Till 1991, India's economic integration with the rest of the world was very limited. But the new economic policy and the liberalisation
measures so introduced made way for the globalisation of Indian businesses.
Earlier, exports were a predominant way of expanding business abroad and
hence the emphasis was on export promotion strategies with restrictions
on cash outflows so as to conserve our foreign exchange reserves. But
over the years, its being realised that for expansion and growth of Indian
companies, it is necessary that they increase their share in the world
market not only by exporting their products but also by acquiring overseas
assets and establishing their presence abroad. Accordingly, the policy
for outward capital flows has evolved, marked by phased liberalisation.
The first policy in the form of guidelines governing overseas
direct investment was issued in 1969 by the Government of India. These
guidelines defined the extent of participation of Indian companies in
projects abroad. They permitted minority participation by an Indian party
with no cash remittances. Association of local parties, local development
banks, financial institutions and local Governments, wherever necessary
was also favoured for promoting such investments.
The Government modified these guidelines by issuing a set
of more comprehensive measures in 1978. These measures included provision
for the approval, monitoring, evaluation of investment proposals at a
focal point by the Ministry
of Commerce. These guidelines also recognised the need of vesting
the necessary powers with the Reserve
Bank of India( RBI) for the release foreign exchange to meet the preliminary
and subsequent expenses of an Indian company relating to its investments
abroad .
Such guidelines were subsequently revised in 1986,1992
and 1995. The policy on Indian investments overseas was first liberalised
in 1992. Under it, an Automatic Route for overseas investments was introduced
and cash remittances were allowed for the first time with restrictions
on the total value. The basic rationale for opening up the regime of Indian
investments overseas had been the need to provide Indian industry access
to new markets and technologies with a view to increasing their competitiveness
globally and help the country's export efforts.
Further liberalisation and streamlining of procedures was
undertaken in 1995. The guidelines of 1995 provided for a detailed framework
by transferring the work relating to overseas investment from Ministry
of Commerce to Reserve
Bank of India (RBI), which became the nodal agency for administering
the overseas investment policy . This provided a single window system
for overseas investment approvals. Since then, all proposals for direct
investment abroad are being made to and processed by the Reserve
Bank of India (RBI). Also, these guidelines aimed at providing transparency
in the framework of overseas investment policy with the following basic
objectives :-
- To provide a framework for Indian industry and business
to access global networks;
- To ensure that trade and investment flows, though determined
by commercial interests, are consistent with the macroeconomic and balance
of payment compulsions of the country, particularly in terms of the
magnitude of the capital flows;
- To give liberal access to Indian business for technology-sourcing
or resource-seeking or market-seeking;
- To indicate that there is a change in the approach of
the Government, from one of regulator or controller to one of facilitator;
- To encourage the Indian industry to adopt a spirit of
self-regulation and collective effort in order to improve its image
abroad.
Subsequently, in 2000, introduction of FEMA
(Foreign Exchange Management Act) changed the entire perspective on
foreign exchange particularly those relating to investment abroad. It
changed the emphasis from exchange regulation to exchange management.
It aimed to facilitate external trade and payments as well as to promote
an orderly development and maintenance of foreign exchange market in India.
Over the years, the liberalisation measures for overseas
investment by Indian companies has continued. The measures so undertaken
in the fiscal year 2003-04 are as follows :-
- The listed Indian companies are permitted to invest
abroad in those foreign companies:- (a) which are listed on a recognized
stock exchange; and (b) which have a shareholding of at least 10% in
an Indian company which is listed on a recognized stock exchange in
India (as on 1 st January of the year of the investment). As per these
guidelines, such investment shall not exceed 25% of the Indian company's
net worth, as on the date of latest audited balance sheet.
- The resident individuals are also permitted to invest
in the overseas companies (as indicated above) without any monetary
limit.
- The Indian corporates or registered partnership firms
are allowed to investment in entities abroad up to 200% of their net
worth. Along with it, the prevailing monetary ceiling of US$ 100 million
(US$ 10 million for partnership firms ) has been removed.
- The Indian corporates or registered partnership firms
are allowed to undertake agricultural activities either directly or
through an overseas branch.
- For investment abroad in the financial sector, the stipulation
of minimum net worth of Rs.15 crores for Indian companies
engaged in financial sector activities in India has been removed.
Further liberalisation measures introduced in the
fiscal year 2005-06
are as follows:-
