INTERNATIONAL BUSINESS

INDIAN SCENARIO IN FDI

SUBMITTED TO

Dr. D. BHANU SREE REDDY .

ASSISTANT PROFESSOR.

VIT BS.

Submitted by:

S.Mahendran

07mba059

On: 7-8-2008

FDI in INDIA:

Compared to most industrializing economies, India followed a fairly restrictive foreign

private investment policy until 1991 – relying more on bilateral and multilateral loans with long

maturities. Inward foreign direct investment (FDI, or foreign investment, or foreign capital hereafter) was

perceived essentially as a means of acquiring industrial technology that was unavailable through licensing

agreements and capital goods import. Technology imports were preferred to financial and technical

Collaborations. Even for technology licensing agreements, there were restrictions on the rates of royalty

payment and technical fees.

However, the 1980s witnessed a gradual relaxation of the foreign investment rules perhaps

best symbolised by the setting up of Maruti, a central government joint venture small car project with

Japan’s Suzuki Motors in 1982. It was followed by Pepsi’s entry in the second half of the decade, to

primarily export processed food products from Punjab, and also to bottle its well known beverages for the

domestic market.

Reforms in FDI:

All this changed since 1991. Foreign investment is now seen as a source of scarce capital,

technology and managerial skills that were considered necessary in an open, competitive, world economy.

India sought to consciously ‘benchmark’ its policies against those of the rapidly growing south-east Asian

economies to attract a greater share of the world FDI inflows. Over the decade, India not only permitted

foreign investment in almost all sectors of the economy (barring agriculture, and, until recently, real

estate), but also allowed foreign portfolio investment – thus practically divorcing foreign investment from

the erstwhile technology acquisition effort. Further, laws were changed to provide foreign firms the same

standing as the domestic ones.

India's FDI outflow to exceed inflow in 2007-08:

As a confident India Inc has started bidding for more and bigger deals abroad, in 2007-08

overseas investment from India will be around $15 billion - surpassing foreign direct investment (FDI)

inflows in the country, says a study. As a confident India Inc has started bidding for more and bigger

deals abroad, in 2007-08 overseas investment from India will be around $15 billion - surpassing foreign

direct investment (FDI) inflows in the country, says a study. The bulk of outward FDI flow will be driven

mainly by India's booming manufacturing sector, said the 'Study on FDI Outflow and amp; Role of

Manufacturing in the Mergers and amp; Acquisitions Front, 2007', by the Associated Chambers of

Commerce and Industry (Assocham). Indian companies' preferred investment destinations are the

European countries and the US, as also Africa taking advantage of its cost competitiveness. Sectors such

as pharma and automobiles will give a major thrust to the FDI outflow, though IT will continue to

dominate the scene, said the report released Friday. 'Riding on strong balance sheets, good credit ratings

and confidence shown by global business community, Indian manufacturing is leading India Inc.'s global

quest,' said Venugopal Dhoot, president, Assocham.

The main factors fuelling the growing hunger for mergers and acquisitions (M and amp;A)

among Indian companies are huge fund supply, globally competitive business practices and favourable

regulatory environment, besides higher margins, revenue, volumes and growth prospects. 'The number of

outbound M and amp;A deals has increased sharply over the past six years from about 37 in 2001 to more

than 170 in 2006. The transactions gathered tremendous momentum in 2005,' the report said. The total

number of deals actually doubled in 2005 from 2004 to reach a figure of close to 150 from 70 in previous

year. According to Assocham, the Indian conglomerates that are upbeat on inorganic growth are the Tata

group, Bharat Forge, Ranbaxy, ONGC, Infosys and Wipro. 'The sectors attracting investments by

Corporate India include a whole gamut of sectors - metal, pharmaceuticals, industrial goods, automotive

components, beverages, cosmetics and energy in manufacturing; and mobile communications, software

and financial services in services,' the report said. Talking about specific examples, the study noted: 'The

Apollo Group of Hospitals may strike cross border deals to expand its global footprint through strategic

partners with some of the local hospital chains overseas while pursuing mergers and acquisitions in the

US and Europe. 'Nicholas Piramal India Ltd plans to invest $50 million over a three-year period in its

plants in the UK. In the energy sector, India's Suzlon Energy Limited, the world's fifth largest wind

turbine manufacturer, has offered $1.3 billion for Germany's REpower.

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

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign direct investments in India are approved through two routes:

1. Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period

of two weeks (provided certain parameters are met) to all proposals involving:

Foreign equity up to 50% in 3 categories relating to mining activities.

Foreign equity up to 51% in 48 specified industries.

Foreign equity up to 74% in 9 categories.

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

almost automatic approval by the RBI.

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

Proposals that require an industrial licence and cases where foreign investment is more than 24%

in the equity capital of units manufacturing items reserved for the small scale industries.

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

Proposals relating to acquisition of shares in an existing Indian company in favour of a

Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and

Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not

permitted and/or whenever any investor chooses to make an application to the Foreign

Investment Promotion Board and not to avail of the automatic route.

