Nature of International Investment: Foreign capital mostly from the developed countries, have been playing an important role

in the development of economies of the developing countries including INDIA. Foreign capital has entered in various forms. Foreign capital has been used for long-term and short term needs. Major forms of foreign capital are as under: y y y Foreign aid Commercial borrowings Equity investment Broadly foreign capital has taken 2 forms a) Loan capital or debt b) Equity or share capital

Foreign aid: Foreign aid or external assistance is major part of the loan capital which has been made available to the country at soft or confessional terms viz, rate of interest being below the market rate or long period of repayment. Foreign aid has been given by foreign governments and Institutions like International development association an affiliate of the World Bank. The recipient in the country is mostly the government, but in some cases private companies also get it. A part of the foreign aid is in the form of grant or gift which involves no repayment obligations either by way of payment of interest or return of the capital. Commercial Borrowings: Besides loans and grants as foreign aid, foreign capital is also sought through commercial borrowings or loans from the International market. A commercial borrowing are subject to market related rate of Interest and is higher than on loan as foreign aid. Loans may be raised by issue of bonds in the International market. Another method of raising commercial loans is through the formation of mutual funds. Commercial credit is also available as supplier credit. It is a loan facility by the suppliers to the buyers of foreign goods. Equity Investment: Equity Investment is in the form of equity capital.i.e non-debt capital.As such, equity investment does not involve payment of interest or repayment of principal equity investement is made with aim of making profits or dividends. Equity investment may be 2 types: 1. Foreign direct Investment 2. Port folio Investment

Foreign capital

Foreign aid

commercial Borrowings

Equity Investment

foreign direct Invetsment

portfolio Investment
Foreign direct Investment: Under Foreign direct Investment investor based in the home country acquires assets in the host country with the interest to manage asset. These investments are made in the establishment of production facilities. The investors are motivated by long term prospects for making profits. These investors add to investible resources and capital formation. Foreign direct investment acts as a means of transferring production technology skills, innovative capacities and organisational and managerial practices as also marketing facilities worldwide. Port folio Investment: Under portfolio Investment, the foreign investors (mostly investment institutions) invest in the shares or bonds of the companies whether in new companies (primary capital market) or in the old companies (secondary capital market or stock exchange). Portfolio investors are always motivated by the short-term profit considerations. Portfolio Investment to a larger extent is expected to be speculative. In terms of commitment, portfolio investment is far more flexible that foreign direct investment. Its earnings also take on largely the form of dividends. Both foreign direct investment and portfolio investment supply risk capital, but their impacts are different. The impact of foreign direct investments is visible in the goods and services market while portfolio investments influence the asset market. Two routes of portfolio investment are: y y Investment by Foreign Institutional Investors (FIIS) like mutual funds. Investment in Global deposit receipts(GDRS),(ADRS) AND (FCCBS)

The reasons behind why some companies Undertake the FDI are y y y y y Foreign direct Investment constitutes a net addition to investible resources i.e. capital of host country companies. Foreign direct investment provides foreign exchange resources and removes constraint of developing countries on balance of payments. Foreign direct investment acts as vehicle of modern technology and efficient management methods which would help host country companies. Foreign direct investment promotes exports because foreign enterprises are in unique position to do so. Foreign direct Investment creates large number of employment opportunities in the developing countries which would in turn help host country companies to increase efficiency and productivity. Foreign direct investment creates higher wages particularly for skilled jobs. Foreign direct investment creates competitive environment in the host country companies.

y y

Foreign direct Investment in INDIA: PAST TRENDS: At the time of Independence, the attitude towards foreign direct investment was one of fear and suspicion. As a result, India adopted a policy of selective foreign direct investment. As a result flow of FDI into INDIA was very limited. However with the announcement of new Industrial policy in July 1991, there developed a favourable climate for inflow of FDI in INDIA. The industrial policy of 1991 by late PV Narashima rao, Prime minister of INDIA encouraged FDI in INDIA. The salient features of the policy are as follows. 1. Approval will be given for FDI up to 51% foreign equity in high priority industries. 2. Dividend payments will be monitored by RBI. This is to ensure a balance between outflows and export earnings. 3. Foreign equity holdings up to 51% equity will be allowed for trading companies. This is to provide access to international markets. 4. Automatic permission will be given for foreign technology agreements in high priority industries up to lump sum payment of Rs 1 crore.

