Foreign Investment

India is the Second most Popular Country in the World and the largest Democracy In the World and sweeping Economic reform undertaken since 1991 have unleashed the enormous growth potential of the economy. There has been a rapid, yet calibrated, move towards deregulation and liberalization, which has resulted in India becoming a favorite destination for foreign investment. The mood is upbeat and signals strong. Undoubtely ,India has emerged as one of the most vibrant and dynamic of the developing economics. In olden days capital flowed from one place to another by goods. Traders went another country for selling their goods for making profit. But after the in late 1980, have significantly changed the environment for international investment according to Peter Drucker. Foreign investment refers to long term participation by country A into country B. Usually invoives participation in management, joint venture & transfer of technology

Foreign investment may also help increase a countrys exports and reduce the import
requirements. If such investment take place in export oriented and ImportCompeting industries.

ADVANTAGESInfrastructure $ technology transfer. Increase productive efficiency due to competiton from multinational companies. Improvement in the quality of the factors of production Faster growth of output and employment. Increase in exports

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FDI refers to investment in a forign country where the invester retain control over the
investment.

portfolio investments If the investor has only assort of property interest in investing the capital in buying equities ,bonds ,or other securities abroad, it is referred to as portfolio investments. There are many routes of portfolio investments.in india .viz., by foreign Institutional Investors(FIIs) like Mutual Funds and through Global depository Receipt(GDRs)

F A
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India
*1. One largest economies of the world. Fourth largest economy in term of purchasing power. 2.Large and rapidly growing Consumer Market up to 300 million people constitute the Market for branded consumer products 3. Easy access to markets of the other nations belonging to the south assion association for Regional Corporation. 4. Large and diversified infrastructure spread across the Country. 5. Promising future in the IT Industry 6. Large Manufacturing Capability., spanning almost all areas of manufacturing activities 7. Well developed R&D infrastructure. 8.Well establish knowledge industry. 9. Abundance of natural resources. 10. Developed Banking system 11. Well balanced package of fiscal incentives. 12. Stable democratic environment fostered by over 53 years of independence. 13. Established, independent judiciary. 14. English the preferred business language. 3|Page

Four E (PPP

Significance of Foreign Investment

Foreign capital and technology can play a very important role in the socio-economic development of a nation. Helps economic growth by facilitating essential imports. Foreign Investment (FI) may also help increase a countrys exports and reduce import. FI also increases jobs and domestic labour may get higher wages. Consumer get cheaper goods. FI may also bring in a lot of indirect gains.

Limitations and Dangers of Foreign Capital

The following criticisms are levelled against foreign capital: Mostly FI is in high profit areas and not in priority areas. Unfavorable effect on balance of payment. Sometimes interfere with national politics. Danger of creation of monopolies or oligopolistic structures.

TECHNICAL COLLABORATION
Royalty for use of trademark and brand name without technology transfer is allowed upto 2% for exports and 1% for domestic sales. In case of technology transfer, no separate royalty can be paid for trade marks & brand name Remittance upto USD 1 million per project for consultancy service procured from outside India is permitted under the automatic route .

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SIGNIFICANCE OF FOREIGN INVESTMENT

Foreign capital and technology can play a very important role in the socio-economic development of a nation. They have very significantly contributed to the development of the developed countries. Foreign capital and technology have been playing a significant role in the development of a number of developing countries. Foreign investment is playing an increasing role in economic development. Economic reforms and the far-reaching political changes have resulted in very substantial changes in the International capital flows. Foreign investment may also help increase a countrys exports and reduce the import requirements if such Investment take place in export-oriented and import-competing industries. The analysis of Donald MacDougall and Paul Streeten, Gerald Meier observes that, from the stand point of national economic benefit, the essence of the case for encouraging an inflow of capital is that the capital is that the resturent increase in the income of investor. As long as foreign investment raises of productivity, and this increase is not wholly appropriated by the investor, the greater product must be shared with others and there must be some direct benefits to others, and there must be some direct benefits to other income group as mentioned below:

FDI can have social and economic benefits.

Domestic labour There might also be an expansion of the employment opportunities. Consumers:-If the investment is product-improving or production-innovating, consumer benefit from better quality product or new product. Government:-The increase in production and foreign trade resulting from foreign capital might increase the fiscal revenue of government. External economies:-This could stimulate domestic investment in industrial and other sectors. The endogenous growth framework, the source of growth attributed to capital flows comprise the spillovers associated With foreign capital in the form of technology FDI have remarkably changed the balance of payment and foreign exchange reserve position of several countries.

