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Policies on Foreign
Investment
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Several measures to boost
FDI have been announced in 1998-99. Projects for electricity generation,
transmission and distribution as also roads and highways, ports and harbours,
and vehicular tunnels and bridges have been permitted foreign equity
participation up to 100 per cent under the automatic route, provided foreign
equity does not exceed Rs. 1500 crore. FDI permissible under Non-Banking
Financial Services now includes "Credit Card Business" and
"Money Changing Business". Regarding equity participation in
private sector banks, multilateral financial institutions have been allowed
to contribute equity to the extent of the shortfall in NRI holdings within
the overall permissible limit of 40 per cent. The Government has also
decided to permit FDI up to 49 per cent of the total equity, subject to
license, in companies providing Global Mobile Personal Communication by
Satellite (GMPCS) services. Also, minimum capitalisation norms earlier
required for pure financial consultancy services have been relaxed.
GDR/ADR guidelines have been further liberalised in 1998-99. Unlisted
companies are now permitted to float Euro issues under certain conditions. All end-use
restrictions on GDR/ADR issue proceeds have been removed, except the prevailing
restrictions on investment in stock markets and real estate. The 90-day validity period
for final approvals of GDR/ADR issues has been withdrawn and final approval will continue
to be valid, thereby imparting greater flexibility to issuing companies regarding the
timing of issues. Indian companies are now permitted to issue GDRs/ADRs in the case of
Bonus or Rights issue of shares, or on genuine business reorganisations duly approved by
the High Court. The companies, however, in all such cases, will be required to get
approval from the Department of Economic Affairs for the issue of GDRs/ADRs.
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Direct Investment vs
Portfolio Investment (U.S. $ million)
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1991-92 |
1992-93 |
1993-94 |
1994-95 |
1995-96 |
1996-97 |
1997-98 |
1997-98
(April-Dec) |
1998-99
(April-Dec) |
| Direct Investment |
129 |
315 |
586 |
1314 |
2133 |
2696 |
3197 |
2511 |
1562 |
| Portfolio Investment |
4 |
224 |
3567 |
3824 |
2748 |
3312 |
1828 |
1742 |
-682 |
| Total foreign investment |
133 |
559 |
4153 |
5138 |
4881 |
6008 |
5025 |
4253 |
880 |
| Source: Reserve Bank of India |
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FDI
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Foreign Direct Investment (FDI) inflows to developing countries are
estimated to have gone up to U.S.$ 149 billion in 1997 from U.S.$ 130 billion in 1996.
India’s share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in
1997. On the other hand, India’s share in net portfolio investment flows to the
developing countries declined to 5.1 per cent in 1997 after increasing to 8.7 per cent in
1996.
FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to
U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment (Table 6.9).
Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696
million in 1996-97 to U.S.$ 3,197 million in 1997- 98, portfolio investment declined from
U.S.$ 3,312 million in 1996-97 to U.S.$ 1,828 million in 1997- 98. This decline in
portfolio investment is mainly attributable to the contagion from the East Asian crisis,
which adversely affected capital flows to all emerging markets.
International developments continue to affect capital flows into India
in 1998-99 as well. The provisional estimate of total foreign investment at U.S.$ 880
million during April-December, 1998 was sharply lower compared to the inflow of U.S.$ 4253
million during the corresponding period in the previous year. Although FDI flows were
weaker, this overall decline in capital flows was mainly attributable to a net outflow in
portfolio investment of U.S.$ 682 million during April-December, 1998 as against an inflow
of U.S.$ 1742 million during the same period in 1997. Trends in approvals and actual
inflows of foreign direct investment are shown in Table 1 below.
Mauritius, as in the previous two years, was the dominant source of FDI
inflows in 1997- 98. U.S.A. and S. Korea were, respectively, the second and third largest
sources of FDI. The striking feature was that S. Korea increased its flow of investment in
India from a meagre U.S.$ 6.3 million in 1996-97 (0.2 per cent of total FDI) to U.S.$
333.1 million in 1997-98 (10.4 per cent share).
