amar_garg

8/6/2019 Amar_Garg

1/118

FOREIGN DIRECTINVESTMENT IN INDIA AND

ITS IMPACT ONBANKING,INSURANCE AND

PHARMACEUTICAL SECTOR"

A Dissertation submitted in partial fulfillment of therequirements for the award of M.B.A. Degree of Bangalore

UniversityBy

AMAR GARGRegistration no: 07XQCM6002

2007-09MBA Fourth Semester

M P Birla Institute of Management

Bangalore

Under the guidance and supervision ofPRAVEEN BHAGAWANFaculty

M P Birla Institute of ManagementBangalore 560001

8/6/2019 Amar_Garg

2/118

DECLARATION

I hereby declare that this dissertation entitled a study on FOREIGN DIRECT

INVESTMENT IN INDIA AND ITS IMPACT ON BANKING, INSURANCE AND

PHARMACEUTICAL SECTOR is the result of my own research work carried out

under the guidance and supervision of Prof. Praveen Bhagawan, Faculty, M P Birla

Institute of Management, Bangalore

I also declare that this dissertation has not been submitted earlier to any

Institute/organization for the award of any degree or diploma.

Place: Bangalore

Date: (Amar Garg)

M. P. BIRLA INSTITUTE OF MANAGEMENT 2

8/6/2019 Amar_Garg

3/118

PRINCIPALS CERTIFICATE

This is to certify that this dissertation entitled FOREIGN DIRECT INVESTMENT

IN INDIA AND ITS IMPACT ON BANKING, INSURANCE AND

PHARMACEUTICAL SECTOR is the result of research work carried out by Mr.

Amar Garg under the guidance and supervision ofProf. Praveen Bhagawan, Faculty,

M.P. Birla Institute of Management, Bangalore.

Place: Bangalore (Dr. Nagesh S Malavalli)

Date: Principal


8/6/2019 Amar_Garg

4/118

GUIDES CERTIFICATE

I hereby state that this Dissertation entitled FOREIGN DIRECT INVESTMENT IN

INDIA AND ITS IMPACT ON BANKING, INSURANCE AND

PHARMACEUTICAL SECTOR is an offshoot of the project work carried out by Mr.

Amar Garg under my guidance and supervision

Place: Bangalore (Prof. Praveen Bhagawan)

Date: Faculty


8/6/2019 Amar_Garg

5/118

ACKNOWLEDGEMENT

I am happy to express my gratitude to Dr. N. S. Malavalli, (Principal, M. P. Birla

Institute of Management) for many valuable ideas imparted to me by him for my

project.

I extend my sincere thanks to Prof. Praveen Bhagawan(Faculty), M.P.Birla Institute

of Management, Bangalore for guiding me throughout this project work

Place: Bangalore

Date: (Amar Garg)


8/6/2019 Amar_Garg

6/118

TABLE OF CONTENTS:


Chapter No. CHAPTERS Page No.

1 EXECUTIVE SUMMARY

INTRODUCTION TO FDI

Introduction

Steps to attract FDI

Benefits of FDI

Disadvantages of FDI

Determinants of FDI

FDI quality

FDI and economic development

FDI and infrastructure development

Government policies

Evolution of FDI

Major FDI investors

Trend and patterns of FDI in India

Reasons of FDI in India Investment risks in India

LITERATURE REVIEW

1

2 43

44 - 46

2 RESEARCH DESIGN 47 51

3 INDUSTRY PROFILE Banking

Insurance

Pharmaceutical

52 - 61

8/6/2019 Amar_Garg

7/118

4 DATA ANALYSIS AND INTERPRETATION 62 - 74

5 FINDINGS. CONCLUSION ANDRECOMMENDATIONS

75 - 80

6 BIBLIOGRAPHY 81 - 82

7 ANNEXURES 83 - 109


8/6/2019 Amar_Garg

8/118

LIST OF GRAPHS AND TABLES:


S.No. PARTICULARS PAGE No.

1 TABLE ON GOVERNMENT POLICY REGARDING FDI 19 - 20

2 GRAPH ON FDI FROM 2000-2009 64

3 GRAPH ON FDI IN 2008-2009 65

4 GRAPH ON COUNTRY WISE FDI INFLOWS 65

5 GRAPH ON STATE WISE FDI INFLOWS 66

6 GRAPH ON SECTOR WISE FDI INFLOWS 67

7 TABLE ON FDI INFLOWS IN BANKING ANDINSURANCE SECTORS OVER THE YEARS

67

8 GRAPH ON FDI INFLOWS IN BANKING ANDINSURANCE SECTORS OVER THE YEARS

68

9 TABLE ON FDI INFLOWS IN PHARMACEUTICALSECTOR OVER THE YEARS

68

10 GRAPH ON FDI INFLOWS IN PHARMACEUTICALSECTOR OVER THE YEARS

69

8/6/2019 Amar_Garg

9/118

11 TABLE OF LEAST SQUARE METHOD IN BANKING ANDINSURANCE SECTOR

70

12 GRAPH ON TRENDS OF FDI INFLOWS IN BANKINGAND INSURANCE SECTOR FROM THE YEAR 2002-2010

71

13 TABLE OF LEAST SQUARE METHOD INPHARMACEUTICAL SECTOR

73

14 GRAPH ON TRENDS OF FDI INFLOWS INPHARMACEUTICAL SECTOR FROM THE YEAR 2002-

2010

74

15 ANNEXURES

FDI DATA

84 - 109


8/6/2019 Amar_Garg

10/118

EXECUTIVE SUMMARY:

This Dissertation Report is a study on Foreign Direct Investment in India and its

Impact on Banking, Insurance and Pharmaceutical Sector of an Indian Economy.

The report describes about the introduction , evolution , and development of Foreign

Direct Investment in India. Basically there is an attempt to find out the reasons for the

flow of funds to India, more specifically, an attempt to find out the reasons for India

being one of the favorites; amongst all Asian countries, for foreign investors.

The project explains about the various policies, risks, guidelines, initiatives and plans for

attracting Foreign Direct Investment in India.It consists of various FDI data i.e. year

wise, sector wise, country wise, state wise and other related data to the project.It also

consists of various tables, graphs, charts relating to the project.

It is a generalized report on the trends, patterns in the foreign investment flow in India,

with an attempt to explain and project the reasons for FDI being attracted to India most.

This report has the information and data regarding Banking, Insurance and

Pharmaceutical sectors of an Indian economy.

This report shows the movement of FDI Inflows in Indian economy and reasons behind

that.

The key results and findings of the report is that FDI is very necessary for the country

and its economysgrowth and development.It is noticed that to have a continous flow of

FDI in the economy, country need to have consistent and stable government, policies,

procedures,good tax breaks and additional benefits to foreign investors.

By this report we found that FDI and growth of a particular sector in our case it is

confined to Banking , Insurance and Pharmaceutical sector of Indian economy are inter-

related, hence with FDI inflows in these specified sectors one can see growth and

development in that sector.


8/6/2019 Amar_Garg

11/118

CHAPTER 1:

INTRODUCTION

TO

FOREIGN DIRECT INVESTMENT:


8/6/2019 Amar_Garg

12/118

1.1 INTRODUCTION TO FDI:

Definition of Foreign Direct Investment:

Foreign direct investment is that investment, which is made to serve the business interests

of the investor in a company, which is in a different nation distinct from the investor's

country of origin.

Foreign direct investment is investment made by a foreign individual or company in

productive capacity of another country. It is the movement of capital across national

frontiers in a manner that grants the investor control over the acquired asset.

A parent business enterprise and its foreign affiliate are the two sides of the FDI

relationship. Together they comprise an MNC. The parent enterprise through its foreign

direct investment effort seeks to exercise substantial control over the foreign affiliate

company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of

ordinary shares or access to voting rights in an incorporated firm. For an unincorporated

firm one needs to consider an equivalent criterion.

Ownership share amounting to less than that stated above is termed as portfolio

investment and is not categorized as FDI.

