The Government of India released the new document on FDI policy on March 31, 2010 whereby this document now consolidates all existing regulations related to FDI contained in the Foreign Exchange Management Act (FEMA), RBI Circulars and various press notes issued at various points in time. The comprehensive policy document came into effect from April 1, 2010 and would be replaced every 6 months after incorporating the changes which have been effected during the said period. This is a good move considering that this would bring clarity in understanding the foreign investment rules among investors resulting ultimately in simplification of the policy. This is also expected to improve transparency and boost global investors’ confidence.
100% FDI is permitted under the automatic route in most of the sectors while there are Sectoral caps in the case of Banking (74%), Insurance (26%), Telecom (49%), Aviation (74%) and Single brand retail (51%) etc. In certain sectors like Atomic Energy, Lottery, Gambling and Betting, Multi Brand Retail, Nidhi company etc, FDI is not permitted.
The Government is looking to allow FDI in media and also looking to amend the Press and Registration of Books Act 1867 to facilitate the entry of foreign newspapers or Indian editions of foreign newspapers being printed. The present FDI limit is 26% under Government approval. Currently, 100% FDI is allowed in facsimile publication of foreign newspapers by an entity incorporated or registered in India. FDI in multi-brand retail is another sector where FDI is currently not permitted though the Government says that the current retail infrastructure including the backend (from the farm to the store) needs to be strengthened. The entry of large Indian retail chains has in general been positive allowing farmers to get better prices for their produce and giving multiple choices to the end user. Banking and Insurance sectors could also do with a hike in the FDI limits while this is being monitored after the global meltdown where some of the largest banks and financial institutions went bust. The Government might encourage investments by foreign insurance companies in health and weather (floods, famines) to farmers and rural residents and for banks to be set up in rural areas where this is a Greenfield project.
The Economic Survey released by the Finance Ministry for the year 2009-10 indicated impressive growth in sectors like telecom, infrastructure (power, coal, ports, aviation, roads) and services. Budget 2010 presented by the Government in February 2010 allocated 46% of the total planned outlay in infrastructure (rural and urban) along with an additional INR 20,000 tax deduction for individuals in long term infrastructure bonds helping to garner funds for infrastructure development. This remains the single biggest sector of focus where the Government believes that improvements in the sector coupled with reforms in governance could take India to a double-digit growth rate. The setting up of National Mission on Enhanced Energy Efficiency (NMEEE) which aims to create a market for energy efficiency, Clinical Establishments bill to improve the quality of health standards and regulate the clinical research establishments in the country are measures set to improve transparency and boost the overall confidence of the investors.
The top 3 Indian Regions attracting the highest FDI (April 2000 to January 2010) have been Mumbai Region (representing with US$ 38,074 million (INR 169,691 crores) followed by Delhi Region with US$ 21,460 million (INR 97,125 crores) and Karnataka Region with US$ 6,750 million (INR 29,850 crores). The three put together have accounted for nearly 62% of the total FDI inflows received over the the last 10 years. Other Regions like Gujarat and TamilNadu are also beginning to attract FDI inflows in the last 5 years and are currently not far behind Karnataka Region at US$ 6,382 (INR 28,171 crores) million and US$ 5,309 (INR 23,864 crores) million respectively.
(source: Department of Industrial Policy & Promotion)
Gujarat, in particular, has grabbed the attention of foreign investors due to the presence of strong road and rail network, availability of skilled manpower (presence of academic and research institutions like IIM, NIFT, NID, CEPT etc), proactive governance model and investor friendly regulations go in favour of this state. Some of the leading Indian and Multinational companies including Reliance, Adani, Essar, Aditya Birla, ABG shipyard, Tata, Zydus Cadila, Welspun, Torrent, Amul, Bombardier (Canada), Matsushita (Japan), McCain Foods (Canada), Alstom (France), Shell (Netherlands) General Motors (USA), Linde ( Germany) have set up their operations in the state.
(This article has been contributed by OIFC's Knowledge Partner, Wealth Tree Advisors Pvt Ltd)