Presented by:

10003 - Abhishek Pore

10022 - Arpita Shah
10026 - Atman Shah
10030 - Chintan Anjaria
10132 - Richa Chugh
10159 - Suchi Jain
10170 - Varun Iyer

FDI POLICY OF INDIA:

PROS & CONS
 Index
 Introduction
 Types of FDI
 Major Bodies Constituted to FDI
 India as a FDI destination
 Entry Process
 Entry Strategy
 Pros & Cons of FDI in India
 Sectorial Analysis
 Special Investment Avenues
 FDI Equity Inflow
 Country Wise FDI Inflows
 Recommendations
 Conclusion
 Introduction
It is defined as an investment involving a long-
term relationship and reflecting a lasting interest
and control of a resident entity of one economy
in an enterprise resident of another economy
other than that of the foreign direct investors.
FDI implies that the investor exerts a significant
degree of influence on the management of the
enterprise resident in the other economy.
 Contd.
Generally speaking FDI refers to capital inflows
from abroad that invest in the production
capacity of the economy and are:
 Usually preferred over other forms of
external finance because they are:
 Non-debt creating, non-volatile and their returns
depend on the performance of the projects
financed by the investors

FDI also facilitates international trade and

transfer of knowledge, skills and technology.
 Contd.
The FDI relationship consists of a parent
enterprise and a foreign affiliate which together
form a multinational corporation (MNC).

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.
Foreign Direct Investment (FDI) is permitted as
under the following forms of investments:

 Through financial collaborations

 Through joint ventures and technical

collaborations

 Through capital markets

 Through private placements or preferential

allotments
 Types of FDI

 Greenfield Investment

 Mergers & Acquisitions

 Horizontal Foreign Direct Investment

 Vertical Foreign Direct Investment

Major Bodies Constituted For FDI
 1991- Foreign Investment Promotion Board FIPB

 1996- Foreign Investment Promotion Council

FIPC

 1999- Foreign Investment Implementation

Authority FIIA

 2004- Investment Commission

 Secretariat for Industrial Assistance (SIA)

Factors Responsible for Attracting
Global Companies to India
FDI has been considered as the magic wand that will
transform "under-developed" India into an advanced
nation with a "modern" infrastructure. The factors
responsible for attracting global companies to India are as
follows:

 Atmosphere Conducive For Business

 Labour
 Political Stability
 World - Class Human Resources
 Leadership In Technology Innovation
 Multifaceted Financial Sector
 Infrastructure
 Government Incentives
 Forbidden Territories

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, Sulphur, Diamonds, Copper, Zinc
The Entry Process

CCFI
Route

FIPB
Route

Automatic
Route
The Entry Process: Automatic Route
All items/activities for FDI investment up to 100% fall
under the Automatic Route except the following:

 All proposals that require an Industrial License

 All proposals in which the foreign collaborator has a

previous venture/tie up in India

 All proposals relating to acquisition of existing shares

in an existing Indian Company by a foreign investor

 All proposals falling outside notified sectoral policy/

caps or under sectors in which FDI is not permitted
 Illustrative List Of Sectors Under
Automatic Route For FDI upto 100%
 Most manufacturing activities
 Drugs and pharmaceuticals
 Food processing
 Electronic hardware
 Software development
 Film industry
 Advertising
 Hospitals
 Pollution control and management
 Management consultancy
 Computer related Services
 Construction and related Engineering Services
 Health related & Social Services
 Travel related services
The Entry Process: FIPB Route
Government Approval:
 For all activities, which are not covered under the
Automatic Route
 The FIPB also grants composite approvals involving
foreign investment/ foreign technical collaboration
 RBI has granted general permission under Foreign
Exchange Management Act (FEMA) in respect of
proposals approved by the Government.
 Indian companies getting foreign investment
approval through FIPB route do not require any
further clearance from RBI for the purpose of
receiving inward remittance and issue of shares to
the foreign investors.
The Entry Process: CCFI Route
 Investment proposals falling outside the automatic
route

And

 Having a project cost of Rs. 6,000 million or more

would require prior approval of Cabinet Committee
of Foreign Investment (“CCFI”)

 Decision of CCFI is usually conveyed in 8-10 weeks.

