FDI

FDI (Foreign Direct Investement) 1

INDEX

S

r

.

n

o

.

Chapter Name P

a

g

e

n

o

.

1 INTRODUCTIO

N OF FDI

2

2 FOREIGN

DIRECT

INVESTMENT

7

3 FOREIGN

DIERCT

INVESTMENT;

THEORITICAL

SETTINGS

9

4 ADVANTAGE

AND

DISADVANTAG

E OF FDI FOR

THE HOST

COUNTRY

2

1

5 FOREIGN

DIERCT

INVESTMENT

2

5

K.P.B HINDUJA COLLEGE OF COMMERCE


IN INDIA

6 POLICTES AND

PROCEDUERS

OF FDI

2

7

7 SECTOR

SPECIFIC

GUDELINESS

FOR FDI IN

INDIA

4

0

8 FACTORS

AFFECTING

FDI

5

1

9 CASE STUDY 5

6

1

0

SUGGESTIONS

AND

RECOMMENDA

TIONS

6

4

1

1

CONCIUSION 6

6

1

2

WEBLJOGRAP

Y

6

8



CHAPTER 1: INTRODUCTION ON FDI

The last two decades of the 20thcentury witnessed a dramatic worldwide

increase in foreign direct investment (FDI), accompanied by a markedchange

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 inthe changes

in political and economic systems that have occurred during theclosing years

of the last century. The wave of liberalization 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 globalmarkets are indicative of the rapidly growing international business.

The endof the 20th Century has already marked a tremendous growth in

internationalinvestments, trade and financial transactions along with the

integration and openness of international markets.FDI is a subject of topical

interest.

Countries of the world, particularlydeveloping economies, are vying with each

other to attract foreign capital to boost their domestic rates of investment and

also to acquire new technology and management skills. Intense competition is

taking place among the fundstarved less developed countries to lure

Foreign investors by offering.



Repatriation facilities, tax concessions and other incentives. However, FDI is

not an unmixed blessing. Governments in developing countries have to bevery

careful while deciding the magnitude, pattern and conditions of private

foreign investment. In the 1980s, FDI was concentrated within the Triad (EU,

Japan and US).However, in the 1990s, the FDI flows to developed countries

declined, whilethose in developing countries increased in response to rapid

growth andfewer restrictions. Most FDI flows continue still to be concentrated

in 10 to15 host countries overwhelmingly in Asia and Latin America.

South, East and Southeast Asia has experienced the fastest economic growth

in theworld, 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 in debtness, 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 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 economicgrowth, privatization programmes open to foreig

n investors and theliberalisation 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 the

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 July1991 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-liberalization 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



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 has emphasized

greaterencouragement and mobilization 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

The practice has grown significantly in the last couple of decades, to the point

that FDI has generated quite a bit of opposition from groups such as labor

unions. These organizations have expressed concern that investing at such a

level in another country eliminates jobs. Legislation was introduced in the

early 1970s that would have put an end to the tax incentives of FDI. But

members of the Nixon administration, Congress and business interests rallied

to make sure that this attack on their expansion plans was not successful. One

key to understanding FDI is to get a mental picture of the global scale of

corporations able to make such investment. A carefully planned FDI can

provide a huge new market for the company, perhaps introducing products

and services to an area where they have never been available. Not only that,

but such an investment may also be more profitable if construction costs and

labor costs are less in the host country.

1.1 HistoryIn the years after the Second World War global FDI was dominated by the

United States, as much of the world recovered from the destruction brought by

the conflict. The US accounted for around three-quarters of new FDI



(including reinvested profits) between 1945 and 1960. Since that time FDI has

spread to become a truly global phenomenon, no longer the exclusive preserve

of OECD countries.FDI has grown in importance in the global economy with

FDI stocks now constituting over 20 percent of global GDP. Foreign direct

investment (FDI) is a measure of foreign ownership of productive assets, such

as factories, mines and land. Increasing foreign investment can be used as one

measure of growing economic globalization. The figure below shows

net inflows of foreign direct investment as a percentage of gross domestic

products (GDP). The largest flows of foreign investment occur between the

industrialized countries (North America, European Japan). But flows to non-

industrialized countries are increasing sharply.

A foreign direct investor is an individual, an incorporated or unincorporated

public or private enterprise, a government, a group of related individuals, or a

group of related incorporated and/or unincorporated enterprises which has a

direct investment enterprise – that is, a subsidiary, associate or branch –

operating in a country other than the country or countries of residence of the

foreign direct investor or investors.


http://en.wikipedia.org/wiki/Japan


CHAPTER-2: 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)

2.1. 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 significant degree of influence by the investor on the

management of the enterprise

2.2. UNCTAD Definition

The WIRO 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 investment 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 transactions between them amongforeign

affiliates, both incorporated and unincorporated. Individuals as well as



business entities may undertake FDI. Flows of FDI comprise capital provided

(either directly or through

other related enterprises) by a foreign direct investor to an FDI enterprise,

or capital received from an FDI enterprise by a foreign direct investor. FDI

has three components viz., equity capital, reinvested earnings and intra-

company loans

Equity capital is the foreign direct investor’s purchase of share of an

enterprise in a country other than its own.

Reinvested earnings comprise the direct investors share (in proportion to

direct equity participation) of earnings not distributed as dividends by the

affiliates, or earnings not remitted to the direct investor. Such retained profits

by affiliates are reinvested.

Intra-company loans or intra-company debt transactions refer to short or long

term borrowing and lending of funds between direct investors (parent

enterprises) and affiliate enterprises.

2.3 OECD Benchmark Definition of FDI (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 transactions 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.



CHAPTER-3:

FOREIGN DIRECT INVESTMENT :THEORITICAL

SETTINGSMost of the present day underdeveloped countries of the world have set out

a planned program for accelerating the pace of their economic development.

In a country planning for industrialization and aiming to achieve a target rate

of growth, there is a need for resources. The resources can be mobilized

through domestic as well as foreign sources. So far as, the domestic sources

are concerned, they may not be sufficient to acquire the fixed rate of growth.

Generally domestic savings are less than the required amount of investment.

Also the very process of industrialization calls for import of capital goods

which cannot be locally produced. Hence comesthe need for foreign sources.

They not only supplement the domestic savings but also provide the recipient

country with extra foreign exchange to buy imports essential for filling the

saving investment gap and the foreign exchange gap. The means of getting

foreign resources available to a developing country are mainly three:

1. through export of goods and services

2. External aid

3. Foreign investment

Export of goods and services do contribute to foreign resources but they can

meet only a small part of the total demand for foreign resources. External Aid

from foreign governments and international institutions, by increasing the rate

of home savings and removing the foreign gap allows the utilization of

previously underutilized resources and capacity. But generallythe aid is tied



and distorts the allocation of resources. So its use has been on the decline.

