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 have continued. RBI vide their A.P.(DIR Series) Circular No.66 dated 13.01.2003 (in partial modification of Notification No. FEMA 19/2000-RB dated 3 rd May 2000) has liberalized the policy under automatic route:-
