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CASE STUDY: FOREIGN DIRECT INVESTMENT

Manish Jayantilal Solanki

REGIST. NO. 200736975

SYMBIOSIS CENTRE FOR DISTANCE LEARNING


ACADEMIC YEAR 2007

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Objectives of the Project

This Project attempts to study the trends and patterns in Foreign Direct Investment (FDI)
across the five major sectors viz. Infrastructure, Telecommunication, IT and ITeS,
Financial Services, Media and Entertainment.

Need for the topic


Post Independence, the Indian government imposed excessive control and stringent
regulations over key sectors of the economy gradually led to problems like high inflation,
low forex reserves, stagnant growth rate and Balance Of Payment crises in the 1990s, the
need was felt to liberalize the economy in order to keep pace with the dynamics of global
markets. Major reforms were undertaken in 1990-91 which broadly covers five major
sectors viz. Infrastructure, Telecommunication, IT and ITeS, Financial Services, Media
and Entertainment. The subject matter gives details on the policy framework and its impact
on the major sectors of the Indian Economy

Methodology and Procedure of Work

The project explain in detail of Indian economy pre and post liberalisation its impact on
major sectors of the economy. The project have been completed taking the following
considerations
1. The Study is been carried out on the top investing countries and the the top sectors
which had attracted larger flow of FDI
2. Data Collection: The research have been done with the help of secondary data
(from news papers, magazines and using internet). The data collected from the various
sites of the Indian Government and UNCTAD
3. Case Studies: appropriate case studies have been provided for enhancing the
knowledge related to impact of economic changes on foreign companies investing in
India.
4. Analysis: Appropriate Statistical tools have been used to analyse the growth
patterns of foreign investment in India during the post liberalisation period. The
percentage analysis used to measure the share of each investing countries and the share

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of each sectors in the overall flow of FDI which further simplified in diagrams and
charts

Project Guide

Name: Kartik Parekh


Address : C-7/ 18, Geetanjali Nagar,
Saibaba Mandir Marg, S. V. Road,
Borivali (W)
Mumbai 400092
Qualification: MMS
Designation: Business Analyst (Financial Technology India Ltd.)
Special Field of work: Financial Services
Experience: Worked in different cadres with Axis Bank Ltd; NCDX

Mr. Kartik Parekh having experience of six years in different financial sector and
immense analytic skills, as a guide has provided valuable assistance to me on preparation
of my project work. My sincere thanks to him for the timely guidance provided to me.

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Index
Title Page No.

Introduction to the Indian Economy 5


Need for Liberalisation in Indian Economy 9
Foreign Direct Investment 9
Concept 9
Comarision between FDI and FII 9
Types of FDI 10
Advantages of FDI 11
Global FDI Scenario 13
Introduction 13
Regional Share of Developing and Transition
Companies 14
Indian overview 15
Total Foreign Investment and FDI 17
Introduction 17
Foreign Institutional Investors 17
Large outflow of capital 17
Policy on Foreign Direct Investment 19
Enrty Strategies for Foreign Investors 22
Foreign Investment through GDR 25
Sectoral Specific Guidelines for FDI 26
FDI in Core Sectors Scope and recent
developments 31
Infrastructure 31
Telecommunication 34
IT and ITeS 36
Finance 41
Media and Entertainment 44
Case Studies
Coca- Cola 48
Hewlette- Packard 50
Star India 54
Vodafone 59
Recent Developments
EU crisis hits FDI inflows 63
Curbs on FDI 64
FICCI signs agreement 65
Annexures
I Proposal 1
I
I Statistics 67

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I
I References 72
INTRODUCTION TO INDIAN ECONOMY

India is the seventh largest and second most populous country in the world, in terms of
Purchasing Power Parity India is the world’s fourth largest economy. Its GDP in
Purchasing Power Parity terms is at $3.388 trillion. India is also the tenth most
industrialised country in the world. With its consistent growth performance and abundant
high-skilled manpower, India provides enormous opportunities for investment, both
domestic and foreign.

Since the beginning of economic reforms in 1991, major reforms initiatives have been
taken in the fields of investment, trade, financial sector, exchange control simplification of
procedures, enactment of competition and amendments in the intellectual property rights
laws, etc. India provides a liberal, attractive and investor friendly investment climate.

A new spirit of economic freedom is now stirring in the country, bringing sweeping
changes in its wake. A series of ambitious economic reforms aimed at deregulating the
country and stimulating foreign investment has moved India firmly into the front ranks of
the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex
and rapidly changing nation.

India’s process of economic reforms is firmly rooted in a political consensus that spans her
diverse political parties. India’s democracy is a known and stable factor, which has taken
deep roots over nearly half a century. Importantly, India has no fundamental conflict
between its political and economic systems. Its political institutions have fostered an open
society with strong collective and individual rights and an environment supportive of free
economic enterprise.

Investment Outlook

A number of studies in the recent past have highlighted the growing attractiveness of India
as an investment destination. According to the study ‘Dreaming with BRICKS’ by
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Goldman Sachs, Indian Economy is expected to continue growing at the rate of 5% or
more till 2050. Some of the conclusions are listed below:
• 2nd most attractive destination- A.T. Kearney’s 2007, Foreign Direct Investment
Confidence Index
• 2nd most attractive investment destination among Transnational Corporations for
FDI for 2007 to 2010- UNCTAD’s ‘World Investment Report, 2007’

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NEED FOR LIBERALISATION IN INDIAN ECONOMY

• India in 1947 was characterised by very low per capita income. There were a lot of
people, so there was always a big GDP, but per capita income was very low.
• Licence Raj was the regulations that were required to set up business in India
between 1947-1990. Where all aspects of the economy are controlled by the state
and licenses were given to a select few.
• 1980s, suggests that the root cause of the crisis was the large and growing fiscal
imbalance.
• Large fiscal deficits emerged as a result of mounting government expenditures,
particularly during the second half of the 80s.
• These fiscal deficits led to high levels of borrowing by the government from the
Reserve Bank India, IMF, World Bank.
• Over the 1980s, Government expenditure in India grew at a phenomenal rate, faster
than what Government earns as revenues.
• The subsidies grew at a rate faster than Government expenditures.
• Expenditure on subsidies rose from Rs. 19.1 billion in 1980-81 to Rs. 107.2 billion
in 1990-91.
• Although, a large part of the problem concerning external imbalances in India
could be attributed to extraneous developments, such as two oil-shocks during the
last decade.
• The Indian Economy was indeed in deep trouble.
• Lack of foreign reserves
• Gold reserves was empty
• Before 1991, India was a closed economy
• The Government was close to default and its foreign exchange reserves had
reduced to the point that India could barely finance three weeks’ worth of imports

The Government of India headed by Chandra Shekhar decided to usher in several reforms
that are collectively termed as liberalisation in the Indian media with Dr. Man Mohan
Singh whom he appointed as a special economical advisor.

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The reforms brought changes in three broad areas, collectively known as
• Liberalisation,
• Privatisation and
• Globalisation
This reforms did away with regulatory hurdles and minimized licensing requirements,
ended many public monopolies, allowing automatic approval of Foreign Direct Investment
in many sectors.

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FOREIGN DIRECT INVESTMENT

CONCEPT:
 Long term Investment by a foreign direct investor in an enterprise resident in an
economy other then that in which the foreign direct investor is based
 The FDI relationship, consist of a parent enterprise and a foreign affiliate which
together form a transnational corporation (TNC)
 Parent enterprise investment must afford the parent enterprise control over its
foreign affiliate (owing 10% or more of the ordinary shares or voting power of an
incorporated firm or its equivalent for an unincorporated firm- UN definition)

COMPARISION BETWEEN FDI AND FII


FDI FII
Direct investment by a controlling Parent Investment in the capital- debt stock of
Enterprise in the assets of an affiliate a company/govt. securities by investor
Enterprise Located in an economy other that is from or registered in a country
than where parent enterprise is based outside of the one in which its investing

Investment by any corporation that Includes Hedge funds, insurance compa-


Proposes to carry out business in the nies, pension funds and mutual funds
country other than its own

Long term & direct investment in plant & Short term investment (generally) made
Machinery aimed to carry out/expand under portfolio management to earn
business in the affiliate’s country profits from value appreciation

Regulated by RBI & FIPB of the Dept. of SEBI registration is required to Commerce
under ministry of finance operate as an FII in India

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Sector specific limits prescribed for FDI Aggregate investment ending for FII
Under automatic/ approval route investment is 10% (5% for single) of the
paid up capital of a company (upto 24%
in case of listed Indian companies
under General Body Resolution

TYPES OF FDI
Greenfield Investment
 Direct investment in new facilities / expansion of existing facilities
 Objective to create new production capacity and jobs, transfer technology and know-
how and form linkages to the global market place
 Leads to crowding out of local industry due to production of goods more cheaply
(due to advanced technology and efficient process) and uses up resources
 Profits from production do not feed back int the local economy but to the
multinational’s home economy

Mergers & Acquisitions


 Primary type of FDI involving transfer of existing assets from local firms to foreign
firms
 Assets and operation of firms from different countries and combined to establish a
new legal entity (Cross-border merger)
 Control of assets and operations is transferred to foreign company by its local
affiliate company (Cross-border acquisition)
 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

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Horizontal Foreign Direct Investment
 Investment in the same industry abroad as a firm operates in at home

Vertical Foreign Direct Investment


 Backward vertical: Industry abroad provides inputs for a firm’s domestic production
processes
 Forward Vertical: Industry abroad sells the outputs of a firm’s domestic production
processes

ADVANTAGES OF FDI

FDI plays a pivot role in the development of India’s economy. It is an integral part of the
economic development strategies for India. FDI ensures a huge amount of domestic
capital, production level, and employment opportunities in the developing countries, which
is a major step towards the economic growth of the country. FDI has been a booming
factor that has bolstered the economic life of India. The incorporation of a range of well-
composed and relevant policies will boost up the profit ratio from Foreign Direct
Investment higher. Some of the biggest advantages of FDI enjoyed by India have been
listed as under:

Economic Growth:
This is one of the major sectors, which is enormously benefited from FDI. A remarkable
inflow of FDI in various industrial units in India boosted the economic life of the country

Trade:
FDI have opened a wide spectrum of opportunities in the trading of goods and services in
India both in terms of import and export production. Products of superior quality are

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manufactured by various industries in India due to greater amount of FDI inflows in the
country.

Employment and Skill levels:


FDI has also ensured a number of employment opportunities by aiding the setting up of
industrial units in various concerns of India

Technology Diffusion and Knowledge Transfer:


FDI apparently helps in the outsourcing of knowledge from India especially in the
Information Technology sector. It helps in developing the know-how process in India in
terms of enhancing the technological advancement in India.

Linkages and Spill over to Domestic Firms:


Various foreign firms are now occupying a position in the Indian market through joint
Ventures and collaboration concerns. The maximum amount of the profits gained by the
foreign firms through these joint ventures is spent on the Indian market.

