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Foreign Direct Investment is an investment made by a
company or entity based in one country, into a
company or entity based in another country. Foreign
direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas
institutions invest in equities listed on a nation's stock
exchange. Entities making direct investments typically
have a significant degree of influence and control over
the company into which the investment is made. Open
economies with skilled workforces and good growth
prospects tend to attract larger amounts of foreign
direct investment than closed, highly regulated
economies. Foreign direct investment reflects the
objective of establishing a lasting interest by a resident
enterprise in one economy (direct investor) in an
enterprise (direct investment enterprise) that is
resident in an economy other than that of the direct
investor. The direct or indirect ownership of 10% or
more of the voting power of an enterprise resident in
one economy by an investor resident in another
economy is evidence of such a relationship. It is clear
that the central aspect of the operational FDI definition
is lasting interest to be captured through a foreign

investors ownership of minimum 10 per cent voting

power in the invested company. As the OECD definition
explains, The lasting interest implies the existence of a
long-term relationship between the direct investor and
the direct invested enterprise and a significant degree
of influence on the management of the enterprise.
Evidently, this is how the foreign direct investor can
maintain his ownership advantages over his proprietary
assets. Given that it is not possible to do detailed
industry and firm-level studies at all times, the most
immediate measure of the contribution of FDI in a host
country is given by the absolute amount of recorded
FDI inflows. In this context it came to be recognised
that direct investment is not solely limited to equity
investment (to be captured by a minimum 10% equity
share) but also relates to reinvested earnings and intercompany debt. In the context of many countries, the
concern has been that the ratios of FDI inflows to total
capital inflows as well as those to gross domestic
investment tend to understate the financial importance
of FDI for a host economy, because recorded FDI flows
do not capture even the complete financial contribution
of foreign affiliates in many countries. This was true for
several developed and developing countries like India,
Thailand, etc., which did not include either reinvested
earnings or inter-company debt or both in the reported
FDI data until a few years ago. But, given that we now
live in a different world of proliferating Free Trade
Agreements (FTAs) and Bilateral Investment Treaties
(BITs) involving investment liberalisation that make
privileges and treatment accorded to foreign direct
investors legally binding, it may be important to

recognise that beyond the concerns of being able to

capture the real financial and economic contribution of
FDI inflows, developing country governments promoting
FDI need to be aware that FDI definitions are also about
protecting the rights of the so-defined investors in the
host country.

Foreign Direct

Policy in

Foreign Direct Investment

policy in India
It is in this context that it is pertinent looking at what
the current FDI policy in India points to. Recently, the
Department of Industrial Policy and Promotion (DIPP)
under Indias Ministry of Commerce and Industry
released the Draft Press Note on FDI Regulatory
Framework consolidating all prior regulations on FDI
into one document for comments. It reflects the current
regulatory framework on FDI in India. While the Draft
Note confirms that:
The motivation of the direct investor is a strategic long
term relationship with the direct investment enterprise

to ensure the significant degree of influence by the

direct investor in the management of the direct
investment enterprise, it goes on clarify that in India
the lasting interest is not evinced by any minimum
holding of percentage of equity capital/shares/voting
rights in the investment enterprise.
Clearly, India is not following the international best
practice. The attempt seems to be to try and capture
the broad influence of FDI inflows in our economies by
including all kinds of foreign capital into the definition
of FDI. This can serve two purposes. Clearly, such a
catch-all definition that treats all foreign investments in
Indian companies equity capital as FDI irrespective of
the extent of their share will inflate the FDI inflow
figures. This is surely helpful in cheering up free
market advocates who have been lamenting the
smaller amounts of FDI received by India in comparison
to those received by China and have constantly been
pushing for greater policy liberalization for attracting
larger amounts of FDI into India. Analysts and
academicians have already pointed to the increasing
role of private equity in the observed sharp increase in
FDI figures and the increased routing of inflows through
the tax havens in the years since 2005. Through a
pioneering analysis of the officially largest 1832
individual cases of FDI inflows into India during the
period 2004-2008, Rao and Dhar (2010) have just come
out with empirical evidence on how FDI figures in India
are indeed an overestimate if one were to consider the
normal Dunning type of FDI. Separating out private
equity (PE) investors and portfolio investors as well as
those controlled by Indians from the FDI category and
considering only Typical FDI that would add to the
existing facilities, they found that only a little less than
half of the inflows could be categorised under the FDI
category. They have considered as FDI only those
inflows from foreign investors operating in the same

sectors in their home countries and can be expected to

be long term players and can be expected to bring in
not only capital but also associated benefits and on
their own strength.

Location in
Global FDI

Attractive Location in Global

It is a well-known fact that due to infrastructural
facilities, less bureaucratic structure and conducive
business environment China tops the chart of major
emerging destination of global FDI inflows. The other

most preferred destinations of global FDI flows apart

China and Brazil are Mexico, Russia, and India. The
annual growth rate registered by China was 15%, Brazil
was 84%, Mexico was 28%, Russia was 62%, and India
was 17% in 2007 over 2006. During 1991-2007 the
compound annual growth rate registered by China was
20%, Brazil was 24%, Mexico was 11%, Russia was 41%
(from 1994), and India was 41%. Indias FDI need is
stood at US$ 15 bn per year in order to make the
country on a 9% growth trajectory (as projected by the
Finance Minister of India in the current Budget). Such
massive FDI is needed by India in order to achieve the
objectives of its second generation economic reforms
and to maintain the present growth rate of the
economy. Although, Indias share in world FDI inflows
has increased from 0.3% to 1.3% (Chart-3.2 & Table
3.2) from 1990-95 to 2007. Though, this is not an
attractive share when it is compared with China and
other major emerging destinations of global FDI inflows.
Table 3.2- Share of India in World FDI:-



(Table-3.3) reveals that during the period under review

FDI inflow in India has increased from 11% to 69%. But
when it is compared with China, Indias FDI inflows
stand nowhere. And when it is compared with rest of
the major emerging destinations of global FDI India is
found at the bottom of the ladder (Table-3).
Table- 3.3- Emerging Economies of the World:-

infrastructural problems, business environment, or
government stability. India has to consider the five
point strategy as put forward by the World Bank for
India, if India wants to be an attractive location of
global FDI in the coming years.



Direct Investment Categories


Clearly, adding more investor/asset classes to the

overestimation of actual FDI even worse. As already
mentioned, the problems of dealing with assessing the
consequences of FDI inflows under the prevailing norms
already abound.7 Blurring the lines between direct and
portfolio investments will also make a proper
assessment of the true benefits from and consequences
of FDI inflows more and more complicated and difficult.
But, in addition to these problems, the consequences of
having such broad national FDI definition without a
clear distinction between direct and portfolio
investments can be dangerous for Indias remaining
policy space related to investment policies and capital
controls. This is because, treating all foreign
investments in Indian companies equity capital as FDI
irrespective of the extent of their share will also make
all these categories of foreign investors (or/and assets)
eligible for the privileges and treatment accorded to
FDI, such as freedom for capital repatriation and
investment/investor protection including investor-state
dispute settlement mechanism. Further, lack of clarity
in national FDI definitions can take away any leverage
we have in investment negotiations with developed
countries in Free Trade Agreements (FTAs), Economic
Partnership Agreements (EPAs), etc. and will contribute
to a wider process of multi-lateralisation of investment
rules, as we shall discuss later on. As shown by Rao and
Dhar (2010), in inflows recorded as FDI in India, there
are investments by banks and other financial
characteristics of FDI, these investments seeking purely
capital gains cannot be considered FDI, unless they are
in their own sectors (that is, in the financial sector
itself). In the second category are investments by


