Few Modes of foreign currency inflow

I)   Foreign Direct Investment (FDI):FDI (Foreign Direct Investment) is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India.In a major drive to simplify FDI procedures, Indian companies have been permitted to accept investment under automatic approval route without obtaining prior permission from RBI. Foreign equity up to 100 per cent[1] has been permitted in electricity generation, transmission and distribution (excluding atomic reactor power plants) and in construction and maintenance of roads, vehicular tunnels, parts and these industries under the automatic approval route should not exceed Rs. 1500 crore.

II)  Global Depositary Receipts (GDR): When Indian companies issue their shares in the global capital market, the shares are surrendered to a depositary which issues computerized receipts in place of share certificates. If shares are issued through out the global capital market, these receipts are referred as GDRs otherwise if only USA, American Depositary Receipts (ADRs). Indian Companies are permitted to issue GDRs/ADRs in the case of business reorganizations duly approved by the High Court. The Companies, however, in all such cases, will be required to get approval from the Department of Economic affairs for the issue of GDRs/ADRs.

III) Foreign Portfolio Investment (FPI): FPI is the investment made by either NRIs/PIOs or foreign institutional investors (FIIs) in securities without taking interest in promotion as well as operation of a company. The aggregate ceiling for investment in a company by all NRIs/PIOs through stock exchange has been made separate and exclusive of the investment ceiling available for FIIs.

IV)  External Commercial Borrowing (ECB): ECB is the commercial borrowing made by corporate organizations or PSUs from abroad in the form of issue of bonds, debentures or direct borrowing of foreign currency notes from financial institutions or banks.

Computation of Foreign investment in India

The IMF definition of FDI treats both reinvested and other direct capital flows such as debt securities trade credits and grants as part of FDI. This definition is accepted by most countries and also by UNCTAD for reporting FDI data.

According to a recent study conducted by the International Finance Corporation (IFC), adoption of international standards for computation of FDI would raise India’s net annual FDI inflows from the present level of $2 to 3 billion to about $8 billion. This works out to about 1.7 per cent of the country’s GDP.

According to a statement issued by the Ministry, the FDI data for 2001-02 is based purely on foreign equity investments including preference shares other than foreign portfolio investment. It excludes investment by offshore venture capital funds, domestic venture capital funds set up by foreign venture capital investors, which strictly speaking should form part of the FDI inflows. Apart from this, it excludes reinvested earnings and other direct capital flows which are treated as FDI according to International Monetary Fund standards.

FDI – negative and positive dimensions

Negative

Although foreign investment policies have been liberalized in recent years, there is by no means a unanimity of views among experts, and the public, on the effects of such investment in India. Three different sets of arguments have been advanced against foreign investment:

1.   A negative feature of foreign investment, from the point of view of recipient countries, is that it is more volatile than purely domestic investments as capital tends to move out in response to increase in domestic wages over time or to political and other uncertainties.

2.   The political argument that large-scale foreign ownership of industrial assets could pose a threat to national sovereignty or mortgage the national interest to foreigners (as indeed was the case during the colonial period).

3. Arguments against foreign investment concerns possible shoddy cross-border transactions between the parent company abroad and the subsidiary company at home (e.g. ‘transfer pricing’ leading to transfer of capital abroad thereby evading tax in India).

4.  At times the FDI route is misused to bring back unaccounted money through tax havens. As per an estimate, almost 60% of FDI in construction sector is Indian money being rerouted. This leads to loss of crucial Tax revenue.

The opponents of FDI have also drawn attention to several other imperfections and deleterious effects, such as capital intensity of such investment, inappropriate technology, possible adverse effects on income distribution, emergence of financial, technological and social dualism in the economy.

Proponents of FDI

The proponents of FDI have highlighted the beneficial effects in terms of encouragement to the development of technology, managerial expertise, integration with the world economy, exports, higher growth, inculcating greater competition in the particular sub-sector and hence raising the degree of efficiency and presenting a greater and better choice schedule to the consumers.

Foreign investment policy

In 1991, the Government of India initiated wide-ranging program of economic reform, which has succeeded in mobilizing the country’s huge potential. The new measures have transformed the climate for business and opened the economy to foreign investment.

Under the new foreign investment policy, two routes are available for foreign investors, depending upon the industry and the levels of investment contemplated:

Automatic Route

Companies proposing foreign investment under the automatic route do not require any Government approval, provided the requisite documents are filed with the Reserve Bank of India (RBI) within 30 days of receipt of funds. The automatic route encompasses all proposals:

• Where the foreign investment in the equity capital of the Indian Company is up to 50/51/74/100 per cent as the case may be as applicable to the list of high priority Industries/items.

Where the proposed item(s) of manufacture/ activity does not require an Industrial Licence and is not reserved for the Small Scale Sector.          

Foreign Investment Promotion Board (FIPB) route

India has signed the Bilateral Investment Protection Agreement with several countries that provides for investment protection.

All other proposals for foreign investment, which are not covered under the automatic approval route, are considered for approval, on merits, by the FIPB. Composite proposals, i.e. proposals seeking other industrial approvals like industrial licence, technical collaborations, etc. along with approval for foreign investment, are given a composite clearance by the FIPB. Further, foreign financial/ technical collaborators with previous ventures/tie-up in India also have to apply to the FIPB for approval for setting up any new venture.

Foreign Investment Promotion Board

The FIPB is a specially empowered Board headed by the Secretary, Department of Industrial Policy and Promotion, set up specifically for the purpose of expediting the approval process for foreign investment proposals.

No special application form is needed for applying to the FIPB. Proposals can be sent to the FIPB in the Ministry of Industry or the Secretariat for Industrial Assistance (SIA) directly, or through any of India’s diplomatic missions abroad.

Its approach is liberal for all sectors and all types of proposals and rejections are few. While applications are subject to stages of negotiations, it is important for the investors to convince the FIPB on the benefits to the Indian economy from the project. Some of the parameters that the FIPB considers while evaluating proposals are the levels of investment proposed, the technology to be inducted, the export potential or the import substitution factors, the foreign exchange balance sheet and the employment potential.

Single Window Service and Escort Service

Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investor a single point of contact to meet all regulatory requirements and get approvals. ES is targeted at large and medium sized projects and an individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.

Financial Incentives

Various incentives are offered by state governments to encourage investment and attract capital. These commonly take the form of investment incentives, sales tax exemption/deferment, power tariff incentives, and other fiscal benefits. Lately the differential benefits like tax holidays given by some states have led to flight of capital from one state to another often creating ground for antagonism.

Power Tariff Incentives

Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for the purchase and installation of captive power generation sets. The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which the unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.

A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through the various institutional offices on a time bound basis.

Some state governments have succeeded in simplifying procedures and improving the investment climate in their regions, more than others. Single window and escort services introduced recently by various states are a strong step forward in cutting the red tape of bureaucratic controls.

Other aspects

• Free repatriation of profits and capital investment is permitted, except for a specified list of consumer goods industries where it is subject to dividend balancing against export earnings.
• Use of foreign brand names/trade marks for sale of goods in India is allowed.
• India has entered into agreements for avoidance of double taxation with over 45 countries.
• India has signed several bilateral investment protection agreements.
• Special investment and tax incentives are given for exports and certain infrastructure sectors, IT, etc.