³Analytical Study Of Foreign Direct Investment in India´ ! "##$%&#
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Faculty Guide
V.S.B
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,/, This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone a research project on ³Y ´And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow.
Date: Director of V.S.B. Dr . J.R Bhatti Meerut
,/, This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a research project on ³Y ´And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow
) * Faculty guide Meerut Date:
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I extend my sincere thanks to all those who helped me in the completion of this project. Without their undying help and guidance, this project would not be what it is. I specially extend my heartfelt thanks to my Faculty guide Miss Garima Chaudhray
for helping me at every step, and guiding me in every way
possible. This project would not have been successful without her
help and continuous guidance
throughout. A special note of thanks also goes out to the people from various fields for giving me their precious time and helping me with this project. I also extend my appreciation towards my family who encouraged me and were by my side whenever I needed them.
Deepak Kumar Gautam
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Introduction Meaning Definition History
Objective of the study Research methodology Conclusion Recommendations & suggestions Limitations of research Bibliography Annexure
Introduction
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, 5 5 1 / ' , 5 6 Meaning: These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporation¶s home country. The investing corporation must control 10 percent or more of the voting power of the new venture. According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago. The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment.
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FDI growth has been a key factor in the ³international´ nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the world¶s economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy. Foreign direct investment (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 as a percentage of gross domestic product (GDP). 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. Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) .Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (µµdirect investor¶¶) in an entity resident in an economy other than that of the investor (µµdirect investment enterprise¶¶).The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. / ' , 5 ± when a firm invests directly in production or other facilities, over which it has effective control, in a foreign country.
/', requires the establishment of production facilities.
5/', requires building service facilities or an investment foothold via capital contributions or building office facilities. c
/ ± overseas units or entities. * ± the country in which a foreign subsidiary operates. / /', ± the amount of FDI undertaken over a given time. ( /', ± total accumulated value of foreign-owned assets. 7, /', ± the flow of FDI out of or into a country. / , 5 ± the investment by individuals, firms, or public bodies in foreign financial instruments. Stocks, bonds, other forms of debt. Differs from FDI, which is the investment in physical assets.
* ± the behavior of individuals or firms administering large
amounts of financial
assets.
.%* * Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. The FDI impact is similar: FDI flows to developed countries for innovation, and from developed countries as products evolve from being innovative to being mass-produced.
Distinguishes between: ± ( ± external condition that gives rise to monopoly advantages as a result of entry barriers ± ( ± failure of intermediate product markets to transact goods and services at a lower cost than internationalization
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'* * 5 A firm¶s ability to diffuse, deploy, utilize and rebuild firm-specific resources for a competitive advantage. Ownership specific resources or knowledge are necessary but not sufficient for international investment or production success. It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based deployment that is transferable to the multinational environment. Firms develop centers of excellence to concentrate core competencies to the host environment.
5 * An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad more profitably than local competitors. Monopolistic Advantage comes from: ± | ± production technologies, managerial skills, industrial organization, knowledge of product. ± ± through horizontal or vertical FDI Internationalization Theory When external markets for supplies, production, or distribution fails to provide efficiency, companies can invest FDI to create their own supply, production, or distribution streams. Advantages ± Avoid search and negotiating costs ± Avoid costs of moral hazard (hidden detrimental action by external partners) ± Avoid cost of violated contracts and litigation ± Capture economies of interdependent activities ± Avoid government intervention ± Control supplies ± Control market outlets ± Better apply cross-subsidization, predatory pricing and transfer pricing
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' Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.
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* In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (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 as a percentage of gross domestic product (GDP). 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. / ' 5 A foreign direct investor is an individual, an incorporated or unincorporated public or privateenterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise ± that is, a subsidiary, associate or branch ± operating in a country other than the country or countries of residence of the foreign direct investor or investors.
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* / ' , 5 8 5 5 FDIs can be broadly classified into two types: & /', ", /', This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. /',8 An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.' , /',8Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
9 /', Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. 9 direct investments happen when a multinational company carries out a similar business operation in different nations. Horizontal FDI ± the MNE enters a foreign country to produce the same products product at home. Conglomerate FDI ± the MNE produces products not manufactured at home. Vertical FDI ± the MNE produces intermediate goods either forward or backward in the supply stream. Liability of foreignness ± the costs of doing business abroad resulting in a competitive disadvantage.
