FOREIGN INVESTMENT AS A BOON TO

ECONOMIC DEVELOPMENT
MASTER OF COMMERCE
PART 1
SEMESTER II
(2015-16)

SUBMITTED BY:
Akshata Ravindra Gawand
ROLL NO.8
GUIDE NAME :
Prof. Dr. P Murugesan

VIVEKANAND EDUCATION SOCIETYS

COLLEGE OF ARTS, SCIENCE & COMMERCE
Sindhi Society, Chembur , Mumbai- 400071.
1

FOREIGN INVESTMENT AS A BOON TO

ECONOMIC DEVELOPMENT

MASTER OF COMMERCE
PART 1
SEMESTER II
Submitted
In Partial Fulfillment of the requirements
For the Award of the Degree of
Master of Commerce
By
AKSHATA . R . GAWAND
8
VIVEKANAND EDUCATION SOCIETYS COLLEGE OF
ARTS, SCIENCE & COMMERCE
Sindhi Society, Chembur, Mumbai- 400071.
2

VIVEKANAND EDUCATION SOCIETYS

COLLEGE OF ARTS, SCIENCE & COMMERCE
Sindhi Society, Chembur, Mumbai- 400071

CERTIFICATE
This is to certify that Shri/Miss Akshata Ravindra Gawand
M.Com.

Accountancy

Semester

II

(2015-16)

has

successfully completed the project on Foreign Investment as

a Boon to Economic Development under the guidance of
Prof. Dr. P. Murugesan

Course Coordinator

Principal

Project Guide/ Internal Examiner

External Examiner

DECLARATION

I, Akshata Ravindra Gawand , the student of M.Com.

(Accountancy) Semester II (2015-16) hereby declare that I have
completed this Project on Foreign Investment as a Boon to
Economic Development.
The information submitted is true and original to the best of my
knowledge.

_____________________
Students Signature
Akshata Gawand
8

Acknowledgement

First of all immensely and wholeheartedly I thank God and also my parents for
giving me this opportunity for successful completion of my project work . Also I
thank the management for giving us a chance for doing this course. I wish to
express my sincere thanks to all my teachers, for the continuous and creative ideas,
given during my studies and also for this project .I am deeply indebted to my
mentor,

my

guide and

my

respected

teacher

Mr.

Prof.

Dr.

P.

Murugesan , for his patience, valuable inputs, motivations toperform more better a
nd his instincts support without which the
project work would not have completed .I am extremely indebted to the internet
technology for the valuable help rendered to me by providing the necessary
materials and support needed for the preparation of this project work.

Research Methodology

The information collected is from secondary data.

Secondary Sources :
Secondary data is a data which is collected and complied for
different purpose, which is used in research for the study. The secondary
data includes material collected from internet, newspaper, books and
magazines.

Executive Summary
Foreign institutional investors have gained a significant role in Indian
capital markets. Availability of foreign capital depends on many firm specific
factors other than economic development of the country. In this context this paper
examines the contribution of foreign institutional investment particularly among
companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also
examined is the relationship between foreign institutional investment and firm
specific characteristics in terms of ownership structure, financial performance and
stock performance. It is observed that foreign investors invested more in
companies with a higher volume of shares owned by the general public. The
promoters holdings and the foreign investments are inversely related. Foreign
investors choose the companies where family shareholding of promoters is not
substantial. Among the financial performance variables the share returns and
earnings per share are significant factors influencing their investment decision.
Indias consumer market has experienced unprecedented growth in the last
decade. This trend is expected to continue, and India would likely to emerge as one
of the fastest-growing economies1 in the world. A favorable demographic profile
and rising income levels would be the key drivers of this inclusive growth. As a
result, the US$500-billion Indian retail market is expected to grow at a CAGR of
12% to reach a value of US$900 billion by 2017. The relevant organized market,
which is currently valued at US$35 billion, is expected to grow at a CAGR of 21%,
7

to reach a size of US$90 billion by 2017. The Indian organized retail market is in
the growth phase, and the associated stakeholders retailers, consumers, vendors,
mall operators and regulatory bodies are evolving simultaneously.

INDEX
Serial No.
1
2
3
4
5
6
7
8
9
10

Particulars
Introduction
Objective
Purpose
History
Definition of Foreign Direct Investment
India
The Present Banking Scenario
Positive Effects of Foreign Investment
FDI Scenario in India
Conclusion

Pg.No.
9
11
11
12
14
17
26
31
40
42

11

Bibliography

43

1. Introduction
With strong governmental support, FDI has helped the Indian economy grow
tremendously. But with $34 billion in FDI in 2007, India gets only about 25% of
the FDI in China.
Foreign direct investment (FDI) in India has played an important role in the
development of the Indian economy. FDI in India has in a lot of ways enabled
India to achieve a certain degree of financial stability, growth and development.
This money has allowed India to focus on the areas that needed a boost and
economic attention, and address the various problems that continue to challenge
the country.
India has continually sought to attract FDI from the worlds major investors. In
1998 and 1999, the Indian national government announced a number of reforms
designed to encourage and promote a favorable business environment for
investors.
FDIs are permitted through financial collaborations, through private equity or
preferential allotments, by way of capital markets through euro issues, and in joint
ventures. FDI is not permitted in the arms, nuclear, railway, coal or mining
industries.
A number of projects have been implemented in areas such as electricity
generation, distribution and transmission, as well as the development of roads and
highways, with opportunities for foreign investors.
The Indian national government also granted permission for FDIs to provide up to
100% of the financing required for the construction of bridges and tunnels, but
with a limit on foreign equity of INR 1,500 crores, approximately $352.5 million.
9

