GDRs are designated in dollars and are not subject to any ceilings on investment. For instance, divestments amounted to $110 billion in the case of FDI outflows from Germany, accounting for 40% of its gross FDI flows in 2008. Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. had also an important impact on the FDI pattern
· In future, countries outside the regional blocks might have disadvantages in attracting FDI.
Improving global sentiment and a growing conducive environment in India are increasingly facilitating foreign investors’ role in the country currently. India’s share in FDI inflows into Asia has increased to 10.6% in 2008 from 2.4% in 2000.
India’s share in global FDI flows improved significantly to 2.4% in 2008 from 1.3% in 2007 and 0.3% in 2000. These industries will now be guided like other large enterprises as far as FDI is concerned.
The Prime Minister, Dr Manmohan Singh, while inaugurating the crude flow from the Rajasthan oil fields of Cairn India-ONGC in Barmer, said, “Cairn’s efforts show that there is a good climate for bringing foreign investment into India and I invite entrepreneurs to invest in India.”
The Cairn-ONGC consortium has US$ 2 billion-investment and plans to invest a further US$ 1.8 billion by 2011.
German luxury car manufacturer, Audi, is eyeing higher sales this year than its earlier target of 1,500 units and as part of its US$ 42.83 million investment in India, the company will set up a new assembly line at its Aurangabad plant to assemble the Q5 model from 2010.
Italian carmaker, Fiat, will source more than US$ 1 billion worth components for its global businesses in 2010 from India.
Accor Hospitality has said it will invest US$ 130 million to come up with 50 hotels in India by 2012.
HealthHiway, an initiative by the Apollo Hospitals Group providing software solutions for the healthcare sector, has received an investment of US$ 4 million from Silicon Valley-based venture capital firm, Greylock Partners.
Japanese tyre manufacturer, Bridgestone, which has a plant at Pithampur, near Indore, will set up a second facility near Pune at an investment of about US$ 420.72 million.
The German carmaker, Volkswagen, has decided to invest US$ 453.66 million more towards expansion at its Chakan plant.
South Korean steel giant, Posco, plans to set up a galvanising plant at an investment of US$ 907.32 million in Raigad district of Maharashtra.
Clinton Climate Initiative (CCI), a programme of US-based William J Clinton Foundation, has signed a memorandum of understanding (MoU) with the Gujarat government for setting up solar parks in Gujarat and the proposed 3,000 mega watt (MW) solar power project will see an investment of over US$ 10.28 billion.
PepsiCo is doubling its investment in its Indian beverage business for calendar 2009 to over US$ 220 million to increase the capacity of the business.
Robert Bosch Engineering and Business Solutions Ltd (RBEI), the engineering and IT services subsidiary of Bosch in India, said it would invest an initial US$ 34.89 million in a new centre in Coimbatore, which would be developed in three phases.
Mexican cinema chain, Cinépolis, will invest around US$ 163.1 million in south India for setting up multiplexes across the four states. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The FIPB has also cleared a proposal by Ramboll Singapore involving an FDI of US$ 4.54 million, to set up a wholly-owned subsidiary to provide engineering consultancy services in the field of oil and gas.
Other proposals that have been cleared are UK’s Ramboll Whitbybird Holdings, Amann Sewing Embroidery Threads, Rescal S.A.S France, Housing Development Finance Corp, and Marconi Telecommunications. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy– even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Several other factors being attributed to the revival in foreign direct investments (FDI) in the country include liberal investment policies and reforms, innovative and technologically advanced products being manufactured in India and low cost and effective solutions.
India has been ranked at the third place in global foreign direct investments this year, following the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years, according to United Nations Conference on Trade and Development (UNCTAD) in a new report on world investment prospects titled, ‘World Investment Prospects Survey 2009-2011’.
Foreign direct investment (FDI) inflow to India was US$ 3.5 billion in July, 56 per cent higher than US$ 2.25 billion in the same month a year ago, according to the Commerce and Industry Minister, Mr Anand Sharma. FDI is a long term investment while FII is generally not for such long time.
Investment in India – Investing in India – Venturing into the Indian Market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. Research firms in India can provide the information to determine how, when and where to enter the market. In other words, if we were to include reinvested earnings (to make the FDI data comparable to that of other countries), the total FDI inflows in 2009 could reach about US$40 billion (3.4% of GDP) compared with US$41.2 billion in 2008.
According to UNCTAD data, the share of developed economies in global FDI flows has dropped to 57% as of 2008 from 81% as of 2000. Reinvested earnings could be an additional US$6-7 billion. Trading in Transferable Development Rights (TDRs)
vii. It also plays a crucial role in the context of rise in the productivity of the host countries. Organized labor, convinced that foreign investment exported jobs, undertook a major campaign to reform the tax provisions which affected foreign direct investment. FDI equity inflows amounting to US$ 10.532 billion were received during April-July 2009.