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GLOBAL FDI SCENARIO

The year 2008 marked the end of a growth cycle in Global Foreign Direct Investment, with
worldwide flows down by more than 21%. Due to the global financial crisis, the capacity
of companies to invest has been weakened by reduced access to financial resources, both
internally and externally, and their propensity to invest has been severely affected by
collapsed growth prospects and heightened risks. Many large Transnational Corporations
(TNCs) have revised their global expansion plans, and a large number of Greenfield and
cross border merger and Acquisition (M&A) projects are being cancelled or suspended.
The trend is widespread, hitting many sectors ranging from extractive industries to
manufacturing and services.

FDI Inflows and Cross-border M&A, by Region and major Economy, 2007-08
Amount in USD billion
FDI inflows Cross border M &As
Growth Growth
Region/ Economy 2007 2008 Rate (%) 2007 2008 rate (%)
1833. 1637.
World 3 1449.1 -21 1 1183.7 -27.7
1247. 1454.
Developed Economies 6 840.1 -32.7 1 981.8 -32.5

Europe 848.5 562.3 -33.7 825 548.7 -33.5

United States 232.8 220 -5.5 379.4 314.9 -17

Japan 22.5 17.4 -22.6 21.4 19.1 -10.8

Developing Economies 499.7 517.7 3.6 152.9 177 15.7

Africa 53 61.9 16.8 10.2 26.3 157


Latin America and the
Caribbean 126.3 142.3 12.7 30.7 29.5 -3.8

West Asia 71.5 56.3 -21.3 30.3 31.5 4

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South, East and South-
East asia 247.8 256.1 3.3 81.5 89.4 9.7

South-East Europe & CIS 85.9 91.3 6.2 30.1 25 -17


The sharp decline in global FDI in 2008 marks the end of a growth which lasted four years.
For the short-to-medium term (2010-2012), UNCTAD proposes three scenarios, the
probability of which depends on a range of factors, including in particular the evaluation of
the financial crisis itself, the severity and duration of the global recession.

REGIONAL SHARE OF developing and Transnational Economies:

In developing and transition economies, preliminary estimates suggest that FDI inflows
were comparibly more resilient in 2008, the estimated 4% growth rate for 2008 as a whole
does not reflect the current critical situation in these economies, as the worst impact of the
global financial crisis on FDI inflows was transmitted to them mainly in the last quarter of
the year.

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100
80
60
40
20
0
-20 China Hong Kong, India Indonesia Malaysia Singapore Thailand
China
-40
-60
-80

2007 2008 Growh rate (%)

INDIAN OVERVIEW

Despite the global recession and liquidity crunch, the Indian economy recorded an 11%
increase in FDI in 2008-09, with sectors like chemicals and telecommunication
experiencing robust growth of 227 % and 103% respectively.

Total FDI Inflows FDI inflows (amount US$ million)

40,000
35,000
30,000
FDI inflows

25,000
20,000
15,000
10,000
5,000
0
2000-01 2001-02 2002-03 2003-04 2005-06 2006-07 2007-08 2008-09 2009-10
Financial Years

As per dept of Industrial policy & promotion Ministry of Commerce and


Industry

Enhanced international response and powerful sectoral productivity ratios in India are
increasingly drawing attention of the global investors in India. Other aspects being
characterized to the resumption in foreign direct investment (FDI) recently entail growing

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client assurance in the market, which can be seen from the chart that FDI flows till 2009-
10 had increased in full swing by 2007-08 and 2008-09.

India had received 24.57 billion dollars in Foreign Direct Investment (FDI) during the
2007-08 fiscal; that number increased to US$27 billion in 2008-2009. India drew FDI
influx of US$ 1.74 billion during November 2009 which is 60% more in the previous
fiscal. The FDI inflows in 2007-08 saw an increase of 56.50 per cent over 15.70 billion
dollars in the previous year. India, which saw a GDP growth of 8.7 per cent in 2007-08. the
collective amount of FDI influx 1991 to 2009 stood at US$ 127.46 billion

As per Commerce and Industry Minister Kamal Nath India remains attractive investment
destination and it will be a good parking lot for money. FDI inflows reflect growing
confidence (of global investors) in India

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TOTAL FOREIGN INVESTMENT AND FDI

Total foreign investment received in IFY 2009-2010 (upto February, 2010) was USD 60
billion, compared to USD 18.69 billion in 2008-09, this was way ahead of the (net) total
investments received by February 2009.
FDI in 2009-10 was USD 33 billion and up from USD 31 billion in 2008-09. Foreign
portfolio investment by Foreign Institutional Investors (FIIs) was increased significantly
from negative USD 13 billion due to world crisis in FY 2008-09 has increased to robust
USD 27 billion in FY 2009-10 which shows the confidence in Indian economy by the
investors

Foreign Institutional Investors (FII)

FII inflow in April 2010 totaled Rs. 9,990 crores. FII had bought equities worth Rs.
19,928.20 croore in March 2010. FII flow in the calander year 2010 totaled Rs. . 30,544.60
crore. There are a total of 1,711 foreign funds registered with the Securities & Exchange
Board of India (SEBI)

Large Outflow of Capital

India is beginning to bounce back from the global financial crisis but the IMF has warned
that large capital inflows from the FIIs could disrupt thos recovery.

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While the global economic recovery has been better than anticipated, the IMF identifies
two risks: one that affects advanced countries and the other emerging economies. The
sovereign risk crisis, which has already erupted in Europe is also threatening other
advanced countries with high fiscal deficits and rising debt levels. Emerging economies
experiencing a high speed growth recovery are receiving, once again, large capital inflows
from advanced countries that undertook huge liquidity expansion in response to the
financial crisis. This has led to a rise in the prices of both goods and assets in emerging
economies, besides exerting upward pressure on their exchabge rate. The impact on India
is particularly significant.

It is reveal from the above chart that FIIs resumed pouring money into Indian Stock
Markets, which has pulled up stock market prices, although thay have not toched pre-crisis
level yet, this also resulted in rupee has been appreciating against the dollar since March
2009wjth nthe cental bank having virtually stopped buying dollars (in net terms) since
October 2009. Both this trends spell trouble for the Indian economy.

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POLICY ON FOREIGN DIRECT INVESTMENT

India has the most liberal and transparent policies on FDI among the emerging economies.
FDI up to 100% is allowed under the automatic route in all activities / sectors except the
following which require prior approval of the Government:
 Manufacturing of cigars and cigarettes of tobacco and manufactured tobacco
industries;
 Manufacture of Electronic aerospace and defence equipments: all types
 Manufacture of items exclusively reserved for Small Scale Sector with more than
24% FDI;
 Proposals in which the foreign collaborator has an existing financial / technical
collaboration in India in the ‘same’ field
 All proposals falling outside notified sectoral policy / caps

Automatic Route or Automatic Approval:


FDI in sectors/ activities to the extent permitted under automatic route does not require any
prior approval either by the Government or RBI. The investors are only 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 of issue of shares to foreign
investors. This route is available for all sectors or activities that do not have ‘sector cap’
i.e. where 100% foreign ownership is permitted, or for investments that are within a sector
cap and where the automatic route is allowed

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Government Approval:
FDI in activities not covered under the automatic route requires prior Government
approval. Such proposals are considered by the Foreign Investment Promotion Board
(FIPB).

FIPB approves investment proposals:


o Where the proposed shareholding is above the prescribed sector caps, or
o Where the activity belongs to that small list of sectors where FDI is either not
allowed or where it is mandatory that proposals be routed through the FIPB (e.g.
sectors that require industrial licencing)

The FIPB ensures a single-window approval for the investment and acts as ascreening
agency (for sensitive/ negative list sectors). FIPB approvals (or rejections) are normally
received in 30 days. Some foreign investors use the FIPB application route where there
may be absence of stated policy or lack of policy clarity.

An outline of the broad policies for groups of sectors:

Manufacturing:
o Most manufacturing sectors are on the 100% automatic route. Foreign equity is
limited only in production of defence equipment (26%) and 5 specific industrial
licence II is mandatory i.e. for
o distillation and brewing of alcoholic drinks,
o tobacco cigars, cigarettes and substitutes,
o electronic aerospace and defence equipment,
o industrial explosives and
o hazardous chemicals.
o Most mining sectors are similarly on the 100% automatic route, with foreign equity
limits only on atomic minerals (74%), coal and lignite (74%).
o 100% equity is also allowed in non-crop agro allied sectors (agro processing) and
crop agriculture under conditions (e.g. hot houses).

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Infrastructure:
100% FDI under the automatic route is allowed for most infrastructure sectors – highways
and roads, ports, inland waterways and transport, and urban infrastructure. Select
infrastructure sectors have defined caps for e.g. Telecom Service has a sector cap of 74%
and Airlines have a 49% sector cap

Services:
100% FDI under the automatic route is permitted for many services such as real estate
construction, townships (Subject to minimum scale norms of 25 acres or 50000 sq. meters
of constructed area), resorts, hotels and tourism (including tour operators and travel
agencies, serviced apartments, convention and exhibition centres), films, IT and IT –
enabled services, ISP/email/voice mail services, business services and consultancy,
renting and leasing, venture capital funds/ companies (VCFs/ VCCs), medical/ health
services, education, advertising and wholesale trade and courier services. 100% FDI
permitted in non-banking financial services subject to minimum capitalisation norms.

Certain service sectors are being opened up in a phased manner to allow domestic
companies to prepare for global competition. In both banking and insurance, foreign
investment is permitted subject to specific caps or entry conditions. FDI in media is
permitted with varying sector caps. Retail trade is currently restricted to 51% FDI
permitted in single brand retail stores and 100% FDI permitted in wholesale cash and
carry. Legal services are currently not open to foreign investment.

Restricted list of Sectors:


The extant policy does not permit FDI in the following cases:
1. Gambling and betting
2. Lottery Business
3. Atomic Energy
4. Retail trading (except Single Branded product retailing)
5. Business of Chit Fund, Nidhi Company,
6. Plantations (However, FDI is allowed in Tea Plantation, Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables,

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Mushrooms etc. under controlled conditions and allowed in services related to agro and
allied sectors),
7. Trading in Transferable Development Rights (TDRs) and any activity/ sector that is not
opened to private sector investment.

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 India
owned company.
India extends National treatment to foreign investors with absolutely no discrimination
against foreign invested companies registered in India or in favour of domestic ones.

ENTRY STRATEGIES FOR FOREIGN INVESTORS

Starting Operation in India


A foreign company planning to set up business operations in India has the following
options
As an Indian Company
A foreign company can commence operations in India by incorporating a company under
the Companies Act, 1956 through
• Joint Ventures; or
• Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements
of the investor, subject to equity caps in respect of the area of activities under the Foreign
Direct Investment (FDI) polivy.

