Forign Invest

8/3/2019 Forign Invest

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Foreign InvestmentIndia is the Second most Popular Country in the World and the largest Democracy In the

World and sweeping Economic reform undertaken since 1991 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 favorite destination for foreign investment. The mood is upbeat and signals

strong. Undoubtely ,India has emerged as one of the most vibrant anddynamic ofthe developing economics.

In olden days capital flowed from one place to another by goods. Traders went another

country for selling their goods for making profit. But after the in late 1980, havesignificantly changed the environment for international investment according toPeter Drucker.

Foreign investment refers to long term participation by country A intocountry B. Usually invoives participation in management, jointventure & transfer of technology

Foreign investment may also help increase a countrys exports and reduce the importrequirements. If such investment take place in export oriented and Import-Competing industries.

ADVANTAGES-

Infrastructure $ technology transfer.

Increase productive efficiency due to competiton from multinational companies.

Improvement in the quality of the factors of production

Faster growth of output and employment.

Increase in exports

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FDI refers to investment in a forign country where the invester retain control over theinvestment.

portfolio investments If the investor has only assort of property interest in investing the

capital in buying equities ,bonds ,or other securities abroad, it is referred to asportfolio investments.

There are many routes of portfolio investments.in india .viz., by foreign Institutional

Investors(FIIs) like Mutual Funds and through Global depository Receipt(GDRs)

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Indi*1. One largest economies of the world. Fourth largest economy in term of

purchasing power.

2.Large and rapidly growing Consumer Market up to 300 million people constitute the

Market for branded consumer products

3. Easy access to markets of the other nations belonging to the south assion associationfor Regional Corporation.

4. Large and diversified infrastructure spread across the Country.

5. Promising future in the IT Industry6. Large Manufacturing Capability., spanning almost all areas of manufacturing

activities

7. Well developed R&D infrastructure.

8.Well establish knowledge industry.

9. Abundance of natural resources.10. Developed Banking system

11. Well balanced package of fiscal incentives.12. Stable democratic environment fostered by over 53 years of independence.

13. Established, independent judiciary.

14. English the preferred business language.

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Significance of Foreign Investment

Foreign capital and technology can play a very important role in the socio-economicdevelopment of a nation.

Helps economic growth by facilitating essential imports.

Foreign Investment (FI) may also help increase a countrys exports and reduce import.

FI also increases jobs and domestic labour may get higher wages.Consumer get cheaper goods.

FI may also bring in a lot of indirect gains.

Limitations and Dangers of Foreign Capital

The following criticisms are levelled against foreign capital:

Mostly FI is in high profit areas and not in priority areas.

Unfavorable effect on balance of payment.

Sometimes interfere with national politics.Danger of creation of monopolies or oligopolistic structures.

TECHNICAL COLLABORATION

Royalty for use of trademark and brand name without technology transfer is allowed upto

2% for exports and 1% for domestic sales.

In case of technology transfer, no separate royalty can be paid for trade marks & brandname Remittance upto USD 1 million per project for consultancy service procured

from outside India is permitted under the automatic route .

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SIGNIFICANCE OF FOREIGN

INVESTMENTForeign capital and technology can play a very important role in the socio-economic

development of a nation.

They have very significantly contributed to the development of the developed countries. Foreign capand technologyhave been playing a significant role in the development of a number of developing countries.

Foreign investment is playing an increasing role in economic development.

Economic reforms and the far-reaching political changes have resulted in very

substantial changes in theInternational capital flows. Foreign investment may also help increase a countrys exports and reduc

the import requirements if such Investment take place in export-oriented and import-competing

industries.The analysis of Donald MacDougall and Paul Streeten, Gerald Meier observes that, from

the stand point of

national economic benefit, the essence of the case for encouraging an inflow of capital is that the capis that the

resturent increase in the income of investor.

As long as foreign investment raises of productivity, and this increase is not wholly appropriated by tinvestor, the greater product must be shared with others and there must be some direct benefits to oth

and there must be some direct benefits to other income group as mentioned below:

FDI can have social and economic benefits.Domestic labour There might also be an expansion of the employment opportunities.Consumers:-If the investment is product-improving or production-innovating, consumer benefit fro

better quality

product or new product.

