Abhishek Fdi

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Foreign Direct Investment

1

UNIVERSITY OF MUMBAI

SHRI CHINAI COLLEGE OF COMMERCE AND

ECONOMICS

MUMBAI-400069

PROJECT REPORT ON

FOREIGN DIRECT INVESTMENT

SUBMITTED BY

ABHISHEK GUPTA

T.Y.BMS

SEMESTER V

PROJECT GUIDE

PROF: SHIVANI BAFLEKAR

ACADEMIC YEAR

2010-2011

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Declaration

I ABHISHEK GUPTA, OF SHRI CHINAI COLLEGE OF COMMERCE &

ECONOMICS, OF TYBMS HEREBY DECLARE THAT I HAVE COMPLETED THIS

PROJECT ON FOREIGN DIRECT INVESTMENT DURING THE ACADEMIC

YEAR 2010-2011. THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL

TO THE BEST OF MY KNOWLEDGE.

________________________SIGNATURE OF THE STUDENT

Certificate

I Prof. SHIVANI BAFLEKAR, HEREBY CERTIFY THAT ABHISHEK GUPTA, OFSHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS, OF TYBMS HASCOMPLETED HIS PROJECT ON FOREIGN DIRECT INVESTMENT DURINGTHE ACADEMIC YEAR 2010-2011. THE INFORMATION SUBMITTED IS TRUEAND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

________________ ______________PROJECT GUIDE PRINCIPAL

_________________________________________SIGNATURE OF THE EXTERNAL EXAMINER

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ACKNOWLEDGMENT

This project on FOREIGN DIRECT INVESTMENT is a result of co-operation hard

work and good wishes of many people.

I student of SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS

would like to thank my project guide Prof. SHIVANI BAFLEKAR for her involvement

in my project work and timely assessment that provided me inspiration and valued

guidance throughout my study.

I owe the debt to Dr. MALINI JOHRI principal ofSHRI CHINAI COLLEGE OF

COMMERCE AND ECONOMICS for giving an opportunity to present a creative

outcome in the form of project work.

I also take this opportunity to express my sincere gratitude to the library staff that has

provided me right information and study material at the right time.

I am also thankful to my parents, professors, and even my friends and relatives for their

guidance and encouragement.

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EXECUTIVE SUMMARY

The Indian real estate sector plays a significant role in the country's economy. The real

estate sector is second only to agriculture in terms of employment generation and

contributes heavily towards the gross domestic product (GDP). Almost five per cent of

the country's GDP is contributed to by the housing sector. In the next five years, this

contribution to the GDP is expected to rise to 6 per cent.

This project involves a study of pattern of Foreign Direct Investment in Real Estate

sector in India, Since Real Estate being the booming sector in which the demand has been

created for the land, due to setting up of many retail outlets like malls and residential

premises through FDI.

The study includes the entire concept of FDI, its relevance, advantages, objectives, and

various factors that need to be considered while making investment in foreign countries.

In this Project I have analyzed the reasons behind higher FDI inflow in China than India.

Since the focus is on FDI in real estate sector, a detailed study of Governments

guidelines on FDI in real estate is done and conclusions are drawn upon.

At the end recommendations are also given as to what are challenges faced by the real

estate industry to attract FDI.

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TABLE OF CONTENT

PARTICULARS

Title Page

Certificate & Declaration

Acknowledgment

Executive Summary

PAGE NO

i

ii

iii

iv

CHAPTER PARTICULARS PAGE NO

1Introduction

1

2Research and Methodology

7

3Foreign Direct Investment (FDI)

9

4Importance of FDI

13

5Objective of FDI

16

6Types of Foreign Direct Investment: An overview

17

7Types of foreign direct investor

21

8Methods

22

10Advantage of FDI

23

11Factor influence of FDI

26

12FDI in INDIA

27

13Comparative analysis FDI INDIA vs CHINA

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14FDI in real estate in INDIA

42

15Gaining Momentum

56

16Government initiatives

62

17Recommendation

63

18Conclusion

65

Bibliography66

Annexure67


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CHAPTER .1

INTRODUCTION

The Real Estate Industry

The real estate industry is one of the fastest growing industries in our economy, with a

Compound Annual Growth Rate of approximately 30%.(Ernst and Young)

A US$ 16 billion industry at present, it is expected to touch US$ 60 billion in the next

five years. (Ernst and Young)

The Indian real estate sector plays a significant role in the country's economy. The realestate sector is second only to agriculture in terms of employment generation and

contributes heavily towards the gross domestic product (GDP). Almost five per cent of

the country's GDP is contributed to by the housing sector. In the next five years, this

contribution to the GDP is expected to rise to 6 per cent. According to Jones Lang

LaSalle, faster economic growth in Brazil, Russia, India and China (BRIC) could result in

the property markets of those nations recovering at a faster rate than the UK and US real

estate markets. It has also been suggested that India's property sector could begin to

improve from late 2009 and may attract up to US$ 12.11 billion in real estate investment

over a five-year period. The IT and ITES sector alone is estimated to require 150 million

sq ft of office space across urban India by 2010. Organised retail is also responsible for

the growth in commercial office space requirement. The organised retail industry is likely

to require an additional 220 million sq ft by 2010. Moreover, growth is not restricted to a

few towns and cities but is pan-India, covering nearly all tier-I and tier-II cities.

Contribution of the Indian real estate sector to the GDP of the economy has beencalculated to be around 7 %. One of the very important indicators for real estate sector

growth is the demand for loan for the same.

It has been observed that the total disbursed amount of loan for real estate purposes in

the year 2006 has increased by almost 12000 crores from the previous year.


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But this enthusiasm came out to be too much for the apex bank of India as it felt that the

economy is becoming overheated. So, the frequent churning of the repo and reverse repo

by RBI has cooled down the demand for home loans. The rate of interest rate associated

with the home loan is now at 9.25-10.5 level.

Real estate sector has come up as the second largest employment generator in India

coming only after agriculture sector. It has been estimated that 15% of the educated

workforce are attached with real estate sector in India. Positive steps taken by the

Government of India for for the development of Indian real estate sector The most

significant step taken by the Indian government in this end is the granting of permission

for 100% FDI in Real estate sector Government has succeeded in introducing a trust

called Real Estate Investment Trust (REIT) which has made it possible for the smallinvestors to earn a formidable dividend from the real estate investments.

Some of the regressive aspects that are associated with the Real Estate Sector in India

The structure of the Stamp Duty required to be paid are not standardized yet all over

India. Though according to the Urban Development Ministry the stamp duty has to be

rationalized at the rate of 5 %, differential rate are applied in different states which most

of the times cross the 5% mark. Urban Land Ceiling and Regulation Act is one of the

major obstacles in the path of real estate growth in India because it barres real estate

development on valuable piece of land.

Some of the Reputed Real Estate Companies In India are 21st Century Realtors, Adhiraj

Construction Pvt Ltd., Adarsh Group, Jhavar and Associates and many more.

Real Estate Industry Growth

Growth is compulsory: but its rate must be within limits- Being rich is having money;

being wealthy is having time- Margaret Bonnano. Riding piggyback on a healthy per

capita income growing at a rate of 13 percent (at current prices in 2006-07), the Indian

real estate industry is booming at an exponential rate.


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This upturn has in fact pulled up many related sectors to the threshold from where they

can flourish and has simultaneously given a big push to a number of others. In this study

we make an attempt to find out the causes and effects of this growth and at the same time

analyse the various employment vistas that the surge has thrown open to the Indians.

