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FOREIGN DIRECT INVESTMENT

IS BETTER THAN

FOREIGN INSTITUTIONAL INVESTMENT

Submitted By F10 Students:-


1.Siddharth Joshi (58)
2. Vikas Yadav (70)
3. Pushkar Gogia (44)
4. Gaurav Dua (18)
5. Akshat Ghai (02)

ACKNOWLEDGEMENT
We thank Prof. Pankaj Upadhaya in particular for assigning
us this topic and encouraging us to write in the first place.
We owe much to Prof. Pankaj Upadhaya for his helpful
comments.

We are indebted to all those who have been helpful


throughout the process of writing this Report, but as the
cliché goes, we are solely responsible for any remaining
errors of fact or judgment.
Foreign direct investment (FDI)
It is defined as a company from one country making a physical
investment into building a factory in another country. It is the
establishment of an enterprise by a foreigner.

Its definition can be extended to include investments made to


acquire lasting interest in enterprises operating outside of the
economy of the investor. The FDI relationship consists of a
parent enterprise and a foreign affiliate which together form an
international business or a multinational corporation (MNC)

International business
International business is a term used to collectively describe
topics relating to the operations of firms with interests in
multiple countries. In its simplest form, international business
occurs when a business sells its product or service to a
purchaser who lives in a different country, such as, through a
mail-order catalogue or by way of an e-commerce transaction.

Multinational Corporation
A multinational corporation (MNC) or transnational corporation
(TNC), also called multinational enterprise (MNE), is a
corporation or enterprise that manages production or delivers
services in more than one country. It can also be referred to as
an international corporation.

In order to qualify as FDI the investment must afford the parent


enterprise control over its foreign affiliate. The IMF defines
control in this case as owning 10% or more of the ordinary
shares or voting power of an incorporated firm or its equivalent
for an unincorporated firm; lower ownership shares are known
as portfolio investment.

History of FDI
Foreign direct investment (FDI) is a measure of foreign
ownership of productive assets, such as factories, mines and
land. Increasing foreign investment can be used as one measure
of growing economic globalization. Maps below show net
inflows of foreign direct investment as a percentage of gross
domestic products (GDP). The largest flows of foreign
investment occur between the industrialized countries (North
America, North West Europe and Japan). But flows to non-
industrialized countries are increasing.
US International Direct Investment Flows

Period FDI Outflow FDI Inflows Net


1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of


the economy and could be any one of the following:
1) an individual
2) a group of related individuals
3) an incorporated or unincorporated entity
4) a public company or private company
5) a group of related enterprises
6) a government body
7) an estate (law)
8) trust or other societal organization
9) any combination of the above

Methods of Foreign Direct Investments


The foreign direct investor may acquire 10% or more of the
voting power of an enterprise in an economy through any of
the following methods:
1) By incorporating a wholly owned subsidiary or company
2) By acquiring shares in an associated enterprise
3) Through a merger or an acquisition of an unrelated
enterprise
4) Participating in an equity joint venture with another
investor or enterprise

Foreign direct investment incentives may take the


following forms:
1) Low corporate tax and income tax rates
2) Tax holidays
3) Other types of tax concessions
4) Preferential tariffs
5) Special economic zones
6) Investment financial subsidies
7) Soft loan or loan guarantee
8) Free land or land subsidies
9) Relocation & expatriation subsidies
10) Job training & employment subsidies
11) Infrastructure subsidies
12) R&D support
13) Derogation from regulations (usually for very large
projects)
The importance of foreign direct investment
Foreign direct investment (FDI) provides a major source of
capital which brings with it up-to-date technology. It would
be difficult to generate this capital through domestic savings,
and even if it were not, it would still be difficult to import
the necessary technology from abroad, since the transfer of
technology to firms with no previous experience of using it
is difficult, risky, and expensive.
Over a long period of time FDI creates many externalities in
the form of benefits available to the whole economy which
the TNCs cannot appropriate as part of their own income.
These include transfers of general knowledge and of specific
technologies in production and distribution, industrial
upgrading, work experience for the labor force, the
introduction of modern management and accounting
methods, the establishment of finance related and trading
networks, and the upgrading of telecommunications services.
FDI in services affects the host country's competitiveness by
raising the productivity of capital and enabling the host
country to attract new capital on favorable terms. It also
creates services that can be used as strategic inputs in the
traditional export sector to expand the volume of trade and to
upgrade production through product and process innovation.

