FDI IN INDIA

SECTION-F GROUP-1

Contributors Rakesh Kumar Purohit S Bharadwaj S K Chakravarthy N Abhinav Akash Prashant Jain Aradhna Dayal DM-120 DM-128 DM-129 FN-002 FN-082 IB-019

FDI IN INDIA 2011

TABLE OF CONTENTS

Introduction ----------------------------------------------------------------------------------------------3 Types of FDI ----------------------------------------------------------------------------------------------4 FDI procedure in India----------------------------------------------------------------------------------5 FDI limits currently in India --------------------------------------------------------------------------6 Sectoral Analysis -----------------------------------------------------------------------------------------8 FDI culture in India--------------------------------------------------------------------------------------26 India as a FDI Destination------------------------------------------------------------------------------27 Recommendations ----------------------------------------------------------------------------------------28 Conclusion -------------------------------------------------------------------------------------------------32 References --------------------------------------------------------------------------------------------------32

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1.1 INTRODUCTION
There is hardly a facet of the Indian psyche that the concept of foreign has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991. Contrary to the grand narrative opening of flood-gates idea of 1991, what took place was a gradual process of changes in policies on investment in certain sub-sections of the Indian economy. FDI eludes definition owing to the presence of many authorities: Organization for Economic Cooperation and Development (OCED), International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) and United Nations Conference on Trade and Development (UNCTAD). All these bodies attempt to illustrate the nature of FDI with certain measuring methodologies. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are usually preferred over other forms of external finance because they 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. Changes in the national political climate have precipitated a marked trend towards greater acceptability of FDI. The envisioned role of FDI has evolved from that of a tool to solve the crisis under the license raj system to that of a modernizing force that has been given special agencies and extensive discourse. This evolution is illustrated by analysis of the Economic policies of the Indian government from 1991 to 2005. The primary focus of this analysis will be towards the industrial and infrastructural sectors which form the beginning of the gradual liberalization process that was started in 1991. A complete understanding of these two sectors will provide interesting statistics and information regarding trends of FDI. In most narratives on Indias liberalization, 1991 has acquired a revolutionary status as a time of change in the planning of Indias future. Data from various individuals and agencies can lead to different conclusions all of which can be challenged on different grounds. The Ministry of Finance, however, forms my primary source of information for two main reasons: it has been the agency of and party to economic reform and has compiled data on the state of reforms for the entire duration of their history.

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With the new government focus on FDI was evident in changes in 1996-97 that resulted in an increase in understanding and resources towards investment. This included the setting up of the Foreign Investment Promotion Council along with the Foreign Investment Promotion Board (FIPB) being streamlined and made more transparent. The first ever guidelines were announced for consideration of foreign direct investment proposals by the FIPB, which were not covered under the automatic route.26 The list of industries eligible for automatic approval of up to 51 per cent foreign equity were expanded and there was a recognition that foreign direct investment flows provided savings without adding to the country's external debt. The case of comparison for numbers and example seem to be China and the Asian Tigers that were enjoying the economic boom. By now FDI trends are taken more serious and FDI flow had to be maintained for the economy to grow. The government recognized that greater procedural simplifications were still needed in the area of FDI. In 1998 when there was a decline in FDI the government had to take greater technical measures in terms of liberalizing investment norms in bring in FDI were still needed in the area of FDI. In 1998 when there was a decline in FDI the government had to take greater technical measures in terms of liberalizing investment norms in bring in FDI.

1.2 TYPES OF FDI

Greenfield Investment y y Direct investment in new facilities/ expansion of existing facilities Objectiveis to create new production capacity and jobs, transfer technology and know-how and form linkages to the global marketplace y Leads to crowding out of local industry due to production of goods more cheaply (due to advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc). y Profits from production do not feed back into the local economy but to the multinational's home economy. Mergers & Acquisitions y y Primary type of FDI involving transfer of existing assets from local firms to foreign firms Assets and operation of firms from different countries are combined to establish a new legal entity (Cross-border merger)

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y Control of assets and operations is transferred to foreign company by its local affiliate company (Cross-border acquisition) y No long term benefits to the local economy, unlike Greenfield investment, as mostly the owners of the local firm are paid in stock from the acquiring firm Horizontal Foreign Direct Investment y Investment in the same industry abroad as a firm operates in at home

Vertical Foreign Direct Investment o Backward vertical: Industry abroad provides inputs for a firm's domestic production processes o Forward vertical: Industry abroad sells the outputs of a firm's domestic production processes

1.3 FDI PROCEDURE IN INDIA

FDI Procedure in India Foreign Direct Investment (FDI) is permitted as under the following forms of investments: y y y y Through financial collaborations Through joint ventures and technical collaborations Through capital markets Through private placements or preferential allotments Forbidden Territories: FDI is not permitted in the following industrial sectors: 1. Arms and ammunition 2. Atomic Energy R 3. Railway Transport

