FDI an Overview

8/2/2019 FDI an Overview

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1-INTRODUCTION

The last two decade of the 20th century witnessed a dramatic world-wide increase in

foreign direct investment (FDI), accompanied by a marked change in the attitude of most

developing countries towards inward FDI. As against a highly suspicious attitude of these

countries towards inward FDI in the past, most countries now regard FDI as beneficial

for their development efforts and compete with each other to attract it. Such shift in

attitude lies in the changes in political and economic systems that have occurred during

the closing years of the last century.

The wave of liberalisation and globalization sweeping across the world has opened many

national markets for international business. Global private investment, in most part, is

now made by multinational corporations (MNCs). Clearly these corporations play a

major role in world trade and investments because of their demonstrated management

skills, technology, financial resources and related advantages. Recent developments in

global markets are indicative of the rapidly growing international business. The end of

the 20th century has already marked a tremendous growth in international investments,

trade and financial transactions along with the integration and openness of international

markets.

In the 1980s, FDI was concentrated within the Triad (EU, Japan and US). However, in

the 1990s, the FDI flows to developed countries declined, while those to developing

countries increased in response to rapid growth and fewer restrictions. Most FDI flows

continue still to be concentrated in 10 to 15 host countries overwhelmingly in Asia and

Latin America. South, East and Southeast Asia has experienced the fastest economic

growth in the world, and emerged as the largest host region. China is now the largest host

country in the developing world.

However, small markets with low growth rates, poor infrastructure, and high

indebtedness, slow progress in introducing market and private-sector oriented economic

reforms and low levels of technological capabilities are not attractive to foreign investors.

The remarkable expansion of FDI flows to developing countries had belied the fear that


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the opening of central and Eastern Europe and the efforts of the countries of that region to

attract such investment would divert investment flows from developing countries. The

most important factors making developing countries attractive to foreign investors are

rapid economic growth, privatization programmes open to foreign investors and the

liberalisation of the FDI regulatory framework.

In India, prior to economic reforms initiated in1991, FDI was discouraged by

Imposing severe limits on equity holdings by foreigners and

Restricting FDI to the production of only a few reserved items.

The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by Foreign

Exchange Management Act [FEMA]), prescribed the detailed rules in this regard and the

firms belonging to this group were known as FERA firms. All foreign investors were

virtually driven out from Indian industries by FERA. Technology transfer was possible

only through the purchase of foreign technology. However, due to severe limits on

royalty payments to foreigners to reduce foreign exchange use, this option was

ineffective. However, the government granted liberal tax incentives to encourage

indigenous generation of technology by domestic firms. In the absence of foreign

technology, Indian industry suffered both in terms of cost of production and quality.The initial policy stimulus to foreign direct investment in India came in July 1991 when

the new industrial policy provided, inter alia, automatic approval for project with foreign

equity participation up to 51 percent in high priority areas. In recent years, the

government has initiated the second generation reforms under which measures have been

taken to further facilitate and broaden the base of foreign direct investment in India. The

policy for FDI allows freedom of location, choice of technology, repatriation of capital

and dividends. As a result of these measures, there has been a strong surge of

international interest in the Indian economy. The rate at which FDI inflow has grown

during the post-liberalisation period is a clear indication that India is fast emerging as an

attractive destination for overseas investors. Encouragement of foreign investment,

particularly for FDI, is an integral part of ongoing economic reforms in India. Though

India has one of the most transparent and liberal FDI regimes among the developing


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countries with strong macro-economic fundamentals, its share in FDI inflows is dismally

low. The country still suffers from weaknesses and constraints, in terms of policy and

regulatory framework, which restricts the inflow of FDI.

Foreign investment policies in the post-reforms period have emphasized greater

encouragement and mobalisation of non-debt creating private inflows for reducing

reliance on debt flows. Progressively liberal policies have led to increasing inflows of

foreign investment in the country.

2-WHAT IS FOREIGN DIRECT INVESTMENT?

FDI is the process whereby residents of one country (the home country) acquire

ownership of assets for the purpose of controlling the production, distribution and other

activities of a firm in another country (the host country).

IMF Definition

According to the BPM5, FDI is the category of international investment that reflects the

objective of obtaining a lasting interest by a resident entity in one economy in an

enterprise resident in another economy. The lasting interest implies the existence of a

long-term relationship between the direct investor and the enterprise and a significantdegree of influence by the investor on the management of the enterprise.

UNCTAD Definition

The WIR02 defines FDI as an investment involving a long-term relationship and

reflecting a lasting interest and control by a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy other than that of

the FDI enterprise, affiliate enterprise or foreign affiliate. FDI implies that the investor

exerts a significant degree of influence on the management of the enterprise resident in

the other economy. Such investment involves both the initial transaction between the two

entities and all subsequent transaction between them among foreign affiliates, both

incorporated and unincorporated. Individuals as well as business entities may undertake

FDI.


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OECD Benchmark Definition of Foreign Direct Investment (Third Edition)

FDI reflects the objective of obtaining a lasting interest by a resident entity in one

economy (direct investor) in an entity resident in an economy other than that of the

investor (direct investment enterprise). The lasting interest implies the existence of a long

term relationship between the direct investor and the enterprise and a significant degree

of influence on the management of the enterprise. Direct investment involves both the

initial transaction between the two entities and all subsequent capital transactions

between them and among affiliated enterprises, both incorporated and unincorporated.

