final draft of project fdi

7/31/2019 Final Draft of Project Fdi

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INTRODUCTION

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It

can provide a firm with new markets and marketing channels, cheaper production facilities,

access to new technology, products, skills and financing. For a host country or the foreign

firm which receives the investment, it can provide a source of new technologies, capital,

processes, products, organizational technologies and management skills, and as such can

provide a strong impetus to economic development.Foreign direct investment, in its classic

definition, is defined as a company from one country making a physical investment into

building a factory in another country. The direct investment in buildings, machinery and

equipment is in contrast with making a portfolio investment, which is considered an indirect

investment. In recent years, given rapid growth and change in global investment patterns, the

definition has been broadened to include the acquisition of a lasting management interest in a

company or enterprise outside the investing firms home country. As such, it may take many

forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment

in a joint venture or strategic alliance with a local firm with attendant input of technology,

licensing of intellectual property, In the past decade, FDI has come to play a major role in

the internationalization of business. Reacting to changes in technology, growing liberalization

of the national regulatory framework governing investment in enterprises, and changes in

capital markets profound changes have occurred in the size, scope and methods of FDI. New

information technology systems, decline in global communication costs have made

management of foreign investments far easier than in the past. The sea change in trade and

investment policies and the regulatory environment globally in the past decade, including

trade policy and tariff liberalization, easing of restrictions on foreign investment and

acquisition in many nations, and the deregulation and privitazation of many industries, has

probably been the most significant catalyst for FDIs expanded role.One of the most striking

developments during the last two decades is the spectacular growth of FDI in the global

economic landscape. This unprecedented growth of global FDI in 1990 around the world


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make FDI an important and vital component of development strategy in both developed and

developing nations and policies are designed in order to stimulate inward flows. Infact, FDI

provides a winwin situation to the host and the home countries. Both countries are directly

interested in inviting FDI, because they benefit a lot from such type of investment. The

home countries want to take the advantage of the vast markets opened by industrial growth.

On the other hand the host countries want to acquire technological and managerial skills and

supplement domestic savings and foreign exchange. Moreover, the paucity of all types of

resources viz. financial, capital, entrepreneurship, technological know- how, skills and

practices, access to markets- abroad- in their economic development, developing nations

accepted FDI as a sole visible panacea for all their scarcities. Further, the integration of global

financial markets paves ways to this explosive growth of FDI around the globe.

A SHORT HISTORY

After getting independence in 1947, the government of India envisioned a socialist

approach to developing the countries economybroadly based on the USSR system. The

government decided to adopt an economic agenda that would follow five year plans.

Each five year plan was focused on certain sectors of the economy that the government

felt needed to be developed for the countries progress. The government followed an

interventionist policy and dictated most of the norms of running a business by favoring

certain sectors and ignoring others.

Until 1991, India was primarily a closed economy. The industrial environment in India

was highly regulated and a license system known as licence raj - was in place to

ensure compliance with the government regulations and directives. Under the Industries

Development and Regulations act (1951) starting and operating any industry required

approval - in the form of a licence - from the government. Any change in production

capacity or change in the product mix also called for obtaining government approval.


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This led to the development of increasingly complex and opaque procedures for obtaining

a licence and led to a burgeoning bureaucracy. The licence system thus shifted lot of

power and perverse incentives in the hands of file pushing bureaucrats (or Babus). This

directly led to increased corruption as the procedure for obtaining a licence was vaguely

defined and left open to individual interpretations. In addition, there was no monitoring

system in place to ensure speedy disposal of licence applications. Also, the labor markets

were highly regulated and the government did not allow the companies to lay off its

workers. This meant that even in severe downturns the companies kept bleeding but

could not rationalize its workforce. Eventually these companies - majority of them public

sector companieswould become chronically sick and the government kept subsidizing

them at huge costs to the taxpayer.

