Fdi

Foreign Direct Investment in India
Phases of Indian Economy 1947-1980

• Command and Control Economy
– Allocation of resources by the Government (budgetary grants) – Government took act
ive part in setting priorities for the economy – Self-Reliance was the buzz word – N
ationalisation of Banks – Limited scope for private participation
Luthra & Luthra Law Offices 2
Phases of Indian Economy 1991-2000
• Liberalization and Globalization of Indian Economy
– Increased emphasis on private sector participation – Limited extent of FDI partici
pation – Gradual improvement in the enabling environment
Luthra & Luthra Law Offices
3
Phases of Indian Economy post 2000
• Political Coalitions have started providing stable governments • Government to get
out of owning and managing businesses: Disinvestment Policy • Gradual relaxation
in the FDI Policy
4
Progressive Liberalisation
Pre-1991 1991 FDI was allowed selectively up to 40% under FERA This period was d
ominated by the Congress party 35 high priority industry groups were placed on t
he Automatic Route for FDI up to 51% Minority Congress government: Initiated eco
nomic reforms in a big way Automatic Route expanded to 111 high priority industr
y groups up to 100%/ 74%/ 51%/50% United Front Government: Inclusive of ‘left part
ies’, was perceived as traditionally opposed to FDI, but continued with the reform
s. All sectors placed on the Automatic Route for FDI except for a small negative
list BJP coalition government:(coalition of Left and Right wing parties) was tr
aditionally seen as opposed to FDI, but continued with economic reforms. Many ne
w sectors opened to FDI; viz., insurance (26%), integrated townships (100%), mas
s rapid transit systems (100%), defence industry (26%), tea plantations (100%),
print media (26%). Sectoral caps in many other sectors relaxed; BJP coalition go
vernment: pursued reforms vigorously and initiated second generation reforms. Lu
thra & Luthra Law Offices 5
1997
2000
Post 2000
Consensus on Economic Liberalisation
• Change in perception
– Indian Business Houses – Government – Legal Framework: shift from a Positive List to
a Negative List (FERA FEMA)
• Gradually all sectors moving to ‘Choice’ and ‘Competition’ (Multiple Player Model)
6
Current economic situation in india
Present Picture
• India: Fourth largest economy in terms of Purchasing Power Parity • Tenth most ind
ustrialized economy • GDP growth rate of 8.1% - Second highest in the world. • Consi
derable improvement in FDI inflows • FII inflows:
– For the period, July 2003 – Jan 2004 FII inflow has exceeded USD 7 bn, which is mo
re than the cumulative FII inflow in the last five years.
• Still a big gap between India and China
Foreign Direct Investment
Foreign direct investment (FDI) is defined as "investment made to acquire lastin
g interest in enterprises operating in the host economy of the investor.“ The FDI
relationship, consists of a parent enterprise and a foreign affiliate which toge
ther form a transnational corporation (TNC). In order to qualify as FDI the inve
stment must afford the parent enterprise control over its foreign affiliate. The
UN 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 fi
rm; lower ownership shares are known as portfolio investment.
The IMF definition of FDI includes as many as twelve different elements, namely:
equity capital, reinvested earnings of foreign companies, inter-company debt tr
ansactions, short-term and long-term loans, financial leasing, trade credits, gr
ants, bonds, non-cash acquisition of equity, investment made by foreign venture
capital investors, earnings data of indirectly held FDI enterprises and control
premium, non-competition fee, and so on.
FDI definition in India is restricted mainly to hard cash unlike other countries
which include noncash such as technology and machinery in the FDI flows. It als
o excludes; -reinvested earnings -subordinated debt -overseas commercial borrowi
ngs which are included in other country statistics.
Entry Process & Entry Strategies
11
The Industrial Policy
Industrial Licensing
• All Industrial undertakings exempt from obtaining an industrial license to manuf
acture, except for:
– Industries reserved for the Public Sector – Industries retained under compulsory l
icensing – Items of manufacture reserved for the Small Scale Sector – If the proposa
l attracts locational restriction
• Industrial Entrepreneur Memorandum
• Industries reserved for the Public Sector: (1) Atomic Energy and (2) Railway Tra
nsport • Compulsory licensing needed in the following industries:
– – – – Distillation and brewing of alcoholic drinks Cigars and cigarettes and manufactu
red tobacco substitutes Electronic aerospace and defence equipment of all types
Industrial explosives including detonating fuses, safety fuses, gun powder, nitr
ocellulose and matches – Certain hazardous chemicals
Locational Policy
• Industrial undertakings are free to select the location • Location to be 25 km awa
y from any city with a million strong population – Exceptions:
• When located in an area designated as an “Industrial Area” before the 25th July, 199
1. • Electronics, Computer Software and Printing (and any other industry which may
be notified in future as ‘non polluting industry’).
Small Scale Industries
• Suitable for Foreign Investment?
– Cap on Investment in fixed assets (plant and machinery) is Rs. 10 million (appro
x. SGD 3,70,000)
– Not more than 24 per cent of total equity can be held by any industrial undertak