Foreign direct investments (FDI) are investment of foreign assets into domestic

structures, equipments and organization. FDI reflects the objectives of obtaining a lastinginterest by a resident entity in one economy (Direct Investor) in entity resident in an

economy other than that of the Investor (Direct investments enterprise). The lasting

interest implies the existing of a long-term relation between the direct investor and the

enterprise and a significant degree influence on the management of the enterprise. Direct

investment involves both the initial transaction between the two entities and all the

subsequent capital transactions between them and among affiliated enterprises, both

incorporated and unincorporated.


Most of the developing countries suffer from low level of income and low level of

capital formation. However, despite this shortage of capital, these countries have

developed a strong urge for industrializing and economic development. Consequently,

they have embarked upon large-scale programmes of industrialization. Since the

8/6/2019 Amar_Garg

13/118

domestic resources to carry out such programmes have been entirely in adequate, these

countries have had to depend on foreign capital

Foreign capital takes two main forms private foreign investments and foreign

aid. Private foreign investment as far as FDI is concerned, the private foreign investor

either sets up a branch or a subsidiary in the recipient country. Of particular importance

has been the increasing role of the multi-national corporations (MNCs) in the

underdeveloped countries. These MNCs have set up a large number of branches and

subsidiaries in these countries and have bought with them new technological expertise,

machinery and equipment, better management and organization, superior marketing

techniques etc.

Indirect foreign investment or portfolio investment takes place when the nationals

(includes foreign institutional investors) (FIIs) of one-country purchase shares or

debentures floated by industries in some other countries (operating in the stock market).

Foreign aid can be defined include all official grants and concessional loans, in

currency or in kinds, which are broadly aimed at transferring resources from developed to

les developed nations on developmental and / or income distributional grounds.

FDI has always been as obsessive and overreaching objective among policy

makers and political leaders of the developing nations. FDI is the largest source of

external finance for many developing countries in their industrial developments.

Recognizing the Importance of FDI governments the world over are opening their

economies to encourage the flow of trade, technology information, investment and

finance for the development of industries.

In India the lure of non-debt creating FDI flows has galvanized successive

governments since 1990-91. Now the government talks about ensuring $10 billion FDI

flows into India as the minimum consideration for achieving the economic growth target

of 8% per annum. Because the sustained flow of FDI would give the economy a smooth

ride to banish the twin dangerous of endemic poverty and huge un-employment and cope

with the vast investment requirements of maintaining the rickety infrastructure and

creating more amenities.


FDI have been found to be contributing negatively to a countrys national income.

Not only they have distorted the economic structure of the country but also have

8/6/2019 Amar_Garg

14/118

interfered into the policy decision of the developing country. There have been instances

when they have tried to undermine democracy by shifting the powers to make critical

economic decisions from the hands of elected officials in a country to un-elected

representing the interest of huge organization that are not accountable to anybody.

Entry of FDI also assumes importance. If the FDI entry is through the take over of

domestic firms, it does not add up to productive capacity of the country, rather it simply

transfers the ownership and control from domestic to foreign hands. This transfer is also

accompanied more often by lay offs of employees (their technology transfers, mostly

labour replacing is not conducive to the available resource of the given country) or the

closing of some productions or functional activities. It has been witnessed that if the

acquires are global oligopolies, they may well dominate the local market. Acquisitions of

local firm are used deliberately to reduce competition in domestic market and to threaten

local entrepreneurship.

In India situation is not much different. According to the RBI study on the

finances of 334 FDI companies, it has been found out that these companies have turned

out to be net negative foreign exchange earners. Their dividend figures are way below the

export earnings and the preferred avenue for repatriation of foreign exchange is import.

Besides this, most of the raw materials imported by the MNCs are of an intra-firm nature

i.e. sourced from parent firm or affiliated in other countries. The study has also revealed

decline in export intensity of sales of FDI companies to a low of 9.33% in 1999-2000.

Considering that the corresponding ratios of China, Malaysia and Singapore are 35%,

70% and 80% respectively viewing India as an import destination rather than export-

manufacturing hub.

Classification of Foreign Direct Investment:

Foreign direct investment may be classified as Inward or Outward.

Foreign direct investment, which is inward, is a typical form of what is termed as 'inward

investment'. Here, investment of foreign capital occurs in local resources.


The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of

existent regulations, loans on low rates of interest and specific grants. The idea behind

this is that, the long run gains from such a funding far outweighs the disadvantage of the

8/6/2019 Amar_Garg

15/118

income loss incurred in the short run. Flow of Inward FDI may face restrictions from

factors like restraint on ownership and disparity in the performance standard.

Foreign direct investment, which is outward, is also referred to as direct investment

abroad. In this case it is the local capital, which is being invested in some foreign

resource. Outward FDI may also find use in the import and export dealings with a foreign

country. Outward FDI flourishes under government backed insurance at risk coverage.

Outward FDI faces restrictions under a host of factors as described below:

Tax incentives or the lack of it for firms, which invest outside their country of

origin or on profits, which are repatriated.

Industries related to defense are often set outside the purview of outward FDI to

retain government's control over the defense related industrial complex

Subsidy scheme targeted at local businesses

Lobby groups with vested interests possessing support from either inward FDI

sector or state investment funding bodies


Government policies, which lend support to the phenomenon of industry

nationalization

Foreign direct investment may be further classified by their set target. The areas

here are Greenfield investment and Acquisitions and Mergers Greenfieldinvestments involve the flow of FDI for either building up of new production

capacities in the host nation or for expansion of the existent production facilities

of the host country. The plus points of this come in form of increased employment

opportunities, relatively high wages, R&D activities and capacity enhancement.

The flip side comes in the form of declining market share for the domestic firm

and repatriation of profits made to a foreign country, which if retained within the

country of origin could have led to considerable capital accumulation for the

nation. Multinationals mostly rely on mergers to bring in FDI. Until 1997 mergers

and acquisitions accounted for around 90% of FDI flow to the US economy. FDI

flow through acquisitions does not render any long run advantage to the economy

of the host nation as under Greenfield investments. Some other types of foreign

8/6/2019 Amar_Garg

16/118

direct investment in vogue are termed as Horizontal FDI, Forward Vertical FDI,

Vertical FDI and Backward Vertical FDI.

Types of FDI:

There are two types of FDI:

Greenfield investment : It is the direct investment in new facilities or the expansion of

existing facilities. It is the principal mode of investing in developing countries.

Mergers and Acquisition : It occurs when a transfer of existing assets from local firms

takes place.

Types of Foreign Direct Investment: An Overview:

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. Thisclassification is based on the types of restrictions imposed, and the various prerequisites

required for these investments.

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.

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 with ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment 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.

Horizontal foreign direct investments happen when a multinational company carries out a

similar business operation in different nations.


Foreign Direct Investment is guided by different motives. FDIs that are undertaken to

strengthen the existing market structure or explore the opportunities of new markets can

be called market-seeking FDIs. Resource-seeking FDIs are aimed at factors of

8/6/2019 Amar_Garg

17/118

production which have more operational efficiency than those available in the home

country of the investor.

Some foreign direct investments involve the transfer of strategic assets. FDI activities

may also be carried out to ensure optimization of available opportunities and economies

of scale. In this case, the foreign direct investment is termed as efficiency-seeking.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,

zinc.

Investment in India:

Government of India recognizes the key role of Foreign Direct Investment (FDI) in

economic development not only as an addition to domestic capital but also as an

important source of technology and global best practices. The Government of India hasput in place a liberal and transparent FDI policy.

FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI

policy in India is reckoned to be among the most liberal in emerging economies. FDI

Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in

most of the sectors including the services sector under automatic route. FDI in

sectors/activities under automatic route does not require any prior approval either by the

Government or the RBI.


Consistent economic growth, de-regulation, liberal investment rulse, and operational

flexibility are all the factors that help increase the inflow of Foreign Direct Investment or

FDI.

FDI or Foreign Direct Investment is any form of investment that earns interest in

enterprises which function outside of the domestic territory of the investor.