Government:-The increase in production and foreign trade resulting from foreign capital might increthe fiscal

revenue of government.

External economies:-This could stimulate domestic investment in industrial and other sectors.The endogenous growth framework, the source of growth attributed to capital flows comprise the

spillovers associatedWith foreign capital in the form of technology

FDI have remarkably changed the balance of payment and foreign exchange reserve position of seve

countries.

Advantages of FDI1- FDI shifts the burden of risk of investment from domestic to foreign investors.

2-Repayments are linked to profitability of the underlying investment whereas under debt financi

the borrowedfunds must be serviced regardless of the project costs.

3-Further, it has also been observed that only capital inflow that has been strongly associated with

higher GDP growth since 1970.

FDI has specific advantages over ODA

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Foreign Private investment:- Foreign investment can havemultidimensional benefits.

1- It helps increase level and thereby the income and employment in the host country.

2-Foreign investment may increase the tax revenue of the government.

3-FDI facilitates transfer of technology to the recipient country.

4- Foreign capital may enable the country to increase its export and reduce import requirements.

5-The Foreign investors may encourage and assist domestic suppliers and consuming industries.

6-Foreign investment improves the quality and reduces the cost of input, that would benefit the domeindustry.

7-Foreign investors may also help increase competition and break domestic monopolies.

INLOW OF FDI IN INDIA

2007-2008--$15.7 billion

2006-2007--$5.5

Role player

Vodafone

Nokia

Suzuki

General motors

OUTFLOW 0F FDI FROM INDIA

2007-08- $15 billion

2006-07 $2.8

Role P layers

Tata groups

Wipro

Ranbaxy

Bharat forge

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Investment Policy-

Automatic Route-Today, foreign investment is freely allowed in all sectors including

the Services, sector except in cases in cases where there are sectoral ceilings .

INSURANCE SECTOR - FDI up to 26% allowed on the automaticroute However, license from the Insurance Regulatory & Development Authority

(IRDA) has to be obtained There is a proposal to increase this limit to 49%(Notfound any data to substantiate this statement

BANKING SECTOR- Foreign Investment up to 74% is permitted from allsources (FDI +FII) under the automatic route subject to guidelines for setting up ofbranches/subsidiaries of foreign banks issued by RBI from time to time.

Energy- The 1991 Power Policy seeks to attracts significant Private sectorInvestment in the Indian Power Sector.

Private sector permitted to set up COAL, Gas or Liquid based thermalprojects and Wind or solar Projects of any size.

Oil and natural gas- The government has announced significant newpolicy initiatives to attract investment: In exploration and Production , Oil

and Gas Field are open to the Private sector as well as for foreign

participation under production sharing contacts .

Foreign investment it to be permitted up to-

100%in small sized oil fields.

60% for unincorporated ventures

51% for incorporated ventures

100% for exploration and production of blocks

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COAL- Private Indian companies setting up or operating power projects aswell as coal or lignite mines for captive consumption are allowed up to 100%

100% FDI are allowed for setting up Coal processing plants.

FOREIGN INSTITUTIONAL INVESTOR -Properly fundsforeign individuals and foreign corporates can register as a subject accounts asinvest through the FII, seperate limits of 10%/15% is available for the subaccounts.

IT sector- Automatic approval for foreign investment equity software and all areasof electronics.

Opportunities-

Communication Infrastructure

Optic Fiber Cable

Satellite based Communication Software Development

IT enable services.

AIRPORTS:

Foreign Investment upto 100% is allowed in green field projects under automatic

route Foreign Direct Investment is allowed in existing projects - upto 74%

under automatic route - beyond 74% and upto 100% subject to Government

approval

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PROHIBITED SECTORS OF FDI -

GAMBLING AND BETTING LOTTERY

ATOMIC ENERGY HOUSING

REAL ESTATES

AGRICULTURE(WITH SOME EXCEPTIONS)

PLANTATION(OTHER THAN TEA PLANTATION)

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(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 economicglobalization. Figure below shows net inflows of foreign direct investment. The largest

flows of foreign investment occur between the industrialized countries (North America,

Western Europe and Japan). But flows to non-industrialized countries are increasingsharply.

