1. FOREIGN DIRECT INVESTMENT
Foreign Direct Investment (FDI) is normally 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/ depositor. 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, via Euro issues
Through private placements or preferential allotments
Foreign Direct Investment in India is not allowed under the following
industrial sectors:
Arms and ammunition
Atomic Energy
Coal and lignite
Rail Transport
Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
diamonds, copper, zinc
FDI IN INDIA ACROSS DIFFERENT SECTORS
Hotel & Tourism
Hotels include restaurants, beach resorts and business ventures providing
accommodation and food facilities to tourist. Tourism would include travel agencies,

2. tour operators, transport facilities, leisure, entertainment, amusement, sports and
health units.
100 per cent FDI is permitted for this sector through the automatic route.
Trading
For trading companies 100 per cent FDI is allowed for
• Exports
• Bulk Imports
• Cash and Carry wholesale trading.
Power
For business activities in power sector like electricity generation, transmission and
distribution other than atomic plants the FDI allowed is up to 100 per cent.
Drugs & Pharmaceuticals
For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed,
subject to the fact that the venture does not attract compulsory licensing, does not
involve use of recombinant DNA technology.
Private Banking
FDI of 49 per cent is allowed in the Banking sector through the automatic route
provided the investment adheres to guidelines issued by RBI.
Insurance Sector
For the Insurance sector FDI allowed is 26 per cent through the automatic route on
condition of getting license from Insurance Regulatory and Development Authority
(IRDA).

3. Telecommunication
• For basic, cellular, value added services and mobile personal communications
by satellite, FDI is 49 per cent.
• For ISPs with gateways, radio-paging and end to end bandwidth, FDI is
allowed up to 74 per cent. But any FDI above 49 per cent would require
government approval.
Business Processing Outsourcing
FDI of 100 per cent is permitted provided such investments satisfy certain
prerequisites.
NRI's And OCB's
They can have direct investment in industry, trade and infrastructure
UP TO 100 PER CENT EQUITY IS ALLOWED IN THE FOLLOWING SECTORS
• 34 High Priority Industry Groups
• Export Trading Companies
• Hotels and Tourism-related Projects
• Hospitals, Diagnostic Centers
• Shipping
• Deep Sea Fishing
• Oil Exploration
• Power

4. • Housing and Real Estate Development
• Highways, Bridges and Ports
• Sick Industrial Units
• Industries Requiring Compulsory Licensing
• Industries Reserved for Small Scale Sector
Increasing FDI in India: Does the Budget go far enough?
India and China not only survived the financial crisis — over the course of the
financial crisis their economies grew. This is the perfect time for India to attract
much needed non-debt creating capital flows through foreign direct investment
(FDI). The Indian Budget for 2010-11 has rightly proposed to simplify the FDI
regime, maintaining FDI flows particularly by recognizing ownership and control
issues and liberalising the pricing and payment system for technology transfers,
trademarks, and brand name and royalty payments. More importantly, the budget
shows an intention to introduce user-friendly regulations and guidelines for FDI.
But while India is macro-economically well placed to attract FDI inflows, merely
showing an intention to introduce user-friendly regulations without addressing the
core regulatory, institutional and policy issues affecting FDI may not be enough to
attract the huge amounts of FDI the country needs.Economic surveys in last few
years confirm time and again the need for concrete reforms to improve the Indian
investment and business climate. While the 2009 „Doing Business‟ survey prepared
by the World Bank showed that India‟s indicators have gotten better, India still lags
behind China overall. China beats India in crucial indicators such as: registering
property, trading across borders, enforcing contracts and closing business (see the
table below). In this context, the suggestion in the budget for simplified, user-
friendly regulations and guidelines would be useful — provided that after the budget

5. institutions are designed to enforce commercial contracts, in order to reassure
investors. In fact, it was expected that the budget would not only demonstrate an
intention to simplify FDI rules and regulations, but also propose a proper framework
of action for achieving this.
India‟s high trade and transaction costs are mainly due to the country‟s lack of
quality infrastructure. This lack of infrastructure discourages resource-seeking and
export-oriented FDI to use India as their base as they do with China.
China‟s unmatched average growth rate of 10 per cent for more than a decade is
due to consistent improvements in physical infrastructure. The 2010-11 Budget
does focus on infrastructure development, allocating substantial general funds,
which constitutes 46 per cent of the total plan allocation, and doubling plan
allocation to power sector and improved allocation for renewable energy in
particular. Moreover, some of the budget‟s announcements—like allocating coal
blocks for captive mining and a proposal to set up a Coal Regulatory Authority to
ensure greater transparency—are welcome steps.
The public sector cannot cover the USD150 billion per annum required for the
maintenance and creation of infrastructure. India invests around 5 to 6 per cent of
GDP on infrastructure whereas China invests 14.4 per cent of GDP. The gap
between infrastructure investments in China and India is widening not only as share
of GDP, but also in absolute levels given that India‟s GDP is only one third that of
China. Hence, the private sector must participate substantially in infrastructure
development in India. One way of improving the environment for infrastructure
development is through public-private partnerships. These require a more stable
and secure policy framework; particularly ensuring the protection of property rights
and consistency in pricing and subsidy policies. Infrastructure projects need
maximum clearances and approvals that sometimes run into innumerable disputes.
Therefore, there should be an institutional mechanism for speedy dispute
resolution. The politically acceptable cost-recovery based pricing is a must for
attracting private investment into the infrastructure sector. Infrastructure projects
are capital intensive. A special federal investment law should be formulated to