8/6/2019 Amar_Garg

18/118

FDIs require a business relationship between a parent company and its foreign subsidiary.

Foreign direct business relationships give rise to multinational corporations. For an

investment to be regarded as an FDI, the parent firm needs to have at least 10% of the

ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if

it owns voting power in a business enterprise operating in a foreign country.

1.2 Steps to attract FDI:

Promotional efforts to attract foreign direct investment (FDI) have become the important

point of competition among developed and developing countries. This competition is also

maintained when countries are adopting economic integration at another level. While

some countries lowering standards to attract FDI in a "race to the bottom," others praise

FDI for raising standards and welfare in recipient countries.

There are several trends, which are reinforcing traditional impulses for foreign direct

investment that is access to natural resources, markets, and low-cost labor. With the rise

of globalization technological progress allows for the separation of production into more

discrete phases across national barriers. Expansion in Information and communication

technologies, Improvement in logistics necessarily allow production to be close to

markets while taking advantage of the specific characteristic of individual production

locations.Countries have adopted their respective policies for attracting more investment.

Some countries rely on targeted financial concessions like tax concessions, cash grants

and specific subsidies. Some countries focus on improving the infrastructure and skill

parameter and creating a base meet the demands and expectations of foreign investors.

Others try to improve the general business climate of a country by changing the

administrative barriers and red tapism. Many governments have created state agencies to

help investors through this administrative paperwork. Finally most of the countries haveentered into international governing arrangements to increase their attractiveness for

more investment.


8/6/2019 Amar_Garg

19/118

"Better Investment Climate" Need of the Hour:

Sound investment climate is crucial for economic growth. Microeconomic reforms aimed

at simplifying business regulations, strengthening property rights, improving labor

market flexibility, and increasing firms' access to finance are necessary for raising living

standards and reducing poverty in a country.

Reform is necessary for creating an investment-oriented climate. Reform management

matters as investment climate reforms are done politically. They often favor unorganized

over organized groups and the benefits tend to accrue only in the long term, while costs

are felt up front. Political decisions play a significant role in this context.Each and every

countries over the globe are stepping forward to change the climate for attracting more

investment. Opening up of doors by most of the nations have compelled them for

adopting reforms.

1.3 Benefits of Foreign Direct Investment:

One of the advantages of foreign direct investment is that it helps in the economic

development of the particular country where the investment is being made.

This is especially applicable for the economically developing countries. During the

decade of the 90s foreign direct investment was one of the major external sources of

financing for most of the countries that were growing from an economic perspective. It

has also been observed that foreign direct investment has helped several countries when

they have faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It was

observed during the financial problems of 1997-98 that the amount of foreign direct

investment made in these countries was pretty steady. The other forms of cash inflows in

a country like debt flows and portfolio equity had suffered major setbacks. Similarobservations have been made in Latin America in the 1980s and in Mexico in 1994-95.


Foreign direct investment also permits the transfer of technologies. This is done basically

in the way of provision of capital inputs. The importance of this factor lies in the fact that

this transfer of technologies cannot be accomplished by way of trading of goods and

8/6/2019 Amar_Garg

20/118

services as well as investment of financial resources. It also assists in the promotion of

the competition within the local input market of a country.

The countries that get foreign direct investment from another country can also develop

the human capital resources by getting their employees to receive training on the

operations of a particular business. The profits that are generated by the foreign direct

investments that are made in that country can be used for the purpose of making

contributions to the revenues of corporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also

helps in increasing the salaries of the workers. This enables them to get access to a better

lifestyle and more facilities in life. It has normally been observed that foreign direct

investment allows for the development of the manufacturing sector of the recipient

country.

Foreign direct investment can also bring in advanced technology and skill set in a

country. There is also some scope for new research activities being undertaken.

Foreign direct investment assists in increasing the income that is generated through

revenues realized through taxation. It also plays a crucial role in the context of rise in the

productivity of the host countries. In case of countries that make foreign direct

investment in other countries this process has positive impact as well. In case of these

countries, their companies get an opportunity to explore newer markets and thereby

generate more income and profits.It also opens up the export window that allows these

countries the opportunity to cash in on their superior technological resources. It has also

been observed that as a result of receiving foreign direct investment from other countries,

it has been possible for the recipient countries to keep their rates of interest at a lower

level.It becomes easier for the business entities to borrow finance at lesser rates of

interest. The biggest beneficiaries of these facilities are the small and medium-sized

business enterprises.

1.4 Disadvantages of Foreign Direct Investment:


The disadvantages of foreign direct investment occur mostly in case of matters related to

operation, distribution of the profits made on the investment and the personnel. One of

8/6/2019 Amar_Garg

21/118

the most indirect disadvantages of foreign direct investment is that the economically

backward section of the host country is always inconvenienced when the stream of

foreign direct investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such an

opinion. It is normally the responsibility of the host country to limit the extent of impact

that may be made by the foreign direct investment. They should be making sure that the

entities that are making the foreign direct investment in their country adhere to the

environmental, governance and social regulations that have been laid down in the

country.The various disadvantages of foreign direct investment are understood where the

host country has some sort of national secret something that is not meant to be

disclosed to the rest of the world. It has been observed that the defense of a country has

faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not

appreciated by the workers of the recipient country. Foreign direct investment, at times, is

also disadvantageous for the ones who are making the investment themselves.

Foreign direct investment may entail high travel and communications expenses. The

differences of language and culture that exist between the country of the investor and the

host country could also pose problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that

a company may lose out on its ownership to an overseas company. This has often caused

many companies to approach foreign direct investment with a certain amount of

caution.At times it has been observed that there is considerable instability in a particular

geographical region. This causes a lot of inconvenience to the investor.


The size of the market, as well as, the condition of the host country could be important

factors in the case of the foreign direct investment. In case the host country is not well

connected with their more advanced neighbors, it poses a lot of challenge for the

investors.At times it has been observed that the governments of the host country are

facing problems with foreign direct investment. It has less control over the functioning of

the company that is functioning as the wholly owned subsidiary of an overseas

company.This leads to serious issues. The investor does not have to be completely

obedient to the economic policies of the country where they have invested the money. At

8/6/2019 Amar_Garg

22/118

times there have been adverse effects of foreign direct investment on the balance of

payments of a country. Even in view of the various disadvantages of foreign direct

investment it may be said that foreign direct investment has played an important role in

shaping the economic fortunes of a number of countries around the world.

1.5 Determinants of Foreign Direct Investment:

One of the most important determinants of foreign direct investment is the size as well as

the growth prospects of the economy of the country where the foreign direct investment

is being made.It is normally assumed that if the country has a big market, it can grow

quickly from an economic point of view and it is concluded that the investors would be

able to make the most of their investments in that country.

In case of foreign direct investments that are based on export, the dimensions of the host

country are important as there are opportunities for bigger economies of scale, as well as

spill-over effects.The population of a country plays an important role in attracting foreign

direct investors to a country. In such cases the investors are lured by the prospects of a

huge customer base.

Now if the country has a high per capita income or if the citizens have reasonably good

spending capabilities then it would offer the foreign direct investors with the scope of

excellent performances.

The status of the human resources in a country is also instrumental in attracting direct

investment from overseas. There are certain countries like China that have taken an active

interest in increasing the quality of their workers.

They have made it compulsory for every Chinese citizen to receive at least nine years of

education. This has helped in enhancing the standards of the laborers in China.


If a particular country has plenty of natural resources it always finds investors willing to

put their money in them. A good example would be Saudi Arabia and other oil rich

countries that have had overseas companies investing in them in order to tap the

unlimited oil resources at their disposal.Inexpensive labor force is also an important

determinant of attracting foreign direct investment. The BPO revolution, as well as the

boom of the Information Technology companies in countries like India has been a proof

8/6/2019 Amar_Garg

23/118

of the fact that inexpensive labor force has played an important part in attracting overseas

direct investment.