Real estate expansion: a closer look

It has been observed since the last few years that end-user buying in the sector has

increased from 35 percent to more than 60 percent. There are many obvious reasons for

this improvement. First, the advent of the IT sector has made job in the cities a highly

common phenomenon. This has induced office workers to migrate to cities. Second, the

median age of home buyers has come down to 28 years from 38 years a decade ago. This

has significantly improved the number of first time home buyers and ensures buying

one's own house even if the job is highly vulnerable to relocations. The table below

depicts the growth of different sectors that have contributed heavily to the real estate

growth in India.

Sector CAGR (Compound Annual Growth Rate)

Organized Retail 49.53

IT and ITES 28

Overall Housing 30

Real Estate 33

But bureaucrats are pre-occupied with another concern. The real estate sector in India is

highly confined to the urban and semi-urban regions and only a few developers in the

country have the capability to operate in niche categories and deliver quality projects.

This is a matter of worry as most of the above mentioned sector have not yet made their

forays in the backward regions. However real estate contributes to more than 7 percent of

the GDP and every rupee invested in this sector results in the addition of 78 paise to the

state's income. These figures are significant enough to ensure at par development of the

needy.


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Globalisation in the Real Estate Industry

Globalisation has transformed the world into a household, the members of which are

heavily dependent on each other. Economists all over the world firmly believe that

globalisation will bring in growth and development and the synergy will eliminate the

present disparities. Asia is being accepted as the trusted brand of 21st century and real

estate has a major role in it. India is destined to make its mark in the real estate market.

The opening of Indian real estate is properly timed and scrupulously regulated thus

increasing the chances of its success. It has lot of models beforehand to choose from and

the indirect benefits that exist are significantly huge. After all, a man does not seek his

luck, luck seeks its man.

Indian world-class real estate: the factors propelling the boost

India's rising demand for real estate is fueled by multidimensional components. IT is one

of the major segments contributing to this surge. Estimates say that the IT sector will

require a space of 150 million sq. ft. in major cities by 2010. The residential sector faces

a shortage of 19.4 million housing units and the pattern of demand has changed with

house seekers becoming more and more brand-savvy. Industry observers expect the

Indian retail market to grow at a rate of 35 percent and thus generate an aggregatedemand for 220 million sq ft by 2010. The reason for the above metamorphosis can be

innumerable. According to analysts, this transformation is facilitated by significant rise in

purchasing power, encouraging rates on home loans, favourable demographics etc.

However, it is the direct and indirect benefits of globalisation that configure the precise

campaign at work. The indirect benefits include an affluent middle class, a competitive

market and a well-informed consumer. Below we depict the Indian growth and

development scenario in comparison to other countries.

As can be clearly seen, Indian real estate has a magnificent growth rate. China and United

States fare better on the GDP and Life Expectancy fronts. But the real fascination for

India is led by the potential returns from investment at the rate of 25-35 percent.


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Recent changes in the global outlook of Indian real estate

The Indian government got rid of its 'being isolated means being safe' dogma in February

2005, when it permitted 100 percent foreign investments in construction and favored fast-

track approvals. According to a report prepared by property consultants Jones Lang La

Salle, foreign investment of the order of US $ 10 billion will be flowing into India within

next 12-18 months. Malaysia leads the show followed by UK, US, Israel and Singapore.

The companies that are eager to make a fortune out of the bright prospects in India are:

Signature of Dubai, Ayala of the Philippines, Och-Ziff Capital, EurIndia and Old Lane.

Employment scenario in the ocean of real estate

Globalisation of real estate in countries like India is a must from the viewpoint of

unemployment and demographic profiles. India's unemployment hovers around 6 percent

and estimates show that at this rate anywhere between 19 and 37 million people (mostly

consisting of educated youth) will be unemployed by 2012. Secondly demographic

differentials has placed India at an advantageous position. The present population status

concentrated in the younger age group indicate that many new opportunities can be

optimally explored and real estate globalisation is one of them. This will be beneficial in

providing self-employment through franchising and will open new vistas for the unskilledand semi-skilled workforce of India. But before entering the bull's run, one must analyze

the probability of actually hitting the bull's eye. In reality, a courtyard common to all will

be swept by none. There have been many instances when the Asian countries had a bitter

experience due to artificial boom in the real estate brought in by the global funds. Sensex

has seen unprecedented fluctuations in the last few years and so inflow with frequent

checks is always welcome.


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Foreign Direct Investment in the Indian Real Estate Industry

With a view to catalyzing investment in townships, housing, built-up infrastructure and

construction development projects as an instrument to generate economic activity, create

new employment opportunities and add to the available housing stock and built-up

infrastructure, the Government of India has decided to allow FDI up to 100% under the

automatic route in townships, housing, built-up infrastructure and construction

development projects (which would include, but not be restricted to, housing, commercial

premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city

and regional level infrastructure)


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CHAPTER .2

RESEARCH METHODOLOGY

This report is based on secondary data. In this report FDI in India and sector wise

contribution to FDI is studied. However, the focus is on the real estate sector, so

governments guidelines regarding FDI in real estate is studied in detail.

OBJECTIVES

To study the entire concept of FDI, recognize the difficulties faced by the countryto attract higher FDI inflows

To study the pattern of Foreign Direct Investment in real estate sector in India To analyse the reasons behind higher FDI inflows in China than India

RESEARCH TECHNIQUE

The research technique involved in this project is trend analysis i.e analyzing trend of

FDI inflow in India past8 yrs.


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LIMITATIONS OF THE REPORT

The limitations are described below:

1] INFORMATION PROBLEMS

Some statistics from the government based websites were not pertaining to thecurrent year i.e. some information were not updated

There can be some information which are a part of the research but they beinggovernment related information are not disclosed to the public ,so they can create

a hurdle while conducting research

There are some law related a technical term which is not easy for a layman tounderstand and interpret, I have tried my best to understand and interpret such

terms correctly and thoroughly.

DATA SOURCES

The data was collected from various published sources like the RBI web site and websites

of various departments of central government The study has been done by analyzing the.

Various factors that influence FDI inflows in real estate sector.


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CHAPTER .3

FOREIGN DIRECT INVETSMENT (FDI)

No country on this earth is self sufficient. Each nation or even a state or a city is

dependent on other regions. Because of this, today the world is a shrinking place.

Countries have come closer to each other by means of trade and investments in order to

fulfill their necessities. The government of any country cannot run its state just by the

revenues it earns from its nationals. It requires funds from foreign countries. These funds

help the country to grow and develop. These funds can come either in the form of loans

from World Bank, Indian Monetary Fund (IMF) etc. or by inviting foreign investors.

These investors include (Foreign Institutional Investment (FII), FDI and Portfolio

investment to name a few. Borrowing is not going to get a country anywhere. It will lose

some of its valuable foreign exchange. Thus, the concept of these investors is very crucial

and critical for the growth and development of a country. During this presentation we

will try to highlight the importance of these investors focusing mainly on FDI.

Foreign direct investment (FDI) refers to long term participation by country A intocountry B. It usually involves participation in management, joint-venture, transfer of

technology and "know-how".

FDI stands for Foreign Direct Investment, a component of a country's national financial

accounts. Foreign direct investment is investment of foreign assets into domestic

structures, equipment, and organizations. It does not include foreign investment into the

stock markets.


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Foreign direct investment is thought to be more useful to a country than investments in

the equity of its companies because equity investments are potentially "hot money" which

can leave at the first sign of trouble, whereas FDI is durable and generally useful whether

things go well or badly 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 privatization of

many industries, has probably been the most significant catalyst for FDIs expanded role.

Foreign direct investment (FDI) is a measure of foreign ownership of productive

assets, such as factories, mines and land. Increasing foreign investment can be used as

one measure of growing economic globalization.


