H R Khan: Outward Indian FDI - recent trends & emerging issues
Address by Shri H R Khan, Deputy Governor of the Reserve Bank of India, at the Bombay
Chamber of Commerce & Industry, Mumbai, 2 March 2012.
* * *
The speaker acknowledges the contributions of Shri. R. Rajagopalan, Shri. Rajan Goyal, Shri, Rajeev Jain and
Shri. Surajit Bose, Reserve Bank of India.
In recent years, emerging market economies (EMEs) are increasingly becoming a source of
foreign investment for rest of the world. It is not only a sign of their increasing participation in
the global economy but also of their increasing competence. More importantly, a growing
impetus for change today is coming from developing countries and economies in transition,
where a number of private as well as state-owned enterprises are increasingly undertaking
outward expansion through foreign direct investments (FDI). Companies are expanding their
business operations by investing overseas with a view to acquiring a regional and global
reach.
A. Factors providing momentum to outward foreign investments
According to UNCTAD's World Investment Report 2011, the stock of outward FDI from
developing economies reached US$ 3.1 trillion in 2010 (15.3 per cent of global outward FDI
stock), up from US$ 857 billion (10.8 per cent of global outward FDI stock) 10 years ago. On
flow basis, outward FDI from developing economies has grown from US$ 122 billion in 2005
to US$ 328 billion in 2010 accounting for around a quarter of total outward FDI witnessed at
global level.
FDI is a natural extension of globalisation process that often begins with exports. In the
process, countries try to access markets or resources and gradually reduce the cost of
production and transaction by expanding overseas manufacturing operations in countries
where certain ownership-specific advantages can help them to compete globally. Adoption of
such strategies helps them to catch up with competing economies.
A significant uptrend in outward FDI has also been observed in the case of India in recent
years. Since globalisation is a two-way process, integration of the Indian economy with the
rest of the world is evident not only in terms of higher level of FDI inflows but also in terms of
increasing level of FDI outflows.
The overseas investment of domestic corporate sector through FDI has provided them better
access to global networks and markets, transfer of technology and skills and also enables
them to share research and development efforts and outcomes. It can also be seen as a
corporate strategy to promote the brand image and utilisation of raw materials available in
the host country. In the Indian context, overseas investments have been primarily driven by
either resource seeking or market seeking or technology seeking motives. Of late, there has
been a surge in resource seeking overseas investments by Indian companies, especially to
acquire energy resources in Australia, Indonesia and Africa.
It is against this background that I intend to speak on recent trends and emerging issues in
relation to Indian outward FDI. I am thankful to Bombay Chamber of Commerce for choosing
this topical subject for today's discussion. In my presentation, I would briefly talk about the
evolution of outward FDI policy in India, trends and analysis of outward FDI, funding pattern
of outward FDI, measures taken by the Reserve Bank of India and Government of India,
emerging issues and end with some thoughts on way forward.
B. Evolution of outward foreign investment policy in India
Change in policy environment across the economies has greatly influenced the outward
investment pattern in the global economy. Nonetheless, recognising the concerns of capital
outflows, governments in different countries, particularly emerging and developing
economies, have been relatively more circumspect on undertaking policy liberalisation of
outward investment. Therefore, it is important to highlight how the Indian policy in this regard
has evolved over time.
In the Indian context, overseas investments in joint ventures (JV) and wholly owned
subsidiaries (WOS) have been recognised as important channels for promoting global
business by the Indian entrepreneurs. The broad approach has been to facilitate outward
foreign direct investment through joint ventures and wholly owned subsidiaries and provision
of financial support to promote exports including project exports from India. With a steady
rise in capital inflows, particularly in the second half of 2000s, the overall foreign exchange
reserve position provided comfort to progressive relaxation of the capital controls and
simplification of the procedures for outbound investments from India. Three distinct
overlapping phases as under can be discerned in the evolution of the Indian outward FDI
policies.
Phase I (1992 to 1995): Period of Liberalization of Indian economy
Guidelines on outward FDI were in place before the process of liberalisation and
globalisation of Indian economy in 1991-92. Policy changes since 1992 were undertaken
keeping in view the changing needs of a growing economy. Understandably, the rules were
quite restrictive and subject to conditions of no cash remittance and mandatory repatriation of
dividend from the profits from the overseas projects. In 1992, the "automatic route" for
overseas investments was introduced and cash remittances were allowed for the first time.
Nonetheless, the total value was restricted to US$ 2 million with a cash component not
exceeding US$ 0.5 million in a block of 3 years.
