FDI_in_India

8/7/2019 FDI_in_India

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FOREIGN DIRECT INVESTMENT IN INDIA

By. S.R. Rajagopal, Advocate, Madras

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Basically International Law is a system composed solely of rulesgoverning the relations between nations.

The American Law Institutes Revised Statement of the Foreign

Relations Law of the United States (1986) defines International

Law as that law concerned with the conduct of states and of

international organizations, and with their relations inter se, as well

as some of their relations with persons, whether natural orpersonal.

Series of developments like establishment of permanent

international institutions and organizations viz., United Nations,

World Health Organization, movements sponsored by them,

Bilateral Investment Treaties {BIT}, customs, Judicial decisions of

International Court of Justice {ICJ} etc, have given rise to newrules of International Law and in shaping principles of International

Law.

Developing countries, increasingly see foreign direct investment

(FDI) as a source of economic development, modernization and

employment generation, and have liberalised their FDI regimes to

attract investment. Given the appropriate host-country policies anda basic level of development, a preponderance of studies show that

FDI triggers technology spillovers, assists human capital formation,

contributes to international trade integration, helps create a more

competitive business environment and enhances enterprise


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development. All these contribute to higher economic growth.

Existence of real business opportunities is one of the key factors in

attracting FDI.

FDI influences growth by increasing total factor productivity and,

more generally, the efficiency of resource use in the recipient

economy. Technology transfers through FDI generate positive

externalities in the host country. In order to reap the maximum

benefits from FDI, there is a need to establish a transparent, broad

and effective enabling policy environment for investment and to put

in place appropriate framework for their implementation.

FDI contributes to export growth, productivity growth and finance

for balance of payments, it supports increase in national income.

FDI increases employment and contributes to economic growth.

FDI has increased manifold over the past 2 decades. FDI brings

private overseas funds into the country for investments.

FDI IN INDIA GROWTH AND POLICIES

India, among the foreign investors, is believed to be a good

investment despite political uncertainty, bureaucratic hassles,

shortages of power and infrastructural deficiencies. India presents a

vast potential for foreign investment and is actively encouraging the

entrance of foreign players into the market. Foreign investors

cannot ignore India, which is expected to become one of the top

three emerging economies.

India is the fifth largest economy in the world and has the third

largest GDP in the entire continent of Asia. It is also the second

largest among emerging nations. India is also one of the few


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markets in the world which offers high prospects for growth and

earning potential in practically all areas of business. Yet, despite the

practically unlimited possibilities in India for overseas businesses,

the world's most populous democracy has, until fairly recently,

failed to get the kind of enthusiastic attention generated by other

emerging economies such as China.

Indian Government has permitted access to FDI through automatic

route, except for a small negative list. Time to time there has been

revision in liberalization of the FDI.

Recently the Government of India has liberalized their policies in

certain sectors, like

i. Increase in the FDI limits in "Air Transport Services (DomesticAirlines)" up to 49 per cent through automatic route and up to

100 per cent by non-resident Indians (NRIs) through automatic

routes. (No direct or indirect equity participation by foreign

airlines is allowed)

ii. Prior approval of the Government would be required only incases where the foreign investor has an existing joint venture for

technology transfer/trade mark agreement in the 'same' field.

iii. Even in the above mentioned cases, the approval of theGovernment would not be required in respect of the following:

i. Investments to be made by venture capital fundsregistered with SEBI; or

ii. Where the existing joint venture investments by either ofthe parties is less than 3 per cent; or


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iii. Where the existing venture/collaboration is defunct or sick.In so far as joint ventures to be entered after the date of

Press Note dated January 12, 2005 are concerned, the

joint venture agreement may embody a 'conflict of

interest' clause to safeguard the interest of joint venture

partners in the event of one of the partners desiring to set

up another joint venture or a wholly owned subsidiary in

the 'same' field of economic activity.

iv. Foreign investment in the banking sector has been furtherliberalised by raising FDI limit in private sector banks to 74

per cent under the automatic route including investment

by FIIs. The aggregate foreign investment in a private

bank from all sources will be a maximum of 74 per cent of

the paid up capital of the bank and at all times, at least 26

per cent of the paid up capital held by residents except in

regard to a wholly owned subsidiary of a private bank.