India’s FDI inflows touched about US$ 7.016 billion in the April-June period this fiscal. The FDI inflow in May 2009 was US$ 2.1 billion.
While the services sector comprising financial and non-financial services attracted US$ 1,855 million in April- June period of the current fiscal, computer software and hardware sector garnered about US$ 239 million in the said period.
In 2009-10, during the April-June period, Mauritius has led the investors into India with US$ 3,369 million worth FDI, followed by the US with US$ 813 million and Singapore, US$ 372 million.
The Government on September 8, 2009, approved nine FDI proposals amounting to about US$ 15.39 million, including High Mark Credit Information Services, whose FDI proposal is worth US$ 4.74 million. Despite the slowdown in economy, Indian share in the global FDI increased from 0.5 per cent to 2 per cent last year.
Though the ministry is optimistic, the FDI inflows in March plunged to $2.5 billion compared to $4.4 billion a year ago, a whopping 56 per cent drop.
The joint secretary said, including reinvestment by foreign entities, the FDI could reach $40 billion in 2009-10 against $37.5 billion, the likely figure for last year.
The reinvestment by MNCs operating in India is seen at $10 billion, the same as for 2008-09, which means the $2.5 billion rise in FDI expected during the current year will be primarily on account of fresh capital inflows.
Analysts see it as an encouraging sign and hope that the global investors would have a positive outlook on the country’s strong fundamentals and fiscal stimulus measures taken by the government to overcome the crisis.
An industry survey indicated that despite the global economic meltdown, about 80 per cent of the US companies consider India to remain an attractive destination for investments over the next five years.
The past few years have seen significant increase in FDI into India driven by the long term growth prospects of the country’s economy. Moreover, Indian companies have also emerged in size and managerial capability to be able to make acquisitions outside the country. Its approach is liberal for all sectors and all types of proposals, and rejections are few. In the short run, with the global recession extending into 2009 and slow growth projected for 2010, as well as the drastic fall of corporate profits, FDI is expected to be low. Indeed the motivations for divestment have been heightened during this crisis as TNCs seek to cut operating costs, shed non-core activities, and in some cases take part in industry-wide restructuring. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. FDI aims to increase the productivity/capacity
3. Amid a sharpening financial and economic crisis, global FDI inflows fell from a historic high of $1,979 billion in 2007 to $1,697 billion in 2008, a decline of 14%. As developing countries, particularly in Asia, remove restrictions and implement policies to attract FDI inflows, trade and investment have become increasingly intertwined. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected.
The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. TNCs from the services sector, however, have been steadily increasing their share among the top 100. Indeed, with India gradually catching up to China on GDP growth, it would not be surprising to see India reach very close to China on FDI inflows over the next 4-5 years.
FDI in India- Data
(April ’00 to
%age to total
(in terms of rupees)
TOTAL FDI INFLOWS *
SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year wise):
FDI EQUITY INFLOWS (WITH COMPANY-WISE DETAILS) 2000-2009:
Cumulative amount of FDI inflows
(from April 2000 to March 2009)
Rs. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. In fact, a substantial number of the policy changes surveyed were in the direction of facilitating investment, including outward investment. For example, exports by foreign affiliates of TNCs are estimated to account for about a third of total world exports of goods and services, and the number of people employed by them worldwide totalled about 77 million in 2008 – more than double the total labour force of Germany. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Nidhi Company
v. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . However, during the course of 2008, the sharp economic downturn in developed countries and the worldwide slump in stock prices led to large losses in SWFs’ investments (partly because of a
high concentration of investments in financial and business services industries), which depressed the pace of growth of their cross-border MA deals. Note that these numbers exclude re-invested earnings. FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. There are also companies which can guide the foreign firm through the entry process from beginning to end –performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.
Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
And are in percentage of :
n Banking – 74%
n Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) – 100%
n Insurance – 26%
n Telecommunications – 74%
n Private petrol refining – 100%
n Construction development – 100%
n Coal lignite – 74%
n Trading – 51%
n Electricity – 100%
n Pharmaceuticals – 100%
n Transportation infrastructure – 100 %
n Tourism – 100%
n Mining – 74%
n Advertising – 100%
n Airports – 74%
n Films – 100%
n Domestic airlines – 49%
n Mass transit – 100%
n Pollution control – 100%
n Print media – 26% for newspapers and current events, 100 % for scientific and technical periodicals
FDI is not permitted in the following industrial sectors:
Ø Arms and ammunition.
Ø Atomic Energy.
Ø Railway Transport.
Ø Coal and lignite.