4. Coal and lignite 5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

FDI Procedure in India Foreign direct investments in India are approved through two routes: 1. Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving: foreign

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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 The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high- priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route: This involves processing of non-automatic approval cases by FIPB (Foreign

Investment Promotion Board) where the parameters of automatic approval are not met Normal processing time is 4 to 6 weeks Liberal approach for all sectors and all types of proposals with few rejections It is non-mandatory for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

1.4

FDI LIMITS CURRENTLY IN INDIA

Current Indian FDI Limits Sector Specific Foreign Direct Investment in India Hotel & Tourism: FDI in Hotel & Tourism sector in India - 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 wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is granted if i. 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. ii. 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 Private Sector Banking: Non-Banking Financial Companies (NBFC) - 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time in19 NBFC activities - Merchant banking, underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services, factoring,

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credit reference agencies, credit rating agencies, leasing & finance, housing finance, foreign exchange brokering, credit card business, money changing business, micro credit and rural credit There are separate prescribed minimum capitalization norms for fund/non-fund based NBFCs Insurance Sector: Up to 26% FDI is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA) Telecommunication Sector: It is limited to 49% in basic, cellular, value added services and global mobile personal communications by satellite, subject to licensing and security requirements and adherence by the companies (by both investor & investee companies) to the license conditions, up to 74% in ISPs with gateways, radio-paging and end-to-end bandwidth, 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 Trading Companies: Up to 51% under automatic route provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route, 100% FDI is permitted in case of trading companies for activities like exports, bulk imports with ex-port/ex-bonded warehouse sales, cash and carry wholesale trading etc. Power Sector: Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment . Drugs & Pharmaceuticals: Up to 100% under automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations, otherwise prior Government approval is required Pollution Control and Management: Up to 100% under automatic route in both manufacture of pollution control equipment and consultancy for integration of pollution control systems Call Centers/BPO in India: Up to 100% is allowed subject to certain conditions Roads, Highways, Ports and Harbors: Up to 100% under automatic route in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors Retail Sector: The proposal for FDI in Retail sector has loomed into a controversy with the proposal being put on the backburner.

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1.5 SECTORAL ANALYSIS
When the reforms began in 1991 it was inevitable there would be a discrepancy as various sectors have different characteristics and procedures. The reforms and polices on FDI have trickled down to various sectors in different speed and effectiveness. Thus the progress of FDI will be effectively analyzed by studying two sectors of the Indian economy: Industry and Infrastructure. These sectors are an agglomeration of sub sectors that when combined from the integral components of the economic growth.

Sectoral analysis of industry:

When initial reforms took place in 1991, Industry was one of the first to benefit from the reforms as it resulted in changing the overall system. Firstly the new policy of July 1991 sought substantially to deregulate industry so as to promote the growth of a more efficient and competitive industrial economy. During this process the procedures for investment in non-priority industries were streamlined. On a central level the foreign Investment Promotion Board (FIPB) was established to negotiate with large international firms and to expedite the clearances required. The FIPB also considered individual cases involving foreign equity participation over 51 percent.30 Furthermore for industry an important step The government realised that foreign

was the removal of the Mandatory Convertibility Clause.31

investment had been traditionally tightly regulated in India and now the government hand was lifting.

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SECTOR WISE DISTRIBUTION IN INDIA:

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SHARE OF TOP COUNTRIES ATTRACTING FDIS:

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FDI INFLOW ROUTE WISE

SECTORIAL ANALYSIS OF INFRA STRUCTURE SECTOR:

While Industry had taken a stride forward, an examination of Infrastructure reveals a policy and approach that differs significantly from Industry. From the onset the status of infrastructure sector did not cause any state of panic, as overall the sector was not seen to be performing too badly, and was seen as the stabilizing force of the economy. The sector was seen as a bloc and in its components while the performance of coal and telecommunications sectors fell short of the respective targets; simultaneously energy, railways, and shipping exceeded their respective targets thus bringing up the overall performance of the sector to positive growth.