Further, the foreign banks will be permitted to either have

branches or subsidiaries, not both. Foreign banks

regulated by a banking supervisory authority in the home

country and meeting Reserve Bank's licence criteria will be

allowed to hold 100 per cent paid up capital to enable

them to set up wholly-owned subsidiary in India. FDI

ceiling in telecom sector in certain services (such as basic,

public mobile radio trunked services (PMRTS), globalmobile personal communication service (GMPCS) and other

value added services), has been increased from 49 per

cent to 74 percent, in February 2005. The total composite

foreign holding including but not limited to investment by


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FIIs, NRI/OCB, FCCB, ADRs, GDRs, convertible preference

shares, proportionate foreign investment in Indian

promoters/investment companies including their holding

companies etc., will not exceed 74 per cent.

v. In January 2004, guidelines on equity cap on FDI,

including investment by NRIs and Overseas Corporate

Bodies (OCBs) were revised as under: - FDI up to 100 per

cent is permitted in printing scientific and technical

magazines, periodicals and journals subject to compliance

with legal framework and with the prior approval of the

Government.

i) FDI up to 100 per cent is permitted throughautomatic route for petroleum product marketing,

subject to existing sectoral policy and regulatory

framework.

ii)

FDI up to 100 per cent is permitted through

automatic route in oil exploration in both small

and medium sized fields subject to and under the

policy of the Government on private participation

in exploration of oil fields and the discovered

fields of national oil companies.

iii) FDI up to 100 per cent is permitted throughautomatic route for petroleum products pipelinessubject to and under the Government policy and

regulations thereof.


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iv) FDI up to 100 per cent is permitted for NaturalGas/LNG pipelines with prior Government

approval.

* {Source Information by Ministry of Finance, Government of India}

A news report from World Bank "Doing Business in 2005; Removing

Obstacles to Growth" has shown that India has made the highest

progress among South Asian nations in improving its investment

climate. India was rated among top ten reformers in the world.

Further, a recent confidence survey by global consultancy AT Kearney

rated India as the third most favoured FDI destination, next only to

China and United States. According to the World Investment Report,

2004 of United Nations Conference on Trade and Development

(UNCTAD), Global FDI Inflows have declined significantly from the

peak of US$ 1.4 trillion in 2000 to US$ 560 billion in 2003. FDI inflow

to India, on the contrary, has shown a rise, particularly in 2003, to

reach US$ 4.27 billion Country-wise, FDI inflows to India are

dominated by Mauritius (34.49 percent), followed by the United States

(17.08 percent) and Japan (7.33 percent).

Formulation of policy for Indian Direct Investment for setting up Joint

Ventures (JV) and Wholly Owned Subsidiaries (WOS) abroad,

promotion of Indian investment abroad and Bilateral Investment

Promotion and Protection Agreement {BIPA} are the major functions

of IC Section of the Government of India, Ministry of Finance,Department of Economic Affairs Investment Division.

Indian investment abroad is governed by the Foreign Exchange

Management (Transfer or issue of any foreign security) Regulations,

2000 notified by RBI from time to time.


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As part of the Economic Reforms Programme initiated in 1991, the

foreign investment policy of the Government of India was liberalised

and negotiations undertaken with a number of countries to enter into

Bilateral Investment Promotion & Protection Agreement (BIPAs) in

order to promote and protect on reciprocal basis investment of the

investors. Government of India have, so far, signed BIPAs with 57

countries out of which 47 BIPAs have already come into force and the

remaining agreements are in the process of being enforced. In

addition, agreements have also been finalised and/ or being negotiated

with a number of other countries.

The important features of BIPA are : National Treatment for foreign

investment; MFN treatment for foreign investment and investors; free

repatriation/ transfer of returns on investment; recourse to domestic

disputes resolution and international arbitration for investor-State and

State-State disputes; nationalization / expropriation only in public

interest on a non-discriminatory basis and against compensation etc.

Status of Bilateral InvestmentPromotion and Protection Agreementsratified by India(as on 01.04.2005)

(ranked in alphabetical order)

Sl.No. Country

Date of ratification/ enforcement

1. Argentina 12th August 2002

2. Australia 4th May 2000

3. Austria 1st March 2001

4. Belarus 23rd November 2003


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5. Belgium 8th January 2001

6. Bulgaria 23rd September 1999

7. Croatia 19th January 2002

8. Cyprus12th January, 2004

9. Czech Republic 6th February 1998

10. Denmark 28th August 1996

11. Egypt 22nd November 2000

12. Finland 9th April 2003

13. France 17th May 2000

14.

