You are on page 1of 43

Foreign Investment in India

FDI in India

• New Policy since 1991

• Earlier deficits in Current Account met by
borrowing from multilateral financial institutions
and commercial borrowings
• Earlier FDI was linked to imported technology
• Now two routes available for FDI
• Automatic approval by RBI
• Govt. Approval via Foreign Investment Promotion
Board (FIPB)
• At present over 6000 companies have FDI equity
Eligibility for Investing in India
• A person resident outside India (other than a citizen of
Pakistan or Bangladesh) or an incorporated entity outside
India, (other than an entity in Bangladesh or Pakistan) has
the general permission to purchase shares or convertible
debentures or preference shares of an Indian company
subject to certain terms and conditions
• The Indian companies have general permission to issue
equity / preference / convertible preference shares and
convertible debentures subject to certain conditions.
• No person resident outside India other than NRIs/PIO shall
make any investment by way of contribution to the capital
of a firm or a proprietorship concern or any association of
persons in India. The RBI may, on an application made to
it, permit a person resident outside India to make such
investment subject to such terms and conditions as may be
considered necessary.
Policy Framework

• The Industrial Policy Reform of 1991

• Industrial policy provisions applicable to both
domestic and foreign companies
• Once applicable permissions obtained, foreign
companies are treated at par with an Indian
company – national treatment
• Under FEMA 2000, approval of RBI required for
establishment in India of a branch, liaison office
or a project office
RBI Automatic Route
• RBI approval in many industries within sectoral caps:
100%, 74%, 51% and 26%. The lists are comprehensive
and cover most industries of interest to foreign companies.
• The RBI’s approval is automatic (provided certain
parameters are met) and only a filing is to be made after
allotting shares to foreign equity holder(s).
• Foreign technology agreement: not compulsory
• Automatic clearance for foreign technology agreements if
lump sum payments up to USD 2 million and royalty
payments up to 5% of domestic sales and 8% of exports
• Payment of royalty up to 1% on domestic sales and 2% on
exports on the use of trade marks and brand name of the
foreign collaborator without technology transfer
• Foreign Investment Promotion Board (FIPB)
consists of a group of Secretaries (Finance,
External Affairs, SSI, Commerce) under the
Chairmanship of Secretary, Department of
Economic Affairs, Ministry of Finance.
Representation of the Ministry under whose
jurisdiction a particular investment is proposed, is
also invited. FIPB recommends projects to
Finance Minister for approval. Investments
exceeding Rs.600 crores require the approval of
the Cabinet Committee on Foreign Investment
FIPB Route
• Proposals attracting compulsory licensing
• Items of manufacture reserved for small scale
sector (A company which is a small scale
industrial unit may issue shares or convertible
debentures to a non-resident, to the extent of 24%
of its paid-up capital.)
• Extension for foreign collaboration agreements
• List of activities or items for which FDI is
• List of Industries in which Automatic Route Not
Foreign Investment
Implementation Authority (FIIA)
• Foreign Investment Implementation Authority
(FIIA) has been established to facilitate quick
implementation of FDI approvals and assist
foreign investors in getting necessary approvals.
• Fast Track Committees have been set up in 30
Ministries/ Departments for regular review of FDI
mega projects (with proposed investment of Rs. 1
billion and above), and resolution of any
List of Industries in which Automatic
Route Not Available
• 1. Petroleum Sector (except for private sector oil refining)/ Natural
Gas/LNG, Pipelines
• 2. Investing companies in Infrastructure & Services Sector
• 3. Defence and Strategic Industries
• 4. Atomic Minerals
• 5. Print Media
• 6. Broadcasting
• 8. Postal services
• 9. Courier Services
• 10. Establishment and Operation of satellite
• 11. Development of Integrated Township
• 12. Tea Sector
List of activities or items for which FDI
is prohibited.
• Gambling and Betting
• Lottery Business
• Business of chit fund or Nidhi Company
• Housing and Real Estate business except for the
development of townships, housing, built-up infrastructure
and construction development project
• Retail Trading
• Atomic Energy
• Agriculture (excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisciculture
and Cultivation of Vegetables, Mushrooms etc. under
controlled conditions and services related to agro and
allied sectors) and Plantations (other than Tea plantations)
Sectoral Caps for FDI
Private Sector Banking 74% Drugs & Pharmaceuticals 100%
Non-Banking Financial 100% Road and highways, Ports and 100%
Companies harbours
Insurance 26% Hotel & Tourism 100%
Telecommunications 74% Mining 74-
Services 100%
Petroleum Refining- 100% Advertising 100%
Private Sector
Housing and Real Estate 100% Films 100%
Trading 51-100% Airports 74%
Coal & Lignite 50-100% Mass Rapid Transport 100%
Power 100% Systems
Pollution Control & Mng. 100%
Air transport Services 100% -NRIs, Special Economic Zones 100%
(no foreign airlines) 49% others
Illustrative List of Sectors Under Automatic
Route for FDI Up to 100%
• Most manufacturing activities
• Non-banking financial services
• Drugs and pharmaceuticals that do not attract
compulsory licensing or involve use of
recombinant DNA technology
• Food processing
• Electronic hardware
• Software development
• Film industry
• Advertising
Illustrative List of Sectors Under Automatic
Route for FDI Up to 100%
• Hospitals
• Private oil refineries
• Pollution control and management
• Exploration and mining of minerals other than
diamonds and precious stones
• Management consultancy
• Venture capital funds/companies
• Setting up/development of industrial park/model
• Petroleum Products Pipeline
Illustrative List of Infrastructure Sectors with
FDI up to 100% under Automatic Route.