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/ ' , 5 The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: ¬
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 forms: low corporate tax and income tax rates ¬
tax holidays
¬
other types of tax concessions
¬
preferential tariffs
¬
special economic zones
¬
investment financial subsidies
¬
soft loan or loan guarantees
¬
free land or land subsidies
¬
relocation & expatriation subsidies
¬
job training & employment subsidies
¬
infrastructure subsidies
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R&D support
¬
derogation from regulations (usually for very large projects)
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*
The manner in which a firm chooses to enter a foreign market through FDI. ± International franchising ± Branches ± Contractual alliances ± Equity joint ventures ± Wholly foreign-owned subsidiaries Investment approaches: ± Greenfield investment (building a new facility) ± Cross-border mergers ± Cross-border acquisitions ± Sharing existing facilities
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1 */', * 6 The simple answer is that making a direct foreign investment allows
companies to accomplish several
tasks: 1 .Avoiding foreign government pressure for local production. 2. Circumventing trade barriers, hidden and otherwise. 3. Making the move from domestic export sales to a locally-based national sales office. 4. Capability to increase total production capacity. 5.Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;
A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, ³think globally, act locally´, this often used cliché does not really mean very much to the average business executive in a small and medium sized company.
The phrase does have significant connotations for multinational
corporations. But for executives in SME¶s, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SME¶s in particular are now focusing on access to markets, access to expertise and most of all access to technology.
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. ! /',
( ± looking for resources at a lower real cost.
(( ± secure market share and sales growth in target foreign market.
* ( ± seeks to establish efficient structure through useful factors, cultures, policies, or markets.
( ± seeks to acquire assets in foreign firms that promote corporate long term objectives.
* . 5 . 5 - defined as the benefits arising from a host country¶s comparative advantages.- Better access to resources ± Lower real cost from operating in a host country ± Labor cost differentials ± Transportation costs, tariff and non-tariff barriers ± Governmental policies
, 5 ' are the differences in industry structure attributes between home and host countries.
Examples include areas where:
± Competition is less intense ± Products are in different stages of their life cycle ± Market demand is unsaturated ± There are differences in market sophistication
, 5 5 come from the application of proprietary tangible and intangible assets in the host country. ± Reputation, brand image, distribution channels ± Technological expertise, organizational skills, experience ± skills within the firm that competitors cannot easily imitate or match.
) 9 . MNEs exposed to multiple stimuli, developing: ± Diversity capabilities ± Broader learning opportunities Exposed to: ± New markets ± New practices ± New ideas ± New cultures ± New competition
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, /', *
* ± Firms attempt to capitalize on abundant and inexpensive labor. ± Host countries seek to have firms develop labor skills and sophistication. ± Host countries often feel like ³least desirable´ jobs are transplanted from home countries. ± Home countries often face the loss of employment as jobs move.
/',, ' ± Foreign invested companies are likely more productive than local competitors. ± The result is uneven competition in the short run, and competency building efforts in the longer term. ± It is likely that FDI developed enterprises will gradually develop local supporting industries, supplier relationships in the host country.
/ ' , 5 , The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007. However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal. The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering. India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. India faces a burgeoning population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government: Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a previous/existing venture/tie up in India FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign direct investment and FII foreign institutional investors are a separate case study while preparing a report on FDI and economic growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India
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and outflow from India. The FDI statistics and data are evident of the emergence of India as both a potential investment market and investing country. FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort - but with $5.3 billion in FDI . India gets less than 10% of the FDI of China. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the world¶s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts? Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.
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Investment Risks in India
5 ( India is an effervescent parliamentary democracy since its political freedom from British rule more than 50 years ago. The country does not face any real threat of a serious revolutionary movement which might lead to a collapse of state machinery. Sovereign risk in India is hence nil for both "foreign direct investment" and "foreign portfolio investment." Many Industrial and Business houses have restrained themselves from investing in the North-Eastern part of the country due to unstable conditions. Nonetheless investing in these parts is lucrative due to the rich mineral reserves here and high level of literacy. Kashmir on the northern tip is a militancy affected area and hence investment in the state of Kashmir are restricted by law
( India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999, with strong and healthy coalition governments emerging. Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. Economic liberalization which mostly interested foreign investors has been accepted as essential by all political parties including the Communist Party of India Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent.
