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Foreign direct investment(FDI) in all over the world in general and in India in particular after the
opening up of our market with the adoption of the policies namely globalization, privatization and
liberalization has no doubt emerged as one of the most significant source and contributor of external
inflow of resources and is one of the most crucial contributors to the capital formation despite their share
in the world arena still catching up. When we talk about the term FDI we are talking about a bundle of
resources that usually flow into a country including besides capital, production technology, global
managerial skills, innovative marketing strategies and access to new markets.

In this project it has been tried to provide a comprehensive picture about the foreign direct
investment ranging from its conception as a potent source of investment the world over, its various
types, the methodology adopted top FDI countries and agencies engaged and other important aspects.

A cumulative and an exhaustive study of the over all scenario of FDI in India starting from
the introduction of FDI in the country, share of top investing countries, sectors attracting highest FDI
flows, sector wise technology transfer and approvals.

We will also look at the determinants for attracting FDI in the country and also the causes
for low flow of FDI and the mechanisms that can be undertaken to make our country attractive enough
for investors. This study entirely relies on secondary data collected after a thorough and exhaustive
study of various websites, text books, journals, newspapers, magazines and great inputs form various
professors and professionals specializing In this area.

Though the policy is reviewed frequently we lack when compared with countries like
china, so it’s high time the government takes steps to further liberalize the economy and streamline and
liberalize the policies to make India the most preferred FDI destination in the world.

I take this opportunity to thank all those who have been of help to me in the completion of this project.

I would like to appreciate the guidance and co-operation provided to me by our project guide Mr. V.

XXXXX (faculty of Business Management) in the completion of this project.

I am also grateful to XXXX, Director XXX and all the faculty members who have directly or indirectly

helped me in preparing this project report.









1 To study the trends in the inflow of foreign direct investment

2 To study the share of top investing countries of FDI during the period 2003-2006.
3 The sector attracting highest FDI equity inflow

4 Foreign technology transfer

5 Country wise technology transfer

6 Country wise technology transfer approvals

7 Sector wise technology transfer approvals

8 To study the causes and reasons for low FDI inflow in the country

9 To study the determinants for attracting the FDI

10 To study and understand mechanism of approvals of FDI by RBI and FIPB

11 To study the FDI policy in brief.


This project is entirely based on freelance work done by the student and therefore no
organisation has been taken as a base for doing the project. AN exhaustive amount of data
available on the internet, from the text books, news papers, and various magazines and
suggestions from a few experts in the field has been taken in doing this project.

As this is a free lance project, the data has been entirely collected from secondary sources and
therefore its authenticity can be vouched for only by going through the same literature which has
been used.
as this study is aimed to analyze the trends in the FDI inflows, the main focus is given on the
recent trends in the inward FDI inflows, sectors attracting highest FDI, and the share of top
investing countries, it covers only equity capital components. The scope is limited to the
availability of the secondary data.
the study is conducted in a short period, which was not detailed in all aspects.
Non-availability of accurate data to FDI
Data in one secondary source do not match with that of another source.



Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises
operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and
a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the
investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in
this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.


In the years after the Second World War global FDI was dominated by the United States, as much of the
world recovered from the destruction brought by the conflict. The US accounted for around three-quarters
of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to
become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown
in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.

Inward foreign direct investment is when foreign capital is invested in local resources.
Inward FDI is encouraged by:
> Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions
> The thought is that the long term gain is worth short term loss of income
Inward FDI is restricted by:
> Ownership restraints or limits
> Differential performance requirements.
Outward foreign direct investment, sometimes called "direct investment abroad", is when local
capital is invested in foreign resources. Yet it can also be used to invest in imports and exports
from a foreign commodity country.
Outward FDI is encouraged by:
> Government-backed insurance to cover risk
Outward FDI is restricted by:
> Tax incentives or disincentives on firms that invest outside of the home country or on
repatriated profits
> Subsidies for local businesses
Leftist government policies that support the nationalization of industries (or at least a modicum
of government control) Self-interested lobby groups and societal sectors who are supported by
inward FDI or state investment, for example labour markets and agriculture. Security industries
are often kept safe from outwards FDI to ensure the localised state control of the military
industrial complex.
Greenfield investment
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments
are the primary target of a host nation’s promotional efforts because they create new production
capacity and jobs, transfer technology and know-how, and can lead to linkages to the global
marketplace. The Organization for International Investment cites the benefits of greenfield
investment (or insourcing) for regional and national economies to include increased employment
(often at higher wages than domestic firms); investments in research and development; and
additional capital investments. Criticism of the efficiencies obtained from greenfield investments
include the loss of market share for competing domestic firms. Another criticism of greenfield
investment is that profits are perceived to bypass local economies, and instead flow back entirely
to the multinational's home economy. Critics contrast this to local industries whose profits are
seen to flow back entirely into the domestic economy.
Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firms takes place; the primary type of
FDI. Cross-border mergers occur when the assets and operation of firms from different countries
are combined to establish a new legal entity. Cross-border acquisitions occur when the control of
assets and operations is transferred from a local to a foreign company, with the local company
becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide
no long term benefits to the local economy-- even in most deals the owners of the local firm are
paid in stock from the acquiring firm, meaning that the money from the sale could never reach
the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until
around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the
most common way for multinationals to do FDI.
Horizontal FDI
Investment in the same industry abroad as a firm operates in at home.
Vertical FDI

Backward Vertical FDI

Where an industry abroad provides inputs for a firm's domestic production process.

Forward Vertical FDI

Where an industry abroad sells the outputs of a firm's domestic production.

By Motive
FDI can also be categorized based on the motive behind the investment from the perspective of
the investing firm:
Investments which seek to acquire factors of production that are more efficient than those
obtainable in the home economy of the firm. In some cases, these resources may not be available
in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into
developing countries, for example seeking natural resources in the Middle East and Africa, or
cheap labor in Southeast Asia and Eastern Europe.
Investments which aim at either penetrating new markets or maintaining existing ones. FDI of
this kind may also be employed as defensive strategy; it is argued that businesses are more likely
to be pushed towards this type of investment out of fear of losing a market rather than
discovering a new one. This type of FDI can be characterized by the foreign Mergers and
Acquisitions in the 1980’s by Accounting, Advertising and Law firms.
Investments which firms hope will increase their efficiency by exploiting the benefits of
economies of scale and scope, and also those of common ownership. It is suggested that this type
of FDI comes after either resource or market seeking investments have been realized, with the
expectation that it further increases the profitability of the firm.
A tactical investment to prevent the loss of resource to a competitor. Easily compared to that of
the oil producers, whom may not need the oil at present, but look to prevent their competitors
from having it.

The late 1960s and early 1970s foreign direct investment became increasingly politicized.
Organized labor, convinced that foreign investment exported jobs, undertook a major campaign
to reform the tax provisions which affected foreign direct investment. The Foreign Trade and
Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminated both the tax credit
and tax deferral. The Nixon Administration, influential members of Congress of both parties,
and well-financed lobbying organizations came to the defense of the multinational. The
massive counterattack of the multinational corporations and their allies defeated this first major
challenge to their interests.
List of countries by received FDI:
This is a list of countries by FDI in 2006 mostly based on CIA fact book accessed in January
1 United states
2 United kingdom
3 Hong kong
4 Germany
5 China
6 France
7 Belgium
8 Netherlands
9 Spain
10 Canada
A country's international investment position (IIP) is a financial statement setting out the value
and composition of that country's external financial assets and liabilities. The IIP is one
component of the capital account of a country's balance of payments, containing for example
stock of companies, real estate, financial instruments, and so on. By comparison, imports and
exports of goods and services are part of the current account.
The difference between a country's external financial assets and liabilities is the net
international investment position (NIIP).
International Investment Position = domestically owned foreign assets - foreign owned domestic
The International Centre for Settlement of Investment Disputes (ICSID), an institution of
the World Bank group based in Washington, D.C., was founded in 1966 pursuant to the
Convention on the Settlement of Investment Disputes between States and Nationals of Other
States (the ICSID Convention or Washington Convention). As of May 2005, 155 countries had
signed the ICSID Convention.
ICSID has an Administrative Council, chaired by the World Bank's President, and a Secretariat.
It provides facilities for the conciliation and arbitration of investment disputes between member
countries and individual investors.
During the past decade, with the proliferation of bilateral investment treaties (BITs), most of
which refer present and future investment disputes to the ICSID, the caseload of the ICSID has
substantially increased. As of June 30, 2005, ICSID had registered 184 cases more than 30 of
which were pending against Argentina – Argentina's economic crisis in the late 1990s and
subsequent Argentine government measures led several foreign investors to file cases against
Argentina. Bolivia, Nicaragua, Ecuador and Venezuela have announced their intention to
withdraw from the ICSID .

World Association of Investment Promotion Agencies

The World Association of Investment Promotion Agencies, or WAIPA, is an international

NGO hosted by UNCTAD that acts as a forum for investment promotion agencies, provides
networking and promotes best practice in investment promotion.
Having spoken elaborately about the definition, history, types, top countries and various types
of agencies related to foreign direct investment the other aspect that gains importance is the
factors that actually stand in favor or against a country’s interests in encouraging or
discouraging countries from investing in that particular nation.
The location specific advantages involve a number of factors that favor a location in
comparison to an alternative location. The factors deciding location of the foreign direct
investment involve labor costs, marketing factors, trade barriers and government policy.
The size of a country’s market acts as the most important determinant for attracting
foreign investors, market related variables are the most important fundamentals and the
scope of investment depends upon two factors i.e, current market size and potential market
size. while a large market size generates scale economies , a growing market improves the
prospects of market potential and there by attracts FDI inflows. In some markets domestic
brands are preferred and a presence in a specific market is needed for success. The location
of FDI in that specific market is essential to be able to label products “made locally”
The existence of trade barriers is a factor that influences the choice of locations for FDI.
Trade barriers encourage companies to make FDI in markets that would be too expensive
to export to due to tariffs and quotas.
Labor costs are affected by an imperfection in the international market for labor. Since
regulations for immigration exist worldwide, the mobility of labor is reduced and
differences in wage costs arise. This creates different production clusters around the world,
each specialized in different wage levels. An example of this is the low wage area in the
south east Asia producing toys and clothing and on the other hand western Europe with its
high tech production and high wage levels.
Cost factors are nothing but factors that cause investment cost differentials across
countries . They usually include factors like cost of labour, cost of capital and cost of
infrastructure. Cost factors most significantly influence the choice of an investment
location for the resource seeking and efficiency- seeking foreign direct investment.
Usually it is seen that higher lending rates may have a positive impact on the
FDI inflows i.e. higher the cost of capital in the host country the more capital can be
brought in by the foreign firms. Alternatively It can also be said that the hostr country’s
cost of capital impact directly on the domestic consumption. Thus the lower the interest
rates, the higher the domestic consumption and hence higher the FDI inflows. As far as
infrastructure costs are concerned, it is found that higher the availability of infrastructure
lower is the infrastructure cost and higher is the ability of the host country to attract FDI.
This factor presents a rather ambiguous picture as far as the impact of depreciation of
real exchange rate in the host country on FDI inflows is concerned. A devalued
exchange rate may or may not be gainful for the foreign investors. The investor may
gain because of factors like huge purchasing power of the host country, cheap
production costs which would lead to easy exports and this surely catches the fancy of
the resource and efficiency seeking investor. But then the foreign firms may get taken
aback if they believe that depreciation may continue to be too high to justify their
investments in the first place and their continuation.
Macro economic variables like inflation, budget deficit, balance of payments etc. have a
big impact on the FDI across countries. The volatility of the macro economic conditions
presents both opportunities and impediments to companies investing in the host country.
They require not only the ability to manage the risk inherent in volatile countries but also
present an opportunity of moving production to lower cost facilities. Exchange rate
volatility is one of the macro economic volatility where in if exchange rate changes merely
offset price movements so that real purchasing power parity is maintained, the exchange
rate movements would have little real effects.
Low inflation is taken to be a sign of internal economic stability in the host country. High
inflation indicates inability of the government to balance its budget and failures of the
central bank to conduct appropriate monetary policy.
The financial well being of the host country is gauged by external debts to Exports. It is
expected that lower this ratio higher is the probability of economic stability in the country.
The location of FDI also depends a lot on the importance given to the research and
development activities by the host country. Many multi national companies would
definitely look forward to investing in a country which provides very good incentives in the
field of research and development in the form of tax cuts and provision of abundant raw
material at affordable rates and so on as this would help the MNCS to shift their activities
from high cost countries to low cost ones.
In the current era of liberalization where a host of countries are vying to attract foreign
investors to invest in their respective nations, the FDI policies and other policy measures
adopted by them have assumed great significance.
A multi national company or for that matter a country that wants to invest in a
country would first of all look for the governments attitude towards FDI which is best
reflected in its policies. Measures like investor friendly incentives, lower rates of taxes or
relaxation for a particular period of time or provision of rebates, provision of land and other
infrastructure facilities at reasonable rates and other measures would surely go a long way
in making a country a chosen location for parking FDI.
Apart from the above mentioned factors and initiatives companies evaluate the
investment climate in the home country, meaning the political, social and economic
environment. This climate affects the perceived risk of locating operations in the specific
The FDI incentives offered by the host countries can be categorized into two main types,
they are 1: fiscal incentives and 2: financial incentives.
Fiscal incentives refer to the policies designed to reduce tax burden of a firm and
Fiscal incentives include tax concessions in the form of reduction of the standard corporate
income tax rate, tax holidays, accelerated depreciation allowances on the capital taxes,
exemption from import duties and duty drawbacks on exports.
Financial incentives refer to the direct contributions to the firm from the
government including direct capital subsidies or subsidized loans. They also include grants,
subsidized loans and loan guarantees, publicly funded ventures capital participating in
investment involving high commercial risks and governments insurance at preferential