• Electricity Generation (except Atomic energy)

• Electricity Transmission
• Electricity Distribution
• Mass Rapid Transport System
• Roads & Highways
• Toll Roads
• Vehicular Bridges
• Ports & Harbours
• Hotel & Tourism
• Townships, Housing, Built-up Infrastructure and
Construction Development Project
Illustrative List of Services Sector with FDI
Upto 100% under Automatic Route
• Advertising and Films
• Computer related Services
• Research and Development Services
• Construction and related Engineering Services
• Pollution Control and Management Services
• Urban Planning and Landscape Services
• Architectural Services
• Health related & Social Services
• Travel related services
• Road Transport Services
• Maritime Transport Services
• Internal Waterways Transport Services
• Trading is permitted under automatic route with FDI up to
51% provided it is primarily export activities, and the
undertaking is an export house/ trading house / super
trading house/ star trading house. However, under the
FIPB route:
• 100% FDI is permitted in case of trading companies for
the following activities:
- exports;
- bulk imports with export/ ex-bonded warehouse sales;
- cash and carry wholesale trading;
- other import of goods or services provided at least 75% is
for procurement and sale of the same group and not for
third party use or onward transfer/ distribution/sales.
Latest Developments
• Nov. 2005: FDI (thru FIPB approval) allowed in Asset
Reconstruction Companies (ARCs) up to 49%. However,
FII investment not allowed. FIIs can invest in Security
Receipts (SRs) issued by ARCs up to 49% of each tranche
of SRs, with investment of a single FII in each tranche of
scheme of SRs not exceeding 10% of the issue.
• Aug. 2005: FDI permitted up to 100 % under the automatic
route, in townships, housing, built-up infrastructure and
construction development projects, subject to guidelines
• July 2005: FDI up to 100% permitted under the automatic
route in petroleum product marketing, oil exploration in
both small and medium sized fields and petroleum product
lines. In air transport services (domestic airlines) sector –
FDI up to 100% under the automatic route by NRIs and up
to 49% by others. However, no direct or indirect equity
participation by foreign airlines would be allowed.
Conversion of ECB / Lump sum
Fee/Royalty into Equity
• General permission has been granted for
conversion of External Commercial Borrowings
into equity, subject to certain conditions.
• General permission is also available for issue of
shares against lump-sum technical know-how fee,
royalty, under automatic route or SIA/FIPB route,
subject to pricing guidelines of Reserve Bank /
SEBI and compliance with applicable tax laws.
• Withholding tax rates for payment to non-residents are
determined by the Finance Act passed by Parliament for
each year. The current rates are:
• (i) Interest: 20%
• (ii) Dividends paid by domestic companies: Nil
• (iii) Royalties: 20%
• (iv) Technical Services: 10%
• (v) Any Other Services - Individuals: 30% of the Income,
Companies: 40% of the net income
• The above rates are general and in respect of countries
with which India does not have a Double Taxation
Avoidance Agreement (DTAA).
Private Equity Industry
• Probably more than USD 1.5 billion has been invested by
the PE industry in India. Examples: Warburg Pincus in
Bharti and Moser Baer, Chrys Capital Investment in
Spectramind and YES Bank, ICICI Ventures in PVR
Cinema, General Atlantic Partners in Patni Computers,
New Bridge & Temasek in Matrix and Oakhill
Investments in GECIS.
• Private equity funds invest usually for a long term (3 to 7
years) and investing firms add value by participating in
corporate governance and strategy of the investee
company. These investments are late stage, i.e. once the
enterprise has a proven business model, customers,
revenue, etc., as compared to a venture capital fund which
are early stage investment in new business start-ups, new
technology, etc.
• The PE industry has developed over the last 25 years or so
Double Taxation Avoidance Agreements
Dividends (%) Interest (%) Royalties (%)
Bangladesh 15 15 15
China 10 10 10
Germany 10 10 10
Japan 15 15 20
Korea 20 15 15
Mauritius 15 20 15
Netherlands 10 10 10
Singapore 15 15 25
UK 15 15 15
USA 20 15 15
Non-treaty 0 20 20
International Portfolio Investment
• Portfolio investment represents purchases and sales of
foreign financial assets such as stocks and bonds that do
not involve a transfer of management control.
• International portfolio investments have become popular in
recent years due to the desire of investors to diversify risk
globally. Global investors may feel that they may also
benefit from higher expected returns from some foreign
• Such investments can be in the form of bonds (convertible
and non-convertible) as well as equity (say in the form of
ADRs/ GDRs). Investments may be made directly or
through institutional investments (say FIIs).
