COMPANY LAW 1

INTENSIFIED ATTENTION OF FOREIGN COMPANIES FOR INDIA

EVIDENCES MATURITY OF DOMESTIC ECONOMY – A STUDY
FINAL SUBMISSION

NAME Soumya Malhotra

PRN 17010224146

DIVISION B

BATCH 2017-22

of
Symbiosis Law School, NOIDA

Symbiosis International (deemed) University, PUNE

On
AUGUST, 2019

Under the guidance of

Prof. Rajnish Jindal
Prof. Sonakshi Kumar
Assistant Professor
 CERTIFICATE

The project titled “INTENSIFIED ATTENTION OF FOREIGN COMPANIES

FOR INDIA EVIDENCES MATURITY OF DOMESTIC ECONOMY – A
STUDY” submitted to the Symbiosis Law School, NOIDA for ‘COMPANY LAW 1’
as part of Internal Assessment is based on my original work carried out under the
guidance of Prof. Rajnish Jindal and Prof. Sonakshi Kumar from July to September,
2019 The research work has not been submitted elsewhere for award of any degree.
The material borrowed from other sources and incorporated in the Project has been
duly acknowledged. I understand that I myself could be held responsible and
accountable for plagiarism, if any, detected later on.
Signature of the Candidate

Date:
 Intensified Attention Of Foreign Companies For India Evidences
Maturity Of Domestic Economy – A Study
ABSTRACT
The article gives a brief about the concept of globalization and how it came into being in India in 1990’s. Coming of
globalization resulted in opening up of Indian market to international competitors. This meant introduction of new
policies by the government with respect to foreign direct investment (FDI).

The term foreign company has been mentioned in the companies act, 2013 which has been elaborated in the section
below.

How does coming of foreign investors and competitors affect the domestic economy and why is it that almost after 3
decades, what makes the domestic economy “matured”. To look into that and for further clarification is a case study
about Walmart’s recent acquisition of Flipkart . How foreign investors like Walmart has created a huge market for Indian
companies like Paytm in our own home country.

INTRODUCTION
In India, which traditionally had quite a developed pre-industrial base of trade and market, the impact of the
changing role of institutions has been gradual. The market and trade relations continue to be located in local
cultures even today.

Also, the economic policy of India up to the 1980s has been that of import substitution and protectionism in
trade and market. The full momentum of the globalization of economy started from 1990s onwards, but many
checks and balances continue to persist. The history of globalization in India has gained specificity. Here, it is
linked with liberalization and privatization. Both the sociologists and economists talk about liberalization
though inevitably their reference is to economic liberalization.

In July 1991 the Government of India decided to go in for liberalisation of Indian economy. A new economic
policy was formulated and implemented with an emphasis new upon economic reforms.

These reforms paved the way for initiating the process of liberalisation and globalisation of Indian economy.
It began developing as an outwardly opening economy, with the aim of linking, integrating and unifying
domestic economy with world economy.

What Really Is Globalization?

Globalization is the free movement of people, goods, and services across boundaries. This movement is
managed in a unified and integrated manner. Further, it can be seen as a scheme to open the global economy
as well as the associated growth in trade (global). Hence, when the countries that were previously shut to
foreign investment and trade have now burned down barriers.

Considering a precise definition, countries that abide by the rules and regulations set by WTO (World Trade
Organization) are part of globalization. These procedures include oversees trade conditions among countries.
Apart from this, there are other organizations such as the UN and different arbitration bodies available for
supervision. Under this, non-discriminatory policies of trade are also enclosed.
Through the coming of globalisation in India In 1990’s, it paved the way for foreign companies to set up their
brands and expand themselves in the Indian market. It has almost been three decades since globalization came
into our country. The way it has adapted in the Indian economy and how the Indian economy has evolved
itself in respect to foreign companies setting their feet in our economy is what we will be discussing further in
this article.

FOREIGN COMPANIES UNDER INDIAN LAW

The term ‘foreign company’ is clearly laid down under Section 2 sub-section 42 of the Companies Act, 2013
A foreign company is any company or body corporate incorporated outside India which,

1. has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and

2. conducts any business activity in India in any other manner.1

In order to be considered a ‘foreign company’, one has to fulfil both the abovementioned criteria.

REASONS WHY FOREIGN COMPANIES EXPAND THEMSELVES IN

INDIA

HIGH
PROMOTION BY
INELLIGENCE
GOVT SCHEMES
QUOTIENT

CHEAPER
COMPARITIVELY
PROPERTY
CHEAP LABOUR
VALUE

RELAXED
LARGE
OPERATION OF
CONSUMER
BASE
REASONS CONSUMER
LAWS

INTENSIFICATION OF FOREIGN COMPANIES IN INDIA

1
Section 2 (42), Companies Act, 2013.
Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wage
and changing business environment of India. Such investments are done through a one major source known as
“Foreign Direct Investment (FDI)”.

