Till 1991, India's economic integration with the rest of the world was very limited. But the new economic policy and the liberalisation measures so introduced made way for the globalisation of Indian businesses. Earlier, exports were a predominant way of expanding business abroad and hence the emphasis was on export promotion strategies with restrictions on cash outflows so as to conserve our foreign exchange reserves. But over the years, its being realised that for expansion and growth of Indian companies, it is necessary that they increase their share in the world market not only by exporting their products but also by acquiring overseas assets and establishing their presence abroad. Accordingly, the policy for outward capital flows has evolved, marked by phased liberalisation.
The first policy in the form of guidelines governing overseas direct investment was issued in 1969 by the Government of India. These guidelines defined the extent of participation of Indian companies in projects abroad. They permitted minority participation by an Indian party with no cash remittances. Association of local parties, local development banks, financial institutions and local Governments, wherever necessary was also favoured for promoting such investments.
The Government modified these guidelines by issuing a set of more comprehensive measures in 1978. These measures included provision for the approval, monitoring, evaluation of investment proposals at a focal point by the Ministry of Commerce. These guidelines also recognised the need of vesting the necessary powers with the Reserve Bank of India( RBI) for the release foreign exchange to meet the preliminary and subsequent expenses of an Indian company relating to its investments abroad .
Such guidelines were subsequently revised in 1986,1992 and 1995. The policy on Indian investments overseas was first liberalised in 1992. Under it, an Automatic Route for overseas investments was introduced and cash remittances were allowed for the first time with restrictions on the total value. The basic rationale for opening up the regime of Indian investments overseas had been the need to provide Indian industry access to new markets and technologies with a view to increasing their competitiveness globally and help the country's export efforts.
Further liberalisation and streamlining of procedures was undertaken in 1995. The guidelines of 1995 provided for a detailed framework by transferring the work relating to overseas investment from Ministry of Commerce to Reserve Bank of India (RBI), which became the nodal agency for administering the overseas investment policy . This provided a single window system for overseas investment approvals. Since then, all proposals for direct investment abroad are being made to and processed by the Reserve Bank of India (RBI). Also, these guidelines aimed at providing transparency in the framework of overseas investment policy with the following basic objectives :-
To provide a framework for Indian industry and business to access global networks;
To ensure that trade and investment flows, though determined by commercial interests, are consistent with the macroeconomic and balance of payment compulsions of the country, particularly in terms of the magnitude of the capital flows;
To give liberal access to Indian business for technology-sourcing or resource-seeking or market-seeking;
To indicate that there is a change in the approach of the Government, from one of regulator or controller to one of facilitator;
To encourage the Indian industry to adopt a spirit of self-regulation and collective effort in order to improve its image abroad.
Subsequently, in 2000, introduction of FEMA (Foreign Exchange Management Act)changed the entire perspective on foreign exchange particularly those relating to investment abroad. It changed the emphasis from exchange regulation to exchange management. It aimed to facilitate external trade and payments as well as to promote an orderly development and maintenance of foreign exchange market in India.
Over the years, the liberalisation measures for overseas investment by Indian companies have continued. RBI vide their A.P.(DIR Series) Circular No.66 dated 13.01.2003 (in partial modification of Notification No. FEMA 19/2000-RB dated 3 rd May 2000) has liberalized the policy under automatic route:-
Corporates: - listed Indian companies are permitted to invest abroad in companies, (a) listed on a recognized stock exchange and (b) which has the shareholding of at least 10% in an Indian company listed on a recognized stock exchange in India (as on 1 st January of the year of the investment). Such investments shall not exceed 35% as of the Indian company's net worth, as on the date of latest audited balance sheet.
Individuals: - Reserve Bank of India, under the "Liberalized Remittance Scheme for Resident Individuals" permits resident individual to remit up to US $ 100,000 per financial year for any permitted current or capital account transactions or a combination of both, such as bank deposits, purchase of immovable property, investment in equity and debt abroad. Similarly, resident individuals are permitted to remit for current account transactions such as gift, donation, medical treatment, education, employment, emigration, import of medicines, books and periodicals subject to foreign trade policy.
Indian corporates / Registered partnership firms are allowed to undertake agricultural activities either directly or through an overseas branch.
The stipulation of minimum net worth of Rs. 15 crores for Indian companies engaged in financial sector activities in India removed for investment abroad in the financial sector. However, an Indian party seeking to make investment in an entity engaged in the financial sector should also fulfill the following additional conditions:
be registered with the appropriate regulatory authority in India for conduction the financial sector activity;
have earned net profit during the preceding three financial years from the financial service activities;
have obtained approval for investment in financial sector activities abroad from regulatory authorities concerned in India and abroad; and
have fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India .
Further liberalisation measures introduced in the fiscal year 2005-06 are as follows:-
Guarantees:the scope of guarantee has been enlarged under the automatic route. Indian entities may offer any forms of guarantee i.e. corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India , provided that: -
All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 300% of the net worth of the investing company;
No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront; and
As in the case of corporate guarantees, all guarantees are required to be reported to Reserve Bank of India (RBI), in Form ODR.
Disinvestment:- in order to enable companies to have operational flexibility according to their commercial judgment, the automatic route of disinvestment has been further liberalized. Indian companies are permitted to disinvest without prior approval of the RBI in the following categories: -
in cases where the JV/WOS is listed in the overseas stock exchange;
in cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of less than Rs. 100 crore;
where the Indian promoter is an unlisted company and the investment in overseas venture does not exceed US$ 10 million.
Proprietorship concerns:-- With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalisation and liberalization, proprietary/ unregistered partnership firms are allowed to set up a JV/WOS outside India with prior approval of RBI.