| in India- Luring World to Investment | | | | III. Carrying out research work, in which the parent |
| An Article by Rajiv Tuli, Advocate* | | | | company is engaged; |
| I. Introduction | | | | IV. Promoting technical or financial collaborations |
| Foreign direct investment, in the common parlance, is | | | | between Indian companies and parent or overseas |
| defined as a company from one country making a | | | | group company; |
| physical investment into building of its business in | | | | V. Representing the parent company in India and acting |
| another country. Foreign direct investment (FDI) has | | | | as buying/selling agents in India; |
| assumed a crucial role in the internationalisation of | | | | VI. Rendering services in Information Technology and |
| economic activities and plays an extraordinary and | | | | development of software in India; |
| ever increasing growing part in global business. For the | | | | VII. Rendering technical support to the products |
| country receiving the investment, it provides source of | | | | supplied by the parent/ group companies; |
| capital, new technologies, processes, products, | | | | VIII. Foreign Airline/shipping Company |
| organizational techniques and management skills, and | | | | Further, a branch office is not allowed to carry out |
| as such can provide a strong impetus to economic | | | | manufacturing activities on its own but is permitted to |
| development. For the business entity making foreign | | | | subcontract these to an Indian manufacturer. Branch |
| investment, it provides new business opportunities | | | | Offices established with the approval of RBI may remit |
| through expanded market and marketing channels. | | | | outside India profit of the branch, net of applicable |
| Given the appropriate host-country policies and a basic | | | | Indian taxes and subject to RBI guidelines. |
| level of development, a prevalence of studies show | | | | Such offices can undertake activities permitted under |
| that FDI triggers technology spillovers, assists human | | | | the Foreign Exchange Management (Establishment in |
| capital formation, contributes to international trade | | | | India of Branch Office or other place of business) |
| integration, helps create a more competitive business | | | | Regulations, 2000. Further, such Companies are also |
| environment and enhances enterprise development. All | | | | required to register themselves with Registrar of |
| these contribute to higher economic growth. Existence | | | | Companies (ROC) within 30 days of setting up a place |
| of real business opportunities is one of the key factors | | | | of business in India. |
| in attracting FDI. FDI influences growth by increasing | | | | V. FDI - Sector wise Policy Framework |
| total factor productivity and, more generally, the | | | | 1. Telecom Sector: |
| efficiency of resource use in the recipient economy. | | | | The partial opening of telecom sector for foreign |
| Technology transfers through FDI generate positive | | | | investment was done long back in 1991 with the |
| externalities in the host country. | | | | permission for FDI in the telecom-manufacturing |
| Reacting to changes in technology, growing | | | | segment. Today, riding on expectations of overall high |
| liberalization of the national regulatory framework | | | | economic growth and consequent rising income levels, |
| governing investment in enterprises, and changes in | | | | telecom market offers an unprecedented opportunity |
| capital markets profound changes have occurred in | | | | for foreign investment. A combination of factors, |
| the size, scope and methods of FDI. FDI has increased | | | | promising rich returns on investments is driving growth |
| manifold over the past 2 decades. Developing | | | | in the sector. Same gets also reflected in the year |
| countries, increasingly see foreign direct investment as | | | | wise data of actual FDI Inflow from August 1991 to |
| a source of economic development, modernization and | | | | January 2007 in the Telecom Sector which is as |
| employment generation, and have liberalised their FDI | | | | follows - |
| regimes to attract investment. In order to reap the | | | | Year FDI INFLOW |
| maximum benefits from FDI, there is a need to | | | | (Rs. in Crore) Year FDI INFLOW |
| establish a transparent, broad and effective enabling | | | | (Rs. in Crore) |
| policy environment for investment and to put in place | | | | Till 1993 2.06 2000 288.58 |
| appropriate framework for their implementation. | | | | 1994 14.02 2001 3,970.90 |
| • The Author is managing partner, MARS & | | | | 1995 206.74 2002 1,081.50 |
| Partners, International Legal Consultants | | | | 1996 764.83 2003 301.40 |
