
2001 7.27016E+11 5471947158 0.75%
2002 6.29055E+11 5626039508 0.89%
2003 5.7268E+11 4322747673 0.75%
2004 7.22708E+11 5771297153 0.80%
2005 1.38624E+12 7269407226 0.52%
2006 1.7027E+12 20029119267 1.18%
2007 2.4715E+12 25227740887 1.02%
2008 2.19953E+12 43406277076 1.97%
2009 1.16305E+12 35581372930 3.06%
2010 1.37597E+12 26502000000 1.93%
2011 1.72487E+12 32190000000 1.87%
Source: Database of World Bank Data Bank, 2011

65
The above table shows, per cent share of India in world FDI net inflows. In the year
1995, we could manage up to 0.67 per cent of world FDI. Slowly India's share started
increasing year after year. Till the year 2000, it rose to 0.27 per cent. In the second
decade of economic reforms, due to opening up of infrastructure and tertiary sector
for FDI, rise in FDI per cent is seen. In the year 2001, it was 0.75 per cent, in 2005 it
was 0.52 per cent, and in 2010 it could grab 1.93 per cent of world FDI. Thus India's
share in world FDI is still very minimal but has started increasing slowly and needs to
grow at a faster pace.

3.9 Sources of FDI in India

India has broadened the sources of FDI in the period of reforms. There are nearly 140
countries investing in India in 2010 as compared to 15 countries in 1991. Thus the
number of countries investing in India increased after reforms. After liberalization of
economy, countries like Mauritius, U.S.A, Japan, U.K., Netherlands, Germany,
Singapore, France, South Korea, Malaysia, Switzerland, Italy and many more
countries predominantly appears on the list of major investors. The details are shown
below.

Table 3.5: Major Sources of FDI in India (2000-2010)

Rank Name of Country Amount of FDI In Million Rupees percentage of Total FDI
1 Mauritius 2379427.00 41.87
2 Singapore 517205.60 9.10
3 United States of America 426201.40 7.50
4 Netherlands 248217.50 4.36
5 Japan 226236.50 3.98
6 United Kingdom 225439.40 3.96
7 Cyprus 206791.00 3.63
8 Germany 130177.80 2.29
9 France 100841.40 1.77
10 Switzerland 83233.32 1.46
Source: Compiled from Ministry of Commerce and Industry, Govt, of India, 2000-2010.

66
Chart 3.3: Major Sources of FDI in India

2500000.00
2000000.00
1500000.00
1000000.00
500000.00
0.00

.6''

/'^/y ^
^^
o/"
,N<>^
.^^ O^

s-*-
<J

Source: Compiled from Ministry of Commerce and Industry. Govt, of India.

The analysis in Table-3.5 presents the major investing countries in India during 2000-
2010. Mauritius is the largest investor in India during the decade. FDI inflows from
Mauritius constitute about 41.87 per cent of the total FDI in India and it enjoys the top
position on India's FDI map. Mauritius has low rates of taxation and an agreement
with India on double tax avoidance regime. To take advantage of that situation, many
companies have set up dummy companies in Mauritius before investing to India. The
fact is that most investment coming to India from the United States is being routed
through that country. In addition, major parts of the investments from Mauritius to
India are actually round tripping by Indian firms. This Double Taxation Avoidance
Agreement (DTAA) type of taxation treaty has been made out with Singapore also,
and it is the second largest investing country in India, which contributes 9.10 per cent
of total FDI, followed by USA (7.50 per cent), Netherlands (4.36 per cent), Japan
(3.98 per cent), UK (3.96 per cent), Cyprus (3.63 per cent), Germany (2.29 per cent),
France (1.77 per cent), and Switzerland (1.46 per cent) respectively. Overall,
countries categorized as tax havens accounted for much higher share of nearly 70 per
cent of the total FDI inflows during the more recent period.

67
Pie chart 1: Major Sources of FDI in India

• Mauritius

• Singapore

• United States Of America

• Netherlands

• Japan

• United Kingdom

• Cyprus

• Germany

'* France

• Switzerland

Source; Compiled and computed from Ministry of Commerce, Govt, of India.

Thus, an analysis of the last ten years of FDI inflows shows that only five countries
accounted for nearly 66 per cent of the total FDI inflows in India. India needs
enormous amount of financial resources to carry forward the agenda of transformation
(i.e., from a planned economy to an open market), to tackle imbalance in BOP, to
accelerate the rate of economic growth.

Conclusion

The current FDI policy aims at simplification of procedures and practices through
which more quantum of investment can be pulled in our country for rapid
development. Started with limited number of sectors and restrictive equity caps, list of
sectors has been expanded incrementally and cautiously and equity caps have been
liberalized. More and more sectors have been shifted from FIPB route to automatic
route. Now, only few sectors are left where FDI is banned, such as atomic energy,
lottery business, gambling and business of chit fund. A large number of sectors
including mining, banking, insurance, telecommunication, construction and
management of ports, harbors, roads, and highways, airlines and defense equipment
have been thrown open to private and foreign owned companies.

By implementing such a broad nature FDI policy, the Government is welcoming

foreign investors to invest in our country. The nature of policies adopted since the

68
independence period were motivated by the stability and sovereignty issues.
Afterwards, the FDI poUcies got cautious welcome in order to protect the indigenous
industries. These policies got tremendous momentum after the acceptance of
economic reforms of 1991. The same approach is continued till today and the
Government is liberalizing the caps on various sectors with proper justification taking
into account the interest of our industries.

Now the Government also has to focus on the spread of FDI in various regions as well
as different sectors of our country in order to have an overall development of our
country. It has been noticed that only few regions got more chunk of FDI than the
rest. But there should be equitable and balanced development in all regions of the
country. In the next chapter, researcher has examined the region wise inflow of FDI in
our country and its implications on our country and society.

69