FDI policy – Indian Perspective

8/3/2019 FDI policy Indian Perspective

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FDI policy Indian Perspective

Submitted by: Submitted to:

Group-8 Dr. C. S. Adhikari

(C.R.Rangarajan )

Shashank Jain-166

Sarang Wankhede-133

Archana Singh-186Sharief Khan-129

Aruna Sharma-182

Mahesh Gaikwad-144

Sayantan Pande-140


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Introduction: What Is FDI?

Foreign direct investment (FDI) is defined as

"investment made to acquire lasting interest in enterprisesoperating outside of the economy of the investor.

It generates benefits through bringing in non-debt-creatingforeign capital resources, technological upgrading, skillenhancement, new employment, spill-over and allocativeefficiency effectsForeign direct investment (FDI) refers to long termparticipation by country A into country B.It usually involves participation in management, joint-venture, transfer of technology and expertise.


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Type of FDI:

Broadly speaking, FDI can be categorized under 5major heading:1. Greenfield investment - (a new operation)

2. Brownfield investment (expansions or re-investmentin existing foreign affiliates or sites)

3. Mergers & Acquisitions (M&As)

4. Privatization and equity investment

5. New forms of investment (joint ventures, strategicalliances, licensing and other partnership agreements)


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4 types of FDI derived from OLI theory

O = Ownership advantages

L = Localization advantages

I = internalization advantages

This theory of FDI was developed by Jere Behrmanto explain the different objectives of FDI:

Resource seeking FDI

Market seeking FDI

Efficiency seeking (global sourcing FDI)Strategic asset/capabilities seeking FDI


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Resource seeking FDI

To seek and secure natural resources e.g. minerals,raw materials, or lower labor costs for the investingcompany

For example, a German company opening a plant inSlovakia to produce and re-export to Germany

Market seeking FDITo identify and exploit new markets for the firms`

finished productsUnique possibility for some type of services for which

production and distribution have to becontemporaneous (telecom, water supply, energysupply)

Automotive TNCs have invested heavily in China


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Efficiency seeking FDI

To restructure its existing investments so as toachieve an efficient allocation of internationaleconomic activity of the firms.

International specialization whereby firms seek tobenefit from differences in product and factor prices

and to diversify risk

Global sourcing resource saving and improvedefficiency by rationalizing the structure of their globalactivities. Undertaken primarily by network based

MNCs with global sourcing operations.


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Strategic asset/capabilities seeking FDIStrategic asset/capabilities seeking FDI

MNCs pursue strategic operations through thepurchase of existing firms and/or assets in order toprotect O specific advantages in order to sustain oradvance its global competitive position.

Acquisition of key established local firms

Acquisition of local capabilities including R&D,knowledge and human capital

Acquisition of market knowledge

Pre empting market entrance by competitors

Pre empting the acquisition by local firms bycompetitors


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Benefits Of FDI

Linkages and spillover to domestic firms:

Various foreign firms are now occupying a position in theIndian market through Joint Ventures and collaborationconcerns. The maximum amount of the profits gained bythe foreign firms through these joint ventures is spent onthe Indian market.

Trade: FDI have opened a wide spectrum of opportunities in the trading of goods and services in Indiaboth in terms of import and export production

Employment and skill levels:

FDI has also ensured a number of employmentopportunities by aiding the setting up of industrial units in

various corners of India.


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Technology diffusion and knowledge transfer:

FDI apparently helps in the outsourcing of knowledgefrom India especially in the Information Technologysector. It helps in developing the know-how process inIndia in terms of enhancing the technologicaladvancement in India.

Economic growth :

This is one of the major sectors, which is enormouslybenefited from foreign direct investment. A remarkable

inflow of FDI in various industrial units in India hasboosted the economic life of country.


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India as major FDI Hot Spot

1. India has replaced the US as the second mostimportant foreign direct investment (FDI) destinationaccording to a survey conducted UNCTAD, next onlyto China.

