Foreign Investment

Foreign Institutional Investors (FII) is used to denote an investor; mostly of the form of an institution or
entity situated outside the country, which invests money in the financial markets of a country. FIIs in
India are companies that are established or incorporated outside India, and is investing in the financial
markets of India. These investors must register with the Securities & Exchange Board of India (SEBI) to
take part in the market. After 1991, due to Indian liberalization process, FIIs were permitted to invest in
Indian stock market. India, since then, has lowered the barriers for foreign investors through the FII.
Statistics also suggest this fact as FIIs registered with SEBI have increased from 492 in 1999 to 1618 by
February 2009.

Foreign Direct Investment (FDI) is defined as a form of investment made in order to gain unwavering and
long-lasting interest in enterprises that are operated outside of the economy of the shareholder. In FDI,
there is a parent enterprise and a foreign associate, which unites to form a Multinational Corporation
(MNC). In order to be deemed as a FDI, the investment must give the parent enterprise power and control
over its foreign affiliate.

Foreign Direct Investment in India

In India, Foreign Direct Investment Policy allows for investment only in case of the following form of
investments:

• Through financial alliance

• Through joint schemes and technical alliance
• Through capital markets
• Through private placements or preferential allotments

The Indian government’s policy towards FDI has evolved over time in tune with the requirements of the
process of development in different phases.

➢ Initial Receptiveness to Foreign Investors (Post-Independence)

• India set out on a strategy of import substitution industrialization soon after Independence,
with a focus on improving the local standards in heavy industries in the manufacturing sector.
As the domestic base of assets was limited, the attitude towards FDI was increasingly
receptive. FDI was sought on mutually advantageous terms though the majority local
ownership was preferred. The foreign exchange crisis of 1957-58 led to further liberalization
in the government’s attitude towards FDI.

➢ Restrictive Policies (1960’s)

• A restrictive attitude was adopted by the government with the local base of manufacturing
capability and local entrepreneurship trying to develop.
• Broad restrictions were put on proposals of FDI which sought more than 40% ownership or
were unaccompanied by technology transfer.
• Industries were listed in which the government believed FDI was not desirable.
 • The range of royalty payments and duration of technology transfer agreements with foreign
collaborators were also specified for different items.
• The guidelines for foreign collaborations required exclusive use of Indian consultancy
services.
• Foreign technology collaborations which sought renewal were restricted.

➢ FERA (1973)
• From 1973 onwards the foreign companies (along with those of local large industrial houses)
could only invest in a select group of core or high priority industries.
• In the same year a new Foreign Exchange Regulation Act, (FERA) came into force which
required all foreign companies operating in India to register under Indian corporate
legislation and the maximum amount of foreign equity allowed was restricted to 40%.
• Exceptions were made only for companies operating in high priority or high technology
sectors, tea plantations, or those producing predominantly for exports

➢ Slight Opening Up the Economy (1980’s)

• In the 1980s,as part of the strategy of industry modernization the attitude towards FDI began
to change, with liberalized imports of capital goods and technology leading to the exposure of
the Indian industry to foreign competition.
• The policy changes covered liberalization of industrial licensing (approval) rules, a number of
incentives, and exemption from foreign equity restrictions under FERA to export-oriented
units(which were 100%).
• 4 export processing zones (EPZ) were set up in addition to the two existing ones, (Kandla and
Santa Cruz) to attract MNEs to set up export oriented units.
• A general level of flexibility was introduced in the policies concerning foreign ownership,
and exceptions from the general ceiling of 40% on foreign equity were allowed on the basis
of individual investment proposals.
• The rules and regulations regarding payments of royalties and technical fees were relaxed and
withholding taxes were reduced.
• India grew at an average of nearly 6% during the 1980s which was respectable and much
better than that achieved during the previous decades. However, the major problem was that
this growth had been fuelled by excessive reliance on short-term external borrowings.

➢ Economic Liberalization (1991)