Foreign investment is of following two types

1. Foreign Direct Investment (FDI) and

2. Portfolio Investment.

3.1 Foreign Direct versus Portfolio InvestmentBy Foreign Direct Investment (FDI) we mean any investment in a foreign

country where the investing party (corporation, firm) retains control

over investment. A direct investment typically takes the form of a foreign firm

starting a subsidiary or taking over control of an existing firm in the country in

question. FDI consists of equity capital, technical and managerial services,

capital equipment and intermediate inputs and legal rights to patents or

secret products, processes or trademarks. It is the direct type of foreign

investment which is associated with multinational corporations of foreign

investment which is associated with multinational corporations because

most of FDI is transferred through firms and remains outside of ordinary,

functioning markets.

FDI can be done in the following ways:

1. In order to participate in the management of the concerned enterprise, the

stocks of the existing foreign enterprise can be acquired.

2. The existing enterprise and factories can be taken over.

3. A New subsidiary with 100% ownership can be established abroad.

4. It is possible to participate in a joint venture through stock holding

5. New foreign branches, offices and factories can be established.

6. Existing foreign branches and factories can be expanded.



7.Minority stock acquisition, if the objective is to participate in the

management of the enterprise.

8. Long term lending, particularly by a parent company to its subsidiary, when

the objective is to participate in the management of the enterprise.

Portfolio investment, on the other hand, does not seek management

control ,but is motivated by profit .Portfolio investment occurs when when

individual investors invest, mostly through stockbrokers ,in stocks of foreign

companies in foreign lands in search of profit opportunities.

FDI flows are usually preferred over other forms of external finance

becausethey are non-debt creating, non-volatile and their returns depend on

the performance of the projects financed by the investors.

FDI also facilitates international trade and transfer of knowledge, skills and

technology. In a world of increased competition and rapid technological

change, their complimentary and catalytic role can be very valuable.

3.2 Superiority of FDI over Other Forms of Capital Inflows FDI is perceived superior to other types of capital inflows for several reasons:

1.In contrast to foreign lenders and portfolio investors, foreign direct investors

direct investors typically have a longer-term perspective when engaging in a

host country. Hence, FDI inflows are less volatile and easier to sustain in

times of crisis.

2. While debt inflows may finance consumption rather than investment in the

host country, FDI is more likely to be used productively.

3. FDI is expected to have relatively strong effects on economic growth,

asdic provides for more than just capital. FDI offers access to internationally



available technologies and management know-how, and may render it easier

to penetrate world markets.

A recent United Nations report has revealed that FDI flows are less volatile

than portfolio flows. To quote, “FDI flows to developing and transition

economies in 1998 declined by about 5 percent from the peak in 1997, a

modest reduction in relation to the effects on the other capital flows of the

spread of the Asian financial crisis to global proportions. FDI flows are

generally much less volatile than portfolio flows. The decline was modest in

all regions, even in the Asian economies most affected by the financial crisis.

3.3 Macroeconomic and Micro-economic Aspects of FDIIn judging the significance of FDI, especially from the viewpoint of developin

g countries, it is useful to make a distinction between macro-economic and

micro-economic effects. The former is connected with issues of domestic

capital formation, balance of payments, and taking advantage of external

markets for achieving faster growth, while the latter is connected with the

issue of cost reduction, product quality improvement, making changes in

industrial structure and developing global inter-firm linkages .In this context,

it needs to be recognized that FDI is an aggregate entity, the sum total of the

investments made by many diverse multinationals, each with its own

corporate stratergy.The micro-economic effects of the investment made by

one multinational may be quite different from that of another multinational

even if the investments are made in the same industry. Also, what benefits the

local economy will depend on the capabilities of the host country in regard

to technology transfer and industrial restructuring.



3.4 Resource-seeking and Market-seeking FDITwo major types of FDI are typically differentiated: resource-seeking FDI and

market-seeking FDI. Resource-seeking FDI is motivated by the availability of

natural resources in the host countries. This type of FDI was historically

important and remains a relevant source of FDI for various developing

countries. However, on a worldwide scale,

the relative importance of resource-seeking FDI has decreased

significantly.The relative importance of market-seeking FDI is rather difficult

to assess. It is almost impossible to tell whether this type of FDI has already

become less important due to economic globalization. Regarding the history

of FDI in developing countries, various empirical studies have shown that the

size and growth of host country markets were among the most important FDI

determinants. It is debatable, however, whether this is still true with ongoing

globalization.

Globalization essentially means that geographically dispersed manufacturing,

slicing up the value chain and the combination of markets and resources

through FDI and trade are becoming major characteristics of the world

economy. Efficiency-seeking FDI, i.e. FDI motivated by creating new sources

of competitiveness for firms and strengthening existing ones, may then

emerge as the most important type of FDI.

Accordingly, the completion for FDI would be based increasingly on the cost

differences between locations, the quality of infrastructure and business-

related services, the ease of doing business and the availability of skills.

Obviously, this scenario involves major challenges for developing countries,



ranging from human capital formation to the provision of business-related

services such as efficient communication and distribution systems.

3.5 Nature of FDIAlmost 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 country;

in fact the pattern of global distribution of FDI has 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 attributes 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 the 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

multinational corporations (MNC’s)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.

3.6Types of FDI

Types of Foreign Direct Investment: An OverviewFDIs can be broadly classified into two types:

Outward FDIs

Inward FDIs



This classification is based on the types of restrictions imposed, and the

various prerequisites required for these investments.

Outward FDIs:

An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage provided to the

domestic industries and subsidies granted to the local firms stand in the way

of outward FDIs, which are also known as 'direct investments abroad.

Inward FDIs:

Different economic factors encourage inward FDIs. These include interest

loans, tax breaks , grants, subsidies, and the removal of restrictions and

limitations. Factors detrimental to the growth of FDIs include necessities of

differential performance and limitations related to ownership patterns

Other categorizations of FDI exist as well. Vertical Foreign DirectInvestment

takes place when a multinational corporation owns some shares of a foreign

enterprise, which supplies input for it or uses the output produced by the

MNC.

By Motive

Resources seeking– looking for resources at a lower real cost.

Market seeking– secure market share and sales growth in target foreign

market.