Infrastructural factors like the status of telecommunications and railways play an

important part in having the foreign direct investors come into a particular country.

It has been observed that if the infrastructural facilities are properly in place in a country

then that country receives a substantial amount of foreign direct investment. If a country

has extended its arms to overseas investors and is also able to get access to the

international markets then it stands a better chance of getting higher amounts of foreign

direct investment.It has been observed in the recent years that a couple of countries have

altered their stance vis-a-vis overseas investment. They have reset their economic policies

in order to suit the interests of the overseas investors.These companies have increased the

transparency of the legal frameworks in place. This has been done so that the overseas

companies can understand the implications of their investment in a particular country and

take the appropriate decisions.

1.6 Foreign Direct Investment Quality:

The quality of FDI, is not more than quantity, is equally important. In a country

such as India with a historically tariffs and large domestic market, FDI might move in

merely to produce behind tariff walls for the domestic market. Such FDI becomes

virtually indistinguishable from domestic investment and has, in the Indian context,

sometimes lobbied for higher protection along with domestic firms. FDI becomes

attractive for its own sake when it makes a net contribution to export and/or has spillover

effects. Policy should target FDI with potential for such effects, rather any FDI, perse. A

powerful tool to achieve this is to make deep cuts in tariff so that opportunities for

production behind walls recede. Another pitfall in FDI policy is to let such investment

substitute for a genuine domestic privatization programmes. Hence, at the level of policy,

a successful FDI policy must be integrated with a policy of trade reforms and genuine

privatization.


8/6/2019 Amar_Garg

24/118

8/6/2019 Amar_Garg

25/118

This is where the foreign direct investment can come in handy. It can also assist in

helping economically underdeveloped countries build their own research and

development bases that can contribute to the technological development of the country.

This is a very crucial contribution as most of these countries are not able to perform these

functions on their own. These assistances come in handy, especially in the context of the

manufacturing and services sector of the particular country, that are able to enhance their

productivity and ultimately advance from an economic point of view.

At times foreign direct investment could be provided in form of technology. Else, the

money that comes in a country through the foreign direct investment can be utilized to

buy or import technology from other countries. This is an indirect way in which foreign

direct investment plays an important part in the context of economic development.

Foreign direct investment can also be helpful in assisting the host countries to set up mass

educational programs that help them to educate the disadvantaged sections of the society.

Such assistance is often provided by the non-governmental organizations in the form of

subsidies. The developing countries can also tackle a number of healthcare issues with

the help of the foreign direct investment.

1.8 Foreign Direct Investment and Infrastructure Development:


One of the many areas in which foreign direct investment can benefit a country or any

entity, for that matter, is that of development of infrastructure. It has been observed over

the years, that a lot of countries as well as other recipients of direct investment from

overseas entities have used that money in order to develop the infrastructural facilities at

their disposal. All the various types of infrastructure that are at the disposal of a country

like health or education, for example, may be benefited by foreign direct investment.

Technological infrastructure is one of the many areas in which foreign direct investment

is meant to benefit a country. With the help of foreign direct investment being made in a

country the government can construct, as well as, improve the existing technological

tools at their disposal.This in turn also plays a very crucial role in the economic

development of a country as this technological advancement assists a country in

upgrading its industries and thus helps them to face the challenges of the contemporary

8/6/2019 Amar_Garg

26/118

global economy.Foreign direct investment is also capable of upgrading the health

infrastructure of a particular country. This could be done by way of providing high-end

equipments or medicines.Such investment is normally made by the world level

organizations in countries that are economically backward and have no or little medical

infrastructure to speak of. For years, the World Health Organization, as well as the World

Bank and the International Monetary Fund have been providing a number of the

economically backward countries, all over the world and especially in Africa, with

money and medicines in order to eradicate critical diseases or improve the medical

infrastructure in place.They have also been sponsoring public health awareness programs

that make people aware about critical diseases that need to be eradicated. In India, for

example, pulse polio and HIV prevention measures have been at the center of such

activities.

Communication infrastructure is an important area where the foreign direct investment

can come in handy. The money that is invested in a country by overseas entities can be

used for the construction of roads, railways and bridge

These facilities are used for establishing connections with the remote areas of a country

and for transporting important services to these parts like medicines and aids at times of

floods or other natural disasters. A lot of construction groups are taking active interest in

developing the communicational infrastructure of other countries.

Foreign direct investment is also used for the purpose of educating the unskilled labor

force that is present in a country. In India during the later stages of 80s and 90s there was

a situation whereby there was a huge labor force but it was mostly unskilled and was

employed in the unorganized sector. It was possible with the help of the financial

assistance from the overseas direct investors to train these people so that they may be

capable of being recruited into the industry. Foreign direct investment is also useful for

executing mass educational programs that can educate those people who remain out of

the bounds of conventional and institutional education as they are not able to afford it or

it may not be available in their areas.


8/6/2019 Amar_Garg

27/118

1.9 GOVERNMENT POLICY TOWARDS FOREIGN DIRECTINVESTMENT:

Sectors Attracting Foreign Direct Investment:

Though the services sector in India constitutes the largest share in the Gross Domestic

Product, still it has failed to some extent in attracting more funds in the forms of

investments.

Important sectors of the Indian Economy attracting more investments into the country are

as follows:

Electrical Equipments (Including Computer Software & Electronic)

Telecommunications (radio paging, cellular mobile, basic telephone service)

Transportation Industry

Services Sector (financial & non-financial)

Fuels (Power + Oil Refinery)

Chemical (other than fertilizers)

Food Processing Industries

Drugs & Pharmaceuticals

Cement and Gypsum Products

Metallurgical Industries

Sectors prohibited for FDI:

i. Retail trading (except Single Brand Product retailing)

ii. Atomic energy

iii. Lottery business

iv. Gambling and Betting


v. Agricultural or plantation activities of Agriculture (excluding Floriculture,

Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of

8/6/2019 Amar_Garg

28/118

8/6/2019 Amar_Garg

29/118

(a) Basic and cellular; Unified

Access Services,National/International LongDistance, V-Sat, Public MobileRadio Trunked Services (PMRTS),

Global Mobile PersonalCommunications Services(GMPCS) and other value added

telecom services

74% (includingFDI, FII, NRI,FCCBs, ADRs,GDRs, convertible

preference shares,and proportionateforeign equity in

Indian

promoters/investing Company

Automaticupto 49%

FIPBbeyond49%

Subject to guidelines notified in

the PN 5/2005 Series

(b) ISP with gateways, radio-paging, end-to-end bandwidth 74%

Automaticup to49%

FIPBbeyond49%

Subject to licencing andsecurity requirements notifiedby the Department ofTelecommunication

(c) ISP without gateway,infrastructure provider providing

dark fibre, electronic mail andvoice mail

100%

Automaticup to49%

FIPBbeyond49%

Subject to the condition thatsuch companies shall divest26% of their equity in favour ofIndian public in 5 years, if

these companies are listed inother parts of the world. Alsosubject to licensing andsecurity requirements, whererequired.

(d) Manufacture of telecomequipment 100% Automatic

Subject to sectoralrequirements

Power including generation (Except Atomic energy);

regulations transmission,distribution and Power Trading

Subject to provisions of the

Electricity Act 2003

Ports 100% Automatic Subject to sectoral regulations

Roads & Highways 100% Automatic Subject to sectoral regulations

Shipping 100% Automatic Subject to sectoral regulations


8/6/2019 Amar_Garg

30/118

1.10 EVOLUTION OF FDI IN INDIA:

INDIA ranks second in the world in terms of financial attractiveness, people and skills

availability and business environment. This is revealed in AT Kearney's 2007 Global

Services Location Index. Country's financial stability in the current environment of

financial turbulence and a possible unwinding of macro imbalances sends clear message

to the prospective foreign investors about India's position as an expanding investment

destination. "India's external sector has displayed considerable strength and resilience

since the reforms in 1991- despite several domestic as well as global political events and

supply shocks in food and fuel........we partner with the global economy fully on the trade

and current account while there is progressive liberalisation of the capital account,

consistent with the progress in reforms in the real, fiscal and financial sectors", observed

Dr Y.V.Reddy, Governor of India's central banking authorities, Reserve Bank of India

(RBI) at the World Leaders Forum in New York in April this year. "The strong macro

economic fundamentals, growing size of the economy and improving investment climate

has attracted global corporation to invest in India. A major outcome of the economic

reforms process aimed at opening up the economy and embracing globalization has led to

to tremendous increase in Foreign Direct Investment inflows into India", says country's

powerful industry lobby CII.