• The high reliance on short term borrowings meant that India had accumulated a large debt
servicing burden and this had strained the balance of payment towards the end of the decade.
This was followed by two major external shocks viz., the collapse in 1989 of the Soviet
Union and the Gulf War in 1990/1 leading to rise in oil prices besides adversely affecting the
inflow of remittances by the non-resident Indians in the region.
• These developments led to a severe liquidity crisis in the country with the foreign exchange
reserves declining to cover just barely a month’s imports. Hence the government had to
negotiate a structural adjustment loan from the IMF.
 • As a part of the conditions attached to the IMF’s Structural Adjustment Program, a package
of economic reform was introduced in the middle of 1991 by the Government. Among the
reform measures implemented included a departure from the restrictive policy towards FDI, a
liberal trade policy besides reforms of capital market and exchange controls emerged.
• The New Industrial Policy announced on 24 July 1991 marked this departure with respect to
FDI policy.
• The industrial approval system in all industries has been abolished except where it is required
for strategic or environmental grounds. In order to bring greater transparency in the FDI
approval system and expedite their clearance, a system of automatic clearance was put into
practice for FDI proposals fulfilling the conditions laid down, such as the ownership levels of
50 per cent, 51 per cent, 74 per cent and 100 per cent foreign equity allowed in sectors
specified for each limit.
• The FERA of 1973 was amended in 1993 and restrictions placed on foreign companies by the
FERA were lifted. New sectors such as mining, banking, insurance, telecommunications,
construction and management of ports, harbours, roads and highways, airlines, and defense
equipment, have been thrown open to private, including foreign owned, companies.
• Still the extent of foreign ownership is limited in some of these service sectors, e.g. 49 per
cent in banking, 26 per cent in insurance, 51 per cent in non-banking finance companies, 49
per cent in telecommunications, 74 per cent in internet service providers, 40 per cent in
airlines, 74 per cent in shipping, 51 per cent in export-oriented trading, 49 per cent in
broadcasting, 74 per cent in advertising, 51 per cent in health and education services.
• Foreign Investment Promotion Board(FIPB) was established to consider and recommend
Foreign Direct Investment (FDI) proposals, which do not come under the automatic route. It
is chaired by Secretary Industry (Department of Industrial Policy & Promotion). FIPB was
established to negotiate with large international firms and to expedite the clearances required.
The FIPB also considered individual cases involving foreign equity participation over 51
percent.

➢ Foreign Investment Promotion Council (FIPC), 1996

• FIPC was constituted under the chairmanship of Chairman ICICI, to undertake
vigorousinvestment promotion and marketing activities. The Presidents of the three
apexbusiness associations such as ASSOCHAM, CII and FICCI are members of theCouncil.

➢ Foreign Investment Implementation Authority (FIIA), 1999

• FIIA functions for assisting the FDI approval holders in obtaining various approvals
andresolving their operational difficulties. FIIA has been interacting periodically with theFDI
approval holders and following up their difficulties for resolution with theconcerned
Administrative Ministries and State Governments.

➢ Investment Commission, 2004

• Headed by Ratan Tata, this commission seeks meetings and visits industrial groupsand
houses in India and large companies abroad in sectors where there was dire need for
investment.
Analysis of Foreign Institutional Investment (FII) in India
The Financial Crisis: The trend in FII investments in the country have also followed
government policies. The FII investments in turn have clearly reflected in the rise of the Indian
Stock Markets. The phenomenon was in clear demonstration in the current financial crisis in
2008-09 when FII’s owing to the liquidity crunch took out large parts of their investments from
the markets and they crashed (as can be seen from the above graph too).
P- Notes Controversy: Ever since they gained popularity among foreign investors in Indian
stock markets, P-Notes have been controversial. Overseas investment flows through P-Notes
have been blamed for all the major stock market crashes in recent years, including the 'Black
Monday' crash in May 2004 and the recent decline in May-June 2006.
The policies that are followed by the government have a direct impact on the FII inflows in the
country which in turn have an immediate impact on the Indian Stock Markets.
One of the best examples to denote the above phenomenon is the controversy surrounding the
Participatory Notes.
P-Notes are derivative instruments issued by the FIIs to foreign investors who want exposure to
Indian equities but do not want to register with the Securities and Exchange Board of India and
adhere to the regulatory framework. In a way it is a contract between a foreign investor
registered in India, and another who is not. The underlying securities of PNs are Indian stocks.
Crucially, it has to be noted that under the existing framework, the FIIs are not bound to reveal
the names of the PN holders. That makes PNs completely opaque.
The Tarapore Committee, set up by the RBI in 2006 to recommend steps to usher in Full Capital
Account Convertibility, reiterated the recommendation of banning PNs. In this connection, the
report stated, "In the case of Participatory Notes (PNs), the nature of the beneficial ownership or
the identity is not known unlike in the case of FIIs. These PNs are freely transferable and trading
of these instruments makes it all the more difficult to know the identity of the owner. It is also
not possible to prevent trading in PNs as the entities subscribing to the PNs cannot be restrained
from issuing securities on the strength of the PNs held by them. The Committee is, therefore, of
the view that FIIs should be prohibited from investing fresh money raised through PNs. Existing
PN-holders may be provided an exit route and phased out completely within one year."
This lead to an immediate reaction on the stock markets and what followed was the Big Crash on
the 17th of May 2006 ( as can be seen by the data in the excel sheet as well that the FII inflow for
the month of May 2006 was negative).
 Analysis of Foreign Direct Investment in India

FDI Inflow in India

Even though the Indian Economy had been liberalized in 1991, steady FDI inflows were coming into the
country but it was nothing to write home about. In the year 2004 the Investment Commission was set up
under the leadership of Ratan Tata.