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FDI CHANGES OVER THE YEARS:
By 2002 FDI changes completely for India as it is given new importance in Ministry of Finances Economic Survey in the form of a new subsection in Industry that exclusively dealt with FDI and went to great lengths to define its role, and provides much more data than in the previous years. There is also particular mention on how RBI is evaluating some modifications in the way that Indian FDI is measured, which could lead somewhat higher estimates for India. By now garnering FDI is a prized commodity in a competitive global arena and is analyzed in context as other countries are also improving policies and institutions, to further increase their FDI flows. By 2003-2004 the non-comparability of the Indian FDI statistics was addressed by a committee constituted in May 2002 by Department of Industrial Policy & Promotion (DIPP), in order to bring the reporting system of FDI data in India into alignment with international best practices. For infrastructure from 2002-2003 (re formulation of FDI data) there is mention in sub sectors for FDI and not for infrastructure as a whole. Telecom has been a major recipient of FDI and during the period of August 1991 to June 2002, 831 proposals for FDI of Rs. 56,226 crore were approved and the actual flow of FDI during the above period was Rs. 9528 crore. In terms of approval of FDI, the telecom sector is the second largest after the energy sector. In 2002, the increase of FDI inflow was of the order of Rs 1077 crore during January to July 2002. The FDI target for the Telecommunication sector is estimated at US $2.5 billion per annum, by the Steering Group on FDI, Planning commission. By 2003-2004 literature on Infrastructure talks about investments needed to bring infrastructure to world standards. However there is no mention of details. Finally for 2004-2005 there is data for Telecom but in general there is no data on FDI in the infrastructure sector as a whole. The analysis of both the sectors and especially Infrastructure raises questions on the haphazard nature of FDI taking place. While this trend may have been acceptable in the early 1990s, when FDI was in its infancy the recognition and building of reforms by the successive governments raises the questions on what part of FDI is the government attention shifted in.

FDI in Services sector: Guidelines for FDI in Banking at a Glance

In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to

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the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the Indian banking sector more competitive. The Reserve Bank of India governs the investment matters in the banking sector. According to the guidelines for FDI in the banking sector, Indian operations by foreign banks can be executed by any one of the following three channels
y y y

Branches in India Wholly owned subsidiaries. Other subsidiaries.

In case of wholly owned subsidiaries (WOS), the guidelines for FDI in the banking sector specified that the WOS must involve a capital of minimum Rs. 300 crores and should ensure proper corporate governance.

Need to raise FDI cap in Insurance Sector:

Rural and Social Sectors offer huge potential for improving Insurance penetration for the uninsured sections of the population and this calls for better risk management, innovations on product design and distribution, infusing technology and greater investments. This clearly justifies greater engagement of Foreign partners in bringing in better risk management practices, innovation in production & distribution, technology, specialized skills and hence there is a strong need to raise FDI cap in insurance sector from the current 26 % to 49%, said CII in its comments on the Insurance Laws (Amendment) Bill, 2008. Insurance Penetration to rural and social sectors is marked by high risk and hence more dynamic and efficient risk management systems are crucial while innovation is needed not just in terms of insurance products but also in ways of distributing them. In addition, use of better technologies right from issuance to servicing of Insurance services is also crucial for long term growth of Insurance sector in India.

Insurance industry is witnessing the transformation of insurance agents from mere intermediaries to financial advisors. Greater foreign investments would help in training and skills upgradation of the agents. Well trained agents would be better equipped to convince the customers about the benefits of insurance

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besides contributing to simplifying the procedure. Moreover, there is a shortage of expertise (skills) in the Indian insurance industry (e.g. underwriting, actuarial, claims management, data standardization etc.) Raising the FDI cap will enable expertise (skills) and know how transfer that are generally not available under the current regime. While the rural and social sector obligations set by IRDA have been met by the Insurance companies, the untapped potential of these sectors also calls for changes in regulations to facilitate movement towards an era of electronic policy issuance and dematerialization. This will reduce the cost of operations and would facilitate address logistical difficulties through use of electronic distribution channels via mobile phone and broadband technologies. While broadly, welcoming the Insurance Laws (amendment) Bill, 2008, CII said that a few amendments need to be re examined such as the value of penalties proposed in case of failure to comply with Section 32B, 32C and 32D may be reduced to Rs 2 lakhs as the upper limit and the higher limit on penalty for contravention of provisions relating to investment of controlled fund or assets may be brought down to Rs. 5 Crs instead of Rs. 25 crores. CII has also suggested that non-executive Directors of a Corporate Agent may be permitted to be the Director/s of Life Insurance Company. This would help regularize many cases where the promoter companies of the Insurance companies have their own Corporate Agency like banks and finance companies. On the insertion of a new definition of health insurance business in the proposed bill to include long term health policies, Personal Accident and Travel Policies etc., CII has pointed out that the term Health Insurance has not been included in the definition of General Insurance and Life Insurance. Under this circumstance, CII has sought for a clarification in the Bill whether the Insurance companies registered with IRDA for conducting General and Life Insurance business shall be able to do Health Insurance under their existing license.

