Foreign Direct Investment in India- Regulatory Environment and Experiences of Foreign Investors

1. Foreign Direct Investment in India- Regulatory Environment and Experiences of Foreign Investors Presented by Dr. Raj Agrawal

2. Contents of Presentation • General Policies for FDI • FDI Routes and Procedures • Fiscal Incentives for FDI • Trends of Foreign Investment • Experiences of Foreign Investors • Concluding Observations FDI Policy- Tarun Das

3. 1.1 General Policies on FDI • Since 1991 India adopted an open door policy and welcomed FDI in most areas. • Objectives: Global integration, industrial diversification, infrastructure development, privatisation, and technology upgradation. • FDI acts an engine of growth and trade, and embodies a package of capital, technology, and managerial, marketing and technical skills. • Presence of Multinationals promotes greater efficiency & dynamism in the domestic sector. • Training gained by workers and local managers and their exposure to modern organisational system are valuable assets. FDI Policy- Tarun Das

4. 1.2 Liberal FDI Regime in India • National Treatment • MFN Treatment • No expropriation • Free expatriation • Rupee is fully convertible on current account. • FERA is replaced FEMA. • FERA companies now operate like any other Indian Company. • Foreign companies can own real estate, use their trade marks and brand names for domestic sales. FDI Policy- Tarun Das

5. 2.1 FDI Approval Procedures 1. FDI upto 100% of equity is allowed under the automatic route (without any prior approval) in almost all sectors except the following: • Activities that require industrial licensing. • Companies where foreign collaborator has already a tie-up. • Acquisition of shares in Indian companies. • Proposals falling outside the notified sectoral caps and policies. 2. All other cases need approval by the Foreign Investment Promotion Board (FIPB) in the Ministry of Finance. 3. A Foreign Investment Implementation Authority (FIIA) has been set up. FDI Policy- Tarun Das

6. 2.2 Foreign investment in India is not allowed in the following: • Chit fund • Nidhi company • Agriculture and plantation • Real estate (except for development of townships) or construction of farm houses • Trading in Transferable Development Rights FDI Policy- Tarun Das

7. 2.3 FDI is not permissible in the following activities: • Retail trading (except for single brand) • Atomic energy • Lottery business/ Chit Fund • Gambling and betting • Housing and real estate business • Agriculture (except floriculture, develop-ment of seeds, animal husbandry, pisiculture and cultivation of vegetables) • Plantations (except tea plantations). FDI Policy- Tarun Das

8. 3.1Incentives for Investment • Various incentives by Centre and States. These are equally applicable to both domestic and foreign companies. • Tax holidays up to 15 years for backward regions and infrastructure. • Incentives for exporters, R&D, SEZs, EPZs, Science and Technology Parks. • States provide capital subsidy, tax breaks or deferment, concessional land, power and utility tariffs. FDI Policy- Tarun Das

9. 3.2Incentives for Foreign Investment • Indian firms are allowed to raise funds abroad through Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds and offshore fund. • FIIs and NRIs allowed to operate in India’s capital markets subject to an individual holding of 10% and collective holding up to 40% of total paid up capital of a company. • Foreign investors are also permitted to pick up disinvested shares of public enterprises. FDI Policy- Tarun Das

10. 3.3Fiscal Incentives for Foreign Investment • Personal income tax reduced to 10 – 30%. • Corporate tax reduced to 35% for domestic companies and 40% for foreign companies. • The long term Capital gains tax on foreign companies lowered to 20% compared to 30% on domestic companies. • India is a member of the Multilateral Investment Guarantee Agency (MIGA) and signed comprehensive treaties for avoidance of double taxation with 66 countries, and FTA with many countries. FDI Policy- Tarun Das

11. 4.1 Substantial increase in Foreign Investment Inflows (US$ billion) FDI Policy- Tarun Das

12. 4.2 Inflows of Foreign Investment to India in 1993-2003 (US$ million FDI Policy- Tarun Das