Developing countries have applied various forms of restrictions to FDI in the pre
liberalized era mostly because of their troubled past and exploitation by their colonial
rulers. Various controls like ownership and control and other operational restrictions like
closing down certain sectors to private enterprises, screening regularization authorization of
investment and minimum capital requirements. For example allowing only fixed
percentage of foreign owned capital in an enterprise, compulsory joint ventures,
compulsory transfer of ownership to local private firms and restrictions on reimbursement
of capital upon liquidation. Even when the foreign firms enter the host country’s market
they could face certain restrictions on their operations such as restrictions on employing
key foreign personnel and performance requirements such as sourcing or local content
requirements, training requirements and export targets.
The best example is the erstwhile Indian economy which followed the license
permit raj before embarking upon economic reforms. But the whole scenario of controlling
the economy in most of the developing nations has been done away with, in most of the
countries and they have seriously embarked upon many liberal measures like quick
licensing, many tax incentives and so on which have changed the economic scenario of
many a nations.
Country experiences indicate that while favorable economic environment and regulatory or
policy framework help induce foreign direct investment flows, there are a number of forces
that tend to discourage such flows.
Many developing countries have, during the past decade or so, begun liberalizing their
national policies to establish a hospitable regulatory framework for foreign direct
investment by relaxing rules regarding market entry and foreign ownership, improving the
standards of treatment accorded to foreign firms and improving the functioning of markets.
These core policies are important because FDI will not take place where it is forbidden or
strongly impeded. However, changes in policies have an asymmetric effect on the location
of foreign direct investment, changes in the direction of greater openness allows firms to
establish themselves in a particular location. In contrast, changes in the direction of less
openness will ensure a reduction in foreign direct investment (UNCTAD, 1998)
The regulatory restrictions including tariffs, quotas tend to discourage cross-border
acquisitions by multinational enterprises. Countries that impose restrictions on foreign
entry and ownership and foreign transactions, as well as discriminatory tax provisions, tend
to hamper foreign direct investment flows. For example, in Kenya, foreign investors face
multiple licensing requirements and high withholding taxes on royalties, and foreign direct
investment remained less than 0.2 percent of GDP. Also, in Yemen where sizeable
outflows of FDI have been recorded since the mid 1990’s, licensing requirements
discouraged new investments, despite incentives like tax holidays and customs exemptions.
Some of the developing countries have not achieved the improvements in the investment
climate necessary to encourage higher FDI flows. While the poor prospect for growth and
unfavourable economic environment have impeded the foreign direct investment flows to
many countries, a number of other factors ( such as political and structural factors ) have
also been the important discouraging factors.
For instance, the economic uncertainty has restrained Greenfield foreign direct investment
in Brazil, and private sector merger and acquisition transactions has slowed down with the
increasing economic difficulties in Argentina. In Indonesia, the severe recession, un
certainty over economic policies, and political disturbances that reduce future economic
prospects have discouraged foreign investment inflows since 1996 due to concerns over
political developments.
In addition, recent analysis find that developing countries with stronger policy
environments attract a larger share of the total foreign investments flows to developing
countries, whereas the higher levels of corruption acts as a deterrent ( IMF 2001 ).
Moreover, in Korea, the process of corporate and financial restructuring has slowed the
foreign direct investment flows.

Pre-colonial period
5 BC
 Silver punch-marked coins were minted by the Mahajanapadas
 India's economy had a 32.9% share of world income, the largest in the world.
 India's economy had a 28.9% share of world income, the largest in the world.
 India's economy had a 24.5% share of world income, the second largest in the world after
China, which had a 25% share.
 India had an income of £17.5 million, under Akbar's Mughal Empire, in contrast to the
entire treasury of Great Britain in 1800, which totalled £16 million.
 India's economy had a 24.4% share of world income, the largest in the world, under
Aurangzeb's Mughal Empire.

Colonial period

East India Company

 1793 Cornwallis' Permanent Settlement Instituted in Bengal
 India's economy had a 16% share of world income, the second largest in the world after

British Raj
 First estimation of India's national income by Dadabhai Naoroji
 India's economy had a 12.2% share of world income under the British Empire.
 India's economy had a 7.6% share of world income under the British Empire.
 Famine of Bengal

Post-Independence period

Nehruvian era
 India's economy had a 3.8% share of world income
 India's economy was $494.8 billion, which accounted for a 3.1% share of world income

1980 - 1991
Virtually Closed

 Economic liberalisation was initiated by Indian prime minister P. V. Narasimha Rao and
his finance minister Manmohan Singh in response to a macroeconomic crisis.
 India's economy was $1,702.7 trillion, which accounted for a 5% share of world income
 India's economy is $3,815.6 trillion (purchasing power parity) which accounts for a 6.3%
share of world income, the fourth largest in the world in terms of real GDP.
The economy of India, when measured in USD exchange-rate terms, is the twelfth largest in
the world, with a GDP of US $1.25 trillion (2008). It is the third largest in terms of purchasing
power parity. India is the second fastest growing major economy in the world, with a GDP
growth rate of 9.4% for the fiscal year 2006–2007. However, India's huge population has a per
capita income of $4,542 at PPP and $1,089 in nominal terms (revised 2007 estimate).The
World Bank classifies India as a low-income economy.
Indian economy is very diverse ranging from agriculture which provides direct
and indirect employment to more than 65% of the population to the services sector which
contributes about 55%of the GDP and still growing strong. India also ranks among the most
promising countries in other sectors like industry,manufacturing, telecommunications etc.

After independence India’s economy was influence by the colonial policy though
exploitative and also by the Fabian socialist ideas of our leaders. India followed a socialistic
policy for most part of its independent history with strict governmental control over private
sector participation, foreign trade and foreign direct investment, with a strong emphasis on
import substitution, self sustainability and central planning which led to a lot of bottle necks
being created in the way of the nations development with extremely low growth rate termed as
the Hindu rate of growth.
The collapse of the soviet union as the major trade partner and
the first gulf war which spiked the oil prices caused a major balance of payments crisis in India
which found the prospect of defaulting on its loans. In response, Prime Minister Narasimha
Rao along with his finance minister Manmohan Singh initiated the economic liberalization of
1991. The reforms did away with the Licence Raj (investment, industrial and import licensing)
and ended many public monopolies, allowing automatic approval of foreign direct investment
in many sectors.
Since 1990 India has emerged as one of the wealthiest economies
in the developing world; during this period, the economy has grown constantly, but with a few
major setbacks. This has been accompanied by increases in life expectancy, literacy rates and
food security. The credit rating of India has been raised to investment level in 2007 by S&P
and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices will
overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By
2035, it was projected to be the third largest economy of the world, behind US and China.


As the third-largest economy in PPP terms, India is a preferred
destination for foreign direct investments (FDI) with strengths being information technology
and other significant areas such as auto components, chemicals, apparels, pharmaceuticals and
jewellery. But its rigid FDI policies were a significant hindrance in this regard. However, as a
result of a series of ambitious and positive economic reforms aimed at deregulating the economy
and stimulating foreign investment, India has positioned itself as one of the front-runners of the
rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical
expertise. The size of the middle-class population at 300 million exceeds the population of both
the US and the EU, and represents a powerful consumer market.
India's recently liberalized FDI policy (2005) allows up to a 100% FDI
stake in ventures. Reforms have substantially reduced industrial licensing requirements, removed
restrictions on expansion and facilitated easy access to foreign technology and FDI. The
upward moving growth curve of the real-estate sector owes some credit to a booming economy
and liberalized FDI regime.
A number of changes were approved on the FDI policy to remove the
caps in most sectors. Restrictions will be relaxed in sectors as diverse as civil aviation,
construction development, industrial parks, petroleum and natural gas, commodity exchanges,
credit-information services and mining. But this still leaves an unfinished agenda of permitting
greater foreign investment in politically sensitive areas such as insurance and retailing. FDI
inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March), according
to the government's Secretariat for Industrial Assistance. This was more than double the total of
US$7.8bn in the previous fiscal year. Between April and September 2007, FDI inflows were
India, the largest democracy and 4th largest economy (in terms of purchase power parity) in the
world is also the tenth most industrialized country in the world. With its consistent growth
performance and abundant high-skilled manpower, India provides enormous opportunities for
investment, both domestic and foreign.

Since the beginning of economic reforms in 1991, major reform initiatives have been taken in the
fields of investment, trade, financial sector, exchange control simplification of procedures,
enactment of competition and amendments in the intellectual property rights laws, etc. India
provides a liberal, attractive, and investor friendly investment climate. Main features of policy on
Foreign Direct Investment are dealt with in this chapter.

10 reasons to Invest in INDIA


 India is the 4th largest economy, in terms of purchasing power parity. Tenth
most industrialized economy.
 Strong macro-economic performance.
 Political stability and broad consensus on reforms. Liberal and transparent
foreign investment regime.
Well developed banking system. Vibrant capital market. National Stock
Exchange third largest, Bombay Stock Exchange fifth largest in terms of number
of trades.
 Strong and independent judicial system.
 Among the highest rates of returns on investment. Profitability of US investments
in India: 19.33% in 2000 (according to US Department of Commerce).


 Strong pool of scientific and technical manpower. Prowess of IITs, IIMs well
255 Fortune 500 companies getting services.
2nd largest English-speaking population.
 Abundant, high-quality, cost-effective, competitive manpower. Over 100,000 IT
professionals added each year.
 India rated as the most attractive destination for offshore business processing
by global consultancy A T Kearney.
IT Industry $14 billion; growing at 50% p.a.
 Exports $12 billion; 2008 exports target: $60 billion, to be 35% of India's total
Job creation: a million direct & 2-3 million indirect


 Prevalence of foreign technology licensing - Rank 1 in the world.

 Availability of scientist and engineers - Rank 2.
 Quality of management schools - Rank 9.
Firm level innovation - Rank 12.
Firm level technology absorption - Rank 16.
 Company spending on R&D - Rank 32. (Source: Global Competitiveness
Report, 2003)
 India amongst the leading entrepreneurial hotbeds globally. (Red Herring
clubs India with Israel


 India among world's fastest growing economies.
(Graph on top left shows Indian GDP growth since 1996-97).
 Average GDP (gross domestic product) growth of 5.4% during the 9th Five-Year
Plan (1997-2002).
 Exports registered growth of over 19% in 2002-03.
 Foreign exchange reserves at an all-time high of over $90 billion.
 Increase in forex during the fiscal year in 2002-03: $20 billion.
 India's economic growth is sustained.
The nation's GDP is expected to grow by over 7.0 % this year.
Under the Industries (Development & Regulation) Act, 1951, industrial license is
needed only for items:
 Falling under the list of compulsory licensing. Reserved for small-scale sector. If
location attracts restriction.
All industries exempt from industrial licensing required to file an Industrial
Entrepreneur Memorandum.
No approval is required; Only notification need.
Industries retained under compulsory licensing under the Industrial (D&R) Act,
 Distillation and brewing of alcoholic drinks.
 Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
 Electronic aerospace and defence equipment.
 Industrial explosives; Hazardous chemicals.


 Setting up of the Competition Commission; Amendments to Companies Act,
Fiscal Responsibilities, and Securitization Act for creditors' security.
 Board for Industrial & Financial Reconstruction to be repealed.
Computerization of Customs interface.
 Stable tax regime. Only 3 rates of indirect tax. Trade facilitation measures
 Foreign Exchange Management Act, 1999 provides a liberal regime; forex
procedures eased.
 Stocks can be sold on the without prior approval.
 Profits, dividends and capital investment can be repatriated.
 Royalties can be paid by wholly owned arms to parent companies.


 Trade policy liberalized. Most items on Open General License.
 Policies fully compatible with WTO.
 Functioning of the Director General Foreign Trade (DGFT) computerized:
All 33 locations are Web-enabled.
70% of the total transactions of exporters/importers are Web-enabled.
 Transaction time has reduced to just 6 hours.
 On-line banking fully integrated.


FDI under ‘Automatic Route,’ except in areas:
 Attracting compulsory licensing; or for acquisition of shares in an existing
 Sectors not open to FDI. (Gambling, lottery, et cetera.)
 Investor can bring automatic route cases for Foreign Investment Promotion
Board approval.
 Foreign technology collaborations freely allowed under automatic and
government approval routes.

India FDI Outlook

 India rated best destination for outsourcing and 6th most attractive destination
for FDI, according to AT Kearney.
 Global competitive report ranks India at first place in terms of prevalence of
foreign technology licensing.
 Among top 10 tourist destinations. Major destination for foreign venture capital
funds. Pie chart, left bottom, shows country-wise FDI inflows.


$12 billion Highways Development Programme. Over 13,000 Kms of Highways
being developed.
The Electricity Act, 2003 in place to facilitate reforms in power sector. Permits
trading in electricity, captive generation freed from prior approval.
 Upgradation of airports at New Delhi and Mumbai.
 ‘Sagar Mala,’ a major programme aimed at developing ports and shipping
sector at an estimated investment of $22 billion.
 Major advances in telecommunications sector. Bandwidths of terabit
available. Sharp decline in telecommunications costs.
 Foreign Investment Implementation Authority helps solve foreign investors'
problems. It meets periodically with investors to sort out operational difficulties
and facilitates implementation.
An Empowered Sub-Committee of the National Development Council set up
on creating an investor friendly climate and removing regulatory barriers to
 Modernization of legislations on intellectual property. All IPR Laws are TRIPS
compliant. Intellectual Property Appellate Tribunal functional.
 Simplification and re-engineering of work procedures.
More information on www.ipindia.com


 Roads: Capacity enhancement of highways. 7000 kms of National Highways
being offered during the current year. Many more opportunities in the States.
Opportunities for equipment manufacturers. technical support.
 Urban Infrastructure: Development of townships for the rapidly growing,
increasingly affluent urban middle class. City level infrastructure. roads, bridges,
IT Parks, sanitation and water supply, etc. Consultancy in urban planning.
 Ports: Government of India's initiative of developing ports – ‘Sagar Mala' with
an investment of $22 billion. Development of Ports. Shipping. Up gradation and
operation of cruise terminal. Operation of Dry Port at Mumbai.
 Power: Addition of 100,000 MW required over the next 10 years. Installed
capacity 106,000 MW. Hydro-electric initiative to develop 50,000 MW. Detailed
project reports to be prepared to facilitate private investment.
 Telecommunications: Cellular phones increasing @ 1.5 million every month. To
increase by 20 million this year. Figure to rise to 100 million in the next 3-4 years.
Telephone connections to rise to 75 million by 2005 and 175 million by 2010.
Investment Opportunities. Setting up manufacturing base. Value-added

A number of studies in the recent past have highlighted the growing attractiveness of India as an
investment destination. According to the study ‘Dreaming with BRICS’ by Goldman Sachs,
Indian economy is expected to continue growing at the rate of 5% or more till 2050. Some of
these conclusions are listed below:
􀂃 2nd most attractive destination – A. T. KEARNEY Business Confidence Index, 2005
􀂃 2nd most attractive investment destination among Transnational Corporations – UNCTAD’s
‘World Investment Report, 2005’
􀂃 Most attractive location for "offshoring" of services activities - A.T. Kearney Global Services
Location Index 2005.