As is evident from the above definitions, there is a large degree of commonality between

the IMF, UNCTAD and OECD definitions of FDI. The IMF definition is followed

internationally.

3-NATURE OF FDI

Almost all modern (FDI) is carried out by corporations rather than individuals. Somewhat

like portfolio investment, the flows of FDI have historically been highly concentrated,

both in terms of geography and by industry and at both the investor and receptor poles.

Geographically, the ownership of global stocks of FDI is highly skewed towards only a

few large, high income countries. Each investing country has, whether by accident or

design , tended to direct the major part of its FDI to only a very few receiving countries;

in fact the pattern of global distribution of FDI have been highly similar to historical

relationships based on colonial ties or other forms of political hegemony.

Viewed industrially, for any given country, FDI generally comes from less than four or

five out of twenty or so major industry groups and inflows into those same industries in

the receptor country.

General attribute of FDI is that it has evoked by type over time. Prior to First World War,

a crude but valid generalization would that a large part of FDI was in service sector of the

host economy (particularly transportation, power, communication and trading) while

most of the rest was of the backward vertical integration type. During the inter-war

period, most of the currently largest manufacturing multinational corporations (MNCs)


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made their initial foreign investments, but these horizontal or market extension types of

investments have now become major category.

The fourth recognized characteristic of manufacturing FDI is that it originates in

industries that are technologically intensive, skill oriented or progressive. In addition,

the FDI prone industries are typically more concentrated, have higher advertising outlays

per unit of sales and exhibit above average export propensities. Industries from which

FDI tends to originate display many characteristics associated with oligopoly.

Another universal property of FDI is that it is really a package of complementary inputs,

a collective flow of both tangible and intangible assets & services.

4-FDI IN DEVELOPING COUNTRIES

FDI is now increasingly recognized as an important contributor to a developing countrys

economic performance and international competitiveness.

After the debt-crisis that hit the developing world in early 1980s, the conventional

wisdom quickly became that it had been unwise for countries to borrow so heavily from

international banks or international bond markets. Rather countries should try to attract

non-debt-creating private inflows (DFI). The financial advantage is that such capital

inflows need not be repaid and that outflow of funds (remittance of profits) wouldfluctuate with the cycle of the economy. It has also been widely observed that the

structural adjustment efforts of the 1980s failed to lead to new patterns of sustained

growth in developing countries. In particular, structural adjustment programs failed to

restore private investment to desirable levels. Again it is hoped that FDI could play an

important role; the World Bank observes that FDI can be an important complement to the

adjustment effort, especially in countries having difficulty in increasing domestic savings.

Against this background of balance of payments problems and low level of private

investment, it is probably not surprising that attitudes in developing countries towards

FDI have shifted. In the 1960s and 1970s many countries maintained a rather cautious,

and sometimes an outright negative position with respect to FDI. In the 1980s, however

the attitudes shifted radically towards a more welcoming policy stance. This change was


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not so much due to new research finding on the impact of FDI but to the economic

problems facing the developing world.

At the global level the flows of FDI and PFI to developing countries have indeed

increased. The average net inflow of FDI in developing countries had been US$ 11

billion in 1980-86, but in 1987 it started to increase, by 1991 the annual net inflow had

risen to US$ 35 billion and by 2004 to US$ 233 billion. The share of developing

economies in total inflow of Foreign Direct Investment in the world has been rising

continuously since 1989.

5-ADVANTAGES AND DISADVANTAGES OF FDI FOR THE HOST COUNTRY

Advantages of Foreign Direct Investment

Foreign Direct Investment has the following potential benefits for less developed

countries.

a) Raising the Level of Investment: Foreign investment can fill the gap between desired

investment and locally mobilised savings. Local capital markets are often not well

developed. Thus, they cannot meet the capital requirements for large investment projects.

Besides, access to the hard currency needed to purchase investment goods not available

locally can be difficult. FDI solves both these problems at once as it is a direct source ofexternal capital. It can fill the gap between desired foreign exchange requirements and

those derived from net export earnings.

b) Upgradation of Technology: Foreign investment brings with it technological knowledge

while transferring machinery and equipment to developing countries. Production units in

developing countries use out-dated equipment and techniques that can reduce the

productivity of workers and lead to the production of goods of a lower standard.

c) Improvement in Export Competitiveness: FDI can help the host country improve its

export performance. By raising the level of efficiency and the standards of product

quality, FDI makes a positive impact on the host countrys export competitiveness.