Efficiency seeking– seeks to establish efficient structure through useful

factors, cultures, policies, or markets.

3.7 FDI in Developing Countries


http://www.economywatch.com/foreign-direct-investment/





FDI is now increasingly recognized as an important contributor to a

developing country’s economic performance and international

competitiveness. After the debt-crisis that hit developing world in 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 trying 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) would fluctuate 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’d

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 not so much due to

new research finding on the impact of FDI but to the economic problems

facing the developing world.Developing countries are liberalizing their

foreign investment regimes and are seeking FDI not only as a source of capital

funds and foreign exchange but also as a dynamic and efficient vehicle to

secure the much needed industrial technology, managerial expertise and



marketing know-how and networks to improve on growth ,

employment,productivity and export performance.

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

1991the 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 risen continuously since 1989.

3.8 Investment risk in India

Sovereign Risk

India was an effervescent parliamentary democracy since its political freedom

from British rule more than50 years ago. The country does not face any real

threat of a serious revolutionary movement which might lead to a collapse of

state machinery. Sovereign risk in India is hence nil for both "foreign direct

investment" and "foreign portfolio investment." Many Industrial and Business

houses have restrained themselves from investing in the North-Eastern part of

the country due to unstable conditions. Nonethelessinvesting in these parts is

lucrative due to the rich mineral reserves here and high level of literacy.

Kashmir to the northern tip is a militancy affected area and hence investment

in the state of Kashmir are restricted by law.

Political Risk



India has enjoyed successive years of elected representative government at the

Union as well as federal level. India suffered political instability for a few

years in the sense there was no single party which won clear majority and

hence it led to the formation of coalition governments. However, political

stability has firmly returned since the general elections in 1999 , with

strong and healthy coalition government emerging,

Nonetheless, political instability did not change India's bright economic

course though it delayed certain decisions relating to the economy.

Economic liberalization which mostly interested foreign investors have been

accepted as essential by all political parties including the Communist Party

of India Though there are bleak chances of political instability in the future,

even if such a situation arises the economic policy of India would hardly be

affected.. Being a strong democratic nation the chances of an army coup or a

foreign dictatorship are minimal. Hence, political risk in India is practically

absent.

Commercial Risk Commercial risk exists in any business ventures of a country. Not each and

every product or service is profitably accepted in the market. Hence it is

advisable to study the demand / supply condition for a particular product or

service before making any major investment. In India one can avail the

facilities of a large number of market research firms in exchange for a

professional fee to study the state of demand /supply for any product. As it is,

entering the consumer market involves some kind of gamble and hence

involves commercial risk.



Risk Due To TerrorismIn the recent past, India has witnessed several terrorist attacks on its soil

which could have a negative impact on investor confidence. Not only business

environment and return on investment, but also the overall security conditions

in a nation have an effect on FDI's. Though some of the financial experts

think otherwise. They believe the negative impact of terrorist attacks would be

a short term phenomenon. In the long run, it is the micro and macro economic

conditions of the Indian economy that would decide the flow of Foreign

investment and in this regard India would continue to be a favorable

investment destination



CHAPTER-4: ADVANTAGES & DISADVANTAGES OF FDI

FOR THE HOST COUNTRY

4.1 Advantages of Foreign Direct Investment Foreign Direct Investment has the following potential benefits for less

developed nation.

1. Raising the Level of InvestmentForeign investment can fill the gap between desired investment and locally

mobilized 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 of external capital. It can fill the gap between desired foreign

exchange requirements and those derived from net export earnings.

2. Upgradation of TechnologyForeign 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.

3.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 country’s export competitiveness. Further,

because of the international linkages of MNCs, FDI provides for 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 those countries which have a small domestic market and

must increase exports vigorously to maintain their tempo of economic growth.

4.Employment GenerationForeign investment can create employment in the modern sectors of

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

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

formation in the host country.

5.Benefits to ConsumersConsumers in developing countries stand togain from FDI through new

products, and improved quality of goods at competitive prices.

6.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 inMexico in 1994-95. FDI is considered less prone

to crises because direct investors typically have a longer-term perspective

when engaging in ahost country. In addition to risk sharing properties of FDI,

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

in thehostcountries than other types of capital inflows. FDI is more than just

capital, as it offers access to internationally available technologies and

management know-how.

7.Revenue to GovernmentProfits generated by FDI contribute tocorporate tax revenues in the host

country.

4.2 Disadvantages of Foreign Direct Investment FDI is not an unmixed blessing. Governments in developing countries haveto

be very careful while deciding the magnitude, pattern and conditions of

private foreign investment. Possible adverse implications of foreign

investment are the following:

1.When foreign investment is competitive with home investment, profits in

the domestic industries fall, leading to fall in domestic savings.

2.Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investmentallowances,

disguised public subsidies and tariff protection provided by the

host government.

3. Foreign firms reinforce dualistic socioeconomic structure and increase

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 consumption of the local elite.

As they are located in urban areas, they create imbalances between rural and

urban opportunities, accelerating the flow of rural population to urban areas.

4.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 lowin price and

high in quality. Their technology is generally capital-intensive which does

not suit the needs of a labor-surplus economy.

5.Foreign firms able to extract sizeable economic and politicalconcessions fro

m competing governments of developing countries.Consequently, private prof

its of these companies may exceed social benefits.

6.Continual outflow of profits is too large in many cases, putting pressure on f

oreign exchange reserves. Foreign investors are very particular about profit

repatriation facilities.

7. Foreign firms may influence political decisions in developing

Countries. In view of their large size and power, national sovereignty

andcontrol over economic policies may be jeopardized. In extreme cases,

foreign firms may bribe public officials at the highest levels to secure

unduefavors.

Similarly, they may contribute to a 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 the positive effects

of FDI through appropriate policies



CHAPTER-5: FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of the Indian economy has

been dominated by a regime of multiple controls, restrictive regulations and

wide ranging state intervention. Industrial economies 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 in 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 a liberalized economic polic

y 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, the virtual abolition of MRTP

restrictions 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 measureslike

devaluation of rupee, lowering of import duties and allowing

foreigninvestmentupto 51% of the equity in a large number of industries



andinvestment of large foreign equity (even up to 100%) in selected

areasespecially for export oriented products.In India, since the 1960’s foreign

investment and/or foreign collaborations by the multinationals have been

principally viewed as an instrument tofacilitate the much needed ‘transfer of

technology’.

In technological as wellas 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.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

strategically 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.



