MEPP Lectures 25-26-27

India’s Outward Investment-

Policy, Regulatory Regime and
Prospects

Presented by

Prof. Tarun Das

IILM, New Delhi.
 CONTENTS
1.Outward investments by
developing countries
2.India’s outward investment
3.Modes of Indian outward
investment
4.Host / Home country policies
5.country policies

Outward FDI - Tarun Das 2

 1.1 Outward Investment
 Since 1990, a number of developing countries
have begun exporting capital, both in the form of
portfolio investments and FDI,
 According to UNCTAD, the outward FDI stock
from developing countries increased from $60
billion in 1980 to $129 billion in 1990 and further to
$859 billion in 2003.
 The share of developing countries in global
outward FDI flows reached about 10%. South Korea,
Malaysia and Singapore have been outward
investors for some time; Brazil, China, India and
South Africa are now following suit.

Outward FDI - Tarun Das 3

 1.2 Outward Investment
 A recent IMF report also stated that outward FDI
from Asian emerging market countries is expanding
rapidly.
 FDI flows from India, China, Korea, Malaysia,
Singapore and Thailand are expanding rapidly and go
beyond the well-publicized investments by Korea’s
POSCO in other countries.
 Nature of such “emerging multinationals”
(EMNCs) also changed over the years.
 In the past, FDI flows from developing countries
resulted from political commitments rather than as an
exploration of business opportunities, involved green
field investments in other developing countries.

Outward FDI - Tarun Das 4

 1.3 Outward Investment
 However, recent years witnessed emergence of
global players from the developing countries
facilitated by their production, marketing, financial
and networking skills supplemented by a specialized
knowledge of doing business in non-OECD countries.
 Growing trends of M&As by the developing
countries as evidenced by the merger between
South African Breweries & Miller, that between Tata
Steel & Corus Steel, the takeover of International
Steel Group by Mittal of India, or the acquisition of
the IBM-PC business by Lenovo of China, and the
attempts to take over US multinationals in oil and
domestic appliances.

Outward FDI - Tarun Das 5

 1.4 India is emerging as a major
player in global outward investment
 Buoyed by the success of IT, ITES, biotech,
auto ancillary, oil companies, India has become
not only a favorable destination for foreign
investment but also is emerging as a major
player in global outward investment.
 Indian overseas investments span not only
across the developing world, but also to the US,
the UK,and Germany.
 With annual outflows averaging at $1 billion
since the turn of the century, India’s ranking in
UNCTAD's outward FDI performance index shot
up from the 107th rank in 1999 to the 61st in
2003 and further to the 54th rank in 2004.

Outward FDI - Tarun Das 6

 1.5 India is emerging as a major
player in global outward investment
 Indian firms have been investing abroad for
many years. But it is only since the late 1990s
that outward FDI flows have risen rapidly.
 India’s outward FDI stock increased from
US$600 million in 1996 to $6.6 billion in
2004, taking India to the 15th rank in terms of
outward FDI stock among the developing
economies.
 Its outward FDI flows in 2004 at $2.2 billion
exceeded that of China at $1.8 billion and that
of Malaysia at $2.1 billion (UNCTAD 2005).

Outward FDI - Tarun Das 7

 1.6 Top 16 developing countries’
outward FDI in 2004 (US$ billion)
Country Outward Stock as % Outward
FDI stock of GDP FDI Flow
1.HongKong 405.6 246.5 39.8
2.Singapore 100.9 94.5 10.7
3.Taiwan 91.2 29.9 7.1
4.Russian 81.9 14.0 9.6
Fed.
5.Brazil 64.4 10.7 9.5
6.Korean Rep. 39.3 5.8 4.8

7.China 38.8
Outward FDI - Tarun Das
2.4 1.8 8
 1.7 Top 16 developing countries’
outward FDI in 2004 (US$ billion)
Country Outward Stock as % Outward
FDI stock of GDP FDI Flow
9.Argentina 21.8 14.4 0.3
10.Mexico 15.9 2.3 2.2
11.Chile 14.5 15.4 0.9
12.Malaysia 13.8 11.7 2.1
13.Venezuela 9.2 8.6 0.4