2. Stable democratic government

3. Large and growing market4. Cost-effective labor5. Well-established legal system with independent

judiciary6. Well established ancillary sector

7. World class scientific, technical and managerialmanpower

8. Indirect incentives (Provides land and infrastructures atless commercial prices)


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India- Advantages as a destination for

FDI

11

India An Emerging Market

Largestdemocracy

politicalstability &

consensus onreforms

Liberal &transparentinvestment

policies

largestEconomy - Asafe place

to dobusiness

Largestreservoir of

skilledmanpower

Long-termsustainableCompetitiveadvantage

- High growth rateeconomy


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Global Interest for FDI in India

One of the fastest growing economies,second only after China

India offers the best return oninvestment among emerging markets

The Time is now..to be in India. This isperhaps the most optimistic Ive felt aboutIndia in the last 10-15 years that I ve beencoming here.


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Advantage India the growth factor

The 4th largest country with estimated GDP(PPP)

~ $3.86 tn)

2nd fastest growing economy in the world

Estimated GDP growth (FY 2010-11, Q2) is 8.9 %

GDP composition is well diversified across sectors withrobust growth.

1. Agriculture 15%2. Industry 21.7%

3. Services 56.2%Growth of

Economy


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FDI AND INDIA : Policy Frame Work

All dealings in foreign exchange were regulatedunder the Foreign Exchange Regulation Act(FERA), 1973

FERA was consolidated and amended to introduce

the Foreign Exchange Management Act (FEMA),1999

The new Act was less stringent and aimed atimproving the capital account management of

foreign exchange in IndiaTo facilitate external trade and payments and to

promote orderly development and maintenance ofthe foreign exchange market in India


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FDI-related Institutions

Foreign Investment Promotion Board (FIPB)

Secretariat for Industrial Assistance (SIA)

Foreign Investment Implementation Authority (FIIA)


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Foreign Investment Policy

Automatic route:

FDI permitted under the automatic route does notrequire any prior approval either by the government or

(RBI).

PriorGovernment Approval route:

In limited category of sectors requiring prior government

approval, the proposals are considered in a time-boundand transparent manner by the Foreign InvestmentPromotion Board (FIPB) under the Department ofEconomic Affairs, Ministry of Finance.


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FDI Approval Procedure

GovernmentRoute for few

sectorsAutomatic Route in most

Sector

RBI FIPB

No permission required, only

to notify RBI within 30 days

of issue of shares to foreign

investors

Approval is granted

generally in 30

days


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LIST OF INDUSTRIES WITH

COMPULSORY INDUSTRIAL LICENSING

1. Distillation and brewing of alcoholic drinks

2. Cigars and Cigarettes of Tobacco and ManufacturedTobacco substitutes

3. Electronic, Aerospace and defense equipment: all types4. Industrial explosives including detonating fuses, safety

fuses, gun powder, nitrocellulose and matches

5. Hazardous chemicals

6. Drugs and Pharmaceuticals (according to modifiedDrug Policy issued in September, 1994 andsubsequently amended in February, 1999)


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Various Indian sectors having FDI

restrictions1. Atomic energy

2. Betting and gambling

3. Chit fund business

4. Plantation or agricultural activities5. Real estate business

6. Business in Transferable Development Rights

7. Lottery business

8. Retail trading

9. Railway transport

10. Mining of chrome, zinc, gold, diamonds, copper,

11. Iron, gypsum, manganese, and sulfur


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EXCHANGEREGULATION

The Exchange Control Department of the RBIadministers the Foreign Exchange Management Act(FEMA)

The general permission of the RBI is available for thefollowing activities under FEMA:

Indian Companies are permitted to issueRights/Bonus shares subject to certain conditions

A company is permitted to issue shares to non

residents pursuant to a scheme of merger/amalgamation provided the shareholding of the nonresident shareholders does not exceed the sectoralcaps


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EXCHANGEREGULATION

A company may issue shares upto 5% of its paid upcapital under Employee Stock Option Scheme, to itsemployees or employees of its joint venture or whollyowned subsidiary abroad, other than citizens of Pakistan and Bangladesh, who are resident outside

India, directly or through a Trust, subject to Securitiesand Exchange Board of India (SEBI) regulations in thisregard and within 30 days from the date of issue of shares the issuing company will report the detailsthereof and submit a stipulated certificate to the RBI.