Germany

13

th

July 1998

15. Indonesia22ndJanuary,2004

16. Israel 18th February 1997

17. Italy 26th March 1998

18. Kazakhstan 26th

July 2001

19. Kuwait 28th June 2003

20. KyrgyzRepublic

12th May 2000


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21. Lao PDR 5th January 2003

22. Malaysia 12th April 1997

23. Mauritius 20th June 2000

24. Mongolia 29th April 2002

25. Morocco 22nd February 2001

26. Netherlands 1st December 1996

27. Oman 13th October 2000

28. Philippines 29th January 2001

29. Poland 31st December 1997

30.

Portugal

19

th

July 2002

31. Qatar 15th December 1999

32. Romania 9th December 1999

33. RussianFederation

5th August 1996

34. South Korea 7th

May 1996

35. Spain 16th October 1998

36. Sri Lanka 13th February 1998


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37. Sweden 1st April 2001

38. Switzerland 16th February 2000

39. Taiwan # 28th November 2002

40. Tajikistan 14th November .2003

41. Thailand 13th July 2001

42. Ukraine 12th August 2003

43. UnitedKingdom

6th January 1995

44. USA * 16th April 1998

45. Uzbekistan 28th July 2000

46. Vietnam 1st December 1999

47. Yemen 10th February 2004

* Investment Incentive Agreement # An Unilateral Declaration issued by GOI to give effect to the

Agreement signed between India-Taipei Association, Taipei andTaipei Economic & Cultural Center , N.Delhi.

{Source Information by Ministry of Finance, Government ofIndia}


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List of countries with whom india has signed Double Taxation

Avoidance Agreement(DTAA)

1. Australia2. Austria

3. Bangladesh4. Belgium5. Belarus6. Brazil7. Bulgaria8. Canada9. China10. Cyprus11. Czech Republic12. Denmark13. Egypt

14. Finland15. France16. Germany17. Greece18. Hungary19. Indonesia20. Ireland21. Israel22. Italy23. Japan

24. Jordan25. Kazakhstan26. Kenya27. Kyrgyz Republic28. Libya29. Malaysia30. Malta31. Mauritius32. Mongolia33. Morocco34. Namibia

35. Nepal36. The Netherlands37. New Zealand38. Norway39. Oman40. Philippines41. Poland


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42. Portugal43. Qatar44. Romania45. Russian Federation46. Singapore

47. South Africa48. South Korea49. Spain50. Sri Lanka51. Sweden52. Switzerland53. Syria54. Tanzania55. Thailand56. Trinidad & Tobago57. Turkey58. Turkmenistan59. Ukraine60. UAE61. United Kingdom62. USA63. Uzbekistan64. Vietnam65. Zambia

List of countries with whom india has signed Limited DTA

1. Afghanistan2. Ethiopia3. Iran4. Kuwait5. Lebanon6. Pakistan7. P.D.R. Yemen8. Saudi Arabia9. Yemen Arab Republic


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India - U.A.E. BIPA

Text of BIPA between India and UAE was finalized in June 1998 and

Cabinet approval for signing and subsequent ratification of the

Agreement was obtained on 10-4-1999. However, signing of the BIPAhas been held up on account of two amendments proposed by the UAE

in the agreed text of the Agreement which are to be negotiated.

Foreign Investment Policy:

The Ministry of Industry has expanded the list of industries eligible for

automatic approval of foreign investments and, in certain cases, raised

the upper level of foreign ownership from 51 percent to 74 percentand further in certain cases to 100 percent. In January 1998, the RBI

announced simplified procedures for automatic FDI approvals. The

announcement further provided that Indian companies will no longer

require prior clearances from the RBI for inward remittances of foreign

exchange or for the issuance of shares to foreign investors.

Facilitating foreign investment:

In the recent budget, the GOI has announced its commitment to a 90-

day period for approving all foreign investments. Government officers

are assigned to larger foreign investment proposals and to facilitate

Central and State clearances in a time-bound manner. Unlisted

companies with a good 3 year track record, have been permitted to

raise funds in international markets through the issue of Global

Depository Receipts (GDRs) and American Depository Receipts (ADRs).

A number of recent policy changes have reduced the discriminatory

bias against foreign firms. The government has amended exchange

control regulations previously applicable to companies with significant

foreign participation. The ban against using foreign brand

names/trademarks has been lifted. The FY 1994/95 budget reduced


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the corporate tax rate for foreign companies from 65 percent to 55

percent. The tax rate for domestic companies was lowered to 40

percent. The long-term capital gains rate for foreign companies was

lowered to 20 percent; a 30 percent rate applies to domestic

companies. The Indian Income Tax Act exempts export earnings from

corporate income tax for both Indian and foreign firms. Other policy

changes have been introduced to encourage foreign direct and foreign

institutional investment.

