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Liberalization of FDI and Liberalization of FDI and its impact on businessits impact on business

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Contents Contents

INTRODUCTIONINTRODUCTION

LIBERALIZATION IN FDILIBERALIZATION IN FDI

SECTORWISE LIBERALIZATIONSECTORWISE LIBERALIZATION

IMPACTS IMPACTS

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INTRODUCTIONINTRODUCTION

LiberalizationLiberalization refers to a relaxation of refers to a relaxation of previous government restrictions, usually previous government restrictions, usually in areas of economic policy. in areas of economic policy.

Since the economic liberalization of 1991, Since the economic liberalization of 1991, there has been a surge in the FDI and there has been a surge in the FDI and portfolio investment in India.portfolio investment in India.

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Contd….Contd….

FDI is the investment in a foreign country FDI is the investment in a foreign country where the investor retains control over the where the investor retains control over the investment.investment.

It takes the form of starting as a It takes the form of starting as a subsidiary, acquiring a stake in an existing subsidiary, acquiring a stake in an existing firm or starting as a joint venture in the firm or starting as a joint venture in the foreign country.foreign country.

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Contd….Contd….The liberalization measures post-The liberalization measures post-1990 have changed with foreign 1990 have changed with foreign investments, now portfolio as well as investments, now portfolio as well as FDI are not only allowed but also FDI are not only allowed but also actively encouraged.actively encouraged.During the decade of the nineties, the During the decade of the nineties, the 'ceilings' on FDI in different sectors 'ceilings' on FDI in different sectors were progressively reduced.were progressively reduced.In 2001, 100 per cent foreign In 2001, 100 per cent foreign investments were allowed in several investments were allowed in several industrial sectors. industrial sectors.

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Contd….Contd…. FDI can enter India through two possible FDI can enter India through two possible

channels: channels:

The automatic route- The automatic route- Under which companies receiving Foreign Under which companies receiving Foreign

Direct Investment need to inform the Direct Investment need to inform the Reserve Bank of India within 30 days of Reserve Bank of India within 30 days of receipt of funds and issuance of shares to receipt of funds and issuance of shares to the foreign investor the foreign investor

For sectors that are not covered under the For sectors that are not covered under the automatic route, prior approval is needed automatic route, prior approval is needed from the Foreign Investment Promotion from the Foreign Investment Promotion Board (FIPB).Board (FIPB).

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Liberalization in FDILiberalization in FDIIn 1991 the government allowed FDI In 1991 the government allowed FDI upto 51% wherein automatic upto 51% wherein automatic permission was granted in high permission was granted in high technology and high investment technology and high investment priority industries.priority industries.

The limit was raised from 51% to 74% The limit was raised from 51% to 74% and subsequently to 100%.and subsequently to 100%.

The 1991 policy invited foreign equity The 1991 policy invited foreign equity holdings upto 51% by international holdings upto 51% by international trading companies.trading companies.

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Contd…..Contd…..

Special Empowerment board has been Special Empowerment board has been constituted to negotiate with a number of constituted to negotiate with a number of large international firms and approve direct large international firms and approve direct foreign investment in selected areas.foreign investment in selected areas.The investment programmes of such firms The investment programmes of such firms would be considered in totality, free from would be considered in totality, free from predetermined parameters or procedure.predetermined parameters or procedure.

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Contd…..Contd…..

Hiring of foreign technicians and testing of Hiring of foreign technicians and testing of indigenously developed technology abroad indigenously developed technology abroad earlier required case by case approval by earlier required case by case approval by the govt.the govt.

This requirement has now been waived This requirement has now been waived and thus no permission is required for and thus no permission is required for these purposes.these purposes.

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100% foreign equity participation for 100% foreign equity participation for setting up of power plants in the country.setting up of power plants in the country.This allows free repatriation of profits and This allows free repatriation of profits and other incentives.other incentives.NRI investment upto 100% of equity is NRI investment upto 100% of equity is allowed in export houses, trading houses, allowed in export houses, trading houses, hospitals, sick industries, hotels etc.hospitals, sick industries, hotels etc.Foreign companies have been allowed to Foreign companies have been allowed to use their trademarks on domestic sales use their trademarks on domestic sales from May14, 1992.from May14, 1992.

