FOREIGN DIRECT INVESTMENT

[Mr. M. GOVINDARAJAN]

                        Investment is usually understood as financial contribution to the equity capital of an enterprise or purchase of shares in the enterprise. 'Foreign investment' is an investment in an enterprise by a Non resident irrespective of whether this involves new equity capital or re-investment of earnings.  Foreign investments is of two kinds-

• Foreign Direct Investment; and
• Foreign portfolio management.

International Monetary Fund (IMF)  and Organization for Economic Co-operation and Development (OECD) define FDI similarly  as a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing  a 'lasting interest' in an enterprise (the direct investment enterprise) that is resident in an economy other than that of a direct investor.

                        It is the policy of the Government of India to attract and promote productive FDI from non residents in activities which significantly contribute to industrialization and socio-economic development. FDI supplements the domestic capital and technology.

                        India's economic reform is supported by Foreign Direct Investment both into and outside India.  Since 1991, economic reforms are being introduced in many phases. As a first step to attract more foreign investment, industrial licensing was abolished for all except 18 industries under the Industries (Development and Regulation) Act, 1951.  Further in 1991, the number of sectors reserved for the public sector was reduced to eight as government wanted to have control only in railway, atomic energy, defense and other core sectors.  Further no prior permission was needed to be obtained for investment in MRTP -designated companies in India since 1991.

                        Since 1991, both FDI and Portfolio investment have been liberalized.   Foreign Institutional Investors (FIIs) have been permitted to invest in shares of listed companies in the Indian stock market from 1993 onwards.  In 1991, automatic approval for FDI projects with up to 51% of the foreign equity in 34 specified sectors was introduced.   Now, FDI is being allowed in almost in all sectors except gambling, lottery, retail trade (except single brand), defence, atomic energy and railways.   Now many sectors have opened for 100% foreign ownership without Indian Government prior approval.  Service sectors, led by insurance, telecommunication and information technology outperformed their sectors.

                        India has recorded a 3.6 times higher FDI in 2006 - 07 alone as compared to in the year 2003-04.  An inflow of USD 34.4 billion in 2007 - 08 which was in excess of government targeted figure of USD 25 billion.  It is to be noted that the aggregate of FDI inflows both to the whole world and to the developing world almost tripled from 2003 to 2007.   In India, FDI inflows have rose more than five times during the analogues period.  India was ranked in the 8^th place in the size of FDI flows among developing nations with four percent of total FDI flows to developing economies.

Current Position of country wise FDI flow into India

Ranks	Country	Cumulative inflows (April 2000 - March 2010) Rs. In cr.	Cumulative inflows (April 2000 - March 2010) USD in millions	% to total inflows (in terms of US $)
1	Mauritius	210,906	47,240	43%
2	Singapore	45,147	10,190	9%
3	U.S.A.	37,190	8,278	8%
4	U.K.	25,998	5,884	5%
5	Netherlands	20,126	4,487	4%
6	Cyprus	17,777	3,899	4%
7	Japan	16,895	3,714	3%
8	Germany	16,895	2,799	3%
9	U.A.E.	7,023	1,549	1%
10	France	6,919	1,530	1%
	TOTAL	516,503	115,728

Source: DIPP, March 2010

Sector wise FDI investment in India

Rank	Sector	Cumulative inflows (April 2000 - March 2010) Rs. In cr	Cumulative inflows (April 2000 - March 2010) USD in millions	% to total inflows (in terms of US $)
1	Service Sector (Financial & non financial)	105,411	23,640	21%
2	Computer Software and Hardware	43,846	9,872	9%
3	Telecommunications (radio, paging, cellular mobile, basic telephone services)	40,708	8,931	8%
4	Housing & Real Estates	37,369	8,357	8%
5	Construction activities (including roads & Highways)	35,721	8,059	7%
6	Power	20,919	4,627	4%
7	Automobile Industry	20,677	4,565	4%
8	Metallurgical Industries	13,440	3,150	3%
9	Petroleum & Natural Gas	11,504	2,666	2%
10	Chemicals (other than fertilizers)	11,274	2,496	2%

 Source: DIPP, March 2010

   Foreign direct investment by non resident in resident entities through transfer or issue to security to person resident outside India is a 'Capital account transaction' and Government of India and Reserve Bank of India regulate this under Foreign Exchange Management Act, 1999 and its various regulations. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press releases which are notified by Reserve Bank of India as amendment to Notification No. FEMA20/2000-RB, dated May 3, 2000.

   Now the Department of Industrial Policy & Promotion issued consolidated FDI policy vide Circular No. 2 of 2010, dated 30^th September, 2010 which came into effect from 01.10.2010.   According to this policy, FDI is prohibited in  the following activities/sectors:

• Retail Trading (except Single brand product retailing);
• Lottery business including Government/private Lottery, online lotteries, etc.,;
• Gambling and betting including casinos, etc.,;
• Business of chit fund;
• Nidhi company;
• Trading in transferable development rights;
• Real estate business or construction of farm houses;
• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of  tobacco or of tobacco substitutes;
• Activities/sectors not opened to private sector investments including Atomic Energy and Railway Transport (other than Mass Rapid Transport System).

Besides foreign investment in any form, foreign technology, collaboration in any form including licensing for franchise, trade mark, brand name, management contract is also completely prohibited for lottery business and gambling and betting activities.