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Section 2: FDI Policy Framework
Policy regime is one of the key factors driving investment flows to a country. Apart from
underlying macro fundamentals, ability of a nation to attract foreign investment essentially
depends upon its policy regime - whether it promotes or restrains the foreign investment flows.
This section undertakes a review of Indias FDI policy framework and makes a comparison of
Indias policy vis--visthat of select EMEs.
2.1 FDI Policy Framework in I ndia
There has been a sea change in Indias approach to fore ign investment from the early 1990s
when it began structural economic reforms encompassing almost all the sectors of the economy.
Pre-Liberalisation Period
Historically, India had followed an extremely cautious and selective approach while
formulating FDI policy in view of the dominance of import-substitution strategy of
industrialisation. With the objective of becoming self reliant, there was a dual nature of policy
intentionFDI through foreign collaboration was welcomed in the areas of high technology and
high priorities to build national capability and discouraged in low technology areas to protect and
nurture domestic industries. The regulatory framework was consolidated through the enactment
of Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a joint
venture was allowed only up to 40 per cent. Subsequently, various exemptions were extended to
foreign companies engaged in export oriented businesses and high technology and high priority
areas including allowing equity holdings of over 40 per cent. Moreover, drawing from successes
of other country experiences in Asia, Government not only established special economic zones
(SEZs) but also designed liberal policy and provided incentives for promoting FDI in these zones
with a view to promote exports. As India continued to be highly protective, these measures did
not add substantially to export competitiveness. Recognising these limitations, partial
liberalisation in the trade and investment policy was introduced in the 1980s with the objective
of enhancing export competitiveness, modernisation and marketing of exports through Trans-
national Corporations (TNCs). The announcements of Industrial Policy (1980 and 1982) and
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Technology Policy (1983) provided for a liberal attitude towards foreign investments in terms of
changes in policy directions. The policy was characterised by de-licensing of some of the
industrial rules and promotion of Indian manufacturing exports as well as emphasising on
modernisation of industries through liberalised imports of capital goods and technology. This
was supported by trade liberalisation measures in the form of tariff reduction and shifting of
large number of items from import licensing to Open General Licensing (OGL).
Post-Liberalisation Period
A major shift occurred when India embarked upon economic liberalisation and reforms
program in 1991 aiming to raise its growth potential and integrating with the world economy.
Industrial policy reforms gradually removed restrictions on investment projects and business
expansion on the one hand and allowed increased access to foreign technology and funding on
the other. A series of measures that were directed towards liberalizing foreign investment
included: (i) introduction of dual route of approval of FDI RBIs automatic route and
Governments approval (SIA/FIPB) route, (ii) automatic permission for technology agreements
in high priority industries and removal of restriction of FDI in low technology areas as well as
liberalisation of technology imports, (iii) permission to Non-resident Indians (NRIs) and
Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors, (iv)
hike in the foreign equity participation limits to 51 per cent for existing companies and
liberalisation of the use of foreign brands name and (v) signing the Convention of Multilateral
Investment Guarantee Agency (MIGA) for protection of foreign investments. These efforts were
boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 [that replaced
the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. This along with
the sequential financial sector reforms paved way for greater capital account liberalisation in
India.
Investment proposals falling under the automatic route and matters related to FEMA are
dealt with by RBI, while the Government handles investment through approval route and issues
that relate to FDI policy per se through its three institutions, viz., the Foreign Investment
Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign
Investment Implementation Authority (FIIA).
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FDI under the automatic route does not require any prior approval either by the
Government or the Reserve Bank. The investors are only required to notify the concerned
regional office of the RBI within 30 days of receipt of inward remittances and file the required
documents with that office within 30 days of issuance of shares to foreign investors. Under the
approval route, the proposals are considered in a time-bound and transparent manner by the
FIPB. Approvals of composite proposals involving foreign investment/ foreign technical
collaboration are also granted on the recommendations of the FIPB. Current FDI policy in terms
of sector specific limits has been summarised in Table 3 below:
Table 3: Sector Specific Limits of Foreign Investment in India
Sector FDI
Cap/Equity
Entry
Route
Other
Conditions
A. Agriculture1. Floriculture, Horticulture, Development of Seeds,
Animal Husbandry, Pisciculture, Aquaculture,
Cultivation of vegetables & mushrooms and servicesrelated to agro and allied sectors.
2. Tea sector, including plantation
100%
100%
Automatic
FIPB
(FDI is not allowed in any other agri cultur al sector /activity)
B. Industry
1. Mining covering exploration and mining of
diamonds & precious stones; gold, silver and minerals.