Private Equity (PE) funds, which are also generally not

known to contribute anything more than risk capital.
While venture capital is a form of private equity
typically provided for early-stage, high-potential,
growth companies, by definition VCs also take a role in
managing these entrepreneurial companies, thus
adding skills as well as capital. In this sense, they are
differentiated from buy out private equity which
typically invests in more mature companies. However,
both investments are in the interest of realising a return
through an initial public offer (IPO) or sale of the
company, unlike the lasting interest entailed in typical
FDI. In a third category are investments by foreign
investors who have base in India and who have
expanded out of India, which have been identified as
Round Tripping. It is contended that irrespective of
whether the money brought in by them is raised abroad
or might have been taken out by them at some point in
the past, this category is also kept out of the
consideration of FDI given that control over the
investee company remains with Indians who have
strong base in India. In particular, these investments
also do not bring in any assets other than financial




Permission Routes
Why has this anomaly come about? This has to do with
the range of instruments through which FDI is allowed
in India. Under the FDI scheme in India, an Indian
debentures to raise FDI and after such issuance the
company has to submit details about the above
mentioned instruments in the prescribed (FCGPR) form
to the Reserve Bank of India (RBI). However, a company
can also issue only fully convertible preference
shares/fully convertible debentures, without any equity
participation from the foreign investor. So, if a foreign
investor invests in fully convertible preference
shares/debentures without any equity participation (or
with equity participation below 10%), even then it is
included as part of FDI. Only non-convertible, optionally
convertible or partially convertible preference shares
for issue of which funds have been received on or after
May 1, 2007 are considered as debt (and accordingly,
all norms applicable to external commercial borrowings
or ECBs apply). Fully convertible preference shares are
not only considered as equity, but they are also
included when calculating the foreign direct investment
(FDI) cap in sectors where foreign equity limits apply.
While the finance ministry had made this differentiation
in April 2007 in order to reduce the large amount of
foreign capital (especially private equity) flowing into


the real estate sector through the route of preference

shares without adhering to any regulation on interest
rates offered on these shares, sectoral equity caps,
etc., considering foreign investment in fully convertible
preference shares without any equity participation as
FDI is problematic for two reasons at least. Most such
investments are by international banks, other financial
intermediaries and PE funds that not only do not have
any lasting interest in the investee company, but these
investors also do not own any proprietary assets in the
area of operation of the investee company. Thus, in no
way do these foreign investments conform to the
understanding of what FDI entails. They are simply
portfolio investments seeking capital gains. In fact,
IMFs BOP Manual 6 considers even fully convertible
preference shares/debentures as debt instruments.
Similarly, in India, Depository Receipts (DRs) and
Foreign Currency Convertible Bonds (FCCBs) are also
considered as FDI. Again, an FII can invest in a
particular share issue of an Indian company either
under the FDI Scheme or the Portfolio Investment
Scheme. The Indian company which has issued shares
to FIIs under the FDI Regulation for which the payment
has been received directly into companys account has
to report these figures separately to the RBI in the FCGPR Form (Annex) (Post issue pattern of shareholding).
However, it is not clear why institutional investors
should be allowed under the FDI route at all. It should
be noted that from June 1998 onwards, registered FIIs
can individually hold up to a maximum of 10% of a
companys total issued capital and aggregate FII limit
for a sector was raised to the sectoral cap for foreign
investment as of September 2001. But, an FII can also
invest in the equity shares of a company on behalf of
his sub-accounts, wherein the investment on behalf of
each such sub-account, in case of foreign corporates or
individuals, can be up to a maximum 5% of the total


issued capital of that company. We already know that

the Participatory Notes (PNs) that are Offshore Derivate
Instruments [ODI] in nature are used by investors or
hedge funds, which are not registered with the
Securities and Exchange Board of India (SEBI), to invest
in Indian securities market through these sub-accounts.
Thus, for calculating both direct foreign investment (i.e.
non-resident investment) in an Indian company and
indirect foreign investment in an Indian company
(wherein an Indian company having foreign investment
in turn invests in another company), all kinds of foreign
investment, namely, investment by FIIs (holding as of
March 31), NRIs, ADRs, GDRs, FCCBs and convertible
preference shares/debentures are considered in
addition to FDI. Indian experience shows these new
types of investors already account for a significant
proportion of the total inflows coming in as FDI,
especially through the tax havens. Rao and Dhar (2010)
found that just less than three-fourths of the inflows
during 2004-2008 under the Round Tripping and PE/VC
categories of investors entered through the Automatic
route that does not require any prior approval from the
government. They also found that typically these
PE/VC and Round Tripping categories of inflows passed
through the tax havens. These investors do not even
profess to contribute anything more than a short-term
financial contribution to the invested company.




Dangers Involved
What is the problem with the classification of an asset
class that is primarily portfolio investment as FDI in the
national FDI definition? First, the country is extending
the preferential conditions of entry and operations
that are offered to FDI to a class of investors whose
actual identity is often unknown and some of whom are
not regulated in their own home countries. Secondly,
despite the fact that these investors cannot be argued
to be either bringing in any intangible ownership
advantages to the host companies or contributing to
national investments in the medium term (since they


are known to sell and move out), it is clear that they

enjoy the freedom for capital repatriation enjoyed by
foreign direct investors. Thus, the countrys ability to
control inward and outward capital movements are
being hampered, which can have detrimental
consequences as we have seen in the recent global
financial crisis. These lead us to a more far reaching
consequence. By defining FDI to include all sorts of
foreign investment, the government could unwittingly
contribute to a process that has been warned to be of
serious consequences for the policy space of
developing countries. It is important not to forget that
in 1998, the OECDs attempt to implement a
Multilateral Agreement on Investment (MAI) was
rejected because of the very fact that developed and
developing countries could not agree on the extent of
flexibility required by the latter in investment policies
within a multilateral framework. With strong opposition
from developing countries, investment was thus
excluded from negotiations in the 2003 WTO Cancun
Ministerial when a Multilateral Framework on
Investment (MFI) was sought to be incorporated. Apart
from GATS that brought in FDI in services under the
WTO by defining trade in services through four modes
including commercial presence of the foreign
provider, the only major FDI-related regulation at the
WTO level remained the agreement on Trade Related
Investment Measures (TRIMS). The latter abolished a
number of legitimate performance requirements that
several governments (most successfully Japan and the
East Asian newly industrialised countries) used to
impose on direct investors in order to ensure that their
investments contributed to meeting development
objectives of the host countries. But unsatisfied with
TRIMS, developed nations like the EU, US and Japan
have been introducing the so-called Singapore Issues in
bilateral FTAs and in particular, deepening investment


negotiations (FTAs, EPAs, etc.) as a means to eventually
re-introduce investment at the multilateral level
negotiations. Analysts studying investment issues in
Bilateral Investment Treaties (BITs), RTAs and
Comprehensive Economic Partnership Agreements
(CEPA) have in the recent years been warning of the
dangers involved in a broad definition of investment
while negotiating standards for entry and operation of
foreign enterprises in developing countries. Why
exactly has a broad definition of investment been
opposed in trade negotiations? It has been found that
North- South FTAs and BITs often have provisions
(typically under a Current Payments and Capital
Movements section) requiring all transfers relating to
the investment from the contracting parties to be
allowed without delay into and out of their territories.
Typically, these transfers cover contributions to capital,
profits, capital gains, dividends, interest, loan
repayments, etc. Use of capital controls as a policy
measure is allowed only as defined under the safeguard
measures in each agreement. In most investment
agreements with developed countries, safeguard
measures through restriction on capital flows are by
definition to be used only under an emergency
situations in case of serious difficulties with monetary
or exchange rate policy or balance of payments and
can only be used temporarily. Clearly, this prevents
countries from utilising different capital control
measures in order to prevent a BoP crisis. In this
context, it is interesting to note that some years back,
the IMF staff report for the 2003 Article IV consultation
for the United States had questioned whether the
investment provisions in US preferential trade
agreements (PTAs) could leave the partner countries
too vulnerable to surges in capital inflows. Apart from
the US FTAs, the EU FTAs and Japans Economic