Indian Companies are allowed to raise foreign currencyresources abroad through the issue of AmericanDepository Receipts/ Global Depository Receipts(ADRs/GDRs) under the automatic route up to 49%subject to conditions prescribed in Press Note 5 of 2005 . Such investment are treated as FDI.


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Non Resident Indians (NRI)

General policy and facility for FDI available to NRIsFollowing additional concessions specifically

applicable to NRIs:

1. NRI Investment in Construction DevelopmentProjects inclusive of housing sector up to 100%wherein conditions prescribed under Press Note2 of 2005 are not applicable

2. NRI investment in domestic airlines sector up to100%.

Further NRIs are permitted to invest on repatriablebasis in partnership firms and proprietary concernson prior approval of the Reserve Bank of India(Master Circular on Foreign Investment in India 01

July, 2006)


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FOREIGN INVESTMENT IN THE

SMALL SCALESECTOR

Defined as units having investments in fixed assets inplant and machinery of not more than INR 10 million.

Equity holding by other units including foreign equity ina small scale undertaking is permissible up to 24 per

cent.In case of foreign investment beyond 24 per cent in a

small scale unit, an industrial license carrying amandatory export obligation of 50 per cent must beobtained.

A SSU manufacturing small scale reserved item(s), onexceeding the small-scale investment ceiling in plantand machinery by virtue of natural growth, needs toapply for and obtain a Carry-on-Business (COB)

License.


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FOREIGN INVESTMENT POLICY FOR

TRADING ACTIVITIES

For approval through the automatic route, the requirementwould be that it is primarily export activities and theundertaking concerned is an export house/trading house/super trading house/star trading house registered underthe provisions of the Export and Import policy in force.

However, under the Government route, 100% FDI ispermitted in case of trading activities carried out in certainspecified sectors such as hi-tech medical and diagnosticitems, items for social sector, exports, bulk imports, toname a few.

FDI upto 100% is also permitted for E-commerce activitiessubject to the condition that such companies would divest26% of their equity in favour of the Indian public in fiveyears, if these companies are listed in other parts of the

world.


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Foreign Investment Implementation

Authority (FIIA)

Government of India has set up the FIIA to facilitate quicktranslation of FDI approvals into implementation

The functions of the FIIA are:

Expediting various approvals/permissions;

Fostering partnership between investors andgovernment agencies concerned;

Resolve difference in perceptions;

Enhance overall credibility;

Review policy framework; andLiaise with the Ministry of External Affairs for keeping

Indias diplomatic missions abroad informed abouttranslation of FDI approvals into actual investment and

implementation.


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Entry Strategies for Foreign Investor

Foreign Company has the following options to set upbusiness operations in India :

By incorporating a company under the Companies Act,1956

A wholly owned subsidiaryJoint venture company - existing company or new

company

with domestic partner

As an unincorporated entity1. Liaison Office

2. Project Office

3. Branch Office


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Liaison Office :

Liaison office not permitted to undertake anycommercial/trading/industrial activity.

The role of the liaison office is limited to collectinginformation about possible market opportunities andproviding information about the company and its

products to prospective Indian customers and actingas a communication channel between the parentcompany and Indian Companies.

It can promote export/import from/to India and alsofacilitate technical/financial collaboration between

parent company/Group companies and companies inIndia

Approval for establishing a liaison office in India isgranted by RBI


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Project Office :

General permission to foreign entities to establishProject / Site Offices (temporary in nature)

Such offices cannot undertake or carry on any activityother than the activity relating and incidental to

execution of the project.General permission also for remitting surplus funds

after completion of project on production of thefollowing documents:

Certified copy of the final audited project accounts;

A Chartered Accountants certificate showing themanner of arriving at the remittable surplus;

Auditors certificate stating that no statutory liabilities inrespect of the Project are outstanding.