2. Coal and lignite mining for captive consumption bypower projects, and iron & steel, cement production.
3. Mining and mineral separation of titanium bearingminerals
100%
100%
100%
Automatic
Automatic
FIPB
C. Manufacturing1. Alcohol- Distillation & Brewing
2. Coffee & Rubber processing & Warehousing.
100%
100%
Automatic
Automatic
3. Defence production 26% FIPB
4. Hazardous chemicals and isocyanates
5. Industrial explosives -Manufacture
6. Drugs and Pharmaceuticals
7. Power including generation (except Atomicenergy); transmission, distribution and power trading.
100%
100%
100%
100%
Automatic
Automatic
Automatic
Automatic
(FDI is not permi tted for generation, transmission & distri bution of electri city
produced in atomic power plant/atomic energy since pri vate investment in thi s
activity is prohibited and reserved for publi c sector.)
D. Services
1. Civil aviation (Greenfield projects and Existing
projects)
100% Automatic
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2. Asset Reconstruction companies 49% FIPB
3. Banking (private) sector 74%
(FDI+FII). FII
not to exceed49%
Automatic
4. NBFCs : underwriting, portfolio managementservices, investment advisory services, financial
consultancy, stock broking, asset management, venture
capital, custodian , factoring, leasing and finance,housing finance, forex broking, etc.
100% Automatic s.t. minimumcapitalisation
norms
5. Broadcasting
a. FM Radio
b. Cable network; c. Direct to home; d. Hardware
facilities such as up-linking, HUB.e. Up-linking a news and current affairs TV Channel
20%
49% (FDI+FII)
100%
FIPB
6. Commodity Exchanges 49% (FDI+FII)
(FDI 26 % FII23%)
FIPB
7. Insurance 26% Automatic Clearance
from IRDA
8. Petroleum and natural gas :
a. Refining
49% (PSUs).
100% (Pvt.
Companies)
FIPB (for
PSUs).
Automatic(Pvt.)
9. Print Mediaa. Publishing of newspaper and periodicals dealing
with news and current affairs
b. Publishing of scientific magazines/specialityjournals/periodicals
26%
100%
FIPB
FIPB
S.t.guidelines by
Ministry of
Information&
broadcasting
10. Telecommunications
a. Basic and cellular, unified access services,
national/international long-distance, V-SAT, publicmobile radio trunked services (PMRTS), global
mobile personal communication services (GMPCS)
and others.
74% (including
FDI, FII, NRI,
FCCBs,ADRs/GDRs,
convertible
preference
shares, etc.
Automatic
up to 49%
and FIPBbeyond
49%.
Sectors where FDI is Banned
1. Retail Trading (except single brand product retailing);2. Atomic Energy;3. Lottery Business including Government / private lottery, online lotteries etc;4. Gambling and Betting including casinos etc.;5. Business of chit fund;6. Nidhi Company;
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7. Trading in Transferable Development Rights (TDRs);8. Activities/sector not opened to private sector investment;9. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture
and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro andallied sectors) and Plantations (Other than Tea Plantations);
10.Real estate business, or construction of farm houses;
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco or of tobacco substitutes.
2.2 FDI Policy: The I nternational Experi ence
Foreign direct investment is treated as an important mechanism for channelizing transfer
of capital and technology and thus perceived to be a potent factor in promoting economic growth
in the host countries. Moreover, multinational corporations consider FDI as an important means
to reorganise their production activities across borders in accordance with their corporate
strategies and the competitive advantage of host countries. These considerations have been thekey motivating elements in the evolution and attitude of EMEs towards investment flows from
abroad in the past few decades particularly since the eighties. This section reviews the FDI
policies of select countries to gather some perspective as to where does India stand at the
current juncture to draw policy imperatives for FDI policy in India.
China
Encouragement to FDI has been an integral part of the Chinas economic reform process.
It has gradually opened up its economy for foreign businesses and has attracted large
amount of direct foreign investment.
Government policies were characterised by setting new regulations to permit joint
ventures using foreign capital and setting up Special Economic Zones (SEZs) and Open
Cities. The concept of SEZs was extended to fourteen more coastal cities in 1984.
Favorable regulations and provisions were used to encourage FDI inflow, especially
export-oriented joint ventures and joint ventures using advanced technologies in 1986.
Foreign joint ventures were provided with preferential tax treatment, the freedom to
import inputs such as materials and equipment, the right to retain and swap foreign
exchange with each other, and simpler licensing procedures in 1986. Additional tax
benefits were offered to export-oriented joint ventures and those employing advanced
technology.