Types

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

one of the following:[citation needed]

an individual; a group of related individuals;

an incorporated orunincorporated entity;

apublic company orprivate company;

a group of related enterprises;

a government body;

anestate (law), trust or other societal organisation;

any combination of the above.

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy

through any of the following methods:

by incorporating a wholly owned subsidiary orcompany

by acquiring shares in an associated enterprise

through a mergeror an acquisition of an unrelated enterprise

participating in an equityjoint venturewith another investor or enterprise

Foreign direct investment incentives may take the following formslow corporate tax andincome tax rates

tax holidays

other types of tax concessions

preferential tariffs special economic zones

EPZ - Export Processing Zones

Bonded Warehouses

Maquiladoras

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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)

Foreign direct investment in India

A recent UNCTAD survey projected India as the second most important FDI destination

(after China) for transnational corporations during 2010-2012. As per the data, the sectors

which attracted higher inflows were services, telecommunication, construction activitiesand computer software and hardware. Mauritius, Singapore, the US and the UK were

among the leading sources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by

five per cent from USD 27.33 billion in the previous fiscal. Foreign direct investment in

August dipped by about 60 per cent to USD 1.33 billion, the lowest in 2010 fiscal,industry department data released showed.

Growth of FDI:-

Cyclical Behaviour FDI flows are characterised by cyclical behaviors. Thedecline in FDI flows after peaking in 2000 followed rapid increases during the

late 1990s. As the World Investment Reports point out, there was a similar patternduring the late 1980s and early 1990s, and in 1982-1983. Thus, this is the third

downward cycle in FDI, each punctuating a long upward trend in FDI every tenyears or so.

Foreign direct investment and the developing world

Foreign investment can be a significant driver of development in poor nations. It provides

an inflow of foreign capital and funds, in addition to an increase in the transfer of skills,

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technology, and job opportunities. Many of the East Asian tigers such as China, South

Korea,Malaysia, and Singaporebenefited from investment abroad. The Commitment to

Development Index ranks the "development-friendliness" of rich country investmentpolicies.

Investment in India - Investing in India - Venturing into the Indian Market

Investment in Indian marketIndia, among the European investors, is believed to be a good investment despite

political uncertainty, bureaucratic hassles, shortages of power and infrastructuraldeficiencies. India presents a vast potential for overseas investment and is actively

encouraging the entrance of foreign players into the market. No company, of any

size, aspiring to be a global player can, for long ignore this country which is expectedto become one of the top three emerging economies.

Success in India

Success in India will depend on the correct estimation of the country's potential,underestimation of its complexity or overestimation of its possibilities can lead to

failure. While calculating, due consideration should be given to the factor of theinherent difficulties and uncertainties of functioning in the Indian system.Entering

India's marketplace requires a well-designed plan backed by serious thought andcareful research. For those who take the time and look to India as an opportunity for

long-term growth, not short-term profit- the trip will be well worth the effort.

Market potential

India is the fifth largest economy in the world (ranking above France, Italy, theUnited Kingdom, and Russia) and has the third largest GDP in the entire continent of

Asia. It is also the second largest among emerging nations. (These indicators arebased on purchasing power parity.) India is also one of the few markets in the world

which offers high prospects for growth and earning potential in practically all areas of

business.Yet, despite the practically unlimited possibilities in India for overseasbusinesses, the world's most populous democracy has, until fairly recently, failed to

get the kind of enthusiastic attention generated by other emerging economies suchas China.

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EV

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India developed a highly

protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were

vigorously fostered, along with a distrust of foreign business. Even as today the climate in India

has seen a seachange, smashing barriers and actively seeking foreign investment, manycompanies still see it as a difficult market. India is rightfully quoted to be an incomparable

country and is both frustrating and challenging at the same time. Foreign investors should be

prepared to take India as it is with all of its difficulties, contradictions and challenges.

Developing a basic understanding or potential of the Indian market, envisaging and

developing a Market Entry Strategy and implementing these strategies when actually

entering the market are three basic steps to make a successful entry into India.

Developing a basic understanding or potential of the Indian market

The Indian middle class is large and growing; wages are low; many workers are well educatedand speak English; investors are optimistic and local stocks are up; despite political turmoil, the

country presses on with economic reforms.But there is still cause for worries-

Infrastructural hassles.