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Branch Office :

Foreign companies engaged in manufacturing andtrading activities abroad are allowed to set upBranch Offices in India for specified purposes

Branch Offices are established with the approval ofR

BIPermitted to remit outside India profit of the branch

No approval required from RBI for a company toestablish a branch/unit in SEZs to undertakemanufacturing and service activities


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SECTOR ATTRACTING HIGHEST FDI

INFLOWS

9%

8%

7%

7%

7%62%

Sector-wise FDI Inflows(Aug '91-Dec '99)

Transportation Industry

Electrical Equipments

Services sector

Telecommunication

Chemical

Other


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SECTOR WISE FDI INFLOWS

21%

10%

7%

6%6%

50%

Sector Wise FDI inflows(Jan'00-March'09)

Service Sector

Computer Hardware&Software

Telecommunications

Housing & Real Estate

Construction Activities

Others


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Rank Aug 1991-Dec 1999 Jan 2000-March 2009

1 Transportation industry (8.9) Services sector (21.2)

2 Electrical Equipment(8.0) Computer Software & Hardware

(9.9)

3 Service sector (7.0) Telecommunications (7.1)

4 Telecommunications(6.9) Housing & Real Estate(6.1)

5 Chemicals (other than fertilisers)(6.9)

Construction Activities (5.7)

6 Fuels (Power & Oil Refinery) (6.3) Automobile industry (3.9)

7 Food-Processing industries (4.1) Power(3.6)

8 Paper and Pulp (includingPaper Products) (1.5)

Metallurgical industries (3.0

)

9 Miscellaneous Mechanical &

Engineering (1.4)

Petroleum & Natural Gas (2.6)

10 Textiles (including Dyed, Printed)

(1.4)

Chemicals (other than fertilisers)

(2.4)


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Share ofService Sector FDI Inflows in

Total FDI Inflows to India (%)

Category 2005 2006 2007 2008

Financial 7.9 17.2 7 12.1

Non-Financial 0 0.4 3 2.6

Banking 1.9 1.2 2.9 1.9

Insurance 1.6 0.7 1.4 2.1

Outsourcing 0.3 0.3 0.7 1.1

Research &Development 0.5 0.3 0.4 1.3

Other 4.2 15.3 2.6 3.3

Sector Total 16.4 35.4 18 24.4


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With financial services having the highest share in total

FDI in the service sector, it shows consistency in its sharesin the sense that its share, along with banking services, is

continuously increasing in the sense that its share, along

with banking services, is continuously increasing.

It can be seen that FDI inflows into the servicesector have shown tremendous growth during 2005 to2008.

Of the total cumulative FDI in different categories ofthe service sector, financial services constitutes almost

half the total foreign direct investment, followed bybanking and other services with 10% and 21.5%,respectively.


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Due to the increase in FDI in services, its share in

total FDI inflows in India increased from 16.4 per centin 2005 to an astounding 35.4 per cent in 2006, butthis share declined in 2007 to 18 per cent, yetmaintaining the net increase over the period 2005-08.

Surprisingly, the share of services in total FDIinflows stood at 24.4 per cent for the year 2008. The24.6 per cent share of the service sectors FDI isdominated by the financial sector (12.1), non-financialservices (2.6), banking services (1.9), and other

services (3.3).


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FDI: Sectoral Guidelines

AIRPORTS:

1. Foreign Investment upto 100% is allowed in greenfield projects under automatic route.

2. Foreign Direct Investment is allowed in existingprojects

- upto 74% under automatic route- beyond 74% and upto 100% subject toGovernment approval

INSURANCE:

1. FDI upto 26% allowed on the automatic route

2. However, license from the Insurance Regulatory &Development Authority (IRDA) has to be obtained

3. There is a proposal to increase this limit to49%(Not found any data to substantiate this

statement)


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DRUGS & PHARMACEUTICALS

FDI upto 100% is permitted under the automatic routefor manufacture of drugs and pharmaceuticals (Thefollowing is the current position)

i. FDI upto 74% in the case of bulk drugs, their

intermediates Pharmaceuticals and formulations(except those produced by the use of recombinantDNA technology) would be covered under automaticroute.

ii. FDI above 74% for manufacture of bulk drugs will beconsidered by the Government on case to case basisfor manufacture of bulk drugs from basic stages


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TRADING

Wholesale / cash & carry trading - Automatic upto100%.