Currently, FDI is allowed in financial services, including the growing credit card
business. These also include the non-banking financial services sector. Foreign
investors can buy up to 40% of the equity in private banks, although there is
condition that these banks must be multilateral financial organizations. Up to 45%
of the shares of companies in the global mobile personal communication by
satellite services (GMPCSS) sector can also be purchased.
In 2007, India received $34 billion in FDI, a huge growth compared to the previous
years, but significantly less than the $134 billion that flowed into China. Although
the Chinese approval process is complex, China continues to outshine India as a
choice destination for foreign investors. Why does India, a country with resources
and a skilled workforce, lag so far behind China in FDI amounts?
Bottom of Form
Physical infrastructure is the biggest hurdle that India currently faces, to the extent
that regional differences in infrastructure concentrates FDI to only a few specific
regions. While many of the issues that plague India in the aspects of
telecommunications, highways and ports have been identified and remedied, the
slow development and improvement of railways, water and sanitation continue to
deter major investors.
Federal legislation is another perverse impediment for India. Local authorities in
India are not part of the approval process and the large bureaucratic structure of the
central government is often perceived as a breeding ground for corruption. Foreign
investment is seen as a slow and inefficient way of doing business, especially in a
paperwork system that is shrouded in red tape

10

2. Objective:
The objective of this thesis is to investigate the causal relationship between foreign
direct investment (FDI) and economic growth. The topic is in fact quite old and has
been discussed by researchers for the last 3 decades. Interest in this area has been
revived in recent years largely due to the recognition that the economy's openness
and international capital inflows (particularly FDI) play an increasing role in
promoting economic growth in developing countries.

3. Purpose:
Further, in cases of FDI, the investors purpose is to gain an effective voice in the
management of the enterprise. The foreign entity or group of associated entities
that makes the investment is termed the "direct investor". The unincorporated or
incorporated enterprise-a branch or subsidiary, respectively, in which direct
investment is made-is referred to as a "direct investment enterprise". Some degree
of equity ownership is almost always considered to be associated with an effective
voice in the management of an enterprise; the BPM5 suggests a threshold of 10 per
cent of equity ownership to qualify an investor as a foreign direct investor.
The main purpose of this note is to deal with methodological aspects related to
Foreign Direct Investment (FDI) from the viewpoint of the Balance of Payments
and the International Investment Position (IIP). Special attention is paid to the
financial system both as a sector investing directly abroad (home perspective) and
receiving investment (host perspective). The note clarifies concepts such as direct
investor, direct investment enterprise (subsidiary, associate and branch) and
describes the different sector breakdowns available and what they imply for
financial sector FDI

11

1) To highlight the impact of FDI on the modern retail sector in India. 2) To

identify the impact of FDI on the overall development of Indian economy and its
infrastructure.

4. History
The economic liberalization in India refers to ongoing economic reforms in India
that started on 24 July 1991. After Independence in 1947, India adhered to socialist
policies. Attempts were made to liberalize economy in 1966 and 1985. The first
attempt was reversed in 1967. Thereafter, a stronger version of socialism was
adopted. Second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The
process came to a halt in 1987, though 1966 style reversal did not take place. In
1991, after India faced a balance of payments crisis, it had to pledge 20 tons of
gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a
bailout deal with the International Monetary Fund (IMF). In addition, the IMF
required India to undertake a series of structural economic reforms. As a result of
this requirement, the government of P. V. Narasimha Rao and his finance minister
Manmohan Singh (currently the Prime Minister of India) started breakthrough
reforms, although they did not implement many of the reforms the IMF wanted.
The new neo-liberal policies included opening for international trade and
investment, deregulation, initiation of privatization, tax reforms, and inflationcontrolling measures. The overall direction of liberalization has since remained the
same, irrespective of the ruling party, although no party has yet tried to take on
powerful lobbies such as the trade unions and farmers, or contentious issues such
as reforming labor laws and reducing agricultural subsidies. Thus, unlike the
reforms of 1966 and 1985 those were carried out by the majority Congress
governments, the reforms of 1991 carried out by a minority government proved
sustainable.
12

India in 1997 allowed foreign direct investment (FDI) in cash and carry wholesale.
Then, it required government approval. The approval requirement was relaxed, and
automatic permission was granted in 2006. Between 2000 to 2010, Indian retail
attracted about $1.8 billion in foreign direct investment, representing a very small
1.5% of total investment flow into India.
Indian retail has experienced limited growth, and its spoilage of food harvest is
amongst the highest in the world, because of very limited integrated cold-chain and
other infrastructure. India has only 5386 stand-alone cold storages, having a total
capacity of 23.6 million metric tons. However, 80 percent of this storage is used
only for potatoes. The remaining infrastructure capacity is less than 1% of the
annual farm output of India and grossly inadequate during peak harvest seasons.
This leads to about 30% losses in certain perishable agricultural output in India, on
average, every year.
Indian laws already allow foreign direct investment in cold-chain infrastructure to
the extent of 100 percent. There has been no interest in foreign direct investment in
cold storage infrastructure build out. Experts claim that cold storage infrastructure
will become economically viable only when there is strong and contractually
binding demand from organized retail. The risk of cold storing perishable food,
without an assured way to move and sell it, puts the economic viability of
expensive cold storage in doubt. In the absence of organized retail competition and
with a ban on foreign direct investment in multi-brand retailers, foreign direct
investments are unlikely to begin in cold storage and farm logistics infrastructure.
India has had years of debate and discussions on the risks and prudence of
allowing innovation and competition within its retail industry. Numerous
economists repeatedly recommended to the Government of India that legal
13