India has among the most liberal and transparent policies on FDI among the emerging
economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except
the following which require prior approval of the Government:
i. Manufacture of Cigars & Cigarettes of tobacco and manufactured tobacco substitutes;
ii. Manufacture of Electronic aerospace and defence equipments: all types
iii. Manufacture of items exclusively reserved for Small Scale Sector with more than 24% FDI;
iv. Proposals in which the foreign collaborator has an existing financial / technical collaboration
in India in the ‘same’ field [Refer Press Note No.1 (2005 series)];
v. All proposals falling outside notified sectoral policy/caps.

FDI policy is reviewed on continued basis and changes in sectoral policy/sectoral equity cap are
notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of
Industrial Policy & Promotion (DIPP). All Press Notes are available at DIPP website
(www.dipp.gov.in). FDI Policy is also notified by Reserve Bank of India (RBI) under Foreign
Exchange Management Act (FEMA) 1999.

FDI up to 100% is permitted on the automatic route in most sectors. Investments under the
automatic route do not require any prior approval and require only post-entry notification to the
Reserve Bank of India. In limited sectors requiring prior Government approval, proposals are
considered in a time bound and transparent manner. There is no restriction on repatriation of
original investment and returns on investment.
Some of the major sectors where FDI up to 100% is allowed under the Automatic route include
most infrastructure sectors, viz., roads and highways, ports and harbours, power generation
except nuclear power; almost all manufacturing activity except few activities under compulsory
licensing or reserved for exclusive manufacture in small scale sector; and a large number of
The Policy also encourages acquisition of technology by the Indian companies to become globally
competitive. Foreign technology collaborations are also allowed on automatic route within
specified ceilings for payment of royalties. Companies, who have entered into foreign technology
collaboration agreements on automatic route, can make royalty payments without any restriction
on duration. All foreign investments, dividends and profits thereon are fully repatriable.
India’s foreign investment policy since independence has been guided by two important acts
namely foreign exchange regulation act 1973 and Foreign exchange management act 1999 among
other acts and regulations. As we discuss elaborately the various factors of foreign direct
investment it is pertinent to have an overview of these two acts.
The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later
placed permanently in the year 1957. At that time the limited objective of the Act was to regulate
the inflow of foreign capital in the form of branches and concerns with the substantial non-
resident interest, and the the employment of foreigners. The country attained freedom in 1947,
after two centuries of foreign rule and protracted freedom struggle stretched over decades. The
prevailing mood then was one of preserving and consolidating the freedom and not to permit
once again any type of foreign domination, political or economic. Initial approach on foreign
capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the
need to regulate, in the national interest, the scope and manner of foreign capital and control (as
per the Industrial Policy Statement 48) arose from the past association of foreign capital and
control with foreign domination of the economy of the country."
However after initiation of a process of rapid industrialization of the country, the need to
conserve foreign exchange was keenly felt. Exports were not picking up and imports were
surging, putting the country to severe balance of trade and balance of payment crisis. This in trn
led to the need to tap the donors or Foreign Aid Givers.
This background induced the Government of India to re-focus the FERA act with the main aim
of conservation of foreign exchange rather than regulation of entry of foreign capital. The
Foreign Exchange Regulation Act, 1973, (hereinafter referred to as FERA) was drafted with the
object of introducing the changes felt necessary for the effective implementation of the
Government policy and removing the difficulties faced in the working of the previous enactment.
FERA is crisis-driven regulation and naturally it contained several draconian provisions. Any
offence under FERA was a criminal offence liable for imprisonment.
However in the early Nineties due to the major changes in Indian economy and liberalization of
industrial and trade policies, consistent with the fast changing international economic and trade
relations the need for a more conducive climate for increased inflow of foreign investment and
capital in the country to accelerate industrial growth and promotion of trade (especially exports)
was felt. In order to remove the special restrictions in respect of companies registered in India
and to simplify the regulations in regard to foreign investment to attract better flow of foreign
capital and investment was paramount. The Amending Act 29 of 1993 was enacted in order to
remove unnecessary restrictions and simplify procedure. Thereby certain provisions dealing with
emergencies of different kinds, which were no longer relevant, were removed for improving the
climate for investment in India.
As the crisis of foreign exchange melted once for all and the country came to be endowed with
sizeable reserves of foreign exchange, the basic aim of foreign exchange policy shifted from one
of control and conservation to that of effective management, to facilitate external trade/payment
and promote the orderly development and maintenance of the forex market in India. The Act was
thoroughly revised and replaced by the by the Foreign Exchange Management Act, 1999. The
latter has dropped many of the stringent provisions of the older Act, in the area of transactions
involving foreign exchange. The FEMA 1999 took effect from June 1, 2000.
To investigate due adherence to the provisions of the Act by the market participants, the Central
Govt. have established the Directorate of Enforcement with a Director and other officers as
officers of the Enforcement. This Act extends to the whole of India and will also apply to all
branches, offices and agencies outside India owned or controlled by a person resident in India. It
will also be applicable to any contravention committed outside India by any person to whom this
Act is applicable.
The ministry of Finance, ministry of corporate affairs and the ministry of commerce and
industries are the most important ministries which with the help of Reserve bank of India look
after the foreign direct investment operations in the country. These ministries have an elaborate
set of institutions and agencies to facilitate the flow of foreign direct investment into the country
and remove the procedural bottlenecks if any that would take place in the promotion of foreign
direct investment.
SIA has been set up by the Government of India in the Department of Industrial Policy and
Promotion in the Ministry of Commerce and Industry to provide a single window for
Entrepreneurial assistance, investor facilitation, receiving and processing all applications which
require Government approval, conveying Government decisions on applications filed, assisting
entrepreneurs and investors in setting up projects, (including liaison with other organizations and
State Governments) and in monitoring implementation of projects. It also notifies all
Government Policy relating to investment and technology, and collects and publishes monthly
production data for 209 select industry groups.


The FIPB is the competent body to consider and recommend Foreign Direct Investment
proposals, which do not come into the country through the automatic route. The board has been
transferred to Department of economic affairs in the Ministry of Finance from the Ministry of
commerce and industries. The functions of the board are:

 to ensure expeditious clearance of the proposals for foreign investment;

 to review periodically the implementation of the proposals cleared by the Board;
 to review, on a continuous basis, the general and sectoral policy regimes relating to FDI
and in consultation with the Administrative Ministries and other concerned agencies,
evolve a set of transparent guidelines for facilitating foreign investment in various
 to undertake investment promotion activities including establishment of contact with and
inviting selected international companies to invest in India in the appropriate projects;
 to interact with the Industry Association/Bodies and other concerned government and
non-government agencies on relevant issues in order to facilitate increased inflow of FDI;
 to identify sectors into which investment may be sought keeping in view the national
priorities and also the specific regions of the world from which investment may be
invited through special efforts;
 to interact with the Foreign Investment Promotion Council (FIPC) being constituted
separately in the Ministry of Industry; and
 To undertake all other activities for promoting and facilitating foreign direct investment,
as considered necessary from time to time. The Board will submit its recommendations to
the Government for suitable action within six weeks.


FIIA was established in the Department of Industrial policy and Promotion, Ministry of
commerce and Industry to facilitate quick translation of Foreign Direct Investment approvals
in implementation, provide a proactive one- stop after care service to foreign investors by
helping them obtain necessary approvals, sort out operational problems and meet with
various government agencies to find solution to problems of the investors. The FIIA may co-
opt other secretaries to the Government of India, Chief Commissioner (NRI), top
functionaries of financial institutions and professional experts from industry and commerce,
as and when necessary. The secretariat for Industrial Assistance (SIA) functions as the
secretariat of the FIIA.


Apart from making the policy framework investor friendly and

Transparent, promotional measures are also taken to attract Foreign Direct
Investment into the country. The Government has constituted a Foreign
Investment Promotion Council (FIPC) in the Department of Industrial
Policy and Promotion, Ministry of Commerce and Industry. This comprises
of professionals from industry and trade. It has been set up to have a more
target oriented approach toward Foreign Direct Investment promotion. The
basic functions of the Council are to identify the sectors/projects within
the country requiring Foreign Direct Investment and target specific regions/
countries of the world from where FDI can be brought in through special efforts.



Consequent upon the Department of Industrial Policy and Promotion having assumed a
promotional role as against the regulatory one prior to the process of liberalization initiated in the
year 1991, an Investment Promotion and Infrastructure Development Cell was created in 1996 to
give further impetus to facilitation and monitoring of investment
as well as for better coordination of infrastructural requirements of industry. The activities
handled by the Cell relates to organization of “Destination India”
events in foreign countries in collaboration with FICCI, dissemination of information on
investment climate in India through publications, promotional films and CD-ROMS.
Investment facilitation and coordination of progress made in infrastructure projects, promotion of
private investment including foreign investment, compilation of sectoral policy, strategies and
guidelines in the infrastructure sector are also the responsibilities assigned to this Cell.
Processing and approval of proposals pertaining to setting up of Industrial Parks and Industrial
Model Towns is also undertaken by this Cell.


The Entrepreneurial Assistance Unit functioning under the Secretariat for Industrial
Assistance, Department of Industrial Policy and Promotion provides assistance to entrepreneurs
on various subjects concerning investment decisions. The unit receives all papers/applications
related to industrial approvals and immediately issues a computerised acknowledgement, which
also has an identity/reference number. All correspondence with the SIA should quote this
number. In case of papers filed by post, the acknowledgement will be sent by post. The Unit
extends this facility to all papers/applications relating to IEMs, Industrial Licenses, Foreign
Investment, Foreign Technology Agreements, 100 per cent EOUs, EHTP, STP Schemes, etc.The
Unit also attends to enquiries from entrepreneurs relating to a wide range of subjects concerning
investment decisions. It furnishes clarifications and arranges meetings with nodal officers in
concerned Ministries/Organizations. The Unit also provides information regarding the current
status of applications filled for various industrial approvals.



The Investment commission was set up in 2004 with a view to make the environment in India
attractive for investors. The commission has the broad authority of the government to engage,
discuss with and invest in India. The recommendations of the commission are to be processed in
the Ministry of finance and will be put up to the competent authority for approval. All policy
decisions emerging from the recommendations of the Commission would be put up to Cabinet
Committee On Economic Affairs for approval.

The commission studied 25 key sectors spanning Infrastructure, Manufacturing, Services,

Natural Resources and the Knowledge Economy. These sectors are significant and would require
an aggregate investment of US $ 550 billion over the next five years.

The commission has recommended a need to identify a few National Thrust Areas where all
impediments for growth are removed, and where appropriate incentives are provided, to
encourage investment. The Thrust Areas could include:

1 Tourism
2 Power
3 Textiles
4 Agro-processing


Major functions of the NRI Unit which is a part of the Investment Division are as under:

(a)Euro-equity/foreign currency convertible bonds policy.

(b)Foreign Institutional Investors Portfolio Investment Policy.
(c)Investment policy for Non-Resident Indian.
(d)Policy governing opening up of branch/liaison/project office by the foreign companies
and coordination in respect of individual proposals referred to Government by RBI
Matters related to Indian Investment Centre, an autonomous body under the Ministry of


The government of India has recently undertaken a comprehensive review of the FDI policy
and associated procedures. As a result, a number of rationalization measures like dispensing
with the need of multiple approvals from Government and/or regulatory agencies that exist in
certain sectors, extending the automatic route to more sectors, and allowing FDI in new

As per the extant policy, FDI up to 100% is allowed, under the automatic route in most
sectors/ activities. FDI under the automatic route does not requires prior approval either by
the government or the reserve bank of India. Investors are only required to notify the
concerned Regional office of RBI within 30 days of issue of shares to foreign investors.

Under the Government approval route, applications for FDI proposals, other than by Non-
Resident Indians, and proposals for FDI in “Single Brand” product retailing, are received in
the Department of Economic Affairs, Ministry of Finance. Proposals for FDI in “Single
Brand” product retailing and the NRI’S are received in the Department of Industrial policy
and Promotion, Ministry of Commerce and Industry.

Foreign investments in equity capital of an Indian company under the Portfolio Investment
Scheme are not within the ambit of FDI policy and are government by separate regulations of
RBI/ Securities and Exchange Board of India (SEBI).

At present FDI is prohibited in the following sectors:

1- Retail trading (except single brand product retailing)

2- Atomic energy
3- Lottery business
4- Gambling and betting.
All activities/ sectors would require period government approval in the following
1 where provisions of press note (2005 series) are attracted
2 Where more than 24 percent foreign equity is proposed to be inducted for
manufacture of items reserved for the small scale sector.

FDI is permitted up to 100 percent in the automatic route in most sectors subject to
sectoral rules/ regulations applicable.


1 FDI up to 100% is allowed under the automatic route in all activities/sectors except the
following which will require approval of the following:
2 Activities or items that require an industrial license;
3 Proposals in which the foreign collaborator has a previous/ existing venture/ tie up in
India or allied field.
4 All proposals relating to acquisitions of shares in an existing Indian company by a
foreign/ NRI investor.
5 All proposals falling outside notified sectoral policy/ caps or under sectors in which
FDI is not permitted.