What is Foreign Direct Investment (FDI)?

Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business
interests located in another country. Generally, FDI takes place when an investor establishes foreign business
operations or acquires foreign business assets, including establishing ownership or controlling interest in a
foreign company.

FDI IN INDIA
Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges
such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving
technical know-how and generating employment.

The Indian government’s favourable policy regime and robust business environment have ensured that foreign
capital keeps flowing into the country. The government has taken many initiatives in recent years such as
relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock
exchanges, among others.

It is because of Govt. Initiatives like these foreign companies, finding the right opportunities, enters into the
Indian market and places their position at par with the domestic competitors.

GOVERNMENT’S INITIATIVES INVITING FOREIGN COMPANIES IN

INDIA2
 As of February 2019, the Government of India is working on a road map to achieve its goal of US$
100 billion worth of FDI inflows.
 In February 2019, the Government of India released the Draft National e-Commerce Policy which
encourages FDI in the marketplace model of e-commerce. Further, it states that the FDI policy for e-
commerce sector has been developed to ensure a level playing field for all participants.
 In December 2018, the Government of India revised FDI rules related to e-commerce. As per the rules
100 per cent FDI is allowed in the marketplace based model of e-commerce. Also, sales of any vendor
through an e-commerce marketplace entity or its group companies have been limited to 25 per cent of
the total sales of such vendor.
 In September 2018, the Government of India released the National Digital Communications Policy,
2018 which envisages increasing FDI inflows in the telecommunications sector to US$ 100 billion by
2022.
 In January 2018, Government of India allowed foreign airlines to invest in Air India up to 49 per cent
with government approval. The investment cannot exceed 49 per cent directly or indirectly.
 No government approval will be required for FDI up to an extent of 100 per cent in Real Estate
Broking Services.
 In September 2017, the Government of India asked the states to focus on strengthening single window
clearance system for fast-tracking approval processes, in order to increase Japanese investments in
India.
 In January 2018, Government of India allowed 100 per cent FDI in single brand retail through
automatic route.

2
www.ibef.org- initiative of Ministry of Commerce & Industry, Government of India
EFFECT ON DOMESTIC ECONOMY
World’s largest population after China is that of India. With such huge population comes a massive consumer
base. India over the years has only increased its domestic demand, thanks to globalisaton, people sitting at
home has access to diverse global market with infinite options to choose from.

When we talk about the country’s economy, it includes a lot of factors be the population, the GDP etc. in
order to stabilize the market conditions, it needs to strike a balance between demand and supply.

Because of increased foreign demand and globalisation, the exports with respect to it, have, not been
satisfactory. India's economic growth in recent years has been "too much" driven by domestic demand and its
exports were about one third of its potential. In the last five years, India's overall growth was "too much"
driven by domestic demand, which resulted in double digit growth of imports, and four to five per cent growth
in exports.

In a live interview with one of the officials of world bank3, he stated about what the domestic economy lacks
because of which the foreign companies outshine them in their home country. He said, the most important
thing is the understanding that domestic institutions need export-led growth because that's where you increase
productivity when you compete in international markets that's where you gain knowledge by interacting with
competitors and with customers abroad.
India, Timmer said, is exporting only 10 per cent of its GDP. "The lack of regional integration is not the main
course of the under performance in exports. And that's often the assumption. When people look at South Asia,
immediately the problem of very limited regional integration jumps up."
A latest report of the World bank on South Asia, asserts that the economic under performance of South Asian
countries is mainly because they are locked on fundamental issues within the domestic economies that have
prevented the countries to become much more export-led, like one sees in East Asia.
Trade liberalization, flexible labour markets skills, trying to address the big problem of the difference between
the formal economy and the informal economy, he said are some of his recommendations for the South Asian
countries.
"So, it's a lot of domestic issues also. It's not just trade policies, a lot of domestic issues that have to be
addressed to unleash that potential that has not been utilized now in exports.

COUNTRIES MAKING BIG IN INDIA OWING TO FOREIGN

INVESTMENTS
1. UNITED STATES

India and America have had strong business relations over the many years and several American companies
are fulfilling the indispensable needs of the Indian market. From searching online through Google to drinking
Coca Cola, or using the latest I-phones by Apple, the Indian consumer is, by and large, a dedicated follower of
American companies. American companies are preparing to set up an alternative to China by investing in
India. Some renowned American companies are Amazon, Citibank, Coca-Cola, Ford India, Google, American
Express, Pepsico, Hewlett Packard, IBM, JP Morgan Chase, Adobe Systems Incorporated, Apple Inc.,
Microsoft Corporation, Cognizant, Oracle.

