Describe the government policy towards foreign investment.

Government policy towards foreign investment has changed over a period of time starting from 1948 when then Industrial Policy Resolution emphasized the importance and need of foreign investment in the country. However regulatory and investment norms were far from being conducive for appreciable foreign investment. In 1991, under the leadership of P.V. Narshimarao, many changes were made in the new economic policy. The year marks the beginning of era of liberalization, privatization and globalization of the Indian economy.

One of the main objectives of the New Economic Reforms was to relax foreign direct investment norms. The government opened up sectors which were otherwise reserved exclusively for Public Sector participation for private and foreign participation. The government allowed approval for up to 51% foreign equity in high priority industries. A special board FDI Promotion Board was constituted to monitor and negotiate for foreign investments.

During 1996-97 some significant changes were made in foreign policy. Some of these are:

Number of industries eligible for up to 51% of foreign equity was increased from 35 to 48.

The upper limit of foreign investment in various economy sectors were subjected to following limits:

  • Banking-up to 20% for foreign investors and up to 40% for NRIs.
  • Non-Banking Financial Companies (NBFC) up to 51%.
  • Ports, roads, power, tourism and venture capital funds 100%.
  • Airlines/Air taxes up to 40% for foreign investors and up to 100% for NRIs
  • Petroleum-up to 100%.
  • Telecommunications-up to 49%.
  • Small Scale Industries-up to 24%.
  • Drugs and Pharmaceuticals-up to 51%.
  • Mining-up to 50% (expect for gold, silver and diamond).

FII investments (equity) in unlisted companies were allowed.

Priority areas of investment include:

  • Infrastructure.
  • Export potential.
  • Large scale employment potential.
  • Items linked with farm sector.
  • Social infrastructure like health care facilities, education and training centers etc.

100% foreign equity is allowed if a foreign company is unable to find a suitable joint venture partner, However subjected to the condition that it will divest 26% of equity in favor of Indian parties in period of next 3 to 5 years.

Foreign companies with 100% equity were  allowed, subjected to following conditions:

  • Only holding operation is required Downstream investments require prior approval.
  • 50 or more production is to be exported.
  • Consultancy and advisory projects.
  • Project requires sophisticated technology.
  • Projects in roads, ports, power and industrial townships.
  • Government opened insurance sector allowing 26% foreign equity participation and 14% NRI investments.
  • Foreign stake in mining industries was limited to 50 percent.
  • Foreign investment in 9 categories of industries was restricted to 74 percent, subjected to automatic approval.
  • Foreign Investment Promotion Council (FTPC) and Foreign Investment Promotion Board (FIPB) were entrusted with the task of making foreign investments more transparent.

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