Further, because of the international linkages of MNCs, FDI provides to the host country

better access to foreign markets. Enhanced export possibility contributes to the growth of

the host economies by relaxing demand side constraints on growth. This is important for


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those countries which have a small domestic market and must increase exports vigorously

to maintain their tempo of economic growth.

d) Employment Generation: Foreign investment can create employment in the modern

sectors of developing countries. Recipients of FDI gain training of employees in the

course of operating new enterprises, which contributes to human capital formation in the

host country.

e) Benefits to Consumers: Consumers in developing countries stand to gain from FDI

through new products, and improved quality of goods at competitive prices.

f) Resilience Factor: FDI has proved to be resilient during financial crisis. For instance, in

East Asian countries such investment was remarkably stable during the global financial

crisis of 1997-98. In sharp contrast, other forms of private capital flows like portfolio

equity and debt flows were subject to large reversals during the same crisis. Similar

observations have been made in Latin America in the 1980s and in Mexico in 1994-

95. FDI is considered less prone to crises because direct investors typically have a longer-

term perspective when engaging in a host country. In addition to risk sharing properties

of FDI, it is widely believed that FDI provides a stronger stimulus to economic growth in

the host countries than other types of capital inflows. FDI is more than just capital, as it

offers access to internationally available technologies and management know-how.

g) Revenue to Government: Profits generated by FDI contribute to corporate tax revenues

in the host country.

Disadvantages of Foreign Direct Investment

FDI is not an unmixed blessing. Governments in developing countries have to be very

careful while deciding the magnitude, pattern and conditions of private foreign

investment. Possible adverse implications of foreign investment are the following:

a) When foreign investment is competitive with home investment, profits in domestic

industries fall, leading to fall in domestic savings.

b) Contribution of foreign firms to public revenue through corporate taxes is comparatively

less because of liberal tax concessions, investment allowances, disguised public subsidies

and tariff protection provided by the host government.


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c) Foreign firms reinforce dualistic socio-economic structure and increase income

inequalities. They create a small number of highly paid modern sector executives. They

divert resources away from priority sectors to the manufacture of sophisticated products

for the consumption of the local elite. As they are located in urban areas, they create

imbalances between rural and urban opportunities, accelerating flow of rural population

to urban areas.

d) Foreign firms stimulate inappropriate consumption patterns through excessive advertising

and monopolistic market power. The products made by multinationals for the domestic

market are not necessarily low in price and high in quality. Their technology is generally

capital-intensive which does not suit the needs of a labour-surplus economy.

e) Foreign firms able to extract sizeable economic and political concessions from competing

governments of developing countries. Consequently, private profits of these companies

may exceed social benefits.

f) Continual outflow of profits is too large in many cases, putting pressure on foreign

exchange reserves. Foreign investors are very particular about profit repatriation

facilities.

g) Foreign firms may influence political decisions in developing countries. In view of their

large size and power, national sovereignty and control over economic policies may be

jeopardized. In extreme cases, foreign firms may bribe public officials at the highest

levels to secure undue favours. Similarly, they may contribute to friendly political parties

and subvert the political process of the host country.

Key question, therefore, is how countries can minimize possible negative effects and

maximize positive effects of FDI through appropriate policies.


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6-FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of Indian economy has been dominated by

a regime of multiple controls, restrictive regulations and wide ranging state intervention.

Industrial economy of the country was protected by the state and insulated from external

competition. As a result of which, India was thrown a long way behind the world of rapid

expanding technology. The cumulative effect of these policies started becoming more and

more pronounced. By the year 1989-90, the situation on the balance of payment and

foreign exchange reserves became precarious and the country was driven to the brink of

default. The credibility reached the sinking level that no country was willing to advance

or lend to India at any cost. In such circumstances, the government quickly followed aliberalized economic policy in July 1991.

The main objectives of the liberalized economic policy are two fold. At the country level

the reform aims at freeing domestic investors from all the licensing requirements, virtual

abolition of MRTP restriction on the investment by large houses, and a competitive

industrial structure for Indian companies to achieve a global presence by becoming as

competitive as their counterparts worldwide. Secondly, the focus on structural reforms

intended to tap foreign investment for economic growth and development.

Gradually & systematically the government has taken a series of measures like

devaluation of rupee, lowering of import duties and allowing foreign investment upto

51% of the equity in a large number of industries and investment of large foreign equity

(even up to 100%) in selected areas especially for export oriented products.

In India, since the 1960s foreign investment and/or foreign collaborations by the

multinationals have been principally viewed as an instrument to facilitate the much

needed transfer of technology. In technological as well as financial collaborations with

foreign firms, the approval and extent of ownership participation had been predominantly

determined by the technology component of the respective products. Import of

technology as against the direct foreign investment was the main focus of the policies till

mid-eighties.


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The New Industrial Policy (NIP) of July 1991 and subsequent policy amendments have

significantly liberalized the industrial policy regime in the country especially as it applies

to FDI. The industrial approval system in all industries has been abolished except for

some strategic or environmentally sensitive industries. In 35 high priority industries, FDI

up to 51% is approved automatically if certain norms are satisfied. FDI proposals do not

necessarily have to be accompanied by technology transfer agreements. Trading

companies engaged primarily in export activities are also allowed up to 51% foreign

entity. A Foreign Investment Promotion Board (FIPB) has been set up to invite and

facilitate investment in India by international companies. The use of foreign brand names

for goods manufactured by domestic industry which had earlier been restricted was alsoliberalized. New sectors have been opened to private and foreign investment. The

international trade policy regime has been considerably liberalized too. The rupee was

made convertible first on trade and finally on the current account. Capital market has

been strengthened. In spite of all these liberalization measures taken by the Indian

government- foreign investments have not been up to expectations. Actual inflow of FDI

has been less than the approval FDI.


