FDI Policy of India

FDI Policy of India

Introduction to Investment in India

FDI is considered is considered as the life breadth of any nation. In the present world, FDI is considered as one of the most important vital economic tool to give economy a big leap. India too has adopted Foreign Direct Investment as the major strategy to boost its economy. The year of 1991 came as a breakthrough that almost revolutionized the economic scenario of the country. In 1991 inspector raj and paved the way for globalization. More pragmatic and scientific program and policies were adopted. Much emphasis was given on foreign investment. Red tapism, license policy was done away with. Emphasis was given on competition and fair trade practices.

Sector after sector were opened for foreign investors. Foreign investors can invest in India via financial and technical collaborations, Joint Ventures, through capital markets (Euro issues) and through preferential allotments.

Restricted Areas
Virtually all the sectors are opened for the foreign investors but there are certain sectors in which foreign investors are not allowed to participate. These are

• Arms and ammunition.




• Atomic Energy




• Railway Transport




• Coal and lignite




• Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc
  

Industrial Policy
The industrial policy of 1991 further removed all the hassle for installation of industry. It encouraged private participation and eliminated the industrial licensing requirements except for certain select sectors. The policy not only gets away with restrictions on investment and expansion but also aimed to promote easy access to foreign technology and direct investment.

The Industrial Policy Resolution of 1991 clearly outlines the Government’s overall industrial policy. Government approval for setting any industry was simplified and normal FDI proposals are cleared within a month, private participation was promoted and the areas earlier reserved for public sector was also opened for the private sector.

Industrial Licensing
Industrial licensing in post reform period is only necessary for few cases like:
• Manufacturing unit reserved for the Public Sector;
• Industries which are included in compulsory licensing;
• Goods reserved for the small scale sector manufacturing
• Any proposal that comes under locational restriction.

Foreign Investment Policy
Barring few sectors, foreign investment is virtually open for all sectors. In many units and industries 100% FDI is permitted and no government approval is required. In some cases however government approval is required.

FDI Approval
FDI can be accomplished by the investors through two medium

• Automatic approval route of RBI




• Approval through FIPB route
  

In automatic approval route, the application for proposal is cleared within 4 weeks. All the cases in which 100% FDI is permitted falls under automatic approval route.

In FIPB route approval is granted within 4 to 6 weeks. The proposals requiring industrial licensing, acquiring of shares in Indian company, where foreign company has previous tie ups in India etc falls under this category.

Secretariat for Industrial Assistance (SIA)
Secretariat for Industrial Assistance (SIA) foreign investment facilitation agency set up by the government for providing a single window service for assisting investors, facilitating investors, receiving and processing all applications which require Government approval, conveying decisions of government on applications filed, helping entrepreneurs and investors in setting up projects (including liaison with other organizations and State Governments) and in monitoring implementation of projects. It also conveys and notifies Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups. It also assist the investors through its website (http://siadipp.nic.in/) where all questions are answered.

Foreign Investment in the Small Scale Sector
The unit having the asset size of INR 10 million is called as small scale industry. The policy states that any investment in this sector by other units including foreign equity is permissible up to 24 per cent. However, if the unit is willing to give up its small scale status, there is no bar on higher equity holding for foreign investment. If foreign investors want to invest more than 24% in a small scale unit manufacturing small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.

Any SSI manufacturing reserved item(s), if exceeds the small-scale investment ceiling in plant and machinery needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. In case if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.

Foreign Investment Policy for trading activities
Investment in the trading activities up to 51% is permissible under automatic route and above that through Government (FIPB) route. Approval through automatic route requires that the activity should be purely export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force.

100% FDI is permitted under Government route in case of trading activities carried out in certain specified sectors like hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.
100% FDI is allowed for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world.

Other modes of Foreign Direct Investments
Investment through Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB) is considered as other modes of FDI in India. Indian companies can raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs. There are no ceilings on investment. The company going for such investment however should have good track record of performance (financial or otherwise) for a minimum period of 3 years.

The companies can float any number of GDRs/ADRs/FCCBs in a financial year. A company manufacturing certain items within specified limits of automatic approval of might exceed that limit after floating of GDRs/ADRs/FCCBs . In such case the company needs to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment

Extra Resources

New FDI Norms 2009-2010