FDI policy Indian Perspective

Submitted by: Group-8 (C.R.Rangarajan )

Submitted to: Dr. C. S. Adhikari

Shashank Jain-166 Sarang Wankhede-133 Archana Singh-186 Sharief Khan-129 Aruna Sharma-182 Mahesh Gaikwad-144 Sayantan Pande-140

Introduction: What Is FDI?

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. It generates benefits through bringing in non-debt-creating foreign capital resources, technological upgrading, skill enhancement, new employment, spill-over and allocative efficiency effects Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, jointventure, transfer of technology and expertise.

Type of FDI:
Broadly speaking, FDI can be categorized under 5 major heading: 1. Greenfield investment - (a new operation) 2. Brownfield investment (expansions or re-investment in existing foreign affiliates or sites) 3. Mergers & Acquisitions (M&As) 4. Privatization and equity investment 5. New forms of investment (joint ventures, strategic alliances, licensing and other partnership agreements)

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 Behrman to explain the different objectives of FDI:  Resource seeking FDI  Market seeking FDI  Efficiency seeking (global sourcing FDI)  Strategic asset/capabilities seeking FDI

Resource seeking FDI

To seek and secure natural resources e.g. minerals, raw materials, or lower labor costs for the investing company  For example, a German company opening a plant in Slovakia to produce and re-export to Germany


Market seeking FDI

To identify and exploit new markets for the firms` finished products  Unique possibility for some type of services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply)  Automotive TNCs have invested heavily in China


Efficiency seeking FDI

To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms.  International specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk  Global sourcing resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations.


Strategic asset/capabilities seeking FDI

MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance 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 by competitors

Benefits Of FDI
 Linkages and spillover to domestic firms:
Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.  Trade: FDI have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production  Employment and skill levels: FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer: FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.  Economic growth : This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

India as major FDI Hot Spot

1. India has replaced the US as the second most important foreign direct investment (FDI) destination according to a survey conducted UNCTAD, next only to China. 2. Stable democratic government 3. Large and growing market 4. Cost-effective labor 5. Well-established legal system with independent judiciary 6. Well established ancillary sector 7. World class scientific, technical and managerial manpower 8. Indirect incentives (Provides land and infrastructures at less commercial prices)

India- Advantages as a destination for FDI

largest Economy - A safe place to do business Largest democracy political stability & consensus on reforms

Largest reservoir of skilled manpower

Liberal & transparent investment policies

Long-term sustainable Competitive advantage - High growth rate economy

India An Emerging Market

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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 on investment among emerging markets

 The Time is now..to be in India. This is perhaps the most optimistic Ive felt about India in the last 10-15 years that I ve been coming here.

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 with robust growth. 1. Agriculture 15% 2. Industry 21.7% Growth of 3. Services 56.2% Economy

FDI AND INDIA : Policy Frame Work



All dealings in foreign exchange were regulated under 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 at improving the capital account management of foreign exchange in India  To facilitate external trade and payments and to promote orderly development and maintenance of the foreign exchange market in India

FDI-related Institutions


Foreign Investment Promotion Board (FIPB)

Secretariat for Industrial Assistance (SIA)

Foreign Investment Implementation Authority (FIIA)

Foreign Investment Policy



Automatic route: FDI permitted under the automatic route does not require any prior approval either by the government or (RBI). Prior Government Approval route: In limited category of sectors requiring prior government approval, the proposals are considered in a time-bound and transparent manner by the Foreign Investment Promotion Board (FIPB) under the Department of Economic Affairs, Ministry of Finance.

FDI Approval Procedure

Automatic Route in most Sector Government Route for few sectors

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 Manufactured Tobacco substitutes 3. Electronic, Aerospace and defense equipment: all types 4. Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches 5. Hazardous chemicals 6. Drugs and Pharmaceuticals (according to modified Drug Policy issued in September, 1994 and subsequently amended in February, 1999)

Various Indian sectors having FDI restrictions

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Atomic energy Betting and gambling Chit fund business Plantation or agricultural activities Real estate business Business in Transferable Development Rights Lottery business Retail trading Railway transport Mining of chrome, zinc, gold, diamonds, copper, Iron, gypsum, manganese, and sulfur

EXCHANGE REGULATION
 The Exchange Control Department of the RBI administers the Foreign Exchange Management Act (FEMA)  The general permission of the RBI is available for the following activities under FEMA:  Indian Companies are permitted to issue Rights/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 non resident shareholders does not exceed the sectoral caps

EXCHANGE REGULATION
 A company may issue shares upto 5% of its paid up capital under Employee Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad, other than citizens of Pakistan and Bangladesh, who are resident outside India, directly or through a Trust, subject to Securities and Exchange Board of India (SEBI) regulations in this regard and within 30 days from the date of issue of shares the issuing company will report the details thereof and submit a stipulated certificate to the RBI. Indian Companies are allowed to raise foreign currency resources abroad through the issue of American Depository 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.