Trading for exports - Automatic upto 100%.

Trading of items sourced from small scale sector -100% with Government approval.

Test marketing of such items for which the Indiancompany has approval for manufacture - 100%with Government approval.

Single Brand product retailing - 51% withGovernment approval.


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INFRASTRUCTURE

100% FDI is permitted for the following activities:

1. Electricity Generation (except Atomic energy)2. Electricity Transmission3. Electricity Distribution

4. Mass Rapid Transport System5. Roads & Highways6. Toll Roads7. Vehicular Bridges8. Ports & Harbors9. Hotel & Tourism


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HOUSING, REAL ESTATE & TOWNSHIPDEVELOPMENT

FDI under the automatic route is allowed upto 100% intownships, housing, built-up infrastructure andconstruction development projects suject to conditionsnotified vide Press Note 2 (2005 Series) including:

a. minimum capitalization of US$ 10 million for whollyowned subsidiaries and US$ 5 million for joint venture.The funds would have to be brought within six monthsof commencement of business of the Indian company

b. Minimum area to be developed under each project-10 hectares in case of development of serviced housingplots; and built-up area of 50,000 sq. mts. in case ofconstruction development project; and any of the abovein case of a combination project


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HOUSING, REAL ESTATE & TOWNSHIPHOUSING, REAL ESTATE & TOWNSHIPDEVELOPMENTDEVELOPMENT

The conditions notified vide Press Note 2 (2005 Series)do not apply to NRIs./OCBs are allowed to invest upto100% under automatic route in:1. Development of serviced plots and construction of

built up residential premises

2. Investment in real estate covering construction ofresidential and commercial premises includingbusiness centers and offices

3. Development of townships4. City and regional level urban infrastructure facilities,

including both roads and bridges5. Investment in manufacture of building materials,which is also open to FDI

6. Investment in Participatory Ventures in the areasmentioned above

7. Investment in Housing Finance Institutions


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FDI

Attracting long-termforeign capital to

supplement domestic

investment efforts,particularly in infrastructure

and export competitive sectors

Developing attractive

Configurations of

locational advantages

at global level

Promoting technology

and other linkages to

enhance domestic industry

competitiveness

Creating skilled employmentOpportunities and Importof world Class managerial

practices


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Top Priority host economies for FDI for2010-12 period


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India has amongthe highest returns

on foreign

investment.

- Dan Scheinman, Cisco

System Inc. as told to

Business Week, August 2005

We came to India for

the costs, stayed for the

quality and are nowinvesting for

innovation.

A T Kearney

FDI Confidence

Index 2005

India is among the

three most attractiveFDI destinations in

the world.

Jack Welch

General

Electric

India is a developed

country as far as

intellectual capital is

concerned.

US

Department

of Commerce

By 2032, India will be

among the three

largest economies inthe world.

BRIC Report,

Goldman Sachs

Why India? Quote Unquote

Travyn Rhall,

ACNielsen

The Indian market has two

core advantages - an

increasing presence of

multinationals and an

upswing in the IT exports.

Craig

Barrett

Intel

Corporatio

n

India has evolved

into one of the

world's leadingtechnology centers.