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Consistent economic growth, de-regulation, liberal investment rules, and operational

flexibility are all the factors that help increase the inflow of Foreign Direct Investment or

FDI.FDI or Foreign Direct Investment is any form of investment that earns interest in

enterprises which function outside of the domestic territory of the investor.

FDIs require a business relationship between a parent company and its foreign subsidiary.

Foreign direct business relationships give rise to multinational corporations.

For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of

the ordinary shares of its foreign affiliates. The investing firm may also qualify for an

FDI if it owns voting power in a business enterprise operating in a foreign country.

Figure below shows net inflows of foreign direct investment as a percentage of grossdomestic product (GDP). The largest flows of foreign investment occur between the

industrialized countries (North America, Western Europe and Japan). But flows to non-

industrialized countries are increasing sharply.


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US International Direct Investment Flows:

Period FDI Outflow FDI Inflows Net

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn

1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn

1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn

1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn

2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn

Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn


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CHAPTER .4

IMPORTANCE OF FDI

It is now a competitive requirement that businesses invest all over the globe to access

markets, technology, and talent. Foreign Direct Investment (FDI) data are a clear

indicator of the trend toward globalization. FDI includes corporate activities such as

businesses building plants or subsidiaries in foreign countries, and buying controlling

stakes or shares in foreign companies. It doesn't include short term capital flows, such as

the portfolio investments of "emerging market" mutual funds.

Foreign Direct Investment (FDI) facilitates globalization of economies. The current boom

in FDI flows has accelerated this process and is the direct result of the liberalization of

FDI policies that has taken place in many countries, as part of the overall movement

towards more open and market- friendly policies.

FDI is conventionally thought of in terms of branch plant or subsidiary company

operations that are controlled by parent companies based in another country. The foreign

country is the host economy, the country that receives the FDI, and the country where

decision making control resides is the donor (or home) country.

FDI involves issues of direct control as resources are transferred internally within firms

rather than externally between independent firms. In the case of FDI, parent companies

have control over both day to day operations of their investment and their nature and

scope in the long run. It is true that parent companies often devolve many aspects of

decision making to subsidiaries or branch plants themselves, but even so parents have

'ultimate' control over strategy and the right to change the decision making autonomy ofsubsidiaries. Moreover, in the case of FDI it is not simply capital that is transferred but

potentially a range of resources (technology, management, marketing skills). Indeed, it is

the return on these resources that is of primary concern to FDI while it is the rate of

return on capital that motivates the supply of portfolio investment.


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In FDI, control and ownership are related but different concepts - Ownership of

corporations by shareholders does not imply control by these same shareholders.

Foreign Direct Investment combines aspects of both international trade in goods and

international financial flows, and is a phenomenon more complex than either of these. As

its name suggests, it first involves ownership of the assets of a firm: Foreign Direct

Investment (FDI) is often defined as the acquisition of 10% or more of the assets of a

foreign enterprise. Second, it involves the choice of a host country for these assets. The

decision of where to invest will depend on cost conditions and the extent to which

investment gives preferential access to the local market, and both of these considerations

depend on trade restrictions and other policies in the host country. In this respect, the

decision of firms to invest abroad will be a counterpart to the international trade policies

of the countries involved. Third, it involves the decision of which activities to keep

internal to a firm, and which to contract on the market: only the activities internal to a

firm will be included in FDI, while other activities can be pursued by arms-length

transactions between unrelated firms.

For example, a firm investing in a country might bring with it some knowledge that

cannot be effectively leased or sold on the market. Instead, it will set up a plant for local

production and also export, so as to profit from the knowledge it has; in this case FDI

leads to a transfer of intangible assets (knowledge) from the parent to the foreign

subsidiary.


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SHARE OF TOP INVESTING COUNTRIES (FDI INFLOW)

(Aug 1995 to Sept 2009)

(Figures in US $ Million)


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CHAPTER .5

OBJECTIVES OF FDI

The question though arises, why do companies invest in foreign countries? The answer is

quite simple actually. FDI, besides providing growth to the host country offers great

benefits to the company itself. It is not just an outlet for surplus funds and a technique of

improving profitability. FDI goes much deeper than that. Let us look at some major

objectives of FDI.

1. EXPANSION STRATEGY:When companies start investing in foreign countries, one of their major objectives is

expansion. Their products and services will get recognition all over the world. This will

add to their brand image and also increase profits substantially.

2. NEW SOURCES OF DEMAND:In many situations growth is restricted in the home country. This may be due to intense

competition or due to unfavorable market conditions. Hence the companies invest in

foreign markets where demand exists.

3. LOW PRODUCTION COSTS:In many countries production costs are low as compared to the home country. There is

cheap availability of labor and raw materials. Hence companys shift their base to these

countries.

4. ECONOMIES OF SCALE:Some companys enter foreign market because they want to enjoy full benefits of

economies of scale. With production taking place in mass scale all over the world the

costs will come down giving the companys a high return on investment.


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CHAPTER .6

TYPES OF FOREIGN DIRECT INVESTMENT: AN OVERVIEW

1. By Direction

Inward

Inward foreign direct investment is when foreign capital is invested in local resources.

Outward

Outward foreign direct investment, sometimes called "direct investment abroad", is when

local capital is invested in foreign resources.

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This

classification is based on the types of restrictions imposed, and the various prerequisites

required for these investments.

An outward-bound FDI is backed by the government against all types of associated risks.

This form of FDI is subject to tax incentives as well as disincentives of various forms.

Risk coverage provided to the domestic industries and subsidies granted to the local firms

stand in the way of outward FDIs, which are also known as 'direct investments abroad.'

Different economic factors encourage inward FDIs. These include interest loans, tax

breaks, grants, subsidies, and the removal of restrictions and limitations. Factors

detrimental to the growth of FDIs include necessities of differential performance and

limitations related with ownership patterns.


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2. By Target

Greenfield investment

Direct investment in new facilities or the expansion of existing facilities. Greenfield

investments are the primary target of a host nations promotional efforts because they

create new production capacity and jobs, transfer technology and know-how, and can

lead to linkages to the global marketplace. The Organization for International Investment

cites the benefits of Greenfield investment (or in sourcing) for regional and national

economies to include increased employment (often at higher wages than domestic firms);

investments in research and development; and additional capital investments. Criticism ofthe efficiencies obtained from Greenfield investments includes the loss of market share

for competing domestic firms. Another criticism of Greenfield investment is that profits

are perceived to bypass local economies, and instead flow back entirely to the

multinational's home economy.

Mergers and Acquisitions

Transfers of existing assets from local firms to foreign firms takes place; the primary type of

FDI. Cross-border mergers occur when the assets and operation of firms from different

countries are combined to establish a new legal entity. Cross-border acquisitions occur when

the control of assets and operations is transferred from a local to a foreign company, with the

local company becoming an affiliate of the foreign company. Unlike Greenfield investment,

acquisitions provide no long term benefits to the local economy-- even in most deals the

owners of the local firm are paid in stock from the acquiring firm, meaning that the money

from the sale could never reach the local economy. Nevertheless, mergers and acquisitionsare a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI

flow into the United States. Mergers are the most common way for multinationals to do FDI.

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place

when a multinational corporation owns some shares of a foreign enterprise, which

supplies input for it or uses the output produced by the MNC.


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Horizontal foreign direct investments happen when a multinational company carries out a

similar business operation in different nations.

Horizontal FDI

Investment in the same industry abroad as a firm operates in at home.

Vertical FDI

(a)Backward Vertical FDI

Where an industry abroad provides inputs for a firm's domestic production process.