Non Resident Indians (NRI)

 General policy and facility for FDI available to NRIs  Following additional concessions specifically applicable to NRIs: 1. NRI Investment in Construction Development Projects inclusive of housing sector up to 100% wherein conditions prescribed under Press Note 2 of 2005 are not applicable 2. NRI investment in domestic airlines sector up to 100%.  Further NRIs are permitted to invest on repatriable basis in partnership firms and proprietary concerns on prior approval of the Reserve Bank of India (Master Circular on Foreign Investment in India 01 July, 2006)

FOREIGN INVESTMENT IN THE SMALL SCALE SECTOR

Defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million.  Equity holding by other units including foreign equity in a 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 a mandatory export obligation of 50 per cent must be obtained.  A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License.


FOREIGN INVESTMENT POLICY FOR TRADING ACTIVITIES

For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force.  However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.  FDI upto 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world.


Foreign Investment Implementation Authority (FIIA)

Government of India has set up the FIIA to facilitate quick translation of FDI approvals into implementation The functions of the FIIA are:  Expediting various approvals/permissions;  Fostering partnership between investors and government agencies concerned;  Resolve difference in perceptions;  Enhance overall credibility;  Review policy framework; and  Liaise with the Ministry of External Affairs for keeping Indias diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.

Entry Strategies for Foreign Investor

Foreign Company has the following options to set up business operations in India : By incorporating a company under the Companies Act, 1956  A wholly owned subsidiary  Joint venture company - existing company or new company  with domestic partner As an unincorporated entity 1. Liaison Office 2. Project Office 3. Branch Office

Liaison Office :
 Liaison office not permitted to undertake any commercial/trading/industrial activity.  The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers and acting as a communication channel between the parent company and Indian Companies.  It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India  Approval for establishing a liaison office in India is granted by RBI

Project Office :
 General permission to foreign entities to establish Project / Site Offices (temporary in nature)  Such offices cannot undertake or carry on any activity other 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 the following documents:  Certified copy of the final audited project accounts;  A Chartered Accountants certificate showing the manner of arriving at the remittable surplus;  Auditors certificate stating that no statutory liabilities in respect of the Project are outstanding.

Branch Office :
 Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes  Branch Offices are established with the approval of RBI  Permitted to remit outside India profit of the branch  No approval required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities

SECTOR ATTRACTING HIGHEST FDI INFLOWS

Sector-wise FDI Inflows(Aug '91-Dec '99)
9% 8% 7% 7% 62% 7% Transportation Industry Electrical Equipments Services sector Telecommunication Chemical Other

SECTOR WISE FDI INFLOWS

Sector Wise FDI inflows(Jan'00-March'09)
Service Sector 21% Computer Hardware &Software Telecommunications 10% Housing & Real Estate Construction Activities Others

50%

7% 6% 6%

Rank 1 2 3 4 5 6 7 8 9 10

Aug 1991-Dec 1999 Transportation industry (8.9) Electrical Equipment(8.0) Service sector (7.0) Telecommunications(6.9) Chemicals (other than fertilisers) (6.9) Fuels (Power & Oil Refinery) (6.3) Food-Processing industries (4.1) Paper and Pulp (including Paper Products) (1.5) Miscellaneous Mechanical & Engineering (1.4) Textiles (including Dyed, Printed) (1.4)

Jan 2000-March 2009 Services sector (21.2) Computer Software & Hardware (9.9) Telecommunications (7.1) Housing & Real Estate(6.1) Construction Activities (5.7) Automobile industry (3.9) Power(3.6) Metallurgical industries (3.0) Petroleum & Natural Gas (2.6) Chemicals (other than fertilisers) (2.4)

