NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

BANGALORE

PROJECT ON

FDI policy in India after 2002

SUBJECT: Investment & Securities law
TRIMESTER-IV
2013-14
UNDER THE SUPERVISION OF

Prof. N.L. Mitra

National Law School of India University, Bangalore

SUBMITTED BY:-Ronak Karanpuria

LL.M. (Business Law)
Student ID No.: 534

Acknowledgement
I express my deep sense of obligation and gratitude to Prof. N. L. Mitra, National Law
School of India University, Bangalore, for his invaluable guidance and persistent
encouragement in the preparation of this project work.
I am deeply indebted to all the Indian and foreign writers and judges whose writings and
decisions have been duly cited in this work and have given me inspiration and light during
preparation of this work.
At last, it is my sincere duty to express my deep obligation towards my respected seniors for
their kindness, grace and many sided benevolence.

Ronak Karanpuria

INDEX

S. No.
1
2
3
5
6

Particulars
Introduction
Foreign Investment Policy & Regulation
Changing Dynamics of Foreign Investment
Impact of Government policies towards foreign capital
Issues & Problem : FDI in India

INTRODUCTION

In 1991, India was under great debt, to overcome such financial crisis Indian government
open the gates of foreign investment, to invest in India. This led to the economic
development, stability & foreign money which overcomes the economic depression & capital
crisis. This step boost the government to inflow the money through various sectors like
industry, health, infrastructure, service etc. to process development in a planned manner &
not depend only on the tax payers money which can be improvise through liberal fiscal &
monetary policy & also to improve the condition of banking sector. To put India at the
forefront, improve GDP & to generate employment opportunities with better diagnostic
techniques. In the 1970s there was almost no foreign investment, with little in 1980, with
liberalisation in 1991 and in year 1996 inflow to India exceed $6 billion. Though dampened
by global financial crises after 1997, net direct investment flows to India remain positive.
India similar to international market in different economy permit foreign investment and open
gates through RBI route or through Government approval route.
With the rapid economic development & changing scenario of market, India also permit
foreign investment in various sectors like energy, power, health, education, media, aircraft,
telecom etc. through either mode foreign direct investment, foreign portfolio investment
scheme, foreign venture capital investment, investment in government securities by NonResident Indian, Person of Indian origin, Foreign entity in partnership firm, companies, LLP
etc. through various investment securities like issues of shares, debentures etc.
Due to foreign investment, it supplement domestic market, enable high growth rate, generate
employment, improvise technology & more importantly at macro-economic level it relax
potential balance of payment requirement, inflexible demand of foreign debt, foreign
investment, presence of foreign firms reduces market concentration & promotes a more
competitive market with consumer driven economy.

FOREIGN INVESTMENT POLICY

With an intent, as government also put in place a policy framework on Foreign Direct
Investment, which is transparent, predictable and easily comprehensible. This framework is
embodied in the Circular on Consolidated FDI Policy, first issued on 2005 & then on 2013
which may be updated every year, to capture and keep pace with the regulatory changes. The
Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry,
Government of India makes policy pronouncements on FDI through Press Notes/ Press
Releases which are notified by the Reserve Bank of India as amendments to the Foreign
Exchange Management (Transfer or Issue of Security by Persons Resident Outside India)
Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000). This can be done
through introduction of dual route of approval of FDI RBIs automatic route and
Governments approval The Foreign Investment Promotion Board (FIPB) route, 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, permission to
Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per
cent in high priorities sectors. Indian companies can issue equity shares, fully, compulsorily
and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible
preference shares subject to pricing guidelines/valuation norms prescribed under FEMA
Regulations.
In sectors/activities with caps, including inter-alia defence production, air transport services,
ground handling services, asset reconstruction companies, private sector banking,
broadcasting, commodity exchanges, credit information companies, insurance, print media,
telecommunications and satellites, Government approval/FIPB approval would be required in
all cases where: (i) An Indian company is being established with foreign investment and is
not owned by a resident entity or (ii) An Indian company is being established with foreign
investment and is not controlled by a resident entity or (iii) The control of an existing Indian
company, currently owned or controlled by resident Indian citizens and Indian companies,
which are owned or controlled by resident Indian citizens, will be/is being transferred/passed
on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares
to non-resident entities through amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by resident
Indian citizens and Indian companies, which are owned or controlled by resident Indian
citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of
transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation,
merger/demerger, acquisition etc.