2. JAPAN

Holding the baton in automobiles and electronics sector, Japanese companies were amongst the 1st ones to
enter India. An incredible 1,305 Japanese companies are registered in India. Japan and India share strong ties,

3
Hans Timmer, World Bank Chief Economist for the South Asia Region
as India seeks Japanese expertise in sectors such as infrastructure, energy and manufacturing. India-Japan
Cooperation Act East Forum, established in 2017 has been a driving force to advance India-Japan
cooperation.4 Japanese companies have a huge opportunity in India and since years Japan is dominating the
Indian market through brands like Suzuki, Honda, Sony and Panasonic etc. Japan proposes to triple
infrastructure orders to about US$300 bn by 2020.5 A few big Japanese companies are Hitachi, Mitsubishi,
Toshiba, Canon, Toyota, Yamaha, Panasonic, Honda, Sony, Suzuki.

3. UNITED ARAB EMIRATES

India has strong bilateral ties in the middle east, especially with the United Arab Emirates. Cumulative foreign
direct investment (FDI) equity flows from UAE into India reached US$898 mn in 2018-2019.6 In a recent
development, Abu Dhabi Investment Authority (ADIA) announced its decision to invest US$ 1 bn in the
National Investment & Infrastructure Fund, India’s attempt to raise equity funds for the infrastructure sector.
The United Arab Emirates (UAE) intends to use India as a food security base and plans to invest in its
agriculture sector. More specifically, the UAE plans to increase its imports of Indian food grains and
horticulture products. UAE has already launched talks with various state governments for this purpose. Some
key companies functioning in India include Emaar, DP World, Abu Dhabi’s National Petroleum Construction
Company, Abu Dhabi National Energy Company, Drake and Scull International.

4. GERMANY

Indo-German trade story dates back to the 16th century when the German companies started manufacturing in
India. Some notable names are Krupp AG & Demag, who set-up the Rourkela Steel plant, while, Bosch set-up
its 1st unit to make spark plugs in 1953, followed by Siemens, Bayer, Daimler-Benz, etc. India has more than
1,600 German companies and over 600 Indo-German joint ventures in operation which include big names
like, BMW, Volkswagen, SAP, Siemens AG, and Merck. FDI from Germany has increased more than 41%
from 2013-14 and has reached a cumulative amount of US$ 4.50 bn till 2017-18.7 Government of India is
seeking investments from German companies in areas including smart cities and construction of airports to
increase economic cooperation between themselves.8

5. FRANCE

The year 2018 has marked the 20th anniversary of the strategic partnership between India and France. The key
deliverables are: 9

 Promote Make-in-India initiative for Indian and French defence enterprises to enter into arrangements
for co-development and co-production of defence equipment in India. Scorpene submarine; Defence
Research and Development Organisation (DRDO) and SAFRAN discussions; Rafale are some
prospects being aggressively considered

 The countries have witnessed exemplary cooperation programme in the Smart Cities of Chandigarh,
Nagpur, and Puducherry. The signing of the loan agreement between the Agence Francaise de
Development (AFD) and the Government of India for US$ 112 mn in support of the Smart Cities
Mission is another achievement

4
India-Japan Development Cooperation in the Indo-Pacific, Press Information Bureau,Government of India, Prime
Minister's Office, 2018
5
Raghunathan, India Is High On Japan's Investment Radar, Forbes Magazine 2014
6
dipp.gov.in, Fact Sheet On Foreign Direct Investment (Fdi), 2019
7
Annual Report, Reserve Bank of India, 2018
8
India seeks German investments in smart cities and airports, PTI, 2019
9
Ministry of External Affairs, India-France Joint Statement during State visit of President of France to India, mea.gov.in
2018
  France has committed US$ 785 mn to the International Solar Alliance (ISA), a treaty-based
organization, launched by Indian Prime Minister in 2015, aims to promote solar energy in 121
countries.

CASE STUDY-
Walmart and Flipkart Deal: Impact on Indian Economy
Recently, Walmart an international e-commerce giant has struck a deal to acquire Flipkart Pvt Ltd, an Indian
e-commerce company based in Bengaluru.

Facts10-

 Walmart, the largest e-commerce giant acquired a controlling stake of 77% in Flipkart ( India’s
largest e-commerce company by market share) by investing $16 Billion.

 With the deal India will now have Walmart, Amazon and Paytm Mall as the key players to compete in
the Indian e-commerce market

 The deal will help Flipkart leverage Walmart’s omni-channel retail expertise and general supply chain
knowledge. Walmart aims to extend their B2B sales across India through this acquisition.

 Walmart has a strong global physical presence in retail space but lacks in e-commerce. This deal can
spur their online presence in Indian markets.

 Both Flipkart and Walmart shall maintain separate brands and operating structures.