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Liberalization of FDI norms - Liberalization of FDI norms - SECTORWISE SECTORWISE

Electricity Sector-Electricity Sector- 100% is permitted on the automatic 100% is permitted on the automatic

route in generation, transmission, route in generation, transmission, distribution of electricity and also distribution of electricity and also power trading subject to the power trading subject to the provisions of the Electricity Act, 2003.provisions of the Electricity Act, 2003.

Private sector permitted to set up Private sector permitted to set up coal, gas or liquid based thermal coal, gas or liquid based thermal project, hydel projects and wind or project, hydel projects and wind or solar projects of any size.solar projects of any size.

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Role of the Central Government curtailed Role of the Central Government curtailed and the State Governments and State and the State Governments and State Electricity Boards (SEBs) empowered to Electricity Boards (SEBs) empowered to negotiate directly with developers, negotiate directly with developers, facilitating speedy clearances for the facilitating speedy clearances for the investor.investor.

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INFORMATION TECHNOLOGYINFORMATION TECHNOLOGY

Automatic approval for foreign equity in Automatic approval for foreign equity in software and almost all areas of software and almost all areas of electronics except aero-space and electronics except aero-space and defence, subject to specified conditions.defence, subject to specified conditions.

100% foreign investment permitted in units 100% foreign investment permitted in units set up exclusively for exports. Such units set up exclusively for exports. Such units can be set up under any one of the can be set up under any one of the following schemes; EHTPs, STPs, Free following schemes; EHTPs, STPs, Free Trade Zones/EPZs, and 100% EOUs.Trade Zones/EPZs, and 100% EOUs.

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Infrastructure sectorInfrastructure sector

100% is permitted on the automatic route 100% is permitted on the automatic route in roads and highways, ports and in roads and highways, ports and Greenfield Airport projects.Greenfield Airport projects.

FDI up to 100% is permitted in existing FDI up to 100% is permitted in existing airport project but the same requires prior airport project but the same requires prior approval for FDI beyond 74%.approval for FDI beyond 74%.

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Infrastructure SectorInfrastructure Sector

Roads-Roads- FDI upto 100% under automatic route is FDI upto 100% under automatic route is

permitted in projects for construction and permitted in projects for construction and maintenance of roads, highways, vehicular maintenance of roads, highways, vehicular bridges, ports and harbours. bridges, ports and harbours.

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Ports-Ports-

No approval required for foreign No approval required for foreign equity up to 51% in projects providing equity up to 51% in projects providing supporting services to water supporting services to water transport, such as loading and transport, such as loading and dischargingdischarging of vehicles. of vehicles.Automatic approval for foreign equity Automatic approval for foreign equity upto 100% in construction and upto 100% in construction and maintenance of ports and harbours. maintenance of ports and harbours. However, if the total foreign equity However, if the total foreign equity investment exceeds Rs. 15 billion, the investment exceeds Rs. 15 billion, the proposal will be referred to the FIPB.proposal will be referred to the FIPB.

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The Government has permitted The Government has permitted formation of joint venture between formation of joint venture between major ports and foreign ports, major ports and foreign ports, between major ports and minor ports, between major ports and minor ports, and between major ports and and between major ports and companies.companies.

FDI up to 100% is permitted in FDI up to 100% is permitted in existing airport project but the same existing airport project but the same requires prior approval for FDI requires prior approval for FDI beyond 74%.beyond 74%.

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Services sectorServices sector

Many of the activities under the Services Many of the activities under the Services sector attract caps on foreign equity and sector attract caps on foreign equity and are subject to sectoral regulations.are subject to sectoral regulations.

Services Sector- Caps:Services Sector- Caps:

26 % 26 % cap in Print media: Publishing cap in Print media: Publishing newspaper and periodicals dealing with newspaper and periodicals dealing with news and current affairs and in Insurancenews and current affairs and in Insurance..

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Cont….Cont….

49 % 49 % in Broadcasting; Air transport in Broadcasting; Air transport services and Stock Exchanges.services and Stock Exchanges.

51% 51% in single brand retailing.in single brand retailing.

74% 74% in Telecommunication services and in Telecommunication services and Private sector banks.Private sector banks.

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FDI upto 100% is allowed for the FDI upto 100% is allowed for the following activities in the telecom following activities in the telecom sector.sector.