ADVANTAGES OF FDI

Attracting foreign direct investment has become 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, but on the other hand it is also
being blamed for ousting domestic inflows. FDI is also
claimed to have lowered few regulatory standards in terms of
investment patterns. The effects of FDI are by and large
transformative. 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 foreign direct investment. A remarkable
inflow of FDI in various industrial units in India has boosted
the economic life of country.

Trade –
Foreign Direct Investments 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 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 corners
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 spillover 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.

Disadvantages of FDI

The disadvantages of foreign direct investment occur mostly


in case of matters related to operation, distribution of the
profits made on the investment and the personnel. One of the
most indirect disadvantages of foreign direct investment is
that the economically backward section of the host country is
always inconvenienced when the stream of foreign direct
investment is negatively affected

The situations in countries like Ireland, Singapore, Chile and


China corroborate such an opinion. It is normally the
responsibility of the host country to limit the extent of
impact that may be made by the foreign direct investment.
They should be making sure that the entities that are making
the foreign direct investment in their country adhere to the
environmental, governance and social regulations that have
been laid down in the country.
The various disadvantages of foreign direct investment are
understood where the host country has some sort of national
secret – something that is not meant to be disclosed to the
rest of the world. It has been observed that the defense of a
country has faced risks as a result of the foreign direct
investment in the country.

At times it has been observed that certain foreign policies are


adopted that are not appreciated by the workers of the
recipient country. Foreign direct investment, at times, is also
disadvantageous for the ones who are making the investment
themselves.

Foreign direct investment may entail high travel and


communications expenses. The differences of language and
culture that exist between the country of the investor and the
host country could also pose problems in case of foreign
direct investment.

Yet another major disadvantage of foreign direct investment


is that there is a chance that a company may lose out on its
ownership to an overseas company. This has often caused
many companies to approach foreign direct investment with
a certain amount of caution.
At times it has been observed that there is considerable
instability in a particular geographical region. This causes a
lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host
country could be important factors in the case of the foreign
direct investment. In case the host country is not well
connected with their more advanced neighbors, it poses a lot
of challenge for the investors.

At times it has been observed that the governments of the


host country are facing problems with foreign direct
investment. It has less control over the functioning of the
company that is functioning as the wholly owned subsidiary
of an overseas company.

This leads to serious issues. The investor does not have to be


completely obedient to the economic policies of the country
where they have invested the money. At times there have
been adverse effects of foreign direct investment on the
balance of payments of a country. Even in view of the
various disadvantages of foreign direct investment it may be
said that foreign direct investment has played an important
role in shaping the economic fortunes of a number of
countries around the world.

Foreign Institutional Investor (FII)

Foreign Institutional Investor (FII) is used to denote an


investor - mostly of the form of an institution or entity,
which invests money in the financial markets of a country
different from the one where in the institution or entity was
originally incorporated.
FII investment is frequently referred to as hot money for the
reason that it can leave the country at the same speed at
which it comes in.
In countries like India, statutory agencies like SEBI have
prescribed norms to register FIIs and also to regulate such
investments flowing in through FIIs. In 2008, FIIs
represented the largest institution investment category, with
an estimated US$ 751.14 billion.
FEMA norms include maintenance of highly rated bonds
(collateral) with security exchange.

History of FII

The Year 2004 has been the most remarkable year in the
history of Indian capital markets with the BSE Sensitive
Index closing at another record high and FII Flows at over
$8.6 billion, a 13.7 per cent growth over previous record
year. It is particularly interesting to note that India attracted
30 per cent of the foreign flows that washed the shores of the
Asia Pacific region during 2004.At a time when India
witnessed a major election reversal and a lean monsoon
season. This is a testament to the resilience of the Indian
economy and its well managed corporate sector which
continues to show a high earnings growth compared to the
peers in the Asia Pacific region. In addition the following
factors contributed significantly to the FII flows to India.