6. consolidate the many sets of State laws, rules and regulations covering the
infrastructure sector. Infrastructure also needs stable financing. Because of this the
Rs 20,000 income tax exemption for investment on infrastructure bonds is a
welcome step. But the government could do more by allowing financial
intermediaries to invest in reasonably rated infrastructure projects and by giving a
guarantee to use pension funds, insurance and FII‟s to invest in infrastructure
projects.
The Budget 2010 intends to simplify and introduce user-friendly regulations and
guidelines for FDI but these are mostly at the central government level. However,
actual implementation of projects will take place at the state level. Bureaucratic
hassles, mainly at the state level, are obstacles to the realisation of FDI. Some of
the major issues related to project implementation such as land acquisition, land
use change, power connection, building plan approval are at the state level This
division of political responsibility creates a delay in implementation. Therefore, a
concerted effort is required for better co-ordination between the central and state
governments on this issue. An institutional mechanism may be set up for getting
clearances of FDI projects from both central and state governments within a
stipulated time.
Another way of attracting FDI is by following the Chinese special economic zone
(SEZ) model. This is large with state of the art infrastructure facilities and proper
infrastructure connectivity to the market. To attract FDI SEZs in India should be
designed as China‟s are, with proper infrastructure connectivity to domestic and
external markets. If necessary, the private sector should be encouraged to set up
private airports and ports to service the SEZs through automatic routes and 100
per cent FDI equity. Since it‟s hard to connect different kinds of transportation
infrastructure in India, SEZs should be established in the coastal regions like in
China to make transportation easier. The Budget 2010-11 should have addressed
some of these measures to attract FDI much needed by the economy.
While foreign equity participation has increased in most sectors, there are still
sectors where there is huge potential for FDI inflows. Further increases in FDI

7. ceilings in sectors such as telecom, civil aviation, power generation, food retailing,
insurance, banking, investing companies and the real estate sector will be required
to achieve this potential. Most of these sectors need to be opened up further with
independent regulatory systems to control market distortions and allow fair
competition. Though the budget recognizes the importance of ownership and
control issues for FDI, no concrete steps have been announced or proposed.
The investment climate can be improved through increasing foreign and private
ownership in different sectors, simplifying rules and regulations and developing
independent regulatory bodies. But India can only succeed in actually creating a
conducive business environment and getting more investment both from private
and foreign investors if it focuses on providing quality physical infrastructure. This
union budget has done the right thing by allocating USD37 billion for infrastructure
upgrades in both rural and urban areas. However, mere allocation is not enough as
infrastructure projects are complicated and actual outcomes are quite different from
the proposals.
Private sector participation, both domestic and foreign, needs to be encouraged to
enable infrastructure development. Though an emphasis on infrastructure
development in the 2010-11 Budget would certainly help in achieving more FDI
realization, we also need to work on other important issues related to labour laws,
centre-state coordination, better SEZ schemes and proper institutional mechanisms
to attract more FDI in future. Foreign direct investment (FDI), which is vital to
India‟s growth, has lacked a proper policy document and has been administered
primarily through a series of press notes over many years. According to the critics,
the 177 existing press notes have created new areas of ambiguity while trying to
resolve the existing ones. Doing away with the press notes approach will go a long
way in making India‟s FDI policy transparent and friendly to investors.
India is becoming increasingly attractive to foreign investors. The reforms proposed
in this year‟s Budget will simplify regulations and guidelines for FDI and make them
more user-friendly, paving the way for a better investment climate and sustainable
growth. But in India there is huge gap between proposals for reforms, and their

8. implementation. Bipartisan cooperation will help to ensure that reforms are
implemented, allowing India to attract FDI and progress toward double digit
growth.
FOREIGN DIRECT INVESTMENT
India has been ranked at the third place in global foreign direct investments in
2009 and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations Conference on
Trade and Development (UNCTAD) in a report on world investment prospects titled,
'World Investment Prospects Survey 2009-2011' released in July 2009.
The 2009 survey of the Japan Bank for International Cooperation released in
November 2009, conducted among Japanese investors continues to rank India as
the second most promising country for overseas business operations, after China.
A report released in February 2010 by Leeds University Business School,
commissioned by UK Trade & Investment (UKTI), ranks India among the top three
countries where British companies can do better business during 2012-14.
According to Ernst and Young's 2010 European Attractiveness Survey, India is
ranked as the 4th most attractive foreign direct investment (FDI) destination in
2010. However, it is ranked the 2nd most attractive destination following China in
the next three years.
Moreover, according to the Asian Investment Intentions survey released by the Asia
Pacific Foundation in Canada, more and more Canadian firms are now focussing on
India as an investment destination. From 8 per cent in 2005, the percentage of
Canadian companies showing interest in India has gone up to 13.4 per cent in
2010.
India attracted FDI equity inflows of US$ 2,214 million in April 2010. The
cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at
US$ 134,642 million, according to the data released by the Department of
Industrial Policy and Promotion (DIPP).

