The Reserve Bank of India has sought clarification on some specific changes in the new foreign direct investment

(FDI) policy and the rationale for the shift before it incorporates them in the foreign exchange rules.

In a letter to the Department of Industrial Policy and Promotion (DIPP), the key government body for framing
foreign investment policy, the Reserve Bank of India has questioned the policy changes in certain aviation
sectors.

The new FDI policy issued on April 1 has retained the 74% ceiling on non-scheduled air transport services,
chartered and cargo airlines, and ground handling services.

However, the new policy allows only 49% FDI under the automatic route as opposed to entire 74% earlier. Any
foreign investment in excess of 49% has to now be approved by the Foreign Investments Promotion Board, or
FIPB.

The RBI has asked the DIPP to not only confirm the change but also give the rationale for this tightening of the
rules before it notifies the changes in the Foreign Exchange Management Act, or FEMA.

Under the automatic route, a foreign investor doesn’t need government’s approval to make investments in India,
whereas prior approval of the FIPB is required for investments falling under government route.

Investments up to 100% for non-resident Indians (NRIs) falling under the automatic route for both the sectors
remains unaltered.+

RBI asks clarification on FDI policy changes in aviation

sector
1

• bank of india
• foreign direct investment
• department
• shift

August 24th, 2010

The Reserve Bank of India has sought clarification on some

specific changes in the new foreign direct investment (FDI) policy and the rationale for the
shift before it incorporates them in the foreign exchange rules.
In a letter to the Department of Industrial Policy and Promotion (DIPP), the key government
body for framing foreign investment policy, the Reserve Bank of India has questioned the
policy changes in certain aviation sectors.
The new FDI policy issued on April 1 has retained the 74% ceiling on non-scheduled air
transport services, chartered and cargo airlines, and ground handling services.
However, the new policy allows only 49% FDI under the automatic route as opposed to entire
74% earlier. Any foreign investment in excess of 49% has to now be approved by the Foreign
Investments Promotion Board, or FIPB.
The RBI has asked the DIPP to not only confirm the change but also give the rationale for
this tightening of the rules before it notifies the changes in the Foreign Exchange
Management Act, or FEMA.
Under the automatic route, a foreign investor doesn’t need government’s approval to make
investments in India, whereas prior approval of the FIPB is required for investments falling
under government route.
Investments up to 100% for non-resident Indians (NRIs) falling under the automatic route for
both the sectors remains unaltered
There is need for an FDI Act

The increase in FDI in India from $129 mn in 1991-92 to $35 bn in 2008-09 happened due to
gradual opening up of the economy and invaluable contributions by organisations like FIPB
and DIPP. But some sectors that can determine our progress heavily—defence, print media—
are still lagging behind in FDI due to investment caps.
The recent rejection of the joint venture proposal of EADS Deutschland GMBH and L&T
because it could have exceeded the sector cap of 26% in defence has come as a
disappointment. The current cap has undoubtedly invited overseas defence OEMs like BAe,
EADS and Lockheed Martin to hugely invest in India’s defence but is not enough an
incentive for them to share their proprietary information as they do not foresee a healthy
economic return in spite of their conformance to rigorous shop establishment procedures.
Boeing’s deal with HAL has not seen anything beyond the manufacture of doors for the
aircraft. By increasing FDI, these companies can get in collaboration with the local players to
develop state-of-the-art technology in defence. This would lead to enough encouragement for
the local players as well, who, in spite of being given an industrial licence in 2001, fear
venturing into military industry because of it being highly capital-intensive. Further, the
increase to 49% is required because India will remain a heavy consumer of military
equipment, confirmed by its spend of over Rs 1,00,000 crore in revenue and capital
expenditure in defence annually. Anything above 49% FDI will mean undermining the
capability of defence PSUs, ordnance factories and reputed organisations like DRDO.
Likewise, relaxing caps in the insurance sector will lead to more IPOs being floated by the
private players. Relaxation in FDI in print media is also welcome. The concern of self-
regulation of media and upholding of journalistic ethics can be dealt with effectively
considering active public voice and sensible journalism.
Relaxed FDI is essential but the long term priority should be to bring all foreign investments
under some kind of foreign investment law, which facilitates an efficient FDI delivery and
management mechanism.
India has replaced the US as the second most important foreign directive investment (FDI) destination for
transnational corporations during 2010-2012, according to a survey conducted UNCTAD.