• Regulation and Trading Efficiencies:


Indian stock markets have been well regulated by the stock
exchanges, SEBI and RBI leading to high levels of
efficiency in trading, settlements and transparent dealings
enhancing the confidence level of FIIs in increasing
allocations to India.

• F and O Segment:
The highly successful derivatives market in India has
provided additional depth to the markets with high traded
volumes and multiple instruments by which investors can
participate in the Indian equity markets. In fact the Single
Stock Futures (SSF) market in India is one of the most
successful SSF market in Asia after Korea.

• New Issuance: We have witnessed extremely high quality


issuance during the year from companies such as NTPC,
ONGC and TCS leading to strong FII participation with
successful new issuance of over $ nine billion, yet another
record for the year.

Importance of FII
Post 1991, our country has succeeded in striking the right
chord with foreign investors, though the pace of such
development was slow. FII money flowing into the Indian
stock markets is definitely not a new phenomenon, and
much is written about this issue in the media and academia.
Basically the coefficient was very low at 0.18, which can
hardly be said to be a strong correlation. Further, I also ran a
regression between the two variables, and found that FII
flows explain only 3% of the Sensex movements. However,
this 3% was STATISTICALLY significant.

It's a bit difficult to reach at a final conclusion when such


issues are concerned. I personally feel that we do at times
over-react to FII flows. However, FIIs are more than just
money. They represent something unquantifiable known as
investors' sentiment. I guess thats why we get a bit anxious
when there are sudden FII outflows, since such behavior
may reflect a change in investor sentiment.

Macro-economic importance of FII flows for India

A survey of literature on portfolio investments revealed the


importance of such investments for a developing economy
like India’s. Foremost, FII investments are non-debt creating
flows, also a reason why Indian policy makers sought to
liberalize such flows in the wake of the BoP crisis in 1990-
91. Theoretically, FII investments bring in global liquidity
into the equity markets and raise the price-earning ratio and
thereby reduce the cost of capital domestically. FII inflows
help supplement domestic savings and smoothen inter-
temporal consumption. Studies indicate a positive
relationship between portfolio flows and the growth
performance of an economy, though such specific studies for
India were not found.

India, in the recent past few years seems to have received a


disproportionately large part of its foreign investment flows
via the FII investments in the equity markets. While in the
last three years the average share of FII in the total foreign
investments was above 70%, this is almost double the
average share of around 36% of FII investments in the three
years of FY01 to FY03. More so, FII inflows have
significantly contributed to the Balance of Payments surplus
in the last three years. Our analysis indicates that FII inflows
as a percentage of the BOP surplus was at around 35% in the
most recent last three years while the average from FY95 to
FY03 had been only around 4.5%. Exhibit 3 also indicates
that FII inflows had significantly contributed to the sharp
increase in the foreign exchange reserves of the economy.

The large build-up of foreign exchange reserves through FII


inflows poses a potential threat of destabilization of the
economy. Portfolio flows are most often referred to as “hot
money” that can be notoriously volatile when compared to
other forms of capital flows. The Mexican crisis and the East
Asian crisis are classic examples of the damage that sudden
outflows of portfolio money can do to an economy.

Without immediately implicating any significant withdrawal


of funds out of India of crisis precipitating proportions, it
needs to be noted that outflows of FII capital from the
market could adversely impact the value of the Indian
currency, as FII inflows form the most significant part of
foreign inflows into the economy. Indeed, the recent soft
trends in FII inflows in May had led the Indian currency to
depreciate against the US dollar The risk of a large
depreciation is even more as we are in a situation where the
higher international price of crude oil has led to a significant
weakening of the current account deficit. In other words, in
the event of a significant tapering off of FII inflows, $/Re
could depreciate sharply in consonance to a widening current
account deficit, as the other forms of capital inflows into the
economy are not significant enough.
There are likely to be repercussions on the growth
momentum of the Indian economy if FII inflows
significantly slow down. This is because a large extent of
buoyancy in consumption was possible due to the positive
wealth effects of a booming stock market and a decline in
the interest rates due to a large overhang of rupee liquidity in
the system (also a byproduct of large FII inflows over the
last few years). Therefore, if FII inflows were to slow down,
it will reduce the wealth generated by the stock market, the
Indian currency will depreciate and RBI will have to draw
down on the foreign exchange reserves or hike interest rates
to prevent wild swings in the exchange rate.