14.Turkey 7.0 2.3 0.9

15.India 6.6 1.0 2.2
16.Nigeria 4.8FDI - Tarun Das 6.8
Outward 0.3 9
2.1 India’s Outward Investment Policy
 It is well known that since 1991 India adopted an
open door policy for foreign investment and trade and
initiated credible reforms in industry, trade, fiscal and
financial sectors to enhance efficiency, productivity
and competitiveness of Indian industries and to
induce dynamism to the overall growth process.
 As a part of the ongoing reforms program, India
liberalized significantly both inward and outward
foreign investment policies.
 It entered into Bilateral Investment Promotion and
Protection Agreements (BIPAs) with a number of
countries to promote and protect foreign investment
on reciprocal basis.

Outward FDI - Tarun Das 10

 2.2 Routes of India’s Outward

Investment
(i) Automatic Route: Indian corporates/ registered
partnership firms are allowed to invest in entities
abroad up to 200% of their net worth in a year, without
prior approval of Reserve Bank or Government of India.
 (ii) ADR/GDR Automatic Route: Indian companies
can freely utilize up to 100% of ADR/GDR proceeds for
overseas investments without any limit under the
automatic route subject to post facto report to the RBI.
 (iii) ADR/GDR automatic stock/ swap route: Indian
companies can automatically swap their fresh issue of
ADRs/GDRs for overseas M&As in the same core activity
s.t. report to RBI.

Outward FDI - Tarun Das 11

 2.3 Routes of India’s Outward
Investment
(iv) Normal Route: Proposals not covered under
the above routes are considered by the Special
Committee on Overseas investments headed by the
RBI Deputy Governor, with members from the
Ministries of Finance, Commerce, External Affairs and
the RBI.
(b) Liberalized policies
»Corporates - Listed Indian companies are
permitted to invest abroad in companies, (a) listed on
a recognized stock exchange and (b) which has the
shareholding of at least 10% in an Indian company.
Such investments shall not exceed 25% of the Indian
company’s net worth.
»Individuals - Resident individuals are permitted to
invest in overseas companies under (i) above without
any monetary limit.

Outward FDI - Tarun Das 12

 2.4 Liberalized Outward Investment
Policy
»Indian corporates/ Registered
partnership firms up to 200% of their net
worth.
» Indian corporates/ registered
partnership firms are allowed to undertake
agricultural activities either directly or
through a branch.
» Guarantees- The scope of guarantee
has been enlarged under the Automatic
Route. Indian entities may offer any forms
of guarantee – corporate or personal,
primary or collateral, guarantee by the
promoter company, guarantee by group
company, sister concern or associate
company in India.
Outward FDI - Tarun Das 13
 2.5 Liberalized Outward Investment
Policy
»Disinvestment- Indian companies are permitted
to disinvest without prior approval of the RBI in cases
where (i) the JV/WOS is listed in the overseas stock
exchange. (ii) Indian promoter company is listed on a
stock exchange in India and has a net worth of less
than Rs.100 crore. (iii) Where the Indian promoter is
an unlisted company and the investment in overseas
venture does not exceed $10 million.
» Proprietorship concerns– With a view to
enabling recognized star exporters with a proven
track record and a consistently high export
performance to reap the benefits of globalization and
liberalization, proprietary/ unregistered partnership
firms are allowed to set up a JV/WOS outside India
with prior approval of RBI.

Outward FDI - Tarun Das 14

 3.1 Approvals of Outward FDI ($ Mln)
Year Num- Equity loan Guara Total
ber ntee
1999-00 395 1299 50 408 1757
2000-01 714 1177 90 113 1380
2001-02 908 2712 157 156 3026
2002-03 1034 1299 104 142 1545
2003-04 1214 822 230 414 1451
2004-05 1281 2010 384 410 2804
2005-06 1265 1324 393 322 2039
Outward FDI - Tarun Das 15
 3.2 Actual Outward FDI ($ Mln)
Year Equity loan Guara Total Annual
ntee Cap