FDI in automotive sector :

The automobile sector in the Indian industry is one of the high performing sectors of the Indian economy. This has contributed largely in making India a prime destination for many international players in the automobile industry who wish to set up their businesses in India. After liberalization of Indian Economy in general and automobile industry in particular, considerable number of Multinational Companies are operating in India either as wholly owned subsidiaries or in

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collaboration with their Indian partners. This automotive sector has taken benefit of liberalization of Indian economy to a large extent and made available various international brands in India for Indian consumers. Firms like Hyundai are supplying manufactures cars in the international market using its manufacturing facility in India in a big way. These firms are using locally available efficient and cost competitive huge pool of human resource in India. The automobile industry in India is growing by 18 percent per year. The automobile sector in India was opened up to foreign investments in the year 1991. 100% Foreign Direct Investment (FDI) is allowed in the automobile industry in India. The production level of the automobile sector has increased from 2 million in 1991 to 9.7 million in 2006 after the participation of global players in the sector.

Advantages of FDI in the Automobile Sector in India

The basic advantages provided by India in the automobile sector include, advanced technology, costeffectiveness, and efficient manpower. Besides, India has a well-developed and competent Auto Ancillary Industry along with automobile testing and R&D centers. The automobile sector in India ranks third in manufacturing three wheelers and second in manufacturing of two wheelers.

INVESTMENT SCENARIO: CUMULATIVE FDI INFLOWS IN AUTOMOBILE INDUSTRY:

Cumulative FDI inflows during January 2000-2009 (up to December 2009) are Rs. 472,231.23 crores (US$ 105.99 billion). Out of this, the amount of FDI inflows in the Automobile Industry during January 2000 to December 2009 is Rs. 20,554.56crores (US$ 4.55 billion) which 4.29% of the total FDI inflows. During the period from January 2000 to December 2009, cumulative FDI inflows received from IPB/SIA, acquisition of existing shares & RBIs automatic routes only include FDI inflows received

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automobile industry auto ancillaries passenger cars others

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35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Series1

FDI IN Telecommunication sector :

Telecom is one of the fastest growing industries in India, and everyone, including foreign players and investors, are eager to be a part of this growth. The last few years have witnessed many activities on the foreign direct investment front with world's leading telecom operators picking up large stakes in domestic operators. The telecom services industry registered a growth of 20.7 percent clocking revenues of 1, 57,542 crore in 2008-09 compared to 1,30,561crore in the previous year. During the year 2009, government had raised the FDI limit in telecom sector from 49 percent to 74 percent, which has contributed to the robust growth of FDI in the sector.

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The greater chunk of foreign investments has flown into states that are doing well industrially and commercially and which have an investor-friendly business environment. An attractive trade and investment policy and lucrative incentives for foreign collaborations have made India one of the worlds most attractive markets for the telecom equipment suppliers and service providers.   No industrial license required for setting up manufacturing units for telecom equipment. 100% Foreign Direct Investment (FDI) is allowed through automatic route for manufacturing of telecom equipments.  Payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route.  Foreign equity of 74% (49 % under automatic route) permitted for telecom services - basic, cellular mobile, paging, value added services, NLD, ILD, ISPs - and global mobile personal communications by satellite. In Basic, Cellular Mobile, Paging and Value Added Service, and Global Mobile Personal Communications by Satellite, Composite FDI permitted is 74% (49% under automatic route) subject to grant of license from Department of Telecommunications subject to security and license conditions. (para 5.38.1 to 5.38.4 of consolidate FDI Policy circular 1/2010 of DIPP) FDI upto 74% (49% under automatic route) is also permitted for the following: . Radio Paging Service Internet Service Providers (ISP's) FDI upto 100% permitted in respect of the following telecom services: Infrastructure Providers providing dark fibre (IP Category I) Electronic Mail Voice Mail

Subject to the conditions that such companies would divest 26% of their equity in favor of Indian public

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in 5 years, if these companies were listed in other parts of the world. The Government has modified method of calculation of Direct and Indirect Foreign Investment in sector with capsand have also issued guidelines on downstream investment by Indian Companies. (para 4.6 of consolidate FDI Policy circular 1/2010 of DIPP) FDI in Indian Telecommunications Industry is one of the most crucial parts that have caused such a hike in the telecom market so far.Inflow of FDI into Indias telecom sector during April 2000 to Feb. 2010 was about Rs 405,460 million. Also, more than 8 per cent of the approved FDI in the country is related to the telecom sector.