Joint Ventures with an Indian Partner


Foreign companies can set up their operations in India by forging strategic alliance with
Indian partners.
Joint Ventures may entail the following advantages for a foreign investor:
• Established distribution / marketing set up of the Indian partner
• Established contacts of the Indian partners which help smoothen the process of
setting up of operations

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Wholly Owned Subsidiary Company
Foreign companies can also set up wholly owned subsidiary in sectors where 100%
foreign direct investment is permitted by FDI policy.
For registration and incorporation , an application has to be filled with Registrar of
Companies (ROC). Once a company has been duly registered and incorporated as an
Inidan company, it is subject to Indian laws and regulations as applicable to other domestic
Indian companies

As a Foreign Company
Foreign companies can set up their operations in India through
• Liaison Office / representative office
• Project Office
• Branch Office
Such offices can undertake any permitted activities. Company have to register themselves
with Registrar of Companies within 30 days of setting up a place of business in India.
• Liaison Office / Representative Office
Liaison office act as a channel of communication between the principal place of
business or head office and entities in India. Liaison office can not undertake any
commercial activity directly or indirectly and can not, therefore, earn any income in
India. Its role is limited to collecting information about the company and its
products to prospective Indian customers. It can promote export / import from / to
India and also facilitate technical/financial collaboration between parent company
and companies in India. Approval for establishing a liaison office in Inida is
granted by Reserve Bank of India

• 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 office may remit outside India the
surplus of the project on its completion, general permission for which has been
granted by RBI.
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• Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are
allowed to set up Branch Offices in India for the following purposes:
I. Export / Import of goods
II. Rendering profession or consultancy services
III. Carrying out research work, in which the parent company is engaged.
IV. Promoting technical or financial collaborations between Indian
companies and parent or overseas group company.
V. Representing the parent company in India and acting as buying/ selling
agents in India.
VI. Rendering services in Information technology and development of
software in India.
VII. Rendering technical support to the products supplied by the parent/
group companies.
VIII. Foreign airlines/ 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 guidelines permission for setting
up branch offices is granted by RBI.

• Branch Office on ‘Stand Alone Basis’


Such branch offices would be isolated and restricted to the Special Economy Zone
(SEZ) alone and no business activiy/ transaction will be allowed outside the SEZs
in India, which include branches/ subsidiaries of its 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.

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FOREIGN INVESTMENT THROUGH GDR (EURO ISSUES)

Foreign Investment

through GDRs is treated as Foreign Direct Investment

Indian companies are allowed to raise equity capital in the international market through the
issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not
subject to any ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good performance (financial
or otherwise) for a minimum period of 3 years. This condition would be relaxed for
infrastructure projects such as power generation, telecommunication, petroleum
exploration and refining, ports, airports and roads.

Clearance from FIPB


There is no restriction on the number of Euro-issue to be floated by a company or a group
of companies in the financial year . A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment after a
proposed Euro issue is likely to exceed 51% or which is implementing a project not
contained in Annex-III, would need to obtain prior FIPB clearance before seeking final
approval from Ministry of Finance.

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Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building and
investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.

Restrictions
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticiption of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the
prior approval of the Government of India.

SECTORAL SPECIFIC GUIDELINES FOR FOREIGN DIRECT INVESTMENT

Sr. No. Sector/ Activity FDI Cap/ Equity Entry Route


1 Civil Aviation
1.1 Airports
a. Greenfield Projects 100% Automatic
b. Existing Projects 100% FIPB beyond 74%
Air Transport Services (including Domestic Scheduled Passenger Airlines;
Non-Scheduled Airlines; Chartered Airlines; Cargo Airlines; Helicopter
1.2 and Seaplane Services)
Scheduled Air Transport
49% FDI; 100% for
Services/ Domestic Scheduled Automatic
NRIs investment
a. Passenger Airline
Non-scheduled Air Transport
Services/ Non-scheduled 74% FDI 100% for
Automatic
airlines, Chartered airlines, NRIs investment
b. and Cargo airlines
Helicopter Services/ Seaplane
services requiring DGCA 100% Automatic
c. approval
1.3 Other services under Civil Aviation Sector
non-scheduled Air Transport
Services/ Non-scheduled 74% FDI 100% for
Automatic
airlines, Chartered airlines, NRIs investment
a. and Cargo airlines
b. Maintenance and repair 100% Automatic

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organisations; flying training
institutes; and technical
training institutions
Alcohol: Distribution and
100% Automatic
2 Brewing
Asset Reconstruction
49% (Only FDI) FIPB
3 Companies
Mining and mineral
separation of titanium bearing
minerals and ores, its value
addition and integrated
activities. Fdi will not be
100% FIPB
allowed in mining of
'prescribed substances/ listed
in Govt. of India notification
issued by Dept. of Atomic
4 Energy
5 Banking: Private Sector 74% (FDI+FII) Automatic
6 Broadcasting
FDI+FII investment
a. FM Radio FIPB
upto 20%
b. Cable network 49% (FDI+FII) FIPB
49% (FDI+FII).
Within this limit FDI
DTH FIPB
should be less than
c. 20%
Setting up hardware facilities
49% (FDI+FII) FIPB
d. such as up linking, HUB, etc
Cigars & Cigarettes-
7 Manufacture 100% FIPB
Coal & Lignite mining for
captive consumption by power
projects, iron & steel, cement
production and other eligible 100% Automatic
activities permitted under the
coal mines (Nationalisation)
8 Act, 1973
Coffee & Rubber processing
100% Automatic
9 & warehousing
10 Commodity Exchanges 49% (FDI+FII) FIPB

27
Construction Development
100% Automatic
11 projects
Courier Services for carrying
packages, parcels and other
items which do not come 100% FIPB
within the ambit of the Indian
12 Post Office Act, 1898
13 Defence production 26% FIPB
Floriculture, Horticulture,
Development of seeds, Animal
husbandry, Pisciculture, 100% Automatic
Aquaculture and cultivation of
14 Vegetables & Mushrooms
15 Financial Infrastructure in Securities markets
49% (FDI+FII)
a. Stock Exchanges
b. Depositories Investment by
Registered FII under
PIS will be limited to FIPB
23% and investment
under FDI scheme
c. Clearing Corporations limited to 26%
49% (FDI+FII)
Investment by
Registered FII under
PIS will be limited to
24% only in the
FIPB
CICs listed at the
Stock Exchanges
within the overall
Credit Information limit of 49% foreign
16 Companies Investment.
17 Hazardous Chemicals 100% Automatic
Industrial explosive
18 Manufacture 100% Automatic
19 Industrial Parks 100% Automatic
20 Insurance 26% Automatic
Investing companies in
infrastructure/ service sector
21 (except telecom sector) 100% FIPB

28
Mining covering exploration
and mining of diamonds &
precious stones; gold, silver
22 and minerals 100% Automatic
23 Non Banking Finance Companies (NBFC)
a Merchant Banking
b. Underwriting Portfolio
c. Management Services
d. Investment advisory Services
e. Financial Consultancy
f Stock Broking 100% Automatic
g. Asset Management
h. Venture Capital
i. Credit Rating Agencies
j. Housing Finance
k. Rural Credit
24 Petroleum & Natural Gas Sector
Other than Refining and
including market study &
formulation; investment/
financing; setting up 100% Automatic
infrastructure for marketing
in petroleum & natural gas
a. sector
FIPB (in case of
49% in case of PSUs
PSUs) Automatic
100% in case of
(in case of Private
Private companies
b. Refining companies)
25 Print Media
Publishing of newspaper and
periodicals dealing with news 26% FIPB
a. and current affairs
Publishing of scientific
magazines/ speaciality 100% FIPB
b. journals/ periodicals
Power: generation,
transmission, distribution and
26 power trading 100% FIPB
Tea Sector, including tea
27 plantation 100% FIPB
28 Telecommunications
a Basic and cellular 74% Automatic upto

29
49%, FIPB
beyond 49%
b. a. ISP without gateway Automatic upto
b. infrastructure provider
c. electronic mail and voice 100% 49%, FIPB

mail beyond 49%


Manufacture of telecom
100% Automatic
c. equipments
29 Trading
Wholesale/ cash & carry
100% Automatic
a trading
b. Trading for exports 100% Automatic
Trading of items sourced from
100% FIPB
c. small scale sector
Test marketing of such items
for which a company has 100% FIPB
d. approval for manufacture
Single Brand Product
51% FIPB
e. Retailing
Satellites- Establishment and
74% FIPB
30 operation
Special Economy Zones and
Free Trade Warehousing
Zones covering setting up of 100% Automatic
these Zones and setting up
31 units in the zones

FOREIGN DIRECT INVESTMENT IN CORE SECTORS SCOPE AND


DEBVELOPMENTS

INFRASTRUCTURE

30
With an upsurge in investment and robust macroeconomia
fundamentals, the future outlook for India is distinctly
upbeat. India could unleash its full potentials, provided it
improves the infrastructure facilities, which are at present
not sufficient to meet the growing demand of the economy,
failing to improve the country’s infrastructure will slow
down India’s growth process, Therefore, Indian Governemnet’s first priority is rising to the
challenge of maintaining and managing high growth through investment in infrastructure
sector, among others.

INFRASTRUCTURE REQUIRMENT IN INDIA


Anticipated Investment
Sector
in 11th FYP (2007-11)
Electricity 150.4
Roads and Bridges 76.1
Telecom 65.1
Railways 62.2
Irrigation 53.1
Water and sanitation 48.6
Ports 18
Airports 8.5
Storage 5.5
Gas 5
Total 492.5

The country’s infrastructure sector accelerated by 5.3 per cent in November 2009, backed
primarily by growth in steel and cement production in the month. The six core sectors,
which contribute 26.7 per cent to the overall Index for Industrial Production (IIP), had
grown 0.8 per cent in the corresponding month of 2008. Finished (carbon) steel production
grew at the highest rate—11.7 per cent—during the month, against a decline of 6.3 per cent
in the corresponding period of 2008. Cement production also picked up to post a growth
rate of 9 per cent in November, marginally up from 8.7 per cent in the month in 2008.
Production of petroleum refinery products also grew by 4.9 per cent on a year on year
basis, as against a contraction of 1.1 per cent in the year ago period.

31
Infrastructure investment in India is set to grow dramatically. India has become a major
outbound investor and people are engaging with Indians to seek investment into their
countries, said the Minister for Road Transport and Highways, Mr Kamal Nath, in Davos.
According to investment banking company Goldman Sachs, India's infrastructure sector
will require US$ 1.7 trillion investment in the next 10-years. It also added that such
investment would come more from the domestic market than overseas.