CHAPTER-6: POLICIES AND PROCEDURES OF FDI

The initial policy stimulus to foreign direct investment in India came in

July1991 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-liberalization period is a

clear indication that India is a fast emerging as an attractive destination for

overseas investors. As part of the economic reform program, policy and

procedures governing foreign investment 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.

6.1 FDI Policy RegimeMost 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 merging and

developing 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



a 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 infavour of domestic owned ones.

There is however a minor restriction on those foreign entities who entered a

particular sub-sector through a 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 any other recipients of FDI.

6.2 Routes for Inward Flows of FDIFDI can be approved either through the automatic route or by the

government:-

1. Automatic Route

Companies proposing FDI under automatic route donot require any

government approval provided the proposed foreign equity

iswithin the specified ceiling and

the requisite documents are filed withReserve Bank of India (RBI) within 30 d



ays of receipt of funds.The automaticroute encompasses all proposals where

the proposed items of manufacture/activity does not require an industrial

license and is notreserved 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

throughthe automatic route of the RBI against total FDI flows remained rather

insignificant. This was partly due to the fact that automatic route. Another

limitation was the ceiling of 51 percent of 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 ofstate policy or lack of policy clarity.



3. Industrial Licensing in FDI Policy

Industrial Licensingis 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 from the larger industrial units for small

sector industries

Locational restrictions on the proposed sitesSectors Which Require

Industrial Licensing.

Electronic aerospace and defense equipment

Alcoholics drink

Explosives

Cigarettes and tobacco products

Hazardous chemicals such as, hydrocyanic acid, phosgene, isocynatesand 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)

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) the new policies have

substantially relaxed restrictions on foreign investment, industrial licensing

and foreign exchange. The capital market has been opened to foreign

investment and banking sector controls have beeneased. 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 promotingthe 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 the policy of the

Government has been aimed at encouraging foreign investment, particularly in

core infrastructure sectors so as to supplement national efforts.

6.3 Post-approval Procedures

1. 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 stateto state.



2.Registration and Inspection

Each industrial unit is supposed tomaintain records in regard to production,

sale and export, use of specifiedraw materials including public utilities like

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

regard to industrial safety andenvironment.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.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 informthe 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 with 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.

6.4 Entry Options for Foreign InvestorsA foreign company planning to set up business operations in India has the

following options: By incorporating a company under the Companies Act,

1956 through

Joint Ventures

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending onthe

requirements of the investor, subject to equity caps in respect of the areaof

activities under the Foreign Direct Investment (FDI) policy.Enter as a foreign

Company through

Liaison Office/Representative Office

Project Office

Branch Office Such offices can undertake activities permitted under the

Foreign Exchange Management Regulations, 2000.

1.Incorporation of Company

For registration and incorporation, an application has to be filed with the

Registrar of Companies (ROC). Once a company has been duly

registered and incorporated as an Indian company, it is subject to Indian laws

and regulations as applicable toother domestic Indian companies.



2.Liaison Office/Representative Office

The role of the liaison office is limited to collecting information about

possible market opportunities and providing information about the company

and its products to prospective Indian customers. Itcan promote

export/import from/to India and also facilitate technical/financial

collaboration between parent company and companies in India.

Liaison office can not undertake any commercial activity directly or indirectly

and can not, therefore, earn any income in India. Approval for establishing a

liaison office in India is granted by Reserve Bank of India (RBI).

3.Project Office

Foreign Companies planning to execute specific projects in India can set up

temporary project/site offices in India. RBI has now granted general

permission to foreign entities to establish Project Offices subject to specified

conditions. Such offices can not undertake or carry on any activity other than

the activity relating and incidental to execution of the project. Project Offices

may remit outside India the surplus of the project on its completion, general

permission for which has been granted by the RBI.

4.Branch Office

Foreign companies engaged in manufacturing andtrading activities abroad are

allowed to set up Branch Offices in India for the following purposes:

Export/Import of goods

Rendering professional or consultancy services



Carrying out research work, in which the parent company is engaged.

Promoting technical or financial collaborations between Indiancompanies

and parent or overseas group company.

Representing the parent company in India and acting as buying/selling agents

in India.

Rendering services in Information Technology and development of software

in India.

Rendering technical support to the products supplied by the parent/group

companies.

Foreign airline/shipping Company.A branch office is not allowed to carry out

manufacturing activities on its own but is permitted to subcontract these to an

Indian manufacturer. Branch Offices established with the approval of RBI

may remit outside India profit of the branch, net of applicable Indian taxes and

subject to RBI guidelinesPermission for setting up branch offices is granted

by the Reserve Bank of India (RBI).

5.Branch office on Stand-Alone Basis in Special Economic Zones(SEZs)

Such branch offices would be isolated and restricted to the SEZand no

business activity/transaction will be allowed outside the SEZ in India, which

include branches/subsidiaries of their parent office in India. No approval shall

be necessary from RBI for a company to establish a branch/unit in SEZs to

undertake manufacturing and service activities,subject to specified conditions.

6.Investment in a Firm or a Proprietary Concern by NRIs

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident

outside India may invest by way of contribution to the capital of a firm or

a proprietary concern in India on non-repatriation basis provided:



The amount is invested by inward remittance or out of specified

account types (NRE/FCNR/NRO accounts) maintained with an Authorized

Dealer.

The firm of proprietary concern is not engaged in any agricultural/ plantation

or real estate business, i.e. dealing in land and immovable property with a

view to earning profit or earning income therefrom.

The amount invested shall not be eligible for repatriation outside

India. NRIs/PIOs may invest in sole proprietorship concerns/partnership firms

with repatriation benefits with the approval of Government/ RBI.

7.Investment in a Firm or a Proprietary concern Other Than NRIs

No person resident outside India other than NRI/PIO shall make any

investment by way of contribution to the capital of a firm or a proprietorship

concern or any association of persons in India. The RBI may, on an

application made to it, permit a person resident outside India to make such an

investment subject to such terms and conditions as may be considered.

6.5 Other Modes of Foreign Direct Investments

1. Global Depository Receipts (GDR)/American Deposit Receipts(ADR) /

Foreign Currency Convertible Bonds (FCCB)

Foreign investment through GDRs/ADRs, Foreign Currency

Convertible Bonds(FCCBs) are treated as Foreign Direct Investment. Indian

companies are allowed to raise equity capital in the international market

through the issue of GDR/ADRs/FCCBs. These are not subject to any

ceilings on investment. An applicant company seeking Government's



approval in this regard should have a consistent track record for good

performance (financial or otherwise) for a minimum period of 3 years.