Issue of shares by Indian companies
under ADR/GDR
• An Indian corporate can raise foreign currency resources
abroad through the issue of American Depository Receipts
(ADRs) or Global Depository Receipts (GDRs).
• An Indian Company, which is not eligible to raise funds
from the Indian Capital Market will not be eligible to issue
• The guidelines allow an Indian company to issue its Rupee
denominated shares to a person resident outside India
being a depository for the purpose of issuing ADRS and/or
GDRS. The ADRs/GDRs are issued in accordance with the
Scheme for issue of Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993 and guidelines issued by the
Central Government thereunder from time to time
Issue of shares by Indian companies
under ADR/GDR
• These instruments are issued by a Depository abroad and
listed in the overseas stock exchanges like NASDAQ. The
proceeds so raised have to be kept abroad till actually
required in India. There are no end use restrictions except
for a ban on deployment/ investment of these funds in Real
Estate and the Stock Market.
• There is no monetary limit up to which an Indian company
can raise ADRs/GDRs. However, the Indian company has
to be otherwise eligible to raise foreign equity under the
extant FDI policy and the foreign shareholding after issue
should be in compliance with the FDI policy.
• The ADR/GDR/FCCB proceeds may be utilised in the first
stage acquisition of shares in the disinvestment process
and also in the mandatory second stage offer to the public
in view of their strategic importance.
Issue of shares by Indian companies
under ADR/GDR
• The ADR/GDR can be issued on the basis of the ratio
worked out by the Indian company in consultation with the
Lead Manager of the issue. The Indian company will issue
its rupee denominated shares in the name of the Overseas
Depository and will keep the shares in the custody of the
domestic Custodian in India. On the basis of the ratio
worked out and the rupee shares kept with the domestic
Custodian, the Depository will issue ADRs/GDRs abroad.
• A limited Two-way Fungibility scheme has been put in
place by the Government of India for ADRs/GDRs. Under
this scheme, a stock broker in India, registered with SEBI,
can purchase the shares from the market for conversion
into ADRs/GDR. Re-issuance of ADRs/GDR would be
permitted to the extent of ADRs/GDRs which have been
redeemed into underlying shares and sold in the domestic
Pricing of ADR/GDR/FCCBs
• The pricing of GDRs and FCCBs should be made at a
price not less than the higher of the following two
• (i) The average of the weekly high and low of the closing
prices of the related shares quoted on the stock exchange
during the six months preceding the relevant date;
• (ii) The average of the weekly high and low of the closing
prices of the related shares quoted on a stock exchange
during the two weeks preceding the relevant date. (The
“relevant date” means the date thirty days prior to the date
on which the meeting of the general body of shareholders
is held in terms of section 81 (IA) of the Companies Act,
1956, to consider the proposed issue.)
• Unlisted companies, while raising ADRs/GDRs/FCCBs
would require prior or simultaneous listing in the domestic
Issue of shares by Indian companies
under ADR/GDR
• An Indian company can also sponsor an issue of
ADR/GDR. Under this mechanism, the company
offers its resident shareholders a choice to submit
their shares back to the company so that on the
basis of such shares, ADRs/GDRs can be issued
abroad. The proceeds of the ADR/GDR issue is
remitted back to India and distributed among the
resident investors who had offered their rupee
denominated shares for conversion.
Portfolio Investment Scheme
• Foreign Institutional Investors registered with SEBI and
Non-resident Indians are eligible to purchase the shares
and convertible debentures under the Portfolio Investment
Scheme. The FII should apply to the designated AD, who
may then grant permission to FII for opening a foreign
currency account and/or a Non Resident Rupee Account.
• NRIs should apply to the concerned designated branch of
the AD authorised by RBI to administer the Portfolio
Investment Scheme (PIS) for permission to open a
NRE/NRO account under the Scheme.
Foreign Institutional Investors
• In the case of FIIs, the total holding of each FII/SEBI
approved sub account shall not exceed 10% of the total
paid up capital or 10% of the paid up value of each series
of convertible debentures issued by an Indian company
and the total holdings of all FIIs/sub-accounts of FIIs put
together shall not exceed 24% of the paid-up capital or
paid-up value of each series of convertible debentures.
• This limit of 24% can be increased to the sectoral
cap/statutory limit as applicable to the Indian company
concerned by passing a resolution by its Board of
Directors followed by passing of a special resolution to
that effect by its General Body.
Foreign Institutional Investors