| II. Trend of Foreign direct Investment in India – | | | | 1997 1,245.19 2004 454.85 |
| Since liberalization of Indian economic policies in 1991, | | | | 1998 1,775.64 2005 94.31 |
| India has experienced acceleration in the inflows of FDI | | | | 1999 212.67 2006 1404.48 |
| into the country. According to the World Bank, India | | | | 2007 (Till January) 0.74 |
| cornered a major portion of US$ 40.1 billion net capital | | | | TOTAL 11817.78 |
| inflows to South Asia in 2006. In fact, India has | | | | Present Policy status |
| overtaken the erstwhile East Asian Tigers — | | | | Business Activities FDI allowed (In %) |
| Thailand, Malaysia, Indonesia, the Philippines, Taiwan and | | | | In Basic, Cellular Mobile, National Long Distance, |
| South Korea — in terms of FDI flow. Year wise | | | | International Long Distance, Value Added Services and |
| data of FDI inflow in India from Aug. 1991 to March | | | | Global Mobile Personal Communications by Satellite 49 |
| 2006 is as under - | | | | 1. Internet Service (with gateways) |
| Year (April-March) FDI inflows (In US$ million) | | | | 2. Infrastructure Providers (Category II) |
| 1991-1992 (Aug-March) 167 | | | | 3. Radio Paging Service 74 |
| 1992-1993 393 | | | | 1. ISPs not providing gateways (Both for satellite and |
| 1993-1994 654 | | | | submarine cables) |
| 1994-1995 1,374 | | | | 2. Infrastructure Providers providing dark fibre (IP |
| 1995-1996 2,141 | | | | Category I) |
| 1996-1997 2,770 | | | | 3. Electronic Mail |
| 1997-1998 3,682 | | | | 4. Voice Mail 100 |
| 1998-1999 3,083 | | | | The above given FDI limits are subject to the following |
| 1999-2000 2,439 | | | | conditions: |
| 2000-2001 2,908 | | | | 1) FDI up to 100% is allowed subject to the condition |
| 2001-2002 4,222 | | | | that such companies would divest 26 per cent of their |
| 2002-2003 3,134 | | | | equity in favour of Indian public within 5 years, if these |
| 2003-2004 2,634 | | | | companies are listed in other parts of the world. |
| 2004-2005 3,755 | | | | 2) The above services would be subject to licensing |
| 2005-2006 5,549 | | | | and security requirements, wherever required. |
| 2006-2007 15,700 (Appox.) | | | | 3) Foreign Investment Promotion Board (FIPB) shall |
| 2007-2008 30,000 (Target) | | | | consider proposals for FDI beyond 49 per cent on a |
| This table clearly shows the growth that India has | | | | case-to-case basis. |
| made in these 15 yrs in terms of FDI inflow has been | | | | 4) In manufacturing activities relating to telecom sector, |
| at the tremendous pace. Equally important is the | | | | FDI upto 100% is allowed under the automatic route. |
| analysis of growth rate in last 2 years. India’s | | | | 2. Insurance Sector: |
| FDI inflows have almost tripled in a year from US$ 5.5 | | | | The insurance sector in India has taken a full round |
| billion in 2005-06 to US$ 15.7 billion in 2006-07 and | | | | from being an open competitive market to |
| double of that, i. e. US$ 30 billion has been set a target | | | | nationalisation and back to a liberalised market again. |
| for 2007-08 by the Government of India. | | | | Tracing the developments in the Indian insurance |
| III. FDI in India – Modes and Policiesa) Modes | | | | sector reveals the 360 degree turn witnessed over a |
| – | | | | period of almost two centuries. For long, the insurance |
| Foreign Direct Investments in India can be made either: | | | | sector in India was operated through public sector |
| - | | | | companies only and thus was kept away even from |
| • Under the Automatic Route, or; | | | | the private players, forget of any foreign investment. |
| • With the specific prior approval of Foreign | | | | Reforms in the Indian insurance sector commenced |
| Investment Promotion Board (FIPB) | | | | with the enactment of the Insurance Regulatory and |
| 1. Automatic Route - FDI up to 100% is allowed under | | | | Development Authority (IRDA) Act 1999, which |
| the automatic route in all activities / sectors except the | | | | facilitated the entry of private insurance companies |
| following, which require prior approval of the | | | | into the Indian market. Thereafter only, the major |
| Government: | | | | international players like AIG, Aviva, MetLife, New York |
| I. Where provisions of Press Note 1 (2005 Series) | | | | Life, Prudential, Allianz, Sun Life, Standard Life and |
| issued by the Government of India are attracted. | | | | Lombard etc. could come into the picture and set-up |
| II. Where more than 24% foreign equity is proposed to | | | | joint ventures with Indian companies for both Life and |
| be inducted for manufacture of items reserved for the | | | | Non-life segments. |