1999-00 314 4 0 319 750

2000-01 1138 69 5 1212 1000
2001-02 860 121 0 982 1000
2002-03 1699 100 -- 1799 1000
2003-04 1237 260 -- 1497 1000
2004-05 1246 388 -- 1634 No cap
2005-06 1381 613 -- 2062 No cap
Outward FDI - Tarun Das 16
 3.3 Inflows from JVs/WOSs ($
Mln)
Year Divide Others Total Exports (Rs.
nd crore)
1999-00 314 4 0 319
2000-01 1138 69 5 1212
2001-02 860 121 0 982
2002-03 1699 100 -- 1799
2003-04 1237 260 -- 1497
2004-05 1246 388 -- 1634
2005-06 1381 613 -- 2062
Outward FDI - Tarun Das 17
 3.4 Sector-wise outward FDI ($
Million)
Year Manufact Financial Non- Trading Others Total
ure financial

2000-01 371 17 877 89 29 1382

2001-02 2211 49 565 139 61 3026

2002-03 1057 2 280 70 62 1470

2003-04 766 35 439 77 134 1451

2004-05 2026 9 548 69 151 2804

2005-06 1111 168 509 133 118 2039

Total 8090 283 4362 635 558 13929

Outward FDI - Tarun Das 18

 3.5 Sector-wise outward FDI (in
percent)
Year Manufact Financial Non- Trading Others Total
ure financial

2000-01 31 0 65 3 0 100
2001-02 27 1 63 6 2 100
2002-03 73 2 19 5 2 100
2003-04 72 0 19 5 4 100
2004-05 53 2 30 5 9 100
2005-06 72 0 20 2 5 100
Total 54 8 25 7 6 100
Outward FDI - Tarun Das 19
 3.6 Top-10 overseas investors
Investor Sector $million % share
1.SBI Banking 1179 25.9
2.Dr.Reddy's Pharma 777 17.1

3.Suzlon Energy 565 12.4

4.Tata Steel Metals 554 12.2
5.Ranbaxy Pharma 324 7.1
6.Videocon Cons.dur 289 6.3

7.VSNL Telecom 254 5.6

8.Matrix Lab Pharma 253 5.5
9.TCS IT 207 4.5
10.Wipro IT FDI - Tarun Das154
Outward 3.4 20
 3.7 Major sectors for outward
investment
Sectors O-Inv % Share
1 Pharmaceuticals 1580 22.2
2 Banking 1180 16.6
3 Infor. Tech. 786 11.0
4 Metals 778 10.9
5 Energy 631 8.8
6 Telecom 308 4.3
7 Consumer durb 289 4.1
8 Tea and coffee 266 3.7
9 Chemicals 235 3.3
10 Automobiles Outward FDI - Tarun Das205 2.9 21
 3.7 Major sectors for outward
investment
Sectors O-Inv % Share
11 Auto ancillaries 159 2.2
12 Fertilisers 153 2.1
13 Petrochemicals 119 1.7
14 Multi products 100 1.4
15 Hotels 78 1.1
16 Tyres and tubes 72 1.0
17 FMCG 62 0.9
18 Paints 27 0.4
19 Textiles 20 0.3
20 Refractory Outward FDI - Tarun Das 16 0.2 22
 3.7 Major sectors for outward
investment
Sectors O-Inv % Share
21 Cement 14 0.2
22 Electrical equipment 13 0.2

23 Foam 12 0.2
24 Packaging 11 0.2
25 Media/entertainmen 5 0.1
t
26 Gems and jewellery 5 0.1
27 Abrasives 2 0.0
28 Engineering 2 0.0
Outward FDI - Tarun Das 23
Total 7129 100.0
Sl. Host Country $ Million % Share
1 United States 1054 18.3
2 United Kingdom 815 14.2
3 Belgium 800 13.9
4 Germany 658 11.4
5 Thailand 487 8.5
6 China 376 6.5
7 Romania 344 6.0
8 Singapore 192 3.3