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7-POLICIES AND PROCEDURES OF FDI

The initial policy stimulus to foreign direct investment in India came in July 1991 when

the new industrial policy provided, inter alia, automatic route approval for projects with

foreign equity participation up to 51 percent in high priority areas. In recent years, the

government has initiated the second generation reforms under which measures have been

taken to further facilitate and broaden the base of FDI in India. The policy of FDI allows

freedom of location, choice of technology repatriation of capital and dividends. The rate

at which FDI inflow has grown during the post-liberalisation period is a clear indication

that India is a fast emerging as an attractive destination for overseas investors.

As part of the economic reforms programme, policy and procedures governing foreign

investment and technology transfer have been significantly simplified and streamlined.

Today FDI is allowed in all sectors including the service sector except in cases where

there are sectoral ceilings.

FDI Policy Regime

Most of the problem for investors arises because of domestic policy, rules and procedures

and not the FDI policy per se or its rules and procedure.

India has one of the most transparent and liberal FDI regimes among the emerging anddeveloping economies. By FDI regime it means those restrictions that apply to foreign

nationals and entities but not to Indian nationals and Indian owned entities. The

differential treatment is limited to a few entry rules, spelling out proportion of equity that

the foreign entrant can hold in an Indian company or business. There are a few banned

sectors and some sectors with limits on foreign equity proportion. The entry rules are

clear and well defined and equity limits for FDI in selected sectors such as telecom quite

explicit and well-known.

Subject to these foreign equity conditions a foreign company can set up a registered

company in India and operate under the same laws, rules and regulations as any Indian

owned company would. There is absolutely no discrimination against foreign invested

companies registered in India or in favour of domestic owned ones. There is however a

minor restriction on those foreign entities who entered a particular sub-sector through a


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joint venture with an Indian partner. If they want to set up another company in the same

sector it must get a no-objection certificate from the joint venture partner. This condition

is explicit and transparent unlike many hidden conditions imposed by some other

recipients of FDI.

Routes for Inward Flows of FDI

FDI can be approved either through the automatic route or by the Government.

1. Automatic Route: Companies proposing FDI under automatic route do not require

any government approval provided the proposed foreign equity is within the specified

ceiling and the requisite documents are filed with Reserve Bank of India (RBI) within 30

days of receipt of funds. The automatic route encompasses all proposals where the

proposed items of manufacture/activity does not require an industrial license and is not

reserved for small-scale sector.

The automatic route of the RBI was introduced to facilitate FDI inflows. However,

during the post-policy period, the actual investment flows through the automatic route of

the RBI against total FDI flows remained rather insignificant. This was partly due to the

fact that crucial areas like electronics, services and minerals were left out of the

automatic route. Another limitation was the ceiling of 51 percent on foreign equity

holding. Increasing number proposals were cleared through the FIPB route while the

automatic route was relatively unimportant. However, since 2000 automatic route has

become significant and accounts for a large part of FDI flows.

2. Government Approval: For the following categories, government approval for FDI

through the Foreign Investment Promotion Board (FIPB) is necessary:

Proposals attracting compulsory licensing

Items of manufacture reserved for small scale sector.

Acquisition of existing shares.

FIPB ensures a single window approval for the investment and acts as a screening

agency. FIPB approvals are normally received in 30 days. Some foreign investors use the

FIPB application route where there may be absence of stated policy or lack of policy

clarity.


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3. Industrial Licensing in FDI Policy: Industrial Licensing is regulated by Industries(Development and Regulation) Act 1951. Following are the sectors which require

Industrial Licensing:

Industries which abide by compulsory licensing

Manufacturing of items by the larger industrial units for small sector industries

Locational restrictions on the proposed sites

Sectors Which Require Industrial Licensing: Electronic aerospace and defense equipment

Alcoholics drinks

Explosives

Cigarettes and tobacco products

Hazardous chemicals such as, hydrocyanic acid, phosgene, isocynates and di-isocynates

of hydro carbon and derivatives.

4. Restricted List of sectors: FDI is not permissible in the following cases:

Gambling and Betting, or

Lottery Business, or

Business of chit fund

Housing and Real Estate business (to a certain extent has been opened.)

Trading in Transferable Development Rights (TDRs)

Retail Trading

Railways,

Atomic Energy , atomic minerals,

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)


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The new polices have substantially relaxed restrictions on foreign investment, industrial

licensing and foreign exchange. Capital market has been opened to foreign investment

and banking sector controls have been eased. As a result, India has been rapidly changing

from a restrictive regime to a liberal one and FDI is encouraged in almost all economic

activities under the automatic route. The Government is committed to promoting

increased flow of FDI for better technology, modernization, exports and for providing

products and services of international standards. Therefore, the policy of the Government

has been aimed at encouraging foreign investment, particularly in core infrastructure

sectors so as to supplement national efforts.

Post-approval Procedures1. Project Clearance: After the approval has been obtained, the applicant may get his

unit/company registered with the Registrar of Company. Subsequently, the company

needs to obtain various clearances such as land clearance, building design clearance, pre-

construction clearance, labour clearance, etc. from different authorities before beginning

its operations. These clearances differ from sector to sector and may also differ from state

to state.

