Page 57 - DMGT401Business Environment

Business Environment

Notes Foreign equity of upto 24% is allowed in the small scale sector too.
Manufacture of items reserved for the small scale sector can also be taken up by non-small
scale units, if they apply for and obtain an industrial license. In such cases, it is mandatory
for the non-small scale unit to undertake minimum export obligation of 50%. This will not
apply to non-small scale EOUs that are engaged in the manufacture of items reserved for
the SSI sector, as they already have a minimum export obligation of 66% of their production.
In addition, if the equity holding from another company (including foreign equity) exceeds
24%, even if the investment in plant and machinery in the unit does not exceed 10
million, the unit loses its small scale status.

Foreign equity upto 100% is particularly encouraged in export-oriented units, power
sector, electronics and software technology parks.
In 1997, the government announced its first ever guidelines for Foreign Direct Investment
(FDI) for expeditious approval of foreign investment in areas not covered under automatic
approval. Priority areas for foreign direct investment proposals included infrastructure,
export potential, large scale employment potential particularly for rural areas, items with
linkages with the farm sector, social sector projects like hospitals, health care and medicines,
and proposals that lead to induction of technology and infusion of capital.
FDI approvals are subject to sectoral cap: 20% (40% for NRIs) in banking sector, 51% in
non-banking financial companies, 100% in power, roads, ports, tourism and venture capital
funds, 49% in telecommunication, 40% (100% for NRIs) in domestic airline/taxi, 24% in
small scale industries, 51% in drugs/pharma industry for bulk drugs, 100% in petroleum,
and 50% in mining except for gold, silver, diamonds and precious stones. The list was
further expanded and in the same year, equity investment upto 100% by NRIs/OCBs was
permitted in high priority industries in metallurgical and infrastructure sectors and 13
other priority industries, hitherto eligible for 74% and 51% equity investment respectively.
Foreign equity investment in mining was also allowed upto 100% for NRI/OCBs.
During 1999-2000, the government decided to put all items under the automatic route for
foreign investment/NRIs and OCB investment, except for a small negative list.
Now the automatic route for FDI/NRI/OCB investment is also available to India's existing
companies to induct foreign equity. For existing companies with an expansion programme,
the additional requirements are that:
(a) the increase in equity level must result from the expansion of the equity base of the
existing company without acquisition of existing shares by NRI/OCB/foreign
investors;

(b) the money to be remitted should be in the sector(s) under the automatic route.
Otherwise the proposal would need government approval through the FIPB. For
this, the proposal must be supported by a Board Resolution of the existing Indian
company.
For existing companies without an expansion programme, the additional requirements
for eligibility for automatic route are:
(a) that they are engaged in the industries under automatic route (including additional
activities covered under the automatic route regardless of whether the original
activities were undertaken with government approval or by accessing the automatic
route);
(b) the increase in equity level must be from expansion of the equity base; and
(c) the foreign equity must be in foreign currency.

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