Outward FDI - Tarun Das 24

Sl. Host Country $ Million % Share
9 Australia 187 3.3
10 Netherlands 171 3.0
11 Canada 118 2.0
12 Cyprus 89 1.5
13 Mauritius 76 1.3
14 South Africa 74 1.3
15 Sweden 65 1.1
16 Mexico 59 1.0

Outward FDI - Tarun Das 25

Sl. Host Country $ Million % Share
17 Austria 56 1.0
18 Korea 55 1.0
19 Morocco 37 0.6
20 Bermuda 36 0.6
Total 5751 100.0

Outward FDI - Tarun Das 26

 4.1 Types of FDI
 Market seeking- to take advantage of
huge domestic markets in host countries
 Resource exploiting- driven by
availability of mineral and other resources
 Export enhancing- to shift production
base to take advantage of low wage rates but
technical manpower and availability of
resources
 Efficiency enhancing through technology
transfer and for infrastructure development
Like inward FDI, most of outward FDI are
more of tariff jumping and market seeking
rather than efficiency seeking.
Outward FDI - Tarun Das 27
 4.2 Modes of Indian O-FDI
 Most of the Indian outward investments
are made through mergers and acquisitions
(M&As) of the existing firms, as the
alternative route of setting up a new
company or constructing a green field
manufacturing unit would be more time
consuming and possibly more expensive.
 Acquisition of already operational
entities also allows the overseas investor to
benefit from the existing marketing network,
clientele and the goodwill of the foreign
company.
Outward FDI - Tarun Das 28
 4.3 Sector-wise acquisitions 2000-
2006
Sector Focus M&As in the Total
Region region number
1. IT/ BPO USA 51 90
2.Pharma Europe 36 62
3. Automotive Europe 18 27
4. Chemicals and USA, LA, 13 19
Fertilisers EU, Africa
5. Con. goods Europe 8 17
6.Metals/ mining Australia 8 15

7. Oil and gas Africa 6 14

Outward FDI - Tarun Das 29

 4.4 Geographical distributions
of India Inc’s M&As
Country No.of Country No.of
M&As M&As

1.USA 100 9.SAARC 4

2.EU (except 82 10.Canada 3
UK)
3.UK 40 11.Russia 3
4.SE Asia 20 12.Mid.East 2

5.Australia 14 13.Japan 1
6.Africa 13 14.Others 5
7.Lat.Am 11
8.China 8FDI - TarunTotal
Outward Das 306 30
 4.5 Top Indian Companies in
terms of number of M&As
Company No.of Company No.of
M&As M&As

1.Teledata Inf. 11 9.Bharat Forg 5

2.Ranbaxy 10 10.Essel 5
3.ONGC 9 11.Glen.Phar. 5

4.Un.Phosphoro 8 12.Nich.Pira 5
s m
5.Wipro 8 13.Subex Sys 5

6.Godrej 7 14.Sun 5
Pharm
Outward FDI - Tarun Das 31
4.6 Crucial Acquisitions by Indian
MNCs
1. Amtek Auto with Zelter GmbH
(Germany), GWK Group (UK), Lloyds
(Brierly Hill) (UK), Midwest Mfg. Co.
(USA).
2. Asian Paints with Delmege Forsyth (Sri
Lanka), Pacific Paints (Australia),
Berger International, SCIB Chemical
(Egypt), Taubmans Paints (Fiji)
3. Aurobindo Pharma with Milpharm (UK)
4. Bharat ForgeCDP Aluminiumtechnik
(Germany), Federal Forge (USA), Imara
Forging Group (Sweden and Scotland)
Outward FDI - Tarun Das 32
4.7 Crucial Acquisitions by Indian
MNCs
5. Dr. Reddy’s Lab with Roche’s API Business Co.
(Mexico), Beta Pharm Group (Germany)
6. Glenmark Pharmaceutical Laboratories with Klinger
(Brazil), Servycal SA (Argentina), Bouwer Bartlett
(South Africa).
7. Indian HotelsHotels in Zambia and Australia
8. M&MJiangling Tractor Company (China)
9. MaricoSundari LLC (USA)
10. Motherson SumiReiner Parizision GmbH and G+S
Kunstofftechnik GmbH (Germany))