Investments

• Larsen & Toubro (L&T), the country’s largest engineering company, will invest
around US$ 5.46 billion to build its thermal power business in the next five years.
L&T Power, the wholly-owned subsidiary of L&T, will have a generation capacity
of 5,500 MW, including hydro power, by 2015. Larsen and Toubro Ltd also formed
a Joint Venture with Malaysia-based SapuraCrest Petroleum to install pipelines and
construct offshore rigs and platforms in India, the Middle East and South East Asia.
• Maersk India, part of the A.P. Moller-Maersk Group of Denmark, inaugurated its
container freight station (CFS) at Ponneri, around 25 km north off Chennai. It has
invested around US$ 10 million in the CFS, which will provide storage and
‘stripping' of laden import containers and consolidation of export cargo, according
to Mr Hans-Henrik Skonning Hansen, South Asia Cluster Manager, Maersk India.
• Corus, a subsidiary of Tata Steel, has decided to invest US$ 50.38 million pounds
at its rail production facility in Hayange, France. The move has come after the
Europe's second largest steel maker secured contract worth US$ 503.79 million
from the French railway operator SNCF.
• York Transport Equipment, the Singapore-based axles/suspensions maker for
heavy commercial vehicles and part of the Tata group, will soon set up a second
plant in India. It already has one in Jamshedpur and is now on the lookout for a site
in south-west India to set up a facility with a capacity of 100,000 units. York was
acquired by TRF, a Tata company specialising in material handling equipment, in
2007. It has units in Singapore, Australia and China with operations across half a
dozen countries.
• Swiss cement company Holcim plans to invest US$ 1 billion in setting up 2-3
greenfield manufacturing plants in the country in the next five years to serve the
rising domestic demand, according to a senior company executive.
32
• Tata Power has lined up investments of US$ 5.19 billion for its upcoming plants in
Mundra, Maithon and Jojobera over the next three years. Tata Power and Reliance
Power are coming up with UMPPs with a combined generation capacity of close to
16,000 MW. Jindal Steel & Power, which has a production capacity of 1,000 MW,
plans to add another 4,380 MW thermal power and 6,100 MW hydro power
capacity in the next five years. With this expansion as planned core sector
engineers are required for boiler, turbine and pump operations, and to also take care
of the logistics.

According to the Central Electricity Authority (CEA), the country will require manpower
of around 800,000 to keep the growth engine running over the next decade. The industry is
likely to require around 40,000 engineers for core sectors such as electrical, mechanical
and instrumentation every year since the average manpower-to-MW ratio here is close to
0.75.
The Government of India has envisaged capacity addition of 100,000 MW by 2012 to meet
its mission of power to all.
The Asian Development Bank (ADB) has approved a financial assistance for US$ 200
million under the Assam Power Sector Enhancement Investment Programme.

TELECOMUNICATION

The Indian telecommunications industry is one of the fastest growing in the world.
According to the Telecom Regulatory Authority of India
(TRAI), the number of telecom subscribers in the country
reached 621.28 million as on March 31, 2010. With this the
overall teledensity (telephones per 100 people) has touched
52.74. The wireless subscriber base has increased to 584.32
million at the end of March 2010 from 564.02 million in February 2010, registering a
growth of 3.6 %.

33
Major Investments

According to the Department of Industrial Policy and Promotion (DIPP), the


telecommunications sector which includes radio paging, mobile services and basic
telephone services attracted foreign direct investment (FDI) worth US$ 2,495 million
during April to February 2010. The cumulative flow of FDI in the sector during April 2000
and February 2010 is US$ 8,872 million.

• Norway-based telecom operator Telenor has bought a further 7 % in Unitech


Wireless for a little over US$ 431.3 million. Telenor now has 67.25 % hold of the
company. Telenor has now completed its four-stage stake buy and has invested a
total of US$ 1.32 billion in Unitech Wireless as agreed on with the latter last year
• The government has approved the FDI proposal of the Federal Agency for State
Property Management of the Russian Federation to buy 20 % stake in telecom
service provider Sistema-Shyam for US$ 660.1 million

Manufacturing

According to the Economic Survey 2009-10,

• The production of telecom equipment in value terms has increased from US$ 9
billion in 2007-08 to US$ 10.53 billion in 2008-09 and is expected to be US$ 12.4
billion in 2009-10.
• Telecommunication equipment major Nokia Siemens is planning to source
components worth US$ 28.5 billion from India in 2010-11. In 2009, the company
sourced components worth US$ 20 billion from India.

According to a report by Gartner Inc., India ranks fourth in manufacturing telecom


equipment in the Asia-Pacific (Apac) region. The country has a 5.7 % share of the region’s
total telecom equipment production revenue of US$ 180 billion in 2009.

Rural Telephony

According to the Economic Survey 2009-10,

34
• rural tele-density has increased from 1.2 % in March 2002 to 21.2 % at the end of
December 2009.
• Rural telephone connections have gone up from 12.3 million in March 2004 to
174.6 million in December 2009.
• The share of private sector players in the total telephone connections has steadily
increased from around 14 % in 2005 to 31 % as on December 31, 2009.
• During 2008-09, the growth rate of rural telephones was 61.5 % as against 36.7 %
for urban telephones.
• The private sector has contributed significantly to the growth of rural telephony by
providing 81.5 % of the rural phones as on December 31, 2009.

The Road Ahead

According to a report published by Gartner Inc in June 2009,

• the total mobile services revenue in India is projected to grow at a compound


annual growth rate (CAGR) of 12.5 % from 2009-2013 to exceed US$ 30 billion.
• The India mobile subscriber base is set to exceed 771 million connections by 2013,
growing at a CAGR of 14.3 % in the same period from 452 million in 2009.
• India is expected to remain the world’s second largest wireless market after China
in terms of mobile connections.
• Mobile market penetration is projected to increase from 38.7 % in 2009 to 63.5 %
in 2013, according to Gartner.

IT AND ITeS

Indian IT/ ITeS sector has matured considerably with its expansion into varied verticals,
well differentiated service offerings and increasing
geographical penetration. India’s importance among emerging
economies, both as a supply and demand centre, is fuelling
further IT/ ITeS growth. The Indian ITeS- BPO (domestic and
exports) revenues are estimated at US$ 14.7 billion and the
sector grew at a rate of 18.9% in 2008-09. India topped the A.T. Kearney Global Service

35
Location Index 2009, beating 49 other countries of the world, emerging to be the
destination of choice as an offshoring location of global IT/ITeS powerhouses.

IT/ITeS sector: moving up the value chain


• India, the primary global offshoring destination for low-end back-office services
earlier; is now emerging as an innovation and research hub.
• India is estimated to continue attracting substantial investment in the sector; with
the cost arbitrage factor expected to prevail for another 10-15 years.
• The ITeS segment is expected to leverage on the penetration of the IT segment,
complementing and completing end-to-end customer requirements with the aid of
offshore and onshore services offerings.

India: Strong offshoring credential

• India’s largest share in the global market has increased to 4% in the IT segment and
close to 12% in ITeS in 2008-09
• India has maintained its position as the preferred outsourcing destination; Indian
IT/ITeS companies are now offering a global delivery model, at par with leading
global standards.
• India offers low cost, technical and language skills, abundant skilled pool, mature
industry players and supportive government policies.
Value addition at Competitive costs
Cost of operations

Top 5 global service • Amongst the top five global services location,
location India maintains a substantive lead with respect to
Index on the financial attractiveness index.
Countrty scale of 10 • Sourcing from India is estimated to deliver cost
India 6.91 savings in the range of 25-60 per cent for global
China 6.29
Malaysia 5.98 MNCs.
Thailand 5.77 • Cost of an engineer is about 20 to 40 per cent,
Indonesia 5.69
selling, General and Administration (SG and A)

36
about 80 per cent , and off-shore billing rates about 50 to 70 per cent lower then
costs in EU.
• Average off-shore billing rate at US$ 20 to 35 per hour is about 50 to70 per cent
lower than EU.
• Apart from lower administration and labour costs, the central and stste governments
offer fiscal and non-fiscal incentives to industry players further adding to the cost
advantage.
• Companies aggressively investing in innovation and R&D to differentiate their
service offerings;change management and process consulting services increasingly
becoming part of the end-to-end service requirements of clients.
• R&D divisions of various MNCs being set up in India;number of patents and
licenses being filed from India firms increasing rapidly;India’s IPR (Intellectual
Property Rights) Laws are now compliant with WTO TRIPS (Trade-Related
Aspects of IPRs)
• HP,Microsoft,Cisco,Oracle,Motorola,Qualcomm are some of the leading IT giants
who have set up their R&D centres in India,with aggressive expansion plans in the
pipeline

Increasing investment activity:


Sustained investor confidence
• Indian technology sector witnessed M&A dwals worth US$ 3.4 billion
in 2008-09, an increase of 17 per cent over 2007-08
• The IT-BPO sector has consistently attracted the highest share of privete
Equity (PE) and Venture Capital (VC) investments in the country.
• Indian technology sector witnessed Private Equity (PE) deals worth US$
488 million in 2008-09.
Some recent PE and M&A deals
Target Acquirer Value in US$ mn
Prudential Capital Capita Indian 100-150
Management services
HOV Services Recap Partnera-LLC 202
AVIVA Global services WNS Holdings 230
People Soft Inc Aegis BPO 250
MedQuist CbaySystems Holding Ltd 287

37
Intervoice Inc Convergys Corporation 335
Accuro Healthcare MedAssets Inc 350
Solution Inc
Citi Group Global Services TCS,India 505
Axon Group PLC HCL Technologies 731
Flextronics Software Kohlberg Kravis Roberts 900
System and Co
Source: Privete Equity Deals 2008-2009, Asian Venture Capital Journal, September
2009 (Data provided by CBK)

Increasing importance of emerging countries (BRIC nations)


As per IDC estimates, technology spending (on hardware) of Brazil, Russia, India and
China (BRIC) together for US$ 110 billion in 2008-09. BRIC spending is estimated to
contribute 9% of global technology spending by 2008-09.Global multinational
corporations are increasingly focusing on tapping opportunities in these markets.

Demand for Offshoring accelerating


Europe is witnessing increased offshoring of services and growth rates from Europe are
expected to be higher. With increasing maturity in ‘near-shore’ delivery capabilities,
European – language speaking countries like Hungary, Czech Republic, Russia, Poland are
expected to support this trend. European enterprises expected to offshore services to India,
Philipines, China and other lower cost location. Customers’ desire to focus on their core
services and utilise the benefits of globalisation in execution of their ‘non-core’ activities is
expected to further drive adopton of outsourcing strategy.

Large Long Term off-shoring contracts 2008-09


• Subex won a US$ 50 million deal with British Telecom
• Mindtree Consulting won a US$ 50 million deal with ArcelorMittal
• Tech Mahindra won a US$ 700 million deal with BT to provide systems and
process transformation
• Infosys won a five year contract with US insurer Conseco
• Wipro won a nine year IT infrastructure management deal with Aircel, estimated at
US$ 500 million

38
Global IT vendors increasing their India presence
Global vendors (such as Accenture, HP, EDS, IBM, Cap Gemini) looking at India with a
long term view by enhancing their offshore delivery capability through the organic and / or
inorganic route. Growing offshore presence of service providers who are able to deliver
seamless hybrid onshore – offshore services at lower cost. Global vendors with limited or
no India presence losing opportunities / contracts. Large players scaling up dramatically in
locations such as China and India with plans to add thousands of people to their off-shore
resources. Large number of India based employees: Accenture (16,000+), IBM (39,000+),
EDS (15,000+)

Engineering: a new outsourcing opportunity


• Global engineering services spend estimated at US$ 750 billion which is expected
to increase to more than US$ 1 trillion by 2020
• India’s share is about US$ 4.9 billion of the US$ 12.8 billion outsourced services in
2008-09; India is estimated to garner a share of about US$ 50 billion by 2020
• Bechtel, General Motors, Ford, John Deere, Caterpiller, Silicon Automation
System, John Brown Engineering are few global giants that have set up their
engineering services division in India

Legal Process Outsourcing

• Outsourcing of legal and Intellectual Property (IP) research is presently at a nascent


stage with tremendous growth potential. India offers the advantage of employing
full-time legal Professionals, resulting in higher efficiencies, compared to the
temporary paralegals employed overseas for a large quantum of work.
• India offers impressive opportunities to scale up, with a large pool of legal
professionals (over 1 million lawyers and over 70,000 law gradutes passing out

39
every year) and cost arbitrage, with Indian lawyers billing one-tenth of their US
counterparts (US$ 40 to 60 in India compared to US$ 350 per hour in the US)
• While most of the business presently comes from the USA, there is huge untapped
opportunity in Europe (especially UK), Canada and Australia.
• Firms like SDD Global Solutions, Juri Matrix, Integreon, Pangea 3, RR Donnelly
are mushrooming with increasing venture capital investment, tapping the vast
market opportunities.