Share of Service Sector FDI Inflows in Total FDI Inflows to India (%)
Category Financial Non-Financial Banking Insurance Outsourcing Research & Development Other Sector Total 2005 7.9 0 1.9 1.6 0.3 0.5 4.2 16.4 2006 17.2 0.4 1.2 0.7 0.3 0.3 15.3 35.4 2007 7 3 2.9 1.4 0.7 0.4 2.6 18 2008 12.1 2.6 1.9 2.1 1.1 1.3 3.3 24.4

financial services having the highest share in total FDI in the service sector, it shows consistency in its shares in 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 service

 With

sector have shown tremendous growth during 2005 to 2008.  Of the total cumulative FDI in different categories of the service sector, financial services constitutes almost half the total foreign direct investment, followed by banking and other services with 10% and 21.5%, respectively.

Due to the increase in FDI in services, its share in total FDI inflows in India increased from 16.4 per cent in 2005 to an astounding 35.4 per cent in 2006, but this share declined in 2007 to 18 per cent, yet maintaining the net increase over the period 2005-08.


 Surprisingly, the share of services in total FDI

inflows stood at 24.4 per cent for the year 2008. The 24.6 per cent share of the service sectors FDI is dominated by the financial sector (12.1), non-financial services (2.6), banking services (1.9), and other services (3.3).

FDI: Sectoral Guidelines

AIRPORTS: 1. Foreign Investment upto 100% is allowed in green field projects under automatic route. 2. Foreign Direct Investment is allowed in existing projects - upto 74% under automatic route - beyond 74% and upto 100% subject to Government 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 to 49%(Not found any data to substantiate this statement)

DRUGS & PHARMACEUTICALS

FDI upto 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position) FDI upto 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations (except those produced by the use of recombinant DNA technology) would be covered under automatic route.

i.

ii. FDI above 74% for manufacture of bulk drugs will be considered by the Government on case to case basis for manufacture of bulk drugs from basic stages

TRADING
 Wholesale / cash & carry trading - Automatic upto 100%.  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 Indian company has approval for manufacture - 100% with Government approval.  Single Brand product retailing - 51% with Government approval.

INFRASTRUCTURE
 100% FDI is permitted for the following activities: 1. Electricity Generation (except Atomic energy) 2. Electricity Transmission 3. Electricity Distribution 4. Mass Rapid Transport System 5. Roads & Highways 6. Toll Roads 7. Vehicular Bridges 8. Ports & Harbors 9. Hotel & Tourism

HOUSING, REAL ESTATE & TOWNSHIP DEVELOPMENT

FDI under the automatic route is allowed upto 100% in townships, housing, built-up infrastructure and construction development projects suject to conditions notified vide Press Note 2 (2005 Series) including: a. minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint venture. The funds would have to be brought within six months of commencement of business of the Indian company b. Minimum area to be developed under each project10 hectares in case of development of serviced housing plots; and built-up area of 50,000 sq. mts. in case of construction development project; and any of the above in case of a combination project

HOUSING, REAL ESTATE & TOWNSHIP DEVELOPMENT

 The conditions notified vide Press Note 2 (2005 Series) do not apply to NRIs./OCBs are allowed to invest upto 100% under automatic route in: 1. Development of serviced plots and construction of built up residential premises 2. Investment in real estate covering construction of residential and commercial premises including business centers and offices 3. Development of townships 4. City and regional level urban infrastructure facilities, including both roads and bridges 5. Investment in manufacture of building materials, which is also open to FDI 6. Investment in Participatory Ventures in the areas mentioned above 7. Investment in Housing Finance Institutions

Attracting long-term foreign capital to supplement domestic investment efforts, particularly in infrastructure and export competitive sectors

Creating skilled employment Opportunities and Import of world Class managerial practices

FDI
Developing attractive Configurations of locational advantages at global level Promoting technology and other linkages to enhance domestic industry competitiveness
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Top Priority host economies for FDI for 2010-12 period

Why India? Quote Unquote

India is among the three most attractive FDI destinations in the world. India has evolved into one of the world's leading technology centers. Craig Barrett Intel Corporatio n India has among the highest returns on foreign investment.

A T Kearney FDI Confidence Index 2005

By 2032, India will be among the three largest economies in the world.

US Department of Commerce

We came to India for the costs, stayed for the quality and are now investing for innovation.

