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Monday, 12 Sep 2011
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 FDI Outflow from India


The FDI data suggest that in the recent years FDI outflow from India has increased steadily. Are the Indian companies fed up of the indifference? Is the Indian government showing this in their projex plans? Is this the reason they are looking for green pastures overseas, where investment conditions are conducive?


"Westward ho… or Jai ho…" Formula One dream is finally coming alive in India. The loud roar of the beastly engines, the pungent smell of tyres burning and the mean machines clocking over 220 mph - enough to sky rocket every man's adrenalin levels. The relationship between men and their machines has always been extraordinary. No wonder men feel prouder when TATA acquires Jaguar and Land Rover in contrast to Bharti acquiring Zain Telecom's operations in 15 nations! Interestingly, slowly but steadily, investment from India or Outward Foreign Direct Investment ("OFDI") has been mounting persistently, almost in every sector. The numbers are astounding. As per the recent data released by the Reserve Bank of India ("RBI"), overseas investments by Indian companies jumped by almost 144 per cent in 2010-11 (USD 43.9 billion) from 2009-10 (USD 18 billion)1 , while the FDI coming into India dropped by 24.72 per cent over the same period2.


If the Indian economy is still one If the Indian economy is still one of the fastest growing in the world, enjoying a growth of almost 8 per cent every year, then why do these corporations seek to venture outside India?Outward FDI fro India_ProjectsToday

Statistically speaking, India today is the world's 21st largest outward investor3 with the recent trends indicating that Mauritius and Singapore4 accounted for the major share of total OFDI.


Government of India issued its first formal guidelines for Overseas Direct Investment in 1969 with various restrictions on foreign investments. However, the trend to spend outside India got a major shot in the arm with the liberalization of the Indian regulatory policies. These policies, which were primarily evolved as strategies for export promotion and strengthening economic linkages with other countries, expanded significantly in their scope and size, especially after the introduction of the Foreign Exchange Management Act in June 2000.


Like it 'takes two to tango', efflux of investment from India is also a two-way story. Factors contributing to this OFDI can broadly be classified into two clusters - one, the "push factors" - which connotes the struggle and the sore points faced by investors which force them to look outside India and second, the "pull factors" - which are the inducements and incentives offered by foreign lands which attract these investors to them. A key 'push factor' and the fundamental for any industry is the "ease of conducting business" in a country. India, as per a recent study by World Bank, ranks at 134 in the world5 in this criterion. Scores of tax and regulatory compliances (some draconian in nature) constantly keep the investors engaged invoking a harried feeling.


Another noticeable 'push factor' is the rapidly escalating corruption levels in India. As per the Corruption Perceptions Index ("CPI") 2010, India is ranked at 87th position worldwide (the highest rank being the worst), way behind countries like Singapore (ranked no.1), Netherlands (ranked no.7) and Japan (ranked no.17). The situation has only deteriorated in the last decade, with Indian ranking worsening from 71 in 2001 to 87 in 20106.


Excitement of entering new foreign markets and the thought of reaping unimaginable profits keeps the Indian corporations on its toes. Apart from these, a major 'pull factor' is also the advanced levels of infrastructure and technology that is available overseas to an Indian investor. A major 'pull factor', which should not go unnoticed is the taxation policy of the foreign nations. Statistics reveal that nearly one-third of the money invested abroad as outbound investment has been in countries investor like Mauritius, Cyprus, British Virgin Islands which provide various tax benefits to the investors. These countries had successfully attracted the foreign investors due to their lucrative investment options and relaxed tax regime. To illustrate, the corporate tax rates in India is 30 per cent and while the same is 15 per cent in Mauritius. Further, a tax credit up to 80 per cent is available making the effective tax rate as low as 3 per cent. Additionally, there is a blanket exemption from the capital gains tax in Mauritius.




  1. Source: RBI Press Release
  2. Source: Department of Industrial Policy and Promotion Press Release
  3. Source: Vale Columbia Center on Sustainable International Investment
  4. Source: UNCTAD report 2011
  5. Source: Doing Business Report of International Finance Corporation
  6. Report by Transparency International



OFDI is an integral part of every developed economy and with the Indian economy maturing further in coming future, we shall definitely see more Indian corporations spreading its wings beyond the Indian subcontinent. Providentially, India is coming out very strongly with solutions to many of the above 'push factors' like setting up Special Economic Zones for industry, institution of Lok Adalats and Mobile Courts in rural areas, the current discussions on Lokpal Bill to curb corruption and several other tax and regulatory reforms in the recent past. There is thus, a great hope that such 'push factors' will soon be overcome and the Indian investor will find better opportunities in their home-country for carrying on the business with the highest levels of efficiency and the best of returns. Jai-ho!


Ravi Shingari_ProjectsTodayRavi Shingari has experience in diverse corporate tax matters relating to multinational and domestic clients in a wide range of industries. He has worked on a range of assignments, involving cross border acquisitions and investment structuring, domestic tax laws, exchange control regulations, double taxation avoidance agreements, tax dispute resolution and other international tax matters.
Jayant Bakshi_ProjectsTodayJayant Bakshi has a rich experience in handling direct and regulatory issues pertaining to range of industries and has successfully serviced a variety of international and domestic clients. He has advised many multinational companies in setting-up their operations in India, cross border acquisitions and investment structuring, double taxation avoidance agreements and other international tax matters.

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