restrictions on organized retail must be removed, and the retail industry in India
must be opened to competition. For example, in an invited address to the Indian
parliament in December 2010, Jagdish Bhagwati, Professor of Economics and Law
at the Columbia University analyzed the relationship between growth and poverty
reduction, then urged the Indian parliament to extend economic reforms by freeing
up of the retail sector, further liberalization of trade in all sectors, and introducing
labor market reforms. Such reforms Professor Bhagwati argued will accelerate
economic growth and make a sustainable difference in the life of Indias poorest.,

5. Definition of Foreign Direct Investment

A foreign direct investment (FDI) is a controlling ownership in a business
enterprise in one country by an entity based in another country.
Foreign direct investment is distinguished from portfolio foreign investment, a
passive

investment

in

the

securities

of

another

country

such

as

public stocks and bonds, by the element of "control". Moreover, control of

technology, management, even crucial inputs can confer de facto control."
The origin of the investment does not impact the definition as an FDI, i.e., the
investment may be made either "inorganically" by buying a company in the target
country or "organically" by expanding operations of an existing business in that
country.

Types
1. Horizontal FDI arises when a firm duplicates its home country-based activities at
the same value chain stage in a host country through FDI.

14

2.

Platform FDI Foreign direct investment from a source country into a

destination country for the purpose of exporting to a third country.

3.

Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform value-adding
activities stage by stage in a vertical fashion in a host country.
Forms of FDI incentives
Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ Export Processing Zones

Bonded warehouses

Maquiladoras

investment financial subsidies

free land or land subsidies

relocation & expatriation

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

15

Governmental Investment Promotion Agencies (IPAs) use various marketing

strategies inspired by the private sector to try and attract inward FDI,
including Diaspora marketing.

by excluding the internal investment to get a profited downstream.

Importance and barriers to FDI

The rapid growth of world population since 1950 has occurred mostly in
developing countries. This growth has been matched by more rapid increases in
gross domestic product, and thus income per capita has increased in most countries
around the world since 1950. While the quality of the data from 1950 may be of
question, taking the average across a range of estimates confirms this. Only wartorn and countries with other serious external problems, such as Haiti, Somalia,
and Niger have not registered substantial increases in GDP per capita. The data
available to confirm this are freely available.
An increase in FDI may be associated with improved economic growth due to the
influx of capital and increased tax revenues for the host country. Host countries
often try to channel FDI investment into new infrastructure and other projects to
boost development. Greater competition from new companies can lead to
productivity gains and greater efficiency in the host country and it has been
suggested that the application of a foreign entitys policies to a domestic subsidiary
may improve corporate governance standards. Furthermore, foreign investment can
result in the transfer of soft skills through training and job creation, the availability
of more advanced technology for the domestic market and access to research and
development resources. The local population may be able to benefit from the
employment opportunities created by new businesses.

16

6. India
Foreign investment was introduced in 1991 under Foreign Exchange Management
Act (FEMA), driven by then finance minister Manmohan Singh. As Singh
subsequently became the prime minister, this has been one of his top political
problems, even in the current times. India disallowed overseas corporate bodies
(OCB) to invest in India. India imposes cap on equity holding by foreign investors
in various sectors, current FDI in aviation and insurance sectors is limited to a
maximum of 49%.
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey
projected India as the second most important FDI destination (after China) for
transnational corporations during 20102012. As per the data, the sectors that
attracted higher inflows were services, telecommunication, construction activities
and computer software and hardware. Mauritius, Singapore, US and UK were
among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4
billion, a drop of 43% from the first half of the last year.
Nine of the 10 largest foreign companies investing in India(from April 2000January 2011) are based in Mauritius . List of the ten largest foreign companies
investing in India (from April 2000- January 2011) are as follows

'FOREIGN DIRECT INVESTMENT - FDI'

The investing company may make its overseas investment in a number of ways either by setting up a subsidiary or associate company in the foreign country, by
acquiring shares of an overseas company, or through a merger or joint venture.

17

The accepted threshold for a foreign direct investment relationship, as defined by

the OECD, is 10%. That is, the foreign investor must own at least 10% or more of
the voting stock or ordinary shares of the investee company.
An example of foreign direct investment would be an American company taking a
majority stake in a company in China. Another example would be a Canadian
company setting up a joint venture to develop a mineral deposit in Chile.

Recent Policy Measures

100% FDI allowed in the telecom sector.

100% FDI in single-brand retail.

FDI in commodity exchanges, stock exchanges & depositories, power

exchanges, petroleum refining by PSUs, courier services under the government
route has now been brought under the automatic route.

Removal of restriction in tea plantation sector.

FDI limit rose to 74% in credit information & 100% in asset reconstruction
companies.

FDI limit of 26% in defence sector rose to 49% under Government approval
route. Foreign Portfolio Investment up to 24% permitted under automatic route.
FDI beyond 49% is also allowed on a case to case basis with the approval of
Cabinet Committee on Security.