• FIIs are not permitted to invest in Print Media
Sector through FDI or PIS routes. Such
investment by FII requires prior approval of
Government of India, Foreign Investment
Promotion Board and Ministry of Information &
Broadcasting. FIIs should also take delivery of the
shares purchased and give delivery of shares sold.
• The FIIs are also permitted to trade in all exchange
traded derivative contracts subject to position
limits as prescribed by SEBI and advised by RBI
to the custodian banks.
Foreign Institutional Investors
• Registered FIIs have been permitted to purchase
shares/convertible debentures of an Indian company
through offer / private placement. This is subject to
applicable ceiling. A FII may invest in a particular issue of
an Indian company either under FDI Scheme or PIS.
• The FII shall restrict allocation of its total investment
between equities and debt including dated Government
Securities and Treasury Bills in the Indian Capital Market
in the ratio of 70:30, with a cap of USD 200 million in
Government securities. The FII can also form a 100% Debt
Fund and get registered with SEBI for investment in debt
investments. Investment in debt securities by FIIs are
subject to limits, if any, stipulated by SEBI in this regard.
FII Cap in debt is at present at USD 2.25 billion in the
domestic market, including a limit of USD 500 million in
corporate debt.
Foreign Institutional Investors
• Guidelines originally issued in Sept.1992
• Consists of pension funds, mutual funds, investment trusts,
AMCs, endowments, etc.
• Good track record, competence, financial soundness,
registration from regulatory authority in home country
• Registration (5 yrs.) by nodal agency - SEBI, also RBI.
• Allowed to invest in all the securities traded on the
primary and secondary markets
• Foreign Institutional Investors can buy dated Government
securities/ treasury bills, non-convertible debentures
/bonds issued by Indian companies and units of domestic
mutual funds either directly from the issuer of such
securities or through a registered stock broker on a
recognised stock exchange in India.
Foreign Institutional Investors
• No max./min. restriction, no lock-in period
• Role of designated branch, custodian
• Allowed to repatriate at market rates the capital gains,
dividends, interest income
• ADs can also offer forward cover to FIIs to the extent of
total inward remittance net of liquidated investments
• Overall FII limit does not include portfolio investments by
NRIs, NRI-OCBs, FDI, GDRs/ADRs, single-regional
funds, etc.
• Generally, investment limit for FIIs hiked to the limit
applicable for FDI/ statutory ceiling in that particular
• Till the end of 2005, over 800 FIIs registered, not all active
Foreign Institutional Investors
• FII net inflows: $10.7 billion in 2005, $9.2 billion in 2004
and $ 6.6 billion in 2003. Total net inflow since 1993: $42
billion in a total market cap of $ 550 billion.
• Investments through three routes: registered FII, registered
as a sub-account of a sponsoring FII, and indirectly
through access products or Participatory Notes (PNs).
• Estimated 90% investment through sub-accounts, as this
avoids procedural problems: establishing broker and
custodian relationships, filing of tax certificates, etc. PNs
account for about 25% of total FII investment, including
• PNs are derivative products wherein the holder gets all the
economic benefits of a direct exposure to Indian equities
with a corresponding exposure that the FII/sub-account
would take on the underlying equities in the Indian market.
Since February 2004, PNs can be issued only to regulated
Investments by NRIs
• In the case of NRIs under PIS it is to be ensured that the
paid-up value of shares/ convertible debentures purchased
by an NRI on repatriation and non-repatriation basis under
PIS route should not exceed 5% of the paid up capital/ paid
up value of each series of debentures.
• The aggregate paid-up value of shares/ convertible
debentures purchased by all NRIs should not exceed 10%
of the paid-up capital of the company/paid-up value of
series of debentures of the company.
• The aggregate ceiling of 10% can be raised to 24%, if the
General Body of the Indian company concerned passes a
special resolution to that effect.
Investments by NRIs
• Payment for purchase of shares and/or debentures is made
by inward remittance in foreign exchange through normal
banking channels or out of funds held in NRE/FCNR
account maintained in India if the shares are purchased on
repatriation basis. Under PIS, NRIs are not permitted to
invest in Print Media Sector.
• With effect from November 29, 2001, Overseas Corporate
Bodies (OCBs) are not permitted to invest under the PIS in
India. Further, the OCBs that have already made
investments under the Portfolio Investment Scheme, may
continue to hold such shares/convertible debentures till
such time these are sold on the stock exchange.
FDI Flows by Regions and Selected Countries