Thereafter, filings have to be made by the Indian
company with the RBI
 The Entry Strategy

 Forms in which Business can be conducted

in India:

 Wholly owned subsidiary

 Joint Venture Company

 Branch Office

 Project Office

 India Presence: Liaison Office

 Pros of FDI in India
 Stable democratic environment over 60 years of
independence

 Large and growing market

 World class scientific, technical and managerial

manpower

 Cost-effective and highly skilled labor. Increase in

Domestic Employment/Drop in unemployment

 Abundance of natural resources

 Contd.

 Well-established legal system with independent

judiciary

 Developed banking system and vibrant capital

market

 India among the top three investment hot spots

and one of the fastest growing economies in the
world

 Large English speaking population

 Cons of FDI in India
 Industrial Sector Dominance in the Domestic
Market

 Technological Dependence on Foreign

Technology Sources

 Disturbance of Domestic Economic Plans in Favor

of FDI-Directed Activities

 “Cultural Change” Created by “Ethnocentric

Staffing” The Infusion of Foreign Culture and
Foreign Business Practices
FDI in India

SECTOR WISE
 FDI in Service Sector
 In the private banking sector of India, FDI is allowed
up to a maximum limit of 74 % of the paid-up capital
of the bank

 Foreign Direct Investment and Portfolio Investment in

the public or nationalized banks in India are subjected
to a limit of 20 % in totality

 Indian operations by foreign banks can be executed by

any one of the following three channels
 Branches in India
 Wholly owned subsidiaries
 Other subsidiaries
Pros & Cons of FDI in Services Sector
 Pros:
 FDI limits in the banking sector of India were
increased with the aim to bring in more FDI inflows
in the country along with the incorporation of
advanced technology and management practices
 The Reserve Bank of India governs the investment
matters in the banking sector

 Cons:
 Constant FDI inflow in the country has lead to
increased liquidity & its subsequent strikes of inflation
 Also there has been immense pressure on our rupees
Structure & Segment – Indian Real
Estate Segment
FDI in Housing & Real Estate Sector
 The housing and real estate sector in India witnessed FDI of
US$ 640 million in April-September 2010-11

 Housing and real estate sector including cineplex, multiplex,

integrated townships and commercial complexes etc,
attracted a cumulative FDI worth US$ 8,996.46 million from
April 2000 to September 2010

 Aggregate FDI inflows into the real estate sector are recorded
at approximately 7.42 per cent of the total inflows

 India allows 100% FDI through the automatic route in:

 townships
 housing
 built-up infrastructure
 construction-development projects
 Pros & Cons of FDI in
Housing & Real Estate Sector

 Pros:
 To make the real estate sector in India more
organized
 To increase professionalism in the sector
 To introduce advanced technology in the
construction business
 To create a healthy and competitive market
environment for both Indian and foreign
investors
 Contd.
 Cons:
 FDI regulations currently in force allow an
entity to receive FDI in construction
development only if the minimum built-up area
of the project is 50,000 square meters
 Many real estate projects have failed to take-off
due to the delay in obtaining statutory
clearances and conversion of land usage
 Current FDI regulations provide for a three-year
lock-in for each tranche of foreign investment,
and early exit needs government approval
 FDI policy for investment in hotels and hospitals
is far less stringent than the one for housing
projects
 FDI in Automobile Sector
 FDI inflows in this sector has been at an increasing rate