One draconian measure was the introduction of the Foreign Exchange Regulation act

(FERA) of 1973 which curtailed foreign investment to 40% in Indian companies. in

1973. Foreign companies also came under the Monopolies and Restrictive Policy

(MRTP), 1969 Act during this period. MRTP (1969) Act restricted companies on the size

of operation and the pricing of products and services. The Reserve Bank of India geared

itself to implement the above act. As a result, many companies that did not want to

increase equity participation of Indians as per section (2) of FERA, 1973 decided to cease

their operations in India. As many as 54 companies applied to wind up their operations by

1977-78 since the implementation of the above Act in 1974 and 9 companies applied to

wind up their operations in 1980-81

(Annual Reports, Reserve Bank of India 1977, 1978, 1981).

This had a very adverse impact and companies such as Coca-Cola and IBM exited the

country. The government also adopted a policy of import substitution and the idea was tohelp the domestic industry improve in a safe environment until the local industries could

compete internationally. This was implemented by levying extremely high tariffs or

completely banning imported goods.Due to the governments protection most of the

industries failed to catch up with the technological innovations taking place around the

world. As they were shielded from imports due to extremely high import tariffs the


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industries had no incentive to improve their operations. This led to a vicious circular

logic where the tariffs were not reduced since domestic companies could not compete and

the high tariffs prevented industries from innovating. Corruption and opaqueness of the

system added to the difficulties and the situation became extremely complex.

THE BOP CRISIS

Gulf war broke out in 1990 and the resulting oil shock was enough to trigger a serious

balance of payment (BoP) crisis for India in 1991. The cost of oil imports went up to

10,820 crores from the estimated 6,400 crores . Traditionally, India received lot of

remittances from the expatriates working in the Gulf countries and this source also dried

up as the migrant Indian workers were forced to return home due to the war. The problem

was compounded due to an extremely high inflation of about 16% and a fiscal deficit of

about 8.5%. The situation was so severe that India had foreign reserves of only around $1

Billion -barely enough to cover two weeks of its payment obligations. Indias credit

rating was downgraded as its debt servicing capability was critically impaired and the

government had to pledge its gold reserves to soothe creditors. Ostensibly, the trigger for

the BoP crisis was the oil shock but the deeper issue was that the governments heavy

hand in trying to regulate businesses and to move the country towards economic progress

had failed to produce results and drastic measures were now called for.

Faced with these insurmountable problems, the Indian government turned to the IMF and

thus began a series of far reaching reforms in the India economy which envisioned

transforming the countrys economy from an interventionist and overly-regulated

economy to a more market oriented one.

THE BEGINING OF A NEW ERA

The year 1991 marks a new growth phase of FDI in India with an all time high flow of

FDI. Following the Industrial Policy (1991) , a large number of foreign companies from

different parts of the world rushed into India. In this period, in addition to thousands of


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foreign collaborations in India, as many as 145 foreign companies registered in India

within a span of 10 years from 1991-2000. Companies like General Motors, Ford Motors,

and IBM that divested from India in the 1950s and 1970s reentered India during this

period. A large number of Asian companies like Daewoo Motors, Hyundai Motors and

LG Electronics from S. Korea, Matsushita Television and Honda Motors from Japan

invested in India during this period.

With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was

abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high

priority industries and the concept of phased manufacturing requirement on foreign

companies was removed. Further, the tariffs on imports have been steadily reduced in

every budget since 1991. Subsequently, GOI replaced FERA, 1973 that regulated all

foreign exchange transactions with Foreign Exchange Management Act (FEMA), 1999.

The objectives of FEMA have been to facilitate external trade and payments and to

promote orderly development and maintenance of foreign exchange market. The total

number of foreign collaborations increased from 976 in the year 1991 to 2144 in the year

2000.

WHAT IS FOREIGN DIRECT INVESTMENT?

Is the process whereby residents of one country (the source country) acquire ownership

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

a firm in another country (the host country). The international monetary funds balance of

payment manual defines FDI as an investment that is made to acquire a lasting interest in

an enterprise operating in an economy other than that of the investor. The investors

purpose being to have an effective voice in the management of the enterprise. The united

nations 1999 world investment report defines FDI as an investment involving a long

term relationship and reflecting a lasting interest and control of a resident entity in one

economy (foreign direct investor or parent enterprise) in an enterprise resident in an

economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise

or foreign affiliate).