Advantages of FDI
1FDI shifts the burden of risk of investment from domestic to foreign investors. 2-Repayments are linked to profitability of the underlying investment whereas under debt financing the borrowed funds must be serviced regardless of the project costs. 3-Further, it has also been observed that only capital inflow that has been strongly associated with higher GDP growth since 1970. FDI has specific advantages over ODA 5|Page

Foreign Private investment:-

Foreign investment can have

multidimensional benefits. 1- It helps increase level and thereby the income and employment in the host country. 2-Foreign investment may increase the tax revenue of the government. 3-FDI facilitates transfer of technology to the recipient country. 4- Foreign capital may enable the country to increase its export and reduce import requirements. 5-The Foreign investors may encourage and assist domestic suppliers and consuming industries. 6-Foreign investment improves the quality and reduces the cost of input, that would benefit the domestic industry. 7-Foreign investors may also help increase competition and break domestic monopolies.

INLOW OF FDI IN INDIA 2007-2008--$15.7 billion 2006-2007--$5.5 Role player Vodafone Nokia Suzuki General motors OUTFLOW 0F FDI FROM INDIA 2007-08- $15 billion 2006-07 $2.8 Role Players Tata groups Wipro Ranbaxy Bharat forge

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Investment PolicyAutomatic Route-Today, foreign investment is freely allowed in all sectors including the Services, sector except in cases in cases where there are sectoral ceilings.

INSURANCE SECTOR -

FDI up to 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained There is a proposal to increase this limit to 49%(Not found any data to substantiate this statement

BANKING SECTOR- Foreign Investment up to 74% is permitted from all

sources (FDI +FII) under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

Energy- The 1991 Power Policy seeks to attracts significant

Investment in the Indian Power Sector.

Private sector

Private sector permitted to set up COAL, Gas or Liquid based thermal projects and Wind or solar Projects of any size.

Oil and natural gas- The government has announced significant new
policy initiatives to attract investment: In exploration and Production , Oil and Gas Field are open to the Private sector as well as for foreign participation under production sharing contacts . Foreign investment it to be permitted up to100%in small sized oil fields. 60% for unincorporated ventures 51% for incorporated ventures 100% for exploration and production of blocks

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COAL-

Private Indian companies setting up or operating power projects as well as coal or lignite mines for captive consumption are allowed up to 100%

100% FDI are allowed for setting up Coal processing plants.

FOREIGN INSTITUTIONAL INVESTOR-Properly funds

foreign individuals and foreign corporates can register as a subject accounts as invest through the FII, seperate limits of 10%/15% is available for the subaccounts.

IT sector- Automatic approval for foreign investment equity software and all areas
of electronics. OpportunitiesCommunication Infrastructure Optic Fiber Cable Satellite based Communication Software Development IT enable services.

AIRPORTS:
Foreign Investment upto 100% is allowed in green field projects under automatic route Foreign Direct Investment is allowed in existing projects - upto 74% under automatic route - beyond 74% and upto 100% subject to Government approval

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PROHIBITED SECTORS OF FDIGAMBLING AND BETTING LOTTERY ATOMIC ENERGY HOUSING REAL ESTATES AGRICULTURE(WITH SOME EXCEPTIONS) PLANTATION(OTHER THAN TEA PLANTATION)

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(FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply.

Types
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organisation; any combination of the above.

Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following formslow corporate tax and income tax rates

tax holidays other types of tax concessions preferential tariffs special economic zones EPZ - Export Processing Zones Bonded Warehouses Maquiladoras 11 | P a g e

investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

Foreign direct investment in India

A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by five per cent from USD 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by about 60 per cent to USD 1.33 billion, the lowest in 2010 fiscal, industry department data released showed.

Growth of FDI: Cyclical Behaviour FDI flows are characterised by cyclical behaviors. The decline in FDI flows after peaking in 2000 followed rapid increases during the late 1990s. As the World Investment Reports point out, there was a similar pattern during the late 1980s and early 1990s, and in 1982-1983. Thus, this is the third downward cycle in FDI, each punctuating a long upward trend in FDI every ten years or so.

Foreign direct investment and the developing world

Foreign investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, 12 | P a g e

technology, and job opportunities. Many of the East Asian tigers such as China, South Korea, Malaysia, and Singapore benefited from investment abroad. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.
Investment in India - Investing in India - Venturing into the Indian Market Investment in Indian market India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies. Success in India Success in India will depend on the correct estimation of the country's potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Entering India's marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort. Market potential India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.

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EVO L
Lack of enthusiasm among investors The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a seachange, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges. Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India. Developing a basic understanding or potential of the Indian market The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms.But there is still cause for worries-

2000 -08

Infrastructural hassles. The rapid economic growth of the last few years has put heavy stress on India's infrastructural facilities. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country's roads are surfaced), low telephone penetration (1.4% of population).

M re o P c ro

Indian Bureaucracy. Although the Indian government is well aware of the need for reform and is pushing ahead in this area, business still has to deal with an inefficient and sometimes still slow-moving bureaucracy.