 High performing sector, Prime destination for the

international players

 Opened to foreign investment in the year 1991

 The production level of this sector has increased from 2

million 1991 to 9.7 million in 2006 and to 11.1 million in
2010

 FDI upto 100 % - turnover of USD 12 billion in the Indian

auto industry and USD 3 billion in the auto parts industry

 Manufacturing – 100 % FDI and Imports are encouraged

Pros of FDI in Automobile Sector

 Advanced Technology, Cost effectiveness, efficient

manpower

 Well developed and competent automotive

ancillary industry along with automobile testing
and R&D centers

 Increase in the manufacturing capacity

Opportunities of FDI in Automobile Sector

 Establishing engineering centers

 Two wheeler segment, Heavy truck segment,

Passenger car segment

 Research and Development centers

 FDI in Telecom Sector
 FDI increased from 49% to 74% in 2005 by the Department of
Industrial Policy and Promotion(Ministry of Commerce and
Industry)
 Telecom sectors - National/ International Long Distance, Basic,
Cellular, V-Sat, Unified Access Services, Public Mobile Radio Trunked
Services (PMRTS), Global Mobile Personal Communications Services
(GMPCS) and other value added Services
 Foreign investment in Indian market - Foreign Institutional Investors
(FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible
Bonds (FCCBs), American Depository Receipts (ADRs), Global
Depository Receipts (GDRs) and convertible preference shares held
by foreign entity
 FDI up to 49 percent will be allotted to certain telecom sectors in
India under automatic route
 In case of the license companies, FDI will require the FIPB approval
provided it has a total ceiling of 74 percent
 FDI investments will be entitled to the laws of the Government of
India and not the overseas countries
Pros of FDI in Telecom Sector

 Benefit to the customer

 Technology transfer & market access
 Rural areas
 Harmonious relationship with country from which
foreign investment is being made

Opportunities of FDI in Telecom Sector

 Manufacturing of equipments and components

 Tele – education, Tele - banking, Tele – Medicine
 Long distance Bandwidth capacity in India
 FDI in Power Sector
 There are huge opportunities of FDI in power sector in India

 Past few years have witnessed an outstanding growth in the power

sector especially the sectors based on renewable sources of energy.

 100% FDI is permitted to this sector under automatic route in

almost all the power sectors in India except the Atomic energy.

 Important aspects of FDI in the power sector of India are –

 Power projects involving generation and distribution tasks are
allowed in all types and sizes
 As per the Electricity Act 2003, trading in power is activated
 Thermal power plants will get a return of 16 percent on equity
 The import of equipments will be entitled to 20 percent of
import duty
 A duration of 30 years will given as a renewable license period
 Power generating projects will have a five year tax holiday .
 Opportunities of Foreign Direct Investment (FDI) in
the Power Sector in India exist in -
 Hydro Projects
 Captive Power
 Ultra Mega Power Projects
 Nuclear Power
 National Grid Program
 Rural Electrification
 Trading
 Renewable

 The government of India aims at reaching 2,00,000

MW by the year 2012
 FDI in Computer
Software & Hardware Sector
 Over the past few years the computer software
industry has been one of the fastest growing sectors in
Indian economy.
 100 percent FDI is permitted under automatic route
to the E-Commerce activities in India
 Software Technology Parks have been a major
initiative in India to drive FDI in computer software
industry .
 India constitutes 0.6 percent of the entire
international market in terms of manufacturing
electronics hardware
 High growth prospects, in terms of increased
consumption in the India as well as increasing
demand for exports are expected to lead to more
Foreign Direct Investments in this sector
 Sub Sectors Of FDI Inflows In Computer
Software & Hardware
%age with total FDI
inflows in Computer
Sr.No. Sub Sectors Amount of FDI inflows
Software & Hardware
Sector

Rupees in crores US $ in millions

1. Computer Software 41,346.67 9,325.99 8.80

Industry

2. Computer Hardware 463.77 105.69 0.10

3. Others (Software) 648.18 141.60 0.13

Total of the above 42,458.62 9,573.28 9.03

 Share Of Top Five RBI‟s Region‟s (With State Covered)
Attracted FDI Inflows For
Computer Software & Hardware
RBI‟s Regional %age with FDI inflows
Rank States Covered Amount of FDI inflows in Computer Software &
Office Hardware
Rupees in US $ in

crores million
1. Mumbai Maharashtra, Dadra & Nagar 9,334.00 2,118.72 22.13
Haveli, Daman & Diu

2. Bangalore Karnataka 5,076.08 1,129.83 11.80

3. Chennai Tamil Nadu, Pondicherry 4,416.89 1,004.44 10.49

4. New Delhi Delhi, Part of UP and 3,858.26 855.03 8.93

Haryana

5. Hyderabad Andhra Pradesh 1,463.37 339.13 3.54

Total of above 24,148.60 5,447.15 56.89

 FDI in Insurance Sector

 FDI up to 26% allowed on the automatic

route

 However, license from the Insurance

Regulatory & Development Authority (IRDA)
has to be obtained

 There is a proposal to increase this limit to

49%
Pros & Cons of FDI in Insurance Sector
 Pros:
 Greater foreign investments would help in
training and skills up gradation of the agents
 Raising the FDI cap will enable expertise in the
Indian insurance industry (e.g. underwriting,
actuarial, claims management, data
standardization, etc.)