Research and Analytics


• Wave of new entrants comprising captive research set up by lending global
investment banks, foreign banks and consulting firms as well as several third-party
service providers and lendingBPO players
• Players aggressively ramping up their employee base, with captive centres by
McKinsey (for business and financial research) and General Electric (for financial
research)
• Leading third-party service providers reported growth of over 100% per annum
over the past four years
• Three of the big four accountancy and professional services firm- Ernst & Young,
Deloitte, KPMG have their global shared services delivery centres in India, along
with other leading firms like Datamonitor, Standard & Poor’s
• India emerged as the choice destination for their front-end research and analysis
divisions, migrating from back-room services offshoring

FINANCIAL SERVICES

40
The Indian economy is estimated to have grown by 6.7 per cent in 2008-09. According to
the latest Central Statistical Organisation (CSO) data, financial services, banking,
insurance and real estate sectors rose by 7.8 per cent in the third quarter of 2009-10.

The government has taken a number of steps in recent months to revive the economy,
including slashing interest rates, lowering factory levies and more than doubling the limit
on foreign investment in corporate bonds. The financial services space is a rapidly growing
one in India.

As per the Securities and Exchange Board of India (SEBI), number of registered FIIs as on
March 29, 2010 was 1710 and the cumulative investments in equity since November 1992
to March 29, 2010, was US$ 76.74 billion, while the cumulative investments in debt during
the same period were US$ 11.85 billion.

The average assets under management of the mutual fund industry stood at US$ 174.06
billion for the month of February 2010, an increase of nearly 36 per cent from US$ 111.55
billion in February 2009, according to the data released by Association of Mutual Funds in
India (AMFI).

Funds raised by the Indian corporate sector via ADRs/ GDRs has jumped over 33 times
from around US$ 101.72 million in 2008 to about US$ 3.50 billion in 2009.

Furthermore, with economic outlook on Indian as well global markets being positive, PE
funds are closing deals more speedily than last year. The merger and acquisition (M&A)
activity has shown similar momentum, with domestic deals ruling the charts.

PE funds closed 29 deals in January 2010 compared to only 16 during the same period last
year. The value of such deals saw a significant jump of 303 per cent, from US$ 309 million
in January 2009 to US$ 1.24 billion this year.

Also, a study by Project Finance International (PFI), a source of global project finance
intelligence and a Thomson Reuters publication has ranked India on top in the global
project finance (PF) market in 2009, ahead of Australia, Spain and the US.

41
The study said the main market for PF in 2009 was the domestic Indian market, which
raised US$ 30 billion, accounting for 21.5 per cent of the global PF market. This was up
from US$ 19 billion in 2008.

The country's foreign exchange reserves were US$ 278.19 billion as on March 19, 2010,
according to the figures released in the Reserve Bank of India's Weekly Statistical
Supplement.

The World Bank and India have concluded negotiations for loans worth US$ 3.2 billion for
recapitalizing state-run banks and funding for the India Infrastructure Finance Company
Ltd.

Qualified Institutional Placements (QIPs)

QIP is a capital raising tool, whereby a listed company can issue equity shares, fully and
partly convertible debentures, or securities other than warrants, which are convertible into
equity shares, to a qualified institutional buyer (QIB).

In 2009, Indian companies had raised close to US$ 7.18 billion by way of 45 QIP
issuances.

Insurance

India is the fifth largest life insurance market in the emerging insurance economies
globally and the segment is growing at a healthy 32-34 per cent annually.

According to a report by research firm RNCOS—'Booming Insurance Market in


India 2008-2011)'—the total life insurance premium in India is projected to grow to US$
259.72 billion by 2010-11. Life Insurance Corporation (LIC) is bullish on growth and is
targetting business in excess of US$ 59.14 billion by 2011-12.

The government is planning to ease restrictions on foreign investments in insurance,


banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from the
present 26 per cent.

42
The 'Mall assurance' delivery channel is first of its kind in India's insurance sector, selling
life and general insurance policies through all Future Group retail outlets across the
country. For Future Generali Insurance, a sizeable chunk of their customers now comes
through the Mall assurance route.

Online sales take place through two major channels through direct sales by the insurers and
through online insurance portals which offer a range of products from various insurers. The
most active insurers online are ICICI Lombard, Bajaj Allianz etc.

Banking services

During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion
for infrastructure projects such as power plants and petroleum refineries. The big-sized
credits have made SBI and group one of the largest project financiers in the country.

Finance Minister, Mr Pranab Mukherjee urged a doubling of infrastructure spending to


US$ 1 trillion in the 12th Plan and said financial entities or banks will be authorised to
issue infrastructure bonds for raising money for specific lending for infrastructure activity

MEDIA AND ENTERTAINMENT

43
Indian Media and Entertainment industry spending on information technology (IT) will
reach US$300 million by 2010, a compound annual growth rate of 32 percent, according to
a study by Springboard Research. Indian Media and Entertainment industry spending on
information technology (IT) will reach US$300 million by 2010, a compound annual
growth rate of 32 percent, according to a study by Springboard Research.

Media, the fourth estate, when entwined with the entertainment component represents an
effective facet of consumers in India.
The Indian Media and Entertainment (M&E) industry stood at US$ 12.9 billion in 2009
registering a 1.4 per cent growth over last year, according to a joint report by KPMG and
an industry chamber.
Over the next five years, the industry is projected to grow at a compound annual growth
rate (CAGR) of 13 per cent to reach the size of US$ 24.04 billion by 2014, the report
stated.
Additionally, the gaming segment is expected to be the fastest growing sector in the M&E
industry. The sector showed a 22 per cent growth in 2009 and is expected to grow at a
CAGR of 32 per cent to reach US$ 705.2 million by 2014,
the animation segment is expected to record a CAGR of 18.7 per cent in the next five years
as per the joint report.

Television

According to the figures released by an industry chamber in March 2010, the Broadcast
and Television (TV) sector comprised over 43 per cent of the overall M&E sector wherein
the total size of the television sector accounted for US$ 5.7 billion. The broadcast sector is
on a strong growth path and the outlook for advertisement expenditure is on a rise for the
television sector.

India is poised to become the world's largest direct-to-home (DTH) satellite pay TV market
with 36.1 million subscribers by 2012, overtaking the US. Furthermore,

Radio

44
Radio is considered a mass medium. It ideally suits the Indian environment - leveraging its
twin advantages of wide coverage and cost effectiveness. Currently, the sector generates
annual revenues worth US$ 49.5 million and is growing at around 20 percent annually

To exploit the true potential of this sector, frequency modulation (FM) radio needs to step
up its penetration to at least 300 stations in 100 cities, which would further attract an
investment of US$ 899,160 per radio station frequency, the total additional investment
required has been estimated at US$ 247.3 million, according to industry sources.

Advertising

A report by consultancy firm KPMG stated that the US$ 5.2 billion advertising industry is
set to grow at a compounded annual growth rate (CAGR) of 14 per cent in 2010

Emphasising on the Internet advertising industry, KPMG said the US$ 185 million industry
would encourage both multinational companies and local brands to focus on their
marketing strategies

Print/Publishing

The print media industry is projected to grow at a CAGR of 9 per cent and targets to reach
around US$ 5.93 billion by 2014, according to the joint report by KPMG and an industry
chamber.

In 1955 a Cabinet decision was taken disallowing any foreign investments in print media
which has since been followed religiously for nearly 45 years.

Jagran Prakashan of Jagran Group, which publishes one of India's largest read language
dailies, stated that it will acquire all the publications of Mid-Day Multimedia in a stock
deal valued nearly at US$ 40 million.

New York Times (5% stake in Deccan Chronicle's Sieger Solutions), Hubert Burda (joint
printing venture with HT Media), NBC Universal (26% stake in NDTV), Walt Disney
(32% stake in UTV), Turner International (JV with the Alva brother's of Miditech to
launch regional channels in the country), Viacom (JV with Network 18), UK's Daily Mail
(JV with India today to launch Mail Today) CNN, CNBC (tie-up with Network 18), Condé

45
Nast group of Vogue fame, Newsweek (tie-up with Outlook), Gruner + Jahr International
(tie up with outlook) are a few names who have of late debuted in Indian media. In the past
few years, there has been a rush among global media giants to associate themselves with
the Indian media industry.

Theatre

Mexico-based multiplex operator Cinepolis plans to set up 40 screens over the next 12
months in India, which could entail an investment of US$ 28 million.

2009 FICCI-KPMG report on the Indian media and entertainment industry that tracked a
steady annual growth of 17% to 18% over the past five years, with revenues of US$2.2
billion at the close of 2007. It projected an 18% cumulative growth for the industry over
the next five years to reach nearly US$3.4 billion by 2013. The report also counted foreign
investments of Rs. 8.5 billion (US$179 million) in the entire entertainment and media
industry in 2007, up 21% over the previous year

Cinema

Films Division has been motivating the broadest spectrum of the Indian public with a view
to enlisting their active participation in nation building activities. According to the joint
report by KPMG and an industry chamber, the film industry contracted 14 per cent growth
in 2009 wherein the industry is projected to grow at a CAGR of 9 per cent to touch an
estimated amount of US$ 3.02 billion over the next five years.

• Sony Pictures Imageworks acquired a 50.1% stake in Cinema-based VFX/


animation studio Frameflow for a reported $5 million and renamed the company as
Imageworks India, has already contributed to ‘Spider- Man 3’ and ‘I Am Legend’
• NBC Universal announced in January 2008 that it will pay $150 million for an
initial 26% stake in NDTV Networks, the holding company for the entertainment
networks operated by leading Indian news broadcaster New Delhi Television

46
• Disney has raised its stake in UTV Software Communications to 32.1% fro its
previous 14.85% at a price of $203 million and is paying $30 million for 15% stake in
UTV Global Broadcasting

Digital Media

The digital technologies and their innovative applications have changed the entertainment
sector considerably, especially the content production and its quality. Internet has also
emerged as the latest revenue stream and has become one of the fastest growing
advertising medium and has made a significant impression on the entertainment industry

Madison Media bagged the media buying account of US carmaker General Motors (GM),
estimated at more than US$ 22.1 million. GM, the third biggest ad spender among auto
companies in the country after Maruti Suzuki and Hyundai Motor, has given the account to
Madison for a period of three years.

