Foreign investment in

India

Submitted By To

RN.-16
Sub-Business Environment
 Declaration

Dissertation ‘foreign investment in India ’

Submitted to the ‘Institute of Management Science’, ‘University of
Lucknow’, in Partial Fulfilment for the award of

‘Master of Business Administration’ semester I

Acknowledgement

This text is compilation work & embodies a fairly

comprehensive treatment of Foreign Investment in India . A few
general topics of the subject have been also dealt with.

The text has been written in simple graspable language

&profusely illustrated .

In the last but not the least, I wish to express my deep sense of
gratitude & indebtedness to those who helped me directly or
indirectly during the preparation of the manuscript of this text. It
couldn’t have been possible for me to execute this work had I not
been supported by a number of people. I’m really grateful to Ms CC
(Faculty, IMS, University of Lucknow).
 Thanking you,

Index
Introduction

India, the largest democracy in the world, with its consistent growth/performance
and abundant skilled manpower provides enormous opportunities for investment,
both domestic and foreign. India is the fourth largest economy in terms of Purchase
Power Parity and the tenth most industrialized country in the world. Major initiatives
such as industrial decontrol, simplification of investment procedures, enactment of
competition law, liberalisation of trade policy, full commitment to safeguarding
intellectual property rights, financial sector reforms, liberalisation of exchange
regulations etc., have been taken, which provide a liberal, attractive, and investor
friendly investment climate.

As the industry moves forward, opportunities abound in a country which has

the world's largest middle class -- some 300 million strong and still growing. The bulk
of expansion in the world milk production is taking place in Asia, and India figures
prominently in it. 'Bharat' - the golden sparrow, is attracting foreign investors who
are assured of good returns. The scope for foreign investment in India is vast. India
offers to foreign investors a well balanced package of fiscal incentives for exports and
industrial investments. It includes complete tax exemptions and tax holidays.
Investment incentives are offered by both the Central Government and the
Government of the State in which the unit is located. India has tax treaties with 40
countries.

There are two types of foreign investment take place in India. One is foreign direct
investment and second is foreign institutional investments.

Foreign Direct Investment is the purchase by the investors or corporations of one

country of non-financial assets in another country. This involves a flow of capital
from one country to another to build a factory, purchase a business or buy real
estate.

The less well known Foreign Institutional Investors/investments (FIIs) have been a
key part of India's growth story this decade. The term FIIs is most commonly used to
refer the investment of companies that are established or incorporated outside India
and are investing in the financial markets of India by registering themselves with the
Securities & Exchange Board of India (SEBI).

Investment in Indian market

India, among the foreign investors, is believed to be a good investment despite
political uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India presents a vast potential for overseas investment and is actively
encouraging the entrance of foreign players into the market. No company, of any
size, aspiring to be a global player can, for long ignore this country which is expected
to become one of the top three emerging economies.

 Success in India
Success in India will depend on the correct estimation of the country's potential,
underestimation of its complexity or overestimation of its possibilities can lead to
failure. While calculating, due consideration should be given to the factor of the
inherent difficulties and uncertainties of functioning in the Indian system. Entering
India's marketplace requires a well-designed plan backed by serious thought and
careful research. For those who take the time and look to India as an opportunity for
long-term growth, not short-term profit- the trip will be well worth the effort.
  Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the United
Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It
is also the second largest among emerging nations. (These indicators are based on
purchasing power parity.) 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. Yet, despite the practically unlimited possibilities in India for overseas
businesses, the world's most populous democracy has, until fairly recently, failed to
get the kind of enthusiastic attention generated by other emerging economies such
as China.

 Lack of enthusiasm among some investors

The reason being, after independence from Britain 50 years ago, India developed a
highly protected, semi-socialist autarkic economy. Structural and bureaucratic
impediments were vigorously fostered, along with a distrust of foreign business.
Even as today the climate in India has seen a sea change, smashing barriers and
actively seeking foreign investment, many companies still see it as a difficult market.
India is rightfully quoted to be an incomparable country and is both frustrating and
challenging at the same time. Foreign investors should be prepared to take India as it
is with all of its difficulties, contradictions and challenges.

 Developing a basic understanding or potential of the Indian market

The Indian middle class is large and growing; wages are low; many workers are well
educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms. But there is still
cause for worries-

 Infrastructural hassles
The rapid economic growth of the last few years has put heavy stress on India's
infrastructural facilities. 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. Problems include power demand shortfall, port
traffic capacity mismatch, poor road conditions (only half of the country's roads are
surfaced), low telephone penetration (1.4% of population).