Construction, operation and maintenance of specified activities of Railway

sector opened to 100% foreign direct investment under automatic route.
Types of Investors
INDIVIDUAL:
18

FVCI

Pension/Provident Fund

Financial Institutions
COMPANY:

Foreign Trust

Sovereign Wealth Funds

NRIs / PIOs
FOREIGN INSTITUTIONAL INVESTORS:

Private Equity Funds

Partnership / Proprietorship Firm

Others

SECTORS WHERE FOREIGN DIRECT INVESTMENT IS PROHIBITED:

Lottery Business including Government /private lottery, online lotteries, etc.

Gambling and Betting including casinos etc.

Chit funds

Nidhi company-(borrowing from members and lending to members only).

Trading in Transferable Development Rights (TDRs)

Real Estate Business (other than construction development) or Construction

of Farm Houses
19

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco substitutes

Activities / sectors not open to private sector investment e.g. Atomic Energy
and Railway Transport (other than construction, operation and maintenance of (i)
Suburban corridor projects through PPP, (ii) High speed train projects, (iii)
Dedicated

freight

lines,

(iv)

Rolling

stock

including

train

sets,

and

locomotives/coaches manufacturing and maintenance facilities, (v) Railway

Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger
terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings
including electrified railway lines and connectivitys to main railway line and (x)
Mass Rapid Transport Systems.)

Services like legal, book keeping, accounting & auditing.

Sectors with Caps

Petroleum Refining by PSU (49%).

Teleports (setting up of up-linking HUBs/Teleports),Direct to Home (DTH),

Cable Networks (Multi-system operators (MSOs) operating at national, state or
district level and undertaking up gradation of networks towards digitalization and
addressability), Mobile TV and Headend-in-the-Sky Broadcasting Service (HITS)
(74%).

Cable Networks (49%).

Broadcasting content services- FM Radio (26%), uplinking of news and

current affairs TV channels (26%).

Print Media dealing with news and current affairs (26%).

20

Air transport services- scheduled air transport (49%), non-scheduled air

transport (74%).

Ground handling services Civil Aviation (74%).

Satellites- establishment and operation (74%).

Private security agencies (49%).

Private Sector Banking- Except branches or wholly owned subsidiaries

(74%).

Public Sector Banking (20%).

Commodity exchanges (49%).

Credit information companies (74%).

Infrastructure companies in securities market (49%).

Insurance and sub-activities (26%).

Power exchanges (49%).

Defence (49% above 49% to CCS).

AUTOMATIC ROUTE:

Under this route no Central Government permission is required.

GOVERNMENT ROUTE:

Under this route applications are considered by the Foreign Investment Promotion
Board (FIPB). Approval from Cabinet Committee on Security is required for more
than 49% FDI in defence. The proposals involving investments of more than INR
12 billion are considered by Cabinet committee on economic affairs.
21

The Indian company receiving FDI either under the automatic route or the
government route is required to comply with provisions of the FDI policy
including reporting the FDI and issue of shares to the Reserve Bank of India. The
details can be seen from Q.6 of Section I of the following link-

Tea sector, including plantations 100%.

Mining and mineral separation of titanium-bearing minerals and ores, its

value addition and integrated activities -100%.

FDI in enterprise manufacturing items reserved for small scale sector

100%.

Defence up to 49% under FIPB/CCEA approval, beyond 49% under

CCS approval (on a case-to-case basis, wherever it is likely to result in access to
modern and state-of-the-art technology in the country).

Teleports (setting up of up-linking HUBs/Teleports), Direct to Home (DTH),

Cable Networks (Multi-system operators operating at National or State or District
level and undertaking up gradation of networks towards digitalization and
addressability), Mobile TV and Headend-in-the Sky Broadcasting Service(HITS)
beyond 49% and up to 74%.

Broadcasting Content Services: up linking of news and current affairs

channels 26%, up linking of non-news and current affairs TV channels 100%.

Publishing/printing

of

scientific

and

technical

magazines/specialty

journals/periodicals 100%.

Print media: publishing of newspaper and periodicals dealing with news and
current affairs- 26%, Publication of Indian editions of foreign magazines dealing
with news and current affairs- 26%.
22

Terrestrial Broadcasting FM (FM Radio) 26%.

Publication of facsimile edition of foreign newspaper 100%.

Airports Brownfield beyond 74%.

Non-scheduled air transport service beyond 49% and up to 74%.

Ground-handling services beyond 49% and up to 74%.

Satellites 74%.

Private securities agencies 49%.

Telecom-beyond 49%.

Single brand retail beyond 49%.

Asset reconstruction company beyond 49% and up to 100%

Banking private sector (other than WOS/Branches) beyond 49% and up to

74%, public sector 20%.

Pharmaceuticals Brownfield 100%.

INCORPORATING A COMPANY IN INDIA:

It can be a private or public limited company. Both wholly owned & joint
ventures are allowed. Private limited company requires minimum of 2
shareholders.
LIMITED LIABILITY PARTNERSHIPS:

Allowed under the Government route in sectors which has 100% FDI
allowed under the automatic route and without any conditions.
23

SOLE PROPRIETORSHIP/PARTNERSHIP FIRM:

Under RBI approval. RBI decides the application in consultation with

Government of India.
EXTENSION OF FOREIGN ENTITY:

Liaison office, Branch office (BO) or Project Office (PO). These offices can
undertake only the activities specified by the RBI. Approvals are granted under the
Government and RBI route. Automatic route is available to BO/PO meeting certain
conditions.

OTHER STRUCTURES:

Foreign investment or contributions in other structures like not for profit

companies etc. are also subject to provisions of Foreign Contribution Regulation
Act (FCRA).