All activities which are not covered under the automatic route according to para 2.1, prior
approval of the Government for FDI shall be compulsory. Areas/ Sectors/ Activities hitherto
not open to FDI investment shall continue to be so unless otherwise decided and notified by
Government. An investor can make an application for prior government approval even when
the proposed activity is under the automatic route.


The Foreign Investment Promotion Board (FIPB) considers approving all proposals for foreign
investment, which requires Government approval. The FIPB also grants composite approvals
involving foreign investment, foreign technical collaboration. For seeking the approval for FDI
other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted
to the department of Economic Affairs (DEA), Ministry of Finance.

Application for proposals requiring prior government approval should be submitted to FIPB in
FC-IL from, plain paper applications carrying all relevant particulars are also accepted, no fee
is charged. The following information should form part of the proposals submitted to FIPB:

1 Whether the applicant has had or has any previous/ existing financial/ technical
collaboration or trade mark agreement in India in the same or allied field for which
approval has been sought; and
2 If so, details thereof and the justification for proposing the new venture/ technical
collaboration (including trademarks).
3 Applications can also be submitted with Indian missions abroad who will forward them
to the department of Economic affairs for further processing.
4 Foreign investment proposals received in the DEA are placed before the Foreign
Investment Promotion Board (FIPB) within 15 days of receipt.

The decision of the government in all the cases is usually conveyed by the DEA within 30

Reserve Bank Of India’s general permission under FEMA, RBI looks after granting of
general permission under the Foreign Exchange Management Act in respect of proposals
approved by the government, Indian companies getting foreign investment approval through
FIPB route do not require any further clearance from RBI for the purpose of receiving inward
remittances and issue of shares to the foreign investors. The companies are, however required to
notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days
of such receipt and to file the required documents with the concerned Regional offices of the RBI
within 30 days after issue to the foreign investors or NRIs.

Besides new companies, automatic route for FDI/NRI investment if also available to
the existing companies proposing to induct foreign equity. For existing companies with an
expansion programme, the additional requirements are as under:

1 The increase in equity level resulting from the expansion of the equity base of the
existing company without the acquisition of existing shares by NRI/forign investors
2 The money to be remitted should be in foreign currency and
3 Proposed expansion programme should be in the sectors under the automatic route.
Otherwise, the proposal would need Government approval through the FIPB. For this a
board Resolution of the existing Indian company must suppost the proposal.

For companies already existing without an expansion programme, the additional requirements
for eligibility for automatic approval are:

That they are engaged in the industries under automatic route.

The increase in equity level must be from expansion of the equity base and the foreign equity
must be in foreign currency.

The earlier SEBI regulation that was applicable to public limited companies, that shares allotted
on preferential basis shall not be transferable in any manner for a period of 5 years from the date
of their allotment has now been modified to the extent that not more than 20 percent of the entire
contribution brought in by the promoter cumulatively in public or preferential issues shall be
locked in. equity participation by international financial institutions such as ADB, IFC, CDC,
DEG etc in the domestic companies is permitted through automatic route subject to SEBI/RBI
regulations and sector specific cap on FDI.



An Indian corporate can raise foreign currency resources abroad through the issue of American
Depository Receipts (ADRs) or Global Depository Receipts (GDRs) by issuing its Rupee
denominated shares to a person resident outside India being a depository for the purpose of
issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs),
subject to the conditions that:

A) The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,
1993 and guidelines issued by the Central Government there under from time to time.

B) The Indian company issuing such shares has an approval from the Ministry of Finance,
Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in
terms of the relevant scheme in force or notification issued by the Ministry of Finance, and

C) Is not otherwise ineligible to issue shares to persons resident outside India in terms of these

There is no limit up to which an Indian company can raise ADRs/GDRs. However, the Indian
company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on
investment in real estate and stock markets.
The FCCB issue proceeds need to conform to external commercial borrowing end use
requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate

Regulation 4 of Schedule-I of FEMA Notification No. 20 deal with the issue of ADR/GDR by an
Indian company.

1.17 A company engaged in the manufacture of items covered under Automatic route, whose
direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the
equity limits under the automatic route, or which is implementing a project falling under
Government approval route, would need to obtain prior Government clearance through FIPB
before seeking final approval from the Ministry of Finance.


FCCBs are issued in accordance with the [Scheme for issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, and
subscribed by a non-resident in foreign currency and convertible into ordinary shares of the
issuing company in any manner, either in whole, or in part, on the basis of any equity related
warrants attached to debt instruments;

The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is as

A) An issuing company desirous of raising foreign funds by issuing Foreign Currency

Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt.
i. Can issue FCCBs up to US$50 Million under the Automatic route,

ii. From US$50 –100 Million, the companies have to take RBI approval,

iii. From US$100 Million and above, prior permission of the Department of Economic Affairs is


Foreign investment through preference shares is:

• treated as Foreign Direct equity for the purposes of sectoral caps on foreign equity, where such
caps are prescribed, provided they carry a conversion option. Preference shares structured
without such conversion option fall outside the foreign direct equity cap.

• considered as part of the share capital and fall outside the External Commercial Borrowing
(ECB) guidelines/cap.

The route, whether Automatic or Government approval depends upon the activity / sector of the

The Duration of conversion shall be as per the maximum limit prescribed under the Companies
Act or what has been agreed to in the shareholders agreement, whichever is less.

The dividend rate would not exceed the limit prescribed by the Ministry of Finance.

Issue of preference shares should conform to the guidelines prescribed by the SEBI and
RBI and other statutory requirements.


Industrial licensing policy:

Industrial Licenses are regulated under the Industries (Development & Regulation) Act, 1951.
With progressive liberalization and deregulation of the economy the requirement of industrial
licensing have been substantially reduced. At present industrial license for manufacturing is
required only for the following:
i. Industries retained under compulsory licensing,
ii. Manufacture of items reserved for small scale sector by non-SSI units; and
iii. When the proposed location attracts locational restriction.
Industries Requiring Compulsory Licensing:

The following industries require compulsory industrial license under I (D&R) Act / appropriate

i. Distillation and brewing of alcoholic drinks.

ii. Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

iii. Electronic Aerospace and defence equipment: all types;

iv. Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and

v. Hazardous chemicals;
a. Hydrocyanic acid and its derivatives
b. Phosgene and its derivatives
c. Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified (example: Methyl

Small-Scale Sector:

An industrial undertaking is defined as a small-scale unit if the capital investment in plant and
machinery does not exceed Rs 10 million.
Small-scale units can get registered with the Directorate of Industries/District Industries Centre
of the State Government. Such units can manufacture any item, and are also free from locational
The Government has reserved certain items for exclusive manufacture in the small-scale sector.
(List available at www.dipp.gov.in).

Manufacture of items reserved for small-scale sector:

Non small-scale units can manufacture items reserved for the small-scale sector only after
obtaining an industrial license. In such cases, the non-small scale unit is required to undertake an
obligation to export 50 per cent of the production of SSI reserved items.

Locational Restrictions:

Industrial undertakings are free to select the location of their projects. Industrial License is
required if the proposed location is within 25 KM of the Standard Urban Area limits of 23 cities
having population of 1 million as per 1991 census. These cities are Urban area limits of Greater
Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Bangalore, Ahmedabad, Pune, Kanpur, Nagpur,
Lucknow, Surat, Jaipur, Kochi, Coimbatore, Vadodara, Indore, Patna, Madurai, Bhopal,
Visakhapatnam, Varanasi and Municipal Corporation limits of Ludhiana.
The Locational restriction does not apply:

i) If the unit were to be located in an area designated as an ‘’industrial area’’ before the 25th
July, 1991.

ii) In the case of Electronics, Computer software and Printing and any other industry, this may be
notified in future as “non polluting industry”.
The location of industrial units is subject to applicable local zoning and land use regulations and
environmental regulations.

Procedure for obtaining Industrial License:

Industrial License is granted by the Secretariat for Industrial Assistance (SIA) on the
recommendation of the Licensing Committee.
Application in the prescribed form. (Form FC-IL) accompanied with a crossed demand draft of
Rs.2500/- may be submitted to the PR&C section in SIA.
Decisions are usually taken within 4-6 weeks of filing the application...

Policy for Industries exempt from licensing - IEM

Industrial undertakings exempt from industrial license are only required to file an Industrial
Entrepreneur Memoranda (IEM) in Part ‘A’, in the prescribed format (Form IEM).

Procedure for IEM:

The Application in the prescribed form. (Form IEM) can be filed with the PR&C section in SIA
either in person or by post. The IEM should be submitted along with a crossed demand draft of
Rs.1000/- for up to 10 items proposed to be manufactured For more than 10 items, an additional
fee of Rs. 250 for up to 10 additional items needs to be paid.
On filing the IEM, an acknowledgement containing the SIA Registration Number, for future
reference, is issued. In case IEM is sent by post, the acknowledgement is sent by post & no
further approval is required.

An IEM would stand cancelled if the proposal requires compulsory license.

Upon commencement of commercial production, Industrial undertakings need to file information
in Part ‘B’ of the IEM to PR&C Section in SIA. No fee is to be paid for filing Part B.

All industrial undertakings whether or not exempt from compulsory industrial licensing, are
statutorily required to submit monthly production return in the prescribed proforma every month.
This should reach the Industrial Statistics Unit (ISU) of the Department positively by the 10th of
the following month.
Note: FC-IL and IEM forms are available in the Public Relation and Complaint Section (PR&C)
of the SIA, all outlets dealing in Government Publications, Indian Embassies, and can be
downloaded from the web site http://www.dipp.gov.in.

Carry on Business (COB) License:

Small- scale units by virtue of their natural growth may exceed the investment limit prescribed
for small-scale units. In such cases these units need to obtain a Carry-on-Business (COB)
License based on the best production in the preceding three years. No export obligation is fixed
on the capacity for which the COB license is granted.
The application for COB licence should be submitted in revised form “EE”, which can be
downloaded from the web site http://www.dipp.gov.in along with a crossed demand draft of

However, on further expansion of its capacity beyond the capacity included in

COB license, the unit would need to obtain an industrial license.

Payment of prescribed fee:

The fee prescribed for various applications, licenses are to be paid through crossed demand draft
drawn in favor of the Pay & Accounts Officer, Department of Industrial Policy & Promotion,
Ministry of Commerce & Industry, payable at New Delhi.

Environmental Clearances:

Entrepreneurs are required to obtain Statutory clearances relating to Pollution Control and
Environment as may be necessary, for setting up an industrial project for 31 categories of
industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued
by the Ministry of Environment & Forests under The Environment (Protection) Act, 1986. This
list includes petrochemical complexes, petroleum refineries, cement, thermal power plants, bulk
drugs, fertilizers, dyes, paper, etc.
However, if investment in the project is less than Rs. 1 billion, such Environmental clearance is
not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and
asbestos products, integrated paint complexes, mining projects, tourism projects of certain
parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating
Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range,
coastal areas, Doon valley, Dahanu, etc.) are guided by separate guidelines issued by the
Ministry of Environment and Forests.
Details can be obtained at the website of Ministry of Environment and Forests
(http://envfor.nic.in ).


General Policy:

For promoting technological capability and competitiveness of the Indian industry, acquisition of
foreign technology is encouraged through foreign technology collaboration agreements.
Induction of know-how through such collaborations is permitted either through automatic route
or with prior Government approval.

Scope of Technology Collaboration:

The terms of payment under foreign technology collaboration, which are eligible for approval
through the automatic route and by the Government approval route, includes technical know how
fees, payment for design and drawing, payment for engineering service and royalty.

Payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing
of indigenous raw material, products, and indigenously developed technology in foreign
countries are governed by separate RBI procedures and rules pertaining to current account
transactions and are not covered by the foreign technology collaboration approval. For details
please refer to the website of the RBI.

Automatic Route:

Payments for foreign technology collaboration by Indian companies are allowed under the
automatic route subject to the following limits:

(i) The lump sum payments not exceeding US$2 million;

(ii) Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports,
without any restriction on the duration of the royalty payments. The royalty limits are net of taxes
and are calculated according to standard conditions.[Press Note No.19 (1998 series) and Press
Note No. 2 (2003 series)].

The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive
of excise duties, minus the cost of the standard bought-out components and the landed cost of
imported components, irrespective of the source of procurement, including ocean freight,
insurance, custom duties, etc.

Use of Trademarks and Brand name:

Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic
route for use of trademarks and brand name of the foreign collaborator without technology transfer.
Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less
agents’/dealers’ commission, transport cost, including ocean freight, insurance, duties, taxes and
other charges, and cost of raw materials, parts and components imported from the foreign licensor
or its subsidiary/affiliated company(Press Note No.1 of 2002).

In case of technology transfer, payment of royalty includes the payment of royalty for use of trade
mark and brand name of the foreign collaborator.

Procedure for Automatic Route:

Authorized Dealers (ADs) appointed by the RBI allow remittances for royalty, payment of lump-
sum fee and remittance for use of Trade mark /Franchise in

India within the limits prescribed under the automatic route.

RBI’s prior approval is required for remittance towards purchase of trade mark/franchise.

Government Approval – Project Approval Board (PAB):

Royalty payment in the following cases requires prior Govt. approval (through PAB when only
technical collaboration is proposed and FIPB where both financial & technical collaboration are

Sectors/activities which are not on the automatic route for FDI.

Procedure for Government Approval:

Proposals for foreign technology collaboration not covered under the automatic route are
considered by the Project Approval Board (PAB) in the Department of Industrial Policy and
Promotion. Application in such cases should be submitted in Form FC-IL to the Secretariat for
Industrial Assistance. Proposals where both financial & technical collaboration are proposed,
application is to be submitted to FIPB. No fee is payable.


Entry Options:

A foreign company planning to set up business operations in India has the following options:

As an Incorporated Entity

i) By incorporating a company under the Companies Act,1956 through

i. Joint Ventures; or

ii. Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of
the investor, subject to any equity caps prescribed in respect of the area of activities under the
Foreign Direct Investment (FDI) policy.

