Foreign Investment in India


Foreign Direct Investment Portfolio Investment by Foreign Sources
Portfolio Investment by NRIs Portfolio Investment by FIIs
External Commercial Borrowings Deposits by Non-Residents
Policies on Foreign Investment Direct Investment vs Portfolio Investment


Policies on Foreign Investment

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 The 90-day validity period for final approvals of GDR/ADR issues has been withdrawn and final approval will continue to be valid, thereby imparting greater flexibility to issuing companies regarding the timing of issues.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)

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1997-98
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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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

  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

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)

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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