FDI IN COMPUTER SOFTWARE AND HARDWARE SECTOR:

Over the past few years the computer software industry has been one of the fastest growing sectors in Indian economy. FDI Inflows to Computer Software and Hardware Industry in India have been significant. 100 percent FDI is permitted under automatic route to the E-Commerce activities in India. However, a pertinent condition is that, 26 percent of their equity will be spent on welfare activities for the Indian population in five years. Software Technology Parks (STP) have been a major initiative in India to drive in Foreign Direct Investment in the computer software industry. These Software Technology Parks provide highly developed infrastructure and facilities that attract foreign investors. Regulatory measures by the Indian government have also played a positive role in this regard. Measures like increased freedom of recruiting and laying-off employees, tax benefits and easing of export producers have contributed to the growth of FDI in this sector. FDI is permitted under automatic route in the computer hardware industry in India. The huge market for computer hardware in India, coupled with the availability of skilled workforce in this sector has boosted the inflow of FDI. High growth prospects, in terms of increased consumption in the India as well as increasing demand for exports are expected to lead to more Foreign Direct Investments in this sector. Between April 2000 and September 2010, the computer software and hardware sector received cumulative foreign direct investment (FDI) of US$ 10,406.16 million, according to the Department of Industrial Policy and Promotion.

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Investment Scenario
Cumulative FDI inflows during January in the Computer Software & Hardware Sector during January 2000 to December 2009 wasRs. 42,458.62 crores (US$ 9.57 billion) which was 9.03% of the total FDI inflows.

SUB SECTORS OF FDI INFLOWS IN COMPUTER SOFTWARE & HARDWARES

(from January 2000 to December 2009) S.No. Sub Sectors Amount of FDI inflows %age with total FDI inflows in Computer Software & Hardware Sector Rupees in crore 1. Computer Industry 2. 3. Computer Hardware Others (Software) 463.77 648.18 42,458.62 105.69 141.60 9,573.28 0.10 0.13 9.03 Software 41,346.67 US $ in million 9,325.99 8.80

Total of the above

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SHARE OF TOP FIVE RBIS REGIONS (WITH STATE COVERED) ATTRACTED HARDWARE
(from January 2000 to December 2009) Rank RBIs Regional Office States Covered Amount of FDI inflows %age with FDI

FDI

INFLOWS

FOR

COMPUTER

SOFTWARE

&

inflows in Computer Software Hardware Rupees in crores US $ in million 2,118.72 22.13 &

1.

Mumbai

Maharashtra, Dadra & Nagar Haveli, Daman & Diu

9,334.00

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2. 3. Bangalore Chennai Karnataka Tamil Pondicherry 4. New Delhi Delhi, Part of UP and Haryana 5. Hyderabad Andhra Pradesh 1,463.37 24,148.60 339.13 5,447.15 3.54 56.89 3,858.26 855.03 8.93 5,076.08 Nadu, 4,416.89 1,129.83 1,004.44 11.80 10.49

Total of above

TOP 5 FDI INFLOWS RECEIVED IN COMPUTER SOFTWARE & HARDWARE

(through Indian companies, from January 2000 to December 2009) Sl. No Name Indian Company Of Country Name Foreign Of RBI Regional Item Manufacture Of Amount Inflows (In RsCrore) 1 I Fliex Mauritius Oracle Global( Mauritius) Ltd 2 I Flex Mauritius Oracle Global Mauritius Ltd Region Not Indicated It To Finiancial 2,578.88 5 Region Not Indicated Software Development. 4,805.58 ( M 1 Of

Collaborator Office

Solutions Ltd

Solutions Ltd

Service Industry

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3 Tata Consultancy Services Ltd. 4 Infrasoft Technologies Ltd 5 MphasisBfl Ltd. Mauritius NRI(As Individual Investor) Mauritius Group Non Resident Baring India Region Pvt Ltd Th Holdings Equity Not Indicated Region Not Indicated It &Pbo Service 1,697.35 365.37 Of Mumbai Internet Services/Information Technology Software Development 2,096.25 531.55 2,148.62 483.16

Provider

Road Ahead
The total investments of EMC Corporation, a leading global player of information infrastructure solutions in India, will touch US$ 2 billion (over US$ 2.01 billion) by 2014. Syntel, an IT company, plans to invest around US$ 50 million in its global development centre in Chennai. Russian IT security software provider, Kaspersky Lab, will be investing US$ 2 million in its India operations at Hyderabad during the next financial year.

FDI IN HOUSING AND REAL ESTATE SECTOR:

Real estate can be segmented into organised and unorganised sector where the unorganised sector commands around 70% of the market share. The unorganised players are characterised by contractors and small builders who generally have only regional presence while organised players include private real estate developers and government affiliated entities. Indias real estate market can be classified into three segments: Residential, Commercial and Retail. These three segments have witnessed rapid growth in the past few years and have a tremendous growth potential. The commercial segment is further divided into office space, hospitality, and industrial

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space.