Partnership Arrangements (EPAs) also increasingly

include broad definitions of investment. Japans EPA
with Malaysia is a case in point. Most EU FTAs with
developing countries such as EU-CARIFORUM and EUSouth Africa also include portfolio investment as a way
to rule out host country controls over capital flows. A
study on investment provisions in EU FTAs found that
only in the case of the EU-Chile FTA, the developing
country preserved the right of its 6 central bank to
exert control over capital flows as stated by its
constitutional law. During 1991- 1998, Chile had
imposed a 30% deposit over a period of one year for all
incoming capital, which had great success in limiting
short-term flows, currency volatility and contagion of
external crises. Chiles agreement with the EU allows it
to impose restrictions up to one year which can be
renewed indefinitely, but on the other hand established
limits to the amount of reserves to be deposited in the
central bank as a requirement for capital moving in or
out the country of up to 30% and for only two years. As
for other existing EU agreements, the case of
EUCARIFORUM agreement, the most recent to be
signed by the EU is revealing. Restrictions on capital
flows can only be imposed as strictly necessary and
for a maximum period of six months. It should be noted
that Thailands central bank had also imposed a 30%
withholding tax on inward investments to slow
speculation on the Thai baht in 2006 and kept this in
place for two years. It is clear that if we define
investment to include investments other than FDI,
these provisions seriously reduce the ability of
developing country members to regulate the flows
linked with speculative capital market transactions and
hot money inflows. Thirdly, the investment chapter in
FTAs generally accords national treatment and mostfavoured nation treatment to foreign investors. Both
these provisions grant equality of treatment to national


and foreign investors in like circumstances. This can

create unforeseen problems as in the current crisis
wherein a countrys ability to carry out stimulus
measures and carry out bailouts aimed at ensuring
systemic stability of the financial sector can also be
challenged on grounds that they deny a foreign
investors right to fair and equitable treatment.
Gallagher (2010) points out that such an argument was
made against the Czech Republic, when a foreign firm
said the Czech Republic had violated its rights by
excluding a small bank in which it had invested from a
bailout program made available to larger too big to
fail Czech banks. Another controversial provision in the
investment chapters in US agreements in the context of
investor-state disputes are those related to the issues
of expropriation and compensation. For example, the
investment chapter in the US-Chile FTA is practically
identical to the controversial Chapter 11 of the NAFTA.
NAFTA includes a list of rights for multinational
corporations, which allow, among other benefits, for
businesses to sue central Governments if they feel that
actions which violate their rights have been taken.
Similarly, the US-CAFTA FTA also prohibits direct and
indirect expropriation (or nationalization). Direct
expropriation is a well-defined term, which refers to the
nationalization, transfer of title or seizure of private
property by the host government. The legal texts
mention the phrase indirect expropriation by measures
equivalent (or tantamount) to expropriation or
nationalization. Thus the actions of the State
measures are broadly defined, which permit a range of
interpretations of these actions by which legitimate
regulations on the part of the State can be brought
under litigation for affecting
the profits of the
investor. This can include regulations at the subfederal and local government levels. These have been
some of the most controversial issues under which


broad investment definitions have been warned against

by several analysts. By having such a broad national
FDI definition and moving away from the international
best practice (which has maintained a critical minimum
qualifying share of 10% in equity capital of a domestic
entity by a non-national investor for it to be included as
FDI), India is not only going against the stand it took in
the investment negotiations at the WTO and making a
mockery of developing countries successful fight
against MAI-type multilateral rules, but it will also be
doing a great disservice to developing countries in this
ongoing battle. This is because if we retain such a
broad definition of FDI, this will do away the need for
developed country negotiators to define investment
broadly! We would have already lost most of the
leverage in investment negotiations by way of
increasing engagement in RTAs. There is continuing
pressure on developing countries to enter into more
bilateral FTAs on the often unjustified premise that they
could otherwise lose market access in developed
country markets to competitors. But, once several
groups of developing countries have made similar
investment agreements under the framework of NorthSouth FTAs, there is a clear danger that these become
the benchmark in the future for extending liberalisation
at the MFN level in multi-lateral negotiations. But, what
is even more alarming is that South-South FTAs are also
seeking to introduce such investment provisions. This is
in fact linked to the fact that many developing
countries such as India, China and Brazil have seen the
emergence of outward investors. For example, if India
pushes ahead with inclusion of such investment
provisions in its proposed agreement with ASEAN, this
can undermine the efforts put in by developing country
negotiators over the years to resist multi-lateralisation
of investment rules. This is because some of the ASEAN
members already have deep investment liberalisation


commitments under EPAs with Japan and are in the

process of negotiations with the EU, apart from
Australia, the US and many other countries. India is also
negotiating with the EU on a proposed FTA. If the
European Commission obtains non-discrimination rules
in its FTAs with ASEAN and India in a manner similar to
that it incorporated in its FTA with CARIFORUM, then,
ASEAN and India will have to provide EU investors the
same treatment that they may agree in more flexible
bilateral agreements with third countries each of them
sign even in the future. Thus, if both India and ASEAN
agree to EU-CARIFORUM type MFN treatment to EU
investors and if India and ASEAN include more flexible
investment/services chapters in the name of SouthSouth cooperation, all these countries will need to treat
EU investors in a similar manner. While detailed
analysis is required to understand the interconnectedness of the investment provisions as well as
service sector liberalisation commitments in each of the
existing and proposed FTAs and their implications for a
countrys ability to maintain financial stability, it seems
logical to conclude that if developing countries fail to
arrest this trend of including other kinds of investments
and instruments into FDI definitions at the national and
regional levels, the next level of multilateral investment
liberalization would have been achieved through these
various FTAs without even mentioning it at the WTO!
Thus, if we define FDI within our national regulatory
frameworks so broadly and allow instruments and
flexibility that was earlier resisted, we would have
already lost most of the leverage in investment
negotiations at the regional and multilateral levels. This
may well become the proverbial last nail in the coffin in
the context of developing countries struggle to keep
out investment from liberalization at the multilateral
level. Given that many of the consequences of the


recent global financial crisis (that originated in the

developed world and transmitted to the developing
world) are yet to be understood, it does not hurt to
reiterate that developing country policy makers would
be wiser to err on the side of caution and avoid the
entry of capital account liberalisation through broad FDI


Direct Investment

Indias Foreign Direct

Investment Trends and Analysis
India has emerged as the preferred destination for
many foreign international enterprises due to
constructive factors such as high economic growth, fast
population growth, English speaking people, and lower
costs for workers.






Location-specific rewards are further classified by three

types of FDI motives:
1. Market-seeking investment is undertaken to
uphold existing markets or to exploit new markets.
For example, due to tariffs and other forms of
barriers, the firm has to relocate production to the
host country where it had previously served by
2. When firms invest abroad to obtain resources not
available in the home country, the investment is
called resource- or asset-seeking. Resources may
be natural resources, raw materials, or low-cost
inputs such as labour.
3. The investment is streamlined or efficiencyseeking when the firm can gain from the general
governance of organically dispersed activities in the
presence of economies of scale and scope.
The host country factors or fundamentals can be
grouped in two categories:
The first group comprises of natural resources, most
kinds of labour, and proximity to markets.
The second group include of a range of environmental
variables that act as a function of political, economic,
legal, and infra-structural factors of a host country.
Indias inward investment rule went through a series of
changes since economic reforms were escorted in two
decades back. The expectation of the policy-makers
was that an investor friendly command will help India


establish itself as a preferred destination of foreign

investors. These expectations remained largely
unfulfilled despite the consistent attempts by the policy
makers to increase the attractiveness of India by
further changes in policies that included opening up of
individual sectors, raising the hitherto existing caps on
foreign holding and improving investment procedures.
But after 200506, official statistics started reporting
steep increases in FDI inflows. Portfolio investors and
round-tripping investments have been important
contributors to Indias reported FDI inflows thus blurring
the distinction between direct and portfolio investors on
one hand and foreign and domestic investors on the
other. These investors were also the ones which have
exploited the tax haven route most.
Inward investments have been constantly rising since
the sharp drop witnessed in 2009, following the global
financial crisis. Hiccups apart, foreign investors see
huge long-term growth potential in the country. As
much as 75 percent of global businesses already
present in the country are looking to considerably
expand their operations going forward according to the
Indian attractive survey by Ernst & Young. This also
confirms that India is undergoing a changeover, both in
terms of investor perception of its market potential, and
in reality.
With GDP growth anticipated to surpass 8 percent
yearly and the number of people in the Indian middle
class set to triple over the next 15 years, with an
equivalent impact on disposable income, domestic
demand is expected to grow exponentially. Indias
young demographic profile also helps it in providing an
increasingly well-educated and cost-competitive labor
force. These factors put India in a good position to
attract an increasing proportion of global FDI.