(v) It is clarified that these guidelines will not apply to sectors/activities where there are no
foreign investment caps, that is, 100% foreign investment is permitted under the automatic
route.
(vi) It is also clarified that Foreign investment shall include all types of foreign investments
i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds
(FCCB) and fully, mandatorily & compulsorily convertible preference shares/debentures,
regardless of whether the said investments have been made under Schedule 1, 2, 3 and 6 of
FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations.
CHANGING DYNAMICS OF FOREIGN INVESTMENT
Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for which
could be the global situation that prevailed during that time frame. Although services sector
remain the sector attracting the highest FDI inflows since 2006-07 its share has been
constantly declining. The FDI flows into computer hardware and software has been
downward ever since 2005-06. It has drastically gone down from 24.8 per cent in 2005-06 to
4.0% in 2010-11. Housing & Real Estate have shown an upward trend in terms of their share
in FDI inflows. Investments in chemicals and metallurgical industries have been erratic as no
clear trend could be observed for the time period 2005-06 to 2010-11. Citizens of Pakistan or
an entity incorporated in Pakistan are permitted to invest in India, under the Government
approval route. FDI in Civil Aviation Sector by foreign airlines has been permitted upto 49%
(cumulative of investment vide FDI and foreign institutional investors). FDI in multi-brand
retail trading sector upto 51% under government approval route. Policy of the Indian
Government related to SEZ is mainly responsible for the FDI inflows. It is because
government announced the SEZ Act, SEZs scheme was launched with the specific intend of
providing an internationally competitive and hassle free environment for exports.
Mauritius has been the largest direct investor in India. Mauritius has low rates of taxation and
an agreement with Indian double tax avoidance regime. The United States (US) is the second
largest investor in India. To take advantage of double tax avoidance regime, many companies
have set up dummy companies in Mauritius before infesting to India. Since 2000, India
signed many regional arrangement & agreements like ASEAN, Gulf Cooperation Council,
BIMSTEC, South Asia Free Trade Agreements, Bilateral Investment Treaty, SAARC. Tax
Holiday for companies who are involved in R&D having commercial application.

There were list of sectors in which FDI is prohibited such as (a) Lottery Business including
Government /private lottery, online lotteries, etc. (b) Gambling and Betting including casinos
etc. (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights
(TDRs) (f) Real Estate Business or Construction of Farm Houses (g) Manufacturing of
Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (h) Activities /
sectors not open to private sector investment e.g. Atomic Energy and Railway Transport
(other than Mass Rapid Transport Systems).
Similar to that there are sectors in which FDI is permitted like in Agriculture where 100%
foreign investment with automatic approval with general conditions attached to it like
complying with compliance with environmental laws & conditions laid down in notifications
issued under Foreign Trade (Development & Regulation ) Act, 1992
Similarly for different sectors separate policy is made to with different conditions like tea
plantations, mining, media, telecommunication, service sector etc. with the general or specific
conditions attached to it either through automatic or government approval route.
In 2012 India attractiveness survey was carried out at a time when the dialogue among
business leaders about the leaders about the economic crisis was at its peak and investors
were in caution mode. Regardless of today's crisis, a strong increase in the number of
foreign direct investment (FDI) projects in India is a clear indication that global investors
view the country as an attractive investment destination.

India Inc witnessed an increase of 25 per cent year-on-year (y-o-y) to record US$ 2.32
billion of FDI in April 2013. Sectors that attracted highest levels of FDI include hotels
and tourism sector (US$ 2.32 billion), followed by pharmaceuticals (US$ 987
million), services (US$ 238 million), chemicals (US$ 51 million) and construction
sector
(US$
32
million).
Singapore alone infused FDI flows worth US$ 1.29 billion in April 2013, followed by
Mauritius, the Netherlands and the US with FDI inflows worth US$ 355 million, US$
173 million and US$ 149 million respectively. FDI inflows aggregated at US$ 22.42
billion in 2012-13.

India's foreign exchange (forex) reserves stood at US$ 280.167 billion for the week
ended July 5, 2013, according to data released by the central bank. The value of
foreign currency assets (FCA) - the biggest component of the forex reserves stood at
US$ 252.103 billion, according to the weekly statistical supplement released by the
Reserve Bank of India (RBI).