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

recommend foreign direct investment, which do not come under the automatic route. Normal processing

time of an FDI proposal in FIPB is 4 to 6 weeks. FIPB is located in the Department of Economic Affairs,

Ministry of Finance. Its constitution is as follows:

Secretary, Department of Economic Affairs (Chairman)

Secretary, Department of Industrial Policy & Promotion (Member)

Secretary, Department of Commerce (Member)

Secretary, (Economic Relation), Ministry of External Affairs (Member)

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

and professional experts of industry and commerce, as and when necessary.

Foreign Investment Implementation Authority (FIIA):

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

quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-

active one stop after care service to foreign investors, help them obtain necessary approvals and by

sorting their operational problems. FIIA is assisted by Fast Track Committee (FTC), which have been

established in 30 Ministries/Departments of Government of India for monitoring and resolution of

difficulties for sector specific projects.

Country Sources of FDI

Among countries, Mauritius has been the largest direct investor in India. Firms based in

Mauritius invested over US$20 billion in India between August 1991 and July 2007 or over two-fifth of

total FDI inflows during that period (Table 2). However, this data is rather misleading. Mauritius has low

rates of taxation and an agreement with India on double tax avoidance regime. To take advantage of that

situation, many companies have set up dummy companies in Mauritius before investing to India. Also, a

major part of the investments from Mauritius to India are actually round-tripping by Indian firms, not

unlike that between Mainland China and Hong Kong.

The United States (US) is the second largest investor in India. The total capital flows from the US

was around US$6. billion between August 1991 and July 2007, which accounted for 12 percent of the

FDI inflows. Most of the US investments were directed to the fuels, telecom, electrical equipment, food

processing, and services sectors. The United Kingdom (UK) and the Netherlands are India’s third and

fourth largest FDI inflows. The investments from these countries to India are primarily concentrated in

the power/energy, telecom, and transportation sectors. Japan was the fourth largest source of cumulative

FDI inflows in India between 1991 and 2007, but inflows from Japan to India have decreased during this

time period. This is opposite to the general trend. This is particularly interesting because Japan’s FDI

outflows in 2006 increased by 10 percent to reach a record US$50 billion, the second highest since 1990.3

It is hard to explain the recent decline of Japanese FDI to India and it might as well be a temporary

anomaly.4 India, however, continues to be one of the biggest recipients of Japanese Official Development

Assistance (ODA). Most of the assistance was in building infrastructure, including electricity generation,

transportation, and water supply. It is plausible that Japanese government assistance has crowded out

some private sector investment from Japan. The top sectors attracting FDI inflows from Japan to India

(January 2000 to November 2006) have been transportation (54 percent), electrical equipment (7 percent),

telecom, and services (3 percent).

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):

Amount Rupees in crore

(US$ in million) Ranks

Country 2005-06

(April-

March)

2006-07

(April-

March)

2007-08

(April-

March)

2008-09

(for April

2008)

Cumulative

Inflows

(from April.

2000 to

April 2008)

%age with total

Inflows

(in terms of

rupees)

1. MAURITIUS 11,441

(2,570)

28,759

(6,363)

44,483

(11,096)

5,183

(1,295)

115,556

(26,930)

44.26 %

2. U.S.A. 2,210

(502)

3,861

(856)

4,377

(1,089)

799

(200)

20,757 (4,733) 7.95 %

3. SINGAPORE 1,218

(275)

2,662

(578)

12,319

(3,073)

1,653

(413)

19,778

(4,770)

7.58 %

4. U.K. 1,164

(266)

8,389

(1,878)

4,690

(1,176)

190

(48)

19,254 (4,410) 7.38 %

5. NETHERLAN

DS

340

(76)

2,905

(644)

2,780

(695)

18

(4)

11,939

(2,709)

4.57 %

6. JAPAN 925

(208)

382

(85)

3,336

(815)

59

(15)

9,395

(2,141)

3.60 %

7. GERMANY 1,345

(303)

540

(120)

2,075

(514)

202

(50)

6,940

(1,594)

2.66 %

8. CYPRUS 310

(70)

266

(58)

3,385

(834)

474

(118)

4,541

(1,104)

1.74 %

9. FRANCE 82

(18)

528

(117)

583

(145)

143

(36)

3,527

(797)

1.35 %

10. U.A.E. 219

(49)

1,174

(260)

1,039

(258)

211

(53)

3,084

(716)

1.18 %

TOTAL FDI INFLOWS * 24,613

(5,546)

70,630

(15,726)

98,664

(24,579)

15,005

(3,749)

285,105

(66,259)

-

FDI Inflows by Sector

Cumulative FDI inflows reached just over US$60 billion between August 1991 and July 2007.