( Commercial risk exists in any business ventures of a country. Not each and every product or service is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. In India one can avail the facilities of a large number of market research firms in exchange for a professional fee to study the state of demand / supply for any product. As it is, entering the consumer market involves some kind of gamble and hence involves commercial risk
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(' In the recent past, India has witnessed several terrorist attacks on its soil which could have a negative impact on investor confidence. Not only business environment and return on investment, but also the overall security conditions in a nation have an effect on FDI's. Though some of the financial experts think otherwise. They believe the negative impact of terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro economic conditions of the Indian economy that would decide the flow of Foreign investment and in this regard India would continue to be a favorable investment destination.
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/', * , / ' , 5 * FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India . These include FDI limits in India for example: d Foreign direct investment in India in infrastructure development projects excluding arms and
ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores. d FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking
services including credit card operations and in insurance sector only in joint ventures with local insurance companies. d FDI limit of maximum 49% in telecom industry especially in the GSM services
) 5 5 / ' ! , Government Approvals for Foreign Companies Doing Business in India or Investment Routes for Investing in India, Entry Strategies for Foreign Investors
India's
foreign
trade
policy
has
been
formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options: ¬
Investment under automatic route; and
¬
Investment through prior approval of Government.
FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not available, include the following: ¬
Banking
¬
NBFC's Activities in Financial Services Sector
¬
Civil Aviation
¬
Petroleum Including Exploration/Refinery/Marketing
¬
Housing
&
Real
Estate
Development
Sector
for
Investment
from
Persons
other
than NRIs/OCBs. ¬
Venture Capital Fund and Venture Capital Company
¬
Investing Companies in Infrastructure & Service Sector
¬
Atomic Energy & Related Projects
¬
Defense and Strategic Industries Ñ
¬
Agriculture (Including Plantation)
¬
Print Media
¬
Broadcasting
¬
Postal Services
) 5 5 FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy & Promotion.
, 5 ** A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.
5 * : , A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one.
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) !, / Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.
Participation by International Financial Institutions Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap on FDI.
/',, ;,<0 A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. See also FDI in Small Scale Sector in India Further Liberalized
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5 , , 4 Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country). The international monetary fund¶s balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors¶ purpose being to have an effective voice in the management of the enterprise¶. The united nations 1999 world investment report defines FDI as µan investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).
,4
/ 5 8,
/', 5 = · Through financial collaborations. · Through joint ventures and technical collaborations. · Through capital markets via Euro issues. · Through private placements or preferential allotments.
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/ ' , 5 , > 8/', > , 100% FDI is permissible in the sector on the automatic route, The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations.
For foreign technology agreements, automatic approval is granted if i.
up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc.
ii.
up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.
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5 ! ( 8
%! ( / ; !/< 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i.
Merchant banking
ii.
Underwriting
iii.
Portfolio Management Services
iv.
Investment Advisory Services
v.
Financial Consultancy
vi.
Stock Broking
vii.
Asset Management
viii.
Venture Capital
ix.
Custodial Services
x.
Factoring
xi.
Credit Reference Agencies
xii.
Credit rating Agencies
xiii.
Leasing & Finance
xiv.
Housing Finance
xv.
Foreign Exchange Brokering
xvi.
Credit card business
xvii.
Money changing Business
xviii.
Micro Credit
xix.
Rural Credit
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b. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought up front and the balance in 24 months c. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.
, 8/', , , FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)
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8 /', i.
In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions.
ii.
ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements.
iii.
No equity cap is applicable to manufacturing activities.
iv.
FDI up to 100% is allowed for the following activities in the telecom sector : a.
ISPs not providing gateways (both for satellite and submarine cables);
b.
Infrastructure Providers providing dark fiber (IP Category 1);
c.
Electronic Mail; and
d.
Voice Mail The above would be subject to the following conditions:
e.
FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world.
f.
The above services would be subject to licensing and security requirements, wherever required.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
ÿå
8 FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i. 100% FDI is permitted in case of trading companies for the following activities: ¬
exports;
¬
bulk imports with ex-port/ex-bonded warehouse sales;
¬
cash and carry wholesale trading;
¬
other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing
ÿè
FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.
8 /',, , Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.
' > FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.
? *? FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.
FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.
