FDI IN INDIA

Submitted By:
Asit Ranjan Nayak Sudarsh Dixit Yash Vardhan Sharma Kaveri Gupta Deepa Kumari

WHAT IS FDI ?
Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country.

Include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

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.

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 via GDRs. Through private placements or preferential allotments.

FDI BENEFITS
Economic Growth

Linkages and spillover to domestic firms

Trade

Technology diffusion and knowledge transfer

Employment and skill levels

FDI AND ECONOMIC DEVELOPMENT

FDI has an important impact on countrys trade balance, increasing
labor standards and skills, transfer of technology, skills and the general business climate.

FDI also provides an opportunity for technological transfer and up

gradation, access to global managerial skills and practices ,optimal utilization of human capabilities and natural resources, making industry internationally competitive,opening up export markets,access to international quality goods and services and augmenting employment opportunities.

 Indias share in global FDI has increased considerably, but

the pace of FDI inflows has been slower than China, Singapore, Brazil, and Russia.

Indian economy is largely agriculture based andt here is

plenty of scope in food processing, agriculture services and agriculture machinery. FDI in this sector should be encouraged.

Research and Development expenditure shows unexpected

negative sign. This could be attributed to the fact that R&D sector is not receiving enough FDI as per its requirement. but this sector is gaining more attention in recent years.

ENTRY STRATEGIES FOR FOREIGN INVESTOR

Foreign Company has the following options to set up business operations in India :

By incorporating a company under the Companies

Act, 1956
A wholly owned subsidiary Joint venture company - existing company or new
company with domestic partner

As an unincorporated entity
Liaison Office Project Office Branch Office

LIAISON OFFICE

Liaison office not permitted to commercial/trading/industrial activity undertake any

The role of the liaison office is limited to Collecting

information about possible market opportunities and providing information about the company and its products to prospective Indian customers

Acting as a communication channel between the parent company and Indian Companies.

It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India

Approval for establishing a liaison office in India is granted by RBI

PROJECT OFFICE

General permission to foreign entities to establish Project / Site Offices (temporary in nature)

Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project

General permission also for remitting surplus funds after completion of project on production of documents.

BRANCH OFFICE

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes

Branch Offices are established with the approval of RBI

Permitted to remit outside India profit of the branch.

FOREIGN INVESTMENTS THROUGH GDRs

Foreign Investment through GDRs is treated as Foreign Direct Investment

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 .

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, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

USE OF GDRs
The proceeds of the GDRs can be used for-

Financing capital goods imports,

Capital expenditure including domestic purchase/installation of plant,

Equipment and building

Investment in software development,

Prepayment or scheduled repayment of earlier external borrowings, and

WHY FDI ?
1. Gain a foothold in a new geographic market.

2. Increase a firms global competitiveness and positioning.

3. Fill gaps in a companys product lines in a global industry.

4. Reduce costs in areas such as R&D, production, and distribution.

FACTORS REQUIRED TO ATTRACT FDI

Low cost BUT Qualified, Educated/Skilled Labor Pool.

Long-term Market Potential OR Yields greater than can be achieved

Domestically.

Access to Natural Resources.

Geography

Stability of the economic and Political Environment.

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,

gold, diamonds, copper, zinc.

Lottery Business Agricultural or plantation activities Housing and Real Estate Business (except development
of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

F D I - APPROVAL
Foreign direct investments in India are approved through three routes:

Automatic approval by RBI. The FIPB Route. CCFI Route

AUTOMATIC ROUTE
No need of Prior Approval From FIPB,RBI,GOI.
BUT

The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances.
AND

File the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.

AUTOMATIC ROUTE
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:

foreign equity up to 50% in 3 categories relating

to mining activities .

foreign equity up to 51% in 48 specified industries.

foreign equity up to 74% in 9 categories .

THE FIPB ROUTE

FDI in activities not covered under the automatic route
require prior government approval.

Approvals of all such proposals including composite

proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of FIPB.

 Application for all FDI cases, except NRI investments and

100% EOUs, should be submitted to the FIPB Unit,DEA, Ministry of Finance.

Application for NRI and 100% EOU cases should be

presented to SIA in Department of Industrial Policy and Promotion (DIPP).

Application can be made in Form FC-IL. Plain paper

applications carrying all relevant details are also accepted.

No fee is payable.

