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Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects. Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.
The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. A number of recent policy changes have reduced the discriminatory bias against foreign firms.
- The government has amended exchange control regulations previously applicable to companies with significant foreign participation.
- The ban against using foreign brand names/trademarks has been lifted.
- The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65 percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.
- The long-term capital gains rate for foreign companies was lowered to 20 percent; a 30 percent rate applies to domestic companies.
- The Indian Income Tax Act exempts export earnings from corporate income tax for both Indian and foreign firms.
To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and OCBs may invest on a repatriable basis in new issues of shares/debentures only of industrial or manufacturing companies.
Foreign Investment Policies
The Ministry of Industry has expanded the list of industries eligible for automatic approval of foreign investments and, in certain cases, raised the upper level of foreign ownership from 51 percent to 74 percent and further in certain cases to 100 percent. In January 1998, the RBI announced simplified procedures for automatic FDI approvals. The announcement further provided that Indian companies will no longer require prior clearances from the RBI for inward remittances of foreign exchange or for the issuance of shares to foreign investors.
In the recent budget, the finance minister announced the government's commitment to a 90-day period for approving all foreign investments. Government officers will be assigned to larger foreign investment proposals and will facilitate Central and State clearances in a time-bound manner. Unlisted companies with a good 3 year track record, have been permitted to raise funds in international markets through the issue of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).
Other changes to encourage foreign direct and foreign institutional investment
For instance, the Securities and Exchange Board of India (SEBI) recently formulated guidelines to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional Investors (FII's). These brokers can now open foreign currency-denominated or rupee accounts for crediting inward remittances, commissions and brokerage fees.
Relaxation
The condition of dividend balancing (offsetting the outflow of foreign exchange for dividend payments against export earnings) has been eliminated for all but 22 consumer goods industries. A 5-year tax holiday is extended to enterprises engaged in development of infrastructural facilities. Even without a registered office in India, foreign companies are allowed to start multimodal transport services in India.
The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the construction of roads/bridges. The peak custom duty rate was reduced to 50 percent from 65 percent in the March 1995 budget. Import regime changes included enhancement of the scope of Special Import License (SIL) programs, and the expansion of freely importable items on the Open General License (OGL) list to include some consumer goods.
References: Investment in India - Openness to Foreign Investment and Foreign Investment in India - Policy & Legal Procedures, http://finance.indiamart.com
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