core sector communique

FDI Equity Inflows Touches US $ 4.664 Billion for Month of May 2011
Second highest FDI Equity Inflow Received in any Month for the Last Eleven Financial Years

RATIONALISATION AND LIBERALIZATION OF FDI POLICY:

There has been a continuing and sustained effort to make the FDI policy more liberal and investor-friendly. Significant rationalization and simplification of the policy has, therefore, been carried out in the recent past. Some of the measures taken in this regard include:

Consolidation of FDI Policy: With the aim of simplifying FDI policy, promoting clarity of understanding of foreign investment rules among foreign investors/sectoral regulators and having a single policy platform, so as to ease the regulatory burden for Government, a major exercise of integrating all existing regulations on FDI, into one consolidated document, was undertaken. The process of consolidation involved integration of 178 Press Notes, covering various aspects of FDI policy, which had been issued since 1991, as also a large number of other regulations governing FDI. The document was released as ‘Circular 1 of 2010’, on 31 March, 2010, as per the commitment made. The document has also been updated at six monthly intervals, to ensure that it remains current and updated.

Review of policy on cases requiring prior Government approval for foreign investment: only proposals involving total foreign equity inflows of more than Rs.1200 crores (as against the earlier limit of the total project cost being more than Rs.600 crores), now require to be placed for consideration of CCEA. Further, a number of categories of cases, where prior approval of FIPB/CCEA for making the initial foreign investment had been taken, have been exempted from the requirement of approaching FIPB/CCEA for fresh approval. This has resulted in saving of considerable time and efforts for FIPB/CCEA and also in expediting foreign investment inflows.

Introduction of a specific provision for ‘downstream investment through internal accruals’: so as to ensure that Indian companies have full freedom in accessing their internal resources for funding their downstream investments.

Flexibility in fixing the pricing of convertible instruments through a formula, rather than upfront fixation: this change, which provides flexibility in fixing the pricing of convertible instruments through a formula, rather than through upfront fixation, will significantly help recipient companies in obtaining a better valuation based upon their performance.

Inclusion of fresh items for issue of shares against non-cash considerations, including import of capital goods/ machinery/ equipment and pre-operative/ pre-incorporation expenses: This measure, which liberalizes conditions for conversion of non-cash items into equity, is expected to significantly ease the conduct of business.

Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the ‘same field”: The requirement of Government approval for establishment of new joint ventures in the ‘same field’ has been done away with. As a result, non-resident companies are now also allowed to have 100% owned subsidiaries in India.

Development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’: FDI has been permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’.

FDI has also recently been permitted in Limited Liability Partnerships (LLPs), subject to specified conditions: This change, which permits induction of FDI through the new modality of LLPs, will significantly benefit the Indian economy, by attracting greater FDI, creating employment and bringing in international best practices and latest technologies in the country



FUTURE EXPECTATIONS:



The recent trend of dip in FDI inflows appears to have been reversed in the current financial year, where a significant upward trend in the FDI inflows is evident. The total FDI equity inflows, in the first two months of the current financial year (i.e. April and May, 2011), are US $ 7.785 billion, representing an increase of around 77% over the FDI equity inflows of US $ 4.392 billion for the corresponding period last year (i.e. April-May, 2010).



The FDI equity inflows of US $ 4.664 billion, received in the month of May, 2011, represent the second highest FDI equity inflow, received in any month, for the last eleven financial years (i.e. since April, 2000). They also represent an increase of nearly 111% over the FDI equity inflows of US 2.213 billion received in the same month last year (i.e. May, 2010), as also the highest FDI equity inflow, in the last eleven financial years (i.e. since the financial year 2000-2001), received in the month of May.



Recent investments are an indicator of this positive trend. For example, the proposed tie-up between BP and Reliance, with a likely FDI of over US $ 7 billion, could possibly be the single largest FDI into any emerging market. Similarly, Vodafone’s purchase of Essar’s stake, at around US $ 5 billion, is also an indicator of continuing investor confidence in India. The approvals given to POSCO and to the Cairn-Vedanta acquisition (a deal of around US $ 8 - 9 billion) are also likely to substantially increase FDI this year.