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The economy of India is the
third largest in the world as measured by purchasing power parity
(PPP), with a gross domestic product (GDP) of US $3.611 trillion.
When measured in USD exchange-rate terms, it is the tenth largest
in the world, with a GDP of US $800.8 billion (2006). India is the
second fastest growing major economy in the world, with a GDP
growth rate of 8.9% at the end of the first quarter of 2006-2007.
However, India's huge population results in a per capita income of
$3,300 at PPP and $714 at nominal.
The economy is diverse and
encompasses agriculture, handicrafts, textile, manufacturing, and
a multitude of services. Although two-thirds of the Indian
workforce still earn their livelihood directly or indirectly
through agriculture, services are a growing sector and are playing
an increasingly important role of India's economy. The advent of
the digital age, and the large number of young and educated
populace fluent in English, is gradually transforming India as an
important 'back office' destination for global companies for the
outsourcing of their customer services and technical support.
India is a major exporter of highly-skilled workers in software
and financial services, and software engineering.
India followed a socialist-inspired approach for most of its
independent history, with strict government control over private
sector participation, foreign trade, and foreign direct
investment. However, since the early 1990s, India has gradually
opened up its markets through economic reforms by reducing
government controls on foreign trade and investment. The
privatisation of publicly owned industries and the opening up of
certain sectors to private and foreign interests has proceeded
slowly amid political debate.
India faces a burgeoning population and the challenge of reducing
economic and social inequality. Poverty remains a serious problem,
although it has declined significantly since independence, mainly
due to the green revolution and economic reforms.
FDI up to 100% is allowed under the automatic route in all
activities/sectors except the following which will require
approval of the Government: Activities/items that require an
Industrial License;
Proposals in which the foreign collaborator has a
previous/existing venture/tie up in India in the same or allied
field
All proposals relating to acquisition of shares in an existing
Indian company by a foreign/NRI investor.
All proposals falling outside notified sectoral policy/caps or
under sectors in which FDI is not permitted.
Foreign Direct Investment Policy
FDI policy is reviewed on an ongoing basis and measures for its
further liberalization are taken. Change in sectoral policy/sectoral
equity cap is notified from time to time through Press Notes by
the Secretariat for Industrial Assistance (SIA) in the Department
of Industrial
Policy announcement by SIA are subsequently notified by RBI under
FEMA. All Press Notes are available at the website of Department
of Industrial Policy & Promotion.
FDI Policy permits FDI up to 100 % from foreign/NRI investor
without prior approval in most of the sectors including the
services sector under automatic route. FDI in sectors/activities
under automatic route does not require any prior approval either
by the Government or the RBI. The investors are required to notify
the Regional office concerned of RBI of receipt of inward
remittances within 30 days of such receipt and will have to file
the required documents with that office within 30 days after issue
of shares to foreign investors.
Automatic Route
All activities which are not covered under the automatic route
prior Government approval for FDI/NRI shall be necessary.
Areas/sectors/activities hitherto not open to FDI/NRI investment
shall continue to be so unless otherwise decided and notified by
Government. An investor can make an application for prior
Government approval even when the proposed activity is under the
automatic route.
Procedure for obtaining Government approval- FIPB
The Foreign Investment Promotion Board (FIPB) considers approving
all proposals for foreign investment, which requires Government
approval. The FIPB also grants composite approvals involving
foreign investment/foreign technical collaboration.
For seeking the approval for FDI other than NRI Investments and
100% EOU, applications in form FC-IL should be submitted to the
Department of Economic Affairs (DEA), Ministry of Finance.
FDI from NRI & for 100% EOU
FDI applications with NRI Investments and 100% EOU should be
submitted to the Public Relation & Complaint (PR&C) Section of
Secretariat of Industrial Assistance (SIA), Department of
Industrial Policy & Promotion.
Proposals requiring Govt's approval
Application for proposals requiring prior Government's approval
should be submitted to FIPB in FC-IL form. Plain paper
applications carrying all relevant details are also accepted. No
fee is payable. The following information should form part of the
proposals submitted to FIPB: -
Whether the applicant has had or has any previous/existing
financial/ technical collaboration or trade mark agreement in
India in the same or allied field for which approval has been
sought; and
If so, details thereof and the justification for proposing the new
venture/ technical collaboration (including trademarks).