Positive Impact of Acquisition on Indian Economy: Pros

 Low prices, more variety: With the e-commerce giants competing for the top spot, product
differentiation and localization will bring more variety and create a diverse product basket at low
prices, this shall benefit the Indian consumers.

 R&D: For greater market penetration across the country, efficiency is the key which comes with more
R&D. Walmart is known for its culture of innovation and service. This can help in scaling up
Walmart’s business scale in India which can generate more revenue and create technological
spillovers and learning effect for domestic firms as well. The improved sophisticated nature of the
products will create external demand for Indian goods.

 Collateral Benefits: As the world’s largest retail giant pours funds, it will lead to more such
investments in e-commerce. The Indian e-commerce market space was drying up as funding ebbed
following liquidity issues due to Demonetization and GST bottlenecks. Walmart’s entry will usher
fresh funds and rejuvenate e-commerce ecosystem as more foreign firms and venture capitalists enter
India .

 With e-commerce giants revamping their business models, Indian e-commerce market is expected to
see broad based growth with better productivity.

 Economic Growth: Walmart will expand across their verticals which will boost output growth and
increase employment opportunities. With positive business sentiments, it will be an impetus to

10
Singh, R and M. Kasi, Advertising Strategies of Flipkart and their Effects by Students of BHU, project report, BHU.
 economic growth and capitalism. The deal will be subject to tax in India so revenue gains shall add to
domestic revenue receipts

 Efficient Supply Chain: Expansion of e-commerce requires efficient supply chain and logistics
which require infrastructural development. This will give a fillip to Indian agriculture and
infrastructure and benefit farmers as they would be able to cater to more demand as Walmart shares
its extensive experience in retailing, logistics and inventory and supply chain management.

 Job Creation: With more investment flowing in Indian economy especially in retail space, capacity
utilization shall improve . Output and productivity growth can create new employment opportunities
for both skilled and unskilled labor .

 ESOPS( Employee stock options): Many existing employees will make windfall gains through this
deal from their stock options. This will incentivize the entry of more workers in e-commerce who had
earlier fled the sector due to the downturn in the sector and can also absorb workers from old brick-
and-mortar and traditional industries which can help in formalization of more of Indian labor force.

Deal Against the Interests of Indian Economy: Cons

 Brick and Mortar Stores may shut down: Walmart is known for scrapping small businesses which
are selling at ultra low prices through Flipkart. Walmart may bring in its own labels with hyper-
competitive prices and replace the domestic MSMEs which can be a threat to brick and mortar stores
as they fear shut down due to competitive pressures.

 Small Players (Mom and Pop stores) will be hurt by this as market spaces shrink due to cut throat
competition which force small firms to exit. In an attempt to survive in the market, firms practice
excessive price cutting at the cost of viability and profitability which leads to inefficiency.

 Threat of Pan India Protests:Tamil Nadu Vanigar Sangankalin Peramaippu federation of traders has
already warned the government of pan India protests. Many more trade unions may call for such
protests which can hurt our economy, create social chaos and cause infrastructural damages.

 Backdoor entry for Walmart: FDI in India allows 100% FDI in single brand retail. Walmart is a
multi brand retail chain where 100% FDI is not allowed, so it focused only on cash and carry
business. Flipkart has already circumvented such restrictions in direct selling which will be used by
Walmart.

CONCLUSION
The Walmart-Flipkart deal has brought multiple but related issues into focus. The more important ones are:
competition, FDI policy, emergence of national champions, finance and livelihoods of the multitude of small
traders and those dependent upon them. The Competition Act under its present form cannot directly address
the problem of foreign acquisitions. But if we look at the positive side of it, while easing the e-commerce
entry barrier, this will become a great opportunity for the postal department also in terms of job creation and
revenue generation. Post office savings can also be used as a mode of online payment. This will enable
MSMEs and traditional industries like khadi to directly sell their products online, without even registering
with established platforms.

The domestic economy shall only flourish in a longer run and shall pave an even bigger way to not only allow
companies in the market but also allow Indian companies to flourish outside.
BIBLIOGRAPHY
Articles-

1. Singh, R and M. Kasi, Advertising Strategies of Flipkart and their Effects by Students of BHU, project
report, BHU.

2. India-Japan Development Cooperation in the Indo-Pacific, Press Information Bureau,Government of India,

Prime Minister's Office, 2018

3. Raghunathan, India Is High On Japan's Investment Radar, Forbes Magazine 2014

4. Ministry of External Affairs, India-France Joint Statement during State visit of President of France to
India, mea.gov.in 2018

5. https://economictimes.indiatimes.com/news/economy/foreign-trade/indias-economic-growth-driven-by-
domestic-demand-need-to-focus-on-exports-world-bank/articleshow/68771821.cms?from=mdr