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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17
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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42
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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Route Wise FDI Inflows
*All figures in Million $
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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Route Wise FDI Inflows
*All figures in Million $
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
Investment goal USD 305billion
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
Investment goal USD 370billion
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.
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