Outward FDI - Tarun Das 33

4.7 Crucial Acquisitions by Indian
MNCs
11. Nicholas Piramal with Rhodia’s IA (UK and
India), Avecia (UK)
12. Sanam Computer with Citisoft (UK)
13. Sterlite Industries with Monte Cello
Corporation (Netherlands), Holding Co. of
Copper Mines (Australia)
14.Sundaram Fasteners with Dana Spire (UK),
Peiner Umformtechnik GmbH (Germany)
15. Tata Motors with Daewoo Commercial
Vehicles (Korea), Hispano Carrocera (Spain)
16. Tata Steel with NetSteel Asia, Corus (UK,
Netherlands)
17.Tata Tea with Tetley, Good Earth. JEM-A.
Glaceau

Outward FDI - Tarun Das 34

4.7 Crucial Acquisitions by Indian
MNCs
18. Tata Consultancy Services with
Comicrom (Chile), FNS (Australia)
19.United Phosphorus with MTM
Agrochem (UK), Agrodan (Denmark),
Midland Fumigants (Europe), Cequisa
(Spain), Shaw Wallace Agrochem
(India), Advanta (seed business)
(Netherlands)
20. VSL with Teleglobe International
Holdings, Tyco Global Network
21. Wipro with Spetramind, GE’s
healthcare software arm, global
Energy practice of American
Management Systems, Nervewire
(USA), Ericsson’s Indian R&D arm.
Outward FDI - Tarun Das 35
 5.1 Drivers of Foreign
Investment- Host Country Policies
 FDI inflows are determined by a complex set of
economic, political and social factors.
 Foreign investors look beyond the array of fiscal
incentives offered by the host country.
 FDI is attracted by sound macro-economic
policies, stable economic systems, sustained high
growth,liberalisation of trade, investment and
industry, particularly by liberal FDI regimes.
 Full currency convertibility, free repatriation,
less performance criteria, tax holidays and other
incentives, abolition of screening requirements,
relaxation of sectoral limits on foreign equity.

Outward FDI - Tarun Das 36

 5.2 Other Factors Attracting
FDI
Domestic market potentials
Skilled labor & reasonable wage rates
Low transactions costs
High rates of return
Labour mobility
Matured capital market
Modern financial system
Efficient infrastructure
Established legal and institutional set-
up
Transparent rules and regulations
Administrative speed and efficiency
Special economic zones, EPZs etc.
Outward FDI - Tarun Das 37
 5.3 Other Factors Attracting
FDI
 National treatment to foreign investors
 Most favored nation treatment (MFN)
 Free transfer of profits and dividends
 International standards for laws
 International arbitration in the case of disputes
 Protection of intellectual property rights (IPR)
 Right to employ management of its choice
 The formation of regional trading blocks such as
NAFTA, ASEAN, APEC, SAARC etc. had also an important
impact on the FDI pattern
 In future, countries outside the regional blocks might
have disadvantages in attracting FDI.

Outward FDI - Tarun Das 38

 5.4 Foreign Investors Dislike
Most
 Any screening of investment except for
national security, public health, individual safety,
and environmental protection.
 Performance requirements such as export
orientation, local content, value addition, foreign
exchange, as these distort international trade and
investment flows, and result in diminished returns
to both home and host countries.
 Since 1980, countries that guaranteed full
repatriation of profits attracted 95% of foreign
investment, countries adhering to Convention of
Settlement of Investment Disputes attracted 90%
of foreign investment from USA.

Outward FDI - Tarun Das 39

 5.5 Role of Fiscal
 Incentives
Fiscal and other incentives remain an
important part of a country’s investment
promotion package, and can tilt the balance in
investors’ location choices, particularly for
“footloose industries” such as automobiles and
food processing industries.
 Incentives play, however, only a minor role
for FDI and attract only those “fly-by-night” firms,
which exist on exploitation of incentives.
 As incentives represent substantial economic
costs, a rational, efficient, equitable and
internationally competitive tax system is more
conducive to FDI than fiscal incentives.