 Indian Bureaucracy
Although the Indian government is well aware of the need for reform and is pushing
ahead in this area, business still has to deal with an inefficient and sometimes still
slow-moving bureaucracy.
  Diverse Market
The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences
differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and

overall economy before taking the plunge. Research firms in India can provide the
information to determine how, when and where to enter the market. There are also
companies which can guide the foreign firm through the entry process from
beginning to end --performing the requisite research, assisting with configuration of
the project, helping develop Indian partners and financing, finding the land or ready
premises, and pushing through the paperwork required.

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 competitor? These are the question which one should ask before the
investment.

Check on Economic Policies

The general economic direction in India is toward liberalization and globalization. But
the process is slow. Before jumping into the market, 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.
Types of foreign investment
foreign
investment

FDI FII

joint venture FPI

mergers
CDRs
&acquisition

subsidaries ADRs

FCCBs

(Types of foreign investment)

1-FDI - Foreign Direct Investment is the purchase by the investors or corporations of
one country of non-financial assets in another country. This involves a flow of capital
from one country to another to build a factory, purchase a business or buy real
estate.

a- Joint ventures- A joint venture is a legal entity formed between two or more
parties to undertake an economic activity together and sharing the risk in
formation. The parties agree to create, for a finite time, a new entity and new
assets by contributing equity.
b- Mergers & Acquisitions - The combining of two or more entities into one,
through a purchase acquisition or a pooling of interests. Acquisition: can also
be called a takeover, and is defined as acquiring control of a corporation,
called a target, by stock purchase or exchange, either hostile or friendly.
c- Subsidiaries - A company owned by the parent company or holding company;
a subordinate theme; auxiliary or supplemental; secondary or subordinate; of,
or relating to a subsidy

2-FII- The term FIIs is most commonly used to refer the investment of companies
that are established or incorporated outside India and are investing in the financial
markets of India by registering themselves with the Securities & Exchange Board of
India (SEBI).

a- PFI- refers to the purchase of foreign stocks, bonds or other securities. In

contrast to FDI, foreign portfolio investors have no controlling interest in
the investment.
b- GDRs - Global Depositary Receipts are negotiable certificates that give
evidence of ownership of a company's shares. They are marketed
internationally, mainly to financial institutions.
c- ADRs - American Depositary Receipts. Certificate issued by US banks to
facilitate trading for US shareholders in the shares of non-US companies.
ADRs, which are denominated in US dollars, allow US investors to get
exposure to foreign stocks within the US stock exchanges.
d- FCCB - Foreign Currency Convertible Bond a type of convertible bond
issued in a currency different than the issuer's domestic currency.
Foreign Direct Investment
Foreign Direct Investment (FDI) is normally defined as a form of investment made in
order to gain unwavering and long-lasting interest in enterprises that are operated
outside of the economy of the shareholder/ depositor. In FDI, there is a parent
enterprise and a foreign associate, which unites to form a Multinational Corporation
(MNC). In order to be deemed as a FDI, the investment must give the parent
enterprise power and control over its foreign affiliate.

Foreign Direct Investment in India

In India, Foreign Direct Investment Policy allows for investment only in case of the
following form of investments:

 Through financial alliance

 Through joint schemes and technical alliance
 Through capital markets, via Euro issues
 Through private placements or preferential allotments
Foreign Direct Investment in India is not allowed under the
following industrial sectors:

 Arms and ammunition

 Atomic Energy
 Coal and lignite
 Rail Transport
 Mining of metals like iron, manganese, chrome, gypsum, sulphur, gold,
diamonds, copper, zinc.

FDI in India across Different Sectors

Hotel & Tourism

Hotels include restaurants, beach resorts and business ventures providing
accommodation and food facilities to tourist. Tourism would include travel agencies,
tour operators, transport facilities, leisure, entertainment, amusement, sports and
health units.

100 per cent FDI is permitted for this sector through the automatic route.

Trading
For trading companies 100 per cent FDI is allowed for

 Exports
 Bulk Imports
 Cash and Carry wholesale trading.

Power
For business activities in power sector like electricity generation, transmission and
distribution other than atomic plants the FDI allowed is up to 100 per cent.
Drugs & Pharmaceuticals
For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed,
subject to the fact that the venture does not attract compulsory licensing, does not
involve use of recombinant DNA technology.

Private Banking
FDI of 49 per cent is allowed in the Banking sector through the automatic route
provided the investment adheres to guidelines issued by RBI.

Insurance Sector
For the Insurance sector FDI allowed is 26 per cent through the automatic route on
condition of getting license from Insurance Regulatory and Development Authority
(IRDA).