9. The services sector comprising financial and non-financial services attracted 21 per
cent of the total FDI equity inflow into India, with FDI worth US$ 4.4 billion during
April-March 2009-10, while construction activities including roadways and highways
attracted second largest amount of FDI worth US$ 2.9 billion during the same
period. Housing and real estate was the third highest sector attracting FDI worth
US$ 2.8 billion followed by telecommunications, which garnered US$ 2.5 billion
during the financial year 2009-10. The automobile industry received FDI worth US$
1.2 billion while power attracted FDI worth US$ 1.4 billion. during April-March
2009-10, according to data released by DIPP.
In April 2010, the telecommunication sector attracted the highest amount of FDI
worth US$ 430 million, followed by services sector at US$ 355 million and computer
hardware and software at US$ 172 million, according to data released by DIPP.
During the financial year 2009-10, Mauritius has led investors into India with US$
10.4 billion worth of FDI comprising 43 per cent of the total FDI equity inflows into
the country. The FDI equity inflows in Mauritius is followed by Singapore at US$ 2.4
billion and the US with US$ 2 billion, according to data released by DIPP.
During April 2010, Mauritius invested US$ 568 million in India, followed by
Singapore which invested US$ 434 million and Japan that invested US$ 327 million,
according to latest data released by DIPP
Investment Scenario
In May 2010, the government cleared 24 foreign investment proposals, worth US$
304.7 million. These include:
Asianet's proposal worth US$ 91.7 million to undertake the business of
broadcasting non-news and current affairs television channels.
Global media magnate Rupert Murdoch-controlled Star India holdings'
investment of US$ 70 million to acquire shares of direct-to-home (DTH)
provider Tata Sky.
AIP Power will set up power plants either directly or indirectly by promotion
Sembcorp Utilities, of joint ventures at an investment of US$ 24.4 million.

10. A COMPANY BASED IN SINGAPORE, has picked up 49 per cent stake in
the 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation
India Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for
US$ 235.1 million.
CINEPOLIS, a Mexico-based multiplex operator, is looking at expanding its
footprint in India. The company which started operations in India last year
plans to invest US$ 350 million in the next five years to operate 500 screens
in 40 cities.
According to a study released by global consultancy BAIN & COMPANY,
private equity (PE) and venture capital (VC) investments are projected to
reach US$ 17 billion in 2010. The report includes a survey conducted across
leading PE investors globally. The survey revealed number of respondents
planning to invest in the range of US$ 200-500 million in 2011 has risen
nearly four-fold to 27 per cent. Further, as per figures released by Grant
Thornton, the food processing and agri-based companies have attracted US$
300 million PE investments during January-June 2010. In 2009, PE
investments in these sectors were about US$ 398 million.
IL&FS Investment Managers (IIML) plans to invest US$ 300 million, in real
estate and urban infrastructure projects by the end of 2010.
“We are in the advance stages of finalizing 3-4 deals in residential real estate
and urban infrastructure space like roads and hospitality,” said Shahzaad
Dalal, Vice-Chairman and MD, IIML.
Investments by French companies in India is expected to touch US$ 12.72
billion by 2012, and would focus on automobile, energy and environment
sectors among others, according to Jean Leviol, Minister Counselor for
Economic, Trade and Financial Affairs, French Embassy in India.
Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million in
India to expand its manufacturing capacity and research capabilities. The
investment will be used for increasing the manufacturing capacity of Active
Pharmaceutical Ingredients (APIs) and product research at the Eisai
Knowledge Centre in Visakhapatnam.

11. Japan's Kobelco Cranes, a subsidiary of Kobe Steel, is planning to invest
US$ 12.7 million to set up a plant near Chennai to produce crawler cranes.
The plant will begin production in 2011.
Franco-American telecom equipment maker, Alcatel-Lucent plans to
shift its global services headquarters to India. The headquarters would need
about US$ 500 million in investments over three years, according to Ben
Verwaayen, Chief Executive Officer, Alcatel-Lucent
POLICY INITIATIVES
The Government of India has released a comprehensive FDI policy document
effective from April 1, 2010. The Circular 1 of 2010 consolidates into one
document all the prior policies/regulations on FDI which are contained in
FEMA, 1999; RBI Regulations under FEMA, 1999 and Press Notes/Press
Releases/Clarifications issued by DIPP and reflects the current 'policy
framework' on FDI.
Furthermore, the government has allowed the Foreign Investment Promotion
Board (FIPB), under the Ministry of Commerce and Industry, to clear FDI
proposals of up to US$ 258.3 million. Earlier all project proposals that
involved investment of above US$ 129.2 million were put up before the
Cabinet Committee of Economic Affairs (CCEA) for approval. The relaxation
would expedite FDI inflow, according to Mr. P Chidambaram, Union Home
Minister.
EXCHANGE RATE USED: 1 USD = 47.07 INR (AS ON JULY 2010)