Outward FDI - Tarun Das 40

5.6 Home Country Policies
Developing countries like India have
paid due attention to outward FDI policies
by liberalizing outward capital flows.
They are liberalizing debt, bond,
capital markets and foreign exchange
regulations to move towards full capital
account convertibility.
 They are also liberalizing policies for
contractual savings and institutional
investors such as insurance, pension and
provident funds leading to a multiple
increase of foreign investment.

Outward FDI - Tarun Das 41

 6.1 FDI Inflows as % of GDI
Country 1984-1989 1990 2004
India 0.1 0.1 3.4
China 1.8 2.6 8.2
Hong Kong 12.2 8.5 92.1
Indonesia 1.6 2.8 1.9
Korea, Rep. 1.4 0.8 3.8
Malaysia 8.8 23.8 23.4
Philippines 5.1 5.2 3.3
Singapore 28.3 47.1 62.7
Taiwan 3.3 3.8 3.1
Thailand 4.4 7.1 2.5
Outward FDI - Tarun Das 42
 6.2 FDI Outflows as % of GDI
Country 2002 2003 2004
India 1.0 0.7 1.4
China 0.5 - 0.2
Hong Kong 47.6 15.9 107.6
Indonesia 0.5 - 0.2
Korea, Rep. 1.6 1.9 2.4
Malaysia 8.6 6.0 8.5
Philippines 0.4 1.5 2.9
Singapore 18.0 16.5 41.6
Taiwan 9.8 11.4 11.6
Thailand 0.4 1.4 0.9
Outward FDI - Tarun Das 43
 6.3 FDI Inward Stock as % of GDP
Country 1980 1990 2004
India 0.7 0.6 5.9
China 3 7 14.9
Hong Kong 487 218 277.6
Indonesia 14 34 4.4
Korea, Rep. 2 2 8.1
Malaysia 21 24 39.3
Philippines 4 7 14.9
Singapore 53 77 150.2
Taiwan 6 6 12.8
Thailand 3 10 29.7
Outward FDI - Tarun Das 44
6.4 FDI Outward Stock as % of GDP
Country 1990 2000 2004
India 0.0 0.4 1.0
China 1.3 2.6 2.4
Hong Kong 15.9 234.9 246.5
Indonesia 0.1 4.6 0
Korea, Rep. 0.9 5.8 5.8
Malaysia 6.1 23.6 11.7
Philippines 0.3 2.1 1.9
Singapore 21.3 62.1 94.5
Taiwan 19.0 21.5 29.9
Thailand 0.5 1.8 2.1
Outward FDI - Tarun Das 45
 6.5. Concluding Remarks
• As the first generation reforms take root
and second generation reforms unfold,
India is emerging not only as a favourite
destination for foreign investment, but
also a major player in outward
investment among the developing
countries.
• India should maintain its open door policy
in goods and services production,
investment and trade.
• Carried to their logical ends, reforms
would make India as one of the most
dynamic and fastest growing economies
of the world by 2010.
• India is an economic miracle waiting to
happen. All of you are welcome to
participate in this process of
Outward FDI - Tarun Das 46
development.
 8.1 Review Questions
1. (a) Discuss different modes for outward
investment.
(b) Which one is the dominant mode for
Indian overseas investment, and what
are the main reasons for that?
(c) Indicate the major destinations for
Indian overseas investment.
(d) Indicate the major sectors for Indian
overseas investment.
2. (a) Indicate the names of top Indian
companies in terms of cross-border
M&As.
(b) Indicate some of the crucial cross-
border acquisitions made by Indian
companies since 2000.
Outward FDI - Tarun Das 47
 8.1 Review Questions
3. (a) Discuss the general host country
policies encouraging Indian outward
investment.
(b) Discuss the important home
country policies encouraging Indian
outward investment.
4. (a) Discuss policies, strategy and
regulatory regime for Indian overseas
investment.
(b) What has been their impact on the
Indian overseas investment?

Outward FDI - Tarun Das 48

 Thank you
Have a Good Day

Outward FDI - Tarun Das 49