| Small Scale sector. | | | | The business of insurance started in India in the year |
| FDI in sectors/activities to the extent permitted under | | | | 1818 with the establishment of the “Oriental Life |
| Automatic Route does not require any prior approval | | | | Insurance Company” in Calcutta. Presently, only |
| either by the Government or the Reserve Bank of | | | | 10% of the market share has been tapped by Life |
| India but permission from the competent authority may | | | | Insurance Corporation and General Insurance |
| be required. For e.g. in case of industrial licence for a | | | | Corporation and the balance 90% of the market still |
| particular manufacturing activity the permission of the | | | | remains untapped. In the private sector, only 12 life |
| competent authority may be required. The investors | | | | insurance and 6 general insurance companies have |
| are only required to notify the Regional Office | | | | been registered with the IRDA. Hence, To serve the |
| concerned of the Reserve Bank of India within 30 | | | | population of more than 100 crore Indians, Indian |
| days of receipt of inward remittances and file the | | | | insurance market offers tremendous opportunities to |
| required documents along with form FC-GPR with that | | | | private insurers. This vast Potential of the Indian |
| Office within 30 days of issue of shares to the | | | | insurance market offers great scope of investment to |
| non-resident investors. | | | | the foreign players. |
| 2. Government Route – FDI in activities not | | | | Present Policy status |
| covered under the automatic route requires prior | | | | FDI up to 26% in the Insurance sector is allowed on |
| Government approval and are considered by the | | | | the automatic route subject to obtaining license from |
| Foreign Investment Promotion Board (FIPB), Ministry of | | | | Insurance Regulatory & Development Authority |
| Finance. Application can be made in Form FC-IL. Indian | | | | (IRDA). |
| companies having foreign investment approval through | | | | Procedure to obtain License from IRDA: - |
| FIPB route do not require any further clearance from | | | | 1. An applicant desiring to carry on insurance business |
| the Reserve Bank of India for receiving inward | | | | in India shall make a requisition for registration |
| remittance and issue of shares to the non-resident | | | | application in Form IRDA/R1. |
| investors. The companies are required to notify the | | | | 2. Every requisition for registration application where |
| concerned Regional Office of the Reserve Bank of | | | | the applicant is a company and incorporated under |
| India of receipt of inward remittances within 30 days | | | | Companies Act, 1956 shall be accompanied by------a) |
| of such receipt and submit form FC-GPR within 30 | | | | a certified copy of the memorandum of association |
| days of issue of shares to the non-resident | | | | and articles of association;b) the name, address and |
| investors.b) Activities where no FDI is allowed – | | | | the occupation of the directors and principal officer;c) a |
| FDI in any form is prohibited under Government as well | | | | statement of the class of insurance business |
| as Automatic Route for the following sectors - | | | | proposed to be carried on;d) a statement indicating the |
| I. Retail Trading (except single brand product retailing) | | | | sources that will contribute the share capital required |
| II. Atomic Energy | | | | 3. An applicant, whose requisition for registration |
| III. Lottery Business | | | | application has been accepted by the Authority, shall |
| IV. Gambling and Betting | | | | make an application in Form IRDA/R2 for grant of a |
| V. Business of Chit Fund | | | | certificate of registration. |
| VI. Nidhi Company | | | | 4. The fee of Rs. 50,000/- for each class of business |
| VII. Agriculture or Agricultural / plantation activities | | | | for registration shall be remitted by a bank draft issued |
| except Floriculture, Horticulture, Development of seeds, | | | | by any scheduled bank in favour of the IRDA. |
| Animal Husbandry, Pisiculture and Cultivation of | | | | 5. An applicant granted a certificate of registration |
| vegetables, mushrooms etc. under controlled conditions | | | | under the Regulations shall commence insurance |
| and services related to agro and allied sectors) and | | | | business for which he has been authorised within 12 |
| Plantations (Other than Tea plantations) | | | | months of the date of registration. |
| VIII. Real estate business or construction of farm | | | | No Growth Data |
| houses (except development of townships, | | | | 3. Advertising Sector: |