Applications can also be submitted with Indian Missions abroad who
will forward them to the Department of Economic Affairs for
further processing. Foreign investment proposals received in the
DEA are placed before the Foreign Investment Promotion Board (FIPB)
within 15 days of receipt. The decision of the Government in all
cases is usually conveyed by the DEA within 30 days.
FDI Prohibited
FDI is not permissible in Gambling and Betting, or Lottery
Business, Business of chit fund, Nidhi Company, Housing and Real
Estate business, Trading in Transferable Development Rights (TDRs),
Retail Trading, Atomic Energy Agricultural or plantation
activities or Agriculture (excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisciculture and
Cultivation of Vegetables, Mushrooms etc. under controlled
conditions and services related to agro and allied sectors) and
Plantations(other than Tea plantations)
General permission of RBI under FEMA
RBI has granted general permission under Foreign Exchange
Management Act (FEMA) in respect of proposals approved by the
Government. Indian companies getting foreign investment approval
through FIPB route do not require any further clearance from RBI
for the purpose of receiving inward remittance and issue of shares
to the foreign investors.
The companies are, however, required to notify the Regional office
concerned of the RBI of receipt of inward remittances within 30
days of such receipt and to file the required documents with the
concerned Regional offices of the RBI within 30 days after issue
of shares to the foreign investors or NRIs.
Besides new companies, automatic route for FDI/NRI investment is
also available to the existing companies proposing to induct
foreign equity. For existing companies with an expansion programme,
the additional requirements include:
the increase in equity level resulting from the expansion of the
equity base of the existing company without the acquisition of
existing shares by NRI/foreign investors,
the money to be remitted should be in foreign currency and
proposed expansion programme should be in the sector(s) under
automatic route. Otherwise, the proposal would need Government
approval through the FIPB. For this a Board Resolution of the
existing Indian company must support the proposal.
For existing companies without an expansion programme, the
additional requirements for eligibility for automatic approval are:
that they are engaged in the industries under automatic route;
the increase in equity level must be from expansion of the equity
base and
the foreign equity must be in foreign currency.
The earlier SEBI requirement, applicable to public limited
companies, that shares allotted on preferential basis shall not be
transferable in any manner for a period of 5 years from the date
of their allotment has now been modified to the extent that not
more than 20 per cent of the entire contribution brought in by
promoter cumulatively in public or preferential issue shall be
locked-in.
Equity participation by international financial institutions such
as ADB, IFC,
CDC, DEG, etc. in domestic companies is permitted through
automatic route subject to SEBI/RBI regulations and sector
specific cap on FDI
ADR/GDR
An Indian corporate can raise foreign currency resources abroad
through the issue of American Depository Receipts (ADRs) or Global
Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA
Notification no. 20 allows an Indian company to issue its Rupee
denominated shares to a person resident outside India being a
depository for the purpose of issuing Global Depository Receipts (GDRs)
and/ or American Depository Receipts (ADRs), subject to the
conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue
of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued
by the Central Government there under from time to time The Indian
company issuing such shares has an approval from the Ministry of
Finance, Government of India to issue such ADRs and/or GDRs or is
eligible to issue ADRs/ GDRs in terms of the relevant scheme in
force or notification issued by the Ministry of Finance, and
There are no end-use restrictions on GDR/ADR issue proceeds,
except for an express ban on investment in real estate and stock
markets. The FCCB issue proceeds need to conform to external
commercial borrowing end use requirements; in addition, 25 per
cent of the FCCB proceeds can be used for general corporate
restructuring,.
Is not otherwise ineligible to issue shares to persons resident
outside India in terms of these Regulations. There is no limit
upto which an Indian company can raise ADRs/GDRs. However, the
Indian company has to be otherwise eligible to raise foreign
equity under the extant FDI policy.
A company engaged in the manufacture of items covered under
Automatic route, whose direct foreign investment after a proposed
GDRs/ADRs/FCCBs issue is likely to exceed the percentage limits
under the automatic route, or which is implementing a project
falling under Government approval route, would need to obtain
prior Government clearance through FIPB before seeking final
approval from the Ministry of Finance.