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TYPES OF FDI

A)BY DIRECTION

Inward FDIs:

Inward FDI for an economy can be defined as the capital provided from a foreign direct

investor (i.e. the coca cola company) residing in a country, to that economy, which is

residing in another country. (i.e. India's economy).

EXAMPLE: General Motors decides to open a factory in India. They are going to need

some capital. That capital is inward FDI for India.

Different economic factors encourage inward FDIs. These include interest

loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations.
http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/


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Outward FDIs:

A business strategy where a domestic firm expands its operations to a foreign country

either via a Green field investment, merger/acquisition and/or expansion of an existing

foreign facility. Employing outward direct investment is a natural progression for firms

as better business opportunities will be available in foreign countries when domestic

markets become too saturated.

In recent years, emerging market economies (EMEs) are increasingly becoming a source

of foreign investment for rest of the world. It is not only a sign of their increasing

participation in the global economy but also of their increasing competence. More

importantly, a growing impetus for change today is coming from developing countries

and economies in transition, where a number of private as well as state-owned enterprises

are increasingly undertaking outward expansion through foreign direct investments

(FDI). Companies are expanding their business operations by investing overseas with a

view to acquiring a regional and global reach.

B) BY TARGET

Greenfield investment:

A form of foreign direct investment where a parent company starts a new venture in a

foreign country by constructing new operational facilities from the ground up. In addition

to building new facilities, most parent companies also create new long-term jobs in the

foreign country by hiring new employees.

Green field investments occur when multinational corporations enter into developing

countries to build new factories and/or stores.Developing countries often offer

prospective companies tax-breaks, subsidies and other types of incentives to set up green

field investments. Governments often see that losing corporate tax revenue is a small

price to pay if jobs are created and knowledge and technology is gained to boost the

country's human capital.


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Horizontal FDI:

Horizontal FDI arises when a firm duplicates its home country-based activities at the

same value chain stage in a host country through FDI. For example, Ford assembles cars

in the United States. Through horizontal FDI, it does the same thing in different host

countries such as the United Kingdom (UK), France, Taiwan, Saudi Arabia, and India.

Horizontal FDI therefore refers to producing the same products or offering the same

services in a host country as firms do at home.

Vertical FDI:

Vertical Foreign Direct Investment takes two forms:

1. Backward vertical FDI: where an industry abroad provides inputs for a firm'sdomestic production process like exploiting the available raw materials in the hostcountry.

2. Forward vertical FDI: in which an industry abroad sells the outputs of a firm'sdomestic production i.e to be nearer to the consumers through the aquisition ofdistribution outlets.

C) BY MOTIVE

Resource seeking:

Investments which seek to acquire factors of production that are more efficient than those

obtainable in the home economy of the firm. In some cases, these resources may not be

available in the home economy at all (e.g. natural resources, anover words - naturally

occurring materials such as coal, fertile land, etc., that can be used by man, and cheap

labor). This characterizes Foreign Direct Investment into developing countries, for

example seeking cheap labor in India and China, or natural resources in the Middle East

and Africa.


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Market seeking:

Market seeking FDI is driven by access to local or regional markets. Investing locally can

be driven by regulations or to save on operational costs such as transportation. General

Motors investment in China is market seeking because the cars built in China are sold in

China,the size and growth of host country markets are among the most important FDI

determinants.

Efficiency seeking:

Investments which firms hope will increase their efficiency by exploiting the benefits of

economies of scale and scope, and also those of common ownership. It is suggested that

this kind of Foreign Direct Investment comes after either resource or market seeking

investments have been realized, with the expectation that it further increases the

profitability of the firm.

Efficiency seeking FDI is commonly described as offshoring, or investing in foreign

markets to take advantage of a lower cost structure. A credit card company opening a call

center in India to serve U.S. customers is a form of efficiency seeking FDI.