Attempting to research directives and results of the above bodies resulted in no direct contact but instead
a list of various other sub bodies.

• Project Approval Board (PAB) for approving foreign technology transfer proposals not falling under the
automatic route.

• Licensing Committee (LC) for considering and recommending proposals for grant of industrial license.

• In addition, concerned Ministries/ Departments issue various approvals as per the allocation of business
and various Acts being administered by them.

• At the State level, State Investment Promotion Agency and, at the district level,

• District Industries Centres, generally look after projects.

• Concerned departments of the State Government handle sectoral projects.

• Fast Track Committees (FTCs) have been set up in 30 Ministries/Departments for close monitoring of
projects with estimated investment of Rs. 100 crores and above and for resolution of issues hampering
implementation.

• “Investment Promotion and Infrastructure Development Cell” gives further impetus to facilitation and
monitoring of investment, as well as for better coordination of infrastructural requirements for industry

• 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.

• CCFI Cabinet Committee on Foreign Investment- meets at the ministerial level and is guided by the
prime Minister, considers foreign investment exceeding Rs 3 billion as requiring special political
attention.
• Indian Missions Abroad- can also receive project proposal and will forward tem to the institutions in
New Delhi.

• Indian Investment Centre- (This was supposed to be closed after the Planning Commission was
established but still continues to operate) established as an autonomous organization in 1960 with the
objective of doing promotional work abroad to attract foreign private investment into India and
establishment of joint ventures, technical collaborations and third country ventures between Indian and
foreign entrepreneurs.

This set up a strong base for the FDI inflows into the country and since 2005 the country has witnessed
steady FDI inflows ( as can be verified by the above graph).

FDI inflow by Country

The chart below shows the country-wise cumulative FDI inflows in India from 2000 to 2008. Mauritius
has become one of the most favourable investment routes for India.

Mauritius

Mauritius is a country whose economic model was built on EPZ (Economic Processing Zone) since 1970.
The Country performed decently on various economic Indicators. However, in the year 1990 Mauritius
was recognized as a low wage, low cost site for manufacturing and doing business by various companies
across the world.

The government of Mauritius laid maximum emphasis on private investment in the development of the
country, but it wholeheartedly opened its gate for FDI coming across the borders. The government of
Mauritius is very selective in approving the FDI. It has policy of allowing FDI in following sectors
preferably:

1. Manufacturing
2. Hotel Management
3. Financial Services
4. Business Services

Mauritius was recognized as financial and manufacturing hub in the year 1990 and so the FDI flow to
Mauritius started to increase and reached substantial levels after year 1992 when the FDI inflows were
among the highest across the world

References:
 1. http://www.socialsciences.manchester.ac.uk/disciplines/economics/research/discussionpapers/pdf
/Discussion_paper_0418.pdf
2. http://unpan1.un.org/intradoc/groups/public/documents/IDEP/UNPAN006648.pdf

FDI inflow by Region

Maharashtra

Maharashtra received maximum FDI among all the Indian States. The reason which can be attributed to
FDi flow in Maharashtra are:
• Dedicated areas for Industrial development
• Division of state into A,B,C,D, D+ class industrial zones
• Dedicated Industrial lands where permission of collector is not required for converting land for
industrial use
• Special Capital incentives in the range of 15%-25% are also offered for Fixed capital Investment
• Sales Tax relief in the range of 60%-130% are offered to companies involved In Fixed capital
investment
• Octoroi rebates are also given in certain cases.

Hence we can see the government of Maharashtra has created an incentive for investors to invest in fixed
capital assets. Hence as most of the FDI is used for that purpose we know that why FDI is maximum for
the state of Maharashtra.

New Delhi (National Capital region)

National Capital region attracts second highest FDI. Following reason can be attributed to it:

• Well connectivity to the rest of India

• Area having maximum population
• Availability of large talent pool
• There are no infrastructural problems in the region
• Easy to obtain regulatory permits

Karnataka

Third in the ranking of the FDI inflow is Karnataka because of the following reasons:

• 1996 Industrial policy stresses on Infrastructure development, Export of value added goods and
use of non-conventional sources
• Bangalore, the capital city is the IT hub of the country. Bangalore attracted huge FDIs for the IT
development sector
 • The government has provision of sales tax exemption and capital investment subsidy for certain
cases.

Tamil Nadu, Gujarat, Andhra Pradesh

Tamil Nadu, Gujarat and Andhra Pradesh also attract large FDI because of the similar incentives given by
the government to the various industries and because of the presence of proper infrastructure to support
different kinds of business.