Private equity (PE) firms upped their investments in India Inc by a hefty 42 per cent
to US$ 5.4 billion through 197 deals during the first half of 2013; major deal being
the US$ 1.2 billion-Bharti Airtel deal, according to a report by EY India (formerly
Ernst & Young).

Meanwhile, Merger and acquisition (M&A) activity in India was also quite intense
pril-June 2013 period. The deal tally stood at US$ 10.9 billion across 130
transactions, according to global deal tracking firm Merger market.

IMPACT OF GOVERNMENT POLICIES TOWARDS FOREIGN CAPITAL

India measures to control inflation, fiscal consolidation will improve investor climate, Indias
economic growth slowed down in 2008-09 in the wake of the international financial crisis.
But the recovery was rapid; the economy grew at 8% in 2009-10 and at 8.5% in 2010-11.
There are fears that the Indian economy may grow at a slower rate in the current fiscal. India
remained very attractive for FDI in 2011. FDI projects increased by 20% in India in 2011,
attracting 932 projects, which created an estimated 255,416 jobs. This is despite a global
economic growth that had not fully recovered from the financial crisis of 200809 and has
begun to slow again, from over 5% in 2010 down to a projected 3.3% through 2012.
Investors came to India to find growth opportunities for their business and the possibility to
operate at lower cost. Fifty percent of our panel claims that Indias massive and growing
domestic market is their number one draw and 45% of them see India as a highly costcompetitive location.

The number of FDI projects increased by 20% in 2011 reaching 932 projects, supported by
the consumer demand, the easy access to financing and the increased approvals by the FIPB.
Investment ratio declined in 2009 and 2010, following the financial crisis, but returned in
2011. Projects have also decreased in value; in 2007, the average project was worth US$73
million and, in 2011, it was worth US$63 million. Despite the uncertain global economy and
the slight majority of businesses that are putting their investment projects on hold, there was
not only an increase in the number of FDI projects in India from 2010 to 2011, but the value
also increased by 12% and the number of jobs by 15%. Investors perceive that India presents
value and promising growth dynamics in this increasingly unstable global economy. With a
rapidly expanding middle class to consume products and the presence of a large, well-trained
labor force keeping costs down, India presents opportunities both to investors who want to
produce and to investors who want to sell.

During 2011, investors committed US$58,261 million in India, 71% of which went into the
manufacturing sector, creating 320 projects and 144,449 jobs (57% of the total jobs), and
producing an average of 451 jobs per project. @**@Since 2007 the attractiveness profile of
India has evolved. Although industry was always important, it has grown from supplying
47% of every FDI job in India in 2007 to 57% of every FDI job in 2011. At the same time,
services jobs have fallen from creating 36% of every FDI job in India in 2007 to creating
31% in 2011.

Issues & Problem: FDI in India

1. Restrictive FDI regime
The FDI regime in India is still quite restrictive. As a consequence, with regard to cross
border ventures. Foreign ownership of between 51 and 100 percent of equity still requires a
long procedure of governmental approval. In our view, there does not seem to be any
justification for continuing with this rule. This rule should be scrapped in favor of automatic
approval for 100-percent foreign ownership except on a small list of sectors that may
continue to require government authorization.
2. Lack of clear cut and transparent sectorial policies for FDI
Expeditious translation of approved FDI into actual investment would require more
transparent sectorial policies, and a drastic reduction in time-consuming red-tapism.
3. High tariff rates
Indias tariff rates are still among the highest in the world, and continue to block Indias
attractiveness as an export platform for labour-intensive manufacturing production. On tariffs
and quotas, India is ranked 52nd in the 1999 GCR, and on average tariff rate, India is ranked
59th out of 59 countries being ranked. Much greater openness is required which among other
things would include further reductions of tariff rates to averages in East Asia.
4. Lack of decision-making authority with the state governments
The reform process so far has mainly concentrated at the central level. India has yet to free up
its state governments sufficiently so that they can add much greater dynamism to the reforms.
In most key infrastructure areas, the central government remains in control, or at least with
veto over state actions. Greater freedom to the states will help foster greater competition
among themselves. The state governments in India need to be viewed as potential agents of
rapid and salutary change. Brazil, China, and Russia are examples where regional
governments take the lead in pushing reforms and prompting further actions by the central
government.
5. Limited scale of export processing zones
The very modest contributions of Indias export processing zones to attracting FDI and
overall export development call for a revision of policy. Indias export processing zones have
lacked dynamism because of several reasons, such as their relatively limited scale.