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Features of Foreign Capital Policy, 1991 (New Foreign Investment Policy)

New Foreign Investment Policy

The new Industrial Policy, 1991 can be described as a minor revolutions as far as decisions concerning foreign investment and foreign technology agreement are concerned. With this, it can be finally said to have laid to rest the ghost of the East India Company.

The various changes in the policy can be broadly classified into four categories:

  1. Liberal Approach:

    In 1991, the Government announced a specified list of high technology and a investment priority industries (LOSSTED in Annexure III) wherein. Automatic permission was granted for foreign direct investment (FDI) up to 51 per cent foreign equity. The limit was raised from 51 per cent to 74% and subsequently to 100 per cent for many of these industries. Moreover, many new industries have been added to this list over the years.

  2. Various Forms of Foreign Capital:

    Earlier, foreign capital was raise mainly through foreign aid and commercial borrowings. But now it is raised in various forms, such as:

  • Foreign Equity Participations:

    It is in the form of foreign direct investment and portfolio investment.

  • Investment by Foreign Institutional Investors :

    Overseas corporate bodies, NRIs, foreign instructional investors are allowed to invest in India capital market.

  • Foreign Collaboration :

    It means setting of an enterprise jointly by the foreign and Indian entrepreneurs in India.

  1. Investment in Indian Capital Market:

    The Government has allowed foreign institutional investors to invest in Indian capital market. This permission will be applicable only if they are registered with SEBI and get approval under FEMA from RBI. The portfolio investment by Foreign Institutional Investors (FII) in primary and secondary markets has been increased from 24% to 40% of issued share capital of any company, subject to the approval of the Board of Directors of the concerned company, subject to the approval of the Board of Directors of the concerned company. The limit is further raised to 49% in 2001-2002 budgets. FIIs have been directed to allocate their total investments between equity and debentures in the ratio are 70: 30.

  2. Organization of Boards:

    A special empowered board has been constituted to negotiate with a number of large international firms and approve direct foreign investment in selected areas, There would be a special programme to attract substantial investment, which would provides access to high technology and world markets. The investment programmes of such firms would be considered in totality, free from pre-determined parameters or procedures.

  3. Special Incentives:

    FDI policy has special incentives for foreign investors,

  • Original investment and the returns on investment are fully repatriable.
  • Payment of lump-sum fee and royalty to foreign technology provider is permitted under the automatic route within the prescribed limits.
  • Payment of royalty on use of trademarks and brand name without transfer of technology is also permitted.
  1. Technological Collaborations:

    For promoting the inflow of modern technology, the new foreign investment policy has also granted various concessions in case of technical collaboration agreements. Under the new policy, no approval will be needed to make payment in foreign currency to foreign technical experts or for getting indigenously developed techniques tested abroad.

  2. Further Liberalization in the Foreign Direct Investment:

    In January 2004, guidelines on equity capital on FBI, including investment by NRIs and Overseas Corporate Bodies (OCB’s) were revised as under:

  • FDI up to 100 per cent is permitted in printing scientific and technical magazines, periodicals and journals, subject to compliance with legal framework and with the prior approval of the Government,
  • FDI up to 100 per cent is permitted through automatic route for petroleum products marketing subject to existing sectoral policy and regulatory framework,
  • FDI up to 100 per cent is permitted through automatic route in oil exploration in both small and medium sized fields subjects to and under the policy of the Government on private participation in exploration of oil fields and the discovered fields of national oil petroleum products pipelines subject to and under the Government policy and regulations the re of,
  • FDI upto 100 per cent is permitted for Natural Gas CNG pipelines with prior Government approval.
  1. Review of Policy for Foreign Direct Investment (FDI):

    A comprehensive review of the FDI policy was undertaken on February 10, 2006, to consolidate the liberalization already effected and further rationalize the FDI policy governing various activities. The major policy initiatives taken are:

  • Change of route-

    FDI has allowed up to 100 per cent under the automatic route for distillation and brewing of potable alcohol, manufacture of industrial explosives, manufacturing of hazardous chemicals, manufacturing activities located within 25kms of the Standard Urban Area limits requiring industrial license under the IDR(ACT) 1951, setting up of Greenfield airport projects, lying of natural Gas CNG pipelines, market study and formulation and investment financing in the petroleum sector, and cash and carry wholesale trading and export trading,

  • Increase in Equity Caps –

    FDI caps have been increased to 100 per cent and automatic route extended to coal lignite mining for captive consumption, setting up of infrastructure relating to marketing in petroleum and natural gas sector and exploration mining of diamonds and precious stones.

  • FDI in New Activities –

    FDI has been allowed up to 10 per cent on the automatic route in power trading and processing and warehousing of coffee and rubber, FDI has also been allowed up to 51 per cent for ‘single brand’ product retailing, which requires prior approval of Government, Specific guideline have been issued for governing FDI for ‘single brand’ product retailing.

  • Removal of Restrictive Conditions –

    Mandatory divestment condition for business to business e- commerce have been dispensed with.

Consolidated FDI Policy, 2013,

The government on 31, 2010 released the consolidated FDI policy framework for making country’s Foreign Direct Investment (FDI) norms investor – friendly.

Salient Features:

Salient features of changes in the consolidated FDI policy, 2013, are as under:

  • Allows up to 51% inflows of foreign direct investment (FDI) in multi- brand retail sector
  • Allowing Pakistan citizens, nationals and companies to invest in India.
  • Allows 49% stake by a foreign airlines in the capital of Indian companies, operating scheduled and non-scheduled air transport services.
  • Raises FDI cap in various us broadcasting services to 74%.
  • Increase foreign investment ceiling in ABCs to 74% up from 49%.
  • Anew paragraph has been added with regards to the issue price of shares.

100% FDI in Single- Brand Retail

The commerce ministry has notified the notified the much-awaited policy permitting 100 per cent Foreign Direct Investment (FDI) in single brand retail. Till now this ceiling was only 51 per cent. While justifying the decision to liberalize the policy for FDI in single brand retail, commerce ministry has extended hope that it will lead to the emergence of some global majors in the Indian Market.

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