Foreign Direct Investment Foreign direct investment is investment made by a foreign individual or company in productive capacity of another country

. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Types of FDI There are two types of FDI:
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Greenfield investment : It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries. Mergers and Acquisition : It occurs when a transfer of existing assets from local firms takes place.

Forbidden Territories: FDI is not permitted in the following industrial sectors:
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Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Investment in India Government of India recognizes the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and transparent FDI policy. FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI.

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India is now the third most favoured destination for Foreign Direct Investment (FDI), behind China and the USA, according to an AT Kearney survey that tracked investor confidence among global executives to determine their order of preferences. India¶s share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment. Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 199697 to U.S.$ 3,197 million in 1997- 98 International developments continue to affect capital flows into India in 1998-99 as well. Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997- 98. U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI.

despite the practically unlimited possibilities in India for overseas businesses. between January and July.2 billion in the corresponding period last year. Structural and bureaucratic impediments were vigorously fostered.y y y y y S. Even as . During the first seven months of 2004.3 million in 1996-97 (0.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. after independence from Britain 50 years ago. Italy. According to the latest Reserve Bank of India figures. Korea increased its flow of investment in India from a meagre U. Success in India Success in India will depend on the correct estimation of the country's potential. not short-term profit.220 crore worth of FDI was approved. as against net inflows of $1. of any size. until fairly recently. While calculating. It is also the second largest among emerging nations. Lack of enthusiasm among investors The reason being.2 per cent of total FDI) to U. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. underestimation of its complexity or overestimation of its possibilities can lead to failure. is believed to be a good investment despite political uncertainty. aspiring to be a global player can.$ 333.4 per cent share). and Russia) and has the third largest GDP in the entire continent of Asia.Entering India's marketplace requires a well-designed plan backed by serious thought and careful research. the world's most populous democracy has. (These indicators are based on purchasing power parity. bureaucratic hassles.S.S. failed to get the kind of enthusiastic attention generated by other emerging economies such as China.$ 6. Rs 5. India developed a highly protected. for long ignore this country which is expected to become one of the top three emerging economies.the trip will be well worth the effort. shortages of power and infrastructural deficiencies.Investing in India . along with a distrust of foreign busines s. For those who take the time and look to India as an opportunity for long -term growth. There has been a sharp rise in the number of FDIs approved in 2004. semi-socialist autarkic economy. Almost a third share of the investment in India is by NRI.Yet.1 million in 1997-98 (10. Investment in India . due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Venturing into the Indian Market Investment in Indian market India. the United Kingdom. No company. among the European investors. Market potential India is the fifth largest economy in the world (ranking above France. outflows through various NRI deposits schemes amounted to $903 million since May 2004.

today the climate in India has seen a seachange. tastes and preferences differ greatly among sections of consumers. The rapid economic growth of the last few years has put heavy stress on India's infrastructural facilities. India is rightfully quoted to be an incomparable country and is both frustrating and c hallenging at the same time. The Indian market is widely diverse. There are also companies which can guide the foreign firm through the entry process from beginning to end --performing the requisite research. envisaging and developing a Market En try Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India. Developing a basic understanding or potential of the Indian market The Indian middle class is large and growing. it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. business still has to deal with an inefficient and sometimes still slow moving bureaucracy. finding the land or ready premises. and pushing through the paperwork required. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. many workers are well educated and speak English.But there is still cause for worriesInfrastructural hassles. Problems include power demand shortfall. many companies still see it as a difficult market. 6 major religions. Developing a basic understanding or potential of the Indian market. Although the Indian government is well aware of the need for reform and is pushing ahead in this area. But the process is slow. wages are low. assisting with configuration of the project. despite political turmoil. it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns which should be taken into account. helping develop Indian partners and financing. . Indian Bureaucracy. Diverse Market . Before jumping into the market. Thus. port traffic capacity mismatch. Therefore. Foreign investors should be prepared to take India as it is with all of its difficulties. Research firms in India can provide the information to determine how. contradictions and challenges. and ethnic diversity as wide as all of Europe. investors are optimistic and local stocks are up. low telephone penetration (1. when and where to enter the market.4% of population). The country has 17 official languages. the country presses on with economic reforms. smashing barriers and actively seeking foreign investment. Developing up-front takes: Market Study Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competi Check on Economic Policies The general economic direction in India is toward liberalization and globalization. poor road conditions (only half of the country's roads are surfaced).

manganese. Restrictions However. investment in stock markets and real estate will not be permitted . ports. Atomic Energy. zinc. sulphur. chrome. Railway Transport. Mining of iron. . equipment an d building and investment in software development. Coal and lignite.Introduction Foreign Direct Investment (FDI) is permited as under the following forms of investments. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. diamonds. Forbidden Territories: FDI is not permitted in the following industrial sectors: y y y y y Arms and ammunition. gold. would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. and equity investment in JV/WOSs in India. prepayment or scheduled repayment of earlier external borrowings. airports and roads. petroleum exploration and refining. This condition would be relaxed for infrastructure projects such as power generation. Use of GDRs The proceeds of the GDRs can be used for financing capital goods imports. gypsum.Foreign Direct Investment . capital expenditure including domestic purchase/installation of plant. y y y y Through Through Through Through financial collaborations. capital markets via Euro issues. GDRs are designated in dollars and are not subject to any ceilings on investment. copper. joint ventures and technical collaborations. Any investment from a foreign firm into India requires the prior approval of the Government of India. telecommunication. 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. 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 . private placements or preferential allotments. 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.FDI Report Investment in India . Foreign Investment through GDRs (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).

Normal processing time is 4 to 6 weeks. foreign equity up to 51% in 48 specified industries (List 3). financial. and tax advice as needed. down compared to dols 1. FII investments FII net investment declined to dols 1.5 billion for IFY 1997 -98. The lists are comprehensive and cover most industries of interest to foreign companies. partly reflecting the effect of the recent crisis in Asia. Its approach is liberal for all sectors and all types of proposals. The outflow. It is not necessary for foreign investors to have a local partner. In an effort to avoid further heavy outflows. selecting a location.7 billion in1996 -97. reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets. Foreign institutional investors Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. even when the foreign investor wishes to hold less than the entire equity of the company. obtaining legal. was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992.Investment in India . The FIPB Route: Processing of non-automatic approval cases FIPB stands for Foreign Investment Promotion Board which appr oves all other cases where the parameters of automatic approval are not met. foreign equity up to 74% in 9 categories (List 4).Approval Foreign direct investments in India are approved through two routes: 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: y y y y foreign equity up to 50% in 3 categories relating to mining activities (List 2).9 billion in1996 -97. 74% participation shall apply. up from dols 2. Opening an office in India Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self. official. developing a product marketing strategy and more. The government is likely to double FDI inflows within two years. prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee. following India's nuclear tests and volatility in the rupee/dollar exchange rate.8 billion in 1997 -98. Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997 -98. compared to dols 2. where List 4 includes items also listed in List 3. Large outflows of capital Large outflows began again in May 1998. the RBI . and rejections are few. The portion of the equity not proposed to be held by the foreign investor can be offered to the public. Total foreign investment and FDI Total foreign investment in IFY 1997-98 was estimated at dols 4.2 billion in 1996 -97. environmental. Foreign Direct Investment (FDI) in 1997 -98 was an estimated dols 3. choosing legal and capital structure. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. The trend reversed itself in February and March 1998.Foreign Direct Investment . obtaining personnel. compared to dols 6 billion in 1996 -97. planning business.1 billion.

1998. .announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11.

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