(b)Forward Vertical FDI

Where an industry abroad sells the outputs of a firm's domestic production.

3. By Motive

FDI can also be categorized based on the motive behind the investment from the

perspective of the investing firm:

Resource-Seeking

Investments which seek to acquire factors of production that are more efficient than thoseobtainable in the home economy of the firm. In some cases, these resources may not be

available in the home economy at all (e.g. cheap labor and natural resources). This

typifies FDI into developing countries, for example seeking natural resources in the

Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.

Market-Seeking

Investments which aim at either penetrating new markets or maintaining existing ones.

FDI of this kind may also be employed as defensive strategy; it is argued that businesses

are more likely to be pushed towards this type of investment out of fear of losing a

market rather than discovering a new one. This type of FDI can be characterized by the

foreign Mergers and Acquisitions in the 1980s by Accounting, Advertising and Law

firms.


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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 thatthis type of FDI comes after either resource or market seeking investments have been

realized, with the expectation that it further increases the profitability of the firm.

Typically, this type of FDI is mostly widely practiced between developed economies;

especially those within closely integrated markets (e.g. the EU).

Strategic-Asset-Seeking

A tactical investment to prevent the loss of resource to a competitor. Easily compared to

that of the oil producers, whom may not need the oil at present, but look to prevent their

competitors from having it.


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CHAPTER .7

TYPES OF FOREIGN DIRECT INVESTOR

A foreign direct investor may be classified in any sector of the economy and could be any

one of the following:

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organisation; or Any combination of the above.


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CHAPTER .8

METHODS

The foreign direct investor may acquire 10% or more of the voting power of an

enterprise in an economy through any of the following methods:

By incorporating a wholly owned subsidiary or company By acquiring shares in an associated enterprise Through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms

Low corporate tax and income tax rates Tax holidays Other types of tax concessions Preferential tariffs Special economic zones 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)


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CHAPTER .9

ADVANTAGES OF FDI

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 plays a pivotal role in the development of an economy. It is an

integral part of the global economic system. Advantages of FDI can be enjoyed to full

extent through various national policies and international investment architecture.

FDI inflow helps the developing countries to develop a transparent, broad, and effective

policy environment for investment issues as well as, builds human and institutional

capacities to execute the same.

Foreign investors introduce a package of highly productive resources into the host

economy. It is now generally accepted that the distinguishing characteristics of FDI are

its stability and ease of service relative to commercial debt or portfolio investment, as

well as its inclusion of non financial assets in production and sales processes. Aside from

increasing output and income, potential benefits to host countries from FDI inflows

include the following:

1. FOREIGN COMPANYS BRING SUPERIOR TECHNOLOGY:Company does bring in superior technology. The competitors in the domestic market will

also try and copy the technology. The extent of benefits to host countries depends on how

much of the technology spills over to domestic and other foreign-invested firms.


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2. FOREIGN INVESTMENT INCREASES COMPETITION IN THE HOSTECONOMY:

The entries of a new firm in a non tradable sector increases industry output and may

thereby reduce the domestic price, leading to a net improvement in welfare. More the

competition in the market, the better will be the quality of goods and services.

3. FOREIGN INVESTMENT TYPICALLY RESULTS IN INCREASEDDOMESTIC INVESTMENT:

In an analysis of panel data for 58 developing countries, it was found that about half of

each dollar of capital inflow translates into an increase in domestic investment. The

findings suggest a foreign resource transfer equal to 53-69% of the inflow of financial

capital. However, when the capital inflows take the form of FDI, there is a near one-for-

one relationship between the FDI and domestic investment. Hence FDI boosts the

domestic market investments also.

4. FOREIGN INVESTMENT CAN AID IN BRIDGING A HOSTCOUNTRYS FOREIGN EXCHANGE GAP:

Two gaps may exist in the economy - insufficient savings to support capital accumulation

to achieve a given growth target, and insufficient foreign exchange to purchase imports.

Often investment requires imported inputs. If domestic savings are insufficient, or face

barriers in being converted to foreign exchange to acquire imports, they may be

insufficient to guarantee growth. Capital inflows help ensure that foreign exchange will

be available to purchase imports for investment.


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Besides the above facts FDI is also beneficial in the following ways:

FDI allows the transfer of technologyparticularly in the form of new varietiesof capital inputsthat cannot be achieved through financial investments or trade

in goods and services. FDI can also promote competition in the domestic input

market.

Recipients of FDI often gain employee training in the course of operating the newbusinesses, which contributes to human capital development in the host country.

Profits generated by FDI contribute to corporate tax revenues in the host country.Thus FDI contributes to investment and growth in host countries through various

channels.

As mentioned earlier FDI is the flow of foreign money in the local market. On the face

of it, it may look very good but there is a catch t it. Foreign money coming into the

market will provide increased capital in the market. Because of this there would be more

money than desired in the market. When this money flows in the economy through the

multiplier effect there will be more people with more money. Hence there will be an

excess of demand over the supply. This will result in high inflation in the economy. As a

result the overall prices of products will rise steeply which again is not good for the

economy as a whole.

Hence the government imposes certain restrictions on the amount of FDI permitted in

each sector. Through its policies the government tries and safeguards the interest of the

domestic market.


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CHAPTER .11

FDI IN INDIA

Foreign Direct Investment (FDI) in India in growing rapidly. Foreign direct investment is

an integral part of an open and effective international economic system and a major

catalyst to development. FDI is highly beneficial for a country like India. Empirical

studies suggest that FDI triggers technology spillovers, assists human capital formation,

contributes to international trade integration, helps create a more competitive business

environment and enhances enterprise development. All these factors contribute to higher

economic growth and consequently aid in alleviating poverty. Apart from bestowing

economic benefits FDI may also help improve environmental and social conditions by

transferring "cleaner" technologies and leading to more socially responsible corporate

policies.

Attracting foreign direct investment has become an integral part of the economic

development strategies for India. FDI ensures a huge amount of domestic capital,

production level, and employment opportunities in the developing countries, which is a

major step towards the economic growth of the country. FDI has been a booming factor

that has bolstered the economic life of India, but on the other hand it is also being blamed

for ousting domestic inflows. FDI is also claimed to have lowered few regulatory

standards in terms of investment patterns. The effects of FDI are by and large

transformative. The incorporation of a range of well-composed and relevant policies will

boost up the profit ratio from Foreign Direct Investment higher.

Some of the biggest advantages of FDI enjoyed by India have been listed as under:

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 the country.

Foreign Direct Investments have opened a wide spectrum of opportunities in the trading

of goods and services in India both in terms of import and export production.


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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

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.

Foreign Direct Investment in India is permitted as under the following forms of

investments:

Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.

FDI is not permitted in the following industrial sectors:

Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,

Zinc


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APPROVAL FOR FDI IN INDIA

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 (provided certain parameters are met) to all proposals

involving:

Foreign equity up to 50% in 3 categories relating to mining activities. Foreign equity up to 51% in 48 specified industries. Foreign equity up to 74% in 9 categories.

Investments in high-priority industries or for trading companies primarily engaged in

exporting are given almost automatic approval by the RBI.

FDI in India on automatic route is not allowed in the following sectors:

Proposals that require an industrial licence and cases where foreign investmentis more than 24% in the equity capital of units manufacturing items reserved for

the small scale industries.

Proposals in which the foreign collaborator has a previous venture/tie-up inIndia.

Proposals relating to acquisition of shares in an existing Indian company infavour of a Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body

(OCB) investor; and

Proposals falling outside notified sectoral policy/caps or under sectors in whichFDI is not permitted and/or whenever any investor chooses to make an

application to the Foreign Investment Promotion Board and not to avail of the

automatic route.


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2. FIPB Route: Foreign Investment Promotion Board (FIPB) is a competent body to

consider and recommend foreign direct investment, which do not come under the

automatic route. Normal processing time of an FDI proposal in FIPB is 4 to 6 weeks.

FIPB is located in the Department of Economic Affairs, Ministry of Finance. Its

constitution is as follows:

Secretary, Department of Economic Affairs (Chairman) Secretary, Department of Industrial Policy & Promotion (Member) Secretary, Department of Commerce (Member) Secretary, (Economic Relation), Ministry of External Affairs (Member)

FIPB can co-opt Secretaries to the Govt. of India and other top officials of financial

institutions, banks and professional experts of industry and commerce, as and when

necessary.

Foreign Investment Implementation Authority (FIIA)

Government has set up Foreign Investment Implementation Authority (FIIA) to facilitate

quick translation of Foreign Direct Investment (FDI) approvals into implementation by

providing a pro-active one stop after care service to foreign investors, help them obtain

necessary approvals and by sorting their operational problems. FIIA is assisted by Fast

Track Committee (FTC), which have been established in 30 Ministries/Departments of

Government of India for monitoring and resolution of difficulties for sector specific

projects.

FDI has helped the Indian economy grow, and the government continues to encourage

more investments of this sort - but with $5.3 billion in FDI in 2004 India gets less than

10% of the FDI of China.

Foreign direct investment (FDI) in India has played an important role in the development

of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a

certain degree of financial stability, Growth and development. This money has allowed

India to focus on the areas that may have needed economic attention, and address the

various problems that continue to challenge the country.


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India has continually sought to attract FDI from the worlds major investors . In 1998 and

1999, the Indian national government announced a number of reforms designed to

encourage FDI and present a favorable scenario for investors.

A number of projects have been announced in areas such as electricity generation,

distribution and transmission, as well as the development of roads and highways, with

opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide up to 100%

of the financing required for the construction of bridges and tunnels, but with a limit on

foreign equity of INR 1,500 crores, approximately $352.5m.

Currently, FDI is allowed in financial services, including the growing credit card

business. These services include the non-banking financial services sector. Foreign

investors can buy up to 40% of the equity in private banks, although there is condition

that stipulates that these banks must be multilateral financial organizations. Up to 45% of

the shares of companies in the global mobile personal communication by satellite

services (GMPCSS) sector can also be purchased.

By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but

less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable

democracy and a smoother approval process, lag so far behind China in FDI amounts?

Although the Chinese approval process is complex, it includes both national and regional

approval in the same process.

Federal democracy is perversely an impediment for India. Local authorities are not part

of the approvals process and have their own rights, and this often leads to projects getting

bogged down in red tape and bureaucracy. India actually receives less than half the FDI

that the federal government approves.

FDI in India has increased over the years due to the efforts that have been made by the

Indian government. The increased flow of FDI in India has given a major boost to the

country's economy and so measures must be taken in order to ensure that the flow of FDI

in India continues to grow.


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The following table shows the FDI Inflows in India

FDI Inflows (AS per international best practices) (Amt US $ Million)

Equity

FISCAL

YEAR

(APRIL-

MARCH)

FIPB

Route/

RBI's

Automati

c Route/

Acquisiti

on Route

Equity

capital of

unincorpo

ratedbodies

Reinvest

ed

earnings

Other

capital

Total

FDI

inflows

Growt

hOver

previous

yr(%)

1991(Augus

t)-2000

(March)

15483 - - -15483

-

2000-01 2339 61 1350 279 4029 -

2001-02 3904 191 1645 390 6130 (+) 52

2002-03 2574 190 1833 438 5035 (-) 18

2003-04 2197 32 1460 633 4322 (-) 14

2004-05 3250 528 1904 369 6051 (+)40

2005-06 5540 435 2760 226 8961 (+) 48

2006-07 15585 896 5828 517 22826 (+) 146

2007-08 24575 2292 7168 327 34362 (+)51

2008-09 23885 334 3004 203 27426 -

Cumulative

Total(From

Aug 1991-

Jan 2009)

99332 4959 26952 3382 134625 -

Source: DIPP, Federal Ministry Of Commerce and Industry, Government of India


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ADVANTAGES OF FDI IN INDIA:

The Indian government made several reforms in the economic policy of the country in the

early 1990s. This helped in the liberalization and deregulation of the Indian economy and

also opened the country's markets to foreign direct investment.

As a result of this, huge amounts of foreign direct investment came into India through

non- resident Indians, international companies, and various other foreign investors. The

growth of FDI in India boosted the economic growth of the country. Major advantages of

FDI in India have been in terms of -

Increased capital flow. Improved technology. Management expertise. Access to international markets.

Amount of foreign direct investment in India

The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this

figure stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in

2004 this figure increased to US$ 113 billion. This shows that the flow of foreign direct

investment in India has grown at a very fast pace over the last few years. The various

forms of foreign capital flowing into India are NRI deposits, investments in the

commercial banks of India, and investments in the country's debt and stock markets.

FDI in major sectors in India

Though the services sector in India constitutes the largest share in the Gross Domestic

Product, still it has failed to some extent in attracting more funds in the forms of

investments.

Important sectors of the Indian Economy attracting more investments into the country are

as follows:
http://www.economywatch.com/foreign-direct-investment/fdi-india/sectors-attracting-fdi.htmlhttp://www.economywatch.com/foreign-direct-investment/fdi-india/sectors-attracting-fdi.html


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Electrical Equipments (Including Computer Software & Electronic) Telecommunications (radio paging, cellular mobile, basic telephone service) Transportation Industry Services Sector (financial & non-financial) Hospitality and Tourism Fuels (Power + Oil Refinery) Chemical (other than fertilizers) Food Processing Industries Drugs & Pharmaceuticals Cement and Gypsum Products Metallurgical Industries
http://www.economywatch.com/foreign-direct-investment/fdi-india/sectors-attracting-fdi.htmlhttp://www.economywatch.com/foreign-direct-investment/fdi-india/sectors-attracting-fdi.html


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Sector wise Analysis of FDI Inflow in India-Glimpses

The IT industry is one of the booming sectors in India. At present India is the leading

country pertaining to the IT industry in the Asia -Pacific region. With more international

companies entering the industry, the Foreign Direct Investments (FDI) has been

phenomenon over the year. The rapid development of the telecommunication sector was

due to the FDI inflows in form of international players entering the market and transfer of

advanced technologies. The telecom industry is one of the fastest growing industries in

India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in

the world.

The FDI in Automobile Industry has experienced huge growth in the past few years. The

increase in the demand for cars and other vehicles is powered by the increase in the levels

of disposable income in India. The options have increased with quality products from

foreign car manufacturers. The introduction of tailor made finance schemes, easy

repayment schemes has also helped the growth of the automobile sector. For the past few

years the Indian Pharmaceutical Industry is performing very well.

The varied functions such as contract research and manufacturing, clinical research,

research and development pertaining to vaccines are the strengths of the Pharma Industryin India. Multinational pharmaceutical corporations outsource these activities and help

the growth of the sector. The Indian Pharmaceutical Industry has been experiencing a

vast inflow of FDI.

The FDI inflow in the Cement Industry in India has increased with some of the Indian

cement giants merging with major cement manufacturers in the world such Holcim,

Heidelberg, Italcementi, Lafarge, etc. The FDI in Semiconductor sector in India were

crucial for the development of the IT and the ITES sector in India. Electronic hardware is

the major component of several industries such as information technology,

telecommunication, automobiles, electronic appliances and special medical equipments.