Restrictions faced by FII in India -


FIIs can buy/sell securities on Indian stock exchanges, but
they have to get registered with stock market regulator Sebi.
They can also invest in listed and unlisted securities outside
stock exchanges if the price at which stake is sold has been
approved by RBI.

No individual FII/sub-account can acquire more than 10% of


the paid up capital of an Indian company. All FIIs and their
sub-accounts taken together cannot acquire more than 24%
of the paid up capital of an Indian Company, unless the
Indian Company raises the 24% ceiling to the sectoral cap or
statutory ceiling as applicable by passing a board resolution
and a special resolution to that effect by its general body in
terms of RBI press release of September 20, 2001 and
FEMA Notification No.45 of the same date.

In addition, the government also introduces new regulations


from time to time to ensure that FII investments are in order.
For example, investment through participatory notes (PNs)
was curbed by SEBI recently.
FDI’ S are better than FII’S are shown by answering
following Questions.

Q.1 How does the Indian government classify foreign


investment?
The Indian government differentiates cross-border capital
inflows into various categories like foreign direct investment
(FDI), foreign institutional investment (FII), non-resident
Indian (NRI) and person of Indian origin (PIO) investment.
Inflow of investment from other countries is encouraged
since it complements domestic investments in capital-scarce
economies of developing countries, India opened up to
investments from abroad gradually over the past two
decades, especially since the landmark economic
liberalization of 1991.
Apart from helping in creating additional economic activity
and generating employment, foreign investment also
facilitates flow of technology into the country and helps the
industry to become more competitive.

Q.2 Why does the government differentiate between


various forms of foreign investment?
FDI is preferred over FII investments since it is considered to
be the most beneficial form of foreign investment for the
economy as a whole.

Direct investment targets a specific enterprise, with the aim


of increasing its capacity/productivity or changing its
management control. Direct investment to create or augment
capacity ensures that the capital inflow translates into
additional production. In the case of FII investment that
flows into the secondary market, the effect is to increase
capital availability in general, rather than availability of
capital to a particular enterprise.

Translating an FII inflow into additional production depends


on production decisions by someone other than the foreign
investor — some local investor has to draw upon the
additional capital made available via FII inflows to augment
production. In the case of FDI that flows in for the purpose of
acquiring an existing asset, no addition to production
capacity takes place as a direct result of the FDI inflow.

Just like in the case of FII inflows, in this case too, addition
to production capacity does not result from the action of the
foreign investor – the domestic seller has to invest the
proceeds of the sale in a manner that augments capacity or
productivity for the foreign capital inflow to boost domestic
production. There is a widespread notion that FII inflows are
hot money — that it comes and goes, creating volatility in the
stock market and exchange rates.
While this might be true of individual funds, cumulatively,
FII inflows have only provided net inflows of capital. FDI
tends to be much more stable than FII inflows.
Moreover, FDI brings not just capital but also better
management and governance practices and, often, technology
transfer. The know-how thus transferred along with FDI is
often more crucial than the capital per se. No such benefit
accrues in the case of FII inflows, although the search by FIIs
for credible investment options has tended to improve
accounting and governance practices among listed Indian
companies.
According to the Prime Minister’s Economic Advisory
Committee, net FDI inflows amounted to $8.5 billion in
2006-07 and is estimated to have gone up to $15.5 billion in
07-08 . The panel feels FDI inflows would increase to $19.7
billion during the current financial year. FDI up to 100% is
allowed in sectors like textiles or automobiles while the
government has put in place foreign investment ceilings in
the case of sectors like telecom (74%). In some areas like
gambling or lottery, no foreign investment is allowed.
According to the government’s definition, FIIs include asset
management companies, pension funds, mutual funds,
investment trusts as nominee companies,
incorporated/institutional portfolio managers or their power
of attorney holders, university funds, endowment
foundations, charitable trusts and charitable societies.