BRIC Report, Goldman Sachs

The Indian market has two core advantages - an increasing presence of multinationals and an upswing in the IT exports. Travyn Rhall, ACNielsen

India is a developed country as far as intellectual capital is concerned. Jack Welch General Electric

- Dan Scheinman, Cisco System Inc. as told to Business Week, August 2005

Country wise FDI Inflows

22% 51% 4% 4% 5% 14% Mauritus USA Japan Germany UK Others

FDI Inflows (Aug. 1991 - Dec 1999) in %

Country wise FDI Inflows

51%

22% Mauritus USA Singapore Netherlands UK Others

4%

4%

5%

14%

FDI Inflows (Jan 2000 - March 2009) in %

Route Wise FDI Inflows

Year (Jan-Dec) FIPB & SIA route RBI's Automatic Route Through Acquisition RBI's Various NRI Scheme Total 66 144 59 265 189 608 365 633 1991 1992 1993 1994 1995 1996 78 188 18 340 79 511 1264 1677 116 169 180 88 600

992 2066 2545

* All figures in Million $

Route Wise FDI Inflows

Year (Jan-Dec) 1997 1998 1999 2000 2001 2002

FIPB & SIA route 2824 2086 1474 1474 2142 1450 RBI's Automatic Route Through Acquisition RBI's Various NRI Scheme Total 242 155 181 467 83 395 479 81 720 813

266 1028 290 91

658 1096 51 2

3622 3360 2205 2429 3571 3361 * All figures in Million $

Route Wise FDI Inflows

Year (Jan-Dec) FIPB & SIA route RBI's Automatic Route Through Acquisition RBI's Various NRI Scheme Total 2080 5214 7355 19720 22292 33709 * All figures in Million $ 2003 2004 2005 2006 2007 2008 934 1055 1136 1534 2586 3209 509 3179 4558 11121 13889 23651 637 980 1661 3465 4447 6169

SECTORAL DISTRIBUTION OF FDI

* All figures in billion $

FDI as % of Gross Total Investment

8 7 6 5 4 3.2 3 2 1 0 2000-04 2005 2006 2007 2008 2.6 FDI as % 5.6 5.6 7.4

Growth Expected in India

To sustain the GDP growth of more than 8 percent, India requires an investment of USD 1.5 trillion in the next five years
2010
GDP USD 900 billion GDP growth rate 9%

2008
GDP USD 750 billion GDP growth rate 9.5%

Services contribution 60-65 % FDI limit is expected to be 100 percent in major industry sectors such as Telecom, Semiconductors,Automobiles, etc. Balance of Trade Should be positive with increased level of exports as compared with imports Investment goal USD 370 billion

2006
GDP USD 590 billion GDP growth rate 9 % Services contribution 54 % FDI limit not 100 percent in major industry sectors such as Telecom, Semiconductors, Automobiles, etc. Balance of Trade USD (-)46.2 billion Investment goal USD 250 billion

Services contribution 60 % FDI limit is expected to be close to 100 percent in major industry sectors such as Telecom, Semiconductors,Automobiles, etc. Balance of Trade Should increase with surging exports as compared with imports Investment goal USD 305 billion

FDI IN RETAILPRESENT CONDITION OF TRADERS

Fringe Benefit Tax
LICENCES & PERMITS INDUSTRIAL DISPUTE ACT SHOP & ESTABLISHMENT ACT COSUMER PROTECTION ACT WEIGHT & MEASUREMENT ACT PACKAGING ACT PREVENTION OF FOOD ADULTRATION ACT

VAT
INEFFICIENT LABOURS
PREVENTION OF BLOCK MARKETING ACT ANTI HOARDING & PROFEELING ACT MONEY LENDING ACT PRODEND FUND ACT MINIMUM WAGES ACT ESI ACT GRATUITY ACT BONUS ACT

ENTRY TAX FDI in Retail Trade

SERVICE TAX

ANTI SOCAL ELEMENTS WATER TAX

OCTROI

CENTRAL EXCISE

POLITICIAL INTERFERANCE PURCHASE TAX

POOR MARKET CONDITION

SALES TAX
POWER PROBLEM

INCOME TAX

INSPECTOR RAJ

STAMP DUTY WELTH TAX HIGH BANK CHARGES PROFESSIONAL TAX

Cash Transaction Tax & Quarterly C Form

New Naka Complex

ESSENTIAL COMMODITIES ACT

Suggestions

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.