200 0

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U to p as m

Diverse Market . The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from beginning to end --performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required. Developing up-front takes: Market Study Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved? Who is the competi Check on Economic Policies The general economic direction in India is toward liberalization and globalization. But the process is slow. Before jumping into the market, it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns which should be taken into account.

FDI Report Investment in India - Foreign Direct Investment - Introduction Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.

Forbidden Territories: FDI is not permitted in the following industrial sectors:

Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

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Foreign Investment through GDRs (Euro Issues) Foreign Investment through GDRs is treated as Foreign Direct Investment Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. Use of GDRs The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India. Restrictions However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India. Investment in India - Foreign Direct Investment - Approval Foreign direct investments in India are approved through two routes: Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:

foreign equity up to 50% in 3 categories relating to mining activities (List 2). foreign equity up to 51% in 48 specified industries (List 3). foreign equity up to 74% in 9 categories (List 4). where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. Opening an office in India Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.

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The FIPB Route:

Processing of non-automatic approval cases FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public. Total foreign investment and FDI Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The government is likely to double FDI inflows within two years. Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia. Foreign institutional investors Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992. FII investments FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets. Large outflows of capital Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998.

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India should be more open to FDI'

Gary Locke: What you see from the Presidents visit is acknowledging the critical role that India plays not just within the region and not just [in] economic issues affecting the United States and India, but really affecting the entire world. Photo: V. Sudershan

diplomacy India-United States Interview with U.S. Commerce Secretary Gary Locke Even as India seeks foreign capital to build its physical infrastructure and has pitched for a Comprehensive Economic Cooperation Agreement with the United States as the next logical step following President Barack Obama's historic visit, the U.S. maintains that lack of reforms especially in the financial services sector and foreign direct investment (FDI) policies would stand in the way of India achieving the desired objectives. In an interview with Ashok Dasgupta,U.S. Commerce Secretary Gary Locke emphasised the need for India to be more open to foreign direct investment in a variety of sectors. On the issue of opening up to multi-brand retail, Mr. Locke said the matter was not discussed at all in deference to the sensitivities of the Indian people. Excerpts: On what President Obama's visit achieved The achievement, I think, is the recognition of the very important role that India plays in the world economy with respect to political decisions touching the entire world. So, what you see from the President's visit is acknowledging the critical role that India plays not just within the region and not just [in] economic issues affecting the United States and India, but really affecting the entire world. The announcements over allowing more hi-tech goods to be purchased by India from the U.S. is a sign of respect for India and recognising that India is a true partner with the United States in the sharing of technology and also the support for having a permanent seat in the Security Council of the United Nations. It's a statement by the U.S. that we 18 | P a g e

recognise that India is a major economic and political force and should be treated that way in international bodies and in our relationship, economic and political and strategic. On the specifics In terms of specifics, policies on high technology, the policies about reforming and modifying our export control regime as they relate to India will mean that companies in India will have access to hi-tech goods, whether in the areas of space exploration research and improvements and modernisation of the military. As the President indicated, both sides will have to move away from the stereotypes and the misperceptions about the realities of global trade. If we want to sell to India, India should be able to sell to the U.S. It can never be one way. On the issue of job losses We really need to focus on the net increase in jobs for each country. There will be job creation in the U.S. when we sell to India and there will be job creation in India when India sells things to the U.S. What we really need to focus on is increased job creation on both sides. As long as we can show the American public that there is a net increase in jobs because of trade, then the American people will understand the benefits and the realities of a global economy. On hike in visa fees We need to work with the Congress on that because it was the Congress that imposed those fees, not just on visas of workers coming from India but from any country around the world. It was not imposed by the U.S. administration, but by the Congress and it was a bipartisan issue as it included the Republicans as well as Democrats. There were amendments and that was a way in which the Congress could find the funds that they could use to pay for the increased cost of security measures along the U.S.-Mexican and the U.S.-Canadian borders. On the need to relax FDI policies We believe that India should be more open to foreign direct investment in a variety of sectors, because we believe that some of the impediments for FDI actually hinder India's ability to achieve its goals of economic progress, job creation for the people and growth of the economy. If India wants foreign investment in construction of roads and bridges or other major infrastructure like water systems, ports and airports, you have to have a strong insurance system to attract that investment, not just from the United States but from Germany, France or Canada and other countries. It is not necessarily in the long-term economic interests of India to have these various restrictions on foreign investment because they may hinder India's ability to proceed with the economic and modernisation objectives that you have. For investments into large 19 | P a g e

infrastructure projects, you need to ensure that you have the insurance cover and bonding that will cover large projects that might be initiated here. You need to understand that in general, overly restrictive policies can prevent a country from receiving the foreign capital that it is seeking to help pay for these major infrastructure projects which your Prime Minister [Manmohan Singh] said will run into trillions of dollars over the next 10 years. So if you have overly restrictive policies, you will not have foreign capital come in for all these roads and bridges and airports and every thing that you desire.

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