Identification of structure

Central Government approval if required

Setting up or incorporating the structure

Inflow of funds via eligible instruments and following pricing guidelines

Meeting reporting requirements of RBI and respective Act

Registrations/obtaining key documents like PAN etc.

Project approval at state level

24

Finding ideal space for business activity based on various parameters like
incentives, cost, availability of man power etc.

Manufacturing projects are required to file Industrial Entrepreneurs

Memorandum (IEM), some of the industries may also require industrial license.

Construction/renovation of unit

Hiring of manpower

Obtaining licenses if any

Other state & central level registrations

Meeting annual requirements of a structure, paying taxes etc.

REPATRIATION OF DIVIDEND:

Dividends are freely repatriable without any restrictions (net after tax
deduction at source or Dividend Distribution Tax.
REPATRIATION OF CAPITAL:

AD Category-I bank can allow the remittance of sale proceeds of a security

(net of applicable taxes) to the seller of shares resident outside India, provided the
security has been held on repatriation basis, the sale of security has been made in
accordance with the prescribed guidelines and NOC / tax clearance certificate from
the Income Tax Department has been produced.

Investments are subject to lock-in period of 3 years in case of construction

development sector.
REPATRIATION OF INTEREST:

25

Interest on fully, mandatorily & compulsorily convertible debentures is also

freely repatriable without any restrictions (net of applicable taxes).
DIRECT TAXES:

The investor is required to pay tax on net income earned in India. The rates
of taxes differ among structures.
COMPANY:

The

company

incorporated

in

India

is

required

to

pay

30%

tax+surcharge+education cess on net income earned. It is also required to deduct

tax on profits distributed @15.5%+surcharge education cess.
BRANCH OFFICE / PROJECT OFFICE / LIAISON OFFICE OR
PERMANENT ESTABLISHMENT:

The fixed place of business in India is treated as a permanent establishment

and is required to pay tax @40%+surcharge+education cess. There is no tax on
profits distributed.
LLPS:

LLPs are required to pay tax @30%+surcharge education cess. There is no

tax on profits distributed.
Foreign Direct Investment as seen as an important source of non-debt inflows, and
is increasing being sought as a vehicle for technology flows and as a means of
attaining competitive efficiency by creating a meaningful network of global
interconnections.
FDI plays a vital role in the economy because it does not only provide
26

opportunities to host countries to enhance their economic development but also

opens new vistas to home countries to optimize their earnings by employing their
ideal resources.
India has sought to increase inflows of FDI with a much liberal policy since 1991
after decade's cautious attitude. The 1990's have witnessed a sustained rise in
annual inflows to India. Basically, opening of the economy after 1991 does not live
much choice but to attract the foreign investment, as an engine of dynamic growth
especially in view of fast paced movement of the world forward Liberalization,
Privatization and Globalization.

7. The Present Banking Scenario:

In recent times economy is been pushing to increase the role of multi-national
banks in the banking and insurance sector, despite, the concern expressed by the
left communist parties are opposing the finance minister move to raise overseas
investment limits in the insurance business. The government wants to fulfill a
pledge to allow companies like New York Life Insurance, Met Life Insurance to
raise investment in local companies to 49 per cent from 26 per cent.
But it is opposed on the front that it will lead to state run insurers loosing business
and workers their job. Left do not want foreign investors to have greater voting
rights in private banks and oppose the privatization of state run pension fund.
There are several reasons why such move is fraught with dangers. When domestic
or foreign investors acquire a large share holding in any bank and exercise
proportionate voting rights, it creates potential problems not only of excursive
27

concentration in the banking sector but also can expose the economy to more
intensive financial crises at the slightest hint of panic.
Opposition is not considering the need of present situation. FDI in banking sector
can solve various problems of the overall banking sector. Such as
i) Innovative Financial Products
ii) Technical Developments in the Foreign Markets
iii) Problem of Inefficient Management
iv) Non-performing Assets
v) Financial Instability
vi) Poor Capitalization
vii) Changing Financial Market Conditions
If we consider the root cause of these problems, the reason is low-capital base and
all the problems is the outcome of the transactions carried over in a bank without a
substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt
inflow, which will directly solve the problem of capital base. Along with that it
entails the following benefits such as
Technology Transfer
As due to the globalization local banks are competing in the global market, where
innovative financial products of multinational banks is the key limiting factor in
the development of local bank. They are trying to keep pace with the technological
development in the banks. Now a days banks have been prominent and prudent in
the rapid expansion of consumer lending in domestic as well as in foreign markets.
28

It needs appropriate tools to assess (how such credit is managed) credit

management of the banks and authorities in charge of financial stability. It may
need additional information and techniques to monitor for financial vulnerabilities.
FDI's tech transfers, information sharing, training programs and other forms of
technical assistance may help meet this need.

What Are the Different Kinds of Foreign Investment?