As project numbers and jobs created are still some way

off highs reached in 2008, which saw 971 projects, the
trend over the last decade has shown a steady, if not
dramatic, upward movement. Generally project
numbers in 2010 were up 60 percent over 2003 and the
The strong domestic market enabled India to deliver a
flexible performance during the global economic
slowdown. India today is rising as a manufacturing
destination, both for the domestic and global markets.
As business leaders battle for growth in the new
economy, there is a sense of urgency among leading
players to grab the prospects offered by the Indian
With the liberty of the simplified compendium on
foreign direct investment, numerous processes on FDI
and associated routes of investment too are being
ratified with a view to speed up the process of inflows
into India.
The out of the country Indian investors too would find it
simpler to entry nodal bodies and invest in India.
Though, a note of caution the Reserve Bank of India
too is attempting to legalize certain sections in Foreign
Exchange Management Act (FEMA) which also allow
NRIs, routes to invest in India. Its argument is that NRIs
tend to invest much more than the cap allowed in the
sectors through these other routes, thereby exceeding
allowed limits for FDI. The government may also
remove the liberties provided to NRIs in sectors such as
aviation, real estate etc.
More reforms to make investing in India a simpler
process, such as FDI in multi-brand retail, defence
production, and agriculture, are in the discussion stage
and the government intends to bring out tangible


policies in this direction. Proposals can also be sent to

DIPP online. This facility will allow all abroad investors
to speed up their investment proposals.

Tax incentives to SEZ developers:Income tax:

1. Deduction from profits and gains from export of
goods/services as follows (Section 10AA).
2. 100 percent income tax exemption for first five
3. 50 percent income tax exemption for next five
4. Income tax exemption for next five years to the
extent of profits.
5. Capital gains tax exemption on relocation to SEZ
(Section 54GA):
This is a controversial issue as to be eligible for
income tax exemption; the unit should be a new
unit. Further, a press statement from Hon. Minister
for Commerce and Industry, Mr. Kamal Nath,
mentions that SEZs are basically for fresh
6. No TDS by overseas banking units on interest on
deposits/borrowings from non-resident or person
not ordinarily resident.
7. No minimum alternate tax.


8. Transferee developer enjoys 100 percent income

tax exemption for balance period of 10 assessment
Indirect tax:
1. SEZ units may import or procure from domestic
sources duty free, all their requirements of capital
goods, raw materials, consumables, spares,
packaging materials, office equipment, DG sets for
implementation of their project in the zone without
any license or specific approval.
2. No import duty on these goods imported.
3. No excise duty on these goods procured from
domestic tariff area.
4. No service tax on services availed from domestic
tariff area.
5. No value added tax and central sales tax on goods
procured from domestic tariff area.
6. On goods procured from DTA, drawback under
section 75 allowed to SEZ unit.
7. Goods imported/procured locally duty free could be
utilized over the approval period of five years.
Other Incentives:
A foreign institutional investor investing in shares and
securities in India would be accountable to tax at 10
percent on its long-term capital gains and 30 percent
on short-term capital gains. The least amount period of
investment in the case of equity shares would be more
than one year to be considered long term, and three
years in the case of other securities. Dividends, interest


or long-term capital gains of an infrastructure capital

fund or infrastructure Capital Company that earns from
investments made on or after June 1, 1998 in any
venture engaged in the business of developing,
maintaining and working any infrastructure facility, and
which has been permitted by the central Government,
is not liable from tax. Dividends paid by local players to
their shareholders are excused from tax. Though, the
domestic corporation would have to pay an extra tax
termed as tax on circulated profits which is
computed at the rate of 10 percent of the amounts
spread as dividends by the local company.

Current Statistics:Indian has been attracting foreign direct investment for

a long period. The sectors like telecommunication,
construction activities and computer software and
hardware have been the major sectors for FDI inflows in
India. As per the fact sheet on FDI, there was Rs.
6,30,336 crore FDI equity inflows between the period of
August 1991 to January 2011.
Top 10 investing FDI investing countries in India are
Mauritius, Singapore, United States, UK, Netherlands,
Japan, Cyprus, Germany, France and UAE. According to
media reports, the decline in the FDI inflows would be a
major concern for the economy, as the Indian economy
is heading to reach the 9 percent growth rate.
The trend of declining FDI tells us very little about
statistics of FDI as it refers to FDI equity inflows.
Though, equity inflow is a better indicator of portfolio
investment (also known as FII inflows) than of FDI. To
understand this, it is essential to define FDI.


Definition of FDI is complex. The main reason is that

unlike portfolio investment, FDI involves a bunch of
activities like managerial inputs, technology infusion
etc which are not measured in the equity definition of
For developing countries like India, the most important
reason to attract FDI is the availability of better
technology. This does not mean that overseas
companies transfer technology. All studies stated that
the presence of foreign companies which positively
impacts productivity of domestic firms through learning
the use of new technologies. This is really important
than obtaining technology through purchases of
drawings and designs. If we accept this, then a better
indicator of FDI interest is the long term trends of FDI in

Real FDI is Increasing in India:An annual FDI inflow indicates that FDI went up from
around negligible amounts in 1991-92 to around US$9
billion in 2006-07. It then hiked to around US$22 billion
in 2007-08, rising to around US$37 billion by 2009-10.
It is now clear that FDI was related to the recessionary
conditions in the western economies. In other words,
the stock of FDI has jumped by almost US$100 billion
since 2006-07. The recent flattening of monthly FDI
flows is a sign more of recovery in the western
economies than any loss of long term interest in the
Indian economy. The monthly figure only shows that the
incremental FDI is going back to the prerecession years
rather than indicating decline of FDI into India. In fact, a
monthly inflow of US$1.1 billion is about 30 percent
higher than pre-recession years.


Also, FDI is all about long term investment. Companies

have already invested in to India and are unlikely to
move elsewhere. Unless any dramatic negative
changes in policy, FDI will continue to inch upwards.
The crucial test for India is how to move from US$10-12
billion FDI economy to one where investment levels are
US$30-40 billion.


Foreign Direct
Investment in
Retail Sector

Foreign Direct Investment In

Indian Retail Sector


As per the current regulatory regime, retail trading

(except under single-brand product retailing FDI up
to 51 per cent, under the Government route) is
prohibited in India. Simply put, for a company to be
able to get foreign funding, products sold by it to the
general public should only be of a single-brand; this
condition being in addition to a few other conditions to
be adhered to. India being a signatory to World Trade
Organizations General Agreement on Trade in Services,
which include wholesale and retailing services, had to
open up the retail trade sector to foreign investment.
There were initial reservations towards opening up of
retail sector arising from fear of job losses, procurement
from international market, competition and loss of
government in a series of moves has opened up the
retail sector slowly to Foreign Direct Investment (FDI).
In 1997, FDI in cash and carry (wholesale) with 100
percent ownership was allowed under the Government
approval route. It was brought under the automatic
route in 2006. 51 percent investment in a single brand
retail outlet was also permitted in 2006. FDI in MultiBrand retailing is prohibited in India.
In 2004, The High Court of Delhi defined the term
retail as a sale for final consumption in contrast to a
sale for further sale or processing (i.e. wholesale). A
sale to the ultimate consumer.
Thus, retailing can be said to be the interface between
the producer and the individual consumer buying for
personal consumption. This excludes direct interface
between the manufacturer and institutional buyers
such as the government and other bulk customers
Retailing is the last link that connects the individual
consumer with the manufacturing and distribution


chain. A retailer is involved in the act of selling goods to

the individual consumer at a margin of profit.