References:

1. http://www.iic.nic.in/iic2_bma.htm
2. http://www.iic.nic.in/iic2_bka.htm
 Sector-wise Analysis viz-a-viz Policy Changes

Services Sector
The trend of FDI worldwide has moved towards the services sector. In 1970s, service sector accounted
for only 25% of the total FDI flow. However, this has risen to more than 60% in the recent times. The
flow to this sector has been rising steadily and it increased from 50% in 1990 to around 67% in 2003.

Service sector include:

• Telecommunication
• IT enabled services
• Electricity insurance
• Air transport

Consultanc Financial and non- Hotel Total

Year Telecom y financial &Tourism Trading Service
1991 0 0 0 0 0 0
1992 0 0 48 7 2 58
1993 17 0 1215 3 55 1289
1994 140 0 943 533 241 1857
1995 1275 0 11015 219 3320 15829
1996 7530 0 10107 444 651 18732
1997 11850 0 5411 1032 945 19238
1998 17410 6 7680 400 520 26015
1999 2156 214 4024 405 981 7780
2000 6855 209 1862 524 1240 10690
2001 42671 2923 8202 472 2204 56472
2002 9091 1003 15431 2238 1824 29587
2003 7273 2480 13904 2594 832 27083
2004 6088 11844 11456 1527 682 31597
2005 9639 1627 31445 2800 1258 46769
---in Rs million

Consultancy services accounted for maximum growth in the service sector followed by financial and non-
financial services, Hotel and tourism and telecommunication and trading. Consultancy services showed a
growth of 119% per annum and other industries showed a growth of more than 40% per annum in the
period from 1991 to 2005
FDI in telecom industry increased manifold form year 1991 to 2010. The telecom industry has a sectoral
cap of 49% for Internet service providers (ISPs) with gateways, radio paging and end to end bandwidth.
However the FDI can be increased to 74% in these sectors subjected to governments approval. FDI up to
100% is allowed in ISPs not providing gateways. 1991-2010 is the time period in which the teledensity in
India increased from 4 per 1000 persons to more than 45 per 1000 persons.

Liberalization of this sector and huge market potential in India attracted FDI from countries across the
world. This period is characterized by setting up of big players like Vodafone, Airtel, Reliance, Tata etc.
The growth in the mobile and internet penetration in India led to the development of this sector and
because of rapid return on growth the FDI increased steadily over the years

In financial sectors like banking, the government allowed the foreign banks to open 22 branches a year as
compared to 12 which was allowed earlier. As of now, 29 foreign have their business running in India and
a total of 39 banks have their representative offices setup in various Indian cities. Similarly the foreign
Insurance companies are allowed to invest in India through automatic route itself, depending on the
approval by IRDA.

With the expansion of the hospitality sector, around 100% of FDI is allowed in Hotel and tourism
industry. Similarly a FDI of up to 100% is allowed in trading sector, bulk imports, e-commerce activities
etc. Even though the service sector FDI has boomed over the years due to rapid liberalization and
domestic growth, the growth in software services’ FDI is sluggish and they have failed to attract foreign
investments when we compare them to their sister industries in the service sector.

Whole Ref: http://www.techno-preneur.net/information-desk/sciencetech-magazine/2007/nov07/FDI.pdf

References:
1. http://rbidocs.rbi.org.in/rdocs/Content/pdfs/71207.pdf
2. http://economictimes.indiatimes.com/Economy/Service-sec-corners-24-of-FDI-
inflow/articleshow/4363565.cms
3. http://www.techno-preneur.net/information-desk/sciencetech-magazine/2007/nov07/FDI.pdf

Defense Sector
The industrial policy resolution, 1948, restricted entry of private sector into Defense Industry. In May
2001 (Press Note 4) government permitted 100% equity with a maximum of 26% FDI (both subject to
licensing) in Defense Industry and with this defense industry become open for private sector. In Press
Note 2 of 2002, detailed guidelines for the issuance of license for the procuction of arms and
ammunitions. However this policy of 26% FDI failed to attract any significant FDI. From 2001 to 2009
only Rs. 70 Lakh flowed in as FDI.
There had been a continuous demand for raise foreign equity on defense from 26% to 49% or 100% from
ASSOCHAM, CII and other similar bodies. Considering these, in 2009, MoD has stated his view that
foreign investment in defense sector should be limited to 26%. However beyond 26% would be
considered on case by case basis. Press Note 2 of 2009 effectively permits higher FDI through milti-
layered structures at the discretion of MoD.
There had been a few cases where MoD had obtained permission from government for 50% foreign
equity. Multi-Role transport aircraft (with Russia), BrahMos missiles (with Russia) and aircraft engine
(with French company Snecma) are a few examples of 50% foreign investment.
Aviation

Till 2004, FDI cap for domestic airlines was 40% with prior government approval of FIPB and
100%NRI/OCB FDI was allowed with prior government approval. In 2004 amendment of
aviation FDI policy, government raised FDI cap upto 49% through the automatic route but barred foreign
airlines from picking up direct or indirect equity. Government also allowed 100% FDI in domestic
airlines by NRIs and overseas corporate bodies (OCBs) through the automatic route.