Foreign currency convertible Bonds
FCCBs are issued in accordance with the scheme [the Scheme for
issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993] and
subscribed by a non-resident in foreign currency and convertible
into ordinary shares of the issuing company in any manner, either
in whole, or in part, on the basis of any equity related warrants
attached to debt instruments;
The eligibility for issue of Convertible Bonds or Ordinary Shares
of Issuing Company is given as under:
An issuing company desirous of raising foreign funds by issuing
Foreign Currency Convertible Bonds or ordinary shares for equity
issues through Global Depositary Receipt
Can issue FCCBs upto USD 50 Million under the Automatic route,
From USD 50 -100 Million, the companies have to take RBI approval,
From USD 100 Million and above, prior permission of the Department
of Economic Affairs is required.
Preference Shares
Foreign investment through preference shares is treated as foreign
direct investment. Proposals are processed either through the
automatic route or FIPB as the case may be, as per the following
guidelines:
Foreign investment in preference share is considered as part of
share capital and fall outside the External Commercial Borrowing (ECB)
guidelines/cap. Preference shares to be treated as foreign direct
equity for purpose of sectoral caps on foreign equity, where such
caps are prescribed, provided they carry a conversion option.
Preference shares structured without such conversion option fall
outside the foreign direct equity cap.
Duration for conversion shall be as per the maximum limit
prescribed under the Companies Act or what has been agreed to in
the shareholders agreement whichever is less. The dividend rate
would not exceed the limit prescribed by the Ministry of Finance.
Issue of preference shares should conform to guidelines prescribed
by the SEBI and RBI and other statutory requirements.
FDI in EOUs/SEZs/Industrial Park/EHTP/STP
Special Economic Zones
100% FDI is permitted under automatic route for setting up of
Special Economic Zone. Units in SEZ qualify for approval through
automatic route subject to sectoral norms. Details about the type
of activities permitted are available in the Foreign Trade Policy
issued by Department of Commerce. Proposals not covered under the
automatic route require approval by FIPB.
Export
Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100%
EOU, subject to sectoral norms. Proposals not covered under the
automatic route would be considered and approved by FIPB.
Industrial Park
100% FDI is permitted under automatic route for setting up of
Industrial Park.
Electronic Hardware Technology Park (EHTP) Units All proposals for
FDI/NRI investment in EHTP Units are eligible for approval under
automatic route. For proposals not covered under automatic route,
the applicant should seek separate approval of the FIPB.
Software Technology Park Units
All proposals for FDI/NRI investment in STP Units are eligible for
approval under automatic route. For proposals not covered under
automatic route, the applicant should seek separate approval of
the FIPB.
Capitalization of Import Payables
FDI inflows are required to be under the following modes:
By inward remittances through normal banking channels or
By debit to the specified account of person concerned maintained
in an authorized dealer/authorized bank. Issue of equity to
non-residents against other modes of FDI inflows or in kind is not
permissible.
However, Issue of equity shares against lump sum fee, royalty
payable and external commercial borrowings (ECBs) in convertible
foreign currency are permitted, subject to meeting all applicable
tax liabilities and sector specific guidelines.
Exchange
Control Management
FEMA
The Reserve Bank of India's Exchange Control Department,
administers Foreign Exchange Management Act, 1999, (FEMA) which
has replaced the earlier act , FERA, with effect from June 1,
2000. The new legislation is for "facilitating external trade" and
"promoting the orderly development and maintenance of foreign
exchange market in India". FEMA extends to the whole of India.
Under FEMA an Indian company with foreign equity participation is
treated at par with other locally incorporated companies.
Accordingly, the exchange control laws and regulations for
residents apply to foreign-invested companies as well.
FDI in Indian Company
In terms of Section 6(3) (b) of Foreign Exchange Management Act.
1999 Reserve Bank regulates transfer or issue of any security by a
person resident outside India read with Notification No. FEMA
20/2000-RB dated May 3, 2000
Issue of Rights/ Bonus Shares
General permission is available to Indian companies to issue
Right/Bonus shares subject to certain conditions. Entitlement of
rights shares is not automatically available to investors who have
been allotted such shares as OCBs. Such issuing companies would
have to seek specific permission from RBI, Foreign Exchange
Department, Foreign Investment Division, Central Office, Mumbai
for issue of shares on right basis to erstwhile OCBs. However,
bonus shares can be issued to OCBs.
Issue of shares under ESOS scheme
A company may issue shares under this Scheme, to its employees or
employees of its joint venture or wholly owned subsidiary abroad
who are resident outside India, directly or through a Trust
subject to the condition that the scheme has been drawn in terms
of relevant regulations issued by the SEBI; and face value of the
shares to be allotted under the scheme to the non-resident
employees does not exceed 5% of the paid-up capital of the issuing
company.