CASE STUDY COCA COLA

47
Coca cola was the first international soft drinks brand to enter in 900 crore softdrink
market of India in early 1970s. Indian market was dominated by domestic brands, with
Limca being the largest selling brand. Cola was the largest selling flavour with market
share of 40%, Lemon drinks 31% and orange drinks only 19%. Uptill 1977, Coca-cola was
the leading soft drink brand in India. But due to norms set by the Foreign Exchange
Regulation Act (FERA), Coca-cola left India and did not return till 1993.

RBI's move on Foreign Equity Regulation


In 1974, Multinationals operating in low priority areas like consumer goods were asked by
RBI (under FERA) to step down equity to 40% either through equity dilution or through
equity sale

Non-strategic category of foreign companies


Coke, which operated in India through a branch office, submitted its plan for stepping
down equity to the RBI. It offered to hold 40% equity in its bottling and distribution units,
but refused to step down equity in its technical and administrative unit

Coke at Logger Heads with the Indian Government


Since this was not in line with FERA, which permitted not more than a 40 % holding in all
operations, Coke was asked to comply properly with the new norms. Coke decided to wind
up its operations in India, but quit making allegations that the Indian Government was
forcing it to share its secret formula for making its concentrate

Blame game in a Bad Blood


The Indian Government slaapped its counter charges and accused the parent of bleeding
profits and repatriating large sums of funds aroad (as administrative charges) even when
the Indian operations were posting losses. Further, there were allegations of Coke abusing

48
import licenses- against which it imported the concentrate- all of which resulted in bad
blood between the two parties

Coke Exists India


In 1977, Coke left India and did not return for nearly two decades. By which time, the
economic situation had undergone a major transformation. More importantly, the particular
provision in FERA had been diluted completely

Coke re enters India


Coke factored in all these issues at the time of its re-entry. In its application to India's
Foreign Promotion Board (FIPB) in 1997, it voluntarily offered to divest 49% in favor of
the Indian public through an IPO at the end of three years. This was despite the fact that
the FDI norms for the soft drink sector did not require mandatory divestment of stake and
noboby was forcing it to do so.

A Healthy Growth to the Indian Economy


After re entry, Coca-cola India has made significant investment to build and continually
consolidate its business in the country, including new production facilities, waste water
treatment plants, distribution systems and marketing channels.
Coca-cola India is among the country’s top international investors, having invested more
than USD 1 billion in India in the first decade, and further pledged another USD 100
million in 2003 for its operations. Coca-cola directly employs approximately 6,000 people,
and indirectly creates employment for more than 125,000 people in related industries
through its vast procurement, supply and distribution system. The success story of Coca-
cola attracted other investors to invest in India which resulted in competition in Indian soft
drink market.

CASE STUDY: HEWLETT- PACKARD INDIA

49
Hewlett-Packard Company (NYSE: HPQ), commonly referred to as HP, is an American
multinational information technology corporation headquartered in Palo Alto, California,
USA. HP is one of the world's largest information technology companies and operates in
nearly every country. HP specializes in developing and manufacturing computing, data
storage, and networking hardware, designing software and delivering services. Major
product lines include personal computing devices, enterprise servers, related storage
devices, as well as a diverse range of printers and other imaging products. HP markets its
products to households, small- to medium-sized businesses and enterprises directly as well
as via online distribution, consumer-electronics and office-supply retailers, software
partners and major technology vendors. HP is a technology company that operates in more
than 170 countries around the world.

HP INDIA

In 1996, EDS, now HP, India was formed as a wholly-owned subsidiary. Maturing very
quickly, the subsidiary became the first company in India to sign a multiyear global
outsourcing contract. Early emergence in the region put HP India at the forefront of the
offshore trend, developing many of our current best practices in work migration and
knowledge transfer.

HPs operations during the year were organized into seven business segments: Enterprise
Storage and Servers (ESS), HP Services (HPS), HP Software, the Personal Systems Group
(PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS) and
Corporate Investments.

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In mid-2006, HP acquired majority stake in MphasiS BFL Limited, a leading Applications
and 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. The
slowdown took an alarming toll on its top line in rupee terms, the group revenue was
almost flat; in dollar terms, it declined. Result: it was the worst performing group in the
DQ Top 5 club. While the others Tatas at 26%, Wipro at 41%, Infosys at 31%, and even
HCL at fared between average to outstanding, HP was left far behind in the race.

Strategy adopted

It was unfortunately not a great start for Neelam Dhawan, who rejoined HP India after her
three-year stint as head of Microsoft India. She took over as the managing director of HP
India in June, 2008, replacing CEO Balu Doraiswamy 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 (which
contributed maximum to HPs revenues) was the silver lining. Within TSG, it was the IT
services business that shonethe EDS acquisition paid off boosting the services topline by
nearly 50%. Acquisitions seemingly did the trick for HP India: other than EDS, on the
enterprise software front it were the Opsware and Tower Software acquisitions. There was
little doubt that the EDS takeover placed HP in a stronger position to leverage the domestic
market. While HP was already a force to reckon with in domestic IT services, it now
gained in terms of new capabilities in manufacturing, transportation, PSUs, healthcare as
well 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, it
was 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 as
the CEO of MphasiS.

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• Efforts were made though to halt the declining fortunes by launching newer products like
Probooks (for SMBs), EliteBooks (for large enterprises), notebooks targeting women and
CQ2000, the touch-smart PCs with QuickPlayer button. HP also undertook an inventory
correction in OND and restructured PSG to ensure cross selling by the sales & marketing
teams for both desktops and notebooks.
• IPG (at 20%, the smallest of the three divisions) too was not immune from the negative
market sentiments mirroring the causes and symptoms afflicting PSG. Remedial measures
adopted 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 Financial
Services Group did provide some solace to the beleaguered partners. Incidentally, these
financing options helped HP services too, as it enabled many SMBs to opt for the option to
come into the services bandwagon. Last year was particularly interesting for HP Financial
Services 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 IT
equipment on lease to SMBs, in addition to facilitating deployment of SAP business
enterprise software, though it reports numbers globally. HPFS enabled per quarter
payments of bundle of solutions bought from HP, last year.

(amount Rs. in Crores)

TSGs growth at 33% (primarily because of the EDS acquisition) was however, defeated by
the flat growth of two major groupsimaging & printing solutions and personal solutions
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(desktops and notebooks). TSG with 55% contribution continued to be HP Indias mainstay,
while the pain areas for HP last year were PSG and IPG. Even though PSG accounted for
nearly a quarter of its revenues and HP continued to retain its top spot in desktops and
notebooks across all four quarters (according to IDC), the generally down consumer
sentiment and the overall declining market were big dampeners. Particularly in the case of
desktops, the market went sharply down, while in notebooks Dell started offering some
competition.

On the enterprise software side, the information management and BI solutions which
included the enterprise records management software that it acquired through its
acquisition of Tower Software in fiscal 2008 and Open Call solutions, which is a suite of
carrier-grade software platforms also helped a great deal. Though critics claim that while
IBM is already moving ahead with a service as a product model, HP is still evaluating a
customized portfolio. The proof of the pudding was in the eating-more than 30% growth in
enterprise software.

Impact

Though the collaboration between HP services with enterprise storage & servers and HP
software groups, as well as third-party system integrators and software and networking
companies to bring solutions were very much there, HPSs synergy with IPG and PSG to
provide managed print services, end user workplace services, and mobile workforce
productivity solutions to enterprise customers were lacklustre. One positive development
was HPs seriousness on the green front. It did start scoring on the efficiency index with the
introduction of products like blade servers with its green touch. Its e-waste strategy added
a further push to its green focus. Amongst some big wins in India, HPFS won the financing
and asset management services contract from Subhiksha last year.

CASE STUDY: STAR TV

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Satellite Television Asia Region (STAR) is an Asian TV service owned by Rupert
Murdoch's News Corporation. It is headquartered in Hong Kong, with regional offices in
India, mainland China, Taiwan, Singapore, as well as in other south Asian countries.

According to the STAR website, their service has more than 300 million viewers in 53
countries and is watched by approximately 120 million viewers every day.

History

Star News is one of the channels in a bouquet of channels run by STAR, a subsidiary of
News Corporation. STAR launched in 1991, was the pioneer of satellite television in India.
Now it runs channels in almost every genre such as entertainment, movies, news, sports,
documentary, music, etc., and has a presence in 53 countries in Asia. Some of its channels
are Star Plus, Star World, Channel V, ESPN.

The company was launched in 1 August 1990 as part of Hutchison Whampoa group. It
started broadcasting five television channels in 1 January 1991 from AsiaSat 1 Satellite.
Launch of The STAR TV Network pioneered satellite television in Asia and in the process
catalyzed explosive growth in the media industry across the entire region.

In 1993 News Corporation purchased 63.6% of STAR for over $500 million, followed by
the purchase of the remaining 36.4% in 1 January 1993. Murdoch declared that:
"(telecommunications) have proved an unambiguous threat to totalitarian regimes
everywhere ... satellite broadcasting makes it possible for information-hungry residents of
many closed societies to bypass state-controlled television channels"

After this, the former prime minister Li Peng requested and obtained the ban of satellite
dishes throughout the country. Subsequently the STAR TV network dropped the BBC
channels from its satellite offer. This, and many ensuing declaration from Murdoch, led

54
critics to believe the businessman was striving to appease the Chinese government in order
to have the ban lifted. [3]

In August of 2009, STAR Broadcasting Corporation revealed a restructure to its Asian


broadcast businesses into three units - Star India, Star Greater China and Fox International
Channels (FIC). James Murdoch (NewsCorp chairman) stated, “We are now reshaping a
big, regional organisation into three highly focused business units..". Paul Aeillo (CEO)
was slated to leave in December 2009.

Challenges

Using Asia Sat for Star-TV created a problem, however, because the satellite was never
meant to be used for broadcasting. Under the jurisdiction of the International
Telecommunications Union (ITU), it was begun as a telecommunications satellite only.
Little has been done about this situation, but criticism has developed in the scholarly
community. In a 1992 paper for the International Communication Association, Seema
Shrikhande asserted that, "Using telecommunications satellites for broadcasting goes
against the ruling that national sovereignty includes the state's control over television
within its borders and that satellite footprints should be tailored to national boundaries as
far as possible." Following these assumptions, several countries have attempted to place
restrictions on reception of Star-TV but have found them difficult to enforce.

Impact

Today STAR Broadcasting Corporation broadcasts over 60 services in 13 languages.


Shows include entertainment, sports, movies, music, news and documentaries.

Reaching more than 300 million viewers in 53 countries across Asia, STAR Broadcasting
Corporation is watched by approximately 120 million viewers every day.

STAR Broadcasting Corporation controls over 20,000 hours of Indian and Chinese
programming and also owns the world's largest contemporary Chinese film library, with
more than 600 titles, featuring superstars including Jackie Chan, Chow Yun-Fat and Bruce
55
Lee. In partnership with leading companies in Asia, STAR Broadcasting Corporation
businesses extend to filmed entertainment, television production, cable systems and
distribution, direct-to-home services, terrestrial TV broadcasting, wireless and digital
services.