13. 4.3 Sectoral Distribution of FDI (%) FDI Policy- Tarun Das

14. 4.4 Share of Home Countries in FDI inflows to India (%) FDI Policy- Tarun Das

15. 4.5 Share of Indian States in FDI in 1991-2003 States Percentage share • Maharashtra 17.3 • Delhi 12.0 • Tamil Nadu 8.6 • Karnataka 8.3 • Gujarat 6.5 • Andhra Pradesh 4.6 • Madhya Pradesh 3.2 • West Bengal 3.2 • Orissa 2.9 • Uttar Pradesh 1.7 • Rajasthan 1.0 FDI Policy- Tarun Das

16. 4.6 FDI Inflows as % of World FDI Country 1990 1995 2000 India 0.1 0.7 0.2 China 1.7 10.9 3.2 Hong Kong 0.9 2.7 5.1 Korea, Rep. 0.4 0.5 0.8 Malaysia 1.1 1.3 0.4 Philippines 0.3 0.4 0.1 Singapore 2.7 2.2 0.4 Thailand 1.2 0.6 0.4 FDI Policy- Tarun Das

17. 4.7 FDI Inflows as % of GDI Country 1984-1989 1990 2000 India 0.1 0.1 2.0 China 1.8 2.6 11.3 Hong Kong 12.2 8.5 60.2 Korea, Rep. 1.4 0.8 9.3 Malaysia 8.8 23.8 20.1 Philippines 5.1 5.2 5.1 Singapore 28.3 47.1 26.1 Taiwan 3.3 3.8 4.4 Thailand 4.4 7.1 13.7 FDI Policy- Tarun Das

18. 4.8 FDI Stock as % of GDP Country 1980 1990 2000 India 0.7 0.6 4 China 3 7 31 Hong Kong 487 218 256 Indonesia 14 34 46 Korea, Rep. 2 2 8 Malaysia 21 24 65 Philippines 4 7 15 Singapore 53 77 98 Taiwan 6 6 8 Thailand 3 10 18 FDI Policy- Tarun Das

19. 5.1 Factors attracting FDI Inflows • Fourth largest economy in terms of PPP adjusted GDP after USA, Japan and China • One of ten fastest economies of the world • Largest pool of technical manpower • Rich in mineral and natural resources • Major country in agricultural and industrial products • Fiscal incentives and investment environment • Low wage rates and low production costs • Higher Return and Huge domestic market • Well developed banking and capital markets • Dynamic private sector FDI Policy- Tarun Das

20. 5.2 Experiences of Foreign Investors • Foreign investors look beyond the array of fiscal incentives offered by the host country. • Foreign investors like the sound macro-economic policies, and stable economic and democratic systems in India, sustained high growth, continual liberalisation of trade and investment, particularly liberal FDI regimes. • They also like currency convertibility, free repatriation, no expropriation of capital, less performance criteria, tax holidays and other incentives, abolition of screening requirements, relaxation of sectoral limits on foreign equity. FDI Policy- Tarun Das

21. 5.3 Foreign Investors would like to have • Labour mobility • Simplification of land laws • Unbundling of risks in infrastructure • Rationalisation of user charges • Developing bond markets • Strengthening Regulatory, legal and institutional set up and model BOT legislation • Separation of policy makers, regulators and operators • Public-private partnership FDI Policy- Tarun Das

22. 5.4 Ranking of India 1.AT KEARNEY Business Confidence Index • Sixth most attractive investment destination, • Third most attractive destination for American and British investors. • The Best Business Process Outsourcing destination 2.United Nations Conference on Trade and Development (UNCTAD) • Second hottest investment destination during the next four years FDI Policy- Tarun Das

23. 6. Concluding Remarks • As the first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for foreign investment, and a land of immense opportunity for all. • India should maintain its open door policy in production, investment and external trade. • Carried to their logical ends, reforms would make India as one of the most dynamic and fastest growing economies of the world. • India is an economic miracle waiting to happen. All of you are welcome to participate in that exciting process of Indian development. FDI Policy- Tarun Das

24. Thank you Have a Good Day FDI Policy- Tarun Das