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ADVANTAGES OF FDI

1. Raising the Level of Investment: Foreign investment can fill the gap betweendesired investment and locally mobilised savings. Local capital markets are often not

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

projects. Besides, access to the hard currency needed to purchase investment goods

not available locally can be difficult. FDI solves both these problems at once as it is a

direct source of external capital. It can fill the gap between desired foreign exchange

requirements and those derived from net export earnings.

2. Upgradation of Technology: Foreign investment brings with it technologicalknowledge while transferring machinery and equipment to developing countries.

Production units in developing countries use out-dated equipment and techniques that

can reduce the productivity of workers and lead to the production of goods of a lower

standard.

3. Improvement in Export Competitiveness: FDI can help the host country improveits export performance. By raising the level of efficiency and the standards of product

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

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

country better access to foreign markets. Enhanced export possibility contributes to

the growth of the host economies by relaxing demand side constraints on growth.

This is important for those countries which have a small domestic market and must

increase exports vigorously to maintain their tempo of economic growth.

4. Employment Generation/Development: Foreign investment can create employmentin the modern sectors of developing countries. Recipients of FDI gain training of


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

capital formation in the host country.

5. Benefits to Consumers: Consumers in developing countries stand to gain from FDIthrough new products, and improved quality of goods at competitive prices.

6. Revenue to Government: Profits generated by FDI contribute to corporate taxrevenues in the host country.

DISADVANTAGES OF FDI

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

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

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

1. When foreign investment is competitive with home investment, profits in domesticindustries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes iscomparatively less because of liberal tax concessions, investment allowances,

disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase incomeinequalities. They create a small number of highly paid modern sector executives.They divert resources away from priority sectors to the manufacture of sophisticated

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

they create imbalances between rural and urban opportunities, accelerating flow of

rural population to urban areas.


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4. Foreign firms stimulate inappropriate consumption patterns through excessiveadvertising and monopolistic market power. The products made by multinationals for

the domestic market are not necessarily low in price and high in quality. Their

technology is generally capital-intensive which does not suit the needs of a labour-

surplus economy.

5. Foreign firms able to extract sizeable economic and political concessions fromcompeting governments of developing countries. Consequently, private profits of

these companies may exceed social benefits.

6. Profit distribution, investment ratios are not fixed:Continual outflow of profits istoo large in many cases, putting pressure on foreign exchange reserves. Foreign

investors are very particular about profit repatriation facilities.

7. Political Lobbying:Foreign firms may influence political decisions in developingcountries. In view of their large size and power, national sovereignty and control over

economic policies may be jeopardized. In extreme cases, foreign firms may bribe

public officials at the highest levels to secure undue favours. Similarly, they may

contribute to friendly political parties and subvert the political process of the host

country.

DETERMINANTS OF FDITo understand the scale and direction of FDI flows, it is necessary to identify their major

determinants. The relative importance of FDI determinants varies not only between

countries but also between different types of FDI. Traditionally, the determinants of FDI

include the following.


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1. Size of the Market: Large developing countries provide substantial markets wherethe consumers demand for certain goods far exceed the available supplies. This

demand potential is a big draw for many foreign-owned enterprises. In many cases,the establishment of a low cost marketing operation represents the first step by a

multinational into the market of the country. This establishes a presence in the

market and provides important insights into the ways of doing business and possible

opportunities in the country.

2. Political stability: In many countries, the institutions of government are stillevolving and there are unsettled political questions. Companies are unwilling to

contribute large amounts of capital into an environment where some of the basics

political questions have not yet been resolved.

3. Macro-economic Environment: Instability in the level of prices and exchange rateenhance the level of uncertainty, making business planning difficult. This increases

the perceived risk of making investments and therefore adversely affects the inflow

of FDI.

4. Legal and Regulatory Framework: The transition to a market economy entails theestablishment of a legal and regulatory framework that is compatible with private

sector activities and the operation of foreign owned companies. The relevant areas in

this field include protection of property rights, ability to repatriate profits, and a free

market for currency exchange. It is important that these rules and their administrative

procedures are transparent and easily comprehensive.