ÿ
, 7 @ , FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India FDI up to 100% is allowed subject to certain conditions.
/ ,A !A NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc. 2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors
i.
34 High Priority Industry Groups
ii.
Export Trading Companies
iii.
Hotels and Tourism-related Projects
iv.
Hospitals, Diagnostic Centers
v.
Shipping
vi.
Deep Sea Fishing
vii.
Oil Exploration
viii.
Power
ix.
Housing and Real Estate Development
x.
Highways, Bridges and Ports
xi.
Sick Industrial Units
xii.
Industries Requiring Compulsory Licensing
3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40% of the new Capital Issue. 4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. ÿÑ
6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. 7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian
ÿ0
, / 02* / , 5 India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake. Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India. Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions.
·
%/',, ;/ "### *"#&#<
0 //', , /.1 ,
, 0B
/ ./', , /.1;, <
Services Sector
787420.81
18118.40
22.39
Computer Software & hardware
391109.74
8876.43
11.12
Telecommunications
275441.38
6215.55
7.83
Construction Activities
213595.12
5029.01
6.07
Automobile
146799.41
3310.23
4.17
Housing & Real estate
217936.02
5118.85
6.20
Power
137089.37
3129.66
3.90
Chemicals (Other than Fertilizers)
87008.07
1964.06
2.47
Ports
63290.50
1551.88
1.80
Metallurgical industries
109563.20
2612.85
3.11
Electrical Equipments
57379.63
1324.92
1.63
Cement & Gypsum Products
70781.19
1621.03
2.01
Petroleum & Natural Gas
94417.17
2244.17
2.68
Trading
62416.85
1480.94
1.77
Consultancy Services
48647.43
1112.92
1.38
Hotel and Tourism
52500.05
1217.50
1.49
Food Processing Industries
34362.49
760.32
0.98
Electronics
33914.75
748.57
0.96
Misc. Mechanical & Engineering industries
28310.13
648.86
0.80
·c
Information & Broadcasting (Incl. Print 52115.90 media)
1194.20
1.48
Mining
21204.94
522.86
0.60
Textiles (Incl. Dyed, Printed)
26736.94
611.03
0.76
Sea Transport
17653.81
402.59
0.50
Hospital & Diagnostic Centers
27241.42
644.73
0.77
Fermentation Industries
27743.46
658.04
0.79
Machine Tools
10955.32
247.88
0.31
Air Transport ( Incl. air freight)
10552.19
240.71
0.30
Ceramics
17462.43
409.92
0.50
Rubber Goods
11392.76
247.60
0.32
Agriculture Services
7937.13
188.39
0.23
Industrial Machinery
13748.27
316.97
0.39
Paper & Pulp
18612.76
429.06
0.53
Diamond & Gold Ornaments
11014.62
248.15
0.31
Agricultural Machinery
6649.12
148.37
0.19
Earth Moving Machinery
5749.34
134.22
0.16
Commercial, Office & Household Equipments
5798.71
132.74
0.16
Glass
5683.60
126.51
0.16
Printing of Books (Incl. Litho printing industry)
6066.23
135.80
0.17
Soaps, Cosmetics and Toilet Preparations
4984.88
114.54
0.14
Medical & Surgical Appliances
8087.87
177.42
0.23 ·
Education
14374.11
309.09
0.41
Fertilizers
4282.17
96.59
0.12
Photographic raw Film & Paper
2580.20
63.90
0.07
Railway related components
3281.85
75.11
0.09
Vegetable oils and Vanaspati
3769.18
83.69
0.11
Sugar
1836.64
41.58
0.05
Tea & Coffee
3774.81
84.28
0.11
Leather, Leather goods & Piackers
1621.56
36.74
0.05
Non-conventional energy
3640.58
86.84
0.10
Industrial instruments
1368.36
29.47
0.04
Scientific instruments
511.44
11.64
0.01
Glue and Gelatine
385.80
8.44
0.01
Boilers & steam generating plants
238.67
5.40
0.01
Dye-Stuffs
406.48
9.52
0.01
Retail Trading (Single brand)
1074.67
25.18
0.03
Coal Production
614.10
15.42
0.02
Coir
50.17
1.12
0.00
Timber products
139.59
3.10
0.00
Prime Mover (Other than 178.30 electrical generators
3.72
0.01
Defence Industries
0.15
0.00
Mathematical, Surveying 50.35 & drawing instruments
1.27
0.00
Misc. industries
4162.55
5.19
6.87
180561.54
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Arms and ammunition
¬
Atomic Energy
¬
Coal and lignite
¬
Rail Transport
¬
Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.