This condition can be relaxed for Infrastructure projects such as power

generation, telecommunication, petroleum exploration and refining, ports,

airports and roads.There is no restriction on the number

of GDRs/ADRs/FCCBs to be floated by a company or a group of companies

in a financial year. A company engaged in the manufacture of items covered

under Automatic Route is likely to exceed the percentage limits under

the Automatic Route, whose direct foreign investment after a proposed

GDR/ADR/FCCBs issue is likely to exceed 50 per cent/51 per cent/74 per

cent as the case may be, or which is implementing a project not contained in

project falling under Government Approval Route, would Need to obtain prior

Government clearance through FIPB before seeking final approval from

the Ministry of Finance.There are no end-use restrictions on GDR/ADR issue

proceeds, except for an express ban on investment in real estate and stock

markets. The FCCB issue proceeds need to conform to external commercial

borrowing end use requirements; in addition, 25 per cent of the FCCB

proceeds can be used for general corporate restructuring.

2. Preference Shares:

Foreign investment through preference shares is treated as foreign direct

investment. Proposals are processed either through the automatic route

or FIPB as the case may be. The following guidelines apply to issues of such

shares:-

Foreign investment in preference share is considered as part of share capital

and fall outside the External Commercial Borrowing (ECB)guidelines/cap



Preference shares to be treated as foreign direct equity for the purpose

of sectoral caps on foreign equity, where such caps are prescribed, provided

they carry a conversion option. If the preference shares are structured without

such conversion option, they would fall outside the foreign direct equity cap.

Duration for conversion shall be as per the maximum limit prescribed under

the Companies Act or what has been agreed to in the shareholders agreement

whichever is less.

The dividend rate would not exceed the limit prescribed by the Ministry of

Finance.

Issue of Preference Shares should conform to guidelines prescribed by the

SEBI and RBI and other statutory requirements.

6.6 Foreign Technology AgreementsForeign technology induction is encouraged both through FDI and through

foreign technology agreements. India has one of the most liberal policy

regimes in regard to technology agreements.Foreign technology collaboration

is permitted either through automatic route or through FIPB.

1.Automatic Approval

RBI accords automatic approval for foreign technology collaboration

agreements for all industries subject to the following:

The lump sum payment should not exceed US$ 2 million.

Royalty payable is limited to 5 percent for domestic sales and 8 percent for

exports subject to total payment of 8 percent of sales over a 10 year period.

The period for payment of royalty not exceed 7 years from the date

of commencement of commercial production, or 10 years from the dateof

agreement whichever is earlier.



2.FIPB Route

For the following categories, Government approval Is necessary:

Proposals attracting compulsory licensing.

Items of manufacture reserved for small-scale sector.

Proposals involving any previous joint venture or technologytransfer/trade

mark agreement in the same or allied field in India.

Extension of foreign technology collaboration agreements.

Proposals not meeting any or all of the parameters for automatic approval.

The different components of foreign technology collaboration such as

technicalknow how fees, payment for design and drawing, payment

for engineering service and royalty are eligible for approval throughTheautom

atic route, and by the Government.



CHAPTER-7:

SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA

7.1 Hotel & Tourism Sector100% 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 wildlife experience to tourists, surface, air and water transport

facilities to tourists, leisure, entertainment, amusement,sports, and health

units for tourists and Convention/Seminar units andorganizations.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.

7.2 Private Sector Banking49% FDI is allowed from all sources on the automatic route subject

toguidelines issued by RBI from time to time.

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 changes Business

r.Micro Credit

s.Rural Credit

2. Minimum Capitalization Norms for fund based NBFCs:

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

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

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

7.5million to be brought up front and the balance in 24 months



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 inadditional

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 undertak

ing other NBFC activities, subject to the subsidiaries also

Complying with the applicable minimum capital inflow i.e.2.(a)and2.

(b)above.

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

compliance with the guidelines of the Reserve Bank of India. RBI would

issue appropriate guidelines in this regard

7.3 Insurance SectorFDI up to 26% in the Insurance sector is allowed on the automatic route

subject to obtaining a license from Insurance Regulatory & the Development

Authority (IRDA)



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

Communications by satellite, FDI is limited to 49% subject to licensingand

security requirements and adherence by the companies (who is investing and

the companies in which investment is being made) to thelicense 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 the 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);

c.Electronic Mail; and

d.Voice MailThe 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.

e.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.



7.5 Trading CompaniesTrading 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. 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.Another import of goods or services provided at least 75% is for the

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 the 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 serviced.

d. Trading of items for social sector

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



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

technology provided and laid down quality specifications, acompany 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 periodof

two years, and investment in setting up manufacturing facility commences

simultaneously with test marketing.

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

conditionthat 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.

7.6 Power SectorUp to 100% FDI allowed in respect of projects relating to electricitygeneratio

n, transmission and distribution, other than atomic reactor power plants.

There is no limit on the project cost and quantum of foreign direct investment.

7.7 Drugs & PharmaceuticalsFDI up to 100% is permitted on the automatic route for the manufacture

of drugs and pharmaceutical, provided the activity does not attract compulsory

licensing or involve the use of recombinant DNA technology, and specific cell

/tissue targeted formulations. FDI proposals for the manufacture of

licensabledrugs and pharmaceuticals and bulk drugs produced by recombinant



DNA technology, and specific cell / tissue targeted formulations will require

prior Government approval.

7.8 Infrastructure SectorFDI up to 100% under automatic route is permitted in projects for constructio

n and maintenance of roads, highways, vehicular bridges, toll roads, vehicular

tunnels, ports and harbors.

7.9 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

7.10 Call Centers in India / Call Centers in IndiaFDI up to 100% is allowed subject to certain conditions

7.11 Business Process Outsourcing BPO in India

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

7.12 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 facilities 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 ExistingCompanies

raising Capital through Public Issue up to 40% of the newCapital Issue.

O.On non-repatriation basis: Up to 100% Equity in any Proprietary

or Partnership engaged in Industrial, Commercial or Trading Activity.

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

upValue of the equity Capital or Convertible Debentures of theCompany by

each NRI. Investment in Government Securities, Units of UTI, National

Plan/Saving Certificates.

q.On Non- Repatriation Basis : acquisition of shares of an IndianCompany,

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.