Source: http://economictimes.indiatimes.com/articleshow/892738.cms

Telecom
Early 1990 were the years of “natural monopoly” for telecom industry. Till 2004 FDI policy allowed
only up to 49% direct foreign ownership, an additional 24.99% foreign equity were possible indirectly
through an Indian-controlled investment company. So, total foreign holdings could go up to 73.99%
(49% plus 24.99%), provided the management control and the investment company remain with Indians.
The telecom sector, that has seen one of the highest FDI flows into the country, was expected to have
100 million cellular subscribers by 2005. There was a growing investment need of Rs. 50,000 crore in
next 3 years (2005-2007) which created a pressure to increase FDI cap.

At present FDI upto 100% is allowed in Telecom manufacturing, ISPs without gateways, Infrastructure
provider (IP) - I, Call centres and IT enabled services. FDI upto 74% is aloowed in ISPs with gateways,
IP-II and Radio paging. FDI uto 49% is allowed in all other telecom services viz. Cellular, Basic, NLD
and other services.

Sources: http://economictimes.indiatimes.com/articleshow/872549.cms ,
dipp.nic.in/manual/manual_0403.pdf

The Changing FDI Landscape viz-a-viz Political Regimes

1. PV NarasimhaRao (1991 – 1996)
• New Industrial Policy was announced which allowed FDI up to 51% in key industrial
sectors and trading companies. Collaboration through foreign technology agreements was
also permitted through automatic route.
• FDI was encouraged by increasing the maximum limit on share of foreign capital in joint
ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority
sectors.
 • Procedures for FDI approvals were streamlined and investment under automatic approval
route was allowed within the limits for foreign participation in at least 35 industries.
• India's equity markets were opened to investment by foreign institutional investors in
1992 and Indian firms were permitted to raise capital on international markets by issuing
Global Depository Receipts (GDRs).

1. HD DeveGowda (1997)
• The list of industries for investment under automatic approval route was extended to
include sectors such as health and medical services, mining and basic metals.

1. IK Gujral (1997)
• FDI up to 100% was allowed for trading companies in exports, cash-and-carry and
wholesale trading
• Foreign investment up to 20% was allowed in banking sector
• Foreign equity up to 40% was allowed on a case-by-case basis in the airlines sector
• Foreign equity up to 100% was allowed in power sector
• Foreign equity up to 49% was allowed in telecom sector
• Foreign investment up to 61% was allowed under automatic route in drugs and pharma
industry
• Foreign equity participation of up to100% was allowed in highways sector

1. AB Bajpayee (1998 – 2004)

1998
• FDI up to 100% was allowed in manufacture of cigarettes

1999
• Foreign equity of up to 100% was allowed in non-banking financial companies

2000
• FDI limit in oil-refining sector under automatic route was increased from 49% to 100%
• FDI up to 100% was allowed through automatic route for all manufacturing activities in
special economic zones
• Foreign equity participation up to 26% was allowed under the automatic route in the
Insurance sector

2001
• FDI up to 100% was permitted in airports as well as drug manufacturing
• The defence industry sector was opened for up to 26% foreign ownership subject to
licensing
• FDI up to 74% was permitted in telecom services subject to licensing and security
requirements.
• FDI up to 49% from all sources was permitted in the banking sector through automatic
route, subject to conformity with RBI guidelines

2002
 • FDI up to 100% in tea sector was allowed, including tea plantations, with prior approval
route

2004
• FDI up to 100% was permitted in oil exploration, petroleum products, natural gas
pipelines, and petroleum product marketing as well as in scientific and technical
magazines
• FDI limit in private sector banks was raised to 74% under automatic route, including FII
investments.

1. Manmohan Singh (2005 – 2010)

2005
• 20% FDI was allowed in FM radio

2006
• FDI up to 26% was permitted with prior approval of the government for up-linking a
news and current affairs TV channel
• 51% FDI was allowed in single brand retail with prior government approval
• FDI up to 100% was allowed in greenfield airport projects
• FDI up to 49% was allowed in asset reconstruction companies, cable networks and direct-
to-home

2008
• Foreign investment up to 49% (26% FDI +23% FII) was allowed in commodity
exchanges
• FDI up to 49% was allowed in domestic passenger airlines

2009
• FDI up to 100% was permitted with prior approval of the government in publication of
facsimile editions of foreign newspapers and magazines
• FDI calculation method was overhauled. Both the control and ownership by Indians made
essential for a company to be called as India-owned.

