discuss the policy adopted by the government of india towards foreign capital investment
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Policies towards Foreign Capital in India!
The Government announced in 1991, a list of industries in which Foreign Direct Investment would be automatically allowed up to 51 percent (Foreign Equity).
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These industries ranged from the capital goods and metallurgical sector to the entertainment, electronic, food processing and service sectors with significant export potential. Hotels and tourist-related areas were also allowed foreign equity holdings by international trading companies of up to 51 percent.
In order to accelerate the progress of the power sector, 100 per cent foreign equity participation was allowed for setting up power plants. Such equity participation allowed free repatriation of profits and other incentives.
During 1992 – 93, several additional measures were taken to encourage investment flows:
The dividend balancing condition earlier applicable to foreign investment up to 51 per cent equity was no longer to be applied except for consumer goods industries.
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Existing companies with foreign equity could raise it to 51 per cent subject to certain prescribed guidelines. FDI was also allowed in exploration, production and refining of oil and marketing of gas. Captive coalmines could also be owned and run by private investors in power.
Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) predominantly owned by them were permitted to invest up to 100 percent equity in high priority industries with reparability of capital and income. NRI investment up to 100 per cent was also allowed in export houses, hospitals, and export oriented units, sick industries, hotels and tourism related industries and without the right of repatriation in the previously excluded areas of real estate, housing and infrastructure.
The restriction prohibiting the use of foreign brand name or trademark for approval for foreign investment and foreign technology agreements was removed.
Disinvestments of equity by foreign investors no longer needed to be at prices determined by the RBI.
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The Foreign Exchange Regulations Act (FERA) 1973 was substantially liberalized in 1991-93. All restrictions on FERA companies in the matter of borrowing funds or raising deposits in India as well as taking over or creating any interest in business in Indian companies were removed. Indian companies and Indian nationals were allowed to start joint ventures abroad.
FERA companies were also exempted from restrictions on the establishment of branches, liaison offices, and acquisition of company in India carrying on business in trade, commerce or industry excepting agriculture and plantations. Companies with more than 40 percent of foreign equity were also now treated on par with fully Indian-owned companies. Now of course, Foreign Exchange Management Act (FEMA) has replaced FERA.
The Indian corporate sector has also been encouraged to access global capital markets through the GDR mechanism as described below:
1. Foreign Investors can invest in Indian companies through the GDR route without any lock-in period.
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2. These receipts can be listed on any of the overseas stock exchanges and denominated in any convertible foreign currency. However, the underlying shares would be denominated in Indian rupees.
3. Private placement with United States (US), investors is also permissible in accordance with the US Securities Act.
4. Short-term capital gains are taxable at the rate of 65 percent along with business income long-term capital gains (computed on holdings for more than 12 months) are taxable at the rate of 10 percent.