2. Registration and Inspection: Each industrial unit is supposed to maintain records in

regard to production, sale and export, use of specified raw materials including public

utilities like water and electricity, labour related details financial details and details in

regard to industrial safety and environment.

The unit is also subject to periodic inspection by the factories inspector, labour inspector,

food inspector, fire inspector, central excise inspector, air and water inspector, mines

inspector, city inspector and the like, the list of which may go up to thirty or more.

3. Foreign Exchange Management Act (FEMA), 2000: The additional provisions

which apply only to entry of FDI emanate from the provisions of FEMA. According to

FEMA, no person resident outside India shall without the approval/knowledge of the RBI

may establish in India a branch or a liaison office or a project office or any other place of

business.


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FDI in a particular industry may, however, be made through the automatic route under

powers delegated to the RBI or with the approval accorded by the FIPB. The automatic

route means that foreign investors only need to inform the RBI within 30 days of

bringing in their investment. Companies getting foreign investment approval through

FIPB route do not require any further clearance from RBI for the purpose of receiving

inward remittance and issue of shares to foreign investors. RBI has granted general

permission under FEMA in respect to proposals approved by FIPB. Such companies are,

however, required to notify the concerned regional office of the RBI of receipt of inward

remittances within 30 days of such receipts and again within 30 days of issue of shares to

the foreign investors.8-SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA

Hotel & Tourism Sector

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing

accommodation and/or catering and food facilities to tourists. Tourism related industry

include travel agencies, tour operating agencies and tourist transport operating agencies,

units providing facilities for cultural, adventure and wild life experience to tourists,

surface, air and water transport facilities to tourists, leisure, entertainment, amusement,

sports, and health units for tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

1. Up to 3% of the capital cost of the project is proposed to be paid for technical and

consultancy services including fees for architects, design, supervision, etc.

2. Up to 3% of net turnover is payable for franchising and marketing/publicity support fee,

and up to 10% of gross operating profit is payable for management fee, including

incentive fee.

Private Sector Banking:

49% FDI is allowed from all sources on the automatic route subject to guidelines issued

from RBI from time to time.


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1. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per

levels indicated below:

a. Merchant banking

b. Underwriting

c. Portfolio Management Services

d. Investment Advisory Services

e. Financial Consultancy

f. Stock Broking

g. Asset Management

h. Venture Capital

i. Custodial Services

j. Factoring

k. Credit Reference Agencies

l. Credit rating Agencies

m. Leasing & Finance

n. Housing Finance

o. Foreign Exchange Brokering

p. Credit card business

q. Money changing Business

r. Micro Credit

s. Rural Credit

2. Minimum Capitalization Norms for fund based NBFCs:

a. For FDI up to 51% - US$ 0.5 million to be brought upfront

b. For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

c. For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to

be brought upfront and the balance in 24 months


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3. Minimum capitalization norms for non-fund based activities: Minimum capitalization

norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs

with foreign investment.

4. Foreign investors can set up 100% operating subsidiaries without the condition to

disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50

million as at 2.(c) above (without any restriction on number of operating subsidiaries

without bringing in additional capital)

5. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will

also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to

the subsidiaries also complying with the applicable minimum capital inflow i.e. 2.(a) and

2.(b) above.

6. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines

of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to

obtaining licence from Insurance Regulatory & Development Authority (IRDA)

Telecommunication sector1. In basic, cellular, value added services and global mobile personal communications by

satellite, FDI is limited to 49% subject to licensing and security requirements and

adherence by the companies (who are investing and the companies in which investment

is being made) to the license conditions for foreign equity cap and lock- in period for

transfer and addition of equity and other license provisions.

2. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74%

with FDI, beyond 49% requiring Government approval. These services would be subject

to licensing and security requirements.

3. No equity cap is applicable to manufacturing activities.

4. FDI up to 100% is allowed for the following activities in the telecom sector :

a. ISPs not providing gateways (both for satellite and submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category 1);


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c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such companies would divest

26% of their equity in favor of Indian public in 5 years, if these companies are listed in

other parts of the world.

The above services would be subject to licensing and security requirements, wherever

required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading Companies

Trading is permitted under automatic route with FDI up to 51% provided it is primarily

export activities, and the undertaking is an export house/trading house/super trading

house/star trading house. However, under the FIPB route:-

1. 100% FDI is permitted in case of trading companies for the following activities:

a. exports;

b. bulk imports with ex-port/ex-bonded warehouse sales;

c. cash and carry wholesale trading;

d. Other import of goods or services provided at least 75% is for procurement and sale of

goods and services among the companies of the same group and not for third party use or

onward transfer/distribution/sales.

2. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for such trading

companies who wish to market manufactured products on behalf of their joint ventures in

which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.


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f. Trading of items sourced from the small scale sector under which, based on technology

provided and laid down quality specifications, a company can market that item under its

brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for manufacture

provided such test marketing facility will be for a period of two years, and investment in

setting up manufacturing facilities commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the condition that such

companies would divest 26% of their equity in favor of the Indian public in five years, if

these companies are listed in other parts of the world. Such companies would engage

only in business to business (B2B) e-commerce and not in retail trading.