Phase II (1995 to 2000): Creation of a Fast Track Route
In 1995, a comprehensive policy framework was laid down and the work relating to approvals
for overseas investment was transferred from Ministry of Commerce to the Reserve Bank of
India to provide a single window clearance mechanism. The policy framework articulated a
cohesive approach that was flexible enough to respond to likely future trends. It reflected the
need for transparency, recognition of global developments, capturing of Indian realities and
learning of lessons from the past. The basic objectives of the policy, was to ensure
inter alia,
that such outflows, were determined by commercial interests but were also consistent with
the macroeconomic and balance of payment compulsions of the country, particularly in terms
of the magnitude of the capital flows. In terms of the overseas investment policy, a fast track
route was adopted where the limits were raised from US$ 2 million to US$ 4 million and
linked to average export earnings of the preceding three years. Cash remittance continued to
be restricted to US$ 0.5 million. Beyond US$ 4 million, approvals were considered under the
"Normal Route" approved by a Special Committee comprising the senior representatives of
the Reserve Bank of India (Chairman) and the Ministries of Finance, External Affairs and
Commerce (members). Investment proposals in excess of US$ 15 million were considered
by the Ministry of Finance with the recommendations of the Special Committee and were
generally approved if the required resources were raised through the global depository route
(GDR) route.
In March 1997, exchange earners, other than exporters, were also brought under the fast
track route. Indian promoters were allowed to set up second and subsequent generation
companies, provided the first generation company was set up under the Fast Track Route. A
series of measures to encourage the software industry in India to expand capacity, reduce
costs, improve quality and also invest abroad were put in place. As part of the reforms
process preceding the introduction of FEMA, the neutrality1 condition attached to the
Overseas Direct Investment was done away with in 1999. The scope for outward FDI,
however, expanded significantly after the introduction of the Foreign Exchange Management
Act (FEMA) in June 2000.
Phase III (2000 till date): Liberalized framework under FEMA
In 2002, the per annum upper limit for automatic approval was raised to US$100 million.
Such upper limit was, however, discontinued when the automatic route for outward FDI was
further liberalised in March 2003 to enable Indian parties2 to invest to the extent of 100 per
cent of their net worth. Since then the limit of outward FDI has been gradually increased to
400 per cent. The ceiling of 400 per cent of net worth, however, is not applicable for
a) investments made out of balances held in the Exchange Earners' Foreign Currency
(EEFC) account of the Indian party or out of funds raised abroad through
ADRs/GDRs.
b) Indian companies engaged in the energy and natural resources sectors, such as, oil,
gas, coal and mineral ores, though they would require prior approval of the Reserve
Bank of India.
Overseas investments in unincorporated entities in oil sector (e.g. by way of taking up
participation interest) by Navaratna Public Sector Undertakings were allowed under the
automatic route and subsequently the facility was extended to other Indian entities as well.
Further, in 2004, the External Commercial Borrowing policy was modified and funding of
JVs/WOS abroad was included as a permissible end-use of the funds raised.
At present, any Indian party can make overseas direct investment in any activity
bona-fide
except certain real estate activities buying and selling of real estate or trading in
{i.e.,
Transferable Development Rights (TDRs)} and banking business (which are considered by
an inter-Ministerial group) that are specifically prohibited. For undertaking activities in the
financial services sector, certain conditions as specified by the Reserve Bank, however, need
to be adhered to. Access to international financial markets was also progressively liberalised
for the Indian corporate sector and they were allowed to use special purpose vehicles (SPVs)
in international capital markets to finance their cross-border acquisitions. The impact of policy
liberalisation is now reflected in cross-border acquisitions by Indian corporate growing at an
accelerated pace.
C. Trend analysis of outward FDI
Even though policy changes undertaken in respect of overseas investment have facilitated
the growing cross-border acquisitions by the Indian corporate sector, other structural reforms
undertaken since 1992, such as, industrial deregulation, trade liberalisation and relaxation of
regulations governing inward FDI, led to major restructuring in the Indian industry. In fact,
many of the leading companies owe their competitiveness to the reform process. Greater
exposure to internal as well external competition proved to be instrumental in building
confidence among the Indian companies to compete with foreign competitors in world
market. Apart from liberalised policy environment for overseas investment, India has gained
ground as an important investor on the back of (a) rapid economic growth, (b) easy access to
financial resources and (c) strong motivations to acquire resources and strategic assets
abroad.
One should not assume that overseas investment by Indian companies is a phenomenon of
1990s. In fact, Indian firms began to invest overseas in the 1960s, but India's restrictive
policies for overseas investment limited them to small, minority joint ventures in developing
economies. First major overseas Indian venture was a textile mill set up in Ethiopia in
1959 by the Birla Group of companies (Authkorala, 2009)3. Overseas investment operations
were, however, geographically concentrated in West and East Africa, Middle East, and South
and East Asia with which India shared a colonial heritage and historical linkages. Sustained
growth in Indian overseas investment could be seen starting during 1970s when the
industrial licensing system was more stringent.
Trend of outward investments during the past one decade
A trend analysis shows that the level of outward FDI from India has increased manifold since
1999-2000. The level of net outward FDI flows (on BoP basis), however, recorded a sharp
uptrend at US$ 74.3 billion during the second half of 2000s (2005-06 to 2009-10) as
compared to US$ 8.2 billion in the first half of 2000s (2000-01 to 2004-05). Even though
trend in India's outward FDI was moderately affected during crisis year of 2009-10, a sharp
rebound was seen in 2010-11 (Table 1).
In recent years, outward FDI continued to be mainly financed through equity and loans.
Although guarantees issued have been rising, their invocation has been negligible during
2009-10 and 2010-11. It has been observed that the number of outward FDI proposals
under the Automatic Route during 2000s has also been on the rise (Table 2) indicating the
growing appetite of the Indian corporates to establish their foot prints abroad and the liberal
regulatory regime.
Position of India in the global context
Outward FDI from India has mainly been by way of equities and loans (Table 1). According to
UNCTAD's World Investment Report 2011, based on the magnitude of FDI outflows, India
was placed 21st in the world. In terms of value of net purchases4 (i.e., cross border
acquisition deals) by Indian companies in 2010, India was placed fifth in the World after the
US, Canada, Japan and China.
Investment trends of Indian transnational companies
Importantly, scale of overseas investment by domestic companies has also expanded as
India was placed second in 2010 only after China in terms of average size of net purchase
deals (US$190 million in India as compared to US$ 197 million in China). Similarly, India also
figures among the top five emerging and developing economies whose state owned
enterprises are increasingly becoming transnational corporations. It is not surprising as in
recent years, India's Public Sector Units (PSUs), viz. NTPC, GAIL, ONGC and NALCO have
undertaken significant overseas green-field investments.
Sectoral investment trends
Sectoral pattern of outward FDI during 2006-07 to 2010-11 shows that it has been mainly
invested in services and manufacturing sector. In 2010-11, within manufacturing, major
sub-sectors which attracted outward FDI from India included agriculture machineries and
equipments, basic organic chemicals, drugs, medicines & allied products, refined petroleum
products, indigenous sugar, Similarly, within services sector, a majority of outward FDI
etc.
had gone into business services, data processing, financial services, architectural and
engineering, engine architectural and other technical consultancy activities (Table 3).
Since late 1990s, Indian outward FDI began to be in more high-tech and trade supporting
sectors. Many Indian IT firms like Tata Consultancy Services, Infosys, WIPRO, and Satyam
acquired global contracts and established overseas offices in developed economies to be
close to their key clients. In addition, other sectors which have attracted significant share of
outward FDI from India in the recent years included extraction of crude petroleum, oil and
gas field services and services incidental to mining.
Investments trends for acquisition of natural & strategic resources
Sectoral pattern suggests that greater outward investment by the Indian corporate sector
seems to have been motivated by long-term strategic considerations rather than by
short-term profitability. For instance, ONGC Videsh Ltd., a fully-owned subsidiary of ONGC,
presently has overseas assets in 33 projects in 14 countries of Middle East, Africa, CIS & Far
East and Latin America. Oil India Limited has presence in eight countries mainly in terms of
exploration blocks in Libya, Gabon, Iran, Nigeria and Sudan. Similarly, Coal India Limited has
formed a subsidiary Coal Videsh Ltd. to acquire coal assets abroad and also set up a joint
venture company International Coal Ventures Ltd with other companies to acquire
metallurgical and thermal coal assets outside India. Overseas investment by Indian
companies in extractive industries assumes importance as it is required to support rapid
economic growth, industrialisation and urbanisation in the domestic sector and guarantee a
long-term, stable supply of natural resources to the country against a background of rising
commodity prices.