In its latest 'World Investment Prospects Survey 2010-2012', the United Nations Conference on Trade and
Development said transnational corporations remain buoyant about investment prospects in China, India and
Brazil.

According to the survey, India is the most important FDI destination next only to China.

India replaced the US as the second most important destination for FDI by transnational companies last year
following severe recession in the US. In the last survey, the US was the second most important destination and
this time the country has slipped to fourth position.

Global FDI flows are expected to jump increase from USD 1.2 trillion this year to USD 1.3-USD 1.5 trillion in 2011
and USD 1.6-2.0 trillion in 2012.

"The results point to a recovery in global FDI flows in 2010 and further growth in 2011 and 2012," UNCTAD said.

Basing its results on the responses from 236 leading transnational corporations and 116 investment promotion
agencies, it forecasts an upswing in the international foreign direct investment flows.

"The crisis was less destructive to FDI than had been feared" despite the worsening economic situation and
growing recession in the industrialised countries, UNCTAD said.

Notwithstanding the squeeze in the investment budget during the worst economic crisis in the last eighty years,
there has been perceptible shift in the TNC's geographical focus to developing and transition economies.

The emerging countries weathered the downturn better than their industrialised country counterparts. Further, the
developing countries are leading the global recovery and are also contributing to the TNC strategies.

Maharashtra and Delhi's National Capital Region accounted for over 50 per cent
of the foreign direct investment (FDI) inflows into the country during the first
quarter of 2010-11, says industry ministry's latest data.

Maharashtra attracted maximum foreign inflows at USD 1.53 billion (Rs 6,989
crore) and accounted for 35 per cent of the country's total FDI during April-June
this fiscal.

Delhi's National Capital Region (NCR) including parts of Uttar Pradesh and
Haryana, received USD 1.51 billion FDI during the first three months of the
current financial year.

NCR accounted for 21 per cent of the country's total FDI. During April-June 2010-
11, India received USD 5.80 billion foreign inflows, the data said.

According to experts, the main reason for the maximum inflows in Maharashtra
and NCR is substantial improvement in the infrastructure and pro-active
approach of the respective governments.
"Infrastructure in these areas have improved considerably and that is making
them attractive destination for FDI in India," said Rakesh Joshi, an international
trade expert at Indian Institute of Foreign Trade.

"Maximum FDI comes in finance sector and Mumbai (in Maharashtra) is the hub
for that," former director of economic think-tank ICRIER Rajive Kumar said.

Karnataka attracted the third highest FDI inflows worth USD 353 million during
the period, followed by Andhra Pradesh (USD 301 million), Goa (USD 290 million),
Tamil Nadu (USD 272 million) and Gujarat (USD 144 million).

FDI in different states in India has increased steadily since the early 1990s when
the Indian economy was opened up to foreign investments, Joshi said.

Sectors, which attracted maximum FDI include services, telecommunication,

metallurgical industries, power, computer hardware and software, and
construction activities.

The highest FDI of USD 1.86 billion came from Mauritius followed by Singapore
(USD 938 million), Japan (USD 437 million) and the Netherlands (USD 343 million)
in April-June 2010-11.

The government is making sustained efforts to make the FDI policy regime more
attractive and investor friendly, with a view to attract investments from all major
investing nations.

The government had floated discussion papers for public comments to liberalise
FDI in multi-brand retail and defence sector.

The FDI for 2009-10 at USD 25.88 billion was lower by five per cent from USD
27.33 billion in the previous fiscal.