IntroductionForeign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country.

foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government spending +(exports - imports], where I is domestic investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country.Foreign investment was introduced in 1991. Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Guidelines on outward FDI were in place before the process of liberalisation and globalisation of Indian economy in 199192. 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. In 1997, exchange earners, other than exporters, were also brought under the fast track route. The scope for outward FDI, however, expanded significantly after the introduction of the Foreign Exchange Management Act (FEMA) in June 2000. In 2002, the per annum upper limit for automatic approval was raised. In 2003 the limit of outward FDI has been gradually increased to 400 per cent. 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. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. FDI is one form of foreign investment characterised by a certain degree of influence and control over assets in the host country. It is distinguished from the provision of cross-border bank loans and portfolio investment. There is however no detailed, authoritative and universal legal definition of what constitutes direct investment. FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. In addition, FDI has the effect of increasing total investment in the economy more than

one for one, which suggests the predominance of complementarity effects with domestic firms. 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. 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. Except certain real estate activities {i.e., buying and selling of real estate or trading in Transferable Development Rights (TDRs)} and banking business (which are considered by an inter-Ministerial group) that are specifically prohibited. It is, thus, imperative that all the stakeholders including the government, the Reserve Bank, professional bodies like yours and Indian corporate bring together their collective experience and wisdom to constantly review the policies and procedures including Home Country Measures (HCMs) that would further facilitate our globalization efforts through outward FDI without adverse implications for vast domestic economy and its macro-economic stability. It is, thus, imperative that all the stakeholders including the government, the Reserve Bank, professional bodies like yours and Indian corporate bring together their collective experience and wisdom to constantly review the policies and procedures including Home Country Measures (HCMs) that would further facilitate our globalization efforts through outward FDI without adverse implications for vast domestic economy and its macro-economic stability. Method of making FDICommon ways of making FDI into a country are through: 1. the creation of a new subsidiary and/or manufacturing base in the host country; 2. mergers and the acquisition of existing businesses in the host country; 3. participation in joint ventures; or 4. re-investment of profits into projects in the host country

The impact of FDI on a host country show that it can have both positive and negative effects depending on factors such as its purpose, quantity, source, target and the policy environment.( Magnus Blomstrm and Ari Kokko, The Impact of Foreign Investment on Host Countries: A Review of the Empirical Evidence (1997) World Bank Policy Research Working Paper) The OECDs Benchmark Definition states thatkey characteristic of FDI is the presence of a lasting interest in an enterprise, consisting of a long-term relationship and a significant degree of influence. LEGAL FRAMEWORK- FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. For example, there are Government guidelines on location of industrial units, or there are certain items like explosives or liquor that need an industrial licence. If the Indian company does not conform to the locational guidelines or needs an Industrial licence then it cannot issue shares under the Automatic Route. Proposals requiring Government ApprovalFDI up to 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government: Activities/items that require an Industrial License. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted. Proposals in which the foreign collaborator has a previous/existing venture/tie up in India in the same. Prior approval of the Government will not be required in the following cases: a. Investments to be made by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI); or b. Where in the existing joint-venture investment by either of the parties is less than 3%; or c. Where the existing venture/ collaboration is defunct or sick.

PROHIBITED SECTORS FOR FDI IN INDIA

FDI is not permissible in the following cases -Gambling and Betting, or - Lottery Business, or - Business of chit fund

- Nidhi Company - Housing and Real Estate business (to a certain extent has been opened. For details please see note on Construction) - Trading in Transferable Development Rights (TDRs) - Retail Trading (discussions are being held to open this area-B2B and Cash & Carry are permitted) - Atomic Energy -Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations) Some legal regimes are made up of a number of components,like 1. regional free trade agreements; 2. multilateral and bilateral investment treaties; 3. specific investment legislation and regulations; and 4. elements of domestic commercial, antitrust, intellectual property, tax, labour and environmental laws. To the contrary, in a cross section of countries, the above study found that more stringent entry regulations were closely associated with lower product quality, poorer environmental standard, inferior public health indicators, and lesser market competition. Therefore, in a majority of countries, although the various investment regulations are well-intended, they fail to achieve their original objectives. The efficiency of the administrative agencies enforcing foreign investment laws and regulations is directly affected by the clarity and rationality of the underlying rules and regulations. In countries going through substantial legal reforms, poor coordination within the reform process may lead to several new laws with clauses that contradict with each other. As policies and laws are reformed, the associated implementing regulations or normative instructions proliferate, often with a time lag and usually without much consideration about how the implementing regulations associated with one law might interact with the implementing regulations associated with other laws. The predictability in the application of the laws and regulations another important component of a good regulatory framework for investment depends on the capacity of the administrative personnel. Better training in legal concepts and administrative skills, coupled with clearer policies and regulations, may help improve the efficiency with which the administrative agencies delivery public services. Technology can also provide a useful tool by linking together agencies via virtual networks, thus facilitating not only the relations between investors and governments officials but also the coordination within the public administration.