Such trend has also been observed in the case of other major emerging market economies,
especially other members of BRIC group. In fact, number of companies investing abroad
from the BRIC group in the FT 500 list has increased from 20 in 2006 to 62 in 2008 (The
Economist, September 10, 2011), reflecting their growing overseas business operations.
Common feature is that domestic companies in BRIC economies have been seeking to
enhance their access to supplies of raw materials and moving into new segments of strategic
commodities and move up the value chain. Nonetheless, oil and gas and other natural
resource-based industries are relatively less prominent in Indian outward FDI compared to
that by Brazil and China.
Other major overseas acquisitions in recent years by Tata Steel, Hindalco, Bharti Airtel, etc
have also been a part of their inorganic growth strategies. In these cases, acquisitions were
specifically undertaken to attain global size and status, and to build new competitive
advantages by combining the best international technology with low-cost Indian labour
(Satyanand and Raghavendran, 2010).5
Destinational investment trends
Direction of outward FDI shows that it is getting more diversified across countries. Diverting
from the past trend (i.e. pre-1990s) when Indian companies were investing in countries
where there was little technological competition, the more recent trend shows that Indian
overseas investment is increasingly flowing to developed economies (Table 4), partly
reflecting growing confidence of the Indian corporates and availability of overseas assets at
competitive rates.
Trend of using SPV or M&A route for investments abroad
Indian companies going for overseas investments have largely used either their overseas
locally-incorporated subsidiaries or have set up holding companies and/or special purpose
vehicles (SPVs) in offshore financial centres or other regional financial centres. In 2005,
Indian companies were allowed to float SPVs in international capital markets to finance
acquisitions abroad facilitating the use of leveraged buy-outs. Since then, SPVs set up in
off-shore financial centres, such as, Mauritius, Singapore and the Netherlands, have been
mainly used as conduits to mobilise funds and invest in third countries mainly keeping in view
the business and legal consideration, taxation advantages and easier access to financial
resources in the countries.
While overseas investment in developed economies is going mainly through M&As, mode of
entry into developing economies is observed to be mainly through green-field investments.
One of the reasons for Indian companies to adopt M&As route for foreign investment in
developed countries is that markets in these economies tend to be mature and saturated
and, therefore, companies prefer to gain market share through acquisitions rather than
green-filed investments. A recent article published in "The Economist" (September 10, 2011)
points out that big acquisitions by companies like Tata were a way of reaching the required
scale quickly. Today, Tata Group companies are reportedly the biggest manufacturer and
employment provider in the UK.
D. Funding pattern of outward FDI
As far as policy regarding the funding of overseas investments is concerned, it is allowed in a
number of ways. These sources mainly include (i) purchase of foreign exchange on-shore
from an authorised dealer in India, (ii) capitalisation of foreign currency proceeds to be
received from the foreign entity on account of exports, fees, royalties or any other dues from
the foreign entity for supply of technical know-how, consultancy, managerial and other
services, (iii) swapping of shares of Indian entity with those of overseas entity, (iv) use of
balances held in the Exchange Earners' Foreign Currency (EEFC) accounts of Indian entity
maintained with an authorised dealer, (v) foreign currency proceeds through ECBs/FCCBs,
and (vi) exchange of ADRs/GDRs issued in accordance with the scheme for issue of Foreign
Currency Convertible Bonds.
A recent study by Virtus Global Partners (April 2011) based on US bound Indian investments
has confirmed that internal accruals were the major financing option used by Indian
companies in 2010.6 It also found that half of Indian acquisitions in the US in 2009 and
2010 were buyouts of distressed assets, whose parent companies were severely impacted
by the global crisis. Seizing these opportunities in overseas markets, many
acquisition/investment deals S Kumar - Hartmax, Cadila's - Novavax, Piramal - RxElite,
(e.g.
and 3i - NRLB, etc.) were struck by Indian companies during 2009.
Role of Indian banks
Although normally banks in India are not permitted to fund the equity contributions of the
promoters, financial assistance to Indian companies by the domestic banks for acquisition of
equity in overseas joint ventures/wholly owned subsidiaries or in other overseas companies,
new or existing, as strategic investment has been permitted. Such policy should include
overall limit on such financing, terms and conditions of eligibility of borrowers, security,
margin, etc. While the Board of the bank may frame its own guidelines and safeguards for
such lending, such acquisition(s) should be beneficial to the company and the country.
