Foreign Direct Investment in India

by - Sameer Pushp, Freelance Writer

India is the largest democracy and is fourth largest economy (in terms of purchasing power parity) in the world. India with its consistent growth performance and abundant high-skilled manpower provides enormous opportunity for investment, both domestic and foreign. Investment in India can be made both by non-resident as well as resident Indian entities. Any non-resident investing in an Indian company is Foreign Direct Investment (FDI).

The Government embarked upon major economic reforms since mid-1991 with a view to integrate with the world economy, and to emerge as a significant player in the globalization process. Reforms undertaken include decontrol of industries from the stringent regulatory process; simplification of investment procedures, promotion of foreign direct investment (FDI), liberalisation of exchange control, rationalization of taxes and public sector divestment. The FDI policy was liberalized progressively through review of the policy on an ongoing basis and allowing FDI in more industries under the automatic route.

A number of studies in the recent past have highlighted on growing attractiveness of India as an investment destination. According to UNCTAD’s World Investment Report 2007, India is the second most attractive investment destination for FDI for 2007-09.

India has one of the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100 percent is allowed under automatic route in all activities and sectors except few sectors like manufacturing of cigar and cigarettes of tobacco, electronic aerospace and defense equipments, etc.

FDI policy is reviewed on continuous basis and changes in sectoral polices / sectoral equity cap are notified through press notes by the Secretariat for Industrial Assistance (SIA) , Department of Industrial policy and promotion (DIIP). FDI policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA) 1991.

FDI in sectors /activities to the extent permitted under automatic route does not require any prior approval either by the Government or Reserve Bank of India. The investor is only required to notify the Concerned Regional office 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.

The Government has decided to allow FDI up to 51 percent; with prior Government approval, in retail ‘single brand products’. This is inter-alia aimed at attracting investment in production and marketing, improving the availability of such goods for the consumers, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprise through access to global designs, technology and management practices.

The Government has put in place a liberal foreign technology transfer policy as well. At present, foreign technology collaboration involving payment of lump sum amount of up to US$2 million and/or royalty at the rate of 5 percent on domestic sales and 8 percent on exports are allowed under the automatic route. There are no limits on the duration of royalty payments. In addition, the current policy also allows payment of royalty up to 2% on exports and 1% on domestic sales under the automatic route for use of trademark and brand names of the foreign collaborator without technology transfer. Proposals involving royalty payments beyond the limits under the automatic route are considered for Government approval through the Project Approval Board (PAB).

The Government has set guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities.

Its salient features are:

Government/FIPB approval will be required in sectors with caps where:

• An Indian company is being established with foreign investment and is owned by a non-resident entity or

• An Indian company is being established with foreign investment and is controlled by a non-resident entity or

• The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity, as a consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition etc. or

• The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition etc.

The new proposals will yield following benefits: The proposal would ensure application of simple, homogenous and uniform norms for calculation of direct and indirect foreign investment across sectors excepting those where it is governed specifically under any statutes or rules there under. And, it would also ensure that approval of Government/FIPB would be required for establishment/change in ownership or control of an Indian company from resident Indian citizens to non-resident entities in sectors with sectoral caps.

India has a young demographic profile with about 50 percent of its population under 25 years, having high propensity to consume. About 20-25 million people are joining the middle class, every year with increasing disposable income. This phenomenon could be leveraged to attract investment as well as to generate employment.

A decade and a half ago the prospect of India becoming a major player in the global economy seemed a distance dream, today with the power of FDI it is a reality. During the last five years there has been a sea change not only in the world perception about India’s future, but in our own perception about us. The world has acknowledged the ‘arrival of India’. With the ushering of social and economic base, we no longer discuss the future of India: we say “the future is India”.

Disclaimer: The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB