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FDI (Foreign Direct Investement) 1

K.P.B HINDUJA COLLEGE OF COMMERCE

INDEX

Sr. no. Chapter Name Page no.

1 INTRODUCTION OF FDI 2

2 FOREIGN DIRECT INVESTMENT 7

3 FOREIGN DIERCT INVESTMENT;

THEORITICAL SETTINGS

9

4 ADVANTAGE AND DISADVANTAGE OF FDI

FOR THE HOST COUNTRY

21

5 FOREIGN DIERCT INVESTMENT IN INDIA 25

6 POLICTES AND PROCEDUERS OF FDI 27

7 SECTOR SPECIFIC GUDELINESS FOR FDI IN

INDIA

40

8 FACTORS AFFECTING FDI 51

9 CASE STUDY 56

10 SUGGESTIONS AND RECOMMENDATIONS 64

11 CONCIUSION 6612 WEBLJOGRAPY 68


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CHAPTER 1: INTRODUCTION ON FDI

The last two decades of the 20thcentury witnessed a dramatic worldwide

increase in foreign direct investment (FDI), accompanied by a markedchang

e in the attitude of most developing countries towards inward FDI. As

against a highly suspicious attitude of these countries towards inward FDI in

the past, most countries now regard FDI as beneficial for their development

efforts and compete with each other to attract it. Such shift in attitude lies

inthe changes in political and economic systems that have occurred during

theclosing years of the last century. The wave of liberalization andglobalization sweeping across the world has opened many national

markets for international business. Global private investment, in most part, is

now made by multinational corporations (MNCs). Clearly these corporations

play a major role in world trade and investments because of their

demonstrated management skills, technology, financial resources and related

advantages. Recent developments in globalmarkets are indicative of

the rapidly growing international business. The endof the 20th Century has

already marked a tremendous growth in internationalinvestments, trade and

financial transactions along with the integration and openness of

international markets.FDI is a subject of topical interest.

Countries of the world, particularlydeveloping economies, are vying with

each other to attract foreign capital to boost their domestic rates of

investment and also to acquire new technology and management skills.

Intense competition is taking place among the fundstarved less developed

countries to lure

Foreign investors by offering.


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Repatriation facilities, tax concessions and other incentives. However, FDI

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

bevery careful while deciding the magnitude, pattern and conditions of

private foreign investment. In the 1980s, FDI was concentrated within the

Triad (EU, Japan and US).However, in the 1990s, the FDI flows to

developed countries declined, whilethose in developing countries increased

in response to rapid growth andfewer restrictions. Most FDI flows continue

still to be concentrated in 10 to15 host countries overwhelmingly in Asia and

Latin America.

South, East and Southeast Asia has experienced the fastest economic growth

in theworld, and emerged as the largest host region. China is now the largest

host country in the developing world. However, small markets with low

growth rates, poor infrastructure, and high in debtness, slow progress in

introducing market and private-sector oriented economic reforms and low

levels of technological capabilities are not attractive to foreign investors.

The remarkable expansion of FDI flows to developing countries had belied

the fear that the opening of central and Eastern Europe and the efforts of the

countries of that region to attract such investment would divert investment

flows from developing countries. The most important factors making

developing countries attractive to foreign

investors are rapid economicgrowth, privatization programmes open to forei

gn investors and theliberalisation of the FDI regulatory framework. In India,

prior to economic reforms initiated in1991, FDI was discouraged by

Imposing severe limits on equity holdings by foreigners and

Restricting FDI to the production of only a few reserved items.


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The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by the

Foreign Exchange Management Act [FEMA]), prescribed the detailed rules

in this regard and the firms belonging to this group were known as FERA

firms. All foreign investors were virtually driven out from Indian

industries by FERA. Technology transfer was possible only through the

purchase of foreign technology. However, due to severe limits on royalty

payments to foreigners to reduce foreign exchange use, this option was

ineffective. However, the government granted liberal

tax incentives to encourage indigenous generation of technology by

domestic firms. In the absence of foreign technology, Indian industry

suffered both in terms of cost of production and quality. The initial policy

stimulus to foreign direct investment in India came in July1991 when the

new industrial policy provided, inter alia, automatic approval for project

with foreign equity participation up to 51 percent in high priority areas.

In recent years, the government has initiated the second generation reforms

under which measures have been taken to further facilitate and broaden the

base of foreign direct investment in India. The policy for FDI allows

freedom of location, choice of technology, repatriation of capital and

dividends. As a result of these measures, there has been a strong surge

of international interest in the Indian economy. The rate at which FDI inflow

has grown during the post-liberalization period is a clear indication that

India is fast emerging as an attractive destination for overseas investors.

Encouragement of foreign investment, particularly for FDI, is an

integral part of ongoing economic reforms in India. Though India has one

of the most transparent and liberal FDI regimes among the developing


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countries with strong macro-economic fundamentals, its share in FDI

inflows is dismally low. The country still suffers from weaknesses and

constraints, in terms of policy and regulatory framework, which restricts the

inflow of FDI. Foreign investment policies in the post-reforms period has

emphasized greaterencouragement and mobilization of non-debt creating

private inflows for reducing reliance on debt flows. Progressively liberal

policies have led to increasing inflows of foreign investment in the country

The practice has grown significantly in the last couple of decades, to the

point that FDI has generated quite a bit of opposition from groups such as

labor unions. These organizations have expressed concern that investing at

such a level in another country eliminates jobs. Legislation was introduced

in the early 1970s that would have put an end to the tax incentives of FDI.

But members of the Nixon administration, Congress and business interests

rallied to make sure that this attack on their expansion plans was not

successful. One key to understanding FDI is to get a mental picture of the

global scale of corporations able to make such investment. A carefully

planned FDI can provide a huge new market for the company, perhaps

introducing products and services to an area where they have never been

available. Not only that, but such an investment may also be more profitable

if construction costs and labor costs are less in the host country.

1.1 History

In the years after the Second World War global FDI was dominated by the

United States, as much of the world recovered from the destruction brought

by the conflict. The US accounted for around three-quarters of new FDI


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CHAPTER-2: FOREIGN DIRECT INVESTMENT

FDI is the process whereby residents of one country (the home country)

acquire ownership of assets for the purpose of controlling the production,

distribution and other activities of a firm in another country (the host

country)

2.1. IMF Definition

According to the BPM5, FDI is the category of international investment that

reflects the objective of obtaining a lasting interest by a resident entity in oneeconomy in an enterprise resident in another economy. The lasting interest

implies the existence of a long-term relationship between the direct investor

and the enterprise and a significant degree of influence by the investor on the

management of the enterprise

2.2. UNCTAD Definition

The WIRO defines FDI as an investment involving a long-term

relationship and reflecting a lasting interest and control by a resident entity

in one economy (foreign direct investment or parent enterprise) in an

enterprise resident in an economy other than that of

the FDI enterprise, affiliate enterprise or foreign affiliate. FDI implies

that the investor exerts a significant degree of influence on the management

of the enterprise resident in the other economy. Such investment involves

both the initial transaction between the two entities and all subsequent

transactions between them amongforeign affiliates, both incorporated and

unincorporated. Individuals as well as business entities may undertake FDI.

Flows of FDI comprise capital provided (either directly or through


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other related enterprises) by a foreign direct investor to an FDI enterprise,

or capital received from an FDI enterprise by a foreign direct investor. FDI

has three components viz., equity capital, reinvested earnings and intra-

company loans

Equity capital is the foreign direct investors purchase of share of an

enterprise in a country other than its own.

Reinvested earnings comprise the direct investors share (in proportion to

direct equity participation) of earnings not distributed as dividends by the

affiliates, or earnings not remitted to the direct investor. Such retained

profits by affiliates are reinvested.

Intra-company loans or intra-company debt transactions refer to short or

long term borrowing and lending of funds between direct investors (parent

enterprises) and affiliate enterprises.

2.3 OECD Benchmark Definition of FDI (Third Edition)

FDI reflects the objective of obtaining a lasting interest by a resident entity

in one economy (direct investor) in an entity resident in an economy

other than that of the investor (direct investment enterprise). The lasting

interest implies the existence of a long term relationship between the direct

investor and the enterprise and a significant degree of influence on the

management of the enterprise. Direct investment involves both the initial

transactions between the two entities and all subsequent capital transactions

between them and among affiliated enterprises, both incorporated and

unincorporated. As is evident from the above definitions, there is a large

degree of commonality between the IMF, UNCTAD and OECD definitions

of FDI. The IMF definition is followed internationally.


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CHAPTER-3:

FOREIGN DIRECT INVESTMENT :THEORITICAL

SETTINGS

Most of the present day underdeveloped countries of the world have set out

a planned program for accelerating the pace of their economic development.

In a country planning for industrialization and aiming to achieve a target

rate of growth, there is a need for resources. The resources can be mobilized

through domestic as well as foreign sources. So far as, the domestic sources

are concerned, they may not be sufficient to acquire the fixed rate of growth.

Generally domestic savings are less than the required amount of investment.

Also the very process of industrialization calls for import of capital goods

which cannot be locally produced. Hence comesthe need for foreign sources.

They not only supplement the domestic savings but also provide the

recipient country with extra foreign exchange to buy imports essential for

filling the saving investment gap and the foreign exchange gap. The means

of getting foreign resources available to a developing country are mainlythree:

1. through export of goods and services

2. External aid

3. Foreign investment

Export of goods and services do contribute to foreign resources but they can

meet only a small part of the total demand for foreign resources. External

Aid from foreign governments and international institutions, by increasing

the rate of home savings and removing the foreign gap allows the utilization

of previously underutilized resources and capacity. But generallythe aid is


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tied and distorts the allocation of resources. So its use has been on the

decline. Foreign investment is of following two types

1. Foreign Direct Investment (FDI) and

2. Portfolio Investment.

3.1 Foreign Direct versus Portfolio Investment

By Foreign Direct Investment (FDI) we mean any investment in a foreign

country where the investing party (corporation, firm) retains control

over investment. A direct investment typically takes the form of a foreign

firm starting a subsidiary or taking over control of an existing firm in the

country in question. FDI consists of equity capital, technical and managerial

services, capital equipment and intermediate inputs and legal rights

to patents or secret products, processes or trademarks. It is the direct type of

foreign investment which is associated with multinational corporations of

foreign investment which is associated with multinational corporations

because most of FDI is transferred through firms and remains outside

of ordinary, functioning markets.

FDI can be done in the following ways:

1. In order to participate in the management of the concerned enterprise, the

stocks of the existing foreign enterprise can be acquired.

2. The existing enterprise and factories can be taken over.

3. A New subsidiary with 100% ownership can be established abroad.

4. It is possible to participate in a joint venture through stock holding

5. New foreign branches, offices and factories can be established.

6. Existing foreign branches and factories can be expanded.


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7.Minority stock acquisition, if the objective is to participate in the

management of the enterprise.

8. Long term lending, particularly by a parent company to its subsidiary,

when the objective is to participate in the management of the enterprise.

Portfolio investment, on the other hand, does not seek management control

,but is motivated by profit .Portfolio investment occurs when when

individual investors invest, mostly through stockbrokers ,in stocks

of foreign companies in foreign lands in search of profit opportunities.

FDI flows are usually preferred over other forms of external finance

becausethey are non-debt creating, non-volatile and their returns depend on

the performance of the projects financed by the investors.

FDI also facilitates international trade and transfer of knowledge, skills and

technology. In a world of increased competition and rapid technological

change, their complimentary and catalytic role can be very valuable.

3.2 Superiority of FDI over Other Forms of Capital Inflows

FDI is perceived superior to other types of capital inflows for several

reasons:

1.In contrast to foreign lenders and portfolio investors, foreign direct

investors direct investors typically have a longer-term perspective when

engaging in a host country. Hence, FDI inflows are less volatile and easier to

sustain in times of crisis.

2. While debt inflows may finance consumption rather than investment in

the host country, FDI is more likely to be used productively.


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3. FDI is expected to have relatively strong effects on economic growth,

asdic provides for more than just capital. FDI offers access to internationally

available technologies and management know-how, and may render it easier

to penetrate world markets.

A recent United Nations report has revealed that FDI flows are less volatile

than portfolio flows. To quote, FDI flows to developing and transition

economies in 1998 declined by about 5 percent from the peak in 1997, a

modest reduction in relation to the effects on the other capital flows of the

spread of the Asian financial crisis to global proportions. FDI flows are

generally much less volatile than portfolio flows. The decline was modest in

all regions, even in the Asian economies most affected by the financial

crisis.

3.3 Macroeconomic and Micro-economic Aspects of FDI

In judging the significance of FDI, especially from the viewpoint of developi

ng countries, it is useful to make a distinction between macro-economic and

micro-economic effects. The former is connected with issues of domestic

capital formation, balance of payments, and taking advantage of external

markets for achieving faster growth, while the latter is connected with the

issue of cost reduction, product quality improvement, making changes in

industrial structure and developing global inter-firm linkages .In this context,

it needs to be recognized that FDI is an aggregate entity, the sum total of the

investments made by many diverse multinationals, each with its own

corporate stratergy.The micro-economic effects of the investment made

by one multinational may be quite different from that of another

multinational even if the investments are made in the same industry. Also,


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what benefits the local economy will depend on the capabilities of the host

country in regard to technology transfer and industrial restructuring.

3.4 Resource-seeking and Market-seeking FDI

Two major types of FDI are typically differentiated: resource-seeking FDI

and market-seeking FDI. Resource-seeking FDI is motivated by the

availability of natural resources in the host countries. This type of FDI was

historically important and remains a relevant source of FDI for various

developing countries. However, on a worldwide scale,

the relative importance of resource-seeking FDI has decreased

significantly.The relative importance of market-seeking FDI is rather

difficult to assess. It is almost impossible to tell whether this type of FDI

has already become less important due to economic globalization. Regarding

the history of FDI in developing countries, various empirical studies have

shown that the size and growth of host country markets were among the

most important FDI determinants. It is debatable, however, whether this

is still true with ongoing globalization.

Globalization essentially means that geographically dispersed

manufacturing, slicing up the value chain and the combination of markets

and resources through FDI and trade are becoming major characteristics

of the world economy. Efficiency-seeking FDI, i.e. FDI motivated by

creating new sources of competitiveness for firms and strengthening existing

ones, may then emerge as the most important type of FDI.


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Accordingly, the completion for FDI would be based increasingly on the

cost differences between locations, the quality of infrastructure and

business-related services, the ease of doing business and the availability of

skills. Obviously, this scenario involves major challenges for developing

countries, ranging from human capital formation to the provision of

business-related services such as efficient communication and distribution

systems.

3.5 Nature of FDI

Almost all modern (FDI) is carried out by corporations rather thanindividuals. Somewhat like portfolio investment, the flows of FDI have

historically been highly concentrated, both in terms of geography and by

industry and at both the investor and receptor poles. Geographically, the

ownership of global stocks of FDI is highly skewed towards only a few

large, high income countries. Each investing country has, whether by

accident or design , tended to direct the major part of its FDI to only a very

few receiving country; in fact the pattern of global distribution of FDI has

been highly similar to historical relationships based on colonial ties or

other forms of political hegemony.

Viewed industrially, for any given country, FDI generally comes from less

than four or five out of twenty or so major industry groups and inflows into

those same industries in the receptor country. General attributes of FDI is

that it has evoked by type over time. Prior to First World War, a crude but

valid generalization would that a large part of FDI was in the service sector

of the host economy (particularly transportation, power , communication

and trading) while most of the rest was of thebackward vertical integration


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type. During the inter-war period, most of the currently largest

multinational corporations (MNCs)made their initial foreign investments, b

ut these horizontal or market extension types of investments have now

become major category.The fourth recognized characteristic of

manufacturing FDI is that it originates in industries that are technologically

intensive, skill oriented or progressive. In addition, the FDI

prone industries are typically more concentrated, have higher advertising

outlays per unit of sales and exhibit above average export propensities.

Industries from which FDI tends to originate display many characteristics

associated with oligopoly .Another universal property of FDI is that it is

really a package of complementary inputs, a collective flow of both tangible

and intangible assets& services.

3.6Types of FDI


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Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:

Outward FDIs

Inward FDIs

This classification is based on the types of restrictions imposed, and the

various prerequisites required for these investments.

Outward FDIs:

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 thedomesticindustries and subsidies granted to the local firms stand in the way

of outward FDIs, which are also known as 'direct investments abroad.

Inward FDIs:

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 to ownership patterns

Other categorizations of FDI exist as well. Vertical Foreign DirectInvestmen

t 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.

By Motive

Resources seekinglooking for resources at a lower real cost.

Market seeking secure market share and sales growth in target foreign

market.
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Efficiency seekingseeks to establish efficient structure through useful

factors, cultures, policies, or markets.

3.7 FDI in Developing Countries

FDI is now increasingly recognized as an important contributor to a

developing countryseconomic performance and international

competitiveness. After the debt-crisis that hit developing world in 1980s, the

conventional wisdom quickly became that it had been unwise for countries

to borrow so heavily from international banks or international bond markets.

Rather countries should try trying to attract non-debt-creating private inflows (DFI). The financial advantage is that such capital

inflows need not be repaid and that outflow of funds (remittance of profits)

would fluctuate with the cycle of the economy. It has also been widely

observed that the structural adjustment efforts of the 1980s failed to lead to

new patterns of sustained growth in developing countries. In particular,

structural adjustment programs failed to restore private investment to

desirable levels. Again it is hoped thatdcould play an important role; the

World Bank observes that FDI can be an important complement to the

adjustment effort, especially in countries having difficulty in increasing

domestic savings

Against this background of balance of payments problems and low level

of private investment, it is probably not surprising that attitudes in

developing countries towards FDI have shifted. In the 1960s and 1970s

many countries maintained a rather cautious, and sometimes an outright

negative position with respect to FDI. In the 1980s, however the attitudes

shifted radically towards a more welcoming policy stance. This change was

not so much due to new research finding on the impact of FDI but to the


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economic problems facing the developing world.Developing countries are

liberalizing their foreign investment regimes and are seeking FDI not only as

a source of capital funds and foreign exchange but also as a dynamic and

efficient vehicle to secure the much needed industrial technology,

managerial expertise and marketing know-how and networks to improve on

growth , employment,productivity and export performance.

At the global level the flows of FDI and PFI to developing countries have

indeed increased. The average net inflow of FDI in developing countries

had been US$ 11 billion in 1980-86, but in 1987 it started to increase, by

1991the annual net inflow had risen to US$ 35 billion and by 2004 to US$

233 billion. The share of developing economies in total inflow of Foreign

Direct Investment in the world has risen continuously since 1989.

3.8 Investment risk in India

Sovereign Risk

India was an effervescent parliamentary democracy since its political

freedom from British rule more than50 years ago. The country does not face

any real threat of a serious revolutionary movement which might lead to a

collapse of state machinery. Sovereign risk in India is hence nil for both

"foreign direct investment" and "foreign portfolio investment." Many

Industrial and Business houses have restrained themselves from investing in

the North-Eastern part of the country due to unstable conditions.

Nonethelessinvesting in these parts is lucrative due to the rich mineral

reserves here and high level of literacy. Kashmir to the northern tip is a


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militancy affected area and hence investment in the state of Kashmir are

restricted by law.

Political Risk

India has enjoyed successive years of elected representative government at

the Union as well as federal level. India suffered political instability for a

few years in the sense there was no single party which won clear majority

and hence it led to the formation of coalition governments. However,

political stability has firmly returned since the general elections in 1999

, with strong and healthy coalition government emerging,

Nonetheless, political instability did not change India's bright economic

course though it delayed certain decisions relating to the economy.

Economic liberalization which mostly interested foreign investors have been

accepted as essential by all political parties including the Communist Party

of India Though there are bleak chances of political instability in the future,

even if such a situation arises the economic policy of India would hardly be

affected.. Being a strong democratic nation the chances of an army coup or a

foreign dictatorship are minimal. Hence, political risk in India is practically

absent.

Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and

every product or service is profitably accepted in the market. Hence it is

advisable to study the demand / supply condition for a particular product or

service before making any major investment. In India one can avail the

facilities of a large number of market research firms in exchange for a


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professional fee to study the state of demand /supply for any product. As it

is, entering the consumer market involves some kind of gamble and hence

involves commercial risk.

Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil

which could have a negative impact on investor confidence. Not only

business environment and return on investment, but also the overall security

conditions in a nation have an effect on FDI's. Though some of the financial

experts think otherwise. They believe the negative impact of terrorist attackswould be a short term phenomenon. In the long run, it is the micro and

macro economic conditions of the Indian economy that would decide the

flow of Foreign investment and in this regard India would continue to be a

favorable investment destination


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CHAPTER-4: ADVANTAGES & DISADVANTAGES OF FDI

FOR THE HOST COUNTRY

4.1 Advantages of Foreign Direct Investment

Foreign Direct Investment has the following potential benefits for less

developed nation.

1. Raising the Level of Investment

Foreign investment can fill the gap between desired investment and locally

mobilized savings. Local capital markets are often not well developed. Thus,

they cannot meet the capital requirements for large investment projects.

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

not available locally can be difficult. FDI solves both these problems at once

as it is a direct source of external capital. It can fill the gap between desired

foreign exchange requirements and those derived from net export earnings.

2. Upgradation of Technology

Foreign investment brings with it technological knowledge while

transferring machinery and equipment to developing countries. Production

units in developing countries use out-

dated equipment and techniques that can reduce the productivity of workers

and lead to the production of goods of a lower standard.

3.Improvement in Export Competitiveness

FDI can help the host country improve its export performance.

By raising the level of efficiency and the standards of product quality, FDI

makes a positive impact on the host countrys export competitiveness.


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Further, because of the international linkages of MNCs, FDI provides for the

host country better access to foreign markets. Enhanced export possibility

contributes to the growth of the host economies by relaxing demand side

constraints on growth.

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

and must increase exports vigorously to maintain their tempo of economic

growth.

4.Employment Generation

Foreign investment can create employment in the modern sectors of

developing countries. Recipients of FDI gain training of employees of in

the course of operating new enterprises, which contributes to human

capital formation in the host country.

5.Benefits to Consumers

Consumers in developing countries stand togain from FDI through newproducts, and improved quality of goods at competitive prices.

6.Resilience Factor:

FDI has proved to be resilient during financial crisis. For instance,

in East Asian countries such investment was remarkably stable during the

global financial crisis of 1997-98. In sharp contrast, other forms of private

capital flows like portfolio equity and debt flows were subject to large

reversals during the same crisis. Similar observations have been made in

Latin America in the 1980s and inMexico in 1994-95. FDI is considered less

prone to crises because direct investors typically have a longer-term


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perspective when engaging in ahost country. In addition to risk sharing

properties of FDI, it is widely believed that FDI provides a stronger stimulus

to economic growth in thehostcountries than other types of capital inflows.

FDI is more than just capital, as it offers access to internationally available

technologies and management know-how.

7.Revenue to Government

Profits generated by FDI contribute tocorporate tax revenues in the host

country.

4.2 Disadvantages of Foreign Direct Investment

FDI is not an unmixed blessing. Governments in developing countries

haveto be very careful while deciding the magnitude, pattern and conditions

of private foreign investment. Possible adverse implications of foreign

investment are the following:

1.When foreign investment is competitive with home investment, profits in

the domestic industries fall, leading to fall in domestic savings.

2.Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investmentallowances,

disguised public subsidies and tariff protection provided by the

host government.

3. Foreign firms reinforce dualistic socioeconomic structure and increase

increase income inequalities. They create a small number of highly paid

modern sector executives. They divert resources away from priority sectors

to the manufacture of sophisticated products for consumption of the local

elite. As they are located in urban areas, they create imbalances between


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rural and urban opportunities, accelerating the flow of rural population to

urban areas.

4.Foreign firms stimulate inappropriate consumption patterns through

excessive advertising and monopolistic market power. The products

made by multinationals for the domestic market are not necessarily lowin

price and high in quality. Their technology is generally capital-intensive

which does not suit the needs of a labor-surplus economy.

5.Foreign firms able to extract sizeable economic and politicalconcessions fr

om competing governments of developing countries.Consequently, private p

rofits of these companies may exceed social benefits.

6.Continual outflow of profits is too large in many cases, putting pressure on

foreign exchange reserves. Foreign investors are very particular about profit

repatriation facilities.

7. Foreign firms may influence political decisions in developing

Countries. In view of their large size and power, national sovereignty

andcontrol over economic policies may be jeopardized. In extreme cases,

foreign firms may bribe public officials at the highest levels to secure

unduefavors.

Similarly, they may contribute to a friendly political parties and subvert the

political process of the host country. Key question, therefore, is how

countries can minimize possible negative effects and maximize the positive

effects of FDI through appropriate policies


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CHAPTER-5: FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of the Indian economy has

been dominated by a regime of multiple controls, restrictive regulations and

wide ranging state intervention. Industrial economies of the country was

protected by the state and insulated from external competition. As a result of

which, India was thrown a long way behind the world of rapid expanding

technology. The cumulative effect of these policies started becoming more

and more pronounced. By the year 1989-90, the situation in the balance

of payment and foreign exchange reserves became precarious and thecountry was driven to the brink of default. The credibility reached the

sinking level that no country was willing to advance or lend to India at any

cost. In such

circumstances, the government quickly followed a liberalized economic poli

cy in July 1991.The main objectives of the liberalized economic policy are

two fold. At the country level the reform aims at freeing domestic investors

from all the licensing requirements, the virtual abolition of MRTP

restrictions on the investment by large houses, and a competitive industrial

structure for Indian companies to achieve a global presence by becoming as

competitive as their counterparts worldwide. Secondly, the focus on

structural reforms intended to tap foreign investment for economic growth

and development

Gradually & systematically the government has taken a series of

measureslike devaluation of rupee, lowering of import duties and allowing

foreigninvestmentupto 51% of the equity in a large number of industries

andinvestment of large foreign equity (even up to 100%) in selected


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areasespecially for export orientedproducts.In India, since the 1960s

foreign investment and/or foreign collaborations by the multinationals have

been principally viewed as an instrument tofacilitate the much needed

transfer of technology.

In technological as wellas financial collaborations with foreign firms, the

approval and extent of ownership participation had been predominantly

determined by the technology component of the respective products. Import

of technology as against the direct foreign investment was the main focus

of the policies till mid-eighties.The New Industrial Policy (NIP) of

July 1991 and subsequent policy amendments have significantly

liberalized the industrial policy regime in the country especially as it applies

to FDI. The industrial approval system in all industries has been abolished

except for some strategically or environmentally sensitive industries. In 35

high priority industries, FDI up to 51% is approved automatically if certain

norms are satisfied. FDI proposals do not necessarily have to be

accompanied by technology transfer agreements.Trading companies

engaged primarily in export activities are also allowed up to 51% foreign

entity.


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CHAPTER-6: POLICIES AND PROCEDURES OF FDI

The initial policy stimulus to foreign direct investment in India came in

July1991 when the new industrial policy provided, inter alia, automatic route

approval for projects with foreign equity participation up to 51 percent in

high priority areas. In recent years, the government has initiated the second

generation reforms under which

measures have been taken to further facilitate and broaden the base of FDI in

India. The policy of FDI allows freedom of location, choice of technology

repatriation of capital and dividends. The rate at

which FDI inflow has grown during the post-liberalization period is a clear

indication that India is a fast emerging as an attractive destination for

overseas investors. As part of the economic reform program, policy and

procedures governing foreign investment governing foreign investment and

technology transfer have been significantly simplified and streamlined.

Today FDI is allowed in all sectors including the service sector except in

cases where there are sectoral ceilings.

6.1 FDI Policy Regime

Most of the problem for investors arises because of domestic policy, rules

and procedures and not the FDI policy per se or its rules and procedure.

India has one of the most transparent and liberal FDI regimes among the

merging and developing economies. By FDI regime it means those

restrictions that apply to foreign nationals and entities but not to

Indian Nationals and Indian owned entities. The differential treatment is


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limited to a few entry rules, spelling out a proportion of equity that the

foreign entrant can hold in an Indian company or business. There are a few

banned sectors and some sectors with limits on foreign equity proportion.

The entry rules are clear and well defined and equity limits for FDI

in selected sectors such as telecom quite explicit and well-known.Subject to

these foreign equity conditions a foreign company can set up a registered

company in India and operate under the same laws, rules and regulations as

any Indian owned company would. There is absolutely no discrimination

against foreign invested companies registered in India or infavour of

domestic owned ones.

There is however a minor restriction on those foreign entities who entered a

particular sub-sector through a joint venture with an Indian partner. If

they want to set up another company in the same sector it must get a no-

objection certificate from the joint venture

partner. This condition is explicit and transparent unlike many hidden

conditions imposed by any other recipients of FDI.

6.2 Routes for Inward Flows of FDI

FDI can be approved either through the automatic route or by the

government:-

1. Automatic Route


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Companies proposing FDI under automatic route donot require any

government approval provided the proposed foreign equity

iswithin the specified ceiling and

the requisite documents are filed withReserve Bank of India (RBI) within 30

days of receipt of funds.The automaticroute encompasses all proposals

where the proposed items of manufacture/activity does not require an

industrial license and is notreserved for small-scale sector.The automatic

route of the RBI was introduced to facilitate FDI inflows.

However, during the post-policy period, the actual investment flows

throughthe automatic route of the RBI against total FDI flows remained

rather insignificant. This was partly due to the fact that automatic route.

Another limitation was the ceiling of 51 percent of foreign equity

holding.Increasing number proposals were cleared through the FIPB route

while the automatic route was relatively unimportant. However, since 2000

automatic route has become significant and accounts for a large part of FDI

flows.

2. Government Approval

For the following categories, government approval for FDI through

the Foreign Investment Promotion Board (FIPB) is necessary:

Proposals attracting compulsory licensing

Items of manufacture reserved for small scale sector.

Acquisition of existing shares. FIPB ensures a single window approval for

the investment and acts as a screening agency. FIPB approvals are normally

received in 30 days. Some foreign investors use the FIPB application route

where there may be absence ofstate policy or lack of policy clarity.


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3. Industrial Licensing in FDI Policy

Industrial Licensingis regulated by Industries (Development and Regulation)

Act 1951. Following are the sectors which require Industrial Licensing:

Industries which abide by compulsory licensing

Manufacturing of items from the larger industrial units for small

sector industries

Locational restrictions on the proposed sitesSectors Which Require

Industrial Licensing.

Electronic aerospace and defense equipment

Alcoholics drink

Explosives

Cigarettes and tobacco products

Hazardous chemicals such as, hydrocyanic acid, phosgene, isocynatesand di-

isocynates of hydro carbon and derivatives.

4. Restricted List of sectors

FDI is not permissible in the following cases:

Gambling and Betting, or

Lottery Business, or

Business of chit fund

Housing and Real Estate business (to a certain extent)

Trading in Transferable Development Rights (TDRs)

Retail Trading

Railways,

Atomic Energy , atomic minerals,


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Agricultural or plantation activities or Agriculture (excluding Floriculture,

Horticulture, Development of Seeds, Animal Husbandry,

Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled

conditions and services related to agro and allied sectors) and Plantations

(other than Tea plantations) the new policies have

substantially relaxed restrictions on foreign investment, industrial licensing

and foreign exchange. The capital market has been opened to foreign

investment and banking sector controls have beeneased. As a result, India

has been rapidly changing from a restrictive regime to a liberal one and FDI

is encouraged in almost all economic activities under the automatic route.

The Government is committed to promotingthe increased flow of FDI for

better technology, modernization, exports and for providing products and

services of international standards. Therefore, the policy of the Government

has been aimed at encouraging the policy of the

Government has been aimed at encouraging foreign investment, particularly

in core infrastructure sectors so as to supplement national efforts.

6.3 Post-approval Procedures

1. Project Clearance

After the approval has been obtained, the applicant may get his unit/

company registered with the Registrar of Company.Subsequently, the

company needs to obtain various clearances such as land clearance,

building design clearance, pre- construction clearance, labour clearance etc.

from different authorities before beginning its operations.These clearances

differ from sector to sector and may also differ from stateto state.


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2.Registration and Inspection

Each industrial unit is supposed tomaintain records in regard to production,

sale and export, use of specifiedraw materials including public utilities like

water and electricity, labour related details financial details and details in

regard to industrial safety andenvironment.The unit is also subject to

periodic inspection by the factories inspector,labour inspector, food

inspector, fire inspector, central excise inspector, air and water inspector,

mines inspector, city inspector and the like, the list of which may go up to

thirty or more.

3.Foreign Exchange Management Act (FEMA), 2000

The additional provisions which apply only to entry of FDI emanate from

the provisions of FEMA. According to FEMA, no person resident outside

India shall without the approval/knowledge of the RBI may establish in

India a branch or a liaison office or a project office or any other place of

business.FDI in a particular industry may, however, be made through the

automatic route under powers delegated to the RBI or with the approval

accorded by the FIPB.

The automatic route means that foreign investors only need to informthe

RBI within 30 days of bringing in their investment. Companies getting

foreign investment approval through FIPB route do not require any further

clearance from RBI for the purpose of receiving inward remittance and issue

of shares to foreign investors.


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RBI has granted general permission under FEMA with respect to proposals

approved by FIPB. Such companies are, however, required to notify the

concerned regional office of the RBI of receipt of inward remittances within

30 days of such receipts and again within 30 days of issue of shares to the

foreign investors.

6.4 Entry Options for Foreign Investors

A foreign company planning to set up business operations in India has the

following options: By incorporating a company under the Companies Act,

1956 through

Joint Ventures

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending

onthe requirements of the investor, subject to equity caps in respect of the

areaof activities under the Foreign Direct Investment (FDI) policy.Enter as

a foreign Company through

Liaison Office/Representative Office

Project Office

Branch Office Such offices can undertake activities permitted under the

Foreign Exchange Management Regulations, 2000.

1.Incorporation of Company

For registration and incorporation, an application has to be filed with the

Registrar of Companies (ROC). Once a company has been duly

registered and incorporated as an Indian company, it is subject to Indian

laws and regulations as applicable toother domestic Indian companies.


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2.Liaison Office/Representative Office

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. Itcan promote

export/import from/to India and also facilitate technical/financial

collaboration between parent company and companies in India.

Liaison office can not undertake any commercial activity directly or

indirectly and can not, therefore, earn any income in India. Approval for

establishing a liaison office in India is granted by Reserve Bank of India

(RBI).

3.Project Office

Foreign Companies planning to execute specific projects in India can set up

temporary project/site offices in India. RBI has now granted general

permission to foreign entities to establish Project Offices subject to specified

conditions. Such offices can not undertake or carry on any activity other than

the activity relating and incidental to execution of the project. Project

Offices may remit outside India the surplus of the project on its completion,

general permission for which has been granted by the RBI.

4.Branch Office

Foreign companies engaged in manufacturing andtrading activities abroad

are allowed to set up Branch Offices in India for the following purposes:

Export/Import of goods

Rendering professional or consultancy services

Carrying out research work, in which the parent company is engaged.


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Promoting technical or financial collaborations between Indiancompanies

and parent or overseas group company.

Representing the parent company in India and acting as buying/selling

agents in India.

Rendering services in Information Technology and development of software

in India.

Rendering technical support to the products supplied by the parent/group

companies.

Foreign airline/shipping Company.A branch office is not allowed to carry

out manufacturing activities on its own but is permitted to subcontract these

to an Indian manufacturer. Branch Offices established with the approval of

RBI may remit outside India profit of the branch, net of applicable Indian

taxes and subject to RBI guidelinesPermission for setting up branch offices

is granted by the Reserve Bank of India (RBI).

5.Branch office on Stand-Alone Basis in Special Economic Zones(SEZs)

Such branch offices would be isolated and restricted to the SEZand no

business activity/transaction will be allowed outside the SEZ in India, which

include branches/subsidiaries of their parent office in India. No approval

shall be necessary from RBI for a company to establish a branch/unit in

SEZs to undertake manufacturing and service activities,subject to specified

conditions.

6.Investment in a Firm or a Proprietary Concern by NRIs

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident

outside India may invest by way of contribution to the capital of a firm or

a proprietary concern in India on non-repatriation basis provided:


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The amount is invested by inward remittance or out of specified

account types (NRE/FCNR/NRO accounts) maintained with an Authorized

Dealer.

The firm of proprietary concern is not engaged in any agricultural/ plantation

or real estate business, i.e. dealing in land and immovable property with a

view to earning profit or earning income therefrom.

The amount invested shall not be eligible for repatriation outside

India. NRIs/PIOs may invest in sole proprietorship concerns/partnership

firms with repatriation benefits with the approval of Government/ RBI.

7.Investment in a Firm or a Proprietary concern Other Than NRIs

No person resident outside India other than NRI/PIO shall make any

investment by way of contribution to the capital of a firm or a proprietorship

concern or any association of persons in India. The RBI may, on an

application made to it, permit a person resident outside India to make such

an investment subject to such terms and conditions as may be considered.

6.5 Other Modes of Foreign Direct Investments

1. Global Depository Receipts (GDR)/American Deposit Receipts(ADR)

/Foreign Currency Convertible Bonds (FCCB)

Foreign investment through GDRs/ADRs, Foreign Currency

Convertible Bonds(FCCBs) are treated as Foreign Direct Investment. Indian

companies are allowed to raise equity capital in the international market

through the issue of GDR/ADRs/FCCBs. These are not subject to any

ceilings on investment. An applicant company seeking Government's

approval in this regard should have a consistent track record for good


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performance (financial or otherwise) for a minimum period of 3 years.

This condition can be relaxed for Infrastructure projects such as power

generation, telecommunication, petroleum exploration and refining, ports,

airports and roads.There is no restriction on the number

of GDRs/ADRs/FCCBs to be floated by a company or a group of companies

in a financial year. A company engaged in the manufacture of items covered

under Automatic Route is likely to exceed the percentage limits under

the Automatic Route, whose direct foreign investment after a proposed

GDR/ADR/FCCBs issue is likely to exceed 50 per cent/51 per cent/74 per

cent as the case may be, or which is implementing a project not contained in

project falling under Government Approval Route, would Need to obtain

prior Government clearance through FIPB before seeking final approval

from the Ministry of Finance.There are no end-use restrictions on

GDR/ADR issue proceeds, except for an express ban on investment in real

estate and stock markets. The FCCB issue proceeds need to conform to

external commercial borrowing end use requirements; in addition, 25 per

cent of the FCCB proceeds can be used for general corporate restructuring.

2. Preference Shares:

Foreign investment through preference shares is treated as foreign direct

investment. Proposals are processed either through the automatic route

or FIPB as the case may be. The following guidelines apply to issues of such

shares:-

Foreign investment in preference share is considered as part of share capital

and fall outside the External Commercial Borrowing (ECB)guidelines/cap

Preference shares to be treated as foreign direct equity for the purpose

of sectoral caps on foreign equity, where such caps are prescribed, provided


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they carry a conversion option. If the preference shares are structured

without such conversion option, they would fall outside the foreign direct

equity cap.

Duration for conversion shall be as per the maximum limit prescribed under

the Companies Act or what has been agreed to in the shareholders agreement

whichever is less.

The dividend rate would not exceed the limit prescribed by the Ministry

of Finance.

Issue of Preference Shares should conform to guidelines prescribed by the

SEBI and RBI and other statutory requirements.

6.6 Foreign Technology Agreements

Foreign technology induction is encouraged both through FDI and through

foreign technology agreements. India has one of the most liberal policy

regimes in regard to technology agreements.Foreign technology

collaboration is permitted either through automatic route or through FIPB.

1.Automatic Approval

RBI accords automatic approval for foreign technology collaboration

agreements for all industries subject to the following:

The lump sum payment should not exceed US$ 2 million.

Royalty payable is limited to 5 percent for domestic sales and 8 percent for

exports subject to total payment of 8 percent of sales over a 10 year period.

The period for payment of royalty not exceed 7 years from the date

of commencement of commercial production, or 10 years from the dateof

agreement whichever is earlier.


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2.FIPB Route

For the following categories, Government approval Is necessary:

Proposals attracting compulsory licensing.

Items of manufacture reserved for small-scale sector.

Proposals involving any previous joint venture or technologytransfer/trade

mark agreement in the same or allied field in India.

Extension of foreign technology collaboration agreements.

Proposals not meeting any or all of the parameters for automatic approval.

The different components of foreign technology collaboration such as

technicalknow how fees, payment for design and drawing, payment

for engineering service and royalty are eligible for approval throughTheauto

matic route, and by the Government.


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CHAPTER-7:

SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA

7.1 Hotel & Tourism Sector

100% FDI is permissible in the sector on the automatic route.The term

hotels include restaurants , beach resorts, and other tourist complexes

providing accommodation and/or catering and food facilities to tourists.

Tourism related industry include travel agencies, tour operating agencies and

tourist transport operating agencies, units providing facilities for cultural,

adventure and wildlife experience to tourists, surface, air and water transport

facilities to tourists, leisure, entertainment, amusement,sports, and health

units for tourists and Convention/Seminar units andorganizations.For

foreign technology agreements, automatic approval is granted if

1.Up to 3% of the capital cost of the project is proposed to be paid

for technical and consultancy services including fees for architects,

design,supervision, etc.2.Up to 3% of net turnover is payable for franchising and

marketing/publicity support fee, and up to 10% of gross operating profit is

payable for management fee, including incentive fee.

7.2 Private Sector Banking

49% FDI is allowed from all sources on the automatic route subject

toguidelines issued by RBI from time to time.

1.FDI/NRI/OCB investments allowed in the following 19 NBFC

Activities shall be as per levels indicated below:

a.Merchant banking


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b.Underwriting

c.Portfolio Management Services

d. Investment Advisory Services.

e. Financial consultancy.

f.Stock Broking

g.Asset Management

h.Venture Capital

i.Custodial Services

j.Factoring

k.Credit Reference Agencies

l.Credit rating agencies.

m.Leasing& Finance

n.Housing Finance

o.Foreign Exchange Brokering

p.Credit card business

Q. Money changes Business

r.Micro Credit

s.Rural Credit

2. Minimum Capitalization Norms for fund based NBFCs:

a.For FDI up to 51% - US$ 0.5million to be brought up front

b.For FDI above 51% and up to 75% - US $ 5million to be broughtupfront.

c.For FDI above 75% and up to 100% - US $ 50million out of which US $

7.5million to be brought up front and the balance in 24 months


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3.Minimum capitalization norms for non-fund based

activities:Minimum capitalization norm of US $ 0.5 million is applicable

in respect of all permitted non-fund based NBFCs with foreign investment.

4.Foreign investors can set up 100% operating subsidiaries without the

condition to disinvest a minimum of 25% of its equity to Indian

entities,subject to bringing in US$ 50 million as at 2.(c) above (without any

restriction on number of operating subsidiaries without

bringing inadditional capital)

5.Joint Venture operating NBFC's that have 75% or less than

75%foreign investment will also be allowed to set up subsidiaries for undert

aking other NBFC activities, subject to the subsidiaries also

Complying with the applicable minimum capital inflow

i.e.2.(a)and2.(b)above.

6.FDI in the NBFC sector is put on the automatic route subject to

compliance with the guidelines of the Reserve Bank of India. RBI would

issue appropriate guidelines in this regard

7.3 Insurance Sector

FDI up to 26% in the Insurance sector is allowed on the automatic route

subject to obtaining a license from Insurance Regulatory & the Development

Authority (IRDA)


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7.4 Telecommunication sector

1. In basic, cellular, value added services and global mobile personal

Communications by satellite, FDI is limited to 49% subject to licensingand

security requirements and adherence by the companies (who is investing and

the companies in which investment is being made) to thelicense conditions

for foreign equity cap and lock- in period for transfer and addition of equity

and other license provisions.

2.ISPs with gateways, radio-paging and end-to- end bandwidth, FDI is

permitted up to 74% with FDI, beyond the 49% requiring Government

approval. These services would be subject to licensing and securityrequirements.

3. No equity cap is applicable to manufacturing activities.

4.FDI up to 100% is allowed for the following activities in the telecom

sector

:a.ISPs not providing gateways (both for satellite and submarine cables);

b.Infrastructure Providers providing dark fiber (IP Category 1);

c.Electronic Mail; and

d.Voice MailThe above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such companies

would divest 26% of their equity in favor of Indian public in 5 years, if these

companies are listed in other parts of the world.

e.The above services would be subject to licensing and security

requirements, wherever required.Proposals for FDI beyond 49% shall be

considered by FIPB on case to case basis.


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7.5 Trading Companies

Trading is permitted under automatic route with FDI up to 51% provided it

is primarily export activities, and the undertaking is an export house/trading

house/super trading house. However, under the FIPB route:-

1.100% FDI is permitted in case of trading companies for the following

activities:

a. Exports;

b. Bulk imports with ex-port/ex-bonded warehouse sales;

c. Cash and carry wholesale trading;d.Another import of goods or services provided at least 75% is for the

procurement and sale of goods and services among the companies of the

same group and not for third party use or onward transfer/

distribution/sales.

2. The following kinds of trading are also permitted, subject to the

provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for

such trading companies who wish to market manufactured products on

behalf of their joint ventures in which they have equity participation in India.

c.Trading of hi-tech items/items requiring specialized after sales serviced.

d. Trading of items for social sector

e. Trading of high-tech, medical and diagnostic items.

f.Trading of items sourced from the small scale sector under which, based

on technology provided and laid down quality specifications, acompany can

market that item under its brand name.


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g. Domestic sourcing of products for exports.

h.Test marketing of such items for which a company has approval

for manufacture provided such test marketing facility will be for a periodof

two years, and investment in setting up manufacturing facility commences

simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the

conditionthat such companies would divest 26% of their equity in favor of

the Indian public in five years, if these companies are listed in other parts of

the world. Such companies would engage only

in business to business (B2B) e-commerce and not in retail trading.

7.6 Power Sector

Up to 100% FDI allowed in respect of projects relating to electricitygenerati

on, transmission and distribution, other than atomic reactor power plants.

There is no limit on the project cost and quantum of foreign direct

investment.

7.7 Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for the manufacture

of drugs and pharmaceutical, provided the activity does not attract

compulsory licensing or involve the use of recombinant DNA technology,

and specific cell /tissue targeted formulations. FDI proposals for the

manufacture of licensabledrugs and pharmaceuticals and bulk drugs

produced by recombinant DNA technology, and specific cell / tissue targeted

formulations will require prior Government approval.


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7.8 Infrastructure Sector

FDI up to 100% under automatic route is permitted in projects for constructi

on and maintenance of roads, highways, vehicular bridges, toll roads,

vehicular tunnels, ports and harbors.

7.9 Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and

consultancy for integration of pollution control systems is permitted on the

automatic route

7.10Call Centers in India / Call Centers in India

FDI up to 100% is allowed subject to certain conditions

7.11 Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

7.12 Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc..

2.Up to 100% equity with full repatriation facilities for capital and dividends

in the following sectors:a.34 High Priority Industry Groups

b.Export Trading Companies

c.Hotels and Tourism-related Projects

d.Hospitals, Diagnostic Centers


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e.Shipping

f.Deep Sea Fishing

g.Oil Exploration

h.Power

i.Housing and Real Estate Development

j.Highways, Bridges and Ports

k.Sick Industrial Units

l.Industries Requiring Compulsory Licensing

m.Industries Reserved for Small Scale Sector

n.Up to 40% Equity with full repatriation: New Issues of ExistingCompanies

raising Capital through Public Issue up to 40% of the newCapital Issue.

O.On non-repatriation basis: Up to 100% Equity in any Proprietary

or Partnership engaged in Industrial, Commercial or Trading Activity.

p.Portfolio Investment on repatriation basis: Up to 1% of the Paid

upValue of the equity Capital or Convertible Debentures of theCompany by

each NRI. Investment in Government Securities, Units of UTI, National

Plan/Saving Certificates.

q.On Non- Repatriation Basis : acquisition of shares of an IndianCompany,

through a General Body Resolution, up to 24% of the Paid Up Value of the

Company.

r.Other Facilities: Income Tax is at a Flat Rate of 20% on Income Arising

from Shares or Debentures of an Indian Company.Certain terms and

conditions do apply.


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7.13 Foreign Direct Investment in Small Scale Industries

(SSI's) in India

Recently, India has allowed Foreign Direct Investment up to 100% in many

manufacturing industries which were designated as Small Scale Industries.

India further ended in February 2008 the monopoly of small-scale units on79

items, leaving just 35 on the reserved list that once had as many as 873 item.

Foreign Direct Investment (FDI) in India is subject to certain Rules and

Regulations and is subject to predefined limits ('Limits') in various sectors

which range from 20% to 100%. There are also some sectors in which FDI is

prohibited. The FDI Limits are reviewed by the Government from time to

time and as and when the need is felt and FDI is allowed in new sectors

where the limits of investment in the existing sectors are modified

accordingly. In order to revise the FDI Limits to attract more foreign

investment in India, the Union Government constituted a committee named,

Arvind Mayaram Committee headed by the Economic Affairs Secretary. On

Tuesday, 16th July, 2013, the Government approved the recommendations

given by the Arvind Mayaram Committee to increase FDI limits in 12

sectors out of the proposed 20 sectors, including crucial ones such as defense

and telecom.

Some of the important changes made in the Existing FDI Limits are

provided below:

FDI Limit in Telecom Sector is increased from 74 per cent to 100 percent,

out of which up to 49 per cent will be allowed under automatic route and the

remaining through Foreign Investment Promotion Board (FIPB) approval. A


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similar dispensation would be allowed for asset reconstruction companies

and tea plantations.

FDI in 4 sectors i.e. gas refineries, commodity exchanges, power trading

and stock exchanges have been allowed via the automatic route. In case of

PSU oil refineries, commodity exchanges, power exchanges, stock

exchanges and clearing corporations, FDI will be allowed up to 49 per cent

under automatic route as against current routing of the investment through

FIPB.

FDI in single brand retail is to be allowed up to 49 percent under the

automatic route and beyond that shall be through FIPB.In credit information firms, 74 per cent FDI under automatic route will be

allowed.

In respect of courier services, FDI of up to 100 per cent will be allowed

under automatic route. Earlier, similar amount of investment was allowed

through FIPB route.

FDI cap in defense sector remained unchanged at 26%, however higher

limits of foreign investment in state-of-the-art manufacturing would be

considered by the Cabinet Committee on Security (CCS). Technically, the

decision leaves it open for CCS to even allow 100% foreign investment in

what the defence ministry will define as "state-of-the-art" segments with

safeguards built in to ensure that the technology and equipment are not

shared with other countries.

In the contentious insurance sector, it was decided to raise the sectoral FDI

cap from 26 per cent to 49 per cent under automatic route under which

companies investing do not require prior government approval. A Bill to

raise FDI cap in this sector is pending in the Rajya Sabha.


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7.14 Forbidden Territories:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,

diamonds, copper, zinc.


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CHAPTER-8: FACTORS AFFECTING FDI

The factors that can narrow the gap between FDI approvals and actual

foreign direct investment inflos and indeed make India a preferred

destination for global capital are,

1.Availability of infrastructure in all areas i.e. transports

hospitality,telecom, power, etc.

2.Transparency of processes, policies and decision making andreduction of

government decision making lead time.

3.Stability of policies i.e. entry, exit, labor laws, etc. over a definite timehorizon so that definite plans can be made.

4.Acceptance of International Standards including accountingstandards.

5.Capital account convertibility so that all capitals and payments can flow

easily in and out of the economy.

6.Simplification of the regulatory framework in general and tax laws.

7.Improvement in bandwidth for internet and data communication.

8.Improvement in the enforcement of intellectual property rights.

9.Implementation of the WTO agreement full.

All investments foreign and domestic are made under the expectation

of future profits. The economy benefits if economy policy fosters

completion, creates a well functioning modern regulatory system and

discourage sartificial monopolies created by the government through entry

barriers. A Recognition and understanding of these facts can result in a

more positive attitude towards FDI. The future policies should be designed

in the light of the above observations. The most important initiatives that

need attention are:


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1.Empowering the State Governments with regard to FDI.

2. Developing a fast track clearance system for legal disputes.

3. Changing the mindset of bureaucracy through HR practices.

4.Developing basic infrastructure.

5.Improving Indias image as aninvestment destination.While the

magnitudes of inflows have recorded impressive growth, they are still at a

small level compared to Indias potential. The policy reforms undertaken

have undoubtedly enabled the country to widen the sectoraland source

composition of FDI inflows. Within a generation, the countries of East Asia

transformed themselves. China, Indonesia, Korea, Thailand and Malaysia

today have living standards much above ours.

8.1 FDI TRENDS IN INDIA

India is the second most populous country and the largest democracy in the

world. The far reaching and sweeping economic reform undertaken

since1991 have unleashed the enormous growth potential of the economy.

There has been a rapid, yet calibrated, move towards deregulation and

liberalization, which has resulted in India becoming a favoritedestination for

investment. Undoubtedly, India has emerged as one of the most vibrant and

dynamic of the developing economies.

8.2 India as an Investment Destination

FDI is seen as a means to supplement domestic investment for achieving a

higher level of economic growth and development. FDI benefits domestic

industry as well as the Indian consumers by providing opportunities

for technological upgradation, access to global managerial skills and


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practices,optimal utilization of human and natural resources, making Indian

industry internationally competitive, opening up export markets, providing

backward forward linkages and access to international quality goods and

services. FDI policy has been constantly reviewed and necessary steps have

been taken to make India a most favorable destination for FDI. There are

several good reasons for investing in India.

1.Third largest reservoir of skilled manpower in the world.

2.Large and diversified infrastructure spread across the country.

3.Abundance of natural resources and self-efficiency in agriculture.

4.Package of fiscal incentives for foreign investors.

5.Large and rapidly growing consumer market.

6. Democratic government with an independent judiciary.

7.English as the preferred business language.

8. A developed commercial banking network of over 63000 branches

supportedby a number of National and State level financial institutions.

9.Vibrant capital market consisting of 22 stock exchanges with over

9400listed companies.

10. A congenial foreign investment environment that provide freedom

of entry, investment, location, choice of technology, import and export, and

11.Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal,Pakistan

and Sri Lanka.


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Top Investing Countries FDI Inflows in India


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CHAPTER-9: CASE STUDY

9.1 HEWLETT- PACKARD INDIA

In mid-2006, HP acquired majority stake in MphasiS BFL Limited, a

leading Applicationsand Business Process Outsourcing (BPO) Services

company based in Bangalore, India.With the addition of MphasiS, the total

work force is now more than 30,000.

Slowdown for HP

FY 09 was definitely not a year that HP India would like to remember

fondly. Theslowdown took an alarming toll on its top line in rupee terms, the

group revenue wasalmost flat; in dollar terms, it declined. Result: it was the

worst performing group in theDQ Top 5 club. While the others Tatas at

26%, Wipro at 41%, Infosys at 31%, and evenHCL at fared between average

to outstanding, HP was left far behind in the race.

Strategy adopted

It was unfortunately not a great start for NeelamDhawan, who rejoined HP

India after her three-year stint as head of Microsoft India. She took over as

the managing director of HPIndia in June, 2008, replacing CEO

BaluDoraiswamy who moved on to become MD for Asia Pacific Japan and

senior VP for HPs global technology solutions group (TSG).Though on a

brighter note, within HP India, the TSG unit that she only headed

(whichcontributed maximum to HPs revenues) was the silver lining. Within

TSG, it was the ITservices business that shonethe EDS acquisition paid off

boosting the services topline bynearly 50%. Acquisitions seemingly did the


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trick for HP India: other than EDS, on theenterprise software front it were

the Opsware and Tower Software acquisitions. There waslittle doubt that the

EDS takeover placed HP in a stronger position to leverage the

domesticmarket. While HP was already a force to reckon with in domestic

IT services, it nowgained in terms of new capabilities in manufacturing,

transportation, PSUs, healthcare aswell as infrastructure management and

BPO. And we are not even counting the impact of MphasiS (which is an

EDS company, and at present separately listed); though in FY 09, itwas

more for MphasiS that the HP-EDS brand equity worked well, and HP too is

sure to benefit from the arrangement. The year even saw HP veteran Ganesh

Ayyar taking over asthe CEO of MphasiS.51

Efforts were made though to halt the declining fortunes by launching newer

products likeProbooks (for SMBs), EliteBooks (for large enterprises),

notebooks targeting women andCQ2000, the touch-smart PCs with

QuickPlayer button. HP also undertook an inventorycorrectionin OND and

restructured PSG to ensure cross selling by the sales &marketingteams for

both desktops and notebooks.

IPG (at 20%, the smallest of the three divisions) too was not immune from

the negativemarket sentiments mirroring the causes and symptoms afflicting

PSG. Remedial measuresadopted included a growing focus on managed

printing services, large format printers,color printing and services like

Snapfish.

The financing scheme offered to resellers of both IPG and PSG by the HP

FinancialServices Group did provide some solace to the beleaguered


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partners. Incidentally, thesefinancing options helped HP services too, as it

enabled many SMBs to opt for the option tocome into the services

bandwagon. Last year was particularly interesting for HP FinancialServices

group (HPFS). It got a big push due to inability of companies to shell out

instant payments in the backdrop of an economic crisis. HPFS offers desktop

PCs and other ITequipment on lease to SMBs, in addition to facilitating

deployment of SAP businessenterprise software, though it reports numbers

globally. HPFS enabled per quarter payments of bundle of solutions bought

from HP, last year.

TSGs growth at 33% (primarily because of the EDS acquisition) was

however, defeated bythe flat growth of two major groupsimag

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