Power Sector

Up to 100% FDI allowed in respect of projects relating to electricity generation,

transmission and distribution, other than atomic reactor power plants. There is no limit on

the project cost and quantum of foreign direct investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs andpharmaceutical, provided the activity does not attract compulsory licensing or involve use

of recombinant DNA technology, and specific cell / tissue targeted formulations. FDI

proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs

produced by recombinant DNA technology, and specific cell / tissue targeted

formulations will require prior Government approval.

Infrastructure Sector

FDI up to 100% under automatic route is permitted in projects for construction and

maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports

and harbors.

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy for

integration of pollution control systems is permitted on the automatic route.


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Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends in the following

sectors:

a. 34 High Priority Industry Groups

b. Export Trading Companies

c. Hotels and Tourism-related Projects

d. Hospitals, Diagnostic Centers

e. Shipping

f. Deep Sea Fishing

g. Oil Exploration

h. Power

i. Housing and Real Estate Development

j. Highways, Bridges and Ports

k. Sick Industrial Units

l. Industries Requiring Compulsory Licensing

m. Industries Reserved for Small Scale Sector

n. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising

Capital through Public Issue up to 40% of the new Capital Issue.

o. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged

in Industrial, Commercial or Trading Activity.


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p. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity

Capital or Convertible Debentures of the Company by each NRI. Investment in

Government Securities, Units of UTI, National Plan/Saving Certificates.

q. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a

General Body Resolution, up to 24% of the Paid Up Value of the Company.

r. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or

Debentures of an Indian Company.

Certain terms and conditions do apply.

Foreign Direct Investment in Small Scale Industries (SSI's) in India

Recently, India has allowed Foreign Direct Investment up to 100% in many

manufacturing industries which were designated as Small Scale Industries.

India further ended in February 2008 the monopoly of small-scale units on 79 items,

leaving just 35 on the reserved list that once had as many as 873 items.

9-FACTORS AFFECTING FDI

The factors that can narrow the gap between FDI approvals and actual foreign direct

investment inflows and indeed make India a preferred destination for global capital are,

1. Availability of infrastructure in all areas i.e. transports hospitality, telecom, power, etc.

2. Transparency of processes, policies and decision making and reduction of government

decision making lead time.

3. Stability of policies i.e. entry, exit, labour laws, etc. over a definite time horizon so that

definite plans can be made.

4. Acceptance of International Standards including accounting standards.

5. Capital account convertibility so that all capital and payments can flow easily in and out

of the economy.6. Simplification of the regulatory framework in general and tax laws.

7. Improvement in bandwidth for internet and data communication.

8. Improvement in the enforcement of intellectual property rights.

9. Implementation of the WTO agreement full.


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[22]

All investments foreign and domestic are made under the expectation of future profits.

The economy benefits if economy policy fosters competition, creates a well functioning

modern regulatory system and discourages artificial monopolies created by the

government through entry barriers. A recognition and understanding of these facts can

result in a more positive attitude towards FDI. The future policies should be designed in

the light of the above observations. The most important initiatives that need attention are:

1. Empowering the State Governments with regard to FDI.

2. Developing fast track clearance system for legal disputes.

3. Changing the mind set of bureaucracy through HR practices.

4. Developing basic infrastructure.

5. Improving Indias image as an investment destination.

While the magnitudes of inflows have recorded impressive growth, they are still at a

small level compared to Indias potential. The policy reforms undertaken have

undoubtedly enabled the country to widen the sectoral and source composition of FDI

inflows. Within a generation, the countries of East Asian transformed themselves. China,

Indonesia, Korea, Thailand and Malaysia today have living standards much above ours.

When competing for FDI, policy makers have to be aware that various measures intendedto induce FDI are necessary. These include liberalisation of FDI regulations and various

business facilitation measures. Other reforms, such as privatization, tend to be more

effective in stimulating FDI inflows, but need to be complemented by reform in other

areas, in order to ensure that FDI inflows are beneficial. Other determinants of FDI,

which were sufficient in the past, may prove to be less relevant in the future


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10-FDI TRENDS IN INDIA

India is the second most populous country and the largest democracy in the world. The

far reaching and sweeping economic reform undertaken since 1991 have unleashed the

enormous growth potential of the economy. There has been a rapid, yet calibrated, move

towards deregulation and liberalisation, which has resulted in India becoming a favourite

destination for investment. Undoubtedly, India has emerged as one of the most vibrant

and dynamic of the developing economies.

India as an Investment Destination

FDI is seen as a means to supplement domestic investment for achieving a higher level of

economic growth and development. FDI benefits domestic industry as well as the Indian

consumers by providing opportunities for technological upgradation, access to global

managerial skills and practices, optimal utilization of human and natural resources,

making Indian industry internationally competitive, opening up export markets, providing

backward forward linkages and access to international quality goods and services. FDI

policy has been constantly reviewed and necessary steps have been taken to make India a

most favourable destination for FDI. There are several good reasons for investing in

India.

1. Third largest reservoir of skilled manpower in the world.

2. Large and diversified infrastructure spread across the country.

3. Abundance of natural resources and self-efficiency in agriculture.

4. Package of fiscal incentives for foreign investors.

5. Large and rapidly growing consumer market.

6. Democratic government with independent judiciary.

7. English as the preferred business language.

8. Developed commercial banking network of over 63000 branches supported by a number

of National and State level financial institutions.

