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The FDI story for India began in 1991 and announced the New
Industrial Policy to open doors for liberalization. Today India has been ranked
third in global foreign direct investments in 2009 and will continue to remain
among the top five attractive destinations for international investors during
2010-11, according to United Nations Conference on Trade and
Development.
Categorization of FDI
FDI can be categorized as shown below
Inward FDI:
Inward FDI for an economy can be defined as the capital provided from
a foreign direct investor residing in a country, to that economy, which is
residing in another country. Here, investment of foreign capital occurs in
local resources. Flow of Inward FDI may face restrictions from factors like
restraint on ownership and disparity in the performance standard.
EXAMPLE: General Motors decide to open a factory in Malaysia. They are
going to invest some capital. That capital is inward FDI for Malaysia.
Outward FDI:
When investment is made by a domestic company in the foreign
country, then there is outflow of FDI from domestic country to foreign
country. Foreign direct investment, which is outward, is also referred to as
direct investment abroad.
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.
1. Horizontal
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.
2. Vertical
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.
3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to diversify the company by combining uncorrelated
assets and income streams.
JOINT VENTURE
IMPORTANCE OF FDI
FDI provides ready resource for the growth of the economy. For capital
starved country, FDI could be a boon. Generating funds internally may
require much time and also FDI is motivated by long term profit
considerations of the investors.
The enhanced money inflow from overseas means that the country can
import more goods those are basic to the building of the economy. This is
particularly important for developing country.
FDI acts as the nucleus around which other businesses can grow. For
example, TOYOTA motors have established their automobile plants in India
and they source fraction of parts from local firms.
Current Scenario
Other Sectors
• Drugs & Pharmaceuticals.
• Private Banking
• Insurance Sector
• Telecommunication.
SECTOR INVESTME
NT
In millions
Service Sector 4392
Construction 2868
Housing and real 2844
Estate
Power 1437
Automobile 1177
The term hotels include restaurants, beach resorts, and other tourist
complexes providing accommodation and/or catering and food facilities to
tourists. Tourism related industry include travel agencies, tour operating
agencies and tourist transport operating agencies, units providing facilities
for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement,
sports, and health units for tourists and Convention/Seminar units and
organizations.
49% FDI is allowed from all sources on the automatic route subject to
guidelines issued from RBI from time to time.
i. Merchant banking
ii. Underwriting
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Venture Capital
ix. Custodial Services
x. Factoring
xi. Credit Reference Agencies
xii. Credit rating Agencies
xiii. Leasing & Finance
xiv. Housing Finance
xv. Foreign Exchange Brokering
xvi. Credit card business
xvii. Money changing Business
xviii. Micro Credit
xix. Rural Credit
iii) For FDI above 75% and up to 100% - US $ 50 million out of which
US $ 7.5 million to be brought up front and the balance in 24 months
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign
investment will also be allowed to set up subsidiaries for undertaking other
NBFC activities, subject to the subsidiaries also complying with the
applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.
• Exports;
• Bulk imports with ex-port/ex-bonded warehouse sales;
• Cash and carry wholesale trading;
• Other import of goods or services provided at least 75% is for
procurement and sale of goods and services among the companies of
the same group and not for third party use or onward
transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to
provisions of EXIM Policy:
a. Companies for providing after sales services (that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level
for such trading companies who wish to market manufactured products
on behalf of their joint ventures in which they have equity participation
in India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which,
based on technology provided and laid down quality specifications, a
company can market that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for
manufacture provided such test marketing facility will be for a period
of two years, and investment in setting up manufacturing facilities
commences simultaneously with test marketing.
Education sector is an ideally placed for FDI infusion with low literacy
rates and large population size in India. Foreign Direct Investment (FDI) in
education is allowed in India under the automatic route, without any sectoral
cap, since February, 2000. There is no offshore campus of any foreign
university in India. In India there are more than 125 institutions running
technical programmes in collaboration with foreign universities and
institutions.
Opportunity
There are only 10.5 million students enrolled in all higher education
institutions in India that is just 11 per cent of the relevant age group (17 to
23) population. According to 2004-05 survey 80,466 Indian students were
enrolled in USA universities and 15,000 Indian students were enrolled in the
UK universities.
The US$ 41-billion Indian life insurance industry is considered the fifth
largest life insurance market, and growing at a rapid pace of 32-34 per cent
annually, according to the Life Insurance Council.
Opportunities
General Insurance
This business of General Insurance sector has picked up off late. Public
sector players posted 13.85 per cent growth in gross premium in 2009-10. At
the same time, private players recorded a 12.82 per cent increase in gross
premium till March 2010. Further nearly 30mn vehicles policies were issued
and total premium of US$ 1.83 billion was collected.
Health Insurance
100% FDI in aircraft maintenance and repair operations has also been
allowed. But the big one, allowing foreign airlines to pick up a stake in
domestic carriers has been given a miss again.
India has decided to allow 26% FDI and 23% FII investments in
commodity exchanges, subject to the proviso that no single entity will hold
more than 5% of the stake.
TRENDS IN FDI
There has been a marked increase in both the flow and stock of FDI in the
world economy over the last 30 years.FDI has grown more rapidly than world
trade and world output because:
THEORIES OF FDI
FEMA (2000)
(a) The foreign investor has to obtain FIPB approval in regard to all proposals
in which the foreign collaborator has a previous venture/tie up in India;
(b) The foreign investor has to obtain FIPB approval in regard to all proposals
relating to acquisition of existing shares in an Indian company/takeovers;
(d) Investment and returns are not freely repatriable in certain cases and is
subject to conditions such as lock in period on original investment, dividend
cap, foreign exchange.
2. Royalty payable is limited to 5 per cent for domestic sales and 8 per cent
for exports subject to total payment of 8 per cent on sales over a 10-year
period.
3. The period for payment of royalty not exceeding 7 years from the date of
commencement of commercial production, or 10 years from the date of
agreement whichever is earlier.
FIPB Route:
For the following categories, Government approval is necessary:
5. Proposals not meeting any or all of the parameters for automatic approval.
ADVANTAGES OF FDI
DISADVANTAGES OF FDI