Division of Retail IndustryUnorganised Retailing:-



The retail industry is mainly divided into1. Organized, and

2. Unorganized Retailing.
Organized retailing refers to trading activities
undertaken by licensed retailers, that is, those who are
registered for sales tax, income tax, etc. These include
the corporate-backed hypermarkets and retail chains,
and also the privately owned large retail businesses.
Unorganized retailing, on the other hand, refers to the
traditional formats of low-cost retailing, for example,
the local kirana shops, owner manned general stores,
paan/beedi shops, convenience stores, hand cart and
pavement vendors, etc.
The Indian retail sector is highly fragmented with 97
per cent of its business being run by the unorganized
retailers. The organized retail however is at a very
nascent stage. The sector is the largest source of
penetration into rural India generating more than 10
per cent of Indias GDP.

FDI Policy with Regard to retailing in India:It will be prudent to look into Press Note 4 of 2006
issued by DIPP and consolidated FDI Policy issued in
October 2010 which provide the sector specific
guidelines for FDI with regard to the conduct of trading


1. FDI up to 100% for cash and carry wholesale

trading and export trading allowed under the
automatic route.
2. FDI up to 51 % with prior Government approval
(i.e. FIPB) for retail trade of Single Brand products,
subject to Press Note 3 (2006 Series)
3. FDI is not permitted in Multi Brand Retailing in India

Entry Options for Foreign Players prior to FDI

Policy:Although prior to Jan 24, 2006, FDI was not authorised
in retailing, most general players had been operating in
the country. Some of entrance routes used by them
have been discussed in sum as below:1. Franchise Agreements:
It is an easiest track to come in the Indian market.
In franchising and commission agents services,
FDI (unless otherwise prohibited) is allowed with
the approval of the Reserve Bank of India (RBI)
under the Foreign Exchange Management Act. This
is a most usual mode for entrance of quick food
bondage opposite a world. Apart from quick food
bondage identical to Pizza Hut, players such as
Lacoste, Mango, Nike as good as Marks as good as
Spencers, have entered Indian marketplace by
2. Cash And Carry Wholesale Trading:
100% FDI is allowed in wholesale trading which
infrastructure to assist local manufacturers. The
wholesaler deals only with smaller retailers and not
Consumers. Metro AG of Germany was the first
significant global player to enter India through this


3. Strategic Licensing Agreements:

Some foreign brands give exclusive licences and
distribution rights to Indian companies. Through
these rights, Indian companies can either sell it
through their own stores, or enter into shop-inshop arrangements or distribute the brands to
franchisees. Mango, the Spanish apparel brand has
entered India through this route with an
agreement with Piramyd, Mumbai, SPAR entered
into a similar agreement with Radhakrishna
Foodlands Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries:
The foreign brands such as Nike, Reebok, Adidas,
etc. that have wholly-owned subsidiaries in
manufacturing are treated as Indian companies
and are, therefore, allowed to do retail. These
companies have been authorized to sell products
to Indian consumers by franchising, internal
distributors, existent Indian retailers, own outlets,
etc. For instance, Nike entered through an
Enterprises but now has a wholly owned
subsidiary, Nike India Private Limited.

FDI in Single Brand Retail:The Government has not categorically defined the
meaning of Single Brand anywhere neither in any of
its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed,
subject to Foreign Investment Promotion Board (FIPB)
approval and subject to the conditions mentioned in
Press Note 3 that:


1. Only single brand products would be sold (i.e.,

retail of goods of multi-brand even if produced
by the same manufacturer would not be
2. Products should be sold under the same brand
internationally, (c) single-brand product retail
would only cover products which are branded
during manufacturing and
3. Any addition to product categories to be sold
under single-brand would require fresh
approval from the government.
While the phrase single brand has not been defined, it
implies that foreign companies would be allowed to sell
goods sold internationally under a single brand, viz.,
Reebok, Nokia, Adidas. Retailing of goods of multiple
brands, even if such products were produced by the
same manufacturer, would not be allowed.
Going a step further, we examine the concept of single
brand and the associated conditions:
FDI in Single brand retail implies that a retail store
with foreign investment can only sell one brand. For
example, if Adidas were to obtain permission to retail
its flagship brand in India, those retail outlets could
only sell products under the Adidas brand and not the
Reebok brand, for which separate permission is
required. If granted permission, Adidas could sell
products under the Reebok brand in separate outlets.
Brands could be classified as products and multiple
products, or could be manufacturer brands and ownlabel brands. Assume that a company owns two leading
international brands in the footwear industry say A
and R. If the corporate were to obtain permission to
retail its brand in India with a local partner, it would
need to specify which of the brands it would sell. A


reading of the government release indicates that A and

R would need separate approvals, separate legal
entities, and may be even separate stores in which to
operate in India. However, it should be noted that the
retailers would be able to sell multiple products under
the same brand, e.g., a product range under brand A
Further, it appears that the same joint venture partners
could operate various brands, but under separate legal
Now, taking an example of a large departmental
grocery chain, prima facie it appears that it would not
be able to enter India. These chains would, typically,
source products and, thereafter, brand it under their
private labels. Since the regulations require the
products to be branded at the manufacturing stage,
this model may not work. The regulations appear to
discourage own-label products and appear to be tilted
heavily towards the foreign manufacturer brands. There
is ambiguity in the interpretation of the term single
brand. The existing policy does not clearly codify
whether retailing of goods with sub-brands bunched
under a major parent brand can be considered as
single-brand retailing and, accordingly, eligible for 51
per cent FDI. Additionally, the question on whether cobranded goods (specifically branded as such at the
time of manufacturing) would qualify as single brand
retail trading remains unanswered.

FDI in Multi Brand Retail:The government has also not defined the term Multi
Brand. FDI in Multi Brand retail implies that a retail
store with a foreign investment can sell multiple brands
under one roof.
In July 2010, Department of Industrial Policy and
Promotion (DIPP), Ministry of Commerce circulated a


discussion paper on allowing FDI in multi-brand retail.

The paper doesnt suggest any upper limit on FDI in
multi-brand retail. If implemented, it would open the
doors for global retail giants to enter and establish their
footprints on the retail landscape of India. Opening up
FDI in multi-brand retail will mean that global retailers
including Wal-Mart, Carrefour and Tesco can open
stores offering a range of household items and grocery
directly to consumers in the same way as the
ubiquitous kirana store.

Foreign Investors Concern regarding FDI Policy in

India:For those brands which adopt the franchising route as a
matter of policy, the current FDI Policy will not make
any difference. They would have preferred that the
Government liberalize rules for maximizing their royalty
and franchise fees. They must still rely on innovative
structuring of franchise arrangements to maximize their
returns. Consumer durable majors such as LG and
Samsung, which have exclusive franchisee owned
stores, are unlikely to shift from the preferred route
For those companies which choose to adopt the route
of 51% partnership, they must tie up with a local
partner. The key is finding a partner which is reliable
and who can also teach a trick or two about the
domestic market and the Indian consumer. Currently,
the organized retail sector is dominated by the likes of
large business groups which decided to diversify into
retail to cash in on the boom in the sector corporates
such as Tata through its brand Westside, RPG Group
through Food world, Pantaloons of the Raheja Group
and Shoppers Stop. Do foreign investors look to tie up
with an existing retailer or look to others not


necessarily in the business but looking to diversify, as

many business groups are doing?
An arrangement in the short to medium term may work
wonders but what happens if the Government decides
to further liberalize the regulations as it is currently
contemplating? Will the foreign investor terminate the
agreement with Indian partner and trade in market
without him? Either way, the foreign investor must
negotiate its joint venture agreements carefully, with
an option for a buy-out of the Indian partners share if
and when regulations so permit. They must also be
aware of the regulation which states that once a foreign
company enters into a technical or financial
collaboration with an Indian partner, it cannot enter
into another joint venture with another Indian company
or set up its own subsidiary in the same field without
the first partners consent if the joint venture
agreement does not provide for a conflict of interest
clause. In effect, it means that foreign brand owners
must be extremely careful whom they choose as
partners and the brand they introduce in India. The first
brand could also be their last if they do not negotiate
the strategic arrangement diligently.