FIIs are required to allocate their investment between equity


and debt instruments in the ratio of 70:30. However, it is also
possible for an FII to declare itself a 100% debt FII in which
case it can make its entire investment in debt instruments.
The government allows greater freedom to FDI in various
sectors as compared to FII investments. However, there are
peculiar cases like airlines where foreign investment,
including FII investment, is allowed to the extent of 49%,
but FDI from foreign airlines is not allowed.

How FDI helping Indian Economy

FDI usually is associated with export growth. It comes only


when all the criteria to set up an export industry are met.
That includes, reduced taxes, favorable labor law, freedom to
move money in and out of country, government assistance to
acquire land, full grown infrastructure, reduced bureaucratic
involvement etc. IT, BPO, Auto Parts, Pharmaceuticals,
unexplored service sectors including accounting; drug
testing, medical care etc are key sectors for foreign
investment. Manufacturing is a brick and mortar investment.
It is permanent and stays in the country for a very long time.
Huge investments are needed to set this industry. It provides
employment potential to semi skilled and skilled labor. On
the other hand the service sector requires fewer but highly
skilled workers. Both are needed in India. Conventional
wisdom is that China will have an upper hand in
manufacturing for a long time. If India plays its cards right
India may be the hub for the service sector. Still high end
manufacturing in auto parts and pharmaceuticals should be
India’s target.

The FII (Foreign Institutional Investor) is monies, which


chases the stocks in the market place. It is not exactly brick
and mortar money, but in the long run it may translate into
brick and mortar

Period 1998 to 2004


It is period of greatest improvement in the Indian economy
and its perception abroad. The economy grew at 6.5% with
an occasional burst of 8% in 2003. The foreign money
managers started to look at India favorably. Political
instability diminished a bit. Constrictions to the growth were
slowly removed or reduced. That allowed the Foreign Direct
Investment (FDI) to increase. A total of about $3.5 Billion in
FDI has reached India in 2004. It compares unfavorably with
China, which received $50 Billion, but it is three times
higher than what India received in 1998.
The economy today is performing better than it has ever
performed in last 50 years. Still it is not performing at its full
potential. Additional outside investment is needed and
needed now to reach its stated 8% growth potential.

How much FDI and FII India Needs


Economists believe that additional $20 Billion a year for
next ten years will drive up GDP growth additional 2 –3%
from the current level of 6.5 –8%. If these monies arrive in
form of FDI, it is good for the country. If it arrives in form of
FII, it is still good, but it has to be controlled. Internal
resources and withdrawal from foreign reserves, trade loans,
long term financing from World Bank etc. will add
additional luster to the investment plans.
All the above will happen, if the planned structural changes
to the Indian economy are concurrently made and country’s
bureaucratic structure is made investor friendly. Other
legislative changes needed to ensure the safety of investor’s
money are made concurrently. The recent changes in India’s
patent rules and regulation are steps in the right direction.
All in all India has to become investor friendly. It is need of
the hour. Left leaning politics will not help. Opportunism in
politics, which endangers the welfare of the people, is to be
thoroughly discouraged.

FDI will increase in insurance sector by US$ 0.46 billion


The Associated Chambers of Commerce and Industry of
India (ASSOCHAM) has projected that foreign direct
investment (FDIs) will increase in insurance sector by US$
0.46 billion in next 2 years and likely to touch US$ 0.96
billion as it is still regulated.
A paper on FDI’s Prospects in Insurance Sector brought out
by the ASSOCHAM says that currently the total insurance
market in India is about US$ 30 billion, in which the element
of FDI’s is US$ 0.5 billion. This is 1.6% of total insurance
business in India.
Despite, insurance being a highly regulated sector, however,
in the first five months of current calendar, i.e. between
January to May, it could attract FDI’s of US$ 217.97 million
which by any standard is not too insignificant.
Releasing the Paper, the ASSOCHAM President, Mr. Sajjan
Jindal said that if the insurance sector is opened up to an
extent of 49% for FDI’s, in next 2 years, i.e. by 2010, the
Chamber expects that FDI’s contribution to insurance
business would touch nearly US$ 2 billion. Currently, only
26% of FDI’s are permitted in insurance sector.
The reason for this is that the domestic insurance sector has
been growing at an average speed of nearly 200% and that is
why the ASSOCHAM is of the view that by 2012, the total
insurance business would touch US$ 60 billion size.