International investment or capital flows fall into four principal categories:
commercial loans, official flows, foreign direct investment (FDI), and foreign
portfolio investment (FPI).
Commercial loans, which primarily take the form of bank loans issued to foreign
businesses or governments.
Official flows, which refer generally to the forms of development assistance that
developed nations give to developing ones.
Foreign direct investment (FDI) pertains to international investment in which the
investor obtains a lasting interest in an enterprise in another country. Most
concretely, it may take the form of buying or constructing a factory in a foreign
country or adding improvements to such a facility, in the form of property, plants,
or equipment.
FDI is calculated to include all kinds of capital contributions, such as the purchases
of stocks, as well as the reinvestment of earnings by a wholly owned company
incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary
or branch. The reinvestment of earnings and transfer of assets between a parent
company and its subsidiary often constitutes a significant part of FDI calculations.
29

According to the United Nations Conference on Trade and Development

(UNCTAD), the global expansion of FDI is currently being driven by over 65,000
transnational corporations with more than 850,000 foreign affiliates.
An investors earnings on FDI take the form of profits such as dividends, retained
earnings, fees and royalty payments.
Foreign portfolio investment (FPI), on the other hand is a category of investment
instruments that is more easily traded, may be less permanent, and do not represent
a controlling stake in an enterprise. These include investments via equity
instruments (stocks) or debt (bonds) of a foreign enterprise which does not
necessarily represent a long-term interest.
Stocks:
dividend payments
holder owns a part of a company
possible voting rights
open-ended holding period
Bonds:
interest payments
ownership of bond rights only
no voting rights
specific holding period
While FDI tends to be commonly undertaken by multinational corporations, FPI
comes from my diverse sources such as a small companys pension or through
mutual funds held by individuals.
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The returns that an investor acquires on FPI usually take the form of interest
payments or dividends.
Investments in FPI that are made for less than one year are distinguished as shortterm portfolio flows. FPI flows tend to be more difficult to calculate definitively,
because they comprise so many different instruments, and also because reporting is
often poor. Estimates on FPI totals generally vary from levels equaling half of FDI
totals, to roughly one-third more than FDI totals.
The difference between FDI and FPI can sometimes be difficult to discern, given
that they may overlap, especially in regard to investment in stock. Ordinarily, the
threshold for FDI is ownership of 10 percent or more of the ordinary shares or
voting power of a business entity (IMF Balance of Payments Manual, 1993).
Until the 1980s, commercial loans from banks were the largest source of foreign
investment in developing countries. However, since that time, the levels of lending
through commercial loans have remained relatively constant, while the levels of
global FDI and FPI have increased dramatically. Over the period 1991-1998, FDI
and FPI comprised 90 percent of the total capital flows to developing countries.
Over the period of 1996-2006, FDI and FPI outflows from the United States more
than doubled (International Monetary Fund, 2007). Global FDI flows decreased
significantly from 2007-2009 due to the Financial Crisis and finally started rising
again in 2010, though have still not reached pre-crisis levels.
8. Positive Effects of Foreign Investment
International investment is important to most economies, and can be particularly
vital for developing countries. In many instances, developing countries have both
the demand for a good or service, and the labor and natural resources to supply it,
but they lack the access to capital necessary to begin producing. In the United
States, most businesses start when an entrepreneur goes to a bank and takes out a
31

loan. Larger enterprises may go to an investment bank to sell stocks or bonds, to

get their businesses going. But in many developing countries, either banks do not
exist in adequate numbers or they do not have enough capital to lend to even the
majority of worthy borrowers. Thus, foreign investment provides essential capital
to help spark the creation of productive enterprises.
Foreign investment also creates obligations and claims against the national
exchequer. Tomorrow, if for unforeseen reasons, foreign investors were to
withdraw their monies from developing countries, it would result in a drain on the
latter's treasuries. To avoid bankruptcy, the developing countries would again have
to borrow hard currencies from elsewhere (possibly at higher interest rates) to
service the claims of existing foreign investors.
All the dollar, sterling and euro reserves would have to be liquidated to pay off
foreign investors who would surrender their own holdings of domestic currencies
in exchange. Therefore, foreign investment is akin to the sword of Damocles
hanging over impoverished countries.
It should be borne in mind that ultimately all foreign investment has to be
repatriated (apart from colonized countries) sooner or later along with the profits
made in developing countries. To meet that contingency, every developing country
has to keep or borrow sufficient reserves of foreign hard currencies to meet
periodic or final claim settlements lodged by foreign investors.
Foreign investment as a means of building up reserves of hard currencies is an
inferior way of doing so than doing it through vigorous trading. Trading does not
incur indebtedness and all foreign bills are promptly cleared through the banking
system. Trading flushes the banking system with foreign hard currencies as

32

businessmen exchange their foreign earnings against domestic currencies and bank
deposits.
Foreign investment only leads to short term capital gains. That, too, has to be
repatriated in the long run. With trading, there are real gains of capital and capital
earned so remains in the domestic economy.
Moreover, under conditions where foreign investment is allowed, developing
countries have to cope with the inflow of 'hot' money or capital of suspicious origin
that finds its way into unproductive uses. Hot money and high-risk venture capital,
both of which are associated with quick and outstanding profits, can cause severe
dislocations in the developing country economies.
Foreign investment can lead to a significant loss of sovereignty in developing
countries as foreign investors gain control of key and strategic industries that are
vital to the host countries' very survival. This phenomenon can result in severe
turmoil as hostile foreign investors dictate national economic policy.
It is no secret that socialist countries do not welcome foreign investment as they
fear the associated interference in internal affairs. To give an example, India under
Prime Minister Gandhi, was determined to eliminate its dependence on foreign
investment and it did nearly succeed in paying all of the country's foreign
investors.
The stress in India's case was on restoring and retaining the country's national
integrity and sovereignty. Today, on the other hand, we have a situation of a fallen
socialist power such as Russia openly inviting foreign investment even in key areas
of its economy such as oil and gas and that, too, from its erstwhile foe - the United
States.
33

