What is FDI?

Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. What are the forms in which business can be conducted by a foreign company in India? Ans. A foreign company planning to set up business operations in India may: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

What is the procedure for receiving Foreign Direct Investment in an Indian company? Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under: . Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Are the investments and profits earned in India repatriable? Ans. All foreign investments are freely repatriable (net of applicable taxes) except in cases where: i) the foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period; and ii) NRIs choose to invest specifically under non-repatriable schemes.

FDI is prohibited in: (a) Lottery Business including Government /private lottery, online lotteries, etc. (b) Gambling and Betting including casinos etc. (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights (TDRs) (f) Real Estate Business or Construction of Farm Houses (g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

PERMITTED SECTORS

Agriculture & Animal Husbandry 100% automatic Tea Plantation 100% government Mining 100% automatic Petroleum & Natural Gas (exploration) 100% automatic Petroleum & Natural(refininery) 49% government Defense 26% government Broadcasting 74% automatic upto 49% and government beyond 49 and upto 74 Print media 26% government AVIATION Airports (a) Greenfield projects 100% Automatic (b) Existing projects 100% Automatic up to 74% Government route beyond 74% Air Transport Services (1) Scheduled Air 49% FDI Automatic Transport Service/ (100% for NRIs) Domestic Scheduled Passenger Airline (2) Non-Scheduled Air 74% FDI Automatic up to 49% Transport Service (100% for NRIs) Government route beyond 49% and up to 74% (3)Helicopter 100% Automatic services/seaplane services requiring DGCA approval

Construction Development: Townships, Housing, Built-up infrastructure 100% Industrial Parks new Automatic and existing 100%

automatic

Satellites Establishment and operation , Satellites Establishment and operation , Telecom Services TRADING , FINANCIAL SERVICES , Pharmaceuticals, Power Exchanges

FDI in AVIATION (a) Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Air Transport Services, helicopter and seaplane services. (b) Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services, as per the limits and entry routes mentioned above. (c) Foreign airlines are also, henceforth, allowed to invest, in the capital of Indian companies, operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. Such investment would be subject to the following conditions: (i) It would be made under the Government approval route. (ii) The 49% limit will subsume FDI and FII investment. (iii) The investments so made would need to comply with the relevant regulations of SEBI, such as the Issue of Capital and Disclosure Requirements (ICDR) Regulations/ Substantial Acquisition of Shares and Takeovers (SAST) Regulations, as well as other applicable rules and regulations. (iv) A Scheduled Operators Permit can be granted only to a company: a) that is registered and has its principal place of business within India; b) the Chairman and at least two-thirds of the Directors of which are citizens of India; and c) the substantial ownership and effective control of which is vested in Indian nationals. (v) Clearance from the home ministry and Foreign Investment Promotion Board will be required (vi) All technical equipment that might be imported into India as a result of such investment shall require clearance from the relevant authority in the Ministry of Civil Aviation. (d) The policy mentioned at (c) above is not applicable to M/s Air India Limited.

(1) Ground Handling Services subject to sectoral regulations and security clearance (2) Maintenance and Repair 100% organizations; flying training institutes; and technical training institutions 6.2.10 Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898 and excluding the activity relating to the distribution of letters.

Other services under Civil Aviation sector 74% FDI Automatic up to 49% (100% for NRIs) Government route beyond 49% and up to 74% Automatic

100%

Government

Positives of FDIs in aviation in national interest

Those in favour of more liberal guidelines say more sophisticated technology in ground handling and flight operations will follow More competition is likely to result in more competitive fares and better product and services. Another potential benefit: better international connectivity. It can contribute to Gross Domestic Product (GDP),Gross Fixed Capital Formation (total investment in a host economy) and balance of payments.

FDI can also contribute toward debt servicing repayments, stimulate export markets and produce foreign exchange revenue. FDI, where it generates and expands businesses, can help stimulate employment, raise wages and replace declining market sectors. However, the benefits may only be felt by small portion of the population, e.g. where employment and training is given to more educated, typically wealthy elites or there is an urban emphasis, wage differentials (or dual economies) between income groups will be exacerbated (OECD Greenfield investments into new business sectors can stimulate new infrastructure development and technologies to host economies Investment in research & development (R&D) from parent companies can stimulate innovation in production and processing techniques in the host country.

Negatives
Corporate strategies e.g. protective tariffs and transfer pricing can reduce the level of corporate tax received by host governments. importation of intermediate goods, management fees, royalties,profit repatriation, capital flight and interest repayments on loans can limit the economic gain to host economy. Therefore the impact of FDI will largely depend on the conditions of the host economy, e.g. the level of domestic investment/savings, the mode of entry (merger & acquisitions or Greenfield (new) investments) and the sector involved, as well as a countrys ability to regulate foreign investment Foreign technology /organizational techniques may actually be inappropriate to local needs, capital intensive and have a negative effect on local competitors, especially smaller business who are less able to make equivalent adaptations. Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies as compared to FDIs Contrary to the belief that FDI is a panacea as regards employment generation, this is not true. Foreignowned projects are capital-intensive and labor-efficient. They invest in machinery and intellectual property, not in wages.