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The following table shows the sector wise inflow of FDI in India

Sector-wise FDI Inflows ( From April 2000 to July 2008)

SECTOR

AMOUNT OF FDIINFLOWS

PERCENT OFTOTAL FDIINFLOWS (Interms of Rs)In Rs Million

In US$Million

Services Sector 623808.97 14659.48 20.97

Computer Software &hardware

368091.46 8369.51 12.37

Telecommunications 180426.68 4156.92 6.06

Construction Activities 196092.19 4646.26 6.59

Automobile 116479.17 2677.52 3.92

Housing & Real estate 166417.79 40262.8 5.59

Power 117536.59 2725.31 3.95

Chemicals (Other than

Fertilizers) 74008.90 1685.91 2.49

Ports 62154.33 1528.25 2.09

Metallurgical industries 105562.25 2528.04 3.55

Electrical Equipments 51143.69 1187.93 1.72

Cement & Gypsum Products 68804.72 1577.41 2.31

Petroleum & Natural Gas 85089.26 2043.44 2.86

Trading 58053 1388.76 1.95

Consultancy Services 41242.49 950.40 1.39

Hotel and Tourism 44768.54 1049 1.50

Food Processing Industries 31853.51 706.73 1.07

Electronics 32333.63 715.54 1.09

Misc. Mechanical & 25527.50 590.33 0.86


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Engineering industries

Information & Broadcasting(Incl. Print media)

38238.17 909.61 1.29

Mining 20814.21 514.57 0.70

Textiles (Incl. Dyed, Printed) 24134.07 557.38 0.81

Sea Transport 17059.88 390.26 0.57

Hospital & DiagnosticCentres

25481.17 608.56 0.86

Fermentation Industries 26778.09 637.58 0.90

Machine Tools 9627.04 219.52 0.32

Air Transport ( Incl. airfreight)

9043.64 209.84 0.30

Ceramics 9929.15 234.61 0.33

Rubber Goods 8354.47 183.17 0.28

Agriculture Services 7778.15 185.11 0.26

Industrial Machinery 11739.04 275.02 0.39

Paper & Pulp 9640.58 227.37 0.32

Diamond & Gold Ornaments 7735.65 178.37 0.26

Agricultural Machinery 6626.94 147.85 0.22Earth Moving Machinery 5661.09 132.41 0.19

Commercial, Office &Household Equipments

5791.40 132.59 0.19

Glass 5628.13 125.32 0.19

Printing of Books (Incl.Litho printing industry)

5609.27 126.43 0.19

Soaps, Cosmetics and ToiletPreparations

4809.40 110.66 0.16

Medical & SurgicalAppliances

5208.93 116.50 0.18

Education 4789.79 112.01 0.16

Fertilizers 4279.74 96.54 0.14

Photographic raw Film & 2580.20 63.90 0.09


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Paper

Railway related components 3067.95 70.67 0.10

Vegetable oils and Vanaspati 2163.30 49.25 0.07

Sugar 1728.24 39.35 0.06

Tea & Coffee (Processing &warehousing coffee &rubber)

2360.81 55.19 0.08

Leather, Leathergoods &Piackers

1570.26 35.70 0.05

Non-conventional energy 3243.16 78.11 0.11

Industrial instruments 599.87 13.60 0.02

Scientific instruments 475.84 10.81 0.02Glue and Gelatine 385.80 8.44 0.01

Boilers & steam generatingplants

238.67 5.40 0.01

Dye-Stuffs 350.28 8.35 0.01

Retail Trading (Single brand) 814.79 19.47 0.03

Coal Production 614.10 15.42 0.02

Coir 50.17 1.12 0.00

Timber products 78.81 1.85 0.00

Prime Mover (Other thanelectrical generators

17.24 0.41 0.00

Defence Industries 2.37 0.05 0.00

Mathematical, Surveying &drawing instruments

50.35 1.27 0.00

Misc. industries 170046 3944.06 5.75

Sub Total 2974981.14 69444.96 100.00

Stock Swapped (from 2002to 2008)

145466.35 3391.09 5.24

Advance of Inflows (from1999 to 2004)

89622.22 1962.82

RBI's NRI Schemes 5330.60 121.33


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Grand Total 3215400.31 74830.18

Sector wise FDI inflows data reclassified, as per segregations of data from April2000 onwards

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government ofIndia


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CHAPTER .12

COMPARATIVE ANALYSIS FDI-INDIA vs. CHINA

Foreign Direct Investment is set to rise in India provided economic reforms and the

government's commitment to attracting FDI continue. The prospect for increase in inward

flows are promising for both India and China assuming that they want to accord FDI a

role in their development process, emphasizing that Beijing would continue to be New

Delhi's biggest competitor in this field.

The large market size and potential, the skilled labour force and low wage cost will

remain the key attraction for foreign investors. Comparing the performance between

India and China in attracting FDI, China has done much better than India for variety of

reason including opening up its economy in 1979 much earlier than India did in 1990s

and the Chinese overseas contributing much more than Indians.

POLICIESINDIA vs. CHINA

China has "more business-oriented" and more FDI-friendly policies than India and

Beijing's FDI procedures are easier and decisions taken rapidly. Besides, China has more

flexible labour laws, a better labour climate and better entry and exit procedures for

business. The role of Chinese business networks abroad and their "significant"

investments in mainland contrasts with much smaller Indian networks and investment in

India. Overseas Chinese are more in number, tend to be more entrepreneurial, enjoy

family connections and have interest and financial capability to invest in China and when

they do, they receive red-carpet treatment. In contrast, overseas Indians are fewer, more

of a professional group and, unlike the Chinese, often lack the family networks and

connections and financial resources to invest in India.


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FUTURE PROSPECTS OF FDIINDIA vs. CHINA

India and China are "giants of the developing world," both enjoy healthy rates of growth.

But it notes that there are "significant differences in their FDI performance. FDI flows to

China grew from $3.5 billion in 1990 to $52.7 billion in 2002. If round-tripping is taken

into consideration, China's FDI inflows could fall to around $40 billion. But those to

India rose from $0.4 billion to $5.5 billion during the same period. Even with the

adjustments, China attracted seven times more FDI than India in 2002, 3.2% of its Gross

Domestic Product (GDP) compared with 1.1% for India. In United Nations Conference of

Trade and Development (UNCTAD) FDI performance index, China ranked 54th and

India 122nd

. On basic economic determinants of inward FDI, China does better than

India.

China's total and per capita GDP are higher, making it more attractive for market-seeking

FDI. It higher literacy and education rates suggest that its labour is more skilled, making

it more attractive to efficiency-seeking investors. Besides, it has large natural resources

endowment and its physical infrastructure is more competitive, particularly in coastal

areas.

Both China and India are good candidates for relocation of labour-intensive activities bytransnational corporations, a major factor in the growth of Chinese exports. But in case of

India, it says, the relocation has been primarily in services, notably information and

communication technology. Almost all major US and European information technology

firms have presence in the country, mostly in Bangalore. However, 80% of Fortune 500

companies have presence in China while 37% of these firms outsource to India. Despite

the improvement in India's policy environment, TNC investment interest remains

lukewarm with some exceptions such as information and communication technology.


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CHAPTER .13

FOREIGN DIRECT INVESTMENT IN REAL ESTATE

INTRODUCTION:

As far as the real estate industry is concerned, India is the fourth largest economy in the

world (according to the Asian Real Estate Society International Conference). The sector

has garnered unprecedented momentum in recent times, and investment in real estate is a

leading indicator of economic growth. Incidentally, half of the FDI in China is in realestate.

In India real estate is expected to grow at 14 per cent per annum. It is also expected to

double its contribution to the countrys GDP.