Additional measures were taken in 1992-1993 to further encourage foreign direct investment: y y y y y The dividend balancing condition (condition 2 above which is discussed) is removes except for consumer goods industries. Existing companies with foreign equity can raise its 51% subject to fulfilment of certain conditions. NRI investment up to 100% of equity is allowed in export house, trading house, hospitals, sick industries, hotels and tourism etc. FDI has been allowed in exploration, production and refining oil.Private investment is allowed in power sector also. Disinvestment of equity by foreign investor is allowed on stock exchanges at market rates. Earlier the price was determined by the RBI. Provisions of FERA have been amended to treat companies with more than 40% equity at par with fully Indian owned companies. Foreign companies are allowed to use their trade a marks on domestic sales. It is thus clear that government is promoting the inflow of foreign capital by offering a large number of concessions. As a result of these measure foreign direct investment has increase substantially in the lastone decade . Although the Liberalization has increased the inflow of foreign investment, it has been much lower than several other developing countries have been receiving.The FDI inflows have been much below the targets. India had not been getting even one tenth the size of FDI flow to china. Not only that FDI inflow has been disappointing, but it is also feared that there may be capital flight from India.

y y

Following are the important reasons for this: y y y y y Bureaucratic problems Unfavourable government attitudes Poor infrastructure Labour factors High input cost

The new policy of government of INDIA is of course much better than the old policy. However in comparison with business environment in many other countries India still is not

very attractive in the eyes of foreign companies despite the fact that Indian market is very large and growing market. Another point to be noted is that foreign direct Investment needs to be directed to priority sectors. RECENT TRENDS OF FDI IN INDIA: A survey by UNCTAD projected India as the second most destination after china for transnational companies during 2010-2012 The sectors which attracted high inflow of FDI y y y y Services Telecommunication Construction activities Computer software and hardware.

Few of the countries which are involved in India are Mauritius, Singapore, US, UK According to Indian industry department, in the first 2 months of 2010-2011 fiscal, FDI inflow raised from 4.4$ billion to $7.78 billion Even the world s largest retail Wal-Mart termed INDIA policy to allow 51% FDI in multi brand retail as first important step and showed keen interest in doing business in India. Due to this policy by India Government, there is huge uproar from opposition political parties.

Foreign direct investment incentives may take the following forms:[citation needed]
              

low corporate tax and individual income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support

 derogation from regulations (usually for very large projects) Some of the important changes in FDI policy are as under:

a) FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical b) FDI up to 100% is permitted in airports with FDI above 74% requiring prior approval of the government. c) The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26% both subject licensing. d) FDI up to 100% is permitted for development of integrated townships including hosuing, hotels, resorts and urban infrastructure facilities. e) FDI up to 100% is permitted in hotel and tourism sector f) FDI up to 74% is permitted for telecom services g) FDI up to 49% from all sources is permitted in the banking sector FDI investment (sector wise) 1. 2. 3. 4. 5. 6. 7. Electronics and electronic equipment sector Engineering Services Sector Chemicals and allied products Finance Computers Pharmaceuticals EOU- Export oriented Unit EHTP-Electronic Hardware Technology Park Software Technology park (STPS) Biotechnology park (BTPS) DTA- Domestic tariff Area NFE-Net foreign exchange FTP- Foreign trade policy FOB- Free on Board CVD- Countervailing Duty SION- Standard Input Output Norms DFIA- DFIA Duty Free Import Authorisation HBP v1 Handbook of Procedures (Vol.1) MoF Ministry of Finance

Entire production of EOU / EHTP / STP / BTP units shall be exported subject to following:

(a) Units, other than gems and jewellery units, may sell goods upto 5 0% of FOB value of exports, subject to fulfilment of positive NFE, on payment of concessional duties. Within entitlement of DTA sale, unit may sell in DTA, its products similar to goods which are exported or expected to be exported from units. However, units which are manufacturing and exporting more than one product can sell any of these products into DTA, up to 90% of FOB value of export of the specific products, subject to the condition that total DTA sale does not exceed the overall entitlement of 5 0% of FOB value of exports for the unit, asstipulated above. No DTA sale at concessional duty shall be permissible in respect of motor cars, alcoholic liquors, books, tea (except instant tea), pepper &pepper products, marble and such other items as maybe notified from time to time. Such DTA sale shall also not be permissible to units engaged in activities of packaging / labelling / segregation / refrigeration/compacting / micronisation / pulverization /granulation / conversion of monohydrate form of chemical to anhydrous form or vice-versa. Sales made to a unit in SEZ shall also be taken into account for purpose of arriving at FOB value of export byEOU provided payment for such sales are made from Foreign Exchange Account of SEZ unit. Sale to DTAwould also be subject to mandatory requirement of registration of pharmaceutical products (including bulk drugs). An amount equal to Anti Dumping duty under section 9A of the Customs Tariff Act, 1 975 leviable at the time of import, shall be payable on the goods used for the purpose of manufacture or processing of the goods cleared into DTA from the unit. (b) For services, including software units, sale in DTA in any mode, including on line data communication, shall also be permissible up to 5 0% of FOB value of exports and /or 5 0% of foreign exchange earned, where payment of such services is received in foreign exchange. (c) Gems and jewellery units may sell upto 1 0% of FOB value of exports of the preceding year in DTA, subject to fulfilment of positive NFE. In respect of sale of plain jewellery, recipient shall pay concessional rate of duty as applicable to sale from nominated 73agencies. In respect of studded jewellery, duty shall be payable as applicable. (d) Unless specifically prohibited in LoP, rejects within an overall limit of 5 0% may be sold in DTA on payment of duties as applicable to sale under sub-para (a) on prior intimation to Customs authorities. Such sales shall be counted against DTA sale entitlement. Sale of rejects upto 5 % of FOB value of exports shall not be subject to achievement of NFE. (e) Scrap / waste / remnants arising out of production process or in connection therewith may be sold inDTA, as per SION notified under Duty Exemption Scheme, on payment of concessional duties as applicable, within overall ceiling of 5 0% of FOB value of exports. Such sales of scrap / waste /remnants shall not be subject to achievement of positive NFE. In respect of items not covered by norms, DC may fix ad-hoc norms for a period of six months and within these period, norms should be fixed by Norms Committee. Ad-hoc norms will continue till such time norms are fixed by Norms Committee. Sale of waste / scrap /