Telecommunication
For basic, cellular, value added services and mobile personal communications by
satellite, FDI is 49 per cent.

For ISPs with gateways, radio-paging and end to end bandwidth, FDI is allowed up to
74 per cent. But any FDI above 49 per cent would require government approval.

Business Processing Outsourcing

FDI of 100 per cent is permitted provided such investments satisfy certain
prerequisites.

NRI's and OCB’s (overseas corporate bodies)

They can have direct investment in industry, trade and infrastructure.

Up to 100 per cent equity is allowed in the following sectors

 Export Trading Companies

 Hotels and Tourism-related Projects
 Hospitals, Diagnostic Centres
  Shipping
 Deep Sea Fishing
 Oil Exploration
 Power
 Housing and Real Estate Development
 Highways, Bridges and Ports
 Sick Industrial Units
 Industries Requiring Compulsory Licensing
 Industries Reserved for Small Scale Sector

FDI policies 2010

The Government of India released the new document on FDI policy on March 31,
2010 whereby this document now consolidates all existing regulations related to FDI
contained in the Foreign Exchange Management Act (FEMA), RBI Circulars and
various press notes issued at various points in time. The comprehensive policy
document came into effect from April 1, 2010 and would be replaced every 6 months
after incorporating the changes which have been effected during the period. This is a
good move considering that this would bring clarity in understanding the foreign
investment rules among investors resulting ultimately in simplification of the policy.
This is also expected to improve transparency and boost global investors’ confidence.

100% FDI is permitted under the automatic route in most of the sectors while there
are Sectoral caps in the case of Banking (74%), Insurance (26%), Telecom (49%),
Aviation (74%) and Single brand retail (51%) etc. In certain sectors like Atomic
Energy, Lottery, Gambling and Betting, Multi Brand Retail, Nidhi company etc, FDI is
not permitted.
The Government is looking to allow FDI in media and also looking to amend the Press
and Registration of Books Act 1867 to facilitate the entry of foreign newspapers or
Indian editions of foreign newspapers being printed. The present FDI limit is 26%
under Government approval. Currently, 100% FDI is allowed in facsimile publication
of foreign newspapers by an entity incorporated or registered in India. FDI in multi-
brand retail is another sector where FDI is currently not permitted though the
Government says that the current retail infrastructure including the backend (from
the farm to the store) needs to be strengthened. The entry of large Indian retail
chains has in general been positive allowing farmers to get better prices for their
produce and giving multiple choices to the end user. Banking and Insurance sectors
could also do with a hike in the FDI limits while this is being monitored after the
global meltdown where some of the largest banks and financial institutions went
bust. The Government might encourage investments by foreign insurance companies
in health and weather (floods, famines) to farmers and rural residents and for banks
to be set up in rural areas where this is a Greenfield project.

Foreign institutional investment

The less well known Foreign Institutional Investors/investments (FIIs) have been a
key part of India's growth story this decade. The term FIIs is most commonly used to
refer the investment of companies that are established or incorporated outside India
and are investing in the financial markets of India by registering themselves with the
Securities & Exchange Board of India (SEBI).

FIIs include overseas pension funds, mutual funds, investment trusts, asset
management companies, nominee companies, banks, institutional portfolio
managers, university funds, endowments, foundations, charitable trusts, charitable
societies, a trustee or power of attorney holder incorporated or established outside
India proposing to make proprietary investments on behalf of a broad-based fund
(i.e., fund having more than 20 investors with no single investor holding more than
10% of the shares or units of the fund). Foreign Institutional Investment is basically
short-term in nature and mostly made in the financial markets.

Foreign Institutional Investors (FIIs) are allowed to invest in the primary and
secondary capital markets in India through the Portfolio Investment Scheme (PIS)
administered by the Reserve Bank of India (RBI). Under this scheme, FIIs can acquire
shares/debentures of Indian companies through the stock exchanges in India. The
ceiling for overall investment by FIIs is 24 per cent of the paid up capital of the Indian
company (20 per cent in the case of public sector banks, including the State Bank of
India). The ceiling of 24 per cent for FII investment can be raised subject to (i)
approval by the company’s board and the passing of a special shareholder resolution
to that effect (ii) certain sector caps imposed by RBI and the Government of India.
The RBI monitors the ceilings on FII investments in Indian companies on a daily basis
and publishes a list of companies allowed to attract investments from FIIs with their
respective ceilings.

One of the main reasons for the FII flows has been an increased recognition of the
long-term growth potential of Indian economy. India offers favorable demographics
and has quickly established its competitive advantage in many spheres including
software. Indian entrepreneurs have been quite successful in launching businesses in
India. FIIs have recognized the fact and unlike other countries where FDI has gained
predominance, India has seen significant growth in FII investment.