ing either foreign or domestic – Upon such equity exceeding 24% the SSI status is
lost. Carry-on-Business (COB) Licence required.
• Various items reserved exclusively for SSIs.
15
.
The Entry Process
Investing in India
Automatic Route
General rule •Inform RBI within 30 days of inflow/issue of shares • Pricing: FEMA Re
gulations •Unlisted – CCI (Comp Comm of India) •Listed – SEBI • Cap of Rs. 600 Crore
Prior Permission
By exception Approval of Foreign Investment Promotion Board needed. Decision gen
erally within 4-6 weeks
16
The Entry Process: Automatic Route
• All items/activities for FDI investment up to 100% fall under the Automatic Rout
e except the following:
– All proposals that require an Industrial Licence. – All proposals in which the for
eign collaborator has a previous venture/ tie up in India. – All proposals relatin
g to acquisition of existing shares in an existing Indian Company by a foreign i
nvestor. – All proposals falling outside notified sectoral policy/ caps or under s
ectors in which FDI is not permitted.
17
The Entry Process: Government Approval
Foreign Investment Promotion Board (FIPB) Approval
• For all activities, which are not covered under the Automatic Route • Composite ap
provals involving foreign investment/ foreign technical collaboration • Published
Transparent Guidelines vs. Earlier Case by Case Approach • Downstream Investment
Acquisition of shares in a Listed Company
Takeover Code
• Acquisition of more than specified equity stakes would entail public offer • Prici
ng: Average of 26 weeks or 2 weeks, whichever is higher • No takeover of managemen
t before completion of Takeover Code formalities
19
Foreign Technology Collaboration
• Foreign technology collaborations are permitted either through the automatic rou
te or by the Government.
Policy for Automatic Approval
• To all industries for foreign technology collaboration agreements, irrespective
of the extent of foreign equity in the shareholding, subject to:
– The lump sum payments not exceeding US $ 2 Million;
20
Policy for Automatic approval (contd.)
– Royalty payable being limited to 5 per cent for domestic sales and 8 per cent fo
r exports, subject to a total payment of 8 per cent on sales – No restriction on t
he duration of the royalty payments – The aforesaid royalty limits are net of taxe
s and are calculated according to standard conditions.
Policy for Automatic approval (contd.)
– Payment of royalty up to 2% for exports and 1% for domestic sales is allowed und
er automatic route on use of trademarks and brand name of the foreign collaborat
or without technology transfer. – Registration of FC Agreement with RBI.
22
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
Exit Issues
• Transfer of shares from non-resident to non-resident does not require RBI approv
al for pricing • Transfer of shares from non-resident to resident does not require
any FIPB Approval, though RBI approval is required for pricing
– Pricing as per FEMA – listed and unlisted securities – RBI permission not required i
f sale through Stock Exchange
• Mauritius Route: Capital Gain Advantage
24
Legal Structures facilitating FDI
25
Facilitating FDI in India
Emergence of Independent Regulators: Electricity, Telecom, Insurance, Capital Ma
rket and Competition Law
• Ensuring level playing field vis-à-vis Government Corporations and inter se privat
e players • Expertise in the subject matter involved • Expeditious resolution of dis
pute
Emergence of Independent Regulators (Contd.) • Regulators under consideration: Pet
roleum, Railways, Information and Broadcasting • Regulator to curb Anti-Competitiv
e Practices • Government Directives
27
Labour laws – a more contractual approach.
• Move towards: hire and fire
• Progressive use of discretionary executive powers
– – – – Permissions granted for closure of unviable units Inspections only upon workers’ g
rievances Voluntary Retirement Schemes EPZs, SEZs etc may be exempted from appli
cation of certain labour laws – Amendment to Industrial Disputes Act under conside
ration – Amendment to Contract Labour (Regulation & Abolition) Act, 1970 under con
sideration.
28
Investment Incentives
29
Incentives for investment in Telecom Sector
Permission for Inter-Circle & Intra-Circle Mergers • Exemplary growth in teledensi
ty, subscriber base etc. • Companies commencing operations before 31st March, 2004
, would enjoy tax benefits:
– 100% deduction for first five years – 30% deduction for next five years
• Exemption from tax on interest income and long term capital gains in certain cas
es • Import duty rates have been reduced for various telecom equipment
Investment Incentive for IT Industry
• Software companies have a ten year tax holiday on their export income • In 1998 th
e Government set up a new Ministry of Information Technology • The Information Tec
hnology Act, 2000 was passed to tackle cyber crimes and facilitate ecommerce
Incentives for Investment in Power Sector
• New Legal Regime: Electricity Act, 2003 • The Act provides for: Multiple Buyer Mod
el, Independent Regulatory Body, Open Access, Power Trading as an independent bu
siness, delicensing of generation • 100% FDI Automatic Route in:
– Hydro-electric power plants; – Coal/lignite based thermal power plants; – Oil/gas ba
sed thermal power plants.
Incentives for Investment in Power Sector
• Other investment incentives:
– New Power Projects eligible for 100% tax holiday in any block of ten years, with
in first fifteen years of operation. – The Deadline for income tax exemption for n