The rapid economic growth of the last few years has put heavy stress on India's infrastructuralfacilities. The projections of further expansion in key areas could snap the already strained lines

of transportation unless massive programs of expansion and modernization are put in place.

Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions

(only half of the country's roads are surfaced), low telephone penetration (1.4% of population).

Indian Bureaucracy.

Although the Indian government is well aware of the need for reform and is pushing ahead in this

area, business still has to deal with an inefficient and sometimes still slow-moving bureaucracy.

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Diverse Market .

The Indian market is widely diverse. The country has 17 official languages, 6 major religions,

and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among

sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and overall

economy before taking the plunge. Research firms in India can provide the information todetermine how, when and where to enter the market. There are also companies which can guide

the foreign firm through the entry process from beginning to end --performing the requisite

research, assisting with configuration of the project, helping develop Indian partners and

financing, finding the land or ready premises, and pushing through the paperwork required.

Developing up-front takes:

Market Study

Is there a need for the products/services/technology? What is the probable market for the

product/service? Where is the market located? Which mix of products and services will find the

most acceptability and be the most likely to generate sales? What distribution and sales channels

are available? What costs will be involved? Who is the competi

Check on Economic Policies

The general economic direction in India is toward liberalization and globalization. But the

process is slow. Before jumping into the market, it is necessary to discover whether government

policies exist relating to the particular area of business and if there are political concerns which

should be taken into account.

FDI Report

Investment in India - Foreign Direct Investment - Introduction

Foreign Direct Investment (FDI) 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.

Forbidden Territories:

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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Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment

Indian companies are allowed to raise equity capital in the international market through the issue

of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any

ceilings on investment. An applicant company seeking Government's approval in this regardshould have consistent track record for good performance (financial or otherwise) for a minimum

period of 3 years. This condition would be relaxed for infrastructure projects such as powergeneration, telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance fromFIPB

There is no restriction on the number of Euro-issue to be floated by a company or a group of

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

Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro

issue is likely to exceed 51% or which is implementing a project not contained in Annex-III,would need to obtain prior FIPB clearance before seeking final approval from Ministry of

Finance.

Use of GDRs

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditureincluding domestic purchase/installation of plant, equipment and building and investment in

software development, prepayment or scheduled repayment of earlier external borrowings, and

equity investment in JV/WOSs in India.

Restrictions

However, investment in stock markets and real estate will not be permitted. Companies may

retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for

approved end uses. Any investment from a foreign firm into India requires the prior approval of

the Government of India.

Investment in India - Foreign Direct Investment - Approval

Foreign direct investments in India are approved through two routes:

Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of two weeks (providedcertain parameters are met) to all proposals involving:

foreign equity up to 50% in 3 categories relating to mining activities (List 2).

foreign equity up to 51% in 48 specified industries (List 3).

foreign equity up to 74% in 9 categories (List 4).

where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies.

Investments in high-priority industries or for trading companies primarily engaged in exportingare given almost automatic approval by the RBI.

Opening an office in India

Opening an office in India for the aforesaid incorporates assessing the commercial opportunity

for self, planning business, obtaining legal, financial, official, environmental, and tax advice as

needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing

a product marketing strategy and more.

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The FIPB Route:

Processing of non-automatic approval casesFIPB stands for Foreign Investment Promotion Board which approves

all other cases where the parameters of automatic approval are not

met. Normal processing time is 4 to 6 weeks. Its approach is liberal forall sectors and all types of proposals, and rejections are few. It is not

necessary for foreign investors to have a local partner, even when theforeign investor wishes to hold less than the entire equity of the

company. The portion of the equity not proposed to be held by theforeign investor can be offered to the public.

Total foreign investment and FDI

Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98,

compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was

an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The government is

likely to double FDI inflows within two years. Foreign portfolio investment by foreigninstitutional investors was significantly lower at dols 752 million for fiscal 1997-98,

down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recentcrisis in Asia.

Foreign institutional investors

Foreign institutional investors (FIIs) were net sellers from November 1997 through

January 1998. The outflow, prompted by the economic and currency crisis in Asia andsome volatility in the Indian rupee, was modest compared to the roughly dols 9 billion

which has been invested in India by FIIs since 1992.