The Securities and Exchange Board of India (SEBI) has recently

formulated guidelines to facilitate the operations of foreign brokers in

India on behalf of registered Foreign Institutional Investors (FII's).

These brokers can now open foreign currency-denominated or rupee

accounts for crediting inward remittances, commissions and brokerage

fees.

The condition of dividend balancing (offsetting the outflow of foreign

exchange for dividend payments against export earnings) has been

eliminated for all but 22 consumer goods industries. A 5-year tax

holiday is extended to enterprises engaged in development of

infrastructural facilities. Even without a registered office in India,

foreign companies are allowed to start multimodal transport services in

India.

The Reserve Bank of India (RBI) now permits 100 percent foreign

investment in the construction of roads/bridges. The peak custom duty

rate was reduced to 50 percent from 65 percent in the March 1995

budget. Import regime changes included enhancement of the scope of

Special Import License (SIL) programs, and the expansion of freely

importable items on the Open General License (OGL) list to include

some consumer goods.


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Currently, there are no investment disputes over expropriation or

nationalization. A committee has been named to study the

longstanding disputes in pharmaceutical sector, but the failure of

Government to produce a swift and transparent resolution has led to a

virtual standstill in foreign investment in India's pharmaceutical sector.

Indian Courts and constitution of Intellectual Property Rights Tribunal

provide adequate safeguards for the enforcement of property and

contractual rights.

Foreign Direct Investment (FDI) in India is permitted under the

following forms of investments.

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

FDI is not permitted in the following industrial sectors:

Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold,

diamonds, copper, zinc.


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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. The Government of India has approved

floating of GDR issue.

There is no restriction on the number of Euro-issue to be floated by a

company or a group of companies in the financial year . A company

engaged in the manufacture of items covered under Annex-III of the

New Industrial Policy whose direct foreign investment after a proposed

Euro issue is likely to exceed 51% or which is implementing a project

not contained in Annex-III, would need to obtain prior FIPB clearance

before seeking final approval from Ministry of Finance.

In India, Department of Industrial Policy and Promotion (DIPP) is the

nodal agency constituted by Ministry of Commerce & Industry. Foreign

Investment Implementation Authority (FILA) has been set up by

Government of India to facilitate quick translation of FDI approvals

into implementation and to help foreign investors to obtain necessary

approvals, sort out operational problems and find solutions to Foreign

Investors problems. Fast track Committee for each sector has been

constituted to assist FILA.

CONCLUSION :

The Indian middle class is large and growing; wages are low; many

workers are well educated and speak English; investors are optimistic

and local stocks are up; despite political turmoil, the country presses

on with economic reforms. The rapid economic growth of the last few


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years has put heavy stress on India's infrastructural facilities. The

projections of further expansion in key areas could snap the already

strained lines of transportation unless massive programs of expansion

and modernization are put in place. Problems include power demand

shortfall, port traffic capacity mismatch, poor road conditions (only half

of the country's roads are surfaced), low telephone penetration (1.4%

of population). Although the Indian government is well aware of the

need for reform and is pushing ahead in this area, business still has to

deal with an inefficient and sometimes still slow-moving bureaucracy.

The Indian market is widely diverse. The country has 17 official

languages, 6 major religions, and ethnic diversity as wide as all of

Europe. Thus, tastes and preferences differ greatly among sections of

consumers. The general economic direction in India is toward

liberalization and globalization.

There is always a constant fear for the investor of the frequent

changes in environmental legislations and policies in India. Long term

environment policies could be drawn up.

India is not a member of the International Center for the Settlement of

Investment Disputes, nor of the New York Convention of 1958.

Commercial arbitration or other alternative dispute resolution (ADR)

methods are not yet popular ways of commercial dispute settlement in

India. The recent introduction in Parliament of a new Arbitration Bill

signals the importance now accorded to this matter by the GOI.

However, India still has a heavy regulation burden among other

countries, e.g the time taken to start business or to register a property

is higher in India. Similarly, indirect taxes, entry-exit barriers and

import duties have been a major detriment to investment climate in

India.


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All these issues are required to be addressed or at least partically

avoided for having higher FDI in India.

Though India is not a signatory to the Convention on Settlement of

Investment Disputes between States and nationals of other States,

many Bilateral Investment Agreements entered by India include an

ICSID Arbitration clause for settlement of disputes. The lack of

legislative and institutional reform is a barrier to FDI.

Though there are several set backs and deficiencies, the existence of

economic opportunities would not dissuade FDI in India.

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