Electronic Mail; and Electronic Mail; and Voice Mail Voice Mail

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Agriculture sector Agriculture sector In the tea sector FDI is allowed up to In the tea sector FDI is allowed up to 100% with prior Government approval.100% with prior Government approval.

FDI is allowed in certain activities up to FDI is allowed in certain activities up to 100% on the automatic route. These are 100% on the automatic route. These are Floriculture, Horticulture, Development Floriculture, Horticulture, Development of Seeds, Animal of Seeds, Animal Husbandry ,Pisiculture, and Cultivation Husbandry ,Pisiculture, and Cultivation of Vegetables, Mushrooms under of Vegetables, Mushrooms under controlled conditions and services controlled conditions and services related to agro and allied sectors. related to agro and allied sectors.

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Real Estate Real Estate

The Government of India in March The Government of India in March 2005 amended existing norms to 2005 amended existing norms to allow 100 per cent FDI in the allow 100 per cent FDI in the construction business.construction business.

This liberalization act cleared the This liberalization act cleared the path for foreign investment to meet path for foreign investment to meet the demand into development of the the demand into development of the commercial and residential real estate commercial and residential real estate sectors. sectors.

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Knowledge Based IndustriesKnowledge Based IndustriesPharmaceuticals –Pharmaceuticals –

Automatic approval for up to 74% Automatic approval for up to 74% foreign equity in the case of bulk foreign equity in the case of bulk drugs, their intermediates and drugs, their intermediates and formulations.formulations.

India pharmaceutical industry has India pharmaceutical industry has shown tremendous progress in terms shown tremendous progress in terms of infrastructure development, of infrastructure development, technology base and range of technology base and range of production.production.

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Biotechnology-Biotechnology-

The Department of Biotechnology has The Department of Biotechnology has recommended to the Department of recommended to the Department of Industrial Policy and Promotion for Industrial Policy and Promotion for permitting 100 per cent FDI in the permitting 100 per cent FDI in the biotechnology sector.biotechnology sector.

Patenting of innovations, technology Patenting of innovations, technology transfer to industries and close transfer to industries and close interaction with them have given a interaction with them have given a new direction to biotechnology new direction to biotechnology research. research.

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Sectors where FDI is prohibitedSectors where FDI is prohibited

Gambling Gambling

Betting & lottery.Betting & lottery.

Atomic energy .Atomic energy .

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IMPACTSIMPACTSTELECOM :TELECOM :

At present the country's telecom At present the country's telecom industry has achieved a growth rate of industry has achieved a growth rate of 14 per cent, after the removal of 14 per cent, after the removal of restrictions on foreign capital restrictions on foreign capital investments. investments. As many as 61 million new phones As many as 61 million new phones have been added since 1998-99 which have been added since 1998-99 which is more than thrice the number of lines is more than thrice the number of lines added in the preceeding five decades. added in the preceeding five decades. Today the industry offers services such Today the industry offers services such as fixed landlines, GSM mobiles, as fixed landlines, GSM mobiles, CDMA and IP services to customers. CDMA and IP services to customers.

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The services sector attracted $1.509 The services sector attracted $1.509 billion during April-September 2006 as billion during April-September 2006 as against $0.581 billion in fiscal 2005-06. against $0.581 billion in fiscal 2005-06.

Electrical equipment sector saw FDI worth Electrical equipment sector saw FDI worth $0.778 billion inflows while FDI worth $0.778 billion inflows while FDI worth $0.405 million flowed into the $0.405 million flowed into the telecommunication sector. telecommunication sector.

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Indian Automobile IndustryIndian Automobile IndustryAllowance of 100% FDI in Indian auto Allowance of 100% FDI in Indian auto industry in 2002 made the industry easily industry in 2002 made the industry easily accessible and attractive for the global accessible and attractive for the global players.players.

Japanese, Korean, European, and Japanese, Korean, European, and American companies entered the Indian American companies entered the Indian market and added more than 1 Million market and added more than 1 Million four-wheelers during 2005-06.four-wheelers during 2005-06.

The production of 2-wheelers grew at a The production of 2-wheelers grew at a CAGR of 14.6% from FY2001 to FY 2006.CAGR of 14.6% from FY2001 to FY 2006.

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Indian Retail SectorIndian Retail Sector

The sector contributes 10% of the GDP, The sector contributes 10% of the GDP, and is estimated to show 20% annual and is estimated to show 20% annual growth rate by the end of the decade. growth rate by the end of the decade.