5. Access to Basic Inputs: Many developing countries have large reserves of skilledand semi-skilled workers that available for employment at wages significantly lower

than in developed countries. This provides an opportunity for foreign firms to make


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investments in these countries to cater to the export market. Availability of natural

resources such as oil and gas, minerals and forestry products also determine the

extent of FDI.

The determinants of FDI differ among countries and across economic sectors. These

factors include the policy framework, economic determinants and the extent of business

facilitation such as macro-economic fundamentals and availability of infrastructure.

METHODOLOGY

In order to accomplish this project successfully we will take following steps.

Data collection:

Secondary Data: Internet, newspapers, journals and books, other reports and projects,

literatures

FDI:

The study takes into account a sample of top 10 investing countries e.g. Mauritius,

Singapore, USA etc. and top 10 sectors e.g. service sector, computer hardware and

software, telecommunications etc. which had attracted larger inflow of FDI from

different countries.It also takes into account the impact of FDI on the GDP growth of

India,Poverty reduction and also makes a comparative study of the various states in Indiaas to how they have harnessed the benefits of FDI.

FII:


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Correlation: We have used the Correlation tool to determine whether two rangesof data move togetherthat is, how the Sensex, Bankex, IT, Power and Capital

Goods are related to the FII which may be positive relation, negative relation or

no relation.

We will use this model for understanding the relationship between FII and stock

indices returns. FII is taken as independent variable. Stock indices are taken as

dependent variable

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs havesignificant impact on the Indian capital market. This will help the investors to

decide on their investments in stocks and shares. If the hypothesis is rejected, or

in other words if the null hypothesis is accepted, then FIIs will have no significant

impact on the Indian bourses.

OBJECTIVES

Examines the trends and patterns in the FDI across different sectors and fromdifferent countries in India during 2002 to 2011.

To study how FDI has impacted the GDP growth,Poverty etc Influence of FII on movement of Indian stock exchange during period that is

March 2006 to March 2011.


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Foreign direct investments in India are approved through two

routes

1. Automatic approval by RBI

The Reserve Bank of India accords automatic approval within a period of two weeks(subject to compliance of norms) to all proposals and permits foreign equity up to 24%;

50%; 51%; 74% and 100% is allowed depending on the category of industries and the

sectoral caps applicable. The lists are comprehensive and cover most industries of interest

to foreign companies. Investments in high priority industries or for trading companies

primarily engaged in exporting are given almost automatic

approval by the RBI.

2. The FIPB Route Processing of non-automatic approval cases

FDI in activities not covered under the automatic route requires prior approval of the

Government which are considered by the Foreign Investment Promotion Board (FIPB),

Department of Economic Affairs, Ministry of Finance. Indian companies having foreign

investment approval through FIPB route do not require any further clearance from the


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Reserve Bank of India for receiving inward remittance and for the issue of shares to the

non-resident investors.

Trend of Equity inflow through FIPB and Automa tic route

SECTOR SPECIFIC CONDITIONS ON FDI

PROHIBITED SECTORS.

1. Retail Trading (except single brand product retailing)2. Lottery Business including Government /private lottery, online lotteries, etc.3. Gambling and Betting including casinos etc.4. Chit funds5. Nidhi company6. Trading in Transferable Development Rights (TDRs)7. Real Estate Business or Construction of Farm Houses8. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco


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9. substitutes10.Activities / sectors not open to private sector investment e.g. Atomic Energy and11.Railway Transport (other than Mass Rapid Transport Systems).

PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each

sector/activity is allowed, subject to applicable laws/ regulations; security and other

conditionalities. In sectors/activities not listed below, FDI is permitted upto 100% on the

automatic route, subject to applicable laws/ regulations; security and other conditions.

Sr.

No.