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

in IndiaRecently, 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 on79

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

Foreign Direct Investment (FDI) in India is subject to certain Rules and

Regulations and is subject to predefined limits ('Limits') in various sectors

which range from 20% to 100%. There are also some sectors in which FDI is

prohibited. The FDI Limits are reviewed by the Government from time to

time and as and when the need is felt and FDI is allowed in new sectors where

the limits of investment in the existing sectors are modified accordingly. In

order to revise the FDI Limits to attract more foreign investment in India, the

Union Government constituted a committee named, Arvind Mayaram

Committee headed by the Economic Affairs Secretary. On Tuesday, 16th July,

2013, the Government approved the recommendations given by the Arvind

Mayaram Committee to increase FDI limits in 12 sectors out of the proposed

20 sectors, including crucial ones such as defense and telecom.

Some of the important changes made in the Existing FDI Limits are provided

below:

FDI Limit in Telecom Sector is increased from 74 per cent to 100 percent, out

of which up to 49 per cent will be allowed under automatic route and the

remaining through Foreign Investment Promotion Board (FIPB) approval. A



similar dispensation would be allowed for asset reconstruction companies and

tea plantations.

FDI in 4 sectors i.e. gas refineries, commodity exchanges, power trading and

stock exchanges have been allowed via the automatic route. In case of PSU oil

refineries, commodity exchanges, power exchanges, stock exchanges and

clearing corporations, FDI will be allowed up to 49 per cent under automatic

route as against current routing of the investment through FIPB.

FDI in single brand retail is to be allowed up to 49 percent under the

automatic route and beyond that shall be through FIPB.

In credit information firms, 74 per cent FDI under automatic route will be

allowed.

In respect of courier services, FDI of up to 100 per cent will be allowed under

automatic route. Earlier, similar amount of investment was allowed through

FIPB route.

FDI cap in defense sector remained unchanged at 26%, however higher limits

of foreign investment in state-of-the-art manufacturing would be considered

by the Cabinet Committee on Security (CCS). Technically, the decision leaves

it open for CCS to even allow 100% foreign investment in what the defence

ministry will define as "state-of-the-art" segments with safeguards built in to

ensure that the technology and equipment are not shared with other countries.

In the contentious insurance sector, it was decided to raise the sectoral FDI

cap from 26 per cent to 49 per cent under automatic route under which

companies investing do not require prior government approval. A Bill to raise

FDI cap in this sector is pending in the Rajya Sabha.



7.14 Forbidden Territories: Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,

diamonds, copper, zinc.



CHAPTER-8: FACTORS AFFECTING FDI

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

foreign direct investment inflos 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 andreduction of

government decision making lead time.

3.Stability of policies i.e. entry, exit, labor laws, etc. over a definite time

horizon so that definite plans can be made.

4.Acceptance of International Standards including accountingstandards.

5.Capital account convertibility so that all capitals 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.

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

profits. The economy benefits if economy policy fosters completion, creates a

well functioning modern regulatory system and discourage sartificial

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 a fast track clearance system for legal disputes.

3. Changing the mindset of bureaucracy through HR practices.

4.Developing basic infrastructure.

5.Improving India’s image as an investment destination.While the magnitudes

of inflows have recorded impressive growth, they are still at a small level

compared to India’s potential. The policy reforms undertaken have

undoubtedly enabled the country to widen the sectoraland source composition

of FDI inflows. Within a generation, the countries of East Asia transformed

themselves. China, Indonesia, Korea, Thailand and Malaysia today have

living standards much above ours.

8.1 FDI TRENDS IN INDIAIndia is the second most populous country and the largest democracy in the

world. The far reaching and sweeping economic reform undertaken since1991

have unleashed the enormous growth potential of the economy. There has

been a rapid, yet calibrated, move towards deregulation and liberalization,

which has resulted in India becoming a favoritedestination for investment.

Undoubtedly, India has emerged as one of the most vibrant and dynamic of

the developing economies.

8.2 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 favorable 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 an independent judiciary.

7.English as the preferred business language.

8. A developed commercial banking network of over 63000 branches

supportedby a number of National and State level financial institutions.

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

9400listed companies.

10. A congenial foreign investment environment that provide freedom

of entry, investment, location, choice of technology, import and export, and

11.Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal,Pakistan

and Sri Lanka.



Top Investing Countries FDI Inflows in India



\



CHAPTER-9: CASE STUDY

9.1 HEWLETT- PACKARD INDIA In mid-2006, HP acquired majority stake in MphasiS BFL Limited, a leading

Applicationsand Business Process Outsourcing (BPO) Services company

based in Bangalore, India.With the addition of MphasiS, the total work force

is now more than 30,000.

Slowdown for HP

FY 09 was definitely not a year that HP India would like to remember fondly.

Theslowdown took an alarming toll on its top line in rupee terms, the group

revenue wasalmost flat; in dollar terms, it declined. Result: it was the worst

performing group in theDQ Top 5 club. While the others Tatas at 26%, Wipro

at 41%, Infosys at 31%, and evenHCL at fared between average to

outstanding, HP was left far behind in the race.

Strategy adopted

It was unfortunately not a great start for NeelamDhawan, who rejoined HP

India after her three-year stint as head of Microsoft India. She took over as the

managing director of HPIndia in June, 2008, replacing CEO BaluDoraiswamy

who moved on to become MD for Asia Pacific Japan and senior VP for HPs

global technology solutions group (TSG).Though on a brighter note, within

HP India, the TSG unit that she only headed (whichcontributed maximum to

HPs revenues) was the silver lining. Within TSG, it was the ITservices

business that shonethe EDS acquisition paid off boosting the services topline



bynearly 50%. Acquisitions seemingly did the trick for HP India: other than

EDS, on theenterprise software front it were the Opsware and Tower Software

acquisitions. There waslittle doubt that the EDS takeover placed HP in a

stronger position to leverage the domesticmarket. While HP was already a

force to reckon with in domestic IT services, it nowgained in terms of new

capabilities in manufacturing, transportation, PSUs, healthcare aswell as

infrastructure management and BPO. And we are not even counting the

impact of MphasiS (which is an EDS company, and at present separately

listed); though in FY 09, itwas more for MphasiS that the HP-EDS brand

equity worked well, and HP too is sure to benefit from the arrangement. The

year even saw HP veteran Ganesh Ayyar taking over asthe CEO of

MphasiS.51

Efforts were made though to halt the declining fortunes by launching newer

products likeProbooks (for SMBs), EliteBooks (for large enterprises),

notebooks targeting women andCQ2000, the touch-smart PCs with

QuickPlayer button. HP also undertook an inventorycorrectionin OND and

restructured PSG to ensure cross selling by the sales &marketingteams for

both desktops and notebooks.

IPG (at 20%, the smallest of the three divisions) too was not immune from the

negativemarket sentiments mirroring the causes and symptoms afflicting PSG.