On the sectoral side, although the engineering industry witnessed a
decline in inflows in 1997-98, it remained an attractive area for FDI, being the second
largest recipient after electronics & electrical equipment.
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Table 1: Foreign Direct Investment : Actual Flows
vs
Approvals
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1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998* |
TOTAL |
| Approvals
in Rs. Crores |
739 |
5256 |
11189 |
13590 |
37489 |
39453 |
57149 |
25103 |
189968 |
| Approvals
in US$ million |
325 |
1781 |
3559 |
4332 |
11245 |
11142 |
15752 |
6132 |
54268 |
| Actual inflows in Rs Crores |
351 |
675 |
1786 |
3009 |
6720 |
8431 |
12085 |
8433 |
41490 |
| Actual inflows in US$ million |
155 |
233 |
574 |
958 |
2100 |
2383 |
3330 |
2073 |
11806 |
| Actual inflows as percentage of approvals (in US$ terms) |
47.7 |
13.1 |
16.1 |
22.1 |
18.7 |
21.4 |
21.1 |
33.8 |
21.7 |
*: Upto September, 1998. Figures are provisional.
Source: Reserve Bank of India
Note: The approval and actual inflows
figures include NRI direct investments approved by RBI. |
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Portfolio
Investment by Foreign Sources
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The decline in portfolio investment, from 1997-98 onwards, has been
contributed by a decline in flows of both foreign institutional investment and
GDRs. Fresh
inflow of funds by FIIs declined from U.S.$ 1,926 million in 1996-97 to U.S.$ 979 million
in 1997-98. This trend intensified in 1998-99 with an estimated outflow of U.S.$ 752
million during April-December, 1998 compared to inflows of U.S.$ 973 million during the
corresponding period in the previous year. GDRs raised in 1997-98 was U.S.$ 645 million,
which was less than half the amount of U.S.$ 1,366 million raised in 1996-97. The
declining trend has continued during the first nine months of 1998-99 with only U.S.$ 15
million raised compared to U.S.$ 612 million during the same period in 1997-98. The poor
performance of portfolio investment is a consequence of both enhanced emerging market
risk-perception, and the depressed condition of the domestic capital market.
Portfolio Investments - NRIs
A number of liberalization measures have been taken in 1998-99 to
promote portfolio foreign investment. In order to avoid NRIs being crowded out by
FIIs,
the aggregate ceiling for investment in a company by all NRIs/PIOs/OCBs through stock
exchanges has been made separate and exclusive of the investment ceiling available for
FIIs. In addition, the aggregate investment ceiling for NRIs/PIOs/OCBs has been raised
from 5 per cent to 10 per cent of the paid up capital of a company. In the case of listed
Indian companies, the ceiling can be raised to 24 per cent of the paid up capital under a
General Body Resolution. Also, the investment limit by a single NRI/PIO/OCB has been
enhanced from 1 per cent to 5 per cent of the paid up capital. Policy pertaining to
investment in unlisted companies has also been liberalised. NRIs/PIOs/OCBs are now
permitted to invest in unlisted companies. However, while investing in unlisted companies,
the same norms and approval procedures applicable to portfolio investments in listed
companies will apply, and it will be subject to the same investment ceilings as in the
listed companies.
Portfolio Investments—FIIs
FIIs can purchase and sell Government Securities and Treasury Bills
within overall approved debt ceilings. To facilitate better risk management by investors,
authorised dealers have been permitted to provide forward cover to FIIs in respect of
their fresh equity investments in India. Moreover, transactions among FIIs with respect to
Indian stocks will no longer require post-facto confirmation from the RBI. Also, 100
percent FII debt funds have been permitted to invest in unlisted debt securities of Indian
companies.