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Currently, the real estate industry in India has a shortage of 20 million units. The demand

for housing is expected to rise to 80 million units by 2015 and 90 million by 2020, The

estimated investment is expected to be $670 billion by 2015 and 890 billion by 2020. An

investment of $34 billion to $45billion per annum is envisaged. It is expected to generate

four million jobs by 2015. In fact, the real estate industry will be the third largest

employer after agriculture and textile.

The size of the real estate industry in India is estimated by FICCI, to be around US$ 12

billion. This figure is growing at a pace of 30% for the last few years. Almost 80 % of

real estate developed in India, is residential space and the rest comprise office, shopping

malls, hotels and hospitals. .According to the Tenth Five Year Plan, there is a shortage of

22.4 million dwelling units. Thus, over the next 10 to 15 years, 80 to 90 million housingdwelling units will have to be constructed with a majority of them catering to middle- and

lower-income groups.

This double-digit growth is mainly attributed to the off-shoring business, including high-

end technology consulting, call centres and software programming houses which in 2003-

04, is estimated to have accounted for more than 10 million square feet of real estate

development. This is the ideal time to invest in the country as policy makers have begun

to emphasize on developing adequate infrastructure for the country. Real estate

companies would also do well to maximize their own performance and operational

efficiency.

For every Indian rupee invested in the construction of houses in India, INR 0.78 is added

to the gross domestic product. The real estate sector is also subservient to the

development of over 250 other ancillary industries. A study by a rating agency ICRA

shows that the construction industry ranks 3rd among the 14 major sectors in terms of

direct, indirect and induced effects in all sectors of the economy. After agriculture, the

real estate sector is the second largest employment generator in India The sustained

demand from the Information Technology sector also affected the urban landscape in

India. As per estimates, there is demand for 66 million square feet of IT space over the

next five years. Several multinational companies continue to move their operations to

India to take advantage of lower costs of skilled manpower and logistics.


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With human resources being the key element in this industry, the hiring and housing of

people, both at their work place and home assume great importance and therefore the

need to create space for people to work and live, which in turn triggers the development

of other related infrastructure.

The predominant trend has been to set up world-class business centres, often campus-

style establishments, bearing a distinctive corporate stamp. So distinct are some of these

locations that they are being termed as the "temples of modern India" by the local press.

This is just an indication of the extent of real estate development taking place. Indian and

international real estate majors also envisage a major boom in the hotel project

developments over the next five years.

During the last five years, major chains such as the Orchid, Marriott, Holiday Inn etc

have either tied up with local developers of property or they have started planning for

their own real estate. Though the real estate sector in India is proclaimed to be the most

promising sector today, it is still hugely plagued by market uncertainties and inhibitions.

This is manifested by an abysmally low mortgage penetration. In India the mortgage to

GDP ratio is about 2%. This compares to a mortgage to GDP ratio of over 51% in USA.

However, even if one were to benchmark with more comparable counterparts, the ratio

ranges between 15-20% for South East Asian countries. Thus the penetration level of

mortgages is miniscule when compared with the shortage of housing units. The real estate

market in India predominantly continues to remain unorganized, fairly fragmented,

mostly characterized by small players with a local presence.

Moreover, India leads the pack of top real estate investment markets in Asia for 2010,

according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute, a

global non-profit education and research institute.

The report, which provides an outlook on Asia-Pacific real estate investment and

development trends, points out that India, particularly Mumbai and Delhi, are good

destinations. Residential properties are viewed as more promising than other sectors and

Mumbai, Delhi and Bangaloretop the pack in the hotel buy' prospects as well.


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The study is based on the opinions of over 270 international real estate professionals,

including investors, developers, property company representatives, lenders, brokers and

consultants.

Apart from the huge demand, India also scores on the construction front. A McKinsey

report reveals that the average profit from construction in India is 18 per cent, which is

double the profitability for a construction project undertaken in the US.

The real estate sector is also likely to get a boost from Real Estate Mutual Funds

(REMFs) and Real Estate Investment Trusts (REITs). In fact, according to a CRISIL

paper, the REITs would have the potential to hold at least 5 per cent share of the total

global real estate market by 2010, the size of which would reach US$ 1,400 billion in the

next three years. The paper titled, Indian REITs; Are We Prepared', says that by 2010,

REITs alone would hold a market size of US$ 70 billion of the total real estate market as

its concept is gaining ground in countries like India and other developing nations.

According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the

Indian real estate sector is likely to experience consolidation wherein bigger players may

opt for outright buy of smaller firms or forge joint ventures or business alliances with

them.

Foreign direct investment (FDI) into India in the real estate sector for the fiscal year

2008-09 has been US$ 12.62 billion approximately, according to the latest data given by

the Department of Policy and Promotion (DIPP).

Moreover, buoyed by positive market sentiment and demand revival in housing, four real

estate companiesEmaar MGF Land, Lodha Developers, Sahara Prime City and

Ambience Ltdare looking to mop-up over US$ 2.35 billion through public offerings.


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FOREIGN DIRECT INVESTMENT (FDI) IN REAL ESTATE

The decision to liberalise the FDI norms in the construction sector is perhaps the most

significant economic policy decision taken by the Union Government. Until now, only

Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to

invest in the housing and the real estate sectors. Foreign investors other than NRIs were

allowed to invest only in development of integrated townships and settlements either

through a wholly owned subsidiary or through a joint venture company in India

along with a local partner. However, the guidelines prescribed via Press Note 2 (2005)

series issued by Ministry of Commerce & Industry, have further opened out FDI intownships, housing, built-up infrastructure and construction-development projects.

Major conglomerates are taking initiative and are wooing internationals firms in order to

line up investments for major projects

NEED OF FDI IN REAL ESTATE

According to the JP Morgan Research Report, the real estate industry is expected to grow

from the present size of $50 billion to a magnificent size of $90 billion by 2011-12. The

residential sector is poised to grow at an eye-catching rate over the next 5-10 years.

Riding on a growing popularity on the stock-market front, real estate has achieved a

market capitalisation of Rs. 2,00,000 crores. This amplification has been directed by

improving demographics, a healthy macro environment, growth of the service industry,

and notification of city development plans, underscores the report. Unavailability of

skilled labour force, a crucial factor in accomplishing projects in time has been accepted

as one of the major challenges.

According to the RBI's First Quarter Review of Annual Monetary Policy for the Year

2007-08, growth in housing and real estate loans were respectively 24.6 percent and 69.8


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percent respectively in 2006-07. RBI has also increased the risk weightage of lending to

the real estate. The norms on FDI in real estate are strict, thus leading to multiple chances

of ineligibility. So real estate investors have taken the FII route to meet the needs for

funds. But it must be kept in mind that FIIs turning net-sellers have led to most of our

stock market crashes. Thus the proposal to allow FDI in realty through the FII route with

a lock-in period is welcome. Moreover the FEMA (Foreign Exchange Management Act)

must be amended before the status of portfolio investment can be given to FDI in real

estate.


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BENEFICIAL EFFECTS OF FDI IN THE INDIAN REAL ESTATE

MARKET

Real estate employs a huge proportion of the workforce next to only the IT sector in

India. The real estate industry's direct employment has been estimated to be around

500,000 people within three years. In addition there are thousands of casual workers who

find job opportunities in unorganised real estate market. There are a number of positions

in the real estate business which can be handled well by unskilled or semi-skilled people.

So the inflow of FDI in the organised real estate market is expected to generate more

employment opportunities in the organised sector and thus ameliorate the general

standard of living.

