Encouraging Estimates

Money will continue to chase growth prospects and the global investors are realizing the fact that India offers an excellent opportunity for them even at a time of global recession. Apparently that’s the reason why growth/emerging markets such as India and China continue to be the most attractive markets for the European family office investors, according to an informal survey conducted by London-based Somerset Capital, a leading independent private market placement firm.

The survey has also highlighted the fact that 63% of Somerset’s top 50 European family offices are ‘active’ in 2009 making new investments. If we extrapolate the same trend to the entire set of global investors, we get the reason why India continues to attract billion-dollar plus foreign direct investments (FDI) even in the recent months that are marked by heightened economic crisis globally. The invest-worthiness of India has been acknowledged by the United Nations Conference on Trade and Development (UNCTAD), which declared India as the second most-preferred global location for foreign investment in 2008.

A similar view was expressed in a recent report released in Toronto by PricewaterhouseCoopers (PwC), the world’s largest professional services firm, which has urged the Engineering and Construction (E&C) companies to look to India for growth as domestic markets contract. “Foreign companies who do not acknowledge the opportunity now may miss out on a critical opportunity to establish a long-term presence in one of the world's largest growth markets”, warns PwC.

PwC estimates that India will become the world's third largest economy by 2050. Similar projections have earlier been made by Goldman Sachs and CLSA. Despite the recent slowdown, PwC expects the Indian economy to grow at 7%-7.5% annually. The reason why PwC has emphasized on Engineering and construction (E&C) sector is the fact that more than $500 billion worth of investment is expected to flow into India's infrastructure by 2012. Projected spending from now until 2012 is $167 billion in electricity, $92 billion in roads and $65 billion in railways. The liberalization of government regulations and a deliberate strategy on the part of the Indian Government to develop infrastructure and promote foreign direct investment (FDI) spells opportunity for foreign E&C companies, the report says.

Government’s Initiatives

India’s Interim Budget for the Financial Year 2009-10 by the Finance Minister on February 16 informed the parliament that the government has accorded approval to 37 infrastructure projects worth $14.4 billion (Rs.70,000 crore) from August 2008 to January 2009. Under the Public Private Partnership (PPP) mode, in-principle approval has been given to 54 Central sector infrastructure projects with project cost of $14 billion (Rs.67,700 crore) and final approval to 23 projects for viability gap funding amounting to $5.75 billion (Rs.27,900 crore) between August 2008 and January 2009.

Not surprisingly, India received FDI worth $23.3 billion during April-December 2008, registering a growth of 45% when compared to the same period in the previous year. In the fiscal year 2007-08, India’s FDI was a record $32.4 billion. Although the government of India has acknowledged a slowdown in FDI post September 2008, the country is still receiving one billion dollar plus foreign direct investments every month. Considering the global liquidity crunch, this figure is not disappointing. FDI inflows in to India till September 2008 averaged between $2.5 billion and $3 billion a month. Despite the recent slowdown, India is attracting much more FDI compared to a few years back. The country had received $3.13 billion FDI in the entire fiscal year of 2003-04.

Apart from Engineering & Construction (E&C), other sectors such as IT, Telecom and real estate have attracted large investments from the foreign investors. During April-September 2008, FDI inflow in IT sector (including computer software and hardware) has reached $1.4 billion, which is equal to the investments during the whole financial year of 2007-08. The telecommuncation sector has attracted FDI of $5.8 billion in the calendar year 2008.

FDI Guidlines

The Indian government has been actively facilitating the foreign investments with its continuous efforts in policy reforms and simplifying approval routes. Recently, in a welcome move, it has further simplified the rules by restricting the cascading effect of foreign shareholding in an Indian company on its downstream investments. As per the new FDI rules, the foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are ‘owned and controlled’ by resident Indian citizens and/or Indian Companies that are owned and controlled by resident Indian citizens. Certain sectors such as telecom, broadcasting and insurance, however, will continue to be covered under the method of calculation of total foreign investment outlined in their sector-specific regulations.

The Government of India permits FDI up to 100% on the automatic route in most sectors/activities. Some of the sectors such as Defence, Aviation, Print Media and Telecom have been classified as sensitive sectors.

FDI is allowed up to 26% in defence production subject to licensing and certain guidelines. In the aviation sector, FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Domestic Scheduled Passenger Airline Sector, while FDI up to 74% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Non Scheduled airlines, Chartered airlines, and Cargo airlines as well as Ground Handling Services. FDI up to 100% is on the automatic route in Maintenance and Repair organizations, flying training institutes, technical training institutions, and helicopter services/seaplane services. Although the foreign airlines are disallowed to participate directly or indirectly in the equity of an Air Service Undertaking, the Indian Minister for Civil Aviation Mr. Prafull Patel has indicated that the government is considering a relaxation on this front.

In the Telecom Sector, 74% foreign investment (Including FDI, Foreign Institutional Investment (FII), Non-Resident Indian (NRI), Foreign Currency Convertible Bond (FCCBs), American Depository Receipt (ADRs), Global Depositary Receipt (GDRs), convertible Preference shares, and proportionate foreign equity in Indian promoters/ Investing Company) is allowed in Basic and cellular services, Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services. Similarly, 74% FDI is permissible for ISPs with gateways, radio-paging and end-to-end bandwidth, while 100% FDI is allowed for ISPs without gateway and infrastructure companies providing dark fibre, right of way, duct space and tower (Category I). Companies offering electronic mail and voice mail services, and Manufacture of telecom equipments also allowed to have 100% FDI.

Print media has a cap of 26% FDI for publishers of newspaper and periodicals dealing with news and current affairs. Publication of Indian editions of foreign magazines dealing with news & current affairs also has a similar cap of 26% FDI including Investments by NRIs/PIOs/FIIs. The government, however, allows 100% FDI for publishing of facsimile edition of foreign newspapers and scientific magazines/specialty journals/periodicals.

Some of the other sectors, such as Direct-to-Home (DTH) and Insurance have the FDI cap of 49% and 26% respectively.