·å
/ , 5 )' ; ,<= Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and 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.
&4 /,!= 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.
"40 )' = 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.
·è
/ 5 , 5 = &4 5* !,= The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. 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.
"4 /,! = % 5= 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.
4
* * /', ·
4 4
75*
/',7 *
*7
1.
Hotel & Tourism
100%
Automatic
2.
NBFC
49%
Automatic
3.
Insurance
26%
Automatic
4.
Automatic 49%
cellular, value added services ISPs
5.
with
gateways,
Above 49% need Govt. licence
radio-
paging
74%
Electronic Mail & Voice Mail
100%
primarily export activities
51%
Automatic
100%
Automatic
power plants)
100%
Automatic
7.
Drugs & Pharmaceuticals
100%
Automatic
8.
Roads, Highways, Ports and 100%
Automatic
bulk imports, cash and carry wholesale trading 6.
Power(other than atomic reactor
Harbors 9.
Pollution
Control
and 100%
Automatic
Management 10
Call Centers
100%
Automatic
11.
BPO
100%
Automatic
12.
100%
Automatic
i.
34 High Priority Industry Groups
ii.
Export
Trading
Companies iii.
Hotels
and
Tourism-
related Projects iv.
Hospitals,
Diagnostic
·Ñ
Centers v.
Shipping
vi.
Deep Sea Fishing
vii.
Oil Exploration
viii.
Power
ix.
Housing and Real Estate Development
x.
Highways, Bridges and Ports
xi.
Sick Industrial Units
xii.
Industries
Requiring
Compulsory Licensing xiii.
Industries Reserved for Small Scale Sector
13.
Y Greenfield projects
100%
Automatic
Existing projects
100%
Beyond 74% FIPB
14
Assets reconstruction company
49%
FIPB
15.
Cigars and cigarettes
100%
FIPB
16.
Courier services
100%
FIPB
17.
Investing
companies
infrastructure
(other
in 49%
FIPB
than
telecom sector)
·0
54
* /', , / "### "##$%&# ; 0B <
4
/ -
/',, I) 5 5 -
1.
2000-01
4,029
----
2.
2001-02
6,130
(+) 52
3.
2002-03
5,035
(-) 18
4.
2003-04
4,322
(-) 14
5.
2004-05
6,051
(+) 40
6.
2005-06
8,961
(+) 48
7.
2006-07
22,826
(+) 146
8.
2007-08
34,362
(+) 51
9.
2008-09
35,168
(+) 02
10.
2009-10
16,232
----
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54
* 5 /', * / "### *"#&# ; <
4
*
/',,
I
/',
, 1.
Mauritius
19,18,633.61
44.01
2.
Singapore
3,80,142.56
8.72
3.
U.S.A.
3,32,935.60
7.64
4.
U.K.
2,40,974.98
5.53
5.
Netherlands
1,78,047.76
4.08
6.
Japan
1,50,129.05
3.44
7.
Cyprus
1,32,448.04
3.04
8.
Germany
1,12,242.06
2.57
9.
France
61,686.39
1.42
10.
U.A.E.
50,915.59
1.17
å
åÿ
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01 percent of total FDI inflows.
Many companies based outside of India utilize Mauritian holding companies to take
advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as ³round tripping.´
The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non- financial and financial Fuels.
Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3,80,142 crores up to January 2010 Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the services sector (financial and non financial), which accounts for about 30% of FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed by computer software and hardware, mining and construction.
0444 The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore in cumulative inflows up to January 2010. According to the Indian government, the top sectors attracting FDI from the United States to India are fuel, telecommunications, electrical equipment, food processing, and services. According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing
å·
0424 The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued at 2,40,974 crores in cumulative inflows up to January 2010 Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector. UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are nonconventional energy, IT, precision engineering, medical equipment, infrastructure equipment, and creative industries.
FDI from Netherlands to India has increased at a very fast pace over the last few years. Netherlands ranks fifth among all the countries that make investments in India. The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign direct investment in the country up to August 2009.
