Foreign Investment in India

The flow of direct foreign investment to India has been comparatively limited because of the type of industrial development strategy and the very cautions foreign investment policy followed by the nation.

Direct foreign investment (private) in India was adversely affected by the following factors.

  1. The public sector was assigned a monopoly or dominant position in the most important industries and therefore, the scope of private investment, both domestic and foreign, was limited.

  2. When the public sector enterprises needed foreign technology or investment, there was a marked preference for the foreign government sources.

  3. Government policy towards foreign capital was very selective. Foreign investment was normally permitted only in high technology industries in priority areas and is export-oriented industries.

  4. Foreign equity participation was normally subject to celeing or 40%, although exceptions were allowed on merit.

  5. Payment of dividends aboard, repatriation of capital etc as well as inward remittances were subject to strigent laws like the foreign Exchange Regulations Act (FERA), 1973. These discouraged foreign investment.

  6. Corporate taxation was high and tax laws & procedure were Complex.

Those factors either limited the scope of or discouraged the foreign investment in India.

Government Policy.:- India was following a very restrictive policy towards foreign capital and Technology. Foreign collaboration was permitted only in fields of high priority and in also where the import of foreign technology was considered necessary. Import of technology was considered on merits if substantial exports were guaranted over a powered of 5 to 10 years and if there were reasonable proposals for such exports. The government had issued list of industries where:

  1. Foreign investment may be permitted.

  2. Only foreign technical collaboration may be permitted.

  3. No foreign collaboration either financial or technical was considered necessary.

The government policy on foreign equity participation was selective. This type of participation had to be justified w.r.t. factors like nature of Technology involved. Foreign share capital was to be by way of cash without being liked to wed Imports of machinery and equipment or to payments for trademark brandnames etc.

The Foreign Exchange Regulation Act (FERA) served as a too for implementing the national policy on foreign private investment in India. The FERA empowered the Reserve Bank of India to regulate or exercise direct control over the activities of foreign companies and foreign nationals in India.

According to FERA, non-residents, foreign citizens resident in India and foreign companies required the permission of the RBI to accept appointment as agents or technical management advisers in India.

The trading, commercial and industrial activities in India of persons resident abroad, foreign citizens in India and foreign companies were regulated by The FERA. They had to obtain permission from the RBI for carrying on in India any activity of a trading, commercial and industrial nature, opening branches or other places of business in India acquiring any business undertaking in India and purchasing shares of India companies.

The New Policy:- The industrial policy statement of July 24, 1991, which observes that while freeing the Indian economy from official controls, opportunities for promoting foreign investment in India should also be fully exploited has liberalized and Indian policy towards foreign investment & technology. In pre-liberalisation era, foreign equity participation was restricted to 40% and foreign investment and technology agreements needed prior approval. New policy has allowed majority foreign equity with automatic approval in a large no of industries.

The new policy also made the import of capital goods automatic provided the foreign exchange requirement for such import is ensured through foreign equity.

Salient features of initiatives under new policy includes the following:-

The automatic route has subsequently been expanded very significantly & now there are different categories of industries on the basis of the celing of foreign equity participation.

  1. Industries in which FDI does not exceed 26%.

  2. Industries in which FDI does not exceed 50%.

  3. Industries in which FDI does not exceed 51%.

  4. Industries in which FDI does not exceed 74%.

  5. Industries in which upto 100% foreign equity is permitted.

In Feburary 2000, government took a major decision to place all items under the automatic route for FDI/NRI/OCB (Overseas Corporate Bodies) Investment except for a small negative list which include:

  1. Automatic Approval by RBI is available for any proposal with lumpsum payment not exceeding us $2 million and royaltly of upto 5% on domestic sales & eight percent on exports.

  2. In all other cases, the Project Approval Board (PAB) considers the proposals and makes recommendations to the Industry Ministry regarding approval.

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