(as on September 30, 2008)
Today, India is one of the world’s favourite investment destinations. This is a result of continuous development and liberalization, in the Foreign Direct Investment (FDI) Policy (“the Policy”), first brought about in the year 1991. On account of such liberalization there has been a continuous increase in the FDI inflow from the year 1991 till September 2008, wherein India has received a total of US$ 96,424 million. Out of the aforesaid figure, a whopping US$ 17,210 million is the amount of FDI inflow for the period April 2008 to September 2008 alone. The year 2008 seems to be even more- promising than ever before since the total inflow from January to September 2008 has reached US$ 29,090 million, a growth of approximately 112% as compared to the corresponding period in the previous year.
As part of continuing liberalization in the Policy, a number of rationalization measures have been undertaken which include dispensing with the need of multiple approvals from the Government and/or regulatory agencies that existed in certain sectors. Additionally, FDI has also been allowed in various new sectors.
Simplification has been the key to significant growth of foreign investment in India. For instance, the Ministry of Corporate Affairs (MCA) has introduced the MCA21 project, which enables an easy and secure online access to MCA services in a manner that best suits corporate entities and professionals besides the public. MCA21 achieves all the objectives of a versatile e-governance project, and provides the business community with an online mechanism to check name availability, incorporate companies, file forms/ returns in a simplified manner without having to physically travel to the Offices of the Registrar of Companies (the concerned administrative body).
The sectors which have attracted the highest FDI inflows are services, computer software and hardware, construction , telecommunications and housing & real estate with the percentage of total inflows being 21.85%, 11.88%, 6.57%, 6.37% & 5.56% respectively.
II. SECTORAL POLICY ON FOREIGN DIRECT INVESTMENT
Investment in a few major sectors and the current Government policy governing such investment is outlined as follows:
FDI is permitted up to 100%, under the automatic route (without any Government approval), for wholesale cash & carry trading and trading for exports. There is no cap on trading of items sourced from the small scale sector & for test marketing of items for which a company has approval to manufacture; however, prior approval of the Government is required. Currently, retail trading is prohibited in India, but Single Brand Product Retailing is permitted with FDI up to 51%, with the prior approval of the Government.
2. Civil Aviation
In the domestic scheduled passenger airline sector, FDI up to 49% is permitted under the automatic route. In the domestic non-scheduled passenger airline sector, FDI up to 74% is permitted under the automatic route. However, no direct or indirect equity participation by foreign airlines is allowed.
In case of airports, FDI is permitted up to 100% under the automatic route for ‘Greenfield projects’. In case of ‘existing’ projects, FDI is permitted up to 100% but FDI beyond 74% would require Government approval.
FDI up to 100% is permitted for exploration and mining of diamonds and precious stones and coal and lignite for captive consumption, under the automatic route.
Further to this, the FDI cap has been raised from 74% to 100% (subject to prior Government approval and adherence to certain prescribed guidelines) in mining and production of titanium ores and other beach sand minerals.
Previously, in the petroleum and natural gas sector, FDI up to 100% was permitted under the ‘automatic route’ in exploration, petroleum product marketing, petroleum product pipelines, natural gas/LNG pipelines and petroleum refining in the private sector. FDI up to 26% was permitted with prior Government approval in petroleum refining by Public Sector Undertakings (PSU’s). In the case of actual trading and marketing of petroleum products, FDI was allowed up to 100% under the ‘automatic route’ with the condition that 26% foreign equity would be disinvested in favour of the Indian partner/public in a period of five years.
The Government has further liberalized the Policy for this sector as a result of which the condition of compulsory disinvestment has been done away with. Further, the FDI cap in petroleum refining (by PSU’s) has been raised from 26% to 49%.
Subject to certain conditions, FDI up to 74% (up to 49% under the automatic route and above 49% with Government approval) is permitted in telecommunication basic and cellular, unified access services, national/international long distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS), ISP with gateways, radio-paging, end-to-end bandwidth and other value added telecom services. However, FDI up to 100% is permitted (up to 49% under the automatic route and above 49% with Government approval) for ISP’s without gateways, infrastructure provider providing dark fibre, electronic mail and voice mail. The FDI cap for manufacture of telecom equipment is 100% under the automatic route.
6.Credit Information Companies:
Credit information companies have recently been brought under the scheme of the Policy. Consequently, equity investment up to 49% is allowed in this sector, subject to the prior approval of the Government and adherence to certain conditions.
Investment in the sphere of commodity exchanges has been made permissible up to an equity cap of 49% (26% FDI+23% FII i.e. Foreign Institutional Investors), subject to adherence to certain conditions and prior FIPB (Foreign Investment Promotion Board) approval.
8.Drugs and Pharmaceuticals:
FDI up to 100% under the ‘automatic route’ has been permitted in the field of “manufacturing of drugs and pharmaceuticals” including those involving use of recombinant DNA technology.
9. Construction Development Projects:
It has been clarified in the Policy that FDI in ‘real estate business’ is not permissible. However, subject to adherence to certain conditions, 100 % FDI under the ‘automatic route’ is permissible in construction development projects which include housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure and townships since such activities do not fall within ‘real estate business’.
10.Investing Companies in Infrastructure/Services Sector:
For investing companies in infrastructure/services sector (except telecom sector), the FDI cap has been increased from 49% to 100%, subject to prior Government approval and adherence to certain prescribed conditions.
A foreign company can set up multiple ventures with different Indian partners in the same field without Government approval. However, this freedom and flexibility will not be available to ventures set up prior to January 13, 2005. In such cases, prior approval of the Government would be required, the exceptions being:
(i)investments made by registered Venture Capital Funds;
(ii)where in an existing joint venture, investment by either the foreign company or by the Indian partner is less than 3%;
(iii)where the existing venture is defunct or sick.
IV.TRADEMARK AND/OR TECHNOLOGY LICENSE
(A)In case of Trademark Licensing, royalties can be paid without any restriction on the duration (of the license) payment regardless of whether or not the licensor has any foreign equity in the shareholding of the licensee.
Royalties up to 2% for exports and 1% for domestic sales is permitted under the automatic route on use of trademarks of the foreign licensor without limit of duration. The royalty will have to be a percentage of “net sales”.
(B) Proposals for technology license no longer require Government approval provided the following limits of compensation are adhered to:
(i) lump sum payment up to US$ 2 million; and
(ii) royalties of 5% for domestic sales and 8% for exports.
(C) In case of an agreement involving transfer of technology and licensing of trade mark, separate royalty for license of trade marks cannot be provided for and such royalty would be subsumed in the royalty payable for technology.
The Government has permitted capitalization of lump sum fees and royalties payable for technical know-how and external commercial borrowings received in convertible foreign currency, subject to compliance with prescribed conditions.