The purpose of this report is examine the broad interactions between FDI and the environment. This analysis motivates proposals for a range of regulatory and market instruments that could help FDI promote the transition to sustainability. i. Sustainable resource use is as important as local environmental impacts of FDIWhen increased flows of trade and the investment exacerbate the existing inefficient use of scarce natural resources, economic benefits will be coupled with environmental and social costs; particularly to the most disadvantaged. Therefore the long term welfare implications of increased investment will be mixed in many environmentally sensitive sectors. Without limits in place even economically efficient use of resources is likely result in over-exploitation and over pollution of the environment. FDI must operates inside absolute sustainability constraints based on the need to preserve vital ecosystem functions. The transition to sustainability requires policy changes that often go against immediate economic incentives for higher resource exploitation and pollution. Institutional responses will always lag behind economic pressures, especially in highly competitive global markets.

ii. iii. iv. v.

To support environmental best-practice by industry, governments must collaborate to eliminate costly and inefficient competition based on lowering or freezing environmental standards. Environmental sustainability can only be achieved inside a broader system of economic governance that respects and enhances basic human and workers rights, and promotes good market governance. The bulk of investment flowing to many low-income countries is channelled into natural resource related sectors such as mining, commodity production and tourism. Many countries are dependent on revenues from these sectors for hard currency earnings, and so the economic and environmental performance of FDI will be a critical factor in their development. However, the broader benefits from FDI in these sectors seem to be smaller than similar investments in manufacturing or services, and external environmental and social costs tend to be higher. The quality of FDI cannot be improved by one magic bullet solution, but requires a variety of measures to improve the accountability and transparency of investor behaviour, and to support improved governance in host countries. This requires a mixture of voluntary and regulatory approaches in both home and host countries, and a higher degree of international collaboration. The large gaps between rich and poor, both within and between countries, means that a convergence of environmental regulation will not automatically occur with achievable rises in incomes. In order for developing countries to achieve higher environmental standards they will require greater domestic political will and more generous financing from industrialised countries. Increased flows of trade and the investment can exacerbate the existing allocation of scarce natural resources. This implies that economic benefits will be coupled with environmental

and social costs, particularly to the most disadvantaged, and that the long term welfare implications of increased FDI are often ambiguous; especially in environmentally sensitive sectors. NGOs, and other civil society groups, can play a vital role in articulating the voices of the marginalised, or dispossessed, who often suffer the detrimental environmental impacts of large-scale investments. This requires greater transparency in public and private processes surrounding investment decisions and increased access to justice both nationally and internationally. Environmental regulation influences a firms investment decision will depend on a number of factors: a. Environmental abatement costs. b. Capacity of the firm to absorb additional environmental costs. This depends on a firms competitive advantages, and their ability to pass the extra costs on to the consumer (elasticity of demand, competition in their markets). c. Possibility to capture ''new markets'' (e.g. niche products, green products). d. The amount of protection afforded to the industry (tariffs, non-tariff barriers). e. The potential for new environmental technologies (developed internally or externally). Lack of adequate environmental governance in host countries is both a cause of these problems, and a result of competitive pressures to attract or retain FDI. Often the environmental costs of FDI fall on the poorest, who fail to benefit from the economic wealth it generates. ConclusionAs the importance of FDI to the global economy increases, there is a growing need for stable and well-tailored FDI regimes that promote national well-being and sustainability. Using the normative power of the law is one way to achieve this. It is important to check carefully the current state of the law in the jurisdiction concerned. This might involve looking at documents that the country has produced specifically for investors, or seeking legal advice as appropriate. legalisation of FDI frameworks provides opportunities for a wide range of stakeholders to influence policy in this area at both the international and national 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.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.Guidelines on outward FDI were in place before the process of liberalisation and globalisation of Indian economy in 199192.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.In March 1997, exchange earners, other than exporters, were also brought under the fast track route.The scope for outward FDI, however, expanded significantly after the introduction of the Foreign Exchange Management Act (FEMA) in June 2000.In 2002, the per annum upper limit for automatic approval was raised.in 2003 the limit of outward FDI has been gradually increased to 400 per cent.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.except certain real estate activities {i.e., buying and selling of real estate or trading in Transferable Development Rights (TDRs)} and banking business (which are considered by an inter-Ministerial group) that are specifically prohibited.It is, thus, imperative that all the stakeholders including the government, the Reserve Bank, professional bodies like yours and Indian corporates bring together their collective experience and wisdom to constantly review the policies and procedures including Home Country Measures (HCMs) that would further facilitate our globalization efforts through outward FDI without adverse implications for vast domestic economy and its macro-economic stability.