FII investmentsFII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the

renewed stability of the rupee and relatively attractive valuations on Indian stock

markets.

Large outflows of capital

Large outflows began again in May 1998, following India's nuclear tests and volatility in

the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI

announced in June that FIIs would be allowed to hedge their incremental investments inIndian markets after June11, 1998.

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India should be more open to FDI'

Gary Locke: What you see from the Presidents visit is acknowledging the critical role that India plays not

just within the region and not just [in] economic issues affecting the United States and India, but really

affecting the entire world. Photo: V. Sudershan

diplomacyIndia-United States

Interview with U.S. Commerce Secretary Gary Locke

Even as India seeks foreign capital to build its physical infrastructure and has pitched

for a Comprehensive Economic Cooperation Agreement with the United States as the

next logical step following President Barack Obama's historic visit, the U.S. maintains

that lack of reforms especially in the financial services sector and foreign directinvestment (FDI) policies would stand in the way of India achieving the desired

objectives. In an interview withAshok Dasgupta,U.S. Commerce Secretary Gary Lockeemphasised the need for India to be more open to foreign direct investment in a variety of

sectors. On the issue of opening up to multi-brand retail, Mr. Locke said the matter was

not discussed at all in deference to the sensitivities of the Indian people. Excerpts:

On what President Obama's visit achieved

The achievement, I think, is the recognition of the very important role that India plays in

the world economy with respect to political decisions touching the entire world. So, what

you see from the President's visit is acknowledging the critical role that India plays notjust within the region and not just [in] economic issues affecting the United States and

India, but really affecting the entire world.

The announcements over allowing more hi-tech goods to be purchased by India from theU.S. is a sign of respect for India and recognising that India is a true partner with the

United States in the sharing of technology and also the support for having a permanent

seat in the Security Council of the United Nations. It's a statement by the U.S. that we

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recognise that India is a major economic and political force and should be treated that

way in international bodies and in our relationship, economic and political and strategic.

On the specifics

In terms of specifics, policies on high technology, the policies about reforming andmodifying our export control regime as they relate to India will mean that companies in

India will have access to hi-tech goods, whether in the areas of space exploration research

and improvements and modernisation of the military. As the President indicated, bothsides will have to move away from the stereotypes and the misperceptions about the

realities of global trade. If we want to sell to India, India should be able to sell to the U.S.

It can never be one way.

On the issue of job losses

We really need to focus on the net increase in jobs for each country. There will be job

creation in the U.S. when we sell to India and there will be job creation in India whenIndia sells things to the U.S.

What we really need to focus on is increased job creation on both sides. As long as we

can show the American public that there is a net increase in jobs because of trade, thenthe American people will understand the benefits and the realities of a global economy.

On hike in visa fees

We need to work with the Congress on that because it was the Congress that imposed

those fees, not just on visas of workers coming from India but from any country around

the world. It was not imposed by the U.S. administration, but by the Congress and it wasa bipartisan issue as it included the Republicans as well as Democrats. There were

amendments and that was a way in which the Congress could find the funds that theycould use to pay for the increased cost of security measures along the U.S.-Mexican and

the U.S.-Canadian borders.

On the need to relax FDI policies

We believe that India should be more open to foreign direct investment in a variety of

sectors, because we believe that some of the impediments for FDI actually hinder India'sability to achieve its goals of economic progress, job creation for the people and growth

of the economy. If India wants foreign investment in construction of roads and bridges orother major infrastructure like water systems, ports and airports, you have to have astrong insurance system to attract that investment, not just from the United States but

from Germany, France or Canada and other countries.

It is not necessarily in the long-term economic interests of India to have these various

restrictions on foreign investment because they may hinder India's ability to proceed withthe economic and modernisation objectives that you have. For investments into large

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infrastructure projects, you need to ensure that you have the insurance cover and bonding

that will cover large projects that might be initiated here.

You need to understand that in general, overly restrictive policies can prevent a countryfrom receiving the foreign capital that it is seeking to help pay for these major

infrastructure projects which your Prime Minister [Manmohan Singh] said will run intotrillions of dollars over the next 10 years. So if you have overly restrictive policies, you

will not have foreign capital come in for all these roads and bridges and airports andevery thing that you desire.

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Documents

Forign Invest