FRAMEWORK FOR FDI IN INDIA AND FOREIGN INVESTMENT POLICY

Presented By:
NEENU .T.HARI NEETHU SUNNY NESRIN.K.A REEBA MARY JOSE SAJISH.V.S

FOREIGN DIRECT INVESTMENT (FDI)
‡FDI is a long ±term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the investor is based. ‡FDI relationship consists of a parent enterprise and a foreign affiliate, which together form a Transnational Corporation.

TYPES OF FDI
y Greenfield Investment y Merger & Acquisitions y Horizontal FDI y Vertical FDI
y y

Backward Vertical FDI Forward Vertical FDI

1900-1918
y

y y y y y y y

Until the end of First World War, 1918, the foreign investment in India was totally dominated by the British companies. Trading and Services sectors were the major areas of foreign investments 11 manufacturing companies from UK, Europe, USA British manufacturing companies like Unilever, ITC, Glaxo, ICI, GEC, Goodlass Nerolac, and Britania Biscuits American companies like Chicago Pneumatics and Ludlow Jute, the Dutch company, Margarine Unie Japanese company, Denso Stable colony with abundant natural and mineral resources India ranked eighth as a host to foreign investments in 1914

1919-1942
y The USA and Japan emerged as powerful nations after the World War-I y Trade and investment from the USA increased in India during this period. y American companies General Motors, Ford Motors, and Colgate Palmolive. y Trade investments from Japan increased y Japan exported more than half (57 %) of its cotton yarn and 28% of its piece

goods to India in 1932. y It also imported as much as 47% of its raw cotton requirement from India in 1928, but the volume increased to more than half (51%) in 1937

1943-1961
y Local industries largely favored the flow of foreign technology and y y y y

foreign capital from around the world. Germany and the United Kingdom set up large-scale industrial projects in India. amount of FDI and the number of foreign joint ventures in India increased With India becoming free from the British rule in 1947, the opportunity for companies from Europe and America arose. Share of FDI in manufacturing sector also increased significantly during this period, due to the FDIpolicy guidelines of the Government of India

1962-1977
y During this period Foreign Exchange Regulation Act (FERA)1973. y Foreign companies also came under the Monopolies and Restrictive Policy y (MRTP), 1969. MRTP (1969) Act restricted companies on the y y y

y y

size of operation and the pricing of products and services closure of foreign companies like Coca Cola in 1977 and IBM in 1978. As a result of the changes in the policy, nearly 80 foreign companies ceased their operations in India and the number of joint ventures from all the foreign countries decreased dramatically. number of foreign collaborations reduced from 464 in the year 1961 to 131 in the year 1968. Unilever and ICI stay back

1978-1990
y The year 1978 marked liberalization and globalization

y y y y y

process of FDI in India. GOI made a series of changes in the export and import policies in India during this period USA emerged to be the biggest contributor to the number of joint ventures in India. Germany was the second largest contributor The total number of joint ventures also increased from 307 in 1978 to 703 in 1990. FDI rose from 89 million INR to 1238 million INR, an increase of over 13 times The year 1991 marks a new growth phase of FDI in India with an all time high flow of FDI.

1991-2000
y y y y y y y y y

Following the Industrial Policy (1991) 145 foreign companies registered in India within a span of 10 years from 1991-2000. Companies like GM, Ford, and IBM divested from India in the 1950s and 1970s reentered India Asian companies like Daewoo Motors, Hyundai Motors and LG Electronics S. Korea: Matsushita Television and Honda. IMF and World Bank provide loans to India on the conditions that India will make major changes to liberalize trade and investments in India GOI replaced FERA, 1973 that regulated all foreign exchange transactions with Foreign Exchange Management Act (FEMA), 1999. The objectives of FEMA : facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market The total number of foreign collaborations increased from 976 in the year 1991 to 2144 in the year 2000. amount of FDI increased from 5156 million INR to 3737 million INR

Present Picture
y India: Fourth largest economy in terms of Purchasing

Power Parity y Tenth most industrialized economy y GDP growth rate of 8.1% - Second highest in the world. y FDI inflows 1.74 bn in Nov 2009 y Financial institutional investors(FII) inflows:
y For the period, July 2003

Jan 2004 FII inflow has exceeded USD 7 bn, which is more than the cumulative FII inflow in the last five years.

India- Advantages as a destination for FDI
‡Young Demographic Profile- 54% population below 25 years ‡Abundant availability of Skilled Human Resources ‡Adequate natural resources and raw materials ‡Large and growing domestic market ‡ Established rule of law and a vibrant three tiered democracy

ROUTES FOR FOREIGN DIRECT INVESTMENT
Three types: ‡ Automatic ‡FIPB Route ‡CCFI Route

ROUTES FOR FOREIGN DIRECT INVESTMENT
Routes available for FDI:

1st route:
Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (³RBI´) within 30 days of receipt of remittance and within 30 days of issuance of shares

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.