In 1994 STAR TV Network removed BBC World Service Television (now BBC World
News) from the network following demands from the government of the People's Republic
of China. It is alleged that the PRC government was unhappy with BBC coverage and
threatened to block Star TV in the huge mainland Chinese market if the BBC was not
withdrawn. This is despite technology that is capable of blocking BBC World in China,
while making it available in other countries they serve.

Recent developments

Star and similar regional operations add a new layer of complexity to discussions of
concepts such as media imperialism, the globalization of culture, and the international flow
of television. The system's emphasis on intra-regional cultural flows--across national
borders but within language and cultural boundaries--assumes that audiences will respond
to the cultural similarity or proximity of the programming. Given further satellite
developments in other regions, Star-TV may be an example of one form of future
television.

• The numero uno status enjoyed by Star Plus for nearly a decade since July 2000, based on
two long-running spells of Kaun Banega Crorepati (KBC) in 2000 and 2007, and a slew of
family melodramas mass-produced by Balaji Telefilms like Kyunki Saas Bhi Kabhi Bahu
Thi and Kahaani Ghar Ghar Kii, has ended.
• STAR TV invested US$ 80 million in building up its Indian operation and has been
growing at 40-50 per cent per annum for the last 3 years. Star TV India is valued at over
US$ 2 billion by Communications Equity Associates, an American investment bank, and
rated as the most valuable and profitable investment of Star TV group in all of Asia. Its
channels cover 300 million people in 53 countries in Asia and the Middle East.

56
• Star India had applied for clearance from the Foreign Investment Promotion Board (FIPB)
to buy a 49 per cent stake in Tata Group’s investment firm TS Investments.
• STAR TV has invested in indiaproperties.com for 20 per cent share in the company.
Indiaproperties.com will use the fund to expand its infrastructure, deploy latest
technologies to introduce new modules and build key alliances with the industry majors to
enhance convenience to the consumers. With the investment, Star TV will have a seat on
the indiaproperties.com board.
• STAR TV India, the media of News Corporation, is estimated to have made revenue of
around Rs 2,200 crore in the 2008-09 financial year, says a report prepared by Media
Partners Asia (MPA), the international media research agency. STAR India follows a July
to June calender.
• This, according to industry sources gives STAR India a growth of 10 per cent in 2008-09.
In 2007-08, it is said to have registered over 20 per cent growth. “MPA estimates indicate
STAR India posted operating income of around $80 million (about Rs 400 crore) in the last
fiscal year (2008-09) on sales of close to $440 million (about Rs 2,200 crore),” says the
report.
• The report terms STAR India’s growth as “disappointing” over the past year. “STAR’s
India operations have been hit by intense competition in Hindi entertainment and an
overall slowdown in the ad market, whose near-term recovery could be checked by a
depressing monsoon season,” it says. According to MPA, STAR India’s operating income
in 2007-08 was close to $95 million.
• The overall advertising revenue of STAR India may have declined by around 7-8 per cent
in 2008-09. However, its subscription revenue registered a high double-digit growth.
• The company have earned around Rs 850 crore-plus from subscription revenue in 2008-09,
compared to around Rs 550 crore-plus in 2007-08, a jump of over 55 per cent, while
maintaining its overall ad revenue for the 2009 fiscal.
• STAR India remains a highly profitable business, with decent growth exposure as it
secures a national footprint with the launch of new regional entertainment channels. MPA
analysts suggest that STAR India could be worth more than 1.6 billion in Ebitda (earnings
before interest, taxes, depreciation and amortisation) by the financial year ending June
2013.”

57
• According to Couto is based on more funding for its movie venture, Fox Star Studios, in
India. MPA also predicts STAR India’s home shopping joint venture with Korea’s CJ
Group will take shape, where both parties will invest $27.5 million each over three years.
• Hindi channels account for a major chunk of the TV advertising market. Screen Digest
believes that whilst the outlook for the top three or four Hindi-language channels in the
general entertainment space is good, ever-increasing competition and pressures on
advertising revenue will see some of the smaller channels either fold their operations or
merge with bigger channel groups. However, Screen Digest believes that the future growth
potential will be in regional channels - News Corporations’ Star TV is already looking to
tap into this market with a $100m investment.

CASE STUDY: VODAFONE

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Vodafone Essar, formerly known as Hutchison Essar is a cellular operator in India that
covers 23 telecom circles in India based in Mumbai. Vodafone Essar is owned by
Vodafone 67% and Essar Group 33%. It is the second largest mobile phone operator in
terms of revenue behind Bharti Airtel, and third largest in terms of customers. [3]

On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% held by
Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance
Communications, Hinduja Group, and Essar Group, which is the owner of the remaining
33%. The whole company was valued at USD 18.8 billion. The transaction closed on May
[4]

8, 2007. Despite the official name being Vodafone Essar, its products are simply branded
Vodafone. It offers both prepaid and postpaid GSM cellular phone coverage throughout
India with good presence in the metros.

Vodafone Essar provides 2.75G services based on 900 MHz and 1800 MHz digital GSM
technology, offering voice and data services in 23 of the country's 23 licence areas. It is
among the top three GSM mobile operators of India.

Previous brands

Initially around 1995 it was "MAX TOUCH"...then around 2000 it was ORANGE..... In
December 2006, Hutch Essar re-launched the "Hutch" brand nationwide, consolidating its
services under a single identity. The Company entered into an agreement with NTT
DoCoMo to launch i-mode mobile Internet service in India during 2007.

The company used to be named Hutchison Essar, reflecting the name of its previous
owner, Hutchison. However, the brand was marketed as Hutch. After getting the necessary

59
government approvals with regards to the acquisition of a majority by the Vodafone
Group, the company was rebranded as Vodafone Essar. The marketing brand was officially
changed to Vodafone on 20 September 2007. [5]

On September 20, 2007 Hutch became Vodafone in one of the biggest brand transition
exercises in recent times.

Vodafone Essar is spending somewhere in the region of Rs. 250 crores on this high-profile
transition being unveiled today.Along with the transition, cheap cell phones have been
launched in the Indian market under the Vodafone brand. The company also plans to
launch co-branded handsets sourced from global vendors as well.

A popular daily quoted a Vodafone Essar director as saying that "the objective is to
leverage Vodafone Group's global scale in bringing millions of low-cost handsets from
across-the-world into India."

Incidentally, China's ZTE, which is looking to set-up a manufacturing unit in the country,
is expected to provide several Vodafone handsets in India. Earlier this year, Vodafone
penned a global low-cost handset procurement deal with ZTE.

Ckallanges:

Vodafone's problems in the country could increase as the Indian telecommunications


regulator has recommended to the government that it charge incumbent telecom operators
a one-time fee for the 2G spectrum they hold beyond the limit of 6.2 MHz in their license
conditions. Vodafone Essar is one of the operators likely to be affected by the new charge
if it comes into force.

The Telecom Regulatory Authority of India (TRAI) has suggested that operators should be
charged for the additional spectrum at rates similar to those being bid in an ongoing
auction of 3G spectrum in India.

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Growth of Hutchison Essar (1992-2005)

In 1992 Hutchison Whampoa and its Indian business partner established a company that in
1994 was awarded a licence to provide mobile telecommunications services in Mumbai
(formerly Bombay) and launched commercial service as Hutchison Max in November
1995. Analjit Singh of Max still holds 12% in company.

In Delhi, UP (E), Rajasthan and Haryana, ESSAR was the major partner. But later Hutch
took the majority Stake.

By the time of Hutchison Telecom's Initial Public Offering in 2004, Hutchison Whampoa
had acquired interests in six mobile telecommunications operators providing service in 13
of India's 23 licence areas and following the completion of the acquisition of BPL that
number increased to 16. In 2006, it announced the acquisition of a company (Essar
Spacetel — A subsidiary of Essar Group) that held licence applications for the seven
remaining licence areas.

In a country growing as fast as India, a strategic and well managed business plan is critical
to success. Initially, the company grew its business in the largest wireless markets in
India — in cities like Mumbai, Delhi and Kolkata. In these densely populated urban areas
it was able to establish a robust network, well known brand and large distribution network
-all vital to long-term success in India. Then it also targeted business users and high-end
post-paid customers which helped Hutchison Essar to consistently generate a higher
Average Revenue Per User ("ARPU") than its competitors. By adopting this focused
growth plan, it was able to establish leading positions in India's largest markets providing
the resources to expand its footprint nationwide.

In February 2007, Hutchison Telecom announced that it had entered into a binding
agreement with a subsidiary of Vodafone Group Plc to sell its 67% direct and indirect
equity and loan interests in Hutchison Essar Limited for a total cash consideration (before
costs, expenses and interests) of approximately US$11.1 billion or HK$87 billion.

• 1992: Hutchison Whampoa and Max Group established Hutchison Max


• 2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets
through ESSAR acquisition

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• 2001: Won auction for licences to operate GSM services in Karnataka, Andhra
radesh and Chennai
• 2003: Acquired AirCel Digilink (ADIL — ESSAR Subsidiary) which operated in
Rajastan, Uttar Pradesh East and Haryana telecom circles and renamed it under
Hutch brand
• 2004: Launched in three additional telecom circles of India namely 'Punjab', 'Uttar
Pradesh West' and 'West Bengal'
• 2005: Acquired BPL (Except Mumbai)- 3 Circles, another mobile service provider
in India
• 2008: Vodafone acquired the Licence in remaining 7 circles and has started its
pending operations in Madhya Pradesh/Chhattisgarh with its headquarters at
Malviya Nagar, Bhopal as well as in Orissa, Assam, North East and Bihar
• 2008: Vodafone launched the Apple iPhone 3G to be used on its 17 circle 2.75G
network.
• Hutch was often praised for its award winning advertisements which all follow a
clean, minimalist look. A recurrent theme is that its message Hello stands out
visibly though it uses only white letters on red background. Another recent
successful ad campaign in 2003 featured a pug named Cheeka following a boy
around in unlikely places, with the tagline, Wherever you go, our network follows.
The simple yet powerful advertisement campaigns won it many admirers.
• 2009: Vodafone launched Recharge Online
• 2009: Vodafone Essar - 1st Indian Telecom operator to receive the Payment Card
Industry Security Standard (PCI DSS) certification for its Mumbai operations and
launches unlimited SMS offer in Mumbai. [6]

• 2010: Vodafone emerged as the most admired marketer in India. 2010: Vodafone
crossed 100 million subscribers in India

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RECENT DEVELOPMENTS

EU crisis hits FDI inflows

With the global markets reeling, India has emerged as one of the most attractive foreign
investment destinations. But Foreign Direct Investment (FDI) inflow figures for the month
of March 2010 and the financial year just ended suggest a different picture altogether.

According to Government sources FDI inflow into India has seen a drop not only in March
2010 but also over previous fiscal as a whole. Well, and the current European crisis is
threatening to impact the future outlook as well.