Post 1948, the industrial policy announced by the government of India focused on the

industrial growth and the overall development of the nation. The primary trust was given

in the areas of consistent increase in production and a fair and equitable distribution of

food grains. The industry policy was later revised after the adoption of the constitution

and the revised policy was adopted in the year 1956. Further, in order to meet the

continuous challenges facing the economy, the policy was further revised in the years

1973, 1977 and 1980. A comprehensive statement of industrial policy was again issued

on July 24, 1991. Thereafter, foreign investment and acquisition of technology necessary

for Indias industrial development would be allowed only if it is in the national interest.

In other areas, even existing collaborations will not be renewed. In fact, the government

offered to issue an illustrative list of industries where no foreign collaboration, financial

8/6/2019 Amar_Garg

31/118

or technical, is considered necessary since indigenous technology has fully developed in

this field. Thus the entire emphasis was on preventing foreign investment.

The 1991 resolution, issued in the aftermath of the economic reforms initiatives,

stated that foreign investment and technology collaboration would be welcomed to obtain

higher technology, to increase exports and to expand the production base. It was

recognized that foreign investment would bring in attend advantages of technology

transfer, marketing expertise, introduction of modern managerial techniques and new

possibilities for promotion of exports. The government, therefore, welcomed foreign

investment, which was in the interest of the countries industrial development. Since then,

FDI has gained prominence across the globe and has been recognized as an instrument

that facilitates international economic integration.

1.11 MAJOR FDI INVESTORS IN INDIA:

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

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

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

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

the UK; $ 3.12 billion from the Netherlands; $ 2.26 billion from Japan; $1.83 billion fromGermany; $ 1.41 billion from Cyprus; and $1.02 billion from France.


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

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

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

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

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

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

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

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

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

witnessed significant increase in the FDI inflows in the infrastructure. In first nine

8/6/2019 Amar_Garg

32/118

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

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

Ofthe total FDI amounting to $ 56450 million in first 11 months of fiscal 2007-08, direct

investment stood at $ 25455 million. of this, equity investment accounts for the major

share with $ 20636 million. Portfolio investments totaled $ 30995 million.

The countrywide figures for 200-01 to January 2009 reveal Mauritius in the leading

position accounting for about 43.3 percent of total FDI inflows into India. The US and

UK is far behind it with 7.72 percent and 6.41 percent respectively. FDI from Mauritius

during this period stood at $ 35180 million. In terms of Rs it stood at Rs 1527677 million.

FDI by US and UK during this period stood at $ 6171 million and $ 5153 million. In

terms of Indian currency it comes to Rs 271491 million and Rs 225415 million

respectively.

The sector attracting most to the FDI is service sector from the year 2000 to 2009 having

22% share with cumulative inflows of 78742 US million $.

Number of cumulative Foreign Technology Transfer Approvals from the year 2000-

2008 are 8024 and in the year 2008-2009 they are 62.


8/6/2019 Amar_Garg

33/118

TRENDS AND PATTERNS OF FOREIGN DIRECTINVESTMENT IN INDIA:


8/6/2019 Amar_Garg

34/118

1.12 Trends and Patterns of FDI in India:

Foreign capital plays an important role in the process of economic development of

a country at the initial stage of development. To what extent it is to be invited depends

upon the type of economy. If it is a closed economy welcoming of foreign capitals is

limited, if it is an open economy role of foreign is high. Since the under developed

countries are having lack of capital, certainly the foreign capital will make a dent in the

process of economic development of that country. So far as Indian economy is

concerned the welcoming of the foreign capital is limited. But after liberalization of the

economy the in flow of foreign capital into India is very high. The role of foreign capital

in the process of economic developments is a debatable issue.

Due to the FDI inflow in to the Indian economy, poverty has not been reduced,

unemployment has increased, agricultural sector, village, cottage and house hold

industries have been disrupted due to liberalized import policy. The Indian floodgates are

opened for foreign goods, which are competing with Indian goods. The Indian goods are

relatively costlier. The Indian producers are not been able to stand in the competition of

the foreign goods in the Indian market, which are cheaper than Indian goods. Indian

producers particularly agriculturists, handsomer could not get even the cost of

production, which resulted in increased debt burden. Many of them have resorted to

suicides due to increased in debt burden as well as pressure for repayment of debt. This

is true in almost all states of the country. This is problem is more acute in states like

PUNJAB, ANDHRA PRADESH, MAHARASHTRA, KERALA, KARNATAKA AND

TAMILNADU. In the context we have to consider the trends and patterns of FDI inflow

into India.

Foreign direct investment (FDI) in India has played an important role in the development

of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a

certain degree of financial stability, growth and development. This money has allowedIndia to focus on the areas that may have needed economic attention, and address the

various problems that continue to challenge the country.


India has continually sought to attract FDI from the worlds major investors. In 1998 and

1999, the Indian national government announced a number of reforms designed to

encourage FDI and present a favorable scenario for investors.

8/6/2019 Amar_Garg

35/118

FDI investments are permitted through financial collaborations, through private equity or

preferential allotments, by way of capital markets through Euro issues, and in joint

ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining

industries.

A number of projects have been announced in areas such as electricity generation,

distribution and transmission, as well as the development of roads and highways, with

opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide up to 100%

of the financing required for the construction of bridges and tunnels, but with a limit on

foreign equity of INR 1,500 crores, approximately $352.5m.

Currently, FDI is allowed in financial services, including the growing credit card

business. These services include the non-banking financial services sector. Foreign

investors can buy up to 40% of the equity in private banks, although there is condition

that stipulates that these banks must be multilateral financial organizations. Up to 45% of

the shares of companies in the global mobile personal communication by satellite

services (GMPCSS) sector can also be purchased.

Although the Chinese approval process is complex, it includes both national and regional

approval in the same process.

Federal democracy is perversely an impediment for India. Local authorities are not part

of the approvals process and have their own rights, and this often leads to projects getting

bogged down in red tape and bureaucracy. India actually receives less than half the FDI

that the federal government approves.


8/6/2019 Amar_Garg

36/118

8/6/2019 Amar_Garg

37/118

The country had received $ 15.7 billion FDI in 2006-07 as compared with $ 5.5

billion a year ago. If reinvested earnings and other capital inflows are included,

total inflows in 2006-07 add up to $ 19.5 billion compared with $7.7 billion in

2005-06, he said.Mauritius continued to remain as the biggest source of FDI for

India, largely because of its tax breaks that helps companies from elsewhere route

their funds through the island, followed by Japan, Cyprus, the US and

Singapore.Services, telecom, electrical equipment, real estate and transportation

were the five major sectors that received a majority of FDI in India this year.

In spite of the global meltdown, in fiscal year 200708, about US$ 32.4 billion as

foreign investment had poured into India. The country posted a 45 per cent

growth in foreign direct investment (FDI) with US$ 23.3 billion between April-

December 2008, over the same period last year. The FDI inflows between April-

November 2008 stood at US$ 19.79 billion.

FDI inflows between April-October 2008 were US$ 18.70 billion, as against the

US$ 9.27 billion received during same period last year. Inflow of FDI equity for

the month of September 2008 alone was US$ 2.56 billion, a growth of 259 per

cent over the same month in last year. Further, October 2008 has witnessed FDI

inflows of US$ 1.49 billion, thereby increasing the FDI inflows for the period

April-October 2008 to US$ 18.7 billion. According to the Reserve Bank of India's (RBI) monthly bulletin, NRIs have

pumped in US$ 513 million (on net basis) in NRI deposits in September 2008,

which is the highest since December 2006.

