fdi finalMJ
-
Upload
niravthegreate999 -
Category
Documents
-
view
221 -
download
0
Transcript of fdi finalMJ
-
8/13/2019 fdi finalMJ
1/68
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
-
8/13/2019 fdi finalMJ
2/68
FDI (Foreign Direct Investement) 2
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
3/68
FDI (Foreign Direct Investement) 3
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
4/68
FDI (Foreign Direct Investement) 4
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
5/68
FDI (Foreign Direct Investement) 5
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
6/68
-
8/13/2019 fdi finalMJ
7/68
FDI (Foreign Direct Investement) 7
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
8/68
FDI (Foreign Direct Investement) 8
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
9/68
FDI (Foreign Direct Investement) 9
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
10/68
FDI (Foreign Direct Investement) 10
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
11/68
FDI (Foreign Direct Investement) 11
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
12/68
FDI (Foreign Direct Investement) 12
K.P.B HINDUJA COLLEGE OF COMMERCE
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,
-
8/13/2019 fdi finalMJ
13/68
FDI (Foreign Direct Investement) 13
K.P.B HINDUJA COLLEGE OF COMMERCE
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 world- wide 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.
-
8/13/2019 fdi finalMJ
14/68
FDI (Foreign Direct Investement) 14
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
15/68
FDI (Foreign Direct Investement) 15
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
16/68
FDI (Foreign Direct Investement) 16
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/http://www.economywatch.com/foreign-direct-investment/ -
8/13/2019 fdi finalMJ
17/68
FDI (Foreign Direct Investement) 17
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
18/68
FDI (Foreign Direct Investement) 18
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
19/68
FDI (Foreign Direct Investement) 19
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
20/68
FDI (Foreign Direct Investement) 20
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
21/68
FDI (Foreign Direct Investement) 21
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
22/68
FDI (Foreign Direct Investement) 22
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
23/68
FDI (Foreign Direct Investement) 23
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
24/68
FDI (Foreign Direct Investement) 24
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
25/68
FDI (Foreign Direct Investement) 25
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
26/68
FDI (Foreign Direct Investement) 26
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
27/68
FDI (Foreign Direct Investement) 27
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
28/68
FDI (Foreign Direct Investement) 28
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
29/68
FDI (Foreign Direct Investement) 29
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
30/68
FDI (Foreign Direct Investement) 30
K.P.B HINDUJA COLLEGE OF COMMERCE
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,
-
8/13/2019 fdi finalMJ
31/68
FDI (Foreign Direct Investement) 31
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
32/68
FDI (Foreign Direct Investement) 32
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
33/68
FDI (Foreign Direct Investement) 33
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
34/68
FDI (Foreign Direct Investement) 34
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
35/68
FDI (Foreign Direct Investement) 35
K.P.B HINDUJA COLLEGE OF COMMERCE
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:
-
8/13/2019 fdi finalMJ
36/68
FDI (Foreign Direct Investement) 36
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
37/68
FDI (Foreign Direct Investement) 37
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
38/68
FDI (Foreign Direct Investement) 38
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
39/68
FDI (Foreign Direct Investement) 39
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
40/68
FDI (Foreign Direct Investement) 40
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
41/68
FDI (Foreign Direct Investement) 41
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
42/68
FDI (Foreign Direct Investement) 42
K.P.B HINDUJA COLLEGE OF COMMERCE
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)
-
8/13/2019 fdi finalMJ
43/68
FDI (Foreign Direct Investement) 43
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
44/68
FDI (Foreign Direct Investement) 44
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
45/68
FDI (Foreign Direct Investement) 45
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
46/68
FDI (Foreign Direct Investement) 46
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
47/68
FDI (Foreign Direct Investement) 47
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
48/68
FDI (Foreign Direct Investement) 48
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
49/68
FDI (Foreign Direct Investement) 49
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
50/68
FDI (Foreign Direct Investement) 50
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
51/68
FDI (Foreign Direct Investement) 51
K.P.B HINDUJA COLLEGE OF COMMERCE
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:
-
8/13/2019 fdi finalMJ
52/68
FDI (Foreign Direct Investement) 52
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
53/68
FDI (Foreign Direct Investement) 53
K.P.B HINDUJA COLLEGE OF COMMERCE
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.
-
8/13/2019 fdi finalMJ
54/68
FDI (Foreign Direct Investement) 54
K.P.B HINDUJA COLLEGE OF COMMERCE
Top Investing Countries FDI Inflows in India
-
8/13/2019 fdi finalMJ
55/68
FDI (Foreign Direct Investement) 55
K.P.B HINDUJA COLLEGE OF COMMERCE
\
-
8/13/2019 fdi finalMJ
56/68
FDI (Foreign Direct Investement) 56
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
57/68
FDI (Foreign Direct Investement) 57
K.P.B HINDUJA COLLEGE OF COMMERCE
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
-
8/13/2019 fdi finalMJ
58/68
FDI (Foreign Direct Investement) 58
K.P.B HINDUJA COLLEGE OF COMMERCE
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