Remedial measuresadopted included a growing focus on managed printing

services, large format printers,color printing and services like Snapfish.

The financing scheme offered to resellers of both IPG and PSG by the HP

FinancialServices Group did provide some solace to the beleaguered partners.



Incidentally, thesefinancing options helped HP services too, as it enabled

many SMBs to opt for the option tocome into the services bandwagon. Last

year was particularly interesting for HP FinancialServices group (HPFS). It

got a big push due to inability of companies to shell out instant payments in

the backdrop of an economic crisis. HPFS offers desktop PCs and other

ITequipment on lease to SMBs, in addition to facilitating deployment of SAP

businessenterprise software, though it reports numbers globally. HPFS

enabled per quarter payments of bundle of solutions bought from HP, last

year.

TSGs growth at 33% (primarily because of the EDS acquisition) was

however, defeated bythe flat growth of two major groupsimaging& printing

solutions and personal solutions52

(desktops and notebooks). TSG with 55% contribution continued to be HP

Indiasmainstay,while the pain areas for HP last year were PSG and IPG. Even

though PSG accounted for nearly a quarter of its revenues and HP continued

to retain its top spot in desktops andnotebooks across all four quarters

(according to IDC), the generally down consumer sentiment and the overall



declining market were big dampeners. Particularly in the case of desktops, the

market went sharply down, while in notebooks Dell started offering

somecompetition.On the enterprise software side, the information

management and BI solutions whichincluded the enterprise records

management software that it acquired through itsacquisition of Tower

Software in fiscal 2008 and Open Call solutions, which is a suite of carrier-

grade software platforms also helped a great deal. Though critics claim that

whileIBM is already moving ahead with a service as a product model, HP is

still evaluating acustomized portfolio. The proof of the pudding was in the

eating-more than 30% growth inenterprise software.

Impact

Though the collaboration between HP services with enterprise storage &

servers and HPsoftware groups, as well as third-party system integrators and

software and networkingcompanies to bring solutions were very much there,

HPSs synergy with IPG and PSG to provide managed print services, end user

workplace services, and mobile workforce productivity solutions to enterprise

customers were lacklustre. One positive developmentwas HPs seriousness on

the green front. It did start scoring on the efficiency index with

theintroduction of products like blade servers with its green touch. Its e-waste

strategy addeda further push to its green focus. Amongst some big wins in

India, HPFS won the financingand asset management services contract from

Subhiksha last year.



9.2 SATELLITE TELEVISION ASIA REGION (STAR) STAR is an Asian TVservice owned by Rupert Murdoch' s News Corporation .

It is headquartered inHong Kong, with regional offices inIndia, mainland

China, Taiwan, Singapore, as well as in other south Asian

countries.According to the STAR website, their service has more than 300

million viewers in 53countries and is watched by approximately 120 million

viewers every day.

History

Star News is one of the channels in a bouquet of channels run by STAR, a

subsidiary of News Corporation. STAR launched in 1991, was the pioneer of

satellite television in India. Now it runs channels in almost every genre such

as entertainment, movies, news, sports,documentary, music, etc., and has a

presence in 53 countries in Asia. Some of its channelsare Star Plus, Star

World, Channel V, ESPN.Thecompany was launched in 1 August 1990 as part

of Hutchison Whampoagroup. Itstarted broadcasting five television channels

in 1 January 1991 fromAsiaSat1 Satellite.Launch of The STAR TV Network

pioneered satellite television in Asia and in the processcatalyzed explosive

growth in the media industry across the entire region.In 1993 News

Corporationpurchased 63.6% of STAR for over $500 million, followed bythe

purchase of the remaining 36.4% in 1 January 1993. Murdoch declared

that:"(telecommunications) have proved an unambiguous threat to totalitarian

regimeseverywhere ... satellite broadcasting makes it possible for information-

hungry residents of many closed societies to bypass state-controlled television

channels"After this, the former prime minister Li Pengrequested and obtained


http://en.wikipedia.org/wiki/Li_Peng

http://en.wikipedia.org/wiki/News_Corporation


http://en.wikipedia.org/wiki/AsiaSat

http://en.wikipedia.org/wiki/Hutchison_Whampoa

http://en.wikipedia.org/wiki/Singapore

http://en.wikipedia.org/wiki/Taiwan

http://en.wikipedia.org/wiki/China

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Hong_Kong


http://en.wikipedia.org/wiki/Rupert_Murdoch

http://en.wikipedia.org/wiki/Rupert_Murdoch

http://en.wikipedia.org/wiki/TV

http://en.wikipedia.org/wiki/Asia


the ban of satellite dishes throughout the country. Subsequently the STAR TV

network dropped theBBC channels from its satellite offer. This, and many

ensuing declaration from Murdoch, led critics to believe the businessman was

striving to appease the Chinese government in order to have the ban lifted.

In August of 2009, STAR Broadcasting Corporation revealed a restructure to

its Asian broadcast businesses into three units - Star India, Star Greater China

and Fox InternationalChannels (FIC). James Murdoch (NewsCorp chairman)

stated, “We are now reshaping a big, regional organisation into three highly

focused business units..". Paul Aeillo (CEO)was slated to leave in December

2009.

Challenges

Using Asia Sat for Star-TV created a problem, however, because the satellite

was never meant to be used for broadcasting. Under the jurisdiction of the

InternationalTelecommunications Union (ITU), it was begun as a

telecommunications satellite only.Little has been done about this situation, but

criticism has developed in the scholarlycommunity. In a 1992 paper for the

International Communication Association, SeemaShrikhande asserted that,

"Using telecommunications satellites for broadcasting goesagainst the ruling

that national sovereignty includes the state's control over televisionwithin its

borders and that satellite footprints should be tailored to national boundaries

asfar as possible." Following these assumptions, several countries have

attempted to placerestrictions on reception of Star-TV but have found them

difficult to enforce.