2010
• Limit on FDI inflow through approval route which does not require cabinet approval, was
raised to Rs1,200 crore from Rs600 crore
• FDI in manufacturing of cigarettes, tobacco was prohibited
 Current status of FDI Policy in India

Sectors where FDI is completely prohibited

• Retail Trading (except single brand product retailing)

• Atomic Energy
• Lottery Business including Government /private lottery, online lotteries,etc.
• Gambling and Betting including casinos etc.
• Business of chit fund
• Nidhi company – A NBFC doing the business of lending and borrowing with its members or
shareholder
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business or Construction of Farm Houses
• Activities / sectors not opened to private sector investment

FDI norms for Agriculture

➢ Agriculture & Animal Husbandry

• 100% FDI is allowed under automatic route in Floriculture, Horticulture, Development of
Seeds, Animal Husbandry, Pisciculture, Aquaculture and Cultivation of Vegetables &
Mushrooms under controlled conditions and services related to agro and allied sectors.
• Companies dealing with development of transgenic/genetically engineered seeds/vegetables
should comply with relevant requirements ofEnvironment (Protection) Act, Foreign Trade
(Development and Regulation) Act, 1992, Genetic Engineering Approval Committee
(GEAC) orany other law specified from time to time.

➢ Tea Plantation
• 100% FDI is allowed in under Government route only if the company commits to
compulsorily divest 26% equity in favour of anIndian partner/public within 5 years AND also
to take prior approval of the State Government concerned in case of any future land use
change.
FDI isn’t allowed in any other agricultural/plantation activity.

FDI norms for Industry

➢ Mining
• 100% under automatic route in Mining and Exploration of metal and non-metal ores
including diamond, gold, silver and precious ores but excluding titanium
 • 100% under automatic route in Coal & Lignite mining only for captive consumption by
eligible activities (eg. power projects) permitted under provisions of Coal Mines Act
• 100% for setting up coal processing plants like washeries only to supply the washed coal to
the parties who were supplying raw coal to coal processing plants for washing or sizing.They
can’t sell it in the open market.
• Mining of Titanium Bearing minerals - 100% allowed under Govt. route in mining, mineral
separation, value addition and integrated activities on the condition that value addition
facilitiesare setup in India along with technology transfer and waste disposal is carried out as
per relevant regulation

➢ Manufacturing

• Manufacture of items reserved for production in Micro and Small Enterprises (MSEs)
○ Foreign Inv. of more than 24% in an industrial entity which is not a MSE but
manufactures items reserved for the MSE sector would require Govt. route & an
Industrial License. Theentity should undertake to export minimum 50% of the new or
additional annual production of the MSE reserved items to be achieved within a
maximum period of three years.

• Alcohol Distillation & Brewing

○ 100% under the automatic route.

• Cigars & Cigarettes Manufacture

○ 100% allowed under Govt. Route subject to obtaining the industrial licence

• Coffee & Rubber processing and warehousing

○ 100% under the automatic route

• Defence Industry – 26% under Govt. route subject to following conditions:

○ There would be a three-year lock-in period for transfer of equity from one foreign
investor to another foreign investor subject to FIPB approval
○ The Ministry of Defence won’t give purchase guarantee for products to be
manufactured
○ Preference may be given to the Public Sector organizations as per guidelines of the
Department of Public Enterprises
○ Arms & ammunition produced can only sold to the Ministry of Defence or other
Government entities with the prior approval of Defence Ministry but not to any other
person or entity
○ The export of manufactured items would be subject to policy and guidelines as
applicable to Ordnance Factories and Defence Public Sector Undertakings
 ○ Any other sale of any non-lethal items would need prior approval of the Ministry of
Defence

• Drugs & Pharmaceuticals including those involving use of recombinant technology

○ 100% under the automatic route

• Hazardous chemicals viz. hydrocyanic acid, phosgene, cyanates of hydrocarbon & their
derivatives
○ 100% under automatic route c

• Industrial Explosives
○ 100% under the automatic route derivatives

➢ Power

• 100% under automatic route for generation, transmission & distribution of electric energy
produced in hydro electric, coal, oil and gas based thermal power plants, non-
conventionalenergy to households, industrial, commercial and other users. Similar permission
is also available for power trading

FDI norms for Services

➢ Advertising & Films

• 100% under automatic route in Advertising sector & Film Industry including film financing,
production, distribution, exhibition, marketing and associated activities

