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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.

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