The Foreign Investment Promotion Board (FIPB) has cleared around 30 proposals

accounting for more than US$ 1.21 billion in the last few months. The approvals

for such proposals went up about 50 per cent in 2008 as against 2007.

The FDI inflows in 2007-08 saw an increase of 56.50 per cent over 15.70 billion

dollars in the previous year. India, which saw a GDP growth of 8.7 per cent in

2007-08, aims to more than double its FDI inflows between 2006-07 and end of

the current financial year.


Foreign Direct Investment (FDI) inflows into India touched a level of $4.9 billion

in the first quarter of the current financial year (2007-08), largely led by British

8/6/2019 Amar_Garg

38/118

telecom major Vodafones $801 million injection into the countrys growing

telecoms market.

Inflows during April to June in the current year jumped 185 per cent against $ 1.7

billion in the corresponding period of the previous year.

During January-June 2007, inflows rose 216 per cent compared to $ 3.6 billion in

the corresponding period last year.

The Delhi region received the maximum inflows of $1.3 billion, accounting for 36

per cent of the total FDI up to May 2007. If Mumbai, Bangalore and Chennai

were added to the list of regions, they accounted for two-thirds of the total inflows

into the country.Vodafone topped the list of big-ticket foreign investments in

India. Matsushita Electric Works of Japan followed it with $342 million.

Foreign Direct Investment (FDI) equity capital inflow during the year 2007-08 till

February 2008 has reached a record level of US $ 20.1 billion. This is the highest

FDI into equity in the country during any year.

The inflow of ECBs and foreign currency convertible bonds slowed considerably

in October 2008 - down 60 per cent from Rs283.49 crore in September to

Rs112.52 crore. Apart from the decline in ECBs, domestic funds too have become

scarce and increasingly dear following a rise in interest rate. The service sector

has been the prime mover of India's gross domestic product in recent years andforeign investors so far never had doubts about its potential. The situation has,

however, changed drastically in the current year. The poor performance of the

software companies dampened the mood of the foreign investors and FDI inflow

to software sector has fallen sharply. The sector received only Rs5,727 crore FDI

in the first seven months of 2008 against Rs10,215 crore in 2007. Its share in total

FDI inflow has fallen to only 5.8 per cent in 2008. The service sector, however,

has continued to enjoy a steady inflow of FDI. Its share in total inflow has

increased further 23.2 per cent during January-July 2008.


FDI inflows received in the month of February 2008 are an unprecedented US $

5.671 billion. The inflows in the month of February have surpassed the inflows

received in any single year since 1991 barring last year i.e. 2006-07.

8/6/2019 Amar_Garg

39/118

The FDI inflows received in February 2008 is an increase of 712% over that in

February 2007. The inflows for April 2006 - February 2007 were US $ 11.88

billion. The inflows for April 2007-February 2008 at US $ 20.137 billion is thus

an increase of about 70% over the corresponding period of last financial year.

With the global economy facing the brunt of financial instability in 2008, FDI is

projected to become an important instrument for fostering global job creation and

investment of capital.

India had received 24.57 billion dollars in Foreign Direct Investment (FDI) during

the last fiscal (2008-2009).

India is fast catching up with China in the flow of foreign direct investment (FDI)

as capital inflows through this route has crossed $10 billion in the first quarter of

this fiscal. FDI in the first quarter of the financial year 2009 has far exceeded the

total FDI flows received by the domestic economy in 2005-06, Reserve Bank of

Indias data said.

The total FDI inflows into the country in the April-June period amounted to

$10.073 billion, nearly one billion more than the total FDI inflows--$8.961

billion-- in the 2005-06 period, RBI said in its August report. The FDI flow into

India was less than $10 billion annually until 2005-06. It shot up to $22 billion in

2006-07 and $32 billion in 2007-08. China has averaged $ 50 billion annually inthe past decade. If the first quarter trend continues, India could cross this fiscal

$40 billion mark in FDI annual inflow for the first time. FDI flows, during April-

June, has doubled when compared to the same quarter of financial year 2008, $5

billion. Of the total FDIs reached here in the April-June period this fiscal, around

$2.253 billion was on account of the acquisition of shares of Indian companies by

foreign entities.

The government has in February 2009 approved 29 foreign direct investment

(FDI) proposals worth US$ 118.95 million including an US$ 70.49 million hotel

project of AAPC Singapore Pte Ltd, a hotel management company this month.


While the momentum in the foreign direct investment is expected to continue in

the remaining part of financial year 2009 on the back of a strong domestic

demand, the pace of the growth may be a little lower compared to the preceding

8/6/2019 Amar_Garg

40/118

months, the RBI said. The country received a record $11.9 billion FDI in the final

quarter of last financial year and has continued the momentum despite the choppy

market conditions in some of the major economies in the first quarter on the back

of a strong domestic demand for various projects.

According to the Reserve Banks estimates, total FDI in the first six months of the

current calendar year aggregated to $21.948 billion, close to a $22.079 mark

routed to the domestic market by foreign direct investors in 2006-07.

Meanwhile, FIIs sold a total of $ 5.177 billion in the April-June period, much

above as compared to a $4.1 billion in Q4 financial year 2009, the RBI said.

Total FII inflows in financial year 2008 stood at $20.328 billion while other

investors including offshore funds put in $298 million during the period.

However, in the current fiscal, except in January, FIIs sold nearly $15.811 billion.

In January, the country received an FII inflow of 6.49 billion.


FDI inflows fall 73% in February 2009:Global financial crisis continued to take

its toll on foreign direct investment (FDI) to the country as such inflows fell in

February 2009, for the fourth time in five months. FDI inflows in February

dropped by as much as 73% to $1.49 billion from $ 5.67 billion a year ago. FDI

inflows from the beginning till the penultimate month of 2008-09 fiscal has

touched only $25.38 billion. This means, the country may miss the $35 billionFDI target for 2008-09 or even the reduced target of $30 billion. But total FDI

during April 2008-February 2009 has already crossed $24.57 billion that the

country received in the previous fiscal, an official said. In 2006-07, India had

received only $15.5 billion worth FDI. Though FDI inflows were robust in the

first half of 2008-09, as the global financial crisis started spreading, it slowed

down. After maintaining a monthly average of $2.8 billion till September in the

2008-09 financial year, FDI inflows fell by 26% in October to $1.49 billion. After

slipping by a similar 26% in November to just $1 billion, FDI inflows once again

fell to $1.36 billion in December 2008 from $1.56 billion in December 2007, a

year-on-year slump of about 13%.However, it turned upwards in January, rising

55% at $2.74 billion, against $1.77 billion in January 2008.

8/6/2019 Amar_Garg

41/118

While during the April-September 2008, FDI inflows were up 137% from the

year-ago period at $17.2 billion, the growth fell to 66% during the April 2008-

January 2009 period at $23.94 billion.

India has attracted FDI inflows of around $88 billion from April 2000 to February

2009.

FDI inflows were robust in the first half of 2008-09, as the global financial crisis

started spreading

It slowed after maintaining a monthly average of $2.8 billion till September in the

2008-09

FDI inflows fell 26% in October to $1.49 billion

After slipping 26% in November to just $1 billion, FDI inflows once again fell to

$1.36 billion in December 2008 from $1.56 billion in December 2007

In 2008-09, India received FDI inflows of $24.57 billion. August alone saw FDI

inflow of $2.32 billion, a jump of 180% over August 2007.

Pointing out that the manufacturing sector received $5 billion worth FDI during

the April-August period, an increase of 41% over inflow.

The industries in the manufacturing sector that got a sizeable portion of FDI

include metallurgical industries ($765 million), cement and gypsum products

($627 million), automobile ($441 million), telecom equipments ($309 million)

and chemicals, other than fertilizers ($301 million).

Mauritius continued to be the leading FDI source, comprising 37% of the inflows.