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External Commercial Borrowings (ECBs) |
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The higher net inflows of U.S.$ 3,999 million of ECBs in 1997-98
compared to U.S.$ 2,848 million in 1996-97 reflected lower amortisation. Disbursements in
1997-98 stood at U.S.$ 7,371 million, which was marginally lower than U.S.$ 7,571 million
recorded in 1996-97. ECB approvals in 1997-98 have been placed at U.S.$ 8,712 million,
which is slightly higher than the level in 1996-97. Regarding sectoral allocation, power
accounted for the highest approvals of U.S.$ 3 billion, followed by telecom with U.S.$1.5
billion (Table 6.11). In 1998-99 up to 23.12.98, approvals have been placed at U.S.$ 3,804
million. The reduced attractiveness of ECB of the corporate sector has been underscored by
a very steep decline in actual disbursements to U.S.$ 1.6 billion (excluding U.S $ 4.2
billion on account of RIBs) in the first two quarters of 1998- 99 compared to U.S.$ 4.3
billion in the same period last year. Increase in cost of ECB funds has come about due to
a general increase in the risk premium for emerging market borrowers, downgrades by
international credit rating agencies and the rise in forward premia. After several years
of unchanged or slightly improving ratings, major rating agencies started to re-examine
our ratings in early 1997 (Table 6.12). Both the deteriorating external environment and
persistent large fiscal deficits have been cited as the main reasons for downgrading.
ECB is approved by the Government within an annual ceiling that is
consistent with prudent debt management, keeping in view the balance of payments position.
The existing ECB policy was reviewed in 1998-99 in light of the financial needs of various
sectors and the impact on international markets of both the East Asian crisis and economic
sanctions. Regarding the sectoral requirements, infrastructure and exports continue to be
accorded high priority in ECB allocation.
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Non-Resident Deposits |
The
Resurgent India Bond (RIB) scheme, launched in the current
financial year, was open to both NRIs/OCBs and the banks acting
in fiduciary capacity on behalf of them. The scheme, that
opened on August 5, 1998 and closed on August 24, 1998, mobilised
U.S.$ 4.2 billion. The interest rates on these five year bonds
were 7.75 per cent for U.S. dollar, 8 per cent for Pound Sterling,
and 6.25 per cent for Deutsche Mark. Other features of RIBs
include joint holding with Indian residents, allowing them
to be gifted to Indian residents, easy transferability, loanability,
premature encashment facility, and tax benefits. 45. Net inflows
under non-resident deposits declined from U.S.$ 3,314 million
in 1996-97 to U.S.$ 1,119 million in 1997-98. The outflow
under FCNRA continued due to redemption payment. Also, the
relative rates of return and the perceived risk premium on
emerging market debt has influenced the flows into these accounts.
Some of the domestic policy-related factors which seem to
have contributed towards subdued net flows include imposition
of incremental cash reserve ratio of 10 per cent on non-resident
deposits and the linking of interest rates under FCNR(B) with
LIBOR, which had the effect of lowering interest rates offered
under this scheme, and thereby reducing its attractiveness.
In order to encourage mobilisation of long-term deposits,
and concomitantly to discourage short-term deposits, the interest
rate ceiling on FCNR(B) deposits of one year and above was
raised and the ceiling on such deposits below one year was
reduced in April, 1998. 46. As at the end of March 1998, outstanding
balances under various non-resident deposit schemes stood
at U.S.$ 20,367 million. Comparison of estimated net flows
under non-resident deposits during April-November 1998 vis-à-vis
the corresponding period in 1997 shows a compositional shift
in favour of Rupee denominated accounts in response to policy
initiatives undertaken in 1997-98. Net inflows under non-residents
deposits, (excluding redemption payments under FCNRA which
had since been discontinued) at US $ 367 million during April-November,
1998 were substantially lower than those of US $ 2266 million
in the same period of 1997. Positive flows have been recorded
only in the NR(E)RA and NR(NR)RD schemes. The initiatives
in terms of freeing of interest rates and removal of incremental
CRR, may have acted as incentives to attract deposits in these
accounts. |
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