ew power projects extended from 2006 to 2012. – Various indirect tax incentives:
• Concessional rate of import duties • Special project import scheme • Deemed export b
enefit for certain categories of power projects.
Reforms in Financial Sector
• FIIs allowed in Capital Market, can invest both in Debt and Equity • FDI cap in pr
ivate sector banks raised to 74%
– 10% cap on voting rights
• The Mutual Fund market is also open now to foreign players. • Equity issue pricing
is market determined
FDI in Real Estate: Policy & Issues
• Press Note 4 (2002 Series)
– 100% FDI under Automatic Route PERMITTED FOR Integrated Townships, subject to fo
llowing conditions:
• Foreign company to be registered as Indian company under Companies Act, 1956 • Cor
e Business - Integrated Township Development with a successful track record. • Min
imum area of development: 100 acres as per local bylaws/rules. In absence of suc
h by laws/rules, minimum of 2000 dwelling houses for about 10,000 population to
be developed by the investor.
• Conditions post acceptance of FDI proposal
• • • •
Minimum capitalization norms Upfront payment Minimum lock-in period Time bound c
ompletion of project
35
FDI in Hotel and Tourism:Policy and Issues
• 100% FDI under Automatic Route • “Hotel” includes Restaurant, beach resorts and other
tourist complexes providing accommodation and/or Catering • “Tourism related industr
ies” includes travel agencies, tour operating agencies, units providing facilities
for cultural, adventure and wild life experience to tourists; surface, air and
water transport facilities to tourists; leisure, entertainment, amusement, sport
s and health units for tourists and Convention/ Seminar units and organizations.
• Automatic approval for Technical, Consultancy, Marketing, Publicity, Managerial
services subject to specified limits.
Conclusion
• Economics occupies centre stage in various elections • Rising expectations; rising
prosperity • Legal regime: more stable and predictable • Bureaucracy: changing with
the times • The Future beckons
37
FDI IN INDIA: FACTS AND FIGURES
38
39
40
LOCATIONAL DETERMINANTS OF FDI
A firm becomes multinational mainly for three reasons. -Ownership advantages, -L
ocation-specific advantages -Internalization. Large market size, proximity to ho
me market, lowcost labor and favorable tax treatment in the host country are all
considered as location advantages
Location-specific advantages are further classified by three types of motives of
FDI. First, market-seeking investment is undertaken to sustain existing markets
or to exploit new markets. For example, due to tariffs and other forms of barri
ers, the firm has to relocate production to the host country where it had previo
usly served by exporting
Second, when firms invest abroad to acquire resources not available in the home
country, the investment is called resource- or asset-seeking. Resources may be n
atural resources, raw materials, or low-cost inputs such as labor.
43
Third, the investment is rationalized or efficiencyseeking when the firm can gai
n from the common governance of geographically dispersed activities in the prese
nce of economies of scale and scope.
44
The Model
FDI = f (MS, OE/FT, I, DMA, EE, IE) • • • • • • • Where FDI = Foreign direct Investment, MS
Size of domestic market, OE/FT = openness of the economy to foreign trade, I = I
nfrastructure of the host country, DMA = Domestic market Attractiveness, EE = Ex
ternal economic stability, IE = Internal economic stability.
The Model
The economic theory suggests that a positive relationship between FDI and size o
f domestic market, openness of the economy to foreign trade, and infrastructure
of the country. While a negative relationship between FDI and External economic
stability, internal economic stability. The larger the market size, the more dem
and for the products or services to be provided by the FDI.
Share of Five Top States Attracting FDI Approvals (January 1991 to March 2004)
No. of FDI Approvals Amount of FDI US $ in Bill ion % FDI Approv al
Rank
Name of the State
Total
Technical
Financial
Rs. In Crores
1 2 3 4 5
Maharashtra Delhi Tamil Nadu Karnataka Gujarat
4,816 2,638 2,607 2,467 1,204
1,308 304 613 494 556
3,508 2,334 1,994 1,973 648
51,114.68 13.18 17.48 35,250.74 9.78 25,071.77 6.52 24,138.44 6.15 18,837.30 4.8
1 12.06 8.58 8.26 6.44
47
Source: Economic Survey-2003-04
Four states namely Karnataka, Maharashtra, Tamilnadu and Gujarat accounted for o
ver one-third of total FDI approvals. The shares of these individual states were
, respectively, 7.6%, 13.7%, 6.7% and 5.3%. The shares of other major states wer
e considerably lower: West Bengal (3.7%), Andhra Pradesh (4.2%), Madhya Pradesh
(4.5%) and Orissa (3.8 %). The shares of Kerala, Haryana, Punjab and Rajasthan w
ere comparatively smaller whereas the flow of FDI into populous states such as B
ihar and Uttar Pradesh has been virtually negligible.
49
Conclusion As far as the economic interpretation of the model is concerned, the
size of the domestic market is positively related to foreign direct investment.
The greater the market, the more customers and the more opportunities to invest.
Since FDI is mostly in the form of physical investment, investors would prefer
the markets with better infrastructure.

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Foreign Direct Investment in India

Phases of Indian Economy 1947-1980

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