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 usually conveyed in 8-10 weeks.

Thereafter, filings have to be made by the Indian company with the RBI.

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)

ADVANTAGES OF FDI
Increase in Domestic Employment/Drop in unemployment

Investment in Needed Infrastructure.

Positive Influence on the Balance of Payments. New Technology and Know How Transfer. Increased Capital Investment. Targeted Regional and Sectoral Development.

DISADVANTAGES OF FDI
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 byEthnocentric Staffing

The Infusion of Foreign Culture , and Foreign Business Practices

SECTOR WISE DISTRIBUTION

Automobile Industry 6%
Power 6% Construction Activities 10% Services Sector 31% Metallurgical Petroleum & Industries Natural Gas Chemicals 4% 4% 3%

Housing & real Estate 11%

Telecommunication s 12%

Computer Software & hardware 13%

FDI SECTORAL GUIDELINES

AIRPORTS
Foreign Investment up to 100% is allowed in green field projects under automatic route

Foreign Direct Investment is allowed in existing projects

- up to 74% under automatic route

- beyond 74% and up to 100% subject to Government approval

TELECOM

FDI in basic and cellular, unified access services, national/ international long distance , V-Sat, public mobile radio trunk services , global mobile personal communications services

- Automatic up to 49% - FIPB beyond 49% but up to 74%

Manufacture of telecom equipments - Automatic up to 100%.

DOMESTIC AIRLINES
FDI up to 49% (40%) permitted under automatic route
Automatic Route is not available

However, a foreign airlines are not allowed to have any

direct or indirect equity participation

100% investment by NRIs/OCBs

DRUGS & PHARMA

FDI up to 100% is permitted under the automatic route
for manufacture of drugs and pharmaceuticals (The following is the current position)

FDI up to 74% in the case of bulk drugs, their

intermediates Pharmaceuticals and formulations would be covered under automatic route.

FDI above 74% for manufacture of bulk drugs will be

considered by the Government on case to case basis

INSURANCE

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%

MINING

Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production Automatic up to 100%

Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

PETROLEUM

Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100%

For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and up to 26% FDI is permitted in Public Sector Undertakings with Government approval

PRIVATE SECTOR BANKING

Foreign Investment up to 74% is permitted from all sources under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

TRADING

Wholesale / cash & carry trading - Automatic upto 100%

Trading for exports - Automatic upto 100%

Trading of items sourced from small scale sector 100% with Government approval

PRINT MEDIA

FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals

FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs.

All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

BROADCASTING

FDI permitted for setting up hardware facilities such as up-linking, HUB, etc up to 49% under Government approval route

FDI permitted in Cable Network up to 49% under Government approval route

Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20%

FDI permitted in FM radio up to 20% under Government approval route

INFRASTRUCTURE

100% FDI is permitted for the following activities:

Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbors Hotel & Tourism

SPECIAL INVESTMENT AVENUES

ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS

100 percent 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 equipment's 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 rendering of services manufacturing of goods and

ADVANTAGES OF 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 Abundance of natural resources

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.

RECOMMENDATIONS
The government should provide additional incentives to foreign
investors to invest in states where the level of FDI inflows is quite low.

Government should ensure the equitable distribution of inflows

among states and must give more freedom to states, so that they can attract inflows at their own level.

Government must target at attracting specific types of FDI that will

be able to generate spillovers effects in the overall economy like investing in human capital, R&D activities, environmental issues, productive capacity, sectors with high income elasticity of demand.

 The policy makers should focus more on attracting diverse types

of FDI and should design policies where foreign investment can be utilized as means of enhancing domestic production, savings, and exports and also as medium of technological learning and diffusion and also in providing access to the external market.

Government

must exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investor s confidence can be maintained for attracting more FDI inflows to India.

CONCLUSION
The increased flow of FDI in a country has given a major boost to the
country's economy.

FDI has provided better access to technologies for the local economy.

FDI has lead to indirect productivity gains.

Multinational firms have increased the degree of competition in hostcountry markets which will force existing inefficient firms to invest more in physical or human capital.

 Service sector has been the most sought after sector

in India for Foreign Direct Investments.

India, with its skilled labor and manpower has the

potential to overtake China as the most preferred destination for Foreign Investments.

Hence measures must be taken in order to ensure that

the flow of FDI in our country continues to grow.