9. Vibrant capital market consisting of 22 stock exchanges with over 9400 listed companies.

10.Congenial foreign investment environment that provides freedom of entry, investment,

location, choice of technology, import and export, and


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Indias Performance in the Global Context

According to UNCTAD World Investment Report, 2007, FDI inflows to South Asia

surged by 126% amounting to $22 billion in 2006, mainly due to investment in India. The

country received more FDI than ever before equivalent to the total inflows during 2003-

2005. Inward FDI inflows to China declined for the first time in 7years. The modest

decline by 4% or $69 billion was mainly due to reduced inflows of financial services.

UNCTADs World Investment Report publishes a set of benchmarks for inward FDI

performance that ranks countries by how they do in attracting inward direct investment.

In contrast, despite enjoying a healthy rate of economic growth India ranked 120th on

UNCTADs inward FDI performance index 1999-2001, far below China which ranked

59th and lower than both Pakistan (116th) and Srilanka (111th). As far as inward FDI

potential index is concerned, India ranks 84th as against Chinas 40th rank. The World

Investment Report, 2005 noted, While India has been catching up in inward FDI, it still

ranks near the bottom.


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TABLE-A

FDI Inflows Year-wise (1990-20011)

(Amount US$ million)

Fiscal Year(April-March)

Equity Reinvestedearnings

Othercapital

TotalFDIinflows

YOYgrowt(%)

FIPBRoute/RBI'sAutomaticRoute

Equity capital ofunincorporatedbodies

1991(Aug)-

2000 (Mar)

15483 - - - 15483 -

2000-01 2339 61 1350 279 4029 -

2001-02 3904 191 1645 390 6130 (+) 52

2002-03 2574 190 1833 438 5035 (-) 18

2003-04 2197 32 1460 633 4322 (-) 14

2004-05 3250 528 1904 369 6051 (+) 40

2005-06 5540 435 2760 226 8961 (+) 48

2006-07 15585 896 5828 517 22826 (+) 14

2007-08 24575 2292 7168 327 34835 (+) 53

2008-09 27329 702 9030 777 37838 (+)092009-10 25609 1540 8669 1945 37763 (-)0.2

2010-11 17081 437 4237 303 22058 ----

(April-Jan)

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India


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Top Investing Countries FDI Inflows in India

In FDI equity investments Mauritius tops the list of first ten investing countries followed

by US, UK, Singapore, Netherlands, Japan, Germany, France, Cyprus and Switzerland.

Between April 2000 and July 2008 FDI inflows from Mauritius stood at $ 30.18 billion

followed by $5.80 billion from Singapore; $ 5.47 billion from the US; $ 4.83 billion from

the UK; $ 3.12 billion from the Netherlands; $ 2.26 billion from Japan; $1.83 billion from

Germany; $ 1.41 billion from Cyprus; and $1.02 billion from France. From 2008-

20011(January) are as per Table B

TABLE-B

TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (In Rs. Crores)(Financial years):

RANK Country 2008-09

(April-

March)

2009-10

(April-

March)

2010-11

( April-

Jan.)

Cumulative

Inflows

(April 00-

Jan. 11)

%age to

total

Inflows

(in terms of

US $)

1. MAURITIUS 50,899

(11,229)

49,633

(10,376)

27,970

(6,129)

238,876

(53,369)

42 %

2. SINGAPORE 15,727

(3,454)

11,295

(2,379)

6,817

(1,504)

51,964

(11,694)

9 %

3. U.S.A. 8,002

(1,802)

9,230

(1,943)

5,001

(1,092)

42,190

(9,371)

7 %

4. U.K. 3,840

(864)

3,094

(657)

2,300

(503)

28,298

(6,387)

5 %

5. NETHERLAN

DS

3,922

(883)

4,283

(899)

4,752

(1,048)

24,877

(5,535)

4 %

6. JAPAN 1,889

(405)

5,670

(1,183)

6,180

(1,367)

23,075

(5,082)

4 %

7. CYPRUS 5,983

(1,287)

7,728

(1,627)

3,458

(755)

21,235

(4,655)

4 %

8. GERMANY 2,750

(629)

2,980

(626)

545

(119)

13,013

(2,918)

2 %

9 FRANCE 2,098

(467)

1,437

(303)

3,149

(690)

10,068

(2,220)

2 %

10. U.A.E. 1,133

(257)

3,017

(629)

1,503

(326)

8,526

(1,875)

1 %

TOTAL FDI INFLOWS 123,025

(27,331)

123,120

(25,834)

77,902

(17,080)

570,105

(127,369)

-

Figures in bracket are in US$ million



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Top Sectors in India attracting FDI

Theaverage FDI inflows per year during the 9th Plan were $ 3.2 billion and during the

10th Plan it increased manifold to stand at $ 16.33 billion the annual average being $ 6.16

billion. The top five sectors attracting FDI in fiscal 2007-08 included Services sector;

Housing and Real Estate; Construction activities; Computer Software & hardware; and

Telecommunications. The infrastructure sector that offers massive potential to attract FDI

witnessed marked increase in FDI inflows during this five-year period. The extant policy

for most of the infrastructure sectors permits FDI up to 100 percent on the automatic

route. From $ 1902 million in fiscal 2001-02 the foreign investment in India's

infrastructure sector increased to $ 2179 million in 2006-07. But fiscal 2007-08 witnessed

significant increase in the FDI inflows in the infrastructure. In first nine months till

December 2007 of fiscal 2007-08 stood at $ 4095 million. From 2000-01 to December

2007, total FDI in India's infrastructure sector stood at $ 10575 million. The FDI inflow

sector wise from 2008-2011(January) is as given in the table.