Sector/Activity FDI cap/Equity Entry/Route

1. Hotel & Tourism 100% Automatic

2. NBFC 49% Automatic

3. Insurance 26% Automatic

4. Telecommunication:

cellular, value added services

ISPs with gateways, radio-pagingElectronic Mail & Voice Mail

49%

74%

100%

Automatic

Above 49% needGovt. licence

5. Trading companies:

primarily export activities

bulk imports, cash and carry

wholesale trading

51%

100%

Automatic

Automatic

6. Power(other than atomic reactor

power plants) 100% Automatic

7. Drugs & Pharmaceuticals 100% Automatic

8. Roads, Highways, Ports and Harbors 100% Automatic

9. Pollution Control and Management 100% Automatic

10 Call Centers 100% Automatic


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Source: Department of Industrial Policy & Promotion

The sectors receiving the largest shares of total FDI inflows up to January 2012 were theservices sector, Telecommunications each accounting for 20 % and 8% respectively.

These were followed by the Computer software and Hardware, real estate, construction

and Drugs and Pharma sectors.
http://dipp.nic.in/http://dipp.nic.in/


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ANALYSIS OF THE TOP 5

Service sector

The services sector covers a wide range activities from the most sophisticated

information technology (IT) to simple services provided by thunorganized sector, such as

the services of the barber and plumber. National Accoun classification of the services

sector incorporate trade, hotels, and restaurants; transport, storagand communication;

financing, insurance, reestate, and business services; and communitsocial, and personal

services. In World Trade Organization (WTO) and Reserve Bank of India RBI

classifications, construction is also included.


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TELECOM SECTOR

FDI policy for the Telecom Sector is as under:

Sr.No.

Sector/Activity FDI Cap/Equity Entry route

1. Basic and cellular, UnifiedAccess Services,National/International LongDistance, V-Sat, Public MobileRadio Trunked Services(PMRTS) Global MobilePersonal CommunicationsServices (GMPCS) and other

value added telecom services

74% (including FDI, FII, NRI,FCCBs, ADRs, GDRs,convertible preference shares,and proportionate foreign equityin Indian promoters /InvestingCompany)

Automatic upto49%.

FIPB beyond49%.

2. ISP with gateways, radio-paging, end-to-end bandwidth.

74% Automatic upto49%

FIPB beyond49%

3. a) ISP without gateway,

b) Infrastructure providerproviding dark fibre, right ofway, duct space, tower(CategoryI);

c) Electronic mail and voicemail

100% Automatic up to49%

FIPB beyond49%

4. Manufacture of telecomequipments

100% Automatic


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India is one of the world's fastest growing telecom markets, and this has acted as the

primary driver for foreign and domestic telecommunication companies investing into the

sector. Massive investments have been made in the telecom sector of India, both by the

private and government sector.

The telecom industry has witnessed significant growth in subscriber base over the last

decade, with increasing network coverage and a competition-induced decline in tariffs

acting as catalysts for the growth in subscriber base. The growth story and the potential

have also served to attract newer players in the industry, with the result that the intensityof competition has kept increasing.

The sector is expected to witness up to US$ 56.3 billion investments and the market will

cross the US$ 101 billion mark in five years, according to consultancy firm Boston

Consulting Group (BCG). BCG India's Partner and Director, Arvind Subramanian said

the industry will continue to grow at 12-13 per cent annually.

The market share of the telecom companies reflects the fragmented nature of the industry,with as many as 15 players. As of January 31, 2012, Bharti telecom led the market with

19.6 per cent share, Reliance (16.7 per cent), Vodafone (16.4 per cent), Idea (11.9 per

cent), BSNL (10.8 per cent), Tata (9.3 per cent), Aircel (6.9 per cent), with the remaining

share being held by other smaller operators, according to Telecom Regulatory Authority

of India (TRAI) database.

The mobile subscriber base in India is estimated rise by 9 per cent to 696 million

connections this year, according to technology researcher Gartner. The country's mobile

subscriber base stood at 638 million connections in calendar year 2011.

The mobile service penetration in the country is currently at 51 per cent and is expected

to grow to 72 per cent by 2016.