In the US$ 30 billion insurance business, nearly 29 insurance


companies are taking part of which 14 are in private life
insurance sector, 9 private non-life insurance sector and 6
public sector insurance companies. Mr. Jindal said that in the
life insurance sector particularly on FDI’s front, the growth
that has taken between 2006 and 2007 is estimated to be
around 270%. This itself speaks the significance and
importance, investors are attaching to both life insurance and
non-life insurance sector.
Opening the FDI in the insurance sector would be good for
the consumers, in a lot of ways. Increasing FDI limit would
affect a lot of industries in a positive way and that we could
even do without the FDI in many other sectors for some for
example in real estate.
India’s insurance market lags behind other economies in the
baseline measure of insurance penetration. At only 3.1%,
India is well behind the 12.5% for the UK, 10.5% for Japan,
10.3% for Korea and 9.2% for the US. Currently, FDI
represents only Rs.827 core of the Rs.3179 crore
capitalizations of private life insurance companies.
FDI in insurance would increase the penetration of insurance
in India, where the penetration of insurance is abysmally low
with insurance premium at about 3% of GDP against about
8% global average. This would be better through marketing
effort by MNCs, better product innovation, consumer
education etc.
FDI can meet India’s long term capital requirements to fund
the building of infrastructures. Infrastructure or the lack of it
has been the brake, which have hindered the leap of the
Indian economy. Despite shortcomings, Indian economy has
come a long way but every industry leader would crib at the
infrastructure bottlenecks that they have face everyday in
their effort for growth.
Insurance sector has the capability of raising long term
capital from the masses as it is the only avenue where people
put in money for as long as 30 years even more. An increase
in FDI in insurance would indirectly be a boon for the Indian
economy, the investments not withstanding but by making
more people invest in long term funds to fuel the growth of
the Indian economy.

Some articles given below give us an idea how FDI is


good for an Indian economy.

The improved sentiment for the country's economic outlook


backed by strong political mandate and fiscal reforms is
expected to help India enhance its overall share in capital
flows marked for emerging markets. Despite the global
slowdown, India has managed to display resilience and
attract good investments.
The foreign direct investment (FDI) inflows during 2008-09
(from April 2008 to March 2009) stood at approx. US$ 27.3
billion, according to the latest data released by Department
of Policy and Promotion (DIPP). FDI inflows for the last
quarter alone of 2008-09 stood at approx. US$ 6.2 billion.
Mauritius was the highest contributor to FDI inflows for the
fiscal year 2008-09 totalling almost US$ 11.2 billion, while
services sector including financial and non-financial services
attracted the maximum amount of US$ 6.1 billion during the
same period.
Further, India achieved a substantial 85.1 per cent increase in
foreign direct investment flows in calendar year 2008—the
highest increase across all countries—even as global flows
declined by 14.5 per cent, as per an UNCTAD study
–‘Assessing the impact of the current financial and economic
crisis on global FDI flows’. The study also estimates that the
FDI investments into India went up from US$ 25.1 billion in
calendar 2007 to US$ 46.5 billion in calendar 2008. It also
noted that some large emerging economies, such as Brazil,
China and India, still remain favourable locations for FDI,
particularly market-seeking FDI.
A trade facilitation body UK-India Business Council
(UKIBC) survey has ranked Pune as the most suitable place
for British investments in India. The survey report, titled
‘Opportunities for UK Plc in Emerging Cities in India’, also
rated eight other cities—Ahmedabad, Chandigarh, Jaipur,
Goa, Indore, Kochi, Nagpur and Vadodara—as the most
conducive destinations for UK investments in India.
The Indian retail market, which is the fifth largest retail
destination globally, has been ranked the most attractive
emerging market for investment in the retail sector by A T
Kearney's annual Global Retail Development Index (GRDI),
in 2009. A recent Ernst & Young study predicts Mumbai and
Bangalore to be the next global centres of investment along
with Shanghai
Government Initiatives
In India, currently after the policy changes in February 2009,
many sectors in manufacturing are open to 100 per cent FDI
under the automatic route. FDI is allowed up to 100 per cent
in all these industries except defence production where it is
capped at 26 per cent. FDI is not allowed in a few services
including retail trading (except single brand), lottery
business and gambling. In the permitted services, foreign
equity is allowed below 50 per cent.
FDI is currently allowed only up to 49 per cent in scheduled
air transport services or domestic passenger airlines.
Broadcasting services also have similar rules. Uplinking of
non-news television channels is the only broadcasting
service permitted to have 100 per cent FDI after clearance by
the Foreign Investment Promotion Board (FIPB). Majority
foreign equity is not allowed in cable television networks
and direct-to-home (DTH) operations. FDI is allowed only
up to 26 per cent in print media.
FDI is allowed up to 74 per cent in financial services such as
private banks. Insurance, however, can get FDI only up to 26
per cent. Minority foreign equity up to 49 per cent is
permitted in asset reconstruction companies (ARCs), stock
exchanges, depositories, clearing corporations and
commodity. Except for ARCs, the FDI space is capped at 26
per cent for these sectors. In telecommunication services—
both basic and cellular—although FDI up to 74 per cent is
allowed, only 49 per cent is allowed under automatic route
with the rest requiring approval from FIPB.
The new Commerce and Industry Minister, Mr Anand
Sharma, has ruled out any “comprehensive” review of the
new foreign direct investment (FDI) policy but said that the
government will continue to study the pros and cons of the
impact of the policy especially in retail sector. The
Department of Economic Affairs (DEA) and the Reserve
Bank of India (RBI) had recently commented on the
implications of the new FDI norms mandated by Press Notes
2, 3 and 4, stating that review was required in certain
restricted sectors like telecom and retail.

