Introduction
'Indian economy is capable of absorbing US$ 50 billion in foreign direct investment (FDI) per year', said Mr P Chidambaram, the Finance Minister, India. FDI is an economic segment that enjoys intense focus and attention from policy makers of the highest rank in the administration.
The Government relaxed FDI regime in sectors including multi-brand retail, single-brand retail, commodity exchanges, power exchanges, broadcasting, non-banking financial institutions (NBFCs) and asset reconstruction companies (ARCs) in 2012.
There were several big-bang reforms and the Government allowed 51 per cent FDI in multi-brand retail and 49 per cent in the aviation sector. FDI cap was also raised from 49 per cent to 74 per cent in broadcasting and ARCs, with an aim to bring foreign expertise in the segments. Foreign investment has also been allowed in power exchanges while foreign institutional investors (FIIs) have been allowed to invest up to 23 per cent in commodity exchanges without seeking prior approval from the Government.
Thus, reforms and policies at such a massive level indicate that Indian FDI landscape offers a plethora of opportunities to foreign investors as the economy is booming and vibrant as compared to its global peers.
Furthermore, favourable demographics and growth opportunities keep India an 'attractive' destination for merger and acquisition (M&A) activities across diverse sectors including consumer goods and pharmaceuticals, according to global consultancy Ernst & Young.
Key Statistics
- India received FDI worth US$ 30.82 billion during April-January 2012-13 while FDI equity inflows during January 2013 stood at US$ 2.16 billion, according to latest data released by the Department of Industrial Policy and Promotion (DIPP).
The sectors which have received high level of FDI during the first ten months of 2012-13 include services (US$ 4.66 billion), construction (US$ 1.21 billion), drugs & pharmaceuticals (US$ 1 billion), hotel and tourism (US$ 3.19 billion), metallurgical industries (US$ 1.38 billion) and automobile (US$ 895 million)
Country wise, high levels of FDI came during the period from Mauritius (US$ 8.17 billion), Singapore (US$ 1.82 billion), the UK (US$ 1.05 billion), Japan (US$ 1.69 billion) and the Netherlands (US$ 1.52 billion), showed the DIPP data
- The value of M&A deals in India stood at US$ 4.5 billion in the March 2013 quarter, according to Thomson Reuters’ India M&A First Quarter 2013 Review. Meanwhile, there were 90 private equity (PE) deals valuing US$ 1.04 billion during January-March 2013 quarter, reveal data from Four-S Services
- India's foreign exchange (forex) reserves stood at US$ 292.64 billion for the week ended March 29, 2013, according to data released by the Central Bank. The value of foreign currency assets (FCA) - the biggest component of the forex reserves – stood at US$ 259.72 billion, according to the weekly statistical supplement released by the Reserve Bank of India (RBI)
Important Developments
- The Indian Government, in consultation with the Foreign Investment Promotion Board (FIPB), has recently cleared 12 FDI proposals amounting to Rs 2, 609 crore (US$ 478.47 million). These included the proposal of Decathlon Sports India's proposal for infusion of foreign equity worth Rs 700 crore (US$ 128.37 million) to engage in single brand retail. The biggest proposal cleared was Ahmedabad-based Claris Otsuka Ltd's plan to accumulate its infusions in business into a new joint venture (JV) with FDI worth Rs 1,050 crore (US$ 192.56 million). The board also cleared Mumbai-based Glynwed Pipe Systems's proposal to receive foreign investment worth Rs 800 crore (US$ 146.74 million) for making downstream investment.
Other proposals to have received green signal included that of Promod S.A.S, France, to induct foreign equity worth Rs 29.69 crore (US$ 5.45 million) into an Indian JV company to be engaged in single brand retail trading and Fossil India and Le Creuset Trading's for setting up of single brand retail stores as a wholly-owned subsidiary (WoS) of a foreign company
- Japanese firm Mitsubishi has formed a JV with Dubai-based ETA Group to set up Mitsubishi Elevators ETA India Pvt Ltd, to manufacture, distribute, install and maintain elevators for premium residential apartment complexes and industrial buildings in India. The company, which was already present in India focusing on the premium commercial segment, will now focus on the premium residential segment and the middle segment in Tier 2 and Tier 3 cities
- Meanwhile, French companies are showing keen interest to park their investments in India, pertaining to segments like defence, space, urban development and infrastructure
Policy Initiatives
The Indian Government is all-set to advertise in the world in the pursuit of reforms it has undertaken to woo foreign investments.
While the Government is contemplating to raise FDI cap in defence sector to at least 49 per cent from the current 26 per cent, Mr P Chidambaram has expressed confidence that the similar amendment could be introduced to the Insurance Bill very soon.
The RBI will come out with a discussion paper by April 20, 2013 on redefining FDI and portfolio investment i.e. FII so as to remove ambiguities. The paper will have clarifications on legal and taxation issues involved in the implementation of the new definition, how the different instruments of foreign investments would be treated and how it would impact investments in listed and unlisted firms.
Also, the DIPP has released its latest edition of consolidated FDI policy which has incorporated in itself the changes made in the regulations over the past one year. The DIPP is the nodal agency on FDI related matters and with a view to make India's FDI regime simple and easy to understand for investors, it had compiled all the related policies into a single document.
Future Outlook
In the wake of several important announcements made by the Government over 2012-13, India is expected to receive higher FDI in 2013, said an official from the Commerce and Industry ministry. And believing that the trend would persist, HSBC has stated in its research report that there might be a shift in FDI flows from China to India in coming years.
Exchange Rate Used: INR 1 = US$ 0.01834 as on April 11, 2013
References: Media Reports, Press Releases, FDI statistics from Department of Industrial Policy and Promotion.
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