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Real EstateReal Estate

Real estate has emerged as one of Real estate has emerged as one of the most appealing investment areas the most appealing investment areas for domestic as well as foreign for domestic as well as foreign investors. investors. Some of the foreign players who have Some of the foreign players who have already tied up with Indian real estate already tied up with Indian real estate developers are Evan Lim, and Keppel developers are Evan Lim, and Keppel Land from Singapore, Salim Group Land from Singapore, Salim Group from Indonesia, Edaw Ltd., from USA, from Indonesia, Edaw Ltd., from USA, Emaar Group from Dubai, IJM, Ho Group from Dubai, IJM, Ho Hup Construction Co., from Malaysia Hup Construction Co., from Malaysia etc.etc.

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In 2003-04, India In 2003-04, India received total FDI received total FDI inflow of US$ 2.70 inflow of US$ 2.70 billion, of which only billion, of which only 4.5% was committed 4.5% was committed to real estate sector.to real estate sector.2004-05 increase 2004-05 increase was upto US$ 3.75 was upto US$ 3.75 billion of which, the billion of which, the real estate shares real estate shares was 10.6%. was 10.6%. 2005-06, total FDIs 2005-06, total FDIs in India were in India were estimated at US$ estimated at US$ 5.46 billion, the real 5.46 billion, the real estate share in them estate share in them was around 16%. was around 16%.

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Year (April-March)Year (April-March)Amount of FDI inflows (In Amount of FDI inflows (In

US$ million)US$ million)

1991-1992 (Aug-March)1991-1992 (Aug-March) 167167

1992-19931992-1993 393393

1993-19941993-1994 654654

1994-19951994-1995 1,3741,374

1995-19961995-1996 2,1412,141

1996-19971996-1997 2,7702,770

1997-19981997-1998 3,6823,682

1998-19991998-1999 3,0833,083

1999-20001999-2000 2,4392,439

2000-20012000-2001 2,9082,908

2001-20022001-2002 4,2224,222

2002-20032002-2003 3,1343,134

2003-20042003-2004 2,6342,634

2004-20052004-2005 3,755* 3,755*

2005-2006 (Upto March 2006) 2005-2006 (Upto March 2006) 5,5495,549

The Inflow of FDI into the country over various years is as follows:

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Ranks Ranks Sectors Sectors FDI inflowsFDI inflows % of tot. % of tot. inflowinflow

11 Electrical equip.Electrical equip. 4885.884885.88 16.516.5

22 Transport. Ind.Transport. Ind. 3143.093143.09 10.3410.34

33 Service sectorService sector 2971.662971.66 9.649.64

44 Telecom.Telecom. 2810.122810.12 9.589.58

55 Fuel Fuel 2521.492521.49 8.418.41

66 Chemicals Chemicals 1889.511889.51 5.865.86

77 Food processingFood processing 1173.181173.18 3.673.67

88 PharmaceuticalsPharmaceuticals 948.54948.54 3.183.18

99 Cement Cement 746.79746.79 2.542.54

1010 Metallurgical ind.Metallurgical ind. 627.32627.32 2.122.12

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FDI in biotechnologyFDI in biotechnology

Investment in the Indian biotech industry Investment in the Indian biotech industry is currently estimated at about $2 billion is currently estimated at about $2 billion and is expected to reach about $10 billion and is expected to reach about $10 billion by the end of this decade.by the end of this decade.This is largely due to growing multinational This is largely due to growing multinational collaborations and indigenous R&D efforts.collaborations and indigenous R&D efforts.The Indian biotech industry is expected to The Indian biotech industry is expected to grow up to Rs. 4,40,000 crores by 2020. grow up to Rs. 4,40,000 crores by 2020.

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FDI in pharmaceutical FDI in pharmaceutical

It is figured among the top 10 sectors It is figured among the top 10 sectors accounting for maximum foreign direct accounting for maximum foreign direct investment in the country.investment in the country.

A turnover of about US$ 12 billion in 2005-06 A turnover of about US$ 12 billion in 2005-06 was achieved and 13% growth in 2007.was achieved and 13% growth in 2007.

Pharma exports value reached about US$ 4.7 Pharma exports value reached about US$ 4.7 billion during 2005-06.billion during 2005-06.

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