In order to facilitate such financial support of Indian business abroad, the Reserve Bank has
enhanced the prudential limit on credit and non-credit facilities extended by banks to Indian
Joint Ventures (where the holding by the Indian company is more than 51 per cent) /Wholly
Owned Subsidiaries abroad from the existing limit of 10 per cent to 20 per cent of their
unimpaired capital funds (Tier I and Tier II capital). Banks in India were also allowed in May
10, 2007 to extend funded and / or non-funded credit facilities to wholly owned step-down
subsidiaries of subsidiaries of Indian companies (where the holding by the Indian company is
51 per cent or more) abroad. Banks, however, have to, among others, ensure that the
JV/WOS is located in a country which has no restriction on obtaining such foreign currency
loan or repatriation of loan/interest and they can create legal charge on overseas
securities/assets securing such exposures.
Role of the Exim Bank
Exim Bank has been involved in supporting Indian direct investment overseas since its
inception and its role has been unique in this regard, given its mandate. The Overseas
Investment Finance (OIF) programme of Exim Bank seeks to cover the entire cycle of Indian
investment overseas including the financing requirements of Indian Joint Ventures (JV) and
Wholly Owned Subsidiaries (WOS) with a suite of financing instruments, which include
(a) finance for Indian company's equity participation, (b) direct finance to the overseas
JVs/WOS, (c) finance for acquisition of overseas business/companies including leveraged
buyouts and (d) direct equity investment. As on December 31, 2011, Exim Bank has
approved credit aggregating to  240.92 billion for 374 ventures set-up by over
298 companies in 69 countries.
Role of Export Credit Guarantee Corporation of India Limited (ECGC)
While some of the overseas acquisitions have been hugely successful, some investments
have been fully written off within a short span of time. There are a number of reasons for
failure but the inability to withstand adverse changes in the operating economic and
regulatory environment has been the most predominant one. This is a pointer to the need for
adequate risk mitigants in the process of investments abroad.
In 1980, ECGC introduced the Overseas Investment Insurance scheme. Since inception of
the scheme, only 61 insurance covers with an aggregate value of 5.73 billion have been
'
issued. One plausible explanation given for the low popularity of the scheme is the
perception that the cost of insurance cover is high (which is between one to 2.5 per cent per
annum depending on country and tenure of investment). It is, however, important to realize
the spectrum of coverage the scheme offers by providing insurance coverage to investments
against political risks including war, expropriation and foreign exchange repatriation
restrictions. Thus, the Indian companies who intend to make investments in politically
vulnerable countries would benefit from such insurance covers more that those having
investments in developed countries.
SPV route for leveraged buy outs
Existing WOSs/JVs or SPVs are being used to fund acquisitions through leverage buyout
route which reduces the risk on the domestic balance sheet. A substantial portion of
investment has taken place through the SPVs set up for the purpose abroad. The funding is
often arranged through overseas banks backed either by shares or assets of the target
company and/or guarantees by the Indian parent. So far companies have largely used a mix
of their retained earnings (internal source) and borrowings (external source) to finance their
overseas acquisition. This is in quite contrast to what is generally seen in the context of many
other countries' cross-border M&As where share swapping is a popular option of financing.
Share swaps have not yet emerged as a favored payment option in India except in a few
large transactions in the software industry7. During the post-reform period, Indian capital
market has been significantly liberalised. As a result, the market capitalisation of stocks of
Indian companies has also substantially improved over the years. This, in turn, seems to
have facilitated greater access to overseas capital markets for financing their overseas
investments. Further, sustained growth in corporate earnings has improved the profitability
and strengthened the balance sheets of Indian companies which also helped them to
undertake cross-border acquisitions through internal resources.
E. Measures taken by the Reserve Bank of India
The liberalisation of the overseas investment policy since the year 2003 has been
substantial, given the improvement in macro fundamentals, and bias towards calibrated
relaxation of the policy towards capital account rules. Commensurate with the build-up of the
foreign exchange reserves of the country, there has been a larger opening up of the
overseas direct investment avenues resulting in the enhancement in the quantum of
overseas direct investment to 400 per cent of the net worth as mentioned earlier. Similarly,
the aggregate ceiling for overseas investment by mutual funds, registered with SEBI, was
enhanced from US$ 4 billion to US$ 5 billion in September 2007. This was further raised to
US$ 7 billion in April 2008. Apart from raising the financial limits, the Reserve Bank has also
automated the entire process of allocation of Unique Identification Number (UIN). The
automation through a web based application has enabled efficient processing which has
reduced the time taken for processing the applications and also improved the management
information system.