åå
/ + /', , 8 ¬
Food processing industries
¬
Telecommunications that includes services of cellular mobile, basic telephone, and radio paging
¬
Horticulture
¬
Electrical equipment that includes computer software and electronics
¬
Service sector that includes non- financial and financial services
54
* /', * / "### "#&# ; <
4
*
,
/', I
/',
, 1.
Service Sector
9,65,210.77
22.14
(Financial & Non Financial) 2.
Computer Software & Hardware
4,13,419.03
9.48
3.
Telecommunication
3,68,899.62
8.46
4.
Housing & Real Estate
3,25,021.36
7.46
5.
Construction Activities
2,65,492.96
6.09
6.
Automobile Industry
1,90,172.22
4.36
7.
Power
1,79,849.92
4.13
8.
Metallurgical Industries
1,25,785.57
2.89
9.
Petroleum & Natural Gas
1,11,957.00
2.57
10.
Chemical
1,01,680.18
2.33
åè
The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent respectively. These were followed by the telecommunications, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 ± March 2009 as compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million FDI in FY µ09 as compared to USD 229 million in FY ¶08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY µ09 as compared to the USD 1261 million in FY ¶08, acquired 9.37 per cent share in total FDI inflow. India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY ¶09 over FY ¶08. The other sectors which registered growth in highest FDI inflow during April ± March 2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities including road & highways (16.35 per cent) and power (1.86 per cent).
å
/ , 5 ! The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window clearance for proposals on foreign direct investment in the country that are not allowed access through the automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary ,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200 crore soon.The Board thus plays an important role in the administration and implementation of the Government¶s FDI policy. In circumstances where there is ambiguity or a conflict of interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it has established its reputation as a body that does not unreasonably delay and is objective in its decision making. It therefore has a strong record of actively encouraging the flow of FDI into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important initiative of the Secretariat to further the cause of enhanced accessibility and transparency .
åÑ
. , ) /', The situation of foreign direct investment has been relatively good in the recent times with an increase of 38%. Normally, the foreign direct investment is made mostly into the extractive industries. However, now the foreign direct investors are also looking to pump money into the manufacturing industry that has garnered 47% of the total foreign direct investment made in 1992. However, the situation has not been the same in the countries with a middle income range. The middle income countries have not received a steady inflow of foreign direct income coming their way. The situation is comparatively better in the low income countries. They have had an uninterrupted and continually increasing flow of foreign direct investment. It has been observed that the various debt crises, as well as, other forms of economic crises have had less effect on these countries. These countries had lesser amounts of commercial bank obligations, which again had been caused by the absence of proper financial markets, as well as the fact that their economies were not open to foreign direct investment. During the later phases of the decade of 70s the Asian countries started encouraging foreign direct investments in their economies. China has received the most of the foreign direct investment that was pumped into the countries with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in 1995. The economic liberalization in China started in 1979. This led to an increase in the foreign direct investment in China. In the years between 1982 and 1991 the average foreign direct investment in China was US$ 2.5 billion. This average increased by seven times to become US$ 37.5 billion during 1995. A significant amount of the foreign direct investment in China was provided in the industrial sector. It was as much as 68%. Around 20% of the foreign direct investment of China was made in the real estate sector. During the same period Nigeria had been the second best in terms of receiving foreign direct investment. In the recent times India has risen to be the third major foreign direct investment destination in the recent years. Foreign direct investment started in India in 1991 with the initiation of the economic liberation.
å0
There were more initiatives that enabled India to garner foreign direct investments worth US$ 2.9 billion from 1991 to 1995. This was a significant increase from the previous twenty years when the total foreign direct investment in India was US$1 billion. Most of the foreign direct investment made in India has been in the infrastructural areas like telecommunications and power. In the manufacturing industry the emphasis has been on petroleum refining, vehicles and petrochemicals Vietnam is a low income country, which is supposed to have the same potential as China to generate foreign direct investment. The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an increase in the foreign direct investment made in the country. The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after the USA removed its economic sanctions in 1994. The gas and petroleum industries were the biggest beneficiaries of the foreign direct investment. Bangladesh started receiving increasing foreign direct investment after 1991, when the economic reforms took place in the country. After 1991 it was possible for foreign companies to set up companies in Bangladesh without taking permission beforehand. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125 million in 1995. As per the available statistics the manufacturing industry, comprising of clothing and textiles took up 20% of the total approved foreign direct investment. Food processing, chemicals and electric machinery were also important in this regard. The increase in the foreign direct investment in Ghana was remarkable as well. The figures increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201 million, on an average, from 1993 to 1995. This improvement was brought about by the privatization of the Ashanti Goldfields.