Issue of shares under merger/amalgamation
An Indian corporate can raise foreign currency resources abroad
through the issue of ADRs or GDRs. Regulation 4 of Schedule I of
FEMA Notification no. 20 allows an Indian company to issue its
Rupee denominated shares to a person resident outside India being
a depository for the purpose of issuing GDRs and/ or ADRs, subject
to the conditions that:
the ADRs/GDRs are issued in accordance with the Scheme for issue
of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued
by the Central Government thereunder from time to time.
The Indian company issuing such shares has an approval from the
Ministry of Finance, Government of India to issue such ADRs and/or
GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant
scheme in force or notification issued by the Ministry of Finance,
and Is not otherwise ineligible to issue shares to persons
resident outside India in terms of these Regulations.
Repatriation of investment Capital and profits Earned in India
All foreign investments are freely repatriable except for the
cases where NRIs choose to invest specifically under non-repatriable
schemes. Dividends declared on foreign investments can be remitted
freely through an Authorised Dealer.
Non-residents can sell shares on stock exchange without prior
approval of RBI and repatriate through a bank the sale proceeds if
they hold the shares on repatriation basis and if they have
necessary NOC/tax clearance certificate issued by Income Tax
authorities. For sale of shares through private arrangements,
Regional offices of RBI grant permission for recognized units of
foreign equity in Indian company in terms of guidelines indicated
in Regulation 10.B of Notification No. FEMA.20/2000 RB dated 3rd
May 2000. The sale price of shares on recognised units is to be
determined in accordance with the guidelines prescribed under
Regulation 10B (2) of the above Notification.
Profits, dividends, etc. (which are remittances classified as
current account transactions) can be freely repatriated.
Transfer of shares/debentures
A person resident outside India (Other than NRI and OCB) may
transfer by way of sale or gift the shares or convertible
debentures to any person resident outside India (including NRIs);
provided transferee has obtained prior permission of SIA/FIPB to
acquire the shares if he has previous venture or tie-up in India
in same field or allied field
NRI or OCB may transfer by way of sale or gift the shares or
convertible debentures held by him or it to another non-resident
Indian; provided transferee has obtained prior permission of
Central Government to acquire the shares if he has previous
venture or tie-up in India in the same field or allied field
The person resident outside India may transfer any security to a
person resident in India by way of gift. A person resident outside
India may sell the shares and convertible debentures of an Indian
company on a recognized Stock Exchange in India through a
registered broker.
Current Account transactions
Prior approval of the RBI is required for acquiring foreign
currency above certain limits for the following purposes:
Holiday travel over US$ 10,000 p.a.
Gift / donation over US$ 5,000 / US$ 10,000 per beneficiary p.a.
Business travel over US$ 25,000 per person
Foreign studies as per estimate of institution or US$ 100,000 per
academic year
Architectural / consultancy services procured from abroad over US$
1,000,000 per project
Remittance for purchase of Trade Mark / Franchise
Reimbursement of pre incorporation expenses over US$ 100,000
Remittances exceeding US$ 25,000 p.a. (over and above ceilings
prescribed for other remittances mentioned above) by a resident
individual for any current account or capital account transaction.
In certain specified cases, prior approval of the ministry
concerned is needed for withdrawal of foreign exchange, such as: -
Remittance of freight of vessel chartered by a PSU,
Payment of import through ocean transport by a Govt. Department or
a PSU on C.I.F basis,
Multi-modal transport operators making remittance to their agents
abroad.
Acquisition of Immovable propert by Non-resident
A person resident outside India, who has been permitted by Reserve
Bank to establish a branch, or office, or place of business in
India( excluding a Laison Office), has general permission of
Reserve Bank to acquire immovable property in India , which is
necessary for, or incidental to, the activity. However, in such
cases a declaration , in prescribed form (IPI), is required to be
filed with the Reserve Bank, within 90 days of the acquisition of
immovable property.
Foreign nationals of non-Indian origin who have acquired immovable
property in India with the specific approval of the Reserve Bank
can not transfer such property without prior permission from the
Reserve Bank of India.
