The budget has removed all sectoral limits on investment by FIIs in Indian companies
The Union Budget has provided foreign institutional investors (FIIs) with enough sops. Earlier, FIIs could invest in an Indian company under the portfolio investment route beyond 24% of the company's paid-up capital with the approval of shareholders.
In the budget speech, finance minister Yashwant Sinha proposed that henceforth FII portfolio investments will not be subject to sectoral limits for foreign direct investment (FDI) except in specified sectors. FIIs are now permitted to trade in all stock-traded derivative products within specified trading limits.
Prior to 1991, foreign firms were allowed to enter the Indian markets only if they possessed technology unavailable in India. Almost every aspect of production and marketing was tightly controlled, as a result of which many foreign companies eventually abandoned their projects. But the liberal industrial policy announced in July 1991 actively promoted foreign investment as indispensable to India's international competitiveness.
It was in September 1992 that foreign investors received permission to invest in Indian securities markets either through equity or debt route. Investment could also be made through GDRs and foreign currency bonds issued by Indian companies.
Besides, foreign financial service institutions were also permitted to set up joint ventures in stock broking, asset management companies, merchant banking activities and other financial services along with an Indian partner. Foreign institutional investors were initially allowed to invest in Indian companies under the portfolio investment route up to 24% of its paid-up capital. In the last budget of 2001-02, this limit was raised to 49%, subject to shareholders' approval.
FII investments have been rising ever since and have touched Rs 55,970.9 crore. From a low of Rs 2,595.1 crore invested in 1993, FII investments rose to Rs 13,292.7 crore in 2001, indicating a jump of a whopping 400%. Now, the government has allowed foreign investors to set up 100% local businesses in many industries and has lifted restrictions on venture capital investment. With this, the annual average investment of $ 3 billion is expected to shoot up to $ 10 billion.
However, the government needs to concentrate more on foreign direct investment (FDI). Multiple rules and poor infrastructure continue to be the stumbling block in poor FDI inflow. The total FDI investment in India figures way below that of China and other Asian countries.
While India derives only 26% of its GDP growth from the industrial sector, this figure in China is as high as 48% of its GDP. China is expected to continue the trend of rising FDI. However, the only solace is that while China managed to attract $ 13-14 billion in the first ten years by way of FDI, India attracted a figure of $ 26-27 billion in its first ten years.
A study conducted by McKinsey states that India possesses the potential to attract $ 100 billion as FDI in the next five years, and if this happens, it will increase its GDP growth rate by 1.5-2%. The study further says that with the right policy environment, India has the potential to attract $ 12 billion in energy, $ 4 billion in telecom, $ 4 billion in financial services and $ 1.5 billion in food alone.
A survey by the Japan Bank for International Co-operation to assess FDI trends rated India as number five among 52 companies for overseas business operations, with the top four positions being occupied by China, US, Thailand and Indonesia, respectively.
Unfortunately, there have been three recent FDI fall-outs in the power sector alone - Enron and Tractabel Power and Merant. US-based energy marketing giant - Merant - switched out of Hirma Power Project in Orissa and Balagarh project in West Bengal; Belgium-based Tractabel Power exited out of Jindal Tractabel Power Company by selling 50% stake to Jindals and financial institutions.