Concerns for the Government for only partially

allowing FDI in Retail Sector:A number of concerns were expressed with regard to
partial opening of the retail sector for FDI. The Honble
Department Related Parliamentary Standing Committee
on Commerce, in its 90th Report, on Foreign and
Domestic Investment in Retail Sector, laid in the Lok
Sabha and the Rajya Sabha on 8 June, 2009, had made
an in-depth study on the subject and identified a
number of issues related to FDI in the retail sector.
These included:


It would lead to unfair competition and ultimately result

in large-scale exit of domestic retailers, especially the
small family managed outlets, leading to large scale
displacement of persons employed in the retail sector.
Further, as the manufacturing sector has not been
growing fast enough, the persons displaced from the
retail sector would not be absorbed there.
Another concern is that the Indian retail sector,
particularly organized retail, is still under-developed
and in a nascent stage and that, therefore, it is
important that the domestic retail sector is allowed to
grow and consolidate first, before opening this sector to
foreign investors.
Antagonists of FDI in retail sector oppose the same on
various grounds, like, that the entry of large global
retailers such as Wal-Mart would kill local shops and
millions of jobs, since the unorganized retail sector
employs an enormous percentage of Indian population
after the agriculture sector; secondly that the global
retailers would conspire and exercise monopolistic
power to raise prices and monopolistic (big buying)
power to reduce the prices received by the suppliers;
thirdly, it would lead to asymmetrical growth in cities,
causing discontent and social tension elsewhere.
Hence, both the consumers and the suppliers would
lose, while the profit margins of such retail chains
would go up.

Limitations of the Present Setup:Infrastructure:

There has been a lack of investment in the logistics of
the retail chain, leading to an inefficient market
mechanism. Though India is the second largest
producer of fruits and vegetables (about 180 million


MT), it has a very limited integrated cold-chain

infrastructure, with only 5386 stand-alone cold
storages, having a total capacity of 23.6 million MT. ,
80% of this is used only for potatoes. The chain is
highly fragmented and hence, perishable horticultural
commodities find it difficult to link to distant markets,
including overseas markets, round the year. Storage
infrastructure is necessary for carrying over the
agricultural produce from production periods to the rest
of the year and to prevent distress sales. Lack of
adequate storage facilities cause heavy losses to
farmers in terms of wastage in quality and quantity of
produce in general. Though FDI is permitted in coldchain to the extent of 100%, through the automatic
route, in the absence of FDI in retailing; FDI flow to the
sector has not been significant.
Intermediaries Dominate the Value Chain:
Intermediaries often flout mandi norms and their
pricing lacks transparency. Wholesale regulated
markets, governed by State APMC Acts, have developed
According to some reports, Indian farmers realize only
1/3rd of the total price paid by the final consumer, as
against 2/3rd by farmers in nations with a higher share
of organized retail.
Improper Public Distribution System:
There is a big question mark on the efficacy of the
public procurement and PDS set-up and the bill on food
subsidies is rising. In spite of such heavy subsidies,
overall food based inflation has been a matter of great
concern. The absence of a farm-to-fork retail supply
system has led to the ultimate customers paying a
premium for shortages and a charge for wastages.


No Global Reach:
The Micro Small & Medium Enterprises (MSME) sector
has also suffered due to lack of branding and lack of
avenues to reach out to the vast world markets. While
India has continued to provide emphasis on the
development of MSME sector, the share of unorganized
sector in overall manufacturing has declined from
34.5% in 1999-2000 to 30.3% in 2007-08. This has
largely been due to the inability of this sector to access
latest technology and improve its marketing interface.
Rationale behind Allowing FDI in Retail Sector:
FDI can be a powerful catalyst to spur competition in
the retail industry, due to the current scenario of low
competition and poor productivity.
The policy of single-brand retail was adopted to allow
Indian consumers access to foreign brands. Since
Indians spend a lot of money shopping abroad, this
policy enables them to spend the same money on the
same goods in India. FDI in single-brand retailing was
permitted in 2006, up to 51 per cent of ownership.
Between then and May 2010, a total of 94 proposals
have been received. Of these, 57 proposals have been
approved. An FDI inflow of US$196.46 million under the
category of single brand retailing was received between
April 2006 and September 2010, comprising 0.16 per
cent of the total FDI inflows during the period. Retail
stocks rose by as much as 5%. Shares of Pantaloon
Retail (India) Ltd ended 4.84% up at Rs 441 on the
Bombay Stock Exchange. Shares of Shoppers Stop Ltd
rose 2.02% and Trent Ltd, 3.19%. The exchanges key
index rose 173.04 points, or 0.99%, to 17,614.48. But
this is very less as compared to what it would have
been had FDI upto 100% been allowed in India for
single brand.


The policy of allowing 100% FDI in single brand retail

can benefit both the foreign retailer and the Indian
partner foreign players get local market knowledge,
while Indian companies can access global best
management practices, designs and technological
knowhow. By partially opening this sector, the
government was able to reduce the pressure from its
trading partners in bilateral/ multilateral negotiations
and could demonstrate Indias intentions in liberalising
this sector in a phased manner.
Permitting foreign investment in food-based retailing is
likely to ensure adequate flow of capital into the
country & its productive use, in a manner likely to
promote the welfare of all sections of society,
particularly farmers and consumers. It would also help
bring about improvements in farmer income &
agricultural growth and assist in lowering consumer
prices inflation.
Apart from this, by allowing FDI in retail trade, India will
significantly flourish in terms of quality standards and
consumer expectations, since the inflow of FDI in retail
sector is bound to pull up the quality standards and
cost-competitiveness of Indian producers in all the
segments. It is therefore obvious that we should not
only permit but encourage FDI in retail trade.
Lastly, it is to be noted that the Indian Council of
Research in International Economic Relations (ICRIER),
a premier economic think tank of the country, which
was appointed to look into the impact of BIG capital in
the retail sector, has projected the worth of Indian retail
sector to reach $496 billion by 2011-12 and ICRIER has
also come to conclusion that investment of big money
(large corporates and FDI) in the retail sector would in
the long run not harm interests of small, traditional,


In light of the above, it can be safely concluded that

allowing healthy FDI in the retail sector would not only
lead to a substantial surge in the countrys GDP and
overall economic development, but would inter alia also
help in integrating the Indian retail market with that of
the global retail market in addition to providing not just
employment but a better paying employment, which
the unorganized sector (kirana and other small time
retailing shops) have undoubtedly failed to provide to
the masses employed in them. Industrial organizations
such as CII, FICCI, US-India Business Council (USIBC),
the American Chamber of Commerce in India, The
Retail Association of India (RAI) and Shopping Centers
Association of India (a 44 member association of Indian
multi-brand retailers and shopping malls) favour a
phased approach toward liberalizing FDI in multi-brand
retailing, and most of them agree with considering a
cap of 49-51 per cent to start with.
The international retail players such as Walmart,
Carrefour, Metro, IKEA, and TESCO share the same view
and insist on a clear path towards 100 per cent opening
up in near future. Large multinational retailers such as
US-based Walmart, Germanys Metro AG and
Woolworths Ltd, the largest Australian retailer that
operates in wholesale cash-and-carry ventures in India,
have been demanding liberalization of FDI rules on
multi-brand retail for some time.
Thus, as a matter of fact FDI in the buzzing Indian retail
sector should not just be freely allowed but per contra
should be significantly encouraged. Allowing FDI in
multi brand retail can bring about Supply Chain
Improvement, Investment in Technology, Manpower
and Skill development, Tourism Development, Greater
Sourcing From India, Up gradation in Agriculture,
Efficient Small and Medium Scale Industries, Growth in