Investment Scenario
The housing and real estate sector in India witnessed foreign direct investment (FDI) of US$ 640 millionin April-September 2010-11, according to the Department of Industrial Policy and Promotion (DIPP). Housing and real estate sector including cineplex, multiplex, integrated townships and

commercial complexes etc, attracted a cumulative foreign direct investment (FDI) worth US$ 8,996.46 million from April 2000 to September 2010. Foreign investors have so far contributed significant capital to Indias real estate market. Aggregate FDI inflows into the real estate sector are recorded at approximately 7.42 per cent of the total inflows. India allows 100 per cent FDI through the automatic route in townships, housing, built-up infrastructure and construction-development projects, subject to certain conditions. The relaxed FDI rules implemented by India last year has invited more foreign investors and real estate sector in India is seemingly the most lucrative ground at present. Private equity players are considering big investments, banks are giving loans to builders, and financial institutions are floating real estate funds. Indian property market is immensely promising and most sought after for a wide variety of reasons. The real estate sector is expecting a liberalised foreign direct investment (FDI) norm and easing of rules

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for external commercial borrowings, in the present tight project finance situation and rising cost of loans, from the Union Budget 2011-12. On the other hand, another round of interest subvention and a higher cap on interest deduction available on housing loans to individual taxpayers will offer relief on the affordability front.

Benefits of FDI in India Real Estate

y y y y

to make the real estate sector in India more organized to increase professionalism in the sector to introduce advanced technology in the construction business to create a healthy and competitive market environment for both Indian and foreign investors

Challenges faced
Current FDI regulations for the sector stipulate certain conditions, such as minimum area to be developed, minimum capitalisation requirements, lock-in and so on, that have been put in place from the perspective of preventing speculation in the sector. Such conditions, however, pose challenges for FDI inflows into various projects, where given the nature of projects, it may not be possible to comply with such conditions.

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y The FDI regulations currently in force allow an entity to receive FDI in construction development only if the minimum built-up area of the project is 50,000 square metres. Such a condition can prove unrealistic for some developers, especially those in metro (tier-I ) cities where large parcels of land are difficult to acquire and prices are exorbitant. Further, it is also unlikely that an affordable housing project would require more than 50,000 square metres of development. y Foreign funds and investors have begun to show increased interest in these brownfield projects. Unfortunately, we have not been able to capitalise on this opportunity as investors are not clear whether FDI is be permitted in brownfield projects . The government can consider imposing certain restrictions and allow FDI inflows into brownfield projects subject to specified conditions. y Real estate is a complex sector and for any project to take-off , clearances are needed from multiple government agencies. Thus, coordination between joint venture partners becomes extremely essential for successful completion of projects. Many real estate projects have failed to take-off due to the delay in obtaining statutory clearances and conversion of land usage. y FDI policy for investing in real estate should provide investors exit options. The current FDI regulations provide for a three-year lock-in for each tranche of foreign investment, and early exit needs government approval. The process can be simplified by defining specific cases where a foreign partner can be allowed to exit a project early without necessarily seeking approval. y The FDI policy for investment in hotels and hospitals is far less stringent than the one for housing projects. In case of such mixed use projects, where the majority of built-up area goes towards development of hotel or hospital, there is lack of clarity which provisions of the FDI policy would apply to the project - those for hotels and hospital or those for housing projects. y The government's concerns about keeping a strict vigil on inflow of funds into the real estate sector should consider certain relaxations to provide a fillip to FDI in the real estate sector. Adequate relaxation in current FDI policy could foster significant opportunities for growth and investment in the sector.

1.6 FDI CULTURE IN INDIA

Many economists in the country have now realized the advantages of FDI to India. While the achievements of the Indian government are to be lauded, a willingness to attract FDI has resulted in what could be termed an FDI Industry. While researching the economic reforms on FDI, it was discovered

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that there exists a plethora of boards, committees, and agencies that have been constituted to ease the flow of FDI. A call to one agency about their mandate and scope usually results in the quintessential response to call someone else. Reports from FICCI and the Planning Commission place investor confidence and satisfaction at an all time high; citizens too deserve to be clued in on the government bodies are doing.

According to the current policy FDI can come into India in two ways. Firstly FDI up to100% is allowed under the automatic route in all activities/sectors except a small list that require approval of the Government. FDI in sectors/activities under automatic routedoes not require any prior approval either by the Government or RBI. The investors are required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days ofissue of shares to foreign investors.51 All proposals for foreign investment requiring Government approval are considered by the Foreign Investment Promotion Board (FIPB). The FIPB also grants composite approvals involving foreign investment/foreign technical collaboration.52 As this clarity is useful for future investors, it has to be seen ifthese bodies were effective.