Other significant amount of FDI has come from Singapore ($1.45 billion), the US

($943 million) dollar, Cyprus ($433 million).

Leading investments included Royal Bank of Scotland, UK acquiring shares in

Reliance Ports and Terminals Ltd in a $382 million dollar transaction and DE

Shaw Composite Investment, Mauritius pumping in $384 According to report, India has set a 35-billion dollars FDI target for the current

fiscal (2009-2010)


Branding India as a "safe and stable" investment destination amid global financial

turmoil, country's Commerce and Industry minister Kamal Nath expects despite

the global financial meltdown, FDI inflows into India during the current fiscal

8/6/2019 Amar_Garg

42/118

year (2008-09) is estimated to close at $ 35 billion signifying over $ 11 billion

invested in the previous financial year (India's fiscal year is April to March). In

2007-08, reinvested earnings of foreign firms in India stood at $ 5.5 billion.

Global firms have routed most of the investment through tax havens like

Mauritius and Singapore during 2007-08, while Japanese firms have poured more

money into India. Lot of investment is expected to flow into petroleum,

manufacturing and electronic hardware sectors.

Policymakers estimate that to sustain high growth rate India will need massive

investment in the five year period to March 2012, including $500 billion in

infrastructure, to sustain high growth rates. In January, India raised FDI limits in

petroleum refinery, aviation, commodity exchanges, credit information companies

and mining of some precious metals to attract more capital and boost growth in

those sectors. The Congress(I)-led UPA government wanted to raise FDI limits in

insurance to 49 cent. in fact the Cabinet has okayed it, now it will go to

Parliament. However, the retail trade is yet to be opened further. The government

is in the process of fine tuning FDI rules in order to make India more attractive as

FDI destination.

Aggressive Investment Plans: The surging economy has resulted in India emerging as the fastest growing

market for many global majors. This has resulted in many companies lining up

aggressive investment plans for the Indian market.

Footwear retail company, Pavers England Footprint, has plans to invest US$ 10

million for setting up 1,000 stores in India by 2013. Moreover, the company also

plans to invest US$ 3 million on an R&D facility in Chennai.

General Motors India plans to invest US$ 500 million, in addition to US$ 1

billion it has already committed to invest in India. General Motors will also invest

US$ 200 million in its Talegaon plant near Pune for its powertrain project.


American Tower Corporation (ATC) plans an investment of about US$ 500

million to buy a stake in an Indian telecom tower company.

8/6/2019 Amar_Garg

43/118

Norway-based Telenor has acquired Unitech Wireless with a US$ 1.23 billion

investment for a 60 per cent stake.

Leading global multiplex player Cinepolis plans to start its India operations with

an investment of US$ 350 million.

Finnish engineering and technology group, Metso started the development of its

49-acre multi-functional industrial facility, in Rajasthan, with an investment of

around US$ 33.28 million over two years.

Swiss processing and packaging major, Tetra Pak International SA, plans to

invest US$ 100.85 million in its second plant in Maharashtra.

Japanese telecom major, NTT DoCoMo, will be buying 27.31 per cent equity

capital of Tata Teleservices for around US$ 2.48 billion.

The Goldman Sachs Group will be making an overall investment of almost US$

100 million in its wholly owned non-banking financial company, Pratham

Investments and Trading Private Ltd.

Ford Indias plans to expand its capacity in India will continue as per schedule.

The expansion programme entails doubling its car manufacturing capacity to

200,000 units per year and an engine manufacturing facility with a capacity of

producing 250,000 engines annually. The project will be completed by early

2010.

All Green Energy India, a subsidiary of Singapore-based All Green Energy Pvt

Ltd, will be investing around US$ 96.30 million for the development of 10

biomass-based renewable energy projects over the next three years.

StarragHeckert, a global company in the field of milling machine centres for the

aerospace, transport (automotive), energy and precision machinery markets, is

planning to invest US$ 31 million in two phases.

Socomec UPS India, part of Socemec, France, will be investing US$ 5.02 millionover the next three years. Targetting a 10 per cent share of the US$ 600 million -

UPS market in India, Socomec has inked alliances with 24 new business partners.


A joint venture by Punj Llyod and US-based Thorium Power will see an

investment of around US$ 1 billion for exploring commercial nuclear power

opportunities.

8/6/2019 Amar_Garg

44/118

Singapore-based Universal Success Enterprises Ltd (USEL) has signed three

pacts with the Gujarat government for infrastructure projects and will be investing

about US$ 17.5 billion for the same.

Government Initiatives:

The government has taken significant steps to make foreign direct investment simpler,

and render caps on FDI redundant.

In a recent move, the government has announced that equity investments coming through

companies with Indians having majority ownership and control would be taken as fully

domestic equity.

With the changes in the FDI policy, sectors like retail, telecom and media amongst others

would benefit greatly.The change in FDI norms will bring much respite to retailers who

can now raise funds through stake sale in subsidiaries, and also build closer alliances with

their foreign partners.

Furthermore, with the revised FDI norms, extensive re-organization of company finances

across many sectors would be seen and companies would now be subject to further

dividend distribution tax of 15 per cent, including surcharges.

Additionally, the government has made new amendments to these revised norms.

Even indirect foreign investment would not be allowed in sectors where foreigninvestment is barred, like multi-brand retail, agriculture, lottery and atomic energy.

The Department of Industrial Policy and Promotion (DIPP) and the Finance Ministry are

planning to remove the cap on FDI in single-brand retail and permit up to 100 per cent

foreign investments as against the 51 per cent currently.

The government is also considering the removal of the incentive cap in wind energy

which is restricted to projects up to 49 MW, presently.

The Reserve Bank of India (RBI) will now permit FDI up to 49 per cent in credit

information companies with voting rights up to 10 per cent.

The government is now planning to permit FDI in investment companies as well.


The government has also proposed wide-ranging modifications in the guidelines FDI

over various sectors.

8/6/2019 Amar_Garg

45/118

Investment by Indian companies in which foreign firms have beneficial investment will

account as direct FDI.

Direct investments made by NRIs to account as FDI.

Looking ahead:

With the government planning more liberalization measures across a broad range of

sectors and continued investor interest, the inflow of FDI into India is likely to further

accelerate.

The Union Commerce and Industry Minister in India, Mr Kamal Nath, has assured that

India will not be greatly affected by the current global meltdown and has expressed

confidence about achieving the FDI target set for this year.

1.13 REASONS OF FOREIGN DIRECT INVESTMENT IN INDIA:

FDI in India:

India is now the third most favoured destination for Foreign Direct Investment (FDI),

behind China and the USA, according to an AT Kearney survey that tracked investor

confidence among global executives to determine their order of preferences.

India remains attractive investment destination and it will be a good parking lot for

money. FDI inflows reflect growing confidence (of global investors) in India.

Investment in Indian market:

India, among the European investors, is believed to be a good investment despite political

uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies.

India presents a vast potential for overseas investment and is actively encouraging the

entrance of foreign players into the market. No company, of any size, aspiring to be aglobal player can, for long ignore this country which is expected to become one of the top

three emerging economies.


8/6/2019 Amar_Garg

46/118

8/6/2019 Amar_Garg

47/118

Developing a basic understanding or potential of the Indian market

The Indian middle class is large and growing; wages are low; many workers are well

educated and speak English; investors are optimistic and local stocks are up; despite

political turmoil, the country presses on with economic reforms.But there is still cause for

worries-

Infrastructural hassles:

The rapid economic growth of the last few years has put heavy stress on India's

infrastructural facilities. The projections of further expansion in key areas could snap the

already strained lines of transportation unless massive programs of expansion and

modernization are put in place. Problems include power demand shortfall, port traffic

capacity mismatch, poor road conditions (only half of the country's roads are surfaced),

low telephone penetration (1.4% of population).

Indian Bureaucracy:

Although the Indian government is well aware of the need for reform and is pushing

ahead in this area, business still has to deal with an inefficient and sometimes still slow-

moving bureaucracy.