India may have become the third most attractive destination globally, but it sure isn't
attracting enough foreign moolah. According to government sources, FDI inflow into India
has seen a drop not only in March 2010 but also over previous fiscal as a whole.

The FDI for March 2010 was down 40 per cent at $ 1.2 billion in comparison to FDI in
March 2009 at $2 billion. In fact FDI inflow for FY09 -10 was down 5 per cent at $ 25.88
billion as against a total FDI inflow of $27.33 billion in FY09.

Commerce minister Anand Sharma said, “We are keeping a close watch on the European
crisis and the global economic situation shouldn't have too much of an impact for FDI
inflows next year.”

In fact, it’s the European financial crisis that could again see FDI into India turn sluggish
and that could be an ugly blow to the overall growth strategy of India, given that it is
heavily relying on foreign investments in key sectors like infrastructure to achieve the 8
per cent GDP growth target.

The commerce ministry, however, is leaving no stones unturned with plans to float as
many as six discussion papers on FDI including on sensitive sectors like defense and retail.

It’s all with the purpose of attracting more foreign moolah to keep to the growth trajectory
and attract another $100 billion in FDI by 2020.

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Curbs on FDI, lower purchasing power make India rank poor in retail list

India has moved five places up to 39th position in the list of most preferred markets for
retailers due to heightened interest from international companies in emerging markets,
according to a study which tracks the presence of top retailers worldwide. India moved to
the 39th position in 2009 from 44 in 2008. Nearly 22 per cent of retailers surveyed have
presence in India. The UK is number one destination for retailers, while countries such as
the UAE, the US, France and China are in subsequent positions, according to the study -
How global is the business of retail? - by international property consultant CB Richard
Ellis. The study maps the global presence of 294 top retailers across 269 countries.

According to Anshuman Magazine, chairman and managing director of CB Richard Ellis,


the restriction on foreign direct investment (FDI) and lower purchasing power of
consumers led to India's poor rank in the list. "If the government relaxes FDI norms, I feel
India's ranking will go up substantially. Given the country's size and business potential,
there is no reason why we cannot go up in the list," Magazine said.

Real estate is among the key factors for retailers to expand in the international markets.

100% FDI in multi-brand retail being considered


The commerce and industry ministry is likely to propose 100 per cent foreign direct
investment (FDI) in multi-brand retail, opening the doors to the likes of Wal-Mart and
Tesco, but will suggest stiff local sourcing requirements and mandatory investments in
backward linkages. Prime Minister Manmohan Singh recently said the country needed
greater competition and, therefore, needed to take a firm view on opening up of the retail
sector.

"We are preparing the paper that will be placed for public debate in some time," a senior
official of the department of industrial policy and promotion (DIPP), the nodal agency for
foreign investments told The Economic Times. The earlier view within the department was
to keep the FDI limit at 51 per cent, same as in the single-brand and cash & carry retail, but
a final decision on the proposed cap will be taken after deliberations with the consumer

64
affairs ministry, the nodal department for retail.

The paper is expected to make it mandatory for big multi-brand foreign retailers to create a
back-end cash & carry for small shopkeepers giving them the benefit of scale on the
sourcing side. The idea is that big multi-brand retail outlets should enable growth of small
retailers and not threaten their existence.

Mandatory domestic procurement will ensure improved returns for farmers while strong
back-end linkages will contribute to the development of food processing and cold chains in
the country, says the ET report.

FICCI SIGNS 3 COOPERATION AGREEMENTS WITH ITALIAN BODIES TO


BOOST FDI, ENHANCE BUSINESS COOPERATION & USE ARBITRATION
FOR DISPUTE SETTLEMENT

FICCI today signed three agreements with Italian organizations with a view to facilitating
direct foreign investment into India and Italy, enhance cooperation with Italian companies
and facilitate arbitration amongst Indian and Italian companies in the event of a business
dispute.

The three agreement were signed between 1. ‘Invest India’, a joint venture between the
Department of Industrial Policy & Promotion (DIPP), Government of India and FICCI, and
Invitalia, The Italian National Agency for Inward Investment Promotion and Enterprise
Development; 2. FICCI and SIMEST SpA )Societa Italian per Le Imprese All ‘Estero; and
3. FICCI Arbitration and Conciliation Tribunal (FACT) and the Chamber of Arbitration of
Milan.

The Memorandum of Intent (MoI) between ‘Invest India’ and Invitalia envisages the two
signatories to act as central points of contact for existing and potential foreign Investors

65
who seek opportunities for investment , face impediments to their investments, or seek
further information on applicable legislation and regulations, without derogating from and
other resources, contacts, or forums that might be available to provide such information.

The Cooperation Agreement between FICCI and SIMEST ApA aims at identifying the
possibility of cooperation in areas such as joint elaboration of studies in common interest
areas, specific seminars, and technical assistance which may contribute to mutual
cooperation specially in the field of SMEs.

The Cooperation Agreement between FACT and The Chamber of Arbitration of Milan
evisages, amongst others, popularizing ADR measures as a means of settling disputes
arising out of internal and international transactions and promoting the use of arbitration
and any other methods of international commercial dispute settlement such as ODR (online
dispute resolution) and ADR measures.

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STATASTICS

FOREIGN TECHNOLOGY TRANSFER (FTC):


(from August 1991 to December 2009)
A. Number of Cumulative FTC approvals:
No. of Cumulative FTC approvals 8,106
(from August’91 to December’09)

No. of FTC approvals during 2008-09 98


(from April’08 to March’09)

No. of FTC approvals during 2009-10 46


(from April’09 to December ’09)

COUNTRY- WISE FOREIGN TECHNOLOGY TRANSFER APPROVALS:


No. Of Technical %age with
Collaborations total tech.
Ranks Country approved approvals
1 USA 1,841 22.71
2 Germany 1,116 13.77
3 Japan 880 10.86
4 UK 876 10.81
5 Italy 489 6.03
6 Other Countries 2,904 35.82
Total of all Country 8,106 100

%ge with total tech. approvals

23%
USA
35%
Germany
Japan
UK
14% Italy
Other Countries
6% 11%
11%

SECTOR WISE FOREIGN TECHNOLOGY TRANSFER APPROVALS

67
No. of
%ge with
Technical
Ranks Sector total tech.
Collaborations
approvals
approved
Electrical Equipments
(Including computer
1 software & electronics) 1,263 15.58
Chemicals (other than
2 fertilizers) 905 11.16
3 Industrial Machinery 872 10.76
4 Transportation Industry 760 9.38
Misc. Mach.
5 Engineering Industry 444 5.48
6 Other sectors 3,862 47.64
Total of all Sectors 8,106 100

STATE WISE FOREIGN TECHNOLOGY TRANSFER APPROVALS


No. of
%ge with
Technical
Ranks Sector total tech.
Collaborations
approvals
approved
1 Maharashtra 1,397 17.23
2 Tamil Nadu 683 8.43
3 Gujarat 634 7.82
4 Karnataka 529 6.53
5 Haryana 369 4.55
6 Other States 4,494 55.44
Total of all States 8,106 100

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS

Amount USD in million


Ranks Country 2006-07 2007-08 2008-09 2009-10 Cumulative % of
Inflows total
April 2000 inflows

68
to Feb 2010
1 Mauritius 6363 11096 11208 9851 46715 43%
2 Singapore 578 3073 3454 2340 10151 9%
3 U.S.A. 856 1089 1802 1884 8,219 8%
4 U.K. 1878 1176 864 538 25455 5%
5 Netherlands 644 695 883 833 4421 4%
6 Cyprus 58 834 1287 1432 3705 3%
7 Japan 85 815 405 1171 3702 3%
8 Germany 120 514 629 587 2760 3%
9 U.A.E. 260 258 257 615 1535 1%
10 France 117 145 467 295 1522 1%
Total FDI Inflows 10959 19695 21256 19546 108185 -

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS


12000

10000
amount in US$

8000

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2006-07 2007-08 2008-09 2009-10

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOW

Amount in USD million


% to
2006- 2007- 2008- 2009- Cumulativ total
Rank Sector 07 08 09 10 e Inflows inflows
Service Sector
1 (Financial and Non- 4664 6615 6116 4185 23433 21%
financial)

69
Computer Software
2614 1410 1677 873 9827 9%
2 and Hardware
3 Telecommunication 478 1261 2558 2495 8872 8%
Housing and Real
4 Estate 467 2179 2801 2704 8216 8%
Construction
5 Activities 985 1743 2028 2810 8001 7%
6 Power 157 967 985 1336 4526 4%
Automobile
7 Industry 276 675 1152 1009 4398 4%
Metallurgical
8 Industry 173 1177 961 373 3096 3%
Petroleum and
9 Natural Gas 89 1427 412 223 2617 2%
Chemicals (other
10 205 229 749 346 2480 2%
than fertilizers)

% to total inflows Service Sector

(Financial and Non-financial)

6% 6% 4% 3% Computer Software and


10%
3% Hardware
12% Telecommunication

Housing and Real Estate

12% 31%
Construction Activities
13% 0%
Power

Automobile Industry

Metallurgical Industry

FDI INFLOWS FINANCIAL YEAR-WISE DATA:


(As per International Best Practices)
Amount USD million
Sr. Financial Foreign Direct Investment Investme
No Year Equity Re- other FDI Inflows nt by
FII's

70
FIPB
Route/ %
RBI's Total growth
invested
Auotomati Equity Capital capital FDI over
earnings
c route/ of Inflows previous
Acquisition unincorporated year
route bodies
1 2000-01 2,339 61 1,350 279 4,029 1,847
2 2001-02 3,904 191 1,645 390 6,130 (+) 52% 1,505
3 2002-03 2,574 190 1,833 438 5,035 (-) 18% 377
4 2003-04 2,197 32 1,460 633 4,322 (-)14% 10,918
5 2004-05 3,250 528 1,904 369 6,051 (+)40% 8,686
6 2005-06 5,540 435 2,760 226 8,961 (+)48% 9,926
7 2006-07 15,585 896 5,828 517 22,826 (+)146% 3,225
8 2007-08 24,573 2,291 7,696 292 34,835 (+)53% 20,328
9 2008-09 27,329 666 6,428 757 35,180 (+)01% -15,017
2009-10
(up to
10 Feb.'10) 24,495 1,155 5,958 1,445 33,053 - 23,841
160,42
Total 111,786 6,445 36,862 5,346 2 65,636

Reference

Books referred

71
• International Finance, by Mr. S. K. Vaze
• International Finance Management by Mr. V. K. Bhalla

Website referred
• Department of Industrial Policy & Promotion Ministry of Commerce and Industry
(www.dipp.nic.in, dipp.gov.in)
• Federation of Indian Chambers of Commerce and Industry (www.ficci.com)
• Indiainfoline (www.indiainfoline.com)
• SEBI (Sebi.gov.in)
• India Brand Equity Foundation www.ibef.org
• Reserve Bank Of India (www.rbi.org)
• indiabudget.nic.in
• www.coca-colacompany.com
• www8.hp.com/in
• www.newscorp.com

News Papers:
• Hindustan Times
• The Economic Times

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