$ billions FDI Inflows FDI Outflows

2003 2004 2003 2004

Developed Countries 442.2 380.0 577.3 637.4
- European Union 338.7 216.4 372.4 279.8

- USA 56.8 95.9 119.4 229.3

- Japan 6.3 7.8 28.8 31.0
Developing 166.3 233.2 29.0 83.2
- China 53.5 60.6 1.0 2.3
Net Capital Inflows to Developing Countries

$ billions 2002 2003 2004

Net equity flows 159.8 176.6 192.3

- Net FDI Inflows 154.0 151.8 165.5

- Net portfolio equity inflows 5.8 24.8 26.8

Net debt flows 8.9 62.2 84.1

Net Inward FDI

$ billions 2002 2003 2004

Brazil 16.6 10.1 15.3
China 49.3 53.5 56.0
Chile 1.9 3.0 5.6
Czech Republic 8.5 2.5 3.8
India 3.7 4.3 5.3
Mexico 14.8 10.8 14.1
Malaysia 3.2 2.5 2.8
Poland 4.1 4.1 4.7
Russian Fed. 3.5 8.0 7.8
Net Inward Portfolio Equity

$ billions 2002 2003 2004

All developing 5.8 24.8 26.8
Brazil 2.0 3.0 0.9
China 4.0 11.8 13.6
Czech Republic -0.3 1.1 0.8
India 1.1 8.2 7.5
Mexico -0.1 -0.1 -2.3
Russian Fed. 2.6 0.4 1.0
South Africa -0.4 0.7 3.5
Foreign Investment
USD million 2004-05 2003-04 2002-03
Foreign Investment (a+b) 11,944 14,776 4,161
a)Foreign Direct Inv. (i+ii) 3,037 3,420 3,217
i. In India 5,526 4,674 5,036
Equity 3,353 2,387 2,766
Reinvested Earnings 1,816 1,800 1,832
Other Capital 357 487 438
ii. Abroad (2,489) (1,254) (1,819)
Equity (1,408) (282) (611)
Reinvested Earnings (700) (892) (1,104)
Other Capital (381) (80) (104)
b) Portfolio Investment 8,907 11,356 944
In India 8,907 11,378 979
Abroad - (22) (35)
FDI to India: Country-wise
$ millions 2004-05 2003-04 2002-03
Total FDI* 2320 1462 1658
Mauritius 820 381 534
USA 469 297 268
UK 84 157 224
Germany 143 69 103
Netherlands 196 197 94
Spain 122 67 66
France 44 34 53
Singapore 64 15 39
Switzerland 64 5 35
South Korea 14 22 15
Others 300 218 227
*Data does not include FDI flows by way of acquisition of shares by non-
FDI to India: Industry-wise Flows
$ millions 2004-05 2003-04 2002-03
Fisheries 10 2 9
Mining 11 18 9
Manufacturing 924 426 480
Food & Dairy Products 183 64 39
Electricity 14 90 48
Construction 209 172 237
Trade, Hotels & Restaurants 22 67 39
Transport 70 20 12
Financing, Insurance, Real Estate & Business Services 363 206 223
Computer Services 372 166 297
Educational Services 2 0 1
Research & Scientific Services 5 1 0
Health & Medical Services 25 15 28
Others 110 215 236