ROUTES FOR FOREIGN DIRECT INVESTMENT IN INDIA
2nd Route: FIPB Route ± Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (³FIPB´). Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI

FIPB APPROVAL
For all activities, which are not covered under the Automatic Route Composite approvals involving foreign investment/ foreign technical collaboration Published Transparent Guidelines vs. Earlier Case by Case Approach Downstream Investment

ROUTES FOR FOREIGN DIRECT INVESTMENT
3rd Route: 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 (³CCFI´). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI - Investment proposals falling within the automatic route and having a project cost of Rs. 6,000 million or more do not require to be approved by CCFI

List of Industries in which Automatic Route Not Available
y 1. Petroleum Sector (except for private sector oil refining)/ Natural y y y y y y y y y y

Gas/LNG, Pipelines 2. Investing companies in Infrastructure & Services Sector 3. Defence and Strategic Industries 4. Atomic Minerals 5. Print Media 6. Broadcasting 8. Postal services 9. Courier Services 10. Establishment and Operation of satellite 11. Development of Integrated Township 12. Tea Sector

List of activities or items for which FDI is prohibited.
Gambling and Betting Lottery Business Business of chit fund or Nidhi Company Housing and Real Estate business except for the development of townships, housing, built-up infrastructure and construction development project y Retail Trading y Atomic Energy y Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea plantations)
y y y y

FDI Scheme- FEMA Regulations 
FDI includes investment by ‡ a non-resident; ‡ a non-resident incorporated entity (foreign company), ‡ a non-resident Indian, ‡ Person of Indian Origin, FDI includes investment through ‡ Issue of Preference shares ‡ American Deposit Receipts (ADR)/Global Deposit Receipts (GDR) ‡ Foreign Currency Convertible Bonds

FDI Policy - Salient features 
Industrial sector‡ Manufacturing- permitted up to 100% on the automatic route in all manufacturing activities except for cigarettes ; defence related items; and items reserved for SSI sector. ‡ Mining Sector -100% is permitted on the automatic route exploration and mining of diamonds, precious stones, gold, silver and minerals. 100% in coal and lignite mining for captive consumption by power projects, and iron and steel, cement production and other activities permitted under the Coal Mines (Nationalisation) Act, 1973. ‡ Electricity Sector- 100% is permitted on the automatic route in generation, transmission, distribution of electricity and also power trading subject to the provisions of the Electricity Act, 2003

FDI Policy - Salient features (contd.) 
Infrastructure sector- 100% is permitted on the automatic route in roads and highways, ports and greenfield Airport projects. FDI up to 100% is permitted in existing airport project but the same requires prior approval for FDI beyond 74%.  Services sector - Many of the activities under the Services sector attract caps on foreign equity and are subject to sectoral regulations.

FDI Policy - Salient features (contd.) Services Sector- Caps 
26 %cap in Print media: Publishing newspaper and periodicals dealing with news and current affairs; and in Insurance 49 %in Broadcasting; Air transport services and Stock Exchanges  51% in single brand product retailing 74% in Telecommunication services; ISP with gateways, radio-paging, end-to-end bandwidth; Establishment and operation of satellites; and Private sector banks

FDI Policy - Salient features (contd.) 
AGRICULTURE- FDI is not allowed in agriculture and plantation activities except tea plantation. In the tea sector FDI is allowed up to 100% with prior Government approval.  FDI is allowed in certain activities up to 100% on the automatic route. These are Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, and Cultivation of Vegetables, Mushrooms under controlled conditions and services related to agro and allied sectors. REAL ESTATE -FDI is not permitted in Real Estate business i.e. buying and selling of properties.

METHODS
y The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: y by incorporating a wholly owned subsidiary or company y by acquiring shares in an associated enterprise y through a merger or an acquisition of an unrelated enterprise y participating in an equity joint venture with another investor or enterprise
y

derogation from regulations (usually for very large projects)

FOREIGN DIRECT INVESTMENT INCENTIVES MAY TAKE THE FOLLOWING FORMS:
y low corporate tax and income tax rates y tax holidays y other types of tax concessions y preferential tariffs y special economic zones y investment financial subsidies y soft loan or loan guarantees

y free land or land subsidies y relocation & expatriation subsidies y job training & employment subsidies y infrastructure subsidies y R&D support

ADVANTAGES
y it helps in the economic development of the particular

country where the investment is being made. y used for the purpose of making contributions to the revenues of corporate taxes of the recipient country y helps in the creation of new jobs in a particular country y assists in increasing the income y opens up the export window y borrow finance at lesser rates of interest

FDI SECTORAL GUIDELINES
y y y y y y y y y y y

AIRPORTS TELECOM DOMESTIC AIRLINES DRUGS & PHARMACEUTICALS INSURANCE MINING PETROLEUM PRIVATE SECTOR BANKING: PRINT MEDIA BROADCASTING INFRASTRUCTURE:

DETERMINANTS
y For a TNC to invest successfully abroad it must possess

advantages which no other firm posses (O), the country it wishes to invest in should offer location advantages (L), and it must be capable of internalizing operations (I). Internalization is synonymous with the ability of firms to exercise control over operations essential for the exploitation of ownership and location advantages. y It is location advantages that form the core of much of the discussion on the determinants of FDI in developing countries. The two other attributes necessary for FDI are taken as given from the perspective of developing countries.

CONCLUSION OF THESE STUDIES
* Host countries with sizeable domestic markets, measured by gross domestic product (GDP) per capita and sustained growth, measured by growth rates of GDP, attract relatively large volumes of FDI. * Resource endowments of host countries, including natural resources and human resources are a factor of importance in the investment decision process of TNCs. * Infrastructure facilities (including transportation and communication networks) are an important determinant of FDI. * Macroeconomic stability, signified by stable exchange rates and low rates of inflation, is a significant factor in the FDI decisions of TNCs.

Cont d
y Political stability in the host countries is a significant factor in

the investment decision process of TNCs. y A stable and transparent policy framework towards FDI is attractive to potential investors.

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