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Friday, 1 July 2011

Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India in growing rapidly. Foreign direct investment is an integral part of an open and effective international economic system and a major catalyst to development. FDI is highly beneficial for a country like India. Empirical studies suggest that FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development. All these factors contribute to higher economic growth and consequently aid in alleviating poverty. Apart from bestowing economic benefits FDI may also help improve environmental and social conditions by transferring "cleaner" technologies and leading to more socially responsible corporate policies.

FDI in India is permitted as under the following forms of investments
  • Through financial collaborations.
  • Through joint ventures and technical collaborations.
  • Through capital markets via Euro issues.
  • Through private placements or preferential allotments.
FDI is not permitted in the following industrial sectors:
  • Arms and ammunition.
  • Atomic Energy.
  • Railway Transport.
  • Coal and lignite.
  • Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
FDI in India are approved through two routes:

1. Automatic approval by RBI:
 The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:
  • Foreign equity up to 50% in 3 categories relating to mining activities.
  • Foreign equity up to 51% in 48 specified industries.
  • Foreign equity up to 74% in 9 categories.
Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI

FDI in India on automatic route is not allowed in the following sectors:
  • Proposals that require an industrial licence and cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries.
  • Proposals in which the foreign collaborator has a previous venture/tie-up in India.
  • Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and
  • Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route.
2. FIPB Route: Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment, which do not come under the automatic route. Normal processing time of an FDI proposal in FIPB is 4 to 6 weeks. FIPB is located in the Department of Economic Affairs, Ministry of Finance. Its constitution is as follows:
  • Secretary, Department of Economic Affairs (Chairman)
  • Secretary, Department of Industrial Policy & Promotion (Member)
  • Secretary, Department of Commerce (Member)
  • Secretary, (Economic Relation), Ministry of External Affairs (Member)
FIPB can co-opt Secretaries to the Govt. of India and other top officials of financial institutions, banks and professional experts of industry and commerce, as and when necessary.
Foreign Investment Implementation Authority (FIIA)
Government has set up Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-active one stop after care service to foreign investors, help them obtain necessary approvals and by sorting their operational problems. FIIA is assisted by Fast Track Committee (FTC), which have been established in 30 Ministries/Departments of Government of India for monitoring and resolution of difficulties for sector specific projects.

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