Investments Scenario
Among 23 FDI (foreign direct investment) proposals worth
US$ 119.6 million cleared by the Government recently are
Damas LLC’s (single-brand retail) plans to establish a joint
venture company with Gitanjali Lifestyle Ltd for retail
trading of jewellery and related accessories, Lazard India
Mauritius’s FDI contribution of US$ 26.5 million, FT
Singapore’s plans to make investment up to 100 per cent in
the issued and paid-up capital of Financial Times India, FIM
Bank, Malta (US$ 5.3 million FDI), Era Infra Engineering
(US$ 7.4 million) and Hyatt Group company – HP India
Holdings Ltd, Mauritius’s plans to establish hotels, in a joint
venture with Emaar MGF for US$ 26.5 million.
• As India does not allow FDI into multi-brand retail,
mega US stores such as Wal-Mart have entered the
country only for wholesale trading known as 'Cash and
Carry'.
• Hyatt Group Company – HP India Holdings has tied up

with Emaar MGF to form ‘Aashirwad Conbuild Ltd’,


which will have foreign equity at 26 per cent
corresponding to an investment of US$ 26.5 million-
US$ 31.8 million over the next five years, while the 74
per cent will be held by Indian partner.
• The Bharti Wal-Mart joint venture has finally opened its

first cash-and-carry store, nearly two years after


announcing its plans, and intends to open 15 such
wholesale stores in the next three years.
• Two European retail majors, Tesco and Carrefour, have
announced similar plans while the German group Metro
has already established an Indian presence.
• The entry of foreign companies into retailing has been
restricted so far to single brand stores such as Reebok
and Benetton.
• Dow Jones & Co Inc is pumping in foreign direct
investment of US$ 458,114 in setting up the wholly
owned subsidiary in India.
• Renault-Nissan Automotive India, a 50:50 joint venture

floated for a passenger car project in Chennai, is eyeing


5.7 per cent of the market share in India by 2012,
according to Colin Dodge, Executive Vice President,
Nissan.
• PepsiCo is doubling its investment in its Indian beverage
business for calendar 2009 to over US$ 220 million to
increase the capacity of the business.
• Bosch will maintain its India focus and the company has
recently made a commitment of US$ 27.1 million to set
up manufacturing units for electronic control units
(ECU).