| construction of residential / commercial premises, | | | | Initially up to 74% FDI was allowed in advertising sector |
| roads or bridges to the extent specified in Notification | | | | but limit was increased in 2003 present day FDI in |
| No. FEMA 136/2005-RB dated July 19, 2005) | | | | advertising sector is allowed up to 100% on the |
| IX. Trading in Transferable Development Rights | | | | automatic route. |
| (TDRs) | | | | No trade history details and No Growth Data |
| IV. FDI in India by a Foreign Company | | | | 4. Film Sector: |
| A foreign company can set up business in India in | | | | The Indian film industry has experienced |
| following ways: | | | | advancements on all fronts including technology used, |
| 1) As an incorporated entity by incorporating a | | | | themes of the movies, finance, exhibition and |
| company under the Companies Act, 1956 through | | | | marketing. The movie making business has got strong |
| – | | | | impetus from the growth of multiplex culture. The Indian |
| ï¶ Joint Ventures | | | | film industry is getting corporatized and has started |
| ï¶ Wholly Owned Subsidiaries | | | | looking overseas for co -production. India has the |
| 2) As an office of a foreign entity through | | | | world's biggest movie industry and produces around |
| ï¶ Liaison Office / Representative Office | | | | 1000 movies each year. Today, the Indian film industry |
| – Liaison office acts as a channel of | | | | stands at approx. INR 85 billion and is projected to |
| communication between the head office or principal | | | | reach around INR 175 billion by 2011. The major reason |
| place of business and entities in India. Liaison office | | | | for this high growth rate is that the industry is |
| cannot undertake any commercial activity directly or | | | | increasingly getting more corporatised, highlighted by |
| indirectly and cannot, therefore, earn any income in | | | | public issues of several film production, distribution and |
| India. Its role is limited to collecting information about | | | | exhibition companies, long term contracts between film |
| possible market opportunities and providing information | | | | production companies and directors/ actors and the |
| about the company and its products to prospective | | | | fact that more than half of 2006’s releases |
| Indian customers. It can promote export/import from/to | | | | were by corporates rather than individual banners |
| India and also facilitate technical/financial collaboration | | | | Before 2002-03, upto 100% FDI was permitted in film |
| between parent company and companies in India. | | | | industry (i.e. film financing, production, distribution, |
| Approval for establishing a liaison office in India is | | | | exhibition, marketing and associated activities relating to |
| granted by Reserve Bank of India (RBI) | | | | film industry) under the automatic route, subject to the |
| ï¶ Project Office – Foreign Companies | | | | following conditions: |
| planning to execute specific projects in India can set up | | | | ï¶ Companies with an established track record |
| temporary project/site offices in India. RBI has now | | | | in films, TV, music, finance, and insurance would be |
| granted general permission to foreign entities to | | | | permitted; |
| establish Project Offices subject to specified | | | | ï¶ The company should have a minimum paid |
| conditions. However, such offices cannot undertake or | | | | up capital of US$ 10 million if it is the single largest |
| carry on any activity other than those relating and | | | | equity shareholder and at least US$ 5 million in other |
| incidental to execution of the project. Project Offices | | | | cases; |
| may remit outside India the surplus of the project on its | | | | ï¶ Minimum level of foreign equity investment |
| completion, general permission for which has been | | | | would be US$ 2.5 million for the single largest equity |
| granted by the RBI. | | | | shareholder and US$ 1 million in other cases; |
| ï¶ Branch Office: Permission for setting up | | | | ï¶ Debt equity ratio of not more than 1:1, i.e., |
| branch offices is granted by the Reserve Bank of | | | | domestic borrowings shall not exceed equity. |
| India (RBI). Foreign companies engaged in | | | | Present FDI Policy: |
| manufacturing and trading activities abroad, are | | | | FDI under the automatic Route up to 100% is available |
| allowed to set up Branch Offices in India for the | | | | for film sector and will not to subject to any conditions |
| following purposes: | | | | about debt equity ratio, minimum level of equity |
| I. Export/Import of goods; | | | | investment. |
| II. Rendering professional or consultancy services; | | | | |