1.7 INDIA AS A FDI DESTINATION

A Reality Check India, among the European investors, seen as a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies A vast potential for overseas investment attracting the entrance of foreign players into this market slated to become one of the top three emerging economies In terms of market potential based on purchasing power parity, India is the fifth largest economy in the world (ranking above France, Italy, UK and Russia) and has the third largest GDP in the Asian continent. It is also the second largest among emerging nations India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business Yet until fairly recently, India failed to get the kind of enthusiastic attention from investors, as generated by other emerging economies such as China due to reasons such as y y a highly protected, semi-socialist autarkic economy, Structural and bureaucratic impediments and distrust of foreign business.

Present climate in India has seen a sea change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market.. Foreign investors should be prepared to estimate Indias potential with due consideration to the inherent difficulties, contradictions and challenges in the system

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Future Potential Investment opportunity of USD 500 billion expected to emerge in India in the next 5 years in major economic sectors, of which USD 250 billion is expected in the infrastructure sector alone Indian auto industry with a turnover of USD 12 billion and the auto parts industry with a turnover of USD 3 billion offer excellent scope for FDI Investment commission has identified 93 foreign companies across various sectors as potential investors. These include Norsk Hydro, Singapore Power, select Japanese and Korean companies for road development projects, Deutsche Telecom, China Telecom, SK Telecom, BT, NEC and Toshiba, Alcan, RusAl, Burlington, Petronas, Sumitomo, Hanwa, Degussa, Renault, Scania and EADS among others In Power sector, peak demand is expected to increase by a staggering 77% to 157,107 MW by 2012. Similarly, the energy requirement is also expected to increase by 274% to 975,222 MU by 2012. The total investment required in over 100,000 MW capacity creation, along with necessary investments in T&D segments is estimated at USD 200 billion Total estimated investment opportunity in the retail sector is around USD 5-6 billion in the next five years. Certain segments that promise a high growth are Food and Grocery (91 per cent), Clothing (55 per cent), Furniture and Fixtures (27 per cent), Pharmacy (27 per cent), Durables, Footwear & Leather, Watch &Jewellery(18 per cent) The Indian pharmaceutical market has been forecast to grow to as much as USD 25 billion by 2010 as per Organization of Pharmaceutical Producers of India (OPPI) estimates. However, Espicom's market projections forecast more modest but stable annual market growth of around 7.2 per cent, putting the market at USD 11.6 billion by 2009 Health tourism presents significant investment potential. At the current pace of growth, medical tourism, currently pegged at USD 350 million, has the potential to grow into a USD 2 billion industry by 2012 Healthcare sector provides another investment outlet and could rise from USD 22.2 billion currently (5.2 percent of GDP) to USD 50 billion- 69 billion (6.2-8.5 percent of GDP) by 2012 . Healthcare spending in the country will double over the next 10 years. Private healthcare will form a large chunk of this spending, rising from USD 14.8 billion to USD 33.6 billion in 2012. This figure could rise by an additional USD 8.4 billion if health insurance cover is available to the rich and the middle class Total investment opportunity in the port sector is estimated at USD 20 billion upto 2012. The Maritime sector (Ports and Shipping, Inland waterways) requires an investment of USD 22 billion for future development.

1.8 RECOMMENDATIONS
For the positive trend of growing FDI investment in India to grow, following recommendations can be given:

ATTRACT QUALITY FDI

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One of the biggest myths surrounding FDI today is that it is always good for the economys present and future. But, in reality it is actually quality FDI which works positively for the economy. World Investment Report published by UNCTAD in 2006 describes quality FDI as the kind that would significantly increase employment, enhance skills and boost the competitiveness of local enterprises. Whether FDI succeeds in these objectives depends on the sector, industry and the countrys global strengths. It also depends on the industrys dependence on external capital and the level of skill of people required. Not all foreign companies have the same objectives when they invest in a country. Firms may differ in terms of degree of vertical integration, investment in local R&D, local sourcing and export orientation.The advantages derived from FDI differ across primary, services and manufacturing sectors. There may be differences across industries within a particular sector also. FDI in primary sector industries like mining, agribusiness and raw materials offers lesser scope of technical progress in

developing countries. In contrast, industries in manufacturing sector and other technology-intensive industries attract high quality FDI. This is because, in developing countries (having a lower technology base), the probability of domestic firms learning about new technology and new knowledge through collaboration and reverse engineering is very high. In contrast, in labor-intensive industries (found mainly in

developing countries), technically advanced firms tend to crowd out the lesser performing and financially weaker domestic firms.