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Telecom Sector FDI Equity Inflows (uS $ Million)

Source: Department of Industrial Policy & Promotion

Note:FDI inflow for 2011-12 only uptil january 2012

Top 5 fdi deals in telecom sector

The NTT DOCOMO-Tata Teleservices joint venture worth $2.70 billion NTTDocomo, Japan, to subscribe to and acquire 27 per cent of the equity (about 110crore shares) in Tata Teleservices and acquire 20.25 per cent of the equity (about 38crore shares) in Tata Teleservices (Maharashtra) and convert it from an operatingcompany into an operating-cum-holding company. These would result in an FDIinflow of about Rs. 12,924 crore and about Rs. 949 crore respectively. The CabinetCommittee on Economic Affairs (CCEA) has approved a proposal by Japanese telecommajorNTT DoCoMo Inc.to acquire 27.31 per cent (1097043742 equity shares) of TataTeleservices Limited.

The CCEA, which met last night under the chairmanship of External Affairs MinisterPranab Mukherjee, in the absence of Prime Minister Manmohan Singh who isconvalescing after a coronory bypass surgery last month, also approved a proposal by theJapanese company to acquire upto 384,241,919 equity shares (20.25%) of Tata

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500

1000

1500

2000

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2007-08 2008-09 2009-10 2010-11 2011-12

US$inmillion

YEAR

FDI in telecom

FDI in telecom
http://www.nttdocomo.com/http://www.nttdocomo.com/http://www.nttdocomo.com/http://www.nttdocomo.com/


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Teleservices (Maharashtra) Limited and to convert it into an operating cum holdingcompany from an operating company.

The two proposals would result in foreign direct investment (FDI) of about Rs 12924crore and Rs 949.07 crore in the country, an official statement said. This would be one of

the largest FDI inflows into India in the last one year.

On November 12, Tokyo-based NTT DoCoMo announced it was entering into a strategic

alliance with the Tatas. The Japanese telecom giant which, with 53 million customers and

51.5% of the Japanese market, is one of the world's largest players in the

telecommunications industry, bought a 26% stake in Tata Teleservices Ltd (TTSL) for

$2.7 billion. NTT DoCoMo followed up this deal with an open offer for 20% in Tata

Teleservices (Maharashtra) Ltd -- TTML -- the listed subsidiary of TTSL. At Rs24.70 (50

cents) a share, this means another $191 million. The offer will open in January. "We arehoping that this will be a long-term partnership as we are like-minded companies," Tata

group chief Ratan Tata told a media briefing soon after the deal was struck.

(Published: November 27, 2008 in India Knowledge@Wharton)


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Indian pharmaceutical industry is third largest in the world and is one of the most

developed industries.Technologically strong and totally self-reliant, the pharmaceuticalindustry in India has low costs of production, low R&D costs, innovative scientific

manpower, strength of national laboratories and an increasing balance of trade. Indian

pharmaceutical industry today is ranked world class, in terms of technology, quality and

range of medicines manufactured. From simple headache pills to sophisticated antibiotics

and complex cardiac compounds, almost every type of medicine is now made

indigenously.

The industry today can boast of producing the entire range of pharmaceutical

formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs,

i.e., chemicals having therapeutic value and used for production of pharmaceutical

formulations.

The pharmaceutical industry in India is stated to be valued at approximately US$ 12.26

billion as per industry estimates. This industry is growing @ 10-11% per annum on

compounded growth rate basis. Although total turnover of pharmaceutical industry is

estimated at 21.04 billion, about 65% of this revenue is from exports. It spends around 18

% of this revenue on research and development (R&D) activities. Additionally, Indias

clinical research industry is estimated to be a US$ 2.2 billion with a high growth rate of

23%. Moreover, Indian pharmaceutical off-shoring industry is slated to become a US$

2.5 billion opportunity by 2012, due to low R&D costs and a high-talent pool.


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Some of the major Indian private companies are Alembic Chemicals, Aurobindo Pharma,

Ambalal Sharabhai Limited, Cadila Healthcare, Cipla, Dr. Reddys, IPCA Laboratories,

Kopran, Lupin Labs, Lyka Labs, Nicholas Piramal, Matrix Laboratories, Orchid

Chemical and Pharmaceuticals, Sun Pharmaceuticals, Ranbaxy Laboratories, Torrent

Pharma, TTK Healthcare, Unichem Labs, and Wockhardt. The foreign companies in

India include Abott India, Astra Zeneca India, Aventis Pharma India, Burrough-

Wellcome, Glaxo SmithKline, Merck India, Novartis, Pfizer Limited, and Wyeth Ledele

India.