Entry Options for FIIs

A foreign company planning to set up business operations in India has the following
options:

By incorporating a company under the Companies Act, 1956 through

• Joint Venture

• Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the

requirements of the investor, subject to equity caps in respect of the area of
activities under the Foreign Direct Investment (FDI) policy.

Important terms to know about FIIs:

Sub-account:
Sub-account includes those foreign corporations, foreign individuals, and institutions,
funds or portfolios established or incorporated outside India on whose behalf
investments are proposed to be made in India by a FII.
Designated Bank:
Designated Bank means any bank in India which has been authorized by the Reserve
Bank of India to act as a banker to FII.

Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity of
providing custodial services in respect of securities.

Broad Based Fund:

Broad Based Fund means a fund established or incorporated outside India, which has
at least twenty investors with no single individual investor holding more than 10%
shares or units of the fund. If the fund has an institutional investor holding more than
10% of shares or units in the fund, then the institutional investor must itself be broad
based fund.

The policy regulating FII, (Foreign Institutional Investors)

 (FIIs), (NRIs), and (PIOs) can invest in Indian capital market- both primary and
secondary capital markets through the portfolio investment scheme (PIS).
Through this scheme, foreign institution investors and Non resident Indians
(NRIs) can acquire shares/debentures of Indian companies through the stock
exchanges in India.
 FIIs can invest only up to 24 per cent of the paid up capital of the Indian
company whereas for NRIs and PIOs this ceiling is kept up to 10 per cent.
However for investment in public sector banks, including the State Bank of
India the limit is 20 per cent of the paid up capital.
 The ceiling of 24 per cent for FII investment can be raised up to sectoral
cap/statutory ceiling, if it is approved by the board and the general body of
the company through a special resolution. Similarly the ceiling limit for NRIs
and PIOs can be raised to 24% from 10% if it is approved by the general body
of the company passing a resolution to that effect.
  The ceiling for FIIs is independent of the ceiling of 10/24 per cent for
NRIs/PIOs.
 The equity shares and convertible debentures of the companies within the
prescribed ceilings are available for purchase under PIS subject to:

1. the total purchase of equity and debentures by all NRIs/PIOs both, on

repatriation and non-repatriation basis, should be within an overall ceiling
limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24
per cent of the total paid up value of each series of convertible debenture.

2. the investment made on repatriation basis by any single NRI/PIO in the equity
shares and convertible debentures not exceeding five per cent of the paid up
equity capital of the company or five per cent of the total paid up value of
each series of convertible debentures issued by the company.

Regulators of foreign investment

1- SEBI:
The Securities and Exchange Board of India (frequently abbreviated SEBI) is
the regulator for the securities market in India. It was formed officially by
the Government of India in 1992 with SEBI Act 1992 being passed by the
Indian Parliament. All foreign investor has to register itself with SEBI before
investing in India.

2- Government:
Government regulates the foreign investment by deciding the equity for the
investors. Initially in 1991 equity for the foreign investors was 24% but later
on it increases up to 49% in few sectors.
Summary
After getting freedom in 1947, India was economically very weak. But Indian
government had fear of foreign investment because British initially invested in India
and then snatched the freedom of country. But till 1991 it became necessary to let
foreign player invest in Indian economy.

FDIs are used for long term investments for example in infrastructures. So that
government encourage this type of investment more instead of short term foreign
investment. If we see the time period before global economic slowdown of 2008
Indian share market was heading towards 20000, but due to economic crisis
investors especially from US started to draw their money back from the Indian
economy. Result was very dramatic. Indian share market which was heading towards
20000 fell down till 8000. Mergers & acquisition, joint ventures come under FDIs n
major cause of bringing new foreign technology in India. So that government
emphasis on FDIs instead of FIIs.
 FIIs are short term investment in the economy. Institutional investors are
organizations which pool large sums of money and invest those sums
in securities, real property and other investment assets. They can also include
operating companies which decide to invest its profits to some degree in these types
of assets.

Types of typical investors include banks, insurance companies, retirement or pension

funds, hedge funds, investment advisors and mutual funds. Their role in the
economy is to act as highly specialized investors on behalf of others. For instance, an
ordinary person will have a pension from his employer. The employer gives that
person's pension contributions to a fund. The fund will buy shares in a company, or
some other financial product. Funds are useful because they will hold a
broad portfolio of investments in many companies. This spreads risk, so if one
company fails, it will be only a small part of the whole fund's investment