Acquisition of Immovable property by NRI
An Indian citizen resident outside India (NRI) can acquire by way
of purchase any immovable property in India other than
agricultural/ plantation /farm house. He may transfer any
immovable property other than agricultural or plantation property
or farm house to a person resident outside India who is a citizen
of India or to a person of Indian origin resident outside India or
a person resident in India.
External trade and investment
Global trade relations
Until the liberalisation of 1991, India was largely and
intentionally isolated from the world markets, to protect its
fledging economy and to achieve self-reliance. Foreign trade was
subject to import tariffs, export taxes and quantitative
restrictions, while foreign direct investment was restricted by
upper-limit equity participation, restrictions on technology
transfer, export obligations and government approvals; these
approvals were needed for nearly 60% of new FDI in the industrial
sector. The restrictions ensured that FDI averaged only around
$200M annually between 1985 and 1991; a large percentage of the
capital flows consisted of foreign aid, commercial borrowing and
deposits of non-resident Indians.
The Bombay Stock Exchange is one of the two largest stock markets
in India. Its index is used to gauge the strength of the Indian
economy.India's exports were stagnant for the first 15 years after
independence, due to the predominance of tea, jute and cotton
manufactures, demand for which was generally inelastic. Imports in
the same period consisted predominantly of machinery, equipment
and raw materials, due to nascent industrialisation. Since
liberalisation, the value of India's international trade has
become more broad-based and has risen to Rs. 63,080,109 crores in
2003-04 from Rs.1,250 crores in 1950-51. India's major trading
partners are China, the US, the UAE, the UK, Japan and the EU. The
exports during August 2006 were $10.3 billion up by 41.14% and
import were $13.87 billion with an increase of 32.16% over the
previous year.
India is a founding-member of General Agreement on Tariffs and
Trade (GATT)since1947 and its successor, the World Trade
Organization. While participating actively in its general council
meetings, India has been crucial in voicing the concerns of the
developing world. For instance, India has continued its opposition
to the inclusion of such matters as labour and environment issues
and other non-tariff barriers into the WTO policies.
Balance of payments Since independence, India's balance of
payments on its current account has been negative. Since
liberalisation in the 1990s (precipitated by a balance of payment
crisis), India's exports have been consistently rising, covering
80.3% of its imports in 2002–03, up from 66.2% in 1990-91.
Although India is still a net importer, since 1996–97, its overall
balance of payments (i.e., including the capital account balance),
has been positive, largely on account of increased foreign direct
investment and deposits from non-resident Indians; until this
time, the overall balance was only occasionally positive on
account of external assistance and commercial borrowings. As a
result, India's foreign currency reserves stood at $141bn in
2005-06.
India is a net importer: in 2005, imports were $89.33bn and
exports $69.18bn.India's reliance on external assistance and
commercial borrowings has decreased since 1991-92, and since
2002-03, it has gradually been repaying these debts. Declining
interest rates and reduced borrowings decreased India's debt
service ratio to 14.1% in 2001–02, from 35.3% in 1990–91. As the
fourth-largest economy in the world, India is undoubtedly one of
the most preferred destinations for foreign direct investments (FDI);
India has strength in information technology and other significant
areas such as auto components, chemicals, apparels,
pharmaceuticals and jewellery. India has always held promise for
global investors, but its rigid FDI policies were a significant
hindrance in this regard. However, as a result of a series of
ambitious and positive economic reforms aimed at deregulating the
economy and stimulating foreign investment, India has positioned
itself as one of the front-runners of the rapidly growing Asia
Pacific Region. India has a large pool of skilled managerial and
technical expertise. The size of the middle-class population at
300 million exceeds the population of both the US and the EU, and
represents a powerful consumer market.
India 's recently liberalised FDI policy (2005) allows up to a
100% FDI stake inventures.Industrial policy reforms have
substantially reduced industrial licensing requirements, removed
restrictions on expansion and facilitated easy access to foreign
technology and foreign direct investment FDI. The upward moving
growth curve of the real-estate sector owes some credit to a
booming economy and liberalized FDI regime. InMarch 2005, the
government amended the rules to allow 100 per cent FDI in the
construction business. This automatic route has been permitted in
townships, housing, built-up infrastructure and construction
development projects including housing, commercial premises,
hotels, resorts, hospitals, educational institutions, recreational
facilities, and city- and regional-level infrastructure.
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Foreign Direct Investment in India
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author can be reached at:
animeshballabh84@legalserviceindia.com /