Diverse Market:

The Indian market is widely diverse. The country has 17 official languages, 6 major

religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ

greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and

overall economy before taking the plunge. Research firms in India can provide the

information to determine how, when and where to enter the market. There are also

companies which can guide the foreign firm through the entry process from beginning to

end --performing the requisite research, assisting with configuration of the project,

helping develop Indian partners and financing, finding the land or ready premises, and

pushing through the paperwork required.


8/6/2019 Amar_Garg

48/118

Check on Economic Policies:

The general economic direction in India is toward liberalization and globalization. But

the process is slow. Before jumping into the market, it is necessary to discover whether

government policies exist relating to the particular area of business and if there are

political concerns which should be taken into account.

India still major FDI destination: Bureaucracy a hurdle:

According to AT Kearney Global Survey, India still remains high on corporate investor

radar screen and is widely perceived to offer ample opportunities for investment.

However, despite its size and potential, India is yet to convert considerable favourable

investor sentiment into substantial new inflows of Foreign Direct Investment (FDI).

Bureaucracy and Regulatory Environment in India have been termed as the biggest

bottlenecks for foreign direct investment inflows.


These observations follow a general decline in FDI inflows into India - which are nearing

1996 levels with $2.63 billion in 2000 (projected) - over the last couple of years even as

China and Brazil are increasingly finding favour with foreign investors.

The Indian market size and potential are unparalleled. No other country offers this

magnitude of untapped markets. But India must take the environment conducive for

attracting investment, Mr. Paul Laudicina, Vice President and Managing Director of the

Global Business Policy Council of AT Kearney, said at a seminar on FDI in India

organized by the Federation of Indian Chambers of Commerce and Industry (FICCI).

Among the other perceived barriers to attracting foreign investment are a slowdown in

the economic reforms process, the poor state of Indian infrastructure, cultural barriers,

involvement of the government in economy, poverty and the consequential income

disparity.

Mr. Laudicina said that among the other driving factors were labour skills and wages,

besides opportunities in infrastructure development. About 75 per cent of investors

interviewed during the survey said that India is replete with investment opportunities...

India needs to cash in on this sentiment, he said.

8/6/2019 Amar_Garg

49/118

Comparing India with Brazil and China - two other large markets higher up on the

Kearney Investment Index - he said that India had higher long-term attractiveness but it

needed to work upon its short-term benefits.

The industries/products in India, which are of interest to foreign investors, include

financial services, industrial products and telecom and other hi-tech products.

Mr. Laudicina also pointed out that China is the biggest adversary to India as far as

attracting FDI was concerned. On the FDI confidence index, while China second only to

the US and is followed by Brazil, India makes an appearance only at the seventh position.

India: A much favoured destination:

India has been rated as the fourth most attractive investment destination in the world,

according to a global survey conducted by Ernst and Young in June 2008. India was after

China, Central Europe and Western Europe in terms of prospects of alternative business

locations. With 30 per cent votes, India emerged ahead of the US and Russia, which

received 21 per cent votes each.

As per the global survey of corporate investment plans carried out by KPMG

International, released in June 2008, (a global network of professional firms providing

audit, tax, and advisory services), India will see the largest overall growth in its share of

foreign investment, and it is likely to become the world leader for investment in

manufacturing. Its share of international corporate investment is likely to increase by 8

per cent to 18 per cent over the next five years, helping it rise to the fourth, from the

seventh position, in the investment league table, pushing Germany, France and the UK

behind.

According to the AT Kearney FDI Confidence Index 2007, India continues to be the

second most preferred destination for attracting global FDI inflows, a position it has held

since 2005. India topped the AT Kearney's 2007 Global Services Location Index,

emerging as the most preferred destination in terms of financial attractiveness, people and

skills availability and business environment.


India is emerging as the most favoured investment destination for many countries.

8/6/2019 Amar_Garg

50/118

The US Consul General, Aileen Crowe Nandi has said, "India is emerging as the most

favoured destination for overseas investment and an important trading partner for the

US."

A recent survey conducted by the Japan Bank for International Cooperation (JBIC) shows

that India has become the most-favoured destination for long-term Japanese investment.

In recent times, Japanese corporations have bought varying amounts of equity stakes in

Indian firms, particularly, in the automobile sector and also machine tools, electronics

and IT. In terms of cumulative FDI inflow, Japan is the fifth largest investor and Japan's

FDI in India is estimated to be around US$ 5.5 billion over five years from 2006 to 2010.

Further, according to Tourism Minister Anil Sarkar, Australia and many South-Asian

countries such as Cambodia, Vietnam and Thailand have plans for investing in the

tourism sector in the Indian state of Tripura.

In terms of FDI equity inflows during April to October, the largest investments came

from Mauritius (US$ 7.69 billion), Singapore (US$ 1.90 billion), U.S.A (US$ 1.25

billion), Cyprus (US$ 827 million), Netherlands (US$ 740 million), U.K ( US$ 701

million), Germany (US$ 538 million), France US$ 295 million), Japan (US$ 223

million), and UAE (US$ 186 million).

Sector-wise FDI:

The sectors bagging the maximum amount of FDI equity during April to October, 2008

are the Services Sector (US$ 3.35 billion), Computer Hardware and Software (US$ 1.52

billion), Telecommunications (US$ 1.99 billion), Construction Activities (US$ 1.74

billion), & Housing and Real Estate (US$ 1.82 billion) .

Now, global investors are also evincing interest in other sectors like telecommunication,

energy, construction, automobiles, electrical equipment apart from others.

Investment in the Indian realty market is set to increase to US$ 20 billion by 2010.


Many big names in international retail are also entering Indian cities. Global players such

as Wal Mart, Marks & Spencers, Rosebys etc., have lined up investments to the tune of

US$ 10 billion for the retail industry.

8/6/2019 Amar_Garg

51/118

According to Mines Minister, Mr Sis Ram Ola, "FDI of about US$ 2.5 billion per annum

is expected in the mining sector from the fifth year of implementation of the new

National Mineral Policy (NMP)."

The surge in mobile services market is likely to see cumulative FDI inflows worth about

US$ 24 billion into the Indian telecommunications sector by 2010, from US$ 3.84 billion

till March 2008.

1.14 Investment Risks in India:

(1). Sovereign Risk:

India is a vibrant parliamentary democracy and has been one since its politicalindependence from British rule more than 50 years ago. There is no serious revolutionary

movement in India; hence there is no conceivable possibility of the state collapsing.

Sovereign Risk in India is therefore zero for both "foreign direct investment" and

"foreign portfolio investment." It is however advisable to avoid investing in the extreme

north-eastern parts of India because of terrorist threats. Kashmir in the northern tip is also

a troubled area, but investment opportunities in Kashmir are anyway restricted by law.

(2). Political Risk:


India suffered political instability for a few years due to the failure of any party to win an

absolute majority in Parliament. However, political stability has returned since the

previous general elections in 1999. However, political instability did not change India's

economic course though it delayed certain decisions relating to the economy.

The political divide in India is not one of policy, but essentially of personalities.

Economic liberalization (which is what foreign investors are interested in) has been

accepted as a necessity by all parties including the Communist Party of India (Marxist).

Thus, political instability in India, in practical terms, posed no risk to foreign direct

investors because no policy framed by a past government has been reversed by any

successive government so far. You can find a comparison in Italy which has had some 45

governments in 50 years, yet overall economic policy remains unchanged. Even if

8/6/2019 Amar_Garg

52/118

political instability is to return in the future, chances of a reversal in economic policy are

next to nil.

As for terrorism, no terrorist outfit is strong enough to disturb the state. Except for

Kashmir in the north and parts of the north-east, terrorist activity is either non-existent or

too weak to be of any significance. It would take an extreme stretching of the imagination

to visualize a Bangladesh-type state-disrupting revolution in India or a Kuwait-type

annexation of India by a foreign power.Hence, political risk in India is practically non-

existent.

3). Commercial Risk:

Commercial

amar_garg

Documents