Investment Policy

The Indian Government is very proactive for boosting growth and investment in Indian

pharmaceutical sector. It allows 100 per cent FDI under the automatic route in the drugs

and pharmaceuticals sector.

The DIPP data suggests that the drugs and pharmaceuticals sector has attracted an

impressive level of FDI worth US$ 1,882.76 million during April 2000 to March 2011.

Industrial licenses are not required in India for most of the drugs and pharmaceutical

products. Manufacturers are free to produce any drug duly approved by the Drug Control

Authority.

MAJOR FDI INVESTMENTSince 2006, as many as six big Indian pharma companies have been taken over by foreign

firms. About $4.73 billion or 50 percent of the recorded FDI in the sector since the year

2000 has been in the form of mergers and acquisitions. In the year 2006, Matrix Lab was

sold to the US-based company Mylan. In 2008, Dabur Pharma was bought by Singapore-

based Fresenius Kabi. Again in the same year, Ranbaxy was taken over by the Japanese

company, Diachii Sankyo. The year 2009 witnessed two major deals in which Shantha

Biotech was taken over by the French major Sanofi Aventis and the US-based company


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Hospira took over Orchid Chemicals. The latest example is of Piramal Healthcare, which

was bought in the year 2010 by the US multinational, Abbot Laboratories.


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COUNTRY-WISE INFLOW OF FDI


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SHARE OF TOP COUNTRIES - FDI EQUITY INFLOWS(Cumulative, between April 2000 to February 2011)

Indias 83% of cumulative FDI is contributed by eight countries while remaining 17 perc

ent by rest of theworld. Indias perception abroad has been changing steadily over the

years. This is reflected in the ever growing list of countries that are showing interest to

invest in India. Mauritius emerged as the most dominant source of FDI contributing 39%

of the total investment in the country since 2000. Singapore was thesecond dominant

source of FDI inflows with 10% of the total inflows. However, USA slipped to fourth

position by contributing 6% of the total inflows.Japan moved to third with investments of

8%

FDI from Mauritius to India is the highest in comparison with all the other countries that

invest in India. FDI from Mauritius to India is the highest due to the special treatment of

tax given in India to the investments that come through Mauritius. The India-Mauritius

39

10

8

6

6

Mauritius

Singapore

Japan

U.S.A

U.K


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Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an

important role in facilitating foreign investment in India via Mauritius. It has emerged as

the largestsource of foreign direct investment (FDI) in India, accounting for 39 per cent

of inflows between April 2000 and February 2011. A large number of foreign

institutional investors (FIIs) who trade on the Indian stockmarkets operate from Mauritius

A large number of Foreign Institutional Investors who trade on the Indian stock markets

operate from Mauritius. According to the tax treaty between India and Mauritius, Capital

Gains arising from the sale of shares is taxable in the country of residence of the

shareholder and not in the country of residence of the Company whose shares have been

sold. Therefore, a company resident in Mauritius selling shares of an Indian company

will not pay tax in India. Since there is no Capital gains tax in Mauritius, the gain will

escape tax altogether.

For instance, a company from the UK may desire to invest in India. It may initiate,

conduct and conclude all negotiations and agreements from the UK. But before the actual

investment, it may purchase a shell company in a tax haven, say, Mauritius, and route its

investment through that Mauritian company.

Since technically or artificially the investment is made from out of a Mauritian company,

it may seek to claim the Indo-Mauritian DTAA rather than the Indo-UK DTAA and, as

such, would capitalize on the tax-effectiveness of the former treaty.

This way, either India or the UK may be deprived of their share of higher revenue

available to them under the Indo-UK DTAA. Since such investing company `shop

around treaties artificially (rather than DTAA to which they are naturally subject), it is

graphically described `treaty shopping.

final draft of project fdi

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