remnants by units not entitled to DTA sale, or sales beyond DTA sale entitlement, shall be on payment of full duties. Scrap / waste /remnants may also be exported. (f) There shall be no duties / taxes on scrap / waste /Remnants, in case same are destroyed with permission of Customs authorities. (g) By-products included in LoP may also be sold in DTA subject to achievement of positive NFE, on payment of applicable duties, within the overall entitlement of sub-para (a). Sale of by-products by units not entitled to DTA sales, or beyond entitlements of subpara (a), shall also be permissible on payment of full duties. (h) EOU / EHTP / STP / BTP units may sell finished products, except pepper and pepper products and marble, which are freely importable under FTP in DTA, under intimation to DC, against payment of full duties, provided they have achieved positive NFE. An amount equal to Anti Dumping duty under74 section 9A of the Customs Tariff Act, 1 975 leviable at the time of import, shall be payable on the goods used for the purpose of manufacture or processing of the goods cleared into DTA from the unit. (i) In case of units manufacturing electronics hardware and software, NFE and DTA sale entitlement shall be reckoned separately for hardware and software. (j) In case of DTA sale of goods manufactured by EOU/EHTP / STP / BTP, where basic duty and CVD is nil, such goods may be considered as non-excisable for payment of duty. (k) In case of new EOUs, advance DTA sale will be allowed not exceeding 5 0% of its estimated exports for first year, except pharmaceutical units where this will be based on its estimated exports for first two years. (i) Units in Textile and Granite sectors shall have an option to sell goods into DTA in terms of sub- paras (a), (d), (e), (g) and (k) above, on payment of an amount equal to aggregate of duties of excise leviable under section 3 of the Central Excise Act, 1 944 or under any other law for the time being in force, on like goods produced or manufactured in India other than in an EOU, subject to the condition that they have not used duty paid imported inputs in excess of 3 % of the FOB value of exports of the preceding year and they have achieved positive NFE. Once this option is exercised, the unit will not be allowed to import any duty free inputs for any purpose. Other Supplies in DTA Following supplies effected from EOU / EHTP / STP/BTP units to DTA will be counted for fulfilment of positive NFE: (a) Supplies affected in DTA to holders of Advance Authorisation / Advance Authorisation for annual requirement / DFIA under duty exemption / remission scheme / EPCG scheme. However, printing sector EOUs (or any other sector that may be notified in HBP v 1 ), cannot supply goods, where basic customs duty and CVD is nil or exempted otherwise, to holders of Advance Authorisation / Advance Authorization for annual requirement. (b) Supplies affected in DTA against foreign exchange remittance received from overseas.

(c) Supplies to other EOU / EHTP / STP / BTP / SEZ units, provided that such goods are permissible for procurement in terms of para 6.2 of FTP.

(d) Supplies made to bonded warehouses set up under FTP and / or under section 65 of Customs Act and free trade and warehousing zones, where payment is received in foreign exchange. (e) Supplies of goods and services to such organizations which are entitled for duty free import of such items in terms of general exemption notification issued by MoF, as may be provided in HBP v 1. f) Supplies of Information Technology Agreement (ITA -1) items and notified zero duty telecom /Electronics items. (g) Supplies of items like tags, labels, printed bags, Stickers, belts, buttons or hangers to DTA unit for export. (h) Supply of LPG produced in an EOU refinery to Public Sector domestic oil companies for being supplied to household domestic consumers at subsidized prices under the Public Distribution System (PDS) Kerosene and Domestic LPG Subsidy Scheme, 2 002, as notified by the Ministry of Petroleum and Natural Gas vide notification No. E-20029/18/2001-PP dated 28.01.2003 (hereinafter referred to as PDS Scheme) subject to the following conditions:(a) Only supply of such quantity of LPG would-be eligible for which Ministry of Petroleum and Natural Gas declines permission for export and Requires the LPG to be cleared in DTA; and (b) The Ministry of Finance by a notification has permitted duty free imports of LPG for supply under the aforesaid PDS Scheme.