market size and Benefits to government through

greater GDP, tax income and employment generation.
Prerequisites before allowing FDI in Multi Brand Retail
and Lifting Cap of Single Brand Retail:
FDI in multi-brand retailing must be dealt cautiously as
it has direct impact on a large chunk of population. Left
alone foreign capital will seek ways through which it
can only multiply itself, and unthinking application of
capital for profit, given our peculiar socio-economic
conditions, may spell doom and deepen the gap
between the rich and the poor. Thus the proliferation of
foreign capital into multi-brand retailing needs to be
anchored in such a way that it results in a win-win
situation for India. This can be done by integrating into
the rules and regulations for FDI in multi-brand retailing
certain inbuilt safety valves. For example FDI in multi
brand retailing can be allowed in a calibrated manner
with social safeguards so that the effect of possible
labor dislocation can be analyzed and policy fine tuned
accordingly. To ensure that the foreign investors make a
infrastructure and logistics, it can be stipulated that a
percentage of FDI should be spent towards building up
of back end infrastructure, logistics or agro processing
units. Reconstituting the poverty stricken and
stagnating rural sphere into a forward moving and
prosperous rural sphere can be one of the justifications
for introducing FDI in multi-brand retailing. To actualize
this goal it can be stipulated that at least 50% of the
jobs in the retail outlet should be reserved for rural
youth and that a certain amount of farm produce be
procured from the poor farmers. Similarly to develop
our small and medium enterprise (SME), it can also be
stipulated that a minimum percentage of manufactured
products be sourced from the SME sector in India. PDS


is still in many ways the life line of the people living

below the poverty line. To ensure that the system is not
weakened the government may reserve the right to
procure a certain amount of food grains for replenishing
the buffer. To protect the interest of small retailers the
government may also put in place an exclusive
regulatory framework. It will ensure that the retailing
giants do resort to predatory pricing or acquire
monopolistic tendencies. Besides, the government and
RBI need to evolve suitable policies to enable the
retailers in the unorganized sector to expand and
improve their efficiencies. If Government is allowing
FDI, it must do it in a calibrated fashion because it is
politically sensitive and link it (with) up some caveat
from creating some back-end infrastructure.
Further, To take care of the concerns of the Government
before allowing 100% FDI in Single Brand Retail and
Multi- Brand Retail, the following recommendations are
being proposed:1. Preparation of a legal and regulatory framework
and enforcement mechanism to ensure that
large retailers are not able to dislocate small
retailers by unfair means.
2. Extension of institutional credit, at lower rates,
by public sector banks, to help improve
efficiencies of small retailers; undertaking of
proactive programme for assisting small retailers
to upgrade themselves.
3. Enactment of a National Shopping Mall
Regulation Act to regulate the fiscal and social
aspects of the entire retail sector.
4. Formulation of a Model Central Law regarding
FDI of Retail Sector.




To determine the Foreign Direct Investment
inflows in India.
To understand the Foreign Direct Investment
trends and its changes in India.
To understand the Foreign Direct Investment
policy in India.
To understand the government concerns for
allowing Foreign Direct Investment in India.
To understand the relationship between the
Foreign Direct Investment and the Retail
sector in India.



Research Methodology


Re s e a rc h
a c t i o n s o r s t e p s n e c e s s a r y t o effectively
carryout the study. Knowledge of how to do research
will indicate its evaluation and enable the users of
the study to use the research results with
reasonable confidence. It enables to make
intelligent decisions concerning problems facing
us in practical life at different stages of time.

Data collection Method:This research is based on secondary data and it

examines the trading mechanism of stock market. The
results are mainly drawn from the secondary data;
sources are:-

Publications of the company,

Business magazines,
Journals, text books,
Annual reports.

Research Design:The Research Design chosen for this study is

Descriptive in nature. Research design is needed
because it facilitates the smoothness of various




effi ciently
information with minimum efforts of time and
Research design stands for advance planning of the
methods to be adopted for collecting relevant data
and techniques to be used in their analysis,
keeping in view the objective of research and
availability of staff, time and money. Preparation of
Research design should be done with great care as any
error in it may upset the entire project.
Fundamental to the success of any research
project is sound research design. Research design
is purely and simply the work or plan for a study that
guides the collection and analysis of the data. A good
research design has the characteristics of analysis,
time required for research project and estimate of


expenses to be incurred. The function of research

design is to ensure that the required data are collected
accurately and economically. It is a blue print that is
followed in completing a study.

Data Analysis:The data collected from the secondary sources

were consolidated, tabulated, analysed, interpreted and
presented in the report. For the purpose of analyzing
the data, graphs, tables and percentage method
have been utilized. On the basis of information
generated from the data analysis, conclusions
have been drawn and suitable
suggestions/recommendations have been made.


Findings and

Findings and Analysis

The reported stock of FDI in India increased
substantially after opening up of the economy. Table 4
presents the inflows data for the 10year period 2000


01 to 200910 which does not suffer from comparison

problems. The change in the reporting practice which
introduced new items, especially reinvested earnings of
significantly to the reported higher total inflows:
44.21% during 200001 200506 and 30.63% during
200506 200910. There is, however, no denying the
fact of a dramatic rise in the inflows after 200506 as
the reported equity inflows which fluctuated between
200102 and 200405, managed to climb slowly initially
and rapidly after 200506. The FDI Equity inflows during
the five years 200506 to 2009 10 were almost seven
times those of the previous five years 200001 to 2004

Table 4- Reported FDI Inflows into India and their

Main Components (As per International Best


Chart 1- Average Reported FDI Equity Inflows

during Different Periods:-

Incidentally, in March 2005, the government announced

a revised FDI policy, an important element of which was
the decision to allow FDI up to 100% foreign equity
under the automatic route in townships, housing, built
projects. The year 2005 also witnessed the enactment
of the Special Economic Zones Act, which entailed a lot
of construction and township development that came
into force in February 2006.
Further, it can be seen from Table 5 that acquisition of
existing shares of companies by foreign investors
contributed substantially to the FDI Equity Inflows and
it peaked in 200506 and 200607 to reach almost two
fifths of the total FDI Equity flows. Acquisition of shares
together with reinvested earnings (which do not
represent actual inflows) account for a substantial
proportion of the reported total inflows. (Chart 2)
Another notable feature of the inflows is that the
proportion of the inflows subject to specific government


approvals declined from 62.25% in 200001 to 13.55%

in 200910 reflecting the progressively greater freedom
enjoyed by the foreign investors in making their
investment decisions.

Table 5- Entry Routewise Distribution of FDI

Equity Inflows in US $ mn:-

Chart 2- Relative Contribution of Reinvested

Earnings and Acquisition of Shares to FDI


A development which provides a specific context to the

present study is the sharp decline in the reported total
FDI Equity inflows during the first eight months of 2010
11 by 23.88% over the inflows of the corresponding
period of 200910. The corresponding fall in FDI Equity
inflows was 27.43%. UNCTAD estimated the fall in
Indias FDI inflows during the calendar year 2010 at
31%.59 From Table 5 (and Chart 2) it can be seen that
even this level of inflow was sustained by a sudden
increase in the inflows through the acquisition route.
From a share of 12.29% in the FDI Equity inflows of
200910, its share doubled to 24.75% in 201011.
Acquisition related inflows in value terms during the
first eight months of 201011 already exceeded that for
the entire 200910. And it is the inflows through the
automatic route which were affected substantially
rather than those through the Foreign Investment
Promotion Board/Secretariat for Industrial Assistance
(FIPB/SIA) approval route suggesting that more than the
problems in getting the approvals through; it is the
voluntary restraint on part of the foreign investors
which was responsible for the slow down. The major fall
in FDI inflows has caused concern in policy making
circles and has become a subject matter of public
comments. RBI in particular is now worried about the


fall in FDI inflows in the context of higher level of

current account deficit and dominance of volatile
portfolio capital flows. The volatile FII inflows which
accounted for a substantial proportion of the equity
flows have in turn contributed to the volatility in equity
prices and the exchange rate. RBI underlined the
sustainability risks posed by the composition of
capital flows and the need for recovery in FDI which is
expected to have longerterm commitments. Besides
integrated township projects and construction of ports,
it identified the sectors responsible for the slow down
as construction, real estate, business and financial
services. It does appear that the role of FDI is now
being seen more from the point of managing the
current account deficit due to its more stable nature,
rather than for it being a bundle of assets. The
increased inflows have been characterised by a sharp
change in their sectoral composition. By 2008, while
the share of manufacturing declined to almost half of
what it was in 2005, share of services increased the
maximum with mining and agriculture related activities
Construction and Real Estate sector gained the most.
The Financial services sector too gained in importance.
Major setback was, however, experienced by the IT &
ITES sector. While the Energy sector gained relatively,
telecommunication services managed to retain its
share. Construction & Real Estate and Finance are thus
the major gainers in this period. (Table 6 and Chart 3) A
further scrutiny of the data suggested that only a few of
the Indian investee companies in the former can be
categorised as engineering & construction companies
like Punj Lloyd, Soma Enterprises and Shriram EPC and
the rest are developersa few of these were engaged
in setting up IT Parks and SEZs. A similar examination
of the inflows to the financial sector suggested that


close to 40% of the inflows were into companies that

serve the securities market suggesting that they do not
directly contribute to the financing needs of the Indian
businesses. These could be termed as adjuncts to the
foreign portfolio investors. In 2009, the situation
changed somewhat.
(Table 7) While the manufacturing sector gained
marginally, the Construction and Real Estate sector
improved its position further to claim more than one
fifth of the inflows. IT & ITES slipped even further with a
share of just 2.55% of the total.