Impact


http://en.wikipedia.org/wiki/STAR_TV_(Asia)#cite_note-guardian.co.uk-2%23cite_note-guardian.co.uk-2

http://en.wikipedia.org/wiki/BBC

http://en.wikipedia.org/wiki/Satellite_dish

http://en.wikipedia.org/wiki/Satellite_dish


Today STAR Broadcasting Corporation broadcasts over 60 services in 13

languages.Shows include entertainment, sports, movies, music, news and

documentaries.Reaching more than 300 million viewers in 53 countries across

Asia, STAR BroadcastingCorporation is watched by approximately 120

million viewers every day.STAR Broadcasting Corporation controls over

20,000 hours of Indian and Chinese programming and also owns the world's

largest

contemporary Chinese film library, withmore than 600 titles, featuring

superstars includingJackieChan,Chow Yun-FatandBruce Lee. In partnership

with leading companies in Asia, STAR Broadcasting Corporation businesses

extend to filmed entertainment, television production, cable systems

anddistribution, direct-to-home services, terrestrial TV broadcasting, wireless

and digitalservices.In 1994 STAR TV Network removedBBC World Service

Television(now BBC World News ) from the network following demands

from the government of the People's Republic of China . It is alleged that the

PRC government was unhappy withBBCcoverageandthreatened to block Star

TV in the hugemainland Chinesemarket if the BBC was notwithdrawn. This is

despite technology that is capable of blocking BBC World in China,while

making it available in other countries they serve.

Recent developments

Star and similar regional operations add a new layer of complexity to

discussions of concepts such as media imperialism, the globalization of

culture, and the international flowof television. The system's emphasis on

intra-regional cultural flows--across national borders but within language and


http://en.wikipedia.org/wiki/Mainland_China

http://en.wikipedia.org/wiki/BBC

http://en.wikipedia.org/wiki/People's_Republic_of_China

http://en.wikipedia.org/wiki/People's_Republic_of_China

http://en.wikipedia.org/wiki/BBC_World_News

http://en.wikipedia.org/wiki/BBC_World_News

http://en.wikipedia.org/wiki/BBC_World_Service_Television

http://en.wikipedia.org/wiki/BBC_World_Service_Television

http://en.wikipedia.org/wiki/Bruce_Lee

http://en.wikipedia.org/wiki/Bruce_Lee


cultural boundaries--assumes that audiences will respondto the cultural

similarity or proximity of the programming. Given further

satellitedevelopments in other regions, Star-TV may be an example of one

form of futuretelevision.

The numerouno status enjoyed by Star Plus for nearly a decade since July

2000, based ontwo long-running spells of KaunBanegaCrorepati (KBC) in

2000 and 2007, and a slew of family melodramas mass-produced by Balaji

Telefilms like KyunkiSaasBhiKabhiBahuThi and KahaaniGharGharKii, has

ended.

STAR TV invested US$ 80 million in building up its Indian operation and has

beengrowing at 40-50 per cent per annum for the last 3 years. Star TV India is

valued at over US$ 2 billion by Communications Equity Associates, an

American investment bank, andrated as the most valuable and profitable

investment of Star TV group in all of Asia. Itschannels cover 300 million

people in 53 countries in Asia and the Middle East.



CHAPTER 10: SUGGESTIONS& RECOMMENDATION

According to some of the foreign companies operating in India the deluge of

corruption lies in the lack of transparency in the rules of governance,

extremely cumbersome official procedures and excessive and unregulated

discretionary power in the hands of politicians and bureaucrats. India should

have her focus immediately on the infrastructure of airports,

telecommunications, ports and roads in selected areas to make the country

more attractive to foreign investors. In fact, in contrast to China, Indian

governments have been concentrating more on link roads or local route in

rural areas in place of highways, airports and railways joining various states

and business centres in India. So, it is high time to have a change in focus.

Sectoral FDI caps should be reduced to the minimum and entry barriers

eliminated. Also, the special economic zones should be developed as the most

competitive destination for export related FDI in the world.

Initiate the perception-changing and image-building exercises as well as

concrete and tangible steps towards further reforms. To achieve this objective

all wings of government have to be made responsible and accountable for

increasing private investment in general and FDI in particular. Aggressive

marketig strategy focused on changing the investors attitude towards India is

the need of the hour.

Income-tax rates on foreign company's income are higher than the rates on the

domestic company. Therefore, the tax rate shall be same on domestic

company and foreign company.



It is suggested that a policy targeting export-oriented FDI or high technology

FDI may be very favourable for the country's BOP rather than one attempting

to maximize the magnitude of FDI irrespective of its composition. And to

accelerate India's exports, on sustainable basis, the focus has to be centered

around "Technology based exports".

Indo-Mauritius double taxation avoidance treaty, which provides for

Mauritius residents to pay capital gains only in Mauritius has been a major

factor behind the increasing inflow of foreign investment into India. Actually,

a part from the double tax avoidance treaties the recent move by the Mauritius

government, permitting Mauritius-based offshore funds to allocate their

capital between various cells should also lead to a sharp spurt in investments

into the country through Mauritius. Thus, double tax avoidance treaties have

improved the investment climate favourable for foreign investors in general.

To what extent they have influenced the inflow of FDI, is uncertain.



CHAPTER-11: CONCLUSION

Economic reforms in India have deregulated the economy and stimulated

domestic and foreign investment, taking India firmly in the forefront

of investment destinations. The Government, keen to promote FDI in the

country, has radically simplified and rationalized policies, procedure and

regulatory aspects. Foreign direct investment is welcome in almost

allsectors; expect those strategic concerns (defense and atomic energy).

Since the initiation of the economic liberalization process in 1991, sectors

such as automobiles, chemicals, food processing, oil and natural gas, etro-

chemicals, power, service , and telecommunication chemicals, power,

services, and telecommunications have attracted considerable investments.

Today, in the changed investment climate, India offers existing 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

have yet to convert considerable favorable investor sentiment into substantial

net flows of FDI.Overall, India remains high on corporate 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 comparableinvestment destinations. India’s investment

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

FDI, which are bureaucratic delays, widespread corruption, poor

infrastructure facilities pro-labor laws, political risk and weak

intellectual property regime. A perceived slowdown in the process of reforms

generates doubts about the market’s 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 India’s relatively higher rates of return on existing investments

and long term potential, addressing the issue of transforming the country

into a viable export platform and encouraging strategic alliances with

foreign investors. In short,this means accelerating India’s integration with

the global economy.



CHAPTER 12: WEBLIOGRAPHY

www.rbi.org.in

www.Sebi.gov.in

www.economictimes.india times.com

http://www.cefims.ac.uk/documents/sample-15.pdf

http://businesscasestudies.co.uk/business-theory/finance/investment-

appraisal.html#axzz2fzrwdqgM

http://homepages.strath.ac.uk/~cds98101/NPV.html




http://homepages.strath.ac.uk/~cds98101/NPV.html

http://businesscasestudies.co.uk/business-theory/finance/investment-appraisal.html#axzz2fzrwdqgM

http://businesscasestudies.co.uk/business-theory/finance/investment-appraisal.html#axzz2fzrwdqgM


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