 Cons:
 Non-executive Directors of a Corporate Agent
are not permitted to be the Director/s of Life
Insurance Company
 FDI in Retail Sector

 FDI up to 100% for cash and carry wholesale

trading and export trading

 FDI up to 51 % with prior Government

approval for retail trade of „Single Brand‟
products

 FDI is not permitted in Multi Brand Retailing

FDI in Retail Sector

Source: McKinsey & Company

 Challenges
Skilled
Workers

Inflation Competition

Taxation
Real Estate
Policy

Supply Chain
Management
Pros & Cons of FDI in Retail Sector

 Pros:
 Enables the Indians to spend the same money in India
 Reduce the pressure from its trading partners in bilateral/
multilateral negotiations
 Permitting foreign investment in food-based retailing is
likely to ensure adequate flow of capital into the country
 Flourish in terms of quality standards and consumer
expectations

 Cons:
 Large-scale exit of domestic retailers
 Threat for the growth of domestic retail sector
 Lead to unemployment
Special Investment Avenues

 Electronic Hardware and software

technology Parks

 Export oriented units

 Special Economic zones

Electronic Hardware And Software
Technology Parks

 100% foreign investment under automatic route is

allowed in electronics and software industries set up
exclusively for exports

 Eligible to purchase, free of customs duty/ excise duty,

their entire requirement of capital goods, raw materials
and components, spares and consumables, office
equipments etc.
 Export Oriented Units
 100% foreign equity (is permitted through Automatic
Route similar to SEZ units) in Export Oriented Units
(“EOUs”) even if it is manufacturing an item reserved for
the small scale sector

 EOUs enjoy several privileges like duty exemption on

import and domestic procurement and also Income tax
exemption till 31.03. 2009

 Project with minimum investment of Rs.10 million and

above in building, plant and machinery qualify to be
considered under EOU scheme

 Not applicable in case of certain industries like agriculture,

floriculture, information technology, services, hand made
jewellery, etc.

 Exemption of Industrial Licensing for manufacture of items

reserved for SSI sectors
 Special Economic Zone

 Special Economic Zone (“SEZ”) is deemed to be foreign

territory for the purposes of trade operations and
duties and tariffs

 No cap on Foreign investment for manufacturing items

reserved for SSI as well as exemption from industrial
licensing

 An SEZ unit can be set up to undertake trading

activities in addition to manufacturing of goods and
rendering of services
FDI Equity Inflow
 FDI Equity Inflows (Month – Wise)
during Financial Year 2010 – 2011:
Financial Year 2010 – 2011 Amount of FDI Inflows
(April – March) (in Rs. Crore) (in US$ mn)
1 April 2010 9,854 2,214
2010 – 2011 (upto April 2010) 9,854 2,214
2009 – 2010 (upto April 2009) 11,708 2,339
%age growth over last year (-) 16% (-) 05 %

FDI Equity Inflows (Month – Wise)

during Financial Year 2011 – 2012:
Financial Year 2011 – 2012 Amount of FDI Inflows
(April – March) (in Rs. Crore) (in US$ mn)
1 April 2011 13,846 3,121
2011 – 2012 (upto April 2011) 13,846 3,121
2010 – 2011 (upto April 2010) 9,697 2,179
%age growth over last year (+) 43 % (+) 43 %
Recommendations
 Attract Quality FDI

 Attract Technology And Localize Production

 The “Spillover” Illusion

 Focus On Export-oriented FDI

 Target Specific Sectors

 Increase Ease Of Doing Business

 Conclusion
 India is continuously gaining its position as a preferred
investment destination. The trend line shows a positive
growth of inward FDI in India and even in the time of global
economic crises it was able to attract investment higher that
the previous years.
 The service sector came up as the front runner in terms of
receiving FDI followed by telecommunication and electrical
equipments. The main reason behind the success of Service
sectors lies in the huge skilled labour pool having good
education and knowledge of English. Many MNC‟s are
setting up their BPO and KPO in India to utilize the skilled
labours to support their business activities.
 Mauritius emerged as the highest investing country using FDI
route. The main reason is DTAA agreement as per this treaty
the capital gain arising in India from the sale of securities can
be taxed only in Mauritius. Since in Mauritius such gains are
not taxed this becomes tax free income. In case of other
countries they levied tax on such gains.
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