Table 6- Major Sectorwise Distribution of FDI

Equity Inflows during 20052008:-

Chart 3- Sectoral Composition of Reported FDI

Equity Inflows during 20052008:-


Table 7- Major Sectorwise Distribution of FDI

Inflows in 2009:-

Another important aspect of the inflows is the

substantial shift in the immediate source country for
FDI into India (Table 8). While the prominence of


Mauritius for routing foreign capital to India has been

well known, the more recent period witnessed further
strengthening of Mauritius as the source country. For
the period 2005 to 2009, the country accounted for
practically half of the total reported inflows.
Interestingly, Singapore secured the second position
with Cyprus and UAE entering the group of top 10 home
countries for FDI into India. Overall, countries
categorised as tax havens accounted for much higher
share of nearly 70% of the total FDI inflows during the
more recent period compared to their share of 40% till
2000 or even the 45% in the immediate preceding

Table 8- Indias FDI Equity Inflows: Top 10 Home

Countries Share (in percentage):-




A start has been made:Walmart has a joint venture with Bharti Enterprises for
cash-and-carry (wholesale) business, which runs the
Best Price stores. It plans to have 15 stores by March
and enter new states like Andhra Pradesh, Rajasthan,
Duke, Wallmarts CEO opined that FDI in retail would
contain inflation by reducing wastage of farm output as
30% to 40% of the produce does not reach the endconsumer. In India, there is an opportunity to work all
the way up to farmers in the back-end chain. Part of
inflation is due to the fact that produces do not reach
the end-consumer, Duke said, adding, that a similar
trend was noticed when organized retail became
popular in the US.
Many of the foreign brands would come to India if FDI in
multi brand retail is permitted which can be a blessing
in disguise for the economy.

Back End Logistics must for FDI in Multi-Brand

Retail:The government has added an element of social benefit
to its latest plan for calibrated opening of the multibrand retail sector to foreign direct investment (FDI).
Only those foreign retailers who first invest in the backend supply chain and infrastructure would be allowed
to set up multi brand retail outlets in the country. The
idea is that the firms must have already created jobs
for rural India before they venture into multi-brand


It can be said that the advantages of allowing

unrestrained FDI in the retail sector evidently outweigh
the disadvantages attached to it and the same can be
deduced from the examples of successful experiments
in countries like Thailand and China; where too the
issue of allowing FDI in the retail sector was first met
with incessant protests, but later turned out to be one
of the most promising political and economical
decisions of their governments and led not only to the
commendable rise in the level of employment but also
led to the enormous development of their countrys
Moreover, in the fierce battle between the advocators
and antagonist of unrestrained FDI flows in the Indian
retail sector, the interests of the consumers have been
blatantly and utterly disregarded. Therefore, one of the
arguments which inevitably need to be considered and
addressed while deliberating upon the captioned issue
is the interests of consumers at large in relation to the
interests of retailers.
It is also pertinent to note here that it can be safely
contended that with the possible advent of
unrestrained FDI flows in retail market, the interests of
the retailers constituting the unorganized retail sector
will not be gravely undermined, since nobody can force
a consumer to visit a mega shopping complex or a
small retailer/sabji mandi. Consumers will shop in
accordance with their utmost convenience, where ever
they get the lowest price, max variety, and a good
consumer experience.
The Industrial policy 1991 had crafted a trajectory of
change whereby every sectors of Indian economy at
one point of time or the other would be embraced by
liberalization, privatization and globalization. FDI in
multi-brand retailing and lifting the current cap of 51%


on single brand retail is in that sense a steady

progression of that trajectory. But the government has
by far cushioned the adverse impact of the change that
has ensued in the wake of the implementation of
Industrial Policy 1991 through safety nets and social
safeguards. But the change that the movement of
retailing sector into the FDI regime would bring about
will require more involved and informed support from
the government. One hopes that the government would
stand up to its responsibility, because what is at stake
is the stability of the vital pillars of the economyretailing, agriculture, and manufacturing. In short, the
socio economic equilibrium of the entire country.



Thus, it is found that FDI as a strategic component of
investment is needed by India for its sustained
economic growth and development. FDI is necessary
manufacturing industries and development of the new
one. Indeed, it is also needed in the healthcare,
education, R&D, infrastructure, retailing and in long
term financial projects. So, the study recommends the
following suggestions: The study urges the policy makers to focus more
on attracting diverse types of FDI.
The policy makers should design policies where
foreign investment can be utilised as means of
enhancing domestic production, savings, and
exports; as medium of technological learning and
technology diffusion and also in providing access to
the external market.
It is suggested that the government should push
for the speedy improvement of infrastructure


sectors requirements which are important for

diversification of business activities.
Government should ensure the equitable
distribution of FDI inflows among states. The
central government must give more freedom to
states, so that they can attract FDI inflows at their
own level. The government should also provide
additional incentives to foreign investors to invest
in states where the level of FDI inflows is quite low.
Government should open doors to foreign
companies in the export oriented services which
could increase the demand of unskilled workers
and low skilled services and also increases the
wage level in these services.
It is suggested that the government endeavour
should be on the type and volume of FDI that will
significantly boost domestic competitiveness,
enhance skills, technological learning and
invariably leading to both social and economic
It is also suggested that the government must
promote sustainable development through FDI by
further strengthening of education, health and R&D
system, political involvement of people and by
ensuring personal security of the citizens.
Finally, it is suggested that the policy makers
should ensure optimum utilisation of funds and
timely implementation of projects. It is also
observed that the realisation of approved FDI into
actual disbursement is quite low. It is also
suggested that the government while pursuing
prudent policies must also exercise strict control
over inefficient bureaucracy, red - tapism, and the


rampant corruption, so that investors confidence

can be maintained for attracting more FDI inflows
to India. Last but not least, the study suggests that
the government ensures FDI quality rather than its



At various stages, the basic objective of the study
is suffered due to inadequacy of time series data
from related agencies. There has also been a
problem of sufficient homogenous data from
different sources. For example, the time series
used for different variables, the averages are used
at certain occasions. Therefore, the trends, growth
rates etc may deviate from the true ones.
The assumption that FDI was the only cause for
development of Indian economy in the post
liberalised period is debatable. No proper methods
were available to segregate the effect of FDI to
support the validity of this assumption.


Above all, it is a B.B.A. research project and the

research was faced with the problem of various
resources like time and money.



Books: Chandan Chakraborty, Peter Nunnenkamp (2006):
Economic Reforms, FDI and its Economic Effects in
Economic Survey, (1992-93): Ministry of Finance,
Government of India, New Delhi.
Goldman Sachs (2007): Global Economic Papers
Handbook of Industrial Policy and Statistics (200708), Government of India.
Nirupam Bajpai and Jeffrey D. Sachs (2006):
Foreign Direct Investment in India: Issues and
Problems, Harvard Institute of International


Development, Development Discussion Paper No.

759, March.

Websites: www.imf.org