[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
The third section discusses the geographical
and sectoral patterns of outward
FDI flows from India. The fourth
section highlights some of the overseas
Mergers & Acquisitions (M&As) made
by Indian firms. The fifth section discusses
their likely motives and the factors
driving overseas investments. The
paper ends with concluding remarks on
some policy implications of the recent
surge in outward FDI from India.
2. The Policy Framework
The policy guidelines for outward FDI
from the country have evolved over the
last few decades. The evolution of India’s
overseas investment policy can be
traced back to 1969, when the guidelines
for overseas direct investment were issued
by the Government of India for the
first time. These guidelines had defined
the extent of participation of Indian
companies in projects abroad. Indian
companies were permitted minority
participation in ‘turnkey projects’ involving
no cash remittances. Subsequently,
these guidelines were revised
in 1978 and 1986, in the pre-reform era.
The main objective of outward investment
policy during this era was to encourage
outward investments by Indian
companies as means of promoting exports
of Indian capital goods, technology
and consultancy services. 3
However, since the onset of economic
reforms in India, overseas investment
policy has undergone a structural
change; with the last five years witnessing
a clear thrust in policy towards promotion
of greater investment opportunities
for Indian firms. The stated
objectives of this structural change in
the overseas investment policy regime
were: to help promote exports from the
country, strengthen its economic linkages
with other countries, provide Indian
firms the access to new markets
and technologies, and increase the global
competitiveness of Indian firms. India’s
overseas investment policy was first
liberalised in 1992, which marked the
introduction of an Automatic Route for
overseas investments and allowed cash
remittances for the first time with restrictions
on the total value of investments.
The total value of overseas investment
by an Indian firm was
restricted to $2 million in a block of
three years, with a cash component of
only $0.5 million. In 1995, the upper
limit for automatic approval was raised
to $4 million; and, the Reserve Bank of
India (RBI) was given the authority for
approval of overseas investment proposals
worth up to $15 million, 4 while overseas
investments worth more than $15
million were still considered and approved
by the Ministry of Finance. The
introduction of Foreign Exchange Management
Act (FEMA), in 2000, brought
in further changes in the policy relating
to investments abroad. The limit for
overseas investment was raised to $50
million annually, without any condition
relating to repatriation of a part of the
declared profits. In March 2002, the upper
limit for automatic approval was
further increased to $100 million annually,
of which 50 percent could be funded
in foreign exchange from any authorized
dealer (i.e. a bank authorized by
RBI to deal in foreign exchange or
foreign securities). 5
Since 2003, however, the policy regime
for overseas investment has been
liberalized significantly. In 2003, Indian
firms were allowed to make overseas
investment (annually) of up to 100 percent
of their net worth under the automatic
approval route. This limit was
enhanced later to 200 percent in 2005
and 300 percent in 2007. 6 In March
2006, RBI also paved the way for proprietary/
unregistered partnership firms
to set up joint ventures or wholly owned
subsidiaries abroad. Recently, the upper
limit for total overseas investment of an
Indian party in all its joint ventures and/
or Wholly Owned Subsidiaries abroad
has been enhanced to, not exceeding
400 percent of its net worth. 7
As regards the implications of these
policy changes in India, Nayyar (2007) 8
observes that the liberalization of the
overseas investment policy regime,
India’s total outward FDI stock rose from $ 124
million in 1990 to (almost) $ 13 billion in 2006.
Still, it was ranked only 16 th among the developing
countries in terms of the total outward FDI stock
along with reforms in the financial sector
particularly those since early 2000s,
have enhanced Indian firms’ access to
capital from both domestic and international
financial markets. For instance,
in April 2003, banks in India were permitted
to provide credit and non-credit
facilities to Indian Joint Ventures or
Wholly Owned Subsidiaries abroad
worth up to 10 percent of their unimpaired
capital funds. This limit was further
raised to 20 percent in November
THE INDIA ECONOMY REVIEW
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