As an Unincorporated Entity

ii) As a foreign Company through

i. Liaison Office/Representative Office

ii. Project Office

iii. Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management
(Establishment in India of Branch Office of other place of business) Regulations, 2000.

Incorporation of Company:

For registration and incorporation, an application has to be filed with Registrar of Companies
(ROC). Once a company has been duly registered and incorporatedas an Indian company, it is
subject to Indian laws and regulations as applicable toother domestic Indian companies.

For details please visit the website of Ministry of Company Affairs athttp://dca.nic.in

Liaison Office/Representative Office:

The role of liaison office is limited to collecting information about possible market
opportunities and providing information about the company and its products to prospective
Indian customers. It can promote export/import from/to India and also facilitate
technical/financial collaboration between parent company andcompanies in India. Liaison office
can not undertake any commercial activitydirectly or indirectly and can not, therefore, earn any
income in India. All expenses of Liasion offices have to be met by inward remittances. Approval
for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

Project Office:

Foreign Companies planning to execute specific projects in India can set up temporary
project/site offices in India. RBI has now granted general permission to foreign entities to
establish Project Offices subject to specified conditions. Such offices can not undertake or
carry on any activity other than the activity relating and incidental to execution of the project.
Project Offices may remit outside India the surplus of the project, after meeting the tax
liabilities, on its completion.
Branch Office:

Foreign companies engaged in manufacturing and trading activitiesabroad are allowed to

set up Branch Offices in India for t he following purposes:

a. Export/Import of goods

b. Rendering professional or consultancy services

c. Carrying out research work, in which the parent company is engaged.

d. Promoting technical or financial collaborations between Indian companies and parent or

overseas group company.

e. Representing the parent company in India and acting as buying/selling agents in India.

f. Rendering services in Information Technology and development ofsoftware in India.

g. Rendering technical support to the products supplied by the parent/ groupcompanies.

h. Foreign airline/shipping company.

Branch Offices established with the approval of RBI may remit outside India profit of the
branch, net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up
branch offices is granted by the Reserve Bank of India (RBI).

Branch Office on “Stand Alone Basis” in SEZ:

Such Branch Offices would be isolated and restricted to Special Economic Zone (SEZ) alone and
no business activity/transaction will be allowed outside the SEZs in India, which include
branches/subsidiaries of its parent office in India.

No approval shall be necessary from RBI for a company to establish a branch/unitin SEZs to
undertake manufacturing and service activities subject to the following conditions:

a. Such units are functioning in those sectors where 100% FDI is permitted,

b. Such units comply with part XI of the Company’s Act (Section 592 to 602),

c. Such units function on a stand-alone basis,

d. In the event of winding up of business and for remittance of winding-up proceeds, the branch
shall approach an authorized dealer in foreign exchange with the documents required as per

Application for setting up Liaison Office/ Project Office/ Branch Office may besubmitted to
Chief General Manager, Exchange Control Department(ForeignInvestment Division), RBI
Central Office, Mumbai-400001, in form FNC 1 (available at RBI website at www.rbi.org.in )


Foreign Exchange Management Act:

The Reserve Bank of India’s Exchange Control Department, administers Foreign Exchange
Management Act, 1999, (FEMA).

Repatriation of Investment Capital and Profits Earned in India:

(i) All foreign investments are freely repatriable, subject to sectoral policies and except for cases
where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on
foreign investments can be remitted freely through an Authorized Dealer.

(ii) Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate
through a bank the sale proceeds if they hold the shares on repatriation basis and if they have
necessary NOC/tax clearance certificate issued by Income Tax authorities

(iii) For sale of shares through private arrangements, Regional offices of RBI grant permission
for recognized units of foreign equity in Indian company in terms of guidelines indicated in
Regulation 10.B of Notification No. FEMA.20/2000 RB dated May ‘2000. The sale price of
shares on recognized units is to be determined in accordance with the guidelines prescribed
under Regulation 10B (2) of the above Notification.

(iv) Profits, dividends, etc.,(which are remittances classified as current account transactions) can
be freely repatriated.
Current Account Transactions

Current account transactions are regulated under the Foreign Exchange Management (Current
Account Transactions) Rules 2000. { No. G.S.R. 381(E),dated 3.5.2000] . Prior approval of the
RBI is required for acquiring foreign currency above specified limits for the following purposes:

a. Holiday travel over US$10,000 p.a.

b. Gift / donation over US$5,000 / US$10,000 per beneficiary p.a.

c. Business travel over US$25,000 per person

d. Foreign studies as per estimate of institution or US$100,000 per academic year

e. Architectural / consultancy services procured from abroad over US$1,000,000 per project

f. Remittance for purchase of Trade Mark / Franchise

g. Reimbursement of pre incorporation expenses over US$100,000

h. Remittances exceeding US$25,000 p.a. (over and above ceilings prescribed for other
remittances mentioned above) by a resident individual for any current account or capital account

The above figures are for the purpose of general guidance of the investors. It is suggested that
investors must reconfirm, the permissible limits before undertaking transactions.

Acquisition of Immovable Property By Non-Resident:

A person resident outside India, who has been permitted by Reserve Bank of India to establish a
branch, or office, or place of business in India (excluding a Liaison Office), has general
permission of Reserve Bank of India to acquire immovable property in India, which is necessary
for, or incidental to, the activity. However, in such cases a declaration, in prescribed form (IPI),
is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable

Foreign nationals of non-Indian origin who have acquired immovable property in India with the
specific approval of the Reserve Bank of India can not transfer such property without prior
permission from the Reserve Bank of India. Please refer to the Foreign Exchange Management
(Acquisition and transfer of Immovable Property in India) Regulations’ 2000 [Notification
No.FEMA.21/2000-RB dated May 3, 2000].
Acquisition of Immovable Property By NRI

An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable
property in India other than agricultural/ plantation /farm house. He may transfer any immovable
property other than agricultural or plantation property or farm house to a person resident outside
India who is a citizen of India or to a Person of Indian Origin resident outside India or a person
resident in India.


Portfolio Investment Scheme(PIS):

Foreign Institutional Investors (FIIs) registered with SEBI and Non-Resident Indians are
eligible to purchase shares and convertible debentures under the Portfolio Investment scheme.
The FII should apply to the designated AD for opening a foreign currency account and/or a Non
Resident Rupee Account.

Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of
FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in the entire process
of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate.
RBI approval is also required under FEMA to enable an FII to buy/sell securities on Stock
Exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch.

Foreign Institutional Investors (FII):

FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts
as Nominee Companies, Incorporated/Institutional Portfolio Managers or their Power of
Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable

Policy On FII Investments

Main features of the policy on investment by FII are:

a. FIIs are required to allocate their investment between equity and debt instruments in the ratio
of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it
can make its entire investment in debt instruments.

b. FIIs can buy/sell securities on Stock Exchanges. They can also invest in listed and unlisted
securities outside Stock Exchanges where the price has been approved by RBI.

c. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian

d. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up
capital of an Indian Company.

e. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory
Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a
Special Resolution to that effect by its General Body in terms of Press Release dated Sept.20,
2001 and FEMA Notification No.45 dated Sept. 20, 2001.

No permission from RBI is needed so long as the FIIs purchase and sell on recognized stock
exchange. All non-stock exchange sales/purchases require RBI permission.

Portfolio Investments by NRIs

NRIs/PIOs are permitted to purchase/sell shares/convertible debentures of Indian companies on

Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply
to a designated branch of a Bank which deals in Portfolio Investment. All the sale/purchase
transaction is routed through the designated branch.

An NRI can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs
taken together cannot purchase more than 10% of the paid up value of the company. This limit
can be increased by the Indian company to 24% by passing a General Body resolution.
Investment can be made both on repatriation basis or non-repatriation basis the sale of shares
will be subject to payment of applicable taxes.
Details regarding portfolio investment scheme available at the websites of RBI (www.rbi.org.in)
and SEBI (www.sebi.gov.in).
Company’s Act 1956:
Incorporation of a company in India is governed by the Companies Act, 1956. Part II of the
Act deal with the incorporation of a company and matters related to.
Private Company:
Private company means a company which has a minimum paid-up capital of Rs,1,00,000/- or
such higher paid-up capital as may be prescribed, and by its articles,
(a) restricts the rights to transfer its shares, if any;
(b) Limits the number of its members to fifty, not including
i) Persons who are in the employment of the company; and
ii) persons who, having been formerly in the employment of the company, were members of
the company while in that employment have continued to be members after the employment
ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the
(d) Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
Public Company:
A public company is a company which is not a private company and has a minimum paid-up
capital of Rs,5,00,000/-or such higher paid-up capital, as may be prescribed.
Formation of a Private Limited Company:
A private Company can be formed either by
i. incorporation of a new company for doing a new business , or
ii. Conversion of existing business of a sole proprietary concern or partnership firm into a
Name of Company:
The name of a corporation is the symbol of its personal existence. Any suitable name may be
selected for registration subject to the following guidelines:
a. The promoters should select three to four alternative names, quite distinct from each other.
b. The names should include, as far as possible, activity as per the main objects of the proposed
c. The names should not too closely resemble with the name of any other registered company.
d. The official guidelines issued by the Central Government should be followed while selecting
the names. Besides, the names so selected should not violate the provisions of the Emblems
and Names (Prevention of Improper Use) Act, 1950.
e. Apply in form 1-A to the Registrar of Companies having jurisdiction along with a filing fee
of Rs. 500.
Memorandum of Association:
An important step in the formation of a company is to prepare a document called
Memorandum of Association. It is the charter of the company and it contains the basic
conditions on which the company is incorporated.
The Memorandum contains the name, the State in which the registered office is to be situated,
main objects of the company to be pursued by the company on its incorporation and objects
incidental or ancillary to the attainment of the main objects, liability of the members and the
authorized capital of the company. The main purpose of the memorandum is to state the scope
of activities and powers of the company.
Articles of Association:
Articles of Association of the company contain rules, regulation and bye-laws for the general
management of the company. It is compulsory to get the Articles of Associations registered
along with the Memorandum of Association in case of a private company.
The Articles are subordinate to the Memorandum of Association. Therefore, the Articles
should not contain any regulation, which is contrary to provisions of the Memorandum or the
Companies Act. The Articles are binding on the members in relation to the company as well as
on the company in its relation to members.
Registration of Company and Issue of Capital:
After completion of the preliminaries, as enumerated above, the application with necessary
documents are required to be filed with the Registrar of Companies of the State in which the
company is proposed to be incorporated. These include:
a. Memorandum of Association (duly stamped) and a duplicate thereof.
b. Articles of Association (duly stamped) and a duplicate thereof
c. The agreement, if any, which the company proposes to enter into with any individual for
appointments as its managing or whole time director or manager.
d. A copy of the letter of the Registrar of Companies intimating the availability of the proper
e. Documents evidencing payment of prescribed registration and filing fee, i.e. a bank draft or a
treasury challan.
f. Documents evidencing the directorship and situation of Registered Office in Form 32 and
Form 18 respectively and declaration of compliance with requirements of the Companies Act
in Form No.1 and Form 29 for giving consent to act as a Director in case of public company
are also given.
The amount of registration fee payable is regulated with reference to the amount of authorized
capital of the proposed company.
Certificate of Incorporation
Upon compliance with all requirements, the Registrar will register the company and issue a
Certificate of Incorporation of company. It brings the company into existence as a legal entity.
Issue of Share Capital:
After obtaining registration, the company proceeds with its business for which it requires
funds. In case of a private company, the capital is to be raised by way of private arrangements
whereas a Public Ltd. company can raise funds from the public. First of all, the company will
issue shares to the subscribers to its memorandum and other members of the company. The
issued capital must not exceed the authorized capital of the company.
It is necessary for a public limited company to obtain the Certificate of Commencement of
Business before commencing the business.
Policy for Setting up Special Economic Zone (SEZ):
SEZ is a specifically delineated duty free enclave and is deemed to be foreign territory for the
purposes to trade operations and duties and tariffs. Goods and services going into the SEZ area
form DTA are treated as exports and goods coming from the SEZ area into DTA are to be
treated as if these are being imported.
A SEZ may be set up in the Public, Private or Joint Sector or by State government(s).
Proposals as per criteria under appendix 14 II O available at DGFT website
(http://dgft.delhi.nic.in) is considered by Board of Approvals and Department of Commerce
issues the letter of permission.
The applicant should follow the following procedure:
a. Submission of 10 copies of application along with project report to Chief Secretary of the
concerned State.
b. Forwarding of application along with comments by the State government to Board of
Approvals in the Department of Commerce.
c. Issue of letter of permission by Department of Commerce.
Policy for FDI/NRI Investment for setting up SEZ/FTWZ:
100% FDI is permitted under automatic route for setting up Special Economic Zones and Free
Trade Warehousing Zones subject to Special Economic Zones Act, 2005 and the Foreign Trade
Policy. FDI in setting up of SEZs & units in SEZ are exempt from Press Note No. 2 (2005),
governing FDI in Construction Development projects.
Policy for setting up EOUs/Units in SEZ under Automatic Route:
Development Commissioners (DCs) of Special Economic Zones (SEZs) accord automatic
approval to projects where
(a) Activity proposed does not attract compulsory licensing or falls in the services sector
except R&D; Software & IT enabled services;
(b) Location is in conformity with the prescribed parameters;
(c) Units undertake to achieve positive net foreign exchange earning;
An EOU unit may be shifted to SEZ with the approval of DCs provided the EOU unit has
achieved pro-rata obligation under the EOU scheme.
If the Unit is amenable to bonding by customs authorities; conversion of existing Domestic
Tariff Area (DTA) units into EOU is also permitted under automatic route, if the DTA unit
satisfies the parameters in Para 8.1. In case there is an outstanding export commitment under
the EPCG scheme, it will be subsumed in the export performance of the unit. If the unit is
having outstanding export commitment under the Advance Licensing Scheme, it will apply to
ALC for reducing its export commitment in proportion of the quantum of duty free material
actually utilized for production and permitted to carry forward the unutilized material imported
against the Advance License.