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Country wise FDI Inflows

22%

14%

5%4%4%

51%

FDI Inflows (Aug. 1991 - Dec 1999) in %

MauritusUSA

Japan

Germany

UKOthers


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Country wise FDI Inflows

22%

14%5%4%4%

51%

FDI Inflows (Jan 2000 - March 2009) in %

MauritusUSA

Singapore

Netherlands

UKOthers


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Route Wise FDI Inflows

*All figures in Million $

Year (Jan-Dec) 1991 1992 1993 1994 1995 1996

FIPB & SIA route 78 188 340 511 1264 1677

RBI's AutomaticRoute 18 79 116 169 180

Through

Acquisition 88

RBI's VariousNRI Scheme 66 59 189 365 633 600

Total 144 265 608 992 2066 2545


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Year (Jan-Dec) 1997 1998 1999 2000 2001 2002

FIPB & SIA route 2824 2086 1474 1474 2142 1450

RBI's AutomaticRoute 242 155 181 395 720 813

Through

Acquisition 266 1028 467 479 658 1096

RBI's VariousNRI Scheme 290 91 83 81 51 2

Total 3622 3360 2205 2429 3571 3361


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Year (Jan-Dec) 2003 2004 2005 2006 2007 2008

FIPB & SIA route 934 1055 1136 1534 2586 3209

RBI's AutomaticRoute 509 3179 4558 11121 13889 23651

Through

Acquisition 637 980 1661 3465 4447 6169

RBI's VariousNRI Scheme

Total 2080 5214 7355 19720 22292 33709


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SECTORALDISTRIBUTION

OF FDI

*All figures in billion $


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FDI as % ofGross Total Investment

3.2

2.6

5.6 5.6

7.4

0

1

2

3

4

5

6

7

8

2000-04 2005 2006 2007 2008

FDI as %


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GDP USD 590 billion

GDP growth rate 9 %

Services contribution 54 %

FDI limit not 100 percent inmajor industry sectors such asTelecom, Semiconductors,Automobiles, etc.

Balance of Trade USD (-)46.2

billion

Investment goal USD 250billion

20062006

GDP USD 750 billion

GDP growth rate 9.5%

Services contribution 60 %

FDI limit is expected to be closeto 100 percent in major industrysectors such as Telecom,Semiconductors, Automobiles,etc.

Balance of Trade Should

increase with surging exports ascompared with imports


20082008

GDP USD 900 billion

GDP growth rate 9%

Services contribution 60-65 %

FDI limit is expected to be 100percent in major industrysectors such as Telecom,

Semiconductors, Automobiles,etc.

Balance of Trade Should bepositive with increased level ofexports as compared withimports


20102010

Growth Expected in India

To sustain the GDP growth of more than 8

percent, India requires an investment of USD1.5 trillion in the next five years

FDI IN RETAIL-


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LICENCES & PERMITS

INDUSTRIALDISPUTE ACT

SHOP & ESTABLISHMENT ACT

COSUMER PROTECTION ACTWEIGHT & MEASUREMENT ACT

PACKAGING ACT

PREVENTION OFFOOD ADULTRATION ACT

PREVENTION OF BLOCK MARKETING ACT

ANTI HOARDING & PROFEELING ACT

MONEY LENDING ACT

PRODEND FUND ACTMINIMUMWAGES ACT

ESI ACT

GRATUITY ACT

BONUS ACT

INEFFICIENT

LABOURS

FDI IN RETAIL

PRESENT CONDITION OF TRADERS

INSPECTOR RAJ

POLITICIAL INTERFERANCE

ANTI SOCAL ELEMENTS

WATER TAX

POWER PROBLEM

HIGH BANK

CHARGES

SALES TAX

OCTROI

SERVICE TAX

WELTH TAX

PROFESSIONAL TAX

INCOME TAX

ENTRY TAX

VAT

STAMP DUTY

POOR MARKET

CONDITION

PURCHASE TAX

ESSENTIAL COMMODITIES ACT

CENTRAL

EXCISE

FDI in Retail Trade

Fringe Benefit Tax

New Naka Complex

Cash Transaction Tax&

Quarterly C Form


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Suggestions


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Conclusion:

FDI policy is to be seen as part of a general policy of

enhancing investment in this economy under conditions of

sustained production efficiency.

This latter variety of FDI needs a certain type of domestic policy support in order to flourish.

FDI has a net contribution of its own there is no reason

why it should be distinguished from the general level

current about 23% of GDP to over 30% of GDP in order to

make growth prospects.

FDI policy – Indian Perspective

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