Foreign Direct Investment in India

Category: Global Economy Sub-category: Indian Economy
Document type: article


Foreign Direct Investment In India

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewelery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 50 million and represents a growing consumer market.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24bn and for 2008-09, it is expected to be above $35 billion. A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going to depend on how the government can create incentives for FDI flow across a large number of sectors in India.

To get details on the fact sheet on foreign direct investment from August 1991 to June 2008 please follow thw following link

Source :Department of Industrial Policy & Promotion
Ministry of Commerce and Industry

Foreign Direct Investment (FDI) is permited as under the following forms of investments.

  1. Through financial collaborations.
  2. Through joint ventures and technical collaborations.
  3. Through capital markets via Euro issues.
  4. Through private placements or preferential allotments.

Forbidden Territories:
FDI is not permitted in the following industrial sectors: Arms and ammunition.

  1. Atomic Energy.
  2. Railway Transport.
  3. Coal and lignite.
  4. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

Foreign direct investments in India are approved through two routes:

Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:

  • foreign equity up to 50% in 3 categories relating to mining activities (List 2).
  • foreign equity up to 51% in 48 specified industries (List 3).
  • foreign equity up to 74% in 9 categories (List 4).
  • where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

Opening an office in India
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.

The FIPB Route:
Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Total foreign investment and FDI

Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The government is likely to double FDI inflows within two years.Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia.

Foreign institutional investors

Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992.

FII investments

FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets.

Large outflows of capital

Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998. Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment

Indian companies are allowed to raise equity capital in the international market through the issue of
Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum ex