Policy for Setting up EOUs/ Units in SEZ under Government Route:

Proposals not covered by the automatic route are forwarded by the Development
Commissioner to the Board of Approval (BoA), Department of Commerce for consideration.
On consideration of the proposal by the Board, the decision would normally be conveyed
within 45 days.
Procedure for Approval:
Applications in the prescribed form for EOUs and units in SEZ should be submitted to the
concerned DCs of the SEZs. The application should be submitted along with a crossed demand
draft of Rs.5000/- drawn in favour of the “the Pay & Accounts Officer, Department of
Commerce, Ministry of Commerce and Industry”, payable at New Delhi.
Application form and detailed procedure may be obtained from the website of Department of
commerce at http://commerce.nic.in . The form is also available at all outlets dealing in
Government publications.
Policy for FDI/ NRI Investment for EOUs/ Units in SEZ:
Details about the type of activities permitted are given in the Foreign Trade Policy issued by
Department of Commerce (web site - http://commerce.nic.in). Proposals not covered under the
automatic route are considered by the FIPB.
Policy under Automatic Route:
The Government notified Industrial Park scheme on 1.4.2002 (available at www.dipp.gov.in)
for setting up Industrial Parks/ Industrial Model Towns. SIA in DIPP accord approval to set up
the Industrial Parks/ Industrial Model Towns, which meet the criteria laid down for approval
under the automatic route within fifteen days.

Approval by Empowered Committee:

Proposals not meeting any or all of the parameters for automatic route require approval of
Empowered Committee set up in the DIPP, Ministry of Commerce & Industry. The decision of
the Committee is usually conveyed within six weeks.
Procedure for Approval and availing 100% Tax Exemption:
Application in the Form-IPS-1, available on this Department’s web site (http://dipp.gov.in),
for obtaining approval for setting up an Industrial Park and for availing 100% tax exemption
available under section 80 IA of the Income Tax Act, should be made to the PR&C Section of
the DIPP. Application for automatic route has to be submitted in duplicate and for non-
automatic approval, in six sets. The application must be accompanied by a fee of Rupees
6,000/- by a demand draft drawn in favor of the Pay and Accounts Officer, DIPP payable at
New Delhi.
Policy for FDI/NRI Investment:
100% FDI is permitted under automatic route for setting up of Industrial Parks/ Industrial
Model Towns. The procedure mentioned in para 1.5 will be applicable for seeking requisite
Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP)
In order to provide impetus to the electronics industry, to enhance its export potential and to
develop an efficient electronic component industry, EHTP and STP schemes offer a package of
incentives and facilities like duty free imports on the lines of the EOU Scheme, deemed
exports benefits and tax holidays.
Automatic Route:
The Directors of STPs in respect of STP proposals; and the Designated Officers in respect of
EHTP proposals accord automatic approval within 2 weeks if:
(a) Items do not attract compulsory licensing;
(b) Location is in conformity with the prescribed parameters;
(c) Units undertake to achieve positive net foreign exchange earning;
Government Approval:
All proposals for setting up of these projects, which do not meet any or all of the parameters
for automatic approval, need to be considered and approved by the Ministry of Information
Technology through the Inter-Ministerial Standing Committee. The decision of the Committee
is usually conveyed within six weeks.
Application, in the prescribed form, should be submitted to the concerned Directors of STPs or
the Designated Officers of EHTPs and to the Ministry of Information Technology for
Government approval. The application should be submitted along with a crossed demand draft
for Rs. 5000/- drawn in favor of the “the Pay & Accounts Offer, Department of Commerce,
Ministry of Commerce & Industry”, payable at New Delhi. The form is available in any outlet
dealing with Government Publications.
Procedure for FDI/NRI Investment:
All proposals for FDI/NRI investment in EHTP/STP Units are eligible for approval under
automatic route subject to parameters listed in Para 1.3. For proposals not covered under
automatic route, the applicant should seek separate approval of the FIPB, as per the procedure
outlined in Para 1.6.


Taxation System in India:

India has a well developed tax structure Income Tax (except tax on agricultural income, which
the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service
Tax are the main taxes levied by the Central Government. Value Added Tax, (Sales Tax where
VAT is yet not in force), Stamp Duty, State Excise, Land Revenue, and Tax on Professions are
the principal taxes levied by the State Governments. Local Bodies are empowered to levy tax
on properties, Octroi and for utilities like water supply, drainage, etc.
Personal Income Tax:
The rates of personal income tax are:
Income range (Rupee) Tax rate(%)

0 -1, 00,000

1, 00,000 -1, 50,000 10

1, 50,000 - 2, 50,000 20

2, 50,000 and above 30

A surcharge of 10% is levied on income exceeding Rs.10, 00,000.

Senior citizens with income up to Rs.1, 85,000 are exempt from Income Tax.

Rates of Withholding Tax:

Current rates for withholding tax for payment to non-residents are:

(i) Interest 20%

(ii)Dividends Dividends paid by domestic companies: Nil

(iii)Royalties 20%

(iv) Technical Services 10%

(v) Any Other Services Individuals: 30% of the income

Companies: 40% of the net income
The above rates are general and in respect of countries with which India does not have a
Double Taxation Avoidance Agreement (DTAA).

Corporate Tax:

Current rates of corporate tax are:

• 30 % in the case of domestic companies and surcharge @ 10% of the tax. Companies
incorporated in India under the applicable law are treated as domestic company for the purpose
of taxation.

• 40% in the case of foreign companies and surcharge @ 2.5% of the tax.

• Education cess is levied @ 2% on the amount of tax and surcharge in all cases.
Special Economic Zones (SEZs)


India offers attractive tax incentives to encourage investments in Special Economic Zones,
priority industries and to promote industrialization of industrially dis-advantageous areas.

Special Economic Zones (SEZs):

‘THE SPECIAL ECONOMIC ZONES ACT, 2005’, notified by the Government of India in June
2005, provides following concessions for the establishment, development and management of
the Special Economic Zones for the promotion of exports. The tax concessions available to
developers of Special Economic Zones and units located in such zones are as follows:

Units which begin to manufacture or produce articles or things or provide any services, on or
after 01-04-2005 are eligible for 15 year tax benefit in relation to export profits, in the following
manner :-

(i) 100 % deduction for 5 years, 50 % deduction for next 5 years, 50 % deduction of the profits
ploughed back into business for the next 5 years.

(ii) 100 % deduction of profits derived by an undertaking / enterprise from the business of
developing an SEZ, notified on or after 1st April, 2005. The deduction is available for 10 out of
15 years beginning from the year in which SEZ has been notified.

(iii) Exemption of capital gains arising on transfer of capital assets in case of shifting of
industrial undertaking from urban area to any Special Economic Zone.

(iv) Minimum Alternate Tax (chargeable @ 7.5 % of the book profit) is not applicable to the
income arising on or after 1st April, 2005 to SEZ units or developers of SEZs.
(v) Exemption of developers of SEZ from dividend distribution tax on dividends to be distributed
by them on or after 1st April, 2005.

(vi) Exemption of interest income received by a non-resident or not ordinarily resident on

deposits made on or after 01-04-2005 with Offshore Banking Units.

(vii) No tax to be deducted by Offshore Banking Units from the interest paid on deposit made by,
or borrowing from, a non-resident or a person not ordinarily resident in India, on or after 01-04-

Capital Gains On Infrastructure Funds:

Income by way of dividend, interest, or long-term capital gain of an infrastructure capital

company or an infrastructure capital fund is 100% tax-exempt. However infrastructure capital
companies are liable to pay minimum alternative tax. Income of Venture Capital Company or
venture capital fund set up to raise funds for investment in a venture capital undertaking is also

Tax Exemptions:

Following tax exemptions are available for priority sectors and incentives to industries located
in special area/regions:

Deduction of 100% of the profit from business of

a. Development or operation and maintenance of ports, airports , roads, highways, bridges, rail
systems, inland waterways, inland ports, water supply projects, water treatment systems,
irrigation projects, sanitation and sewage projects, solid waste management systems..

b. Generation, distribution and transmission of power

c. Development, operation and maintenance of an Industrial Park or SEZ

d. By undertakings set up in certain notified areas or in certain thrust sector industries in the
North-eastern states and Sikkim.

e. By undertakings set up in certain notified areas or in certain thrust sector industries in

Uttaranchal & Himachal Pradesh

f. By undertakings set up in Jammu & Kashmir

g. Derived from export of articles or software by undertakings in FTZ / EHTP / STP

h. Derived from export of articles or software by undertakings in SEZ

i. Derived from export of articles or software by 100% EOU

j. An offshore banking unit situated in a SEZ from business activities with units located in the

k. Derived by undertakings engaged in the business of developing and building housing projects.

l. By undertakings from the business of operating and maintaining Hospital.

m. Derived by an undertaking engaged in the integrated business of handling, storage and

transportation of food grains...

n. Derived by an undertaking engaged in the commercial production or refining of mineral oil

o. Derived by an undertaking from export of woodbased handicraft.

Double Taxation Relief:

India has entered into DTAA with 69 countries including countries like U.S.A., U.K., Japan,
France, Germany, etc. In case of countries with which India has double taxation avoidance
agreements. The Comprehensive DTAA’s, country wise, may please be seen thru website of
Income Tax India at http://incometaxindia.gov.in


With a view to avoid a dispute in respect of assessment of income-tax liability in the case of a
non-resident ( and also specified categories of residents), a Scheme of Advance Ruling was
incorporated in the Income Tax Act. The Authority for Advance ruling (AAR) pronounces
rulings on the applications of the non-resident/residents submitted and such rulings are binding
both on the applicant and the Income-Tax Department. Thus, the applicant can avoid expensive
and time consuming litigation which would have arisen from normal income tax assessment
proceedings. The application in such cases should be addressed to:

The Commissioner of Income-Tax Authority of Advance Rulings,

5th Floor, N.D.M.C. Building,
Yashwant Place, Satya Marg,
New Delhi -110021.



Secretariat for Industrial Assistance (SIA)

Secretariat for Industrial Assistance (SIA) has been set up in the Department of Industrial
Policy & Promotion (DIPP) in the Ministry of Commerce and Industry to provide a single
window for entrepreneurial assistance, investor facilitation, conveying Government decisions on
applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison
with other organisations and State Governments) and in monitoring implementation of projects.
It also notifies all Government policy relating to investment and technology.

Assistance to Entrepreneurs

PR&C Section of the SIA provides assistance to entrepreneurs on various subjects concerning
investment decisions. It receives all papers/ applications related to industrial approvals i.e. IEMs,
Industrial Licenses, Foreign Investment, Foreign Technology Agreements, EHTP, STP Schemes,
etc. and immediately issues a computerized acknowledgement, which also has an
identity/reference number. All correspondence with the SIA should quote this number.
It also provides information regarding the current status of applications filed for various
industrial approvals.

Web Site (http://dipp.gov.in)

DIPP’s website www.dipp.gov.in ensures easy availability of information to the investors about
investment policies and procedures, investment climate, state industrial policies, publications,
notifications and press notes/releases.

The web site contains the following:

􀂃 Manual on Foreign Direct Investment in India - Policy and Procedures (also available in
English/French/German/Spanish/Korean/Japanese/Chinese and Italian language)

􀂃 SIA Newsletter-monthly issues

􀂃 SIA Statistics- monthly issues

􀂃 FDI Statistics

􀂃 Press Notes, Notifications and Press Releases

􀂃 List of SSI reserved items & NIC Codes

􀂃 Industrial Policy Statements

􀂃 Latest Annual Report

􀂃 Information about Intellectual Property Rights

􀂃 Status of SIA applications

􀂃 Important Legislations

􀂃 Information about Attached and Subordinate Offices

􀂃 Profile of selected industrial sectors

􀂃 Link to websites of other Ministries/Departments

􀂃 Link to websites of all States/Union Territories

􀂃 All relevant application forms

National Industrial Classification (NIC) Code:

In all the forms required for various approvals including FDI, description of activities are
required to be given as per the National Industrial Classification of All Economic Activities
(NIC), 1987,

Online Chat And Bulletin Board Services:

DIPP website provides a link this list for the benefit of the users.

The web site has the facility of on line chat between 11AM to 12 Noon & 4.00 to 5.00 P.M.
(Indian Standard Time, GMT+5 ½) on all working days where investors can seek clarification on
any issue relating to FDI Policies and related issues.

The web site also has provision of bulletin board service. If the investor cannot avail the on line
chat facility, he/she can post the question on bulletin board at any time. All efforts are made to
send a reply within 24 hours.

Information about Various Other Clearances and Approvals:

In addition to the approval for bringing FDI in India, other clearances and approvals, such as
registration of company, environment and forest clearance, land acquisition, power and water
connection, etc., may be required for starting a business in India. Details of concerned
Departments/Agencies along with their web site addresses are given in Annex-IV.


Following publications are brought out by DIPP and updated regularly for the guidance of

a. Foreign Direct Investment in India – Policy & Procedure.

b. Investing in India –Flyer

c. Entry Strategies for foreign Investors –Flyer

d. Taxation in India –Flyer

e. Investment Opportunities in infrastructure sectors

. Single Window System in States & Union Territories

g. Compendium of Press notes on FDI policy.

These publications are available through the PR&C of the SIA or Investment Promotion Cell,
DIPP; as also from Indian Missions abroad. These can also be down loaded from the web site
SIA News Letter:
This is a monthly publication on Foreign Direct Investment / NRI Investment / sectoral breaks-
ups / country-wise break-ups, all actual FDI inflows and policy notifications issued during the
month. The monthly publication is uploaded on Department’s website at www.dipp.gov.in.

Annual issues of SIA Newsletter are also published and available on payment from Controller of
Publications, 1, Civil Lines, Delhi - 110 054 or from any outlet dealing in Government
SIA Statistics:

This is also a monthly publication on data relating to Industrial Licences, Foreign Technical
Collaboration, etc., monthly data on industrial production of 209 select industry groups, as well
as policy announcements by Government during the month.