Since 2002, some sectors such as electrical equipment, services, drugs and pharmaceuticals, cement and

gypsum products, metallurgical industries have also been doing very well in attracting FDI. The electrical

equipment sector and the services sector in particular received the largest shares of total FDI inflows

between August 1991 and July 2007. These were followed by the telecommunications, transportation,

fuels, and chemicals sectors (Figure 3). The Department of Industrial Policy and Promotion has recently

modified the classifications of the sectors and data released from August 2007 has been based on the new

sectoral classifications. According to that classification, the top performers are the services and computer

software & hardware sectors. Clearly, India has attracted significant overseas investment interest in

services. It has been the main destination for off-shoring of most services as back-office processes,

customer interaction and technical support (UNCTAD, 2007). Indian services have also ventured into

other territories such as reading medical X-rays, analyzing equities, and processing insurance claims.

According to some reports, however, increasing competition is making it more difficult for Indian firms

to attract and keep BPO employees with the necessary skills, leading to increasing wages and other costs.

Sectors attracting highest FDI

inflows (1991-2005) ($ billion)

Sectors

Cumulative FDI

Inflows 1991-2005

Cumulative FDI

Inflows 2002-2005

Electrical equipement 4,862 2,734

Transportation Industry 3,124 1,110

Services 2,908 1,462

Telecommunications 2,863 0,624

Fuels (power, oil refinery) 2,514 0,416

Chemicals (other than fertilizers) 1,887 0,538

Food processing industry 1,173 0,222

Drugs and pharmaceuticals 0,946 0,552

Cement and gypsum products 0,746 0,483

Metallurgical Industries 0,624 0,393

Distribution of FDI within India

Mumbai and New Delhi have been the top performers, with the majority of FDI inflows

within India being heavily concentrated around these two major cities. Chennai, Bangalore, Hyderabad

and Ahmedabad are also drawing significant shares of FDI inflows. For statistical purposes, India’s

Department of Industrial Policy and Promotion (DIPP) divides the country into 16 regional offices. The

top 6 regions account for more than two-thirds of all FDI inflows to India between January 2000 and July

2007.

FDI inflows according to areas from 2000 to

2005 Regional Office and State covered by FDI

%

New Delhi (Delhi, part of Uttar Pradesh and

Haryana)

25.9

Mumbai (Maharashtra, Dadra and Nagar Haveli,

Daman & Diu)

21.2

Bangalore (Karnataka) 7.6

Chennai (Tamil Nadu & Pondicherry) 6.0

Ahmenabad (Gujarat) 3.3

Hyderabad (Andhra Pradesh) 3.2

Chandigarh (Punjab,Haryana, Himachal,

Pradesh)

1.6

Kolkata (West Bengal, Sikkim, Andaman &

Nicobar Islnds

1.3

Panaji (Goa) 0.6

Kochi (Kerla, Lakshadweep) 0.4

Bhubaneshwar (Orissa) 0.3

Bhopal (Madhya, Pradesh, Chattisgarh) 0.2

Guwhati (Assam, Arunachal, Pradesh, Manipur,

Meghalaya, Mizoram,

Nagaland, Tripura)

0.05

Jaipur (Rajasthan) 0.02

Patna (Bihar, Jharkhand) 0

Kanpur (Uttar Pradesh, Uttranchal) 0

Why India Gets Limited FDI

In 2006 the Government of India undertook a comprehensive review of the FDI policy

and associated procedures (GOI, 2006). A number of measures have been undertaken to make

India a more attractive destination for FDI. Some key measures include allowing FDI in new

sectors, dispensing with the need of multiple approvals from Government and/or regulatory

agencies that exist in certain sectors, and extending the automatic route to more sectors.

According to the current policy, under the automatic route, FDI up to 100 percent is allowed in

most sectors/ activities. No prior approval from the Government of India or the Reserve Bank of

India (RBI) is required for FDI under the automatic route. Investors are only required to notify

the concerned Regional office of RBI within 30 days of receipt of inward remittances and file

required documents with that office within 30 days of issue of shares to foreign investors. In

some sectors, FDI is allowed, subject to certain equity limits and/or other conditions. For

example, the FDI cap in Air Transport Services is 49 percent. However, there is no restriction in

that sector if there is NRI investment. The FDI limit for the insurance sector is only 26 percent

even though it is under the automatic route. For Single Brand product retailing, the limit is 51

percent. FDI in all sectors/activities is subject to guidelines and requirements. FDI is not

permitted in Retail trade (except Single Brand product retailing); Lottery; Gambling and Atomic

Energy. In the remaining sectors/activities, FDI up to 100 percent would be allowed on the

automatic route.

While the relaxation of these FDI norms may have helped attract greater FDI

inflows, prima facie, India’s inward FDI should be huge or at least much bigger than what it

currently receives. If one goes through research output from investment houses India has been

portrayed as nothing short of the “Promised Land”. Research report after research report from

major investment banks shows the upward potential growth trajectory of India. For instance, the

well-known BRICs report from investment bank Goldman Sachs wrote the following a few years

back:

In US dollar terms, China could overtake Germany in the next four years, Japan by 2015

and the US by 2039. India’s economy could be larger than all but the US and China in 30

years…… India has the potential to show the fastest growth over the next 30 and 50

years. Growth could be higher 13 than 5 percent over the next 30 years and close to 5

percent as late as 2050 if development proceeds successfully. (Wilson and

Purushothamam, 2003).