It may thus be observed that keeping in view the changes in the business environment
across the world, Reserve Bank has been proactive in aligning the policies relating to foreign
exchange transactions to suit the dynamic business environment (Exhibit 1). In June 2011,
the Reserve Bank allowed Indian parties to disinvest their stake abroad without prior
approval, where the amount repatriated on disinvestment is less than the amount of the
original investment, subject to certain conditions. Since July 2011, the Reserve Bank has
been disseminating the data in respect of outward FDI on a monthly basis.
Registered trusts and societies engaged in the manufacturing/education/hospital sectors
have since been permitted to establish JV/WOS engaged in these sectors with prior
approval. Further, proprietary/unregistered partnership firm (recognized star export house
with proven track record) are permitted to set up JV/WOS abroad with prior approval from
Reserve Bank.
Further, considering the need for allowing individuals to benefit from the liberalized FEMA
framework as a valuable adjunct to India's globalization efforts as also recognising the fact
that economies were getting coupled, the overseas investment policy was modified to allow
individuals to acquire shares under the ESOP scheme by removing the existing monetary
ceilings, allotment of shares of foreign entities on account of professional services rendered
and a general permission to acquire foreign securities as qualification/rights shares was also
accorded.
F. Measures taken by Government of India
Recognizing the need for promoting overseas investments, the Government of India has
drafted strategic plans aimed at supporting smaller players. The Department of Industrial
Policy and Promotion (DIPP) has identified South East Asia, Eastern Europe and Africa as
zones where Indian companies would be encouraged to acquire assets as well as buy-out of
companies. Also, in 2011, the Government of India approved a policy to support raw material
asset purchases made by select public sector undertakings (PSUs) abroad. Under the
revised policy, the investment limit for "Navratna" firms has been raised to 30 billion from
'
'10 billion for any asset buy-out and for the "Maharatna" firms, the limit has been set at
'50 billion. Government approval would be needed for any additional amount beyond this
limit. PSUs in agriculture, mining, manufacturing and electricity sectors having a three-year
record of making net profits are eligible under this policy. The Ministry of External Affairs and
Indian missions abroad would be associated right from the beginning of the process for a
buyout. The government is currently evaluating proposals to facilitate acquisition of strategic
assets, particularly the energy sector, through a special investment vehicle or through cash
rich PSUs in the field.
G. Emerging issues in outward FDI
Use and abuse of multi-layered structure
One contentious issue which needs to be addressed for providing a transparent policy
framework for outward FDI relates to multi-layered structures. The motivations range from
genuine business/commercial considerations to taxation benefits which are available to any
global investors. On the flip side at times the underlying motive could be to create opacity
through a labyrinth of structures for reasons unjustified on business grounds or from the point
of view of home country's interest. Hence, there is a need to have a greater clarity in our
approach in this regard.
Controlled Foreign Companies under Direct Tax Code
To incentivize the overseas investments, in the last Union Budget, Government had
announced a 50 per cent reduction in the tax rate in respect of dividend inflows from
JV/WOS. Taxation in respect of overseas investments under the "Controlled Foreign
Companies" (CFC) norm of the proposed Direct Tax Code (DTC) would have implications for
Indian outward FDI. It may, however, take a few years before we come to any definitive
conclusions on their implications after DTC is introduced.
Impact on current account deficit
The build-up in the foreign exchange reserves had supported the initiatives of liberalisation of
many of the capital controls including the outward FDI from India. India being a current
account deficit (CAD) economy, there is a need to closely monitor the capital outflows going
from the country. We need surplus on capital account to finance India's growing current
account deficit and also have to keep the level of foreign exchange reserves at a comfortable
level given several demands on the reserves. Therefore, unlimited capital outflows for
outward FDI could have significant implications for sustainability of India's CAD and external
debt profile.
Impact on domestic investments
Another important factor that warrants close monitoring of capital outflows is implication for
domestic investment. It needs to be ensured that overseas investment by Indian companies
do not crowd-out domestic investments. Even though both domestic capital formation and
overseas FDI investments have increased concomitantly in recent years, potential
implications of rising trend in outward FDI for domestic investment, growth and employment
need to be examined against the benefits that domestic companies derive elsewhere in
terms of expanded market base, backward and forward vertical integration and cheap skilled
labour.
In a globalised business environment, establishing an overseas presence becomes
inevitable on account of a country's policy on outsourcing, emphasis on on-shore presence,
protectionism, etc. Hence, the Indian companies have to balance the need for domestic
business expansion with the compulsions of