A country such as India does not need foreign investment because it has its own
holdings of net savings and capital reserves. This fact explains why globalization
and the gradual easing of capital controls is wreaking havoc on domestic Indian
savers since interest rates have fallen to pitiful levels.
Foreign investment can be a boon in conditions of absolute destruction and
deprivation as had occurred in Germany and France after WWII and in subSaharan nations more recently. The Marshall Plan, funded by the United States,
injected billions of dollars into European economies thereby reviving and
rejuvenating them much as the World Bank has been trying to do in sub-Saharan
Africa albeit on a lesser scale.
Without sufficient capital, no country can undertake the arduous task of economic
development and foreign investment is badly needed in such an environment.
However, many developing countries that have achieved a modicum of prosperity
have opened their doors to foreign investment as a way to appease the strong and
wealthy nations who have surplus capital. These poor countries have not been able
to withstand the pressure tactics and strong-arm methods used by wealthy nations
to open the former's markets and economies.
India, to a large extent, managed to finance its economic development by its own
domestic savings. It is contemporary India that has opened its doors to foreign
investment to finance rapid economic growth thereby leaving thousands of
domestic savers in the lurch.
If the present trend of foreign investment and indebtedness continues in the Third
World, then testing times lie ahead for the developing countries more so now than

34

ever before since most of them are meekly giving their assent to the WTO
covenant.
India: Boon for Single Brand Retailing In India-Relaxation in Foreign Direct
Investment Norms
India is the third largest economy in the world and stability coupled with
consistent growth of such a large contributor to the global economy is not an easy
task. The Indian government has been consistent in its support for market
development through trade liberalization, financial liberalization, and taxation
reforms and opening up to foreign investments. India's twin growth engines of
economic growth and demographic profile set it apart from other nations and
present a compelling business case for global retailers looking to enter the Indian
market. The retail industry in India is of late often being hailed as one of the
sunrise sectors in the economy. By relaxing the FDI laws relating to single brand
retails, the Indian government has definitely created a positive step forward, paving
the way for foreign retailers selling single branded products to move into India
without having to join with an India partner.
Background
FDI in single brand product retail trading was allowed up to 51% under the
government route. FDI in single brand product retail trading under the FDI policy
was subject to the following conditions:

Products to be sold should be of a 'Single Brand' only.

Products should be sold under the same brand internationally, i.e. products
should be sold under the same brand in one or more countries other than India.

'Single Brand' product-retailing would cover only products which are

branded during manufacturing.
35

The foreign investor should be the owner of the brand.

PN 1, with the 100% FDIinfusionin single brand product retail trading under the
Government route, has been made subject to further conditions in addition to the
aforementioned already existing conditions:

Overseas retailers who want to invest in single brand product retail trading
in India beyond 51% will have to source 30% of their goods from "Indian" small
industries, village industries and cottage industries, artisans and craftsmen.
Some of the objectives that the Indian economy seeks to gain with such relaxation
are:

Attracting investments in production and marketing;

Improving the availability of such goods for the consumer;

Encouraging increased sourcing of goods from India;

Enhancing competitiveness of Indian enterprises through access to global

designs, technologies and management practices.

Right time to tap the Indian Market

India has emerged as one of the prime destinations for the investment of funds
from an impressive number of foreign investors. Undoubtedly, with the further
relaxations in the FDI norms, there is a lucrative opportunity for foreign players to
enter one of the biggest territorial markets and reach out to a large customer base.
It is also imperative that the players participate in market expansion by getting
introduced in the Indian markets sooner than their competitors.
Growth rate trend of the Indian industry together with the changing consumer
inclination such as increased use of credit cards, brand consciousness, and the
36

growth of population are factors that encourage a foreign player to establish outlets
in India and tap the huge Indian market.
At present, most major global brands and retailers who are not yet in India are
assessing the Indian market with keen interest, recognizing its strengths as a retail
destination. It is widely speculated that major brands like Pavers England, IKEA,
Gap and Starbucks, etc. have either already set the machinery running in order to
make a timely entry in India or are seriously considering making the move.
Furthermore, international brands that had already partnered with an Indian partner
now can go solo without diluting their stake in the Indian market.
With the relaxation of norms, opening up of the market and pro-investment attitude
of the government, this is the ideal time for prospective foreign players to make an
earnest start in a major retail market, as India has finally stepped beyond the brink
of further liberalization.
According to my point of view FDI should be allowed in India as India is a
developing country and has quite weak economic growth rate. I would like to
quote some of the advantages of allowing FDI in retail sector:
One of the major problem that our country is facing at present is inflation, by
introducing FDI we can decrease our inflation rate. As if we consider the old
statistics. Before 90's FDI was not allowed in India and at that time inflation rate
was very high economic growth was too low and many other problems but as soon
as FDI came into effect after 91 our inflation rate gradually decreased from 17% to
7% in the year 95 and GDP increased from 1.7% to 5%.
On the other hand, it will create more job opportunities, which will be acting as a
key growth driver of the organized retail sector in India.
Customers will have access to greater variety of international quality branded
37

goods.
Farmers will get better prices for their for their products through the improvement
of value added food chain.
There will be increase in the disposable income and customer aspiration.
Customers will get a better product at cheaper price, so consumers get value for
this money.
So, In the end I would like to wrap up by saying that since now everything is
becoming globalised FDI is very important and instead of not being in the favor of
this we should rather boost it up.
In my opinion every thing have good and bad side so before forming any opinion
about anything we should look at both its side. FDI has both benefits as well as
loss.