Annual issues of SIA Statistics are available on payment from Controller of Publications, 1 Civil
lines, Delhi - 110 054 or from any outlet dealing in Government publications.


Foreign Investment Implementation Authority (FIIA)

FIIA has been established to facilitate quick implementation of FDI approvals and assist foreign
investors in getting necessary approvals. Fast Track Committees have been set up in 30
Ministries/Departments for regular review of FDI mega projects (with proposed investment of
Rs. 1 billion and above), and resolution of any difficulties. Details of the fast track committees
set up in various ministries is available at http://dipp.gov.in. Investors can approach FIIA through
website http://dipp.gov.in.
Foreign Investment Promotion Board (FIPB)

The Government has set up the FIPB to consider FDI proposals requiring prior Government

The reconstituted FIPB comprises of:

(i) Secretary, Department of Economic Affairs - Chairman

(ii) Secretary, Department of Industrial Policy & Promotion - Member

(iii) Secretary, Department of Commerce - Member

(iv) Secretary (Economic Relations), Ministry of External Affairs - Member

(v) Secretary, Ministry of Overseas Indian Affairs, - Member.

Business Ombudsperson:

To facilitate expeditious redressal of grievances and attend to complaints relating to delays in

grant and implementation of industrial approvals and facilitate their disposal, the Government
has appointed a BUSINESS OMBUDSPERSON in the Ministry of Commerce & Industry.
Additional Secretary & Financial Adviser, Ministry of Commerce and Industry, Udyog Bhavan,
New Delhi-110011 has been nominated to act as Business Ombudsperson(e mail: nc@ub.nic.in).

Grievances Officer-Cum-Joint Secretary:

Grievances and complaints are also received by the Grievances Officer-cum-Joint Secretary,
DIPP, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi-110011, either through
post or through the mail box in the PR&C of the SIA, or at Reception of the Ministry of
Commerce and Industry at Gate No.12, Udyog Bhavan, New Delhi-110011. Such
communications are handled expeditiously and steps are taken to redress the grievance.

Sector Specific Guidelines For Foreign Direct Investment:

S.N Sector/Activity FDI Cap / Entry Other conditions Releva

Equity Route nt
by D/o
1. Airports-
a. Greenfield 100% Automatic Subject to sectoral regulations PN 4 /
projects notified by Ministry of Civil 2006
www.civilaviation.nic. in
b. Existing projects 100% FIPB Subject to sectoral regulations PN 4 /
beyond notified by Ministry of Civil 2006
74%. Aviation www.civilaviation.nic.
2. Air Transport 49%- FDI; Automatic Subject to no direct or indirect .
Services 100%- for participation by foreign airlines.
NRI Government of India Gazette
investment Notification dated 2.11.2004
issued by Ministry of Civil
www.civilaviation.nic. in
3. Alcohol - 100% Automatic Subject to license by PN 4 /
Distillation & appropriate authority 2006
4. Asset 49% FIPB Where
Reconstruction (only FDI) any
Companies individu
s 10%
of the

5. Banking - 74% Automatic Subject to PN 2 / 2004

Private (FDI+FII) guidelines for
sector setting up
subsidiaries of
foreign banks
issued by RBI.
6. Broadcasting
a. FM Radio FDI +FII FIPB Subject to PN 6 / 2005
investment Guidelines
up to 20% notified by
Ministry of
Information &
b. Cable network 49% FIPB Subject to
(FDI+FII) Cable
Network Rules
Notified by
Ministry of
Information &
c. Direct-To-Home 49% FIPB Subject to
(FDI+FII). guidelines
Within this issued by
limit, FDI Ministry of
component Information &
not to exceed Broadcasting
20% www.mib.nic.in

d. Setting up 49% FIPB Subject to Up- PN 1 / 2006

hardware (FDI+FII) linking Policy
facilities notified by
such as up- Ministry of
linking, Information &
HUB, etc Broadcasting
e. Up-linking 26% FIPB Subject to PN 1/ 2006
a News & FDI+FII guidelines issued
Current by Ministry of
Affairs TV Information &
Channel Broadcasting
f. Up-linking 100% FIPB Subject to PN 1 / 2006
a Non- guidelines
issued by
news & Current Affairs TV Channel Ministry of
Information &
7 cigars &cigarettes 100% FIPB Subject to industrial PN 4 / 2006
manufacture. license under the
(Development &
Regulation) Act, 1951
Coal & Lignite 100% Automatic Subject to provisions PN 4 / 2006
mining for captive of Coal Mines
consumption by power (Nationalization) Act,
projects, and iron & 1973
steel, cement www.coal.nic.in
production and other
eligible activities
permitted under the
Coal Mines
(Nationalisation) Act,

Coffee & Rubber processing 100% Automatic PN 4 / 2006

& warehousing
Construction Development 100% Automatic Subject to conditions PN 2
projects, including housing, notified vide Press Note 2 /
commercial premises, (2005 Series) including: 2005
resorts, educational 1 A. minimum &
institutions, recreational capitalization of US$ 10 PN 2
facilities, city and regional million for wholly owned /
level infrastructure, subsidiaries and US$ 5 2006
townships. million for joint venture.
The funds would have to
be brought within six
months of
commencement of
business of the
2 b. Minimum area
to be developed under
each project- in 10
hectares in case of
development of serviced
housing plots and built up
area of 50,000 sq mts. in
case of construction
development project and
any of the above in case
of a combination project.

8. Courier services for 100 FIPB Subject to PN 4 /

carrying packages, parcels % existing laws 2001
and other items which do not and exclusion of
come within the ambit of the activity relating
Indian Post Office Act, 1898. to distribution of
letters, which is
reserved for the
9. Defence production 26% FIPB Subject to PN 4 /
licensing under 2001 &
Industries PN 2 /
(Development & 2002
Regulation) Act,
1951 and
guidelines on
FDI in
production of
arms &

10 Floriculture, Horticulture, 100 Automa PN 4 / 2006

. Development of Seeds, % tic
Animal Husbandry,
Pisciculture, aqua-culture,
cultivation of vegetables,,
mushrooms, under
controlled conditions
under services related to
agro and allied sectors.

11. Hazardous 100% Automatic Subject to industrial PN 4 /

chemicals, viz., license under the 2006
hydrocyanic acid Industries (Development &
and its derivatives; Regulation) Act, 1951 and
phosgene and its other sectoral regulations.
derivatives; and
isocyanates and di-
isocyantes of
12. Industrial 100% Automatic Subject to industrial PN 4 /
explosives- license under Industries 2006
Manufacture (Development &
Regulation) Act, 1951 and
regulations under
Explosives Act, 1898
13. Insurance 26% Automatic Subject to licensing by PN 10 /
the Insurance Regulatory 2000
& Development Authority
14. Investing 49% FIPB Foreign investment in an PN 2 /
companies in investing company will 2000 &
infrastructure / not be counted towards PN 5 /
services sector sectoral cap in 2005
(except telecom infrastructure /services
sector) sector provided the
investment is up to 49%
and the management of
the company is in Indian

15. Mining covering 100% Automatic Subject to Mines & PN 2 /

exploration and Minerals (Development & 2000,
mining of Regulation) Act, 1957 PN 3 /
diamonds & www.mines.nic.in 2005,&
precious stones; Press Note 18 (1998) and PN 4 /
gold, silver and Press Note 1 (2005) are 2006
minerals. not applicable for setting
up 100% owned
subsidiaries in so far as
the mining sector is
concerned subject to a
declaration from the
applicant that he has no
existing joint venture for
the same area and/ or the
particular mineral.

16. Petroleum & Natural Gas sector

a. Other than 100% Automatic Subject to sectoral PN 1
Refining and regulations issued by /
including Ministry of Petroleum & 2004
market study Natural Gas; and &
and in the case of actual PN 4
formulation; trading and marketing /
investment/ of petroleum products, 2006
financing; divestment of 26%
setting up equity in favour of
infrastructure Indian partner/public
for marketing in within 5 years.
Petroleum & www.petroleum.nic.in
Natural Gas
b. Refining 26% in FIPB Subject to Sectoral PN 2
case of (in case of policy /
PSUs PSUs) www.petroleum.nic.in 2000
100% in Automatic
case of (in case of
Private private
companies companies.

17 Print Media-
a. Publishing of 26% FIPB
newspaper and
periodicals dealing with
news and current affairs

b. Publishing of 100% FIPB Subject to PN 1

scientific guidelines issued by /
magazines/ Ministry of 2004
specialty journals/ Information &
periodicals Broadcasting.
18 Power including 100% Automatic Subject provisions of PN 2
generation (except the Electricity Act, /
Atomic energy); 2003 1998,
transmission, www.powermin.nic.in PN /
distribution and 7
Power Trading. 2000,
PN 4
19. Tea Sector, 100% FIPB Subject to PN 6
including tea divestment of 26% /
plantation equity in favour of 2002
partner/Indian public
within 5 years and
prior approval of
State Government
for change in land
20. Telecommunication
a. Basic and cellular, 74% Automatic Subject to PN 5
Unified Access (Including up to guidelines notified in /
Services, FDI, FII, NRI, 49%. the PN 5 / 2005 2005
National/International FCCBs, FIPB Series
Long Distance, V- ADRs, beyond
Sat, Public Mobile GDRs, 49%
Radio Trunked convertible
Services (PMRTS), preference
Global Mobile shares, and
Personal proportionate
Communications foreign
Services (GMPCS) equity in
and other value Indian
added telecom promoters/
services investing

FDI Permitted in Various Sectors/ Activities

2 I. FDI prohibited-
i. Retail trading(except Single Brand Product retailing)

ii. Atomic energy

iii. Lottery business

iv. Gambling and betting sector

4 II. FDI up to 26 % allowed-
6 i.Broadcasting
(a) FM Radio – FDI + FII investment up to 20% with prior Government approval subject to
guidelines by Ministry of Information & Broadcasting.

(b) Uplinking news and current affairs TV Channel – up to 26% (FDI + FII) with prior FIPB

i. Print media:

Publishing newspaper and periodicals dealing with news and current affairs - FDI up to 26%
with prior Government approval

iii. Defence industries - FDI up to 26% with prior Government approval

iv. Insurance - Foreign equity (FDI+FII) up to 26% under the automatic route

v. Petroleum and Natural Gas Sector – Refining in case of PSUs: up to 26% with prior FIPB

III. FDI up to 49 % allowed-

i. Broadcasting-

a. Setting up hardware facilities such as up-linking, HUB, etc.- FDI+FII equity up to 49% with
prior Government approval subject to up-linking Policy notified by Ministry of Information &

b. Cable network- Foreign equity (FDI+FII) up to 49% with prior Government approval subject
to Cable Television Network Rules (1994) notified by Ministry of Information & Broadcasting.
c. DTH - Foreign equity (FDI+FII) up to 49% with prior Government approval. FDI can not exceed
20% subject to guidelines by Ministry of Information & Broadcasting.

ii. Domestic airlines and Air Transport Services - FDI up to 49% under the automatic route
with no direct or indirect participation of foreign airlines

iii. Telecommunication services: basic and cellular - FDI up to 49% is under automatic
route. Beyond 49% and upto 74% requires FIPB approval. Foreign equity includes FDI, FII,
NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity
in Indian promoters/ Investing Company)

iv. Investing companies in infrastructure/service sector (except Telecom Sector) – FDI up

to 49% with prior Government approval.

v. Asset reconstruction companies – up to 49% (only FDI) with prior FIPB approval.

IV. FDI up to 74% allowed-

i. Development of existing Airports- up to 74% under the automatic route; prior
Government approval beyond 74% subject to sectoral regulations notified by Ministry of
Civil Aviation.

ii. ISP with gateways, radio-paging, end-to-end bandwidth – FDI up to 74% with FDI beyond
49% requiring prior Government approval

iii. Establishment and operation of satellites - FDI up to 74% with prior Government approval

iv. Atomic minerals - FDI up to 74% with prior Government approval

v. Private sector banks - Foreign equity (FDI + FII) up to 74% under the automatic route

vi. Single brand retailing – up to 51% with prior Government approval.

V. FDI up to 100 % allowed subject to conditions-

i. Development of Greenfield Airports - FDI under automatic route subject to sectoral

regulations notified by Ministry of Civil Aviation

ii. Exploration and mining of coal and lignite for captive consumption – FDI up to 100%
under automatic route Subject to provisions of Coal Mines (Nationalization) Act, 1973

iii. Petroleum sector: market study and formulation, investment /financing Minimum 26% Indian
equity within 5 years for actual trading and marketing.

iv. Trading: wholesale cash and carry; and trading for exports under the automatic route
subject to guidelines issued by DIPP.

v. Trading: Trading of items sourced from small scale sector under Govt approval route

vi. Trading: Test marketing of such items for which a company has approval for manufacture under
Govt approval route.

vii. Courier services for carrying packages, parcels and other items which do not come within
the ambit of the Indian Post Office Act, 1898.- prior Government approval Subject to
existing laws and subject to existing laws and exclusion of activity relating to distribution of
letters, which is exclusively reserved for the State.

viii. Tea Sector, including tea plantation – prior Government approval subject to divestment of
26% equity within five years.

ix. Non Banking Finance Companies – FDI up to 100% under the automatic route subject to
minimum capitalization norms.

x. ISP without gateway, infrastructure provider providing dark fibre, electronic mail and
voice mail – FDI up to 49% under automatic route. Beyond 49% and up to 100% subject to
FIPB approval subject to divestment of 26% equity in 5 years if the investing companies are
listed in other parts of the world.

xi. Domestic airlines/Air transport services – NRI investment up to 100% permitted under the
automatic route with no direct or indirect participation of foreign airlines.

xii. Power trading –upto 100% subject to compliance with Regulations under the Electricity
Act, 2003;

xiii. Cigars & Cigarettes – up to 100% with prior FIPB approval and Subject to industrial
license under the Industries (Development & Regulation) Act, 1951.

xiv. Alcohol distillation and brewing - 100% FDI under automatic route subject to licence by
appropriate authority.