➢ Civil Aviation Sector

• Airports: 100% automatic FDI in Greenfield projects AND 100% (74% automatic & rest
under govt. route) for Existing projects
• Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline - FDI up to 49%
and investment by NRIs up to 100% allowed on the automatic route
• Non-Scheduled Air Transport Service/airlines, Chartered airlines and Cargo airlines- 74%
FDI (49% automatic & rest with permission) and investment by NRIs up to 100%
• 100% automatic allowed for Helicopter services/seaplane services requiring DGCA approval
• Ground Handling Services- 74% FDI (49% automatic & rest with permission) and investment
by NRIs up to 100%
• 100% automatic FDI allowed for Maintenance and Repair organizations; flying training
institutes; and technical training institutions
 • However, Foreign airlines are not allowed (directly or indirectly) to take equity of an Air
Transport Undertaking engaged in operating Scheduled, Non-Scheduled, and Chartered
Airlinesbut can take for those operating Cargo airlines, helicopter and seaplane services

➢ Asset Reconstruction (of financial assets) Companies

• Only 49% FDI permitted under Govt. Route while FIIs can’t invest at all.
• However, FIIs can invest up to 49% of each tranche of scheme of Security Receipts (SRs)
issued by such companies s.t. investment by a single FII in each tranche of SRs is <=10%

➢ Banking, Private Sector

• Total foreign investment up to 49% under automatic route & beyond up to 74% under govt.
route
• Portfolio investment through stock exchanges by FIIs & NRIs
○ Maximum 10% for individual FII & 24% aggregate for all which can be raised to
49% through a special resolution by the company
○ Maximum 5% for individual NRIs & 10% aggregate for all which can be raised to
24% through a special resolution by the company
• A foreign bank can operate in India only through one of the 3 channels viz. (i) branches (ii) a
wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment<=74%
• There is a limit of 10% on voting rights in respect of banking companies any change in which
can be brought about only after appropriate Parliamentary approvals

➢ Banking, Public Sector

• Total foreign investment up to 20% allowed under Govt. Route

➢ Broadcasting
• Terrestrial Broadcasting (FM Radio): Foreign investment up to 20% prior govt. approval
• Cable Network: Foreign investment up to 49% under Govt. route
• Direct –to-Home: Foreign investment up to 74% (49% automatic & beyond under govt.
route)
• Headend-In-The-Sky (HITS) Broadcasting service: Foreign investment up to 49% (with max
20% FDI) for DTH under Government route
• Setting up hardware facilities
○ Total foreign investment up to 49% under Govt. route for setting up Up-linking
HUB/ Teleports;
○ Total foreign investment up to 26% under Govt. route for up-linking a News &
Current Affairs TV Channel subject to the condition that the FII/ NRI shall not be
“persons acting inconcert” with FDI investors WHILE 100% FDI under govt. route is
allowed for other channels

➢ Business Services
 • 100% automatic FDI: Includes Data processing; software development; computer, business &
management consultancy; Software supply services; MarketResearch, Technical testing &
Analysis

➢ Commodity Exchanges
• Total 49% under govt. route (max. 26% FDI & 23% FII).......FIIs can transact only in
secondary market
• No group of foreign investors acting in concert will hold more than 5% of the company

➢ Construction & Maintenance

• 100% automatic FDI in construction & maintenance of roads (BOT & others), rail-beds,
bridges, tunnels, pipelines, ropeways, runways, waterways & reservoirs, hydroelectric
projects, power plants &industrial plants, Rural Drinking Water Supply Projects, Package
Water Treatment Plants, Rain and Rain Water Harvesting Structures, Waste-Water Recycling
And Re-UseTechniques And Facilities, Rain-Water Re-Charging And Re-Use Techniques Of
Ground Water

➢ Ports &Harbours
• 100% automatic FDI for:-
1) leasing of existing assets of ports
2) Construction & maintenance of assets such as-container terminals etc.
3) Leasing ofequipment for port handling and floating crafts
4) Captive facilities for port based industries
5) Mass Rapid Transport Systems in all Metropolitan Cities including associate
commercialreal estate development

➢ Development of Townships, Housing, Built-up infrastructure and Construction development

projects
• 100% automatic FDI on following conditions:
○ In case of development of serviced housing plots, a minimum land area of 10
hectares to be developed
○ In case of construction-development projects, a minimum built-up area of 50,000
sq.mts to be developed
○ Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5
million for JVs with Indian partners (funds to be brought in within 6 months of
starting business)
○ Original investment can’t be repatriated before 3 years from completion of minimum
capitalization except through FIPB approval
○ At least 50% of the project to be developed within 5 yrs of obtaining all statutory
clearances AND sale of undeveloped plots (as per completion certificate by local
bodies) is notallowed
 • Hotels & Tourism, Hospitals, SEZs & investment by NRIs is exempt from these conditions.
• For combination project, any one of these two would suffice

➢ Courier services
• 100% FDI under Govt. route for carrying packages, parcels and other items outside the ambit
of the Indian Post Office Act