The advantages of FDI are:

1). New jobs would be created.
2). India will get the facility of the latest technology in the world.
3). the economic condition of India will improve by the taxes paid by the
companies that has received FDI or by the company set through FDI.
4). Competition among companies will generate better product.
5). Bribery, corruption, cronyism will decrease considerably.
6). the living standard of people will improve since goods will be available at
38

lower prices.
The disadvantages of FDI are:
1). Small retailer will suffer.
2). People living in small towns or village will not get its benefits.
3). the main aim of FDI is to make profit so it will not focus on environment of
India or health of its workers which are Indians.
Foreign Direct Investment in India is permitted as under the following forms
of investments:
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sculpture, gold, diamonds,
copper, zinc.

Foreign direct investments in India are approved through two routes:

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

approval within a period of two weeks (provided certain parameters are met) to all
proposals involving:
Foreign equity up to 50% in 3 categories relating to mining activities.
Foreign equity up to 51% in 48 specified industries.
Foreign equity up to 74% in 9 categories.
FDI up to 26% in the Insurance sector is allowed on the automatic route
subject to obtaining license from Insurance Regulatory & Development
Authority (IRDA)
Investments in high-priority industries or for trading companies primarily engaged
in exporting are given almost automatic approval by the RBI.
FDI in India on automatic route is not allowed in the following sectors:

Proposals that require an industrial license and cases where foreign

investment is more than 24% in the equity capital of units manufacturing items
reserved for the small scale industries.

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

India.

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

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

Proposals falling outside notified sect oral policy/caps or under sectors in

which FDI is not permitted and/or whenever any investor chooses to make an
application to the Foreign Investment Promotion Board and not to avail of the
automatic route.

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

to consider and recommend foreign direct investment, which do not come under
the automatic route. Normal processing time of an FDI proposal in FIPB is 4 to 6
weeks. FIPB is located in the Department of Economic Affairs, Ministry of
Finance. Its constitution is as follows:
Secretary, Department of Economic Affairs (Chairman)
Secretary, Department of Industrial Policy & Promotion (Member)
Secretary, Department of Commerce (Member)
Secretary, (Economic Relation), Ministry of External Affairs (Member)
FIPB can co-opt Secretaries to the Govt. of India and other top officials of
financial institutions, banks and professional experts of industry and commerce.

9. FDI

Scenario in India

In 1991, the Indian government introduced the economic policy to attract foreign
investments and since then, it has amended the policy from time to time in various
sectors to allow higher levels of foreign participation. The government policy in
retail sector allows 100% foreign investment in wholesale cash-and-carry and
single-brand retailing but prohibits investments in retail trading. In 1997, the
government imposed restrictions on FDI in retail sector but in 2006, these were
lifted and opened in single-brand retailing and in cash-and-carry formats.
The cash-and-carry business is the easiest mode of entry for foreign retailers into
India. Many global players like Metro and Shoprite have already entered the
market. Wal-mart has forged an alliance with Bharti for a cash-and-carry business,
and Bharti is concentrating on front-end retail. Similarly, Tesco has entered India

41

through an alliance with Trent (Tata Group). Apart from investing in the cash-andcarry business, Trent will also support the back-end activities of Trent Ltd.
Many foreign brands have also entered India either through JVs with leading
Indian retailers or through exclusive franchisees to set up shop in India. Louis
Vuitton, Marks & Spencer Plc, GAS, Armani are some such operators who have
entered India through JVs. McDonalds, KFC, and Dominos are the retailers who
have taken the franchise route.
Slowly the government is opening up to the idea of permitting FDI in the Indian
retail sector; consequently there is greater momentum in the sector. Last year,
owing to the global meltdown, investments dropped in all sectors. The
government has therefore changed the guidelines for foreign investments to boost
investments in the current year. This move is certainly likely to improve the
investment climate in the Indian retail space.

11. Conclusion
So finally I conclude that FDI can be made a Boon to India if the
government of India imposes proper rules on them.
Conclusion: Debt and deficit are rising and political turmoil is only adding to the
aggravating economic situation. We are currently at a point of confluence, an
42

estuary; the merging of two historic and economic rivers. India has to take the
stand it took in 1991 economic liberalization, lest the economy will remain
dysfunctional and eventually collapse into recession yet again. F.D.I has already
begun seeping into our financial system in a big way. As I have clearly highlighted,
the pros far outweigh the cons. A decade down the line, F.D.I would have
transformed our country into a global powerhouse, in more than one aspect. We
can also determine from the above write-up that our country is in desperate need of
an economic nudge from the rest of the world. More importantly, we need a new
fillip to our agricultural productivity, logistics and a more efficient supply chain
across sectors. Therefore, we can logically infer that F.D.I is more of a boon than a
bane, more so given the capital and technology gaps that India needs to fill to
provide

much

needed

fuel

to

the

GDP

growth

rate.

12. Bibliography
1) www.google.com
2)http://www.mondaq.com/india/x/206954/Inward+Foreign+Investment/Boon+For
+Single+Brand+Retailing+In+IndiaRelaxation+In+Foreign

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3)http://english.pravda.ru/business/finance/11-09-2013/125623economics_foreign_investment-0/
4)http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/10462/13/13_chapt
er%205.pdf
5) http://en.wikipedia.org/wiki/Foreign_direct_investment
6) http://www.makeinindia.com/policy/foreign-direct-investment/

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