From AUGUST 1991 to September 2007


A. CUMULATIVE FDI EQUITY INFLOWS (equity capital components only):

1. Cumulative amount of FDI inflows Rs. US$

(from August 1991 to March 2007) 2,32,041 54.628
crore million
2. Amount of FDI inflows during 2006- Rs. 29,737 US$ 7,250
2007 crore million
(during April-September 2007)
3. Cumulative amount of FDI inflows Rs. US$
(updated up to September 2007) 2,61,778 61,878
crore million

Note : FDI inflows include amount received on account of advances pending for issue of
shares for the years 1999 to 2004.


1. Cumulative amount of FDI inflows Rs. 2,01,173 US$ 45,179
(from April 2000 to September 2007) crore million


Amount of FDI inflows

(In Rs. crore) (In US$ mn)

1. April 2007 6,928 1,643

2. May 2007 8,642 2,120

3. June 2007 5,048 1,238

4. July 2007 2,849 705
5. August 2007 3,394 831
6. September 2007 2,876 713
2007-2008 (up to Sept. 2007) 29,737 7,250
2006-2007 (up to Sept. 2006) 20,155 4,382

%age growth over last year (+) 48 % (+) 65 %


Amount of FDI inflows

(In Rs. Crore) (In US$ mn)

1. January 2007 8,515 1,921
2. February 2007 3,081 698
3. March 2007 * 16,896 3,838
4. April 2007 6,928 1,643
5. May 2007 8,642 2,120
6. June 2007 5,048 1,238
7. July 2007 2,849 705
8. August 2007 3,394 831
9. September 2007 2,876 713
Year 2007 (upto Sept. 2007) 58,229 13,707
Year 2006 (upto Sept. 2006) 28,374 6,232
%age growth over last year (+) 128 % (+) 118 %

Rupees in crore (US$ in million)
Ranks Country 2004- 2005- 2006-07 2007- Cumulative %age
05 06 (April- 08 Inflows with
(April- (April- March) (April- (from April. total
March) March) Sept. 2000 to Inflows
2007) Sept. 2007) (in
1. Mauritius 5,141 11,441 28,759 13,502 79,392 44.82
(1,129) (2,570) (6,363) (3,301) (17,840)
2. U.S.A. 3,055 2,210 3,861 1,695 17,276 9.75
(669) (502) (856) (412) (3,856)
3. U.K. 458 1,164 8,389 711 15,085 8.52
(101) (266) (1,878) (175) (3,361)
4. Netherlands 1,217 340 2,905 689 9,831 5.55
(267) (76) (644) (167) (2,177)
5. Japan 575 925 382 2,070 8,069 4.55
(126) (208) (85) (496) (1,807)
6. Singapore 822 1,218 2,662 2,059 7,865 4.44
(184) (275) (578) (506) (1,790)
7. Germany 663 1,345 540 1,088 5,752 3.25
(145) (303) (120) (266) (1,296)
8. France 537 82 528 181 2,82 1.68
(117) (18) (117) (44) (660)
9. Switzerland 353 426 257 815 2,746 1.55
(77) (96) (56) (199) (622)
10. Cyprus 12 310 266 1,561 2,243 1.27
(3) (70) (58) (374) (525)
TOTAL FDI 17,138 24,613 70,630 29,736 201,173
INFLOWS * (3,754) (5,546) (15,726) (7,250) (45,179)
Note: (i) *Includes inflows under NRI Schemes of RBI, stock swapped and advances pending
for issue of shares.
(ii) Cumulative country-wise FDI inflows (from April 2000 to September 2007) – Annex-‘A’.


Ranks Sector 2004- 2005- 2006- 2007- Cumulative % age

05 06 07 08 Inflows with
(April- (April- (April- (April- (April 2000 total
March) March) March) Sept. to Inflows
2007) Sept. 2007) (In
1. Services Sector 2,106 2,565 21,434 8,175 37,282 21.05
(financial & non- (469) (581) (4,749) (1,990) (8,432)
2. Computer Software 2,441 6,172 11,786 1,550 28,094 15.86
& Hardware (539) (1,375) (2,614) (378) (6,246)
3. Telecommunications 588 3,023 2,354 3,567 15,212 8.59
(radio paging, cellular (129) (680) (521) (875) (3,455)
mobile, basic
telephone services)
4. Construction 696 667 4,424 2,780 9,176 5.18
activities (152) (151) (985) (682) (2,102)
(including roads &
5. Automobile Industry 559 630 1,254 606 7,765 4.38
(122) (143) (276) (148) (1,710)
6. Power 241 386 713 197 5,949 3.36
(53) (87) (157) (48) (1,285)
7. Chemicals 909 1,979 930 449 5,722 3.23
(other than fertilizers) (198) (447) (206) (123) (1,279)
8.. Housing $ Real 0 171 2,121 2,915 5,327 3.01
Estate (0) (38) (467) (710) (1,242)
9. Drugs & 1,343 760 970 191 4,472 2.52
Pharmaceuticals (292) (172) (215) (47) (989)
10. Electrical 449 156 353 2,177 4,286 2.42
Equipments (98) (35) (77) (520) (989)

Amount Rupees in crore (US$ in million)

Note: (i) Cumulative Sector- wise FDI inflows (from April 2000 to September 2007) - Annex-


INFLOWS1 (from April 2000 to September 2007):

Amount of FDI %age

Inflows with
Rupees in US$ in
crore million
1. MUMBAI MAHARASHTRA, 43,783.97 9,870.33 24.72
2. NEW DELHI DELHI, PART OF 40,978.21 9,236.59 23.13
3. BANGALORE KARNATAKA 12,810.59 2,900.75 7.23
4. CHENNAI TAMIL NADU, 12,665.4 2,834.92 7.15
5. HYDERABAD ANDHRA 6,789.3 1,523.89 3.83
6. AHMEDABAD GUJARAT 5,134.67 1,138.75 2.90
7. CHANDIGARH` CHANDIGARH, 1,754.7 384.22 0.99

8. KOLKATA WEST BENGAL, 1,633.12 361.46 0.92

9. PANAJI GOA 826.34 179.29 0.47
10. BHOPAL MADHYA 442.86 101.67 0.25
11. KOCHI KERALA, 424.53 90.49 0.23
12. BHUBANESHWAR ORISSA 395.52 88.68 0.22
13. JAIPUR RAJASTHAN 293.69 65.11 0.17
14. KANPUR UTTAR 57.7 12.83 0.03
15. GUWAHATI ASSAM, 52.34 11.68 0.03
16. PATNA BIHAR, 1.79 0.39 0.00
17. NOT INDICATED3 49,107.30 10,993.28 27.74
SUB TOTAL 177,152.24 39,798.68 100.00
18. Stock Swapped 14,525.44 3,295.8 -
19. Advance of Inflows 8,962.22 1,962.8
(from 2000 to 2004)
20. RBI’s-NRI Schemes 533.06 121.3 -
GRAND TOTAL 201,172.96 45,178.58 -
(From April 2000 to September 2007)


(From August 1991 to September 2007)


No. Of Cumulative FTC Approvals 7,886
(from august 1991 to September 2007)
No. Of FTC Approvals During 2006-07 81
(from April 2006 to march 2007)
No. Of FTC Approvals During 2007-08 40
(from April 2007 to September 2007)


Ranks Country No. of technical % with Total Tech.

collaborations approved Approvals.
1 U. S. A 1,750 22.19
2 Germany 1,103 13.99
3 Japan 861 10.92
4 U. K 856 10.85
5 Italy 484 6.14
6 Other Countries 2,832 35.91
TOTAL OF ALL 7,886 100.00


Ranks Sector No. of Technical % With Total Tech

Collaborations Approved Approvals
1 Electrical
Equipments(including 1,253 15.89
software &
2 Chemicals other than 883 11.20
3 Industrial Machinery 889 11.02
4 Transportation 730 9.26
5 Misc. mech 441 5.59
engineering industry
6 Other Sectors 3,710 47.04
Total Of All Sectors 7,886 100.00


Ranks State No Of Technical % With Total Tech

Collaborations Approved Approvals
1 Maharastra 1,364 17.30
2 Tamilnadu 650 8.24
3 Gujarat 602 7.64
4 Haryana 354 4.49
5 Delhi 313 3.96
6 Other States. 4,603 58.37
Total Of All States 7,886 100.00



S. NO Country Amount Of
FDI Inflows In US$ %age with
In Rupees total inflows
1 Mauritius 793,921,57 17,839,75 44.82
2 U.S.A 72,756.70 3856.15 9.75
3 U.K 150,849.61 3,361.35 8.52
4 Netherlands 98,307.57 2,177.26 5.55
5 Japan 80,692.50 1.806.51 4.55
6 Singapore 78,652.78 1,789.71 4.44
7 Germany 57,516.28 1,295.98 3.25
8 France 29,821.21 659.69 1.68
9 Switzerland 27,458.33 621.89 1.55
10 Cyprus 22,431.01 524.98 1.27
11 U.A.E 22,351.87 502.72 1.26
12 Bermuda 20,457.36 455.65 1.15
13 Sweden 18,409.85 416.43 1.04
14 Korea(south) 13,717.23 306.64 0.77
15 Italy 9,936.62 221.79 0.56
16 British 9,880.16 227.06 0.43
17 Cayman 7,695.04 170.04 0.43
18 Belgium 7,652.80 0.43
19 Australia 7,555.07 0.43
20 Hong Kong 7,533.90 0.34
21 Spain 6,101.19 0.26
22 Denmark 4,647.33 0.17
23 Malaysia 4,630.41 0.17
24 Canada 4,575.66 0.15
25 South Africa 3,089.57 0.12
26 Luxembourg 2,949.44 0.10
27 Russia 2,670.96 0.10
28 Finland 2,095.71 0.08
29 West Indies 1,788.62 0.07
30 Thailand 1,762.37 0.07


The FDI scenario in India has changed drastically in the last decade. For the first time in 15
years, the government has simplified and rationalized FDI procedures while liberalizing the
existing sectors such as retail, television, diamond and coal mining, airports, wholesale and
export trading, and opening new ones such as power trading, processing and warehousing of
coffee and rubber to foreign investment.

Aggregate FDI inflows into India were somewhat lower during 2003-04 as compared to that
during 2002-03, FDI inflows into India, improved from US$ 2634 million to US$ 3755 million
from the year 2003-04 to 2004-05.

Notwithstanding the upturn, India’s capital account in recent years has gained far more strength
from short-term portfolio flows that from long- term FDI flows. This probably necessitates
revisiting the FDI policy and identifying constraints impeding higher FDI inflows. Procedural
simplifications are likely to encourage much greater FDI flows.

Foreign direct investments (FDI) inflows into India during the fiscal year 2005-06 were Rs.
24613 crore, this was higher by 43% to its corresponding previous year. Net FDI into India
picked up on the back of sustained growth in economic activity and positive investment climate,
with inflows going into the manufacturing as well as services sectors.

FDI inflows into India during December 2006 registered an unprecedented increase of 480%
over the inflows in December of the previous year 2005, the month of December 2006 received
equity inflow of Rs. 9108 Crores in December 2006 compared to Rs. 1587 crore in December
2005. This is the highest inflow ever into the country in a single month. With this, the total
inflows from April 2006 to December 2006 are now about Rs. 42138 crores, as compared to Rs.
16394 crores received during this period last year. The inflows in the year 2005-06 were Rs.
24613 crores.

The sectors attracting highest FDI were Equipments (including computer software &
electronics), services sector (financial and non- financial) and Telecommunications (radio
paging, cellular mobile, basic telephone services)

While Mauritius is the top most investing country followed by USA, UK, Netherlands, Japan,
Singapore, and Germany. In case of no. of technological transfers USA is at first position with
share of 21.98% followed by Germany, Japan, and UK.

Summary and Conclusion

The most important determinants for attracting FDI are the Cost Factors, Market Size, Real
Exchange Rates, Macro Economic Stability, Rate of Inflation, Overall Economic Stability,
National FDI Policy, Investment Incentive, and Removal of Restrictions like Access to few
industries, foreign ownership restrictions, ease of entry performance requirements.

The policy on Foreign Direct Investment has been reviewed on a continuing basis and several
measures announced from time to time for rationalization/ liberalization of the policy and
simplification of procedures.

As a result, a number if rationalization measures have been undertaken which, inter alia include,
dispensing with the need to multiple approvals from Government and/or regulatory agencies that
exist in certain sectors, extending the automatic route to more sectors and allowing FDI in new

The Government should take a series of steps to further liberalize and streamline the procedures
and mechanism for approval of both domestic and foreign direct investment.

In fulfillment of its commitment to provide greater transparency in decision making. It

announces a set of guidelines for the consideration of foreign direct investment proposals by the
Foreign Investment Promotion Board.

In a bid to stimulate the sector further, the government is working on a series of ambitious
economic reforms.

1 The centre has divested some of tis own powers of approving foreign investments that it
exercised through the Foreign Investment Promotion Board and has handed them over to
the general permission route under the RBI.
2 The FDI cap for telecommunications has been increased to 74%, up from prevailing
ceiling of 49 percent.
3 It has set up an Investment Commission that will garner investments in the infrastructure
sectors among other sectors, and plans to increase the limit for investment in the
infrastructure sector.
4 The Government approved sweeping reforms in FDI with a first step towards partially
opening retail markets to foreign investors. It will now allow 51% FDI in single brand
products in the retail sector. Besides retail, other sectors are being opened.
5 100% is allowed in new sectors such as power trading, processing and warehousing of
coffee and rubber.
6 FDI limit raised to 100% under automatic route in mining of diamonds and precious
stones, development of new airports, cash and carry wholesale trading and export trading,
laying of natural gas pipelines, petroleum infrastructure, captive mining of coal and
7 Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of
potable alcohol, industrial explosives and hazardous chemicals.
8 Indian investor is allowed to transfer shares in an existing company to foreign investors.
9 The Government is looking at reviewing regulation involving foreign investments into
the country. Aimed at simplifying the investment from foreign institutional investors
(FII) and FDI in the same light.
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