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TABLE-C

TOP TEN SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

(Amount in Crores )

Figures in bracket are in US$ million


Ranks Sector 2008-09

(April-

March)

2009-10

(April-

March)

2010-11

( April-

Jan.)

Cumulative

Inflows

(April 00-

Jan. 11)

% age

to total

Inflows

(In

terms

of US$)

1. SERVICES SECTOR

(financial & non-financial)

28,516

(6,138)

20,776

(4,353)

13,652

(2,987)

118,923

(26,597)

21 %

2. COMPUTER

SOFTWARE &

HARDWARE

7,329

(1,677)

4,351

(919)

3,225

(708)

47,340

(10,644)

8 %

3. TELECOMMUNICA

TIONS

11,727

(2,558)

12,338

(2,554)

6,041

(1,332)

46,746

(10,262)

8 %

4. HOUSING & REAL

ESTATE

12,621

(2,801)

13,586

(2,844)

4,791

(1,048)

42,163

(9,405)

7 %

5. CONSTRUCTION

ACTIVITIES

8,792

(2,028)

13,516

(2,862)

4,540

(1,006)

40,233

(9,059)

7 %

6. AUTOMOBILE

INDUSTRY

5,212

(1,152)

5,754

(1,208)

5,375

(1,191)

26,198

(5,788)

5 %

7. POWER 4,382

(985)

6,908

(1,437)

4,711

(1,033)

25,715

(5,680)

4 %

8. METALLURGICAL

INDUSTRIES

4,157

(961)

1,935

(407)

4,632

(1,011)

18,073

(4,141)

3 %

9. PETROLEUM &

NATURAL GAS

1,931

(412)

1,328

(272)

2,471

(541)

13,585

(3,120)

2 %

10. CHEMICALS

(other than

fertilizers)

3,427

(749)

1,707

(362)

1,739

(382)

13,007

(2,876)

2 %


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11-CONCLUSION

Economic reforms in India have deregulated the economy and stimulated domestic and

foreign investment, taking India firmly into the forefront of investment destinations. The

Government, keen to promote FDI in the country, has radically simplified and

rationalized policies, procedures and regulatory aspects. Foreign direct investment is

welcome in almost all sectors; expect those strategic concerns (defence and atomic

energy).

Since the initiation of the economic liberalisation process in 1991, sectors such as

automobiles, chemicals, food processing, oil and natural gas, petro-chemicals, power,

services, and telecommunications have attracted considerable investments. Today, in the

changed investment climate, India offers exciting business opportunities in virtually

every sector of the economy. Telecom, electrical equipment (including computer

software), energy and transportation sector have attracted the highest FDI.

Despite its market size and potential, India has yet to convert considerable favourable

investor sentiment into substantial net flows of FDI. Overall, India remains high oncorporate investor radar screens, and is widely perceived to offer ample opportunities for

investment. The market size and potential give India a definite advantage over most other

comparable investment destinations.

Indias investment profile, however, is also conditioned by factors that affect the flow of

FDI, which are bureaucratic delays, wide spread corruption, poor infrastructure facilities

pro-labour laws, political risk and weak intellectual property regime.

A perceived slowdown in the process of reforms generates doubts about the markets

long-term potential. To capitalize on its potential for FDI, would seem that India needs to

accelerate efforts to institutionalize government efficiency and advance the

implementation of promised reforms. Other strategic efforts should include focusing the

market on Indias relatively higher rates of return on existing investments and long-term

potential, addressing the issue of transforming the country into a viable export platform


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and encouraging strategic alliances with foreign investors. In short, this means

accelerating Indias integration with the global economy.

BIBLIOGRAPHY

Books:

Foreign Investment in India: 1947-48 to 2007-08, Dr. Kamlesh Gakhar

Foreign Direct Investment in India: 1947 to 2007, Dr. Nitin Bhasin

Websites:

Official website ofDepartment of Commerce, Government of India

http://www.economywatch.com

http://siadipp.nic.in

http://business.mapsofindia.com
http://business.mapsofindia.com/http://commerce.nic.in/trade/international_ntm.asp?id=4&trade=ihttp://commerce.nic.in/trade/international_ntm.asp?id=4&trade=ihttp://commerce.nic.in/trade/international_ntm.asp?id=4&trade=ihttp://www.economywatch.com/http://siadipp.nic.in/http://business.mapsofindia.com/http://business.mapsofindia.com/http://siadipp.nic.in/http://www.economywatch.com/http://commerce.nic.in/trade/international_ntm.asp?id=4&trade=ihttp://business.mapsofindia.com/

Documents

FDI an Overview