è
/ ,) , , 0 , ., +
,4 , /,, Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.
,,4
( , 5
Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003.
èc
Currently, entities eligible to invest under the FII route are as follows:
i)
As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund.
ii)
As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals.
FIIs registered with SEBI fall under the following categories:
a) Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) to be registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the application form the details of clients on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making investments in the names of such clients. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'. These 'clients' later came to be known as sub-accounts. The broad strategy consisted of having a wide variety of clients, including individuals, intermediated through institutional investors, who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme.
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4
, 5 8
FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:
1) Business of chit fund 2) Nidhi Company 3) Agricultural or plantation activities 4) Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges). 5) Trading in Transferable Development Rights (TDRs).
54
/ , , 5 , 4
Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.
èÿ
!, /,, , Year
End of March
1992-93
0
1993-94
3
1994-95
156
1995-96
353
1996-97
439
1997-98
496
1998-99
450
1999-00
506
2000-01
527
2001-02
490
2002-03
502
2003-04
540
2004-05
685
2005-06
882
2006-07
996
2007-08
1279
2008-09
1609
2009-10
1805
è·
54 -
/,, , )
) ;<
; 4 <
, 5 ;% /,,
;<; 4 <
<
I
; 4 <
1992-93
17
4
13
-
1993-94
5593
466
5127
39338.46
1994-95
7631
2835
4796
-6.45
1995-96
9694
2752
6942
44.75
1996-97
15554
6979
8575
23.52
1997-98
18695
12737
5958
-30.52
1998-99
16115
17699
1584
126.59
1999-00
56856
46734
10122
739.02
2000-01
74051
64116
9935
-1.85
2001-02
49920
41165
8755
-11.88
2002-03
47061
44373
2688
69.30
2003-04
144858
99094
45764
1602.53
2004-05
16953
171072
45881
0.26
2005-06
346978
305512
41466
-9.62
2006-07
520508
489667
30841
-25.62
2007-08
896686
844504
52182
69.20
2008-09
548876
594608
-45732
187.64
2009-10
-
-
-
-
2010 data was not available
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/,,, /.1 1000000 800000 600000 400000
Gross Purchases (a) (Rs.crore) Gross Sales (b) (Rs.crore)
200000 0 -200000
Net Investment (a-b) (Rs.crore)
There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is indices of nifty.
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54
= , ,
% /,,
Sensex
0.80
Bankex
0.18
Power
0.33
IT
0.13
Capital Goods
0.44
From the above table we can say that FII has a positive impact on all the indices which means that if FIIs come in India then it is goods for the Indian economy. FIIs have more co-relation with Sensex so we can say that they are mostly invest in big and reputed companies which are included in Sensex.
Power and Capital Goods sector have more co-relation with FII investment which shows more interest of FIIs in those sectors.
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Difference Between FDI and FII FDI v/s FII Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation.In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI¶s more than then FIIs. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDI¶s are long term. 1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII
is
an
investment
made
by
an
investor
in
the
markets
of
a
foreign
nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor
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5 *8
To know the flow of investment in India To know how can India Grow by Investment . To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India è0
To know which country s safe to invest . To know how much to invest in a developed country or in a developing. To know Which sector is good for investment . To know which country in investing in which country To know the reason for investment in India Influence of FII on movement of Indian stock exchange To understand the FII & FDI policy in India.
* In order to accomplish this project successfully we will take following steps.
' 8 Secondary Data: Internet, Books , newspapers, journals and books, other reports and projects, literatures /',:
The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectors e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger inflow of FDI from different countries. /,,8 ¬ 8 We have used the Correlation tool to determine whether two ranges of data move together ² that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock indices returns. FII is taken as independent variable. Stock indices are taken as dependent variable
¬ * 8 If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market. This will help the investors to decide on their investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses.
c
.0,
A large number of changes that were introduced in the country¶s regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore and the USA. The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market.
Bibliography www.rbi.org www.fin.in.nic www.sebi.org
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