➢ Credit Information companies

• Total foreign investment up to 49% under Govt. Route with FIIs allowed to invest a max
24% only in listed companies
• No FII can hold more than 10% equity, or can seek a representation on the Board of Directors
based on shareholding PLUS they have to report any acquisition of >1% equity to RBI

➢ Health and Medical Services

• 100% automatic FDI

➢ Hotels and Tourism related Industry

• 100% foreign investment under automatic route

➢ Insurance
• 26% automatic FDI

➢ Industrial Parks
• 100% automatic FDI on conditions that it has at least 10 units with no single unit occupying
more than 50% of the allocable area & minimum 66% of allocable area tobe allocated for
industrial activity ELSE it would qualify under construction development project & comply
with regulations accordingly

➢ Infrastructure companies in securities market (stock exchanges, depositories etc.)

• 26% FDI under Govt. route & 23% FII through secondary market purchases (total 49%)

➢ Petroleum & Natural Gas

• FDI upto 49% under Govt. route in petroleum refining PSU without any dilution of domestic
equity AND 100% automatic FDI in private sector in:
• exploration of oil & natural gas fields, marketing of petroleum products, petroleum product
pipelines, natural gas/LNG pipelines, market study and formulation and Petroleum refining

➢ NBFCs
• 100% automatic FDI in the mentioned activities:
 ○ Merchant Banking
○ Under Writing
○ Portfolio Management Services
○ Investment Advisory Services
○ Financial Consultancy
○ Stock Broking
○ Asset Management
○ Venture Capital
○ Custodian Services
○ Factoring
○ Credit Rating Agencies
○ Leasing & Finance
○ Housing Finance
○ Forex Broking
○ Credit Card Business
○ Money Changing Business
○ Micro Credit
○ Rural Credit

• Investment would be subject to following minimum capitalisation norms as:

○ Upfront inv. of US $0.5 mn for foreign capital upto 51%
○ Upfront inv of US $ 5 mn for foreign capital between 51 & 75%
○ US $ 50 mn for foreign capital more than 75% (US$ 7.5 mn to be brought upfront
and the balance in 24 months)
○ 100% foreign owned NBFCs with a minimum capitalisation of US$ 50 mn can set up
step down subsidiaries for specific NBFC activities
○ JV operating NBFCs with <= 75% foreign investment can also set up subsidiaries for
undertaking other NBFC activities which would be subject to the above min cap
requirement
○ US $0.5 mn for all permitted non-fund based NBFCs but such NBFC would not be
permitted to set up any subsidiary, or participate in equity of an NBFC
holding/operating company

➢ Print Media
• 26% total foreign investment under Govt. Route for publishing newspapers / magazines /
periodicals dealing with news and current affairs
• 100% FDI under Govt. route Scientific and Technical Magazines/specialty journals/
periodicals
• Publication of facsimile edition of foreign newspapers - 100% FDI under Govt. route only by
the newspaper owner for publication by an Indian entity registered under Companies Act
➢ R&D services excluding basic Research and setting of R&D/academic institutions
• 100% FDI under automatic route

➢ Security Agencies in Private sector

• Max 49% foreign shareholding under Govt. Route subject to ‘Private Securities Agencies
Act’

➢ Satellites
• Establishment & Operation – 74% FDI under govt. route

➢ Storage and Warehouse Services

• 100% FDI under automatic route

➢ Telecom
• Max 74% foreign investment (49% automatic & rest on permission) in telecom services, ISP,
Radio paging & End-to-end bandwidth with certain restrictions given in appendix
• 100% FDI (49% automatic & rest on permission) for Infrastructure providers (dark fibre, duct
space, tower etc.), Electronic & Voice Mail
• But such companies, if listed elsewhere, would have to divest 26% of their equity in favour of
Indian public in 5 years

➢ Trading
• 100% automatic FDI in (i)Trading for exports (ii) E-Commerce (iii) Cash & Carry Wholesale
Trading (wholesale activity to be judged by type of customers & not sales volume)
• 100% FDI under Govt. route for (i) trading of items sourced from small scale sector & (ii)
Test marketing (only for 2 yrs) of items for which it has approval for manufacture &
theinvestment in setting up manufacturing facility commences with test marketing
• 51% FDI under Govt. route in single brand product retailing

➢ Transport & support services

• 100% FDI under automatic route for
○ Pipeline transport, ocean and water transport, inland water transport & support
services to land/water transport
○ Services incidental to transport like cargo handling incidental to land, water and air
transport
○ Rental and leasing of motor vehicles without operator for passenger transport and
freight transport, refrigerated/cold transport
○ Renting of -transport equipment without operator, of other transport equipment
• 100% automatic FDI in sectors/activities not listed above subject to applicable laws/sectoral
rules/regulations.