ATTRACT TECHNOLOGY AND LOCALIZE PRODUCTION

The benefits from FDI are maximized when it finds its way into technology-intensive sectors and when the production is localized in the host country. Localized production causes knowledge and technology spillover to domestic companies through a high level of vertical integration, local sourcing and local collaboration. Unless transfer of technology and knowledge happens, there is very little FDI can do for the growth of the economy. Foreign pharmaceutical firms in India in the period 1940-1960 invested little in their local manufacturing base and were used to process imported bulk drugs into formulations to sell locally. This activity did not transfer any knowledge to the local industries; neither did they train people with any advanced skills. Such FDI is wasteful, as it provides only employment to local people, but does not train them in new technologies.

THE SPILLOVER ILLUSION

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Spillover means the adoption, by domestic companies, of the knowledge, new technologies and best practices followed by the foreign companies. Spillover may happen in the following ways: Learning the best management practices and technology from their foreign partners Employees moving from one company to other Local suppliers and service providers being told by the company to follow their standards Assistance provided to customers by the company This spillover is the single biggest reason countries go out of their way to attract FDI. But, the degree of spillover depends highly on the ability of local firms to respond successfully to new entrants, new technology, and new competition. It also depends on the human capital and degree of dependence on foreign capital. There are a few prerequisites which must be satisfied when it comes to take the advantage of spillovers. Firstly, to compete against foreign entrants, local firms need skilled labor capable of improving the production efficiency, adopting new technologies and increasing the quality of their products. FDI affects skill-dependent industries in a positive way and the intensity increases with the level of skilldependency. Secondly, knowledge spillovers work only when foreign companies are willing to bring new technologies and skills to the host country. It is extremely good for India as long as companies like Intel set up their R&D bases locally. In fact, it can be mandated by the government to include technology and knowledge transfer clauses when allowing foreign companies the access to India s vast markets and manpower.

FOCUS ON EXPORT-ORIENTED FDI

According to market-orientation, an FDI project either be domestic market-seeking or export-oriented. Domestic market-seeking FDI primarily intends to serve the local market. On the other hand,

exportoriented FDI aims to focus on its global markets. Export-oriented FDI is of higher quality FDI than domestic market-seeking FDI. This is because export oriented companies tend to form micro-level linkages with domestic firms in the form of sourcing and partnerships. Their objective is to exploit the low cost infrastructure and cheap skill available locally for export purposes. In addition to knowledge spillovers to local suppliers, export-oriented foreign firms also cause information spillovers to purely domestic firms to enter into export market. Also, by providing new competitive assets through export-oriented FDI, the supply capacities of export oriented firms are increased. The crowding out effect of local firms is also low in case of export-oriented firms.

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TARGET SPECIFIC SECTORS
Investment promotion agencies (IPAs) of different countries focus on attracting FDI in only specific sectors and industries which fit well with their country s economic characteristics and their strengths.

Country Target sector for attracting FDI

The table above shows the sectors targeted by some countries for attracting FDI. These are the sectors in which these countries possess global strengths. India also needs to focus majorly on a few sectors to attract FDI e.g. manufacturing, services, communications etc.

INCREASE EASE OF DOING BUSINESS

India performs dismally when it comes to starting up a business in India. Doing Business Report, 2010.Published by World Bank gives India a rank of 169 which is way below comparative economies like China (151), Brazil (126) and Russia (106). India fares badly in number of procedures required, time and cost of starting a business in India .

India has secured good ranks in parameters of Getting Credit and Protecting Investors, but in other parameters, a lot needs to be done. The government needs to emphasize on policy reforms to improve

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Indias rank in different parameters to make India the investment destination of the world. Doing Business 2010

1.9 CONCLUSION
As evidenced by analysis and data the concept and material significance of FDI has evolved from the shadows of shallow understanding to a proud show of force. The government while serious in its efforts to induce growth in the economy and country started with foreign investment in a haphazard manner. While it is accepted that the government was under compulsion to liberalize cautiously, the understanding of foreign investment was lacking. A sectoral analysis reveals that while FDI shows a gradual increase and has become a staple for success for India, the progress is hollow (Annexure 1 and 2). The Telecommunications and power sector are the reasons for the success of Infrastructure. This is a throwback to 1991 when Infrastructure reforms were not attempted as the sector was performing in the positive. FDI has become a game of numbers where the justification for growth and progress is the money that flows in and not the specific problems plaguing the individual sub sectors.

1.10 REFERENCES
y y y y y y y www.dipp.nic.in Doing Business Report 2010, World Bank www.livemint.com, last accessed on 25tDecember, 2009 Data derived from Indiastat.com, ris.org.in,adb.org.in and google.com http://www.rbi.org.in http://smetimes.tradeindia.com/smetimes/news/industry/2011/Jan/17/strong-need-to-raise-fdicap-in-insurance-sector-cii624638.html y http://business.mapsofindia.com/fdi-india/guidelines/banking.html

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