The government's plan to regulate ECB(External Commercial Borrowing) for integrated

townships has narrowed down the flow of external debt to the real estate sector. ECB has

come in as 'disguised equity' and has raised the money supply thus pushing the inflation

rate. FDI is surely a better option as it will neither make the real estate sector over-heated

and will also be a long term investment.FDI brings professional real estate experts and

ensures the smooth flow of foreign technology and fund management and will reduce

wastage. This added benefits are essential for the nascent Indian real estate to take off.

GDP FDI

Shareof FDI

in GDP Share of real estate in FDI

2008

INDIA 600.6 3.11 0.20% 4.5% (0.14)

CHINA 1,417,000 57 0.00% 18.3% (10.43)

2009

INDIA 650 3.75 0.57% 10.6% (0.4)

CHINA 1,533,194 60.63 0.00% 21.78%(13.21)

2010 Estimated

INDIA 692.25 15 2.10% 10-20% (1.5-3.75)

CHINA 1,672,714.65 68.6 0.00% 30 (20.5%)

Fig in US $ Billions

Source: Chesterton Meghraj Property Consultants (P) Ltd.


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FDI IN REAL ESTATE IN INDIA: GUIDELINES

The Department of Industrial Policy and Promotion (DIPP) vide Press Note No. 2

(2005) permitted FDI up to 100% under automatic route in townships, housing, built-upinfrastructure and construction development projects

(which would include, but not be restricted to, housing, commercial premises, hotels,

resorts, hospitals, educational institutions, recreational facilities, city and regional level

infrastructure facilities, such as roads and bridges, transit systems etal), subject to the

following guidelines:

1. The minimum area to be developed under each project would be as follows:

In case of development of serviced housing plots, a minimum land area of 10hectares.

In case of construction development projects, a minimum built-up area of50,000 sq.mts.

In case of a combination of the above two projects, any one of the above twoconditions would suffice.

2. The minimum capitalization norm shall be US$ 10 million for a wholly owned

subsidiary and US$ 5 million for joint ventures with Indian partner/s. The funds would

have to be brought in within six months of commencement of business of the company.

3. Original investment cannot be repatriated before a period of three years from

completion of minimum capitalization. However, the investor may be permitted to exit

earlier with prior approval of the government through the FIPB.

4. Development of at least 50% of the integrated project within a period of five years

from the date of obtaining all statutory clearances, has to be completed. The investor

would not be permitted to sell underdeveloped plots (underdeveloped connotes, where

roads, water supply, street lighting, drainage, sewerage and other conveniences as

applicable under prescribed regulations, have not been made available).


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The investor must provide this infrastructure and obtain the completion certificate from

the concerned local body/service agency before being allowed to dispose of the serviced

housing plots.

5. The project shall conform to the norms and standards, including land use requirements

and provision of community amenities and common facilities as laid down in the

applicable building control regulations, by-laws, rules and other regulations of the State

Govt./Municipal/Local Body concerned.

6. The investor shall be responsible for obtaining all necessary approvals, including those

of the building/ layout plans, developing internal and peripheral areas and other

infrastructure facilities, payment of development, external development and other charges

and complying with all other requirements as prescribed under applicable rules/bye-

laws/regulations of the State Government/Municipal Body/ Local Body concerned.

7. The State Government/ Municipal/ Local Body concerned, which approves the

building/ development plans, will monitor the developers compliance to the above

conditions.


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Indian Developers Responses on FDI guidelines:

Minimum Area stipulation of 10 hectares for development of serviced housing plots

Majority of domestic investors i.e., 73.33% feel that the reduction of minimum area

stipulation from 100 acres (approx. 40.5 hectares) to 10 hectares would go a long way in

boosting FDI in the real estate sector. 26.6% view that the limit should be further

lowered to 5 hectares in general and 2 hectares for Joint Ventures (JVs).

Minimum Built-up Area Stipulation of 50,000 sqmts in case of construction

development projects

The policy does not clearly define the scope of built up area, thus leaving it open to an

ambiguous interpretation.

Most of the respondents feel that the definition of built-up area is inadequate and does

not clearly imply whether it is inclusive of basement, common areas, service areas, lifts,

balcony etc. The developers feel that the measure of built-up area should be based on the

FSI (Floor Space Index) / FAR (Floor Area Ratio) as specified and approved by a

competent local planning authority of the State or more aptly a common definition to be

adopted by all the states. However, 63.5% feel that the stipulation of 50,000 sqmts is

appropriate and does not need any revision. Others view that the stipulation should befurther reduced to 10,000 to 25,000 sqmts.

% of Builders Agreeing with the Min. Area and Min. Built-Up Area

Stipulations

73.3363.5

55

6065

70

75

Min . Are Stipulation - 10Hectares

Min Bulit Up Area - 50,000 SqMts

Percentages

Percentages


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Minimum capitalization for Joint Ventures (JVs) to be US$ 5 mn:

Most domestic developers hold the view that there is ambiguity in the clause pertaining to

6 months within commencement of business. Here the problem arises when the FDI is

brought in an existing company which is operational for more than six months before the

date of signing agreement with FDI partner, which date should be considered as date of

commencement of business of the company? The Government should clearly spell out

the implication of the term commencementof business.

It needs to be clarified that the date of commencement of business is the date on which

the joint venture agreement or joint development arrangement or any other form of

agreement for development activities in India is signed by the foreign investor or the date

of incorporation of a company, as the case may be. This ambiguity must be clarified in

subsequent legislations or administrative notices.

However, 76.6% of the domestic developers feel that the minimum capitalization norm of

US$ 5 mn for JVs is appropriate and does not need revision. Others feel that the

minimum capitalization norm should be between US$ 2-3mn. The present FDI policy on

the construction-development sector requires a minimum capitalization of US$ 5 million

where the project is undertaken in joint venture with an Indian partner. This has resulted

in ambiguities on whether FDI of US$ 5 million is in relation to a single foreign investor

or is it the total contribution of multiple foreign investors investing in the project in India.


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Minimum Capitalization for Wholly Owned Subsidiary to be US$ 10 mn :

Most of the domestic developers, i. e. 86.6% feel that the minimum capitalization norm

for wholly owned subsidiary is appropriate at US$ 10 mn, however others are of the

opinion that the minimum norm should be raised to between US$ 15-20 mn.

% Builders Agreeing with Minimum Capitalization Norm

Completion of the project:

76.6% of domestic investors agree with the clause that 50% of the project should be

completed within 5 years of obtaining all statutory clearances. In the case of large

projects that are going to be developed in phases, the provision should allow the builder

the flexibility of developing the different phases only when he perceives the demand for

the project

Sale Of Underdeveloped Plots By The Developers:

Majority of domestic developers, i.e. 86.6% feel the need of amendment of the clause

pertaing to sale of underdeveloped plots, whereby the developer has to obtain the

completion certificate from the concerned local body/service agency before disposing the

serviced housing plots. Completion certificates are sometimes not issued for months,

sometimes running into years.

If sale is not allowed after sanction of the scheme, investments involved in completion of

the project will be extremely high and will make many projects unviable. The present


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position therefore needs to be amended to permit sale after sanction of the project is

received.

Monitoring Agency:

The State Govt/ Local / Municipal bodies as the monitoring agency to oversee the

development of the project in accordance to the established norms was accepted by 60%

of domestic developers and investors. Rest 40% feel that a regulatory body set up for the

purpose or a Central nodal agency should take upon the responsibility to monitor and

regulate this sector.

Guidelines Concerning Repatriation of Capital:

As of now, there is no specific guideline pertaining to exit route and repatriation of

capital, except the lock-in period of three years. Investors are to seek the approval of

FIPB, for repatriation of capital before three years. However, ironi

Documents

Abhishek Fdi