Ø Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Ø Gambling and Betting
Ø Lottery Business
Ø Atomic Energy
Ø Agriculture (with certain exceptions) and Plantations (Other than Tea plantations
Foreign Investment through GDRs (Euro Issues)
Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). Primary sector TNCs — such as Royal Dutch/Shell Group, British Petroleum Company, and ExxonMobil Corporation — ranked high in the list, buoyed by swelling foreign assets. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country.
Foreign direct investment helps in the creation of new jobs in a particular country. Equity investments fell along with cross-border MAs. In general, the primary sector witnessed a growth of 17% in the value of MA sales in 2008; whereas manufacturing and services – which account for the largest proportion of world inward FDI stocks – reported declines of 10% and 54% respectively.
The financial and economic crisis had varying impacts on FDI carried out by special funds, such as sovereign wealth funds (SWFs) or private equity funds. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.
This leads to serious issues. The survey report, titled ‘Opportunities for UK Plc in Emerging Cities in India’, also rated eight other cities–Ahmedabad, Chandigarh, Jaipur, Goa, Indore, Kochi, Nagpur and Vadodara–as the most conducive destinations for UK investments in India.
The Indian retail market, which is the fifth largest retail destination globally, has been ranked the most attractive emerging market for investment in the retail sector by A T Kearney’s annual Global Retail Development Index (GRDI), in 2009. The companies are, however, required to notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.
Investment by Existing companies
Besides new companies, automatic route for FDI/NRI investment is also available to the existing companies proposing to induct foreign equity. It discusses advantages and disadvantages of including FDI in WTO negotiations, and related policy options for developing Asian economies.
To identify the actual status of FDI.
What kind of changes has brought by the FDI in the world economy.
In what condition FDI may be beneficial for a country.
What type of FDI can bring what type of benefits.
Which country has created the highest potentiality in FDI, which is the leading country in respect of this.
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.
Relating to this issue, Gopal Krishna said, ”the Finance Ministry has raised some generic issues… The biggest beneficiaries of these facilities are the small and medium-sized business enterprises.
Disadvantages of Foreign Direct Investment
The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. General Electric, Toyota Motor Corporation, and Ford Motor Company were among the biggest manufacturers. No fee is payable. This is done basically in the way of provision of capital inputs. 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. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Inflows are expected to fall from $1.7 trillion to below $1.2 trillion in 2009, with a slow recovery in 2010 (to a level up to $1.4 trillion) and gaining momentum in 2011 (approaching $1.8 trillion). However, their international stature has not insulated them from the worst global recession in a generation. The slide continued into 2009, with added momentum: preliminary data for 96 countries suggest that in the first quarter of 2009, inflows fell a further 44% compared with their level in the same period in 2008. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. The trailing three-month sum of Gross FDI inflows into India has shot up to US$9.3 billion (annualized rate of US$37.3 billion) as of August 2009 from the trough of US$3.9 billion (annualized rate of US$15.8 billion) in December 2008
Gross FDI Inflows in India
Source: Ministry of Commerce and Industry, CEIC.
If the current trend is maintained in the rest of the calendar year, total FDI in 2009 could reach very close to the high of US$33 billion reached in 2008. For this the proposal must be supported by a Board Resolution of the existing Indian company.
For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are
(i) that they are engaged in the industries under automatic route,
(ii) the increase in equity level must be from expansion of the equity base and
(iii) the foreign equity must be in foreign currency.
The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.
Participation by international financial institutions
Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc. From being ranked 36th in the world on FDI inflows in 2000, India has improved its rank to 20th in 2007. Crore)
(In US$ mn)
2009-10 (Up to October 2009)
2008-09 (Up to October 2008)
%age growth over last year
( + ) 06 %
( – ) 06 %
Graph Showing The States With Highest Number Of Foreign Companies Operating In India
Foreign direct investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by 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 or affiliate enterprise or foreign affiliate). At times there have been adverse effects of foreign direct investment on the balance of payments of a country. 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.
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.
However, investment in stock markets and real estate will not be permitted. Although the projected figure does not show a significant rise, under the present global scenario it is considered as a positive development.
India received FDI worth $24.57 billion in 2007-08 . Regulation 4 of Schedule I of FEMA Notification no. Within services, the financial services segment accounts for bulk of the inflows, followed by the IT/BPO segment.
2. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations)
General Permission of RBI under FEMA
RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. By debit to the specified account of person concerned maintained in an authorized dealer/authorized bank. In the first eleven months of the 2008-09, the country received FDI of $25.3 billion, 3.2 per cent higher than the corresponding period last year.
“There will be some investment which will be delayed but overall outlook is positive and optimistic,” joint secretary in the Department of Industrial Policy and Promotion (DIPP), Gopal Krishna said in New Delhi yesterday.
“The fact of the matter is our share of world FDI inflows continues to grow,” Gopal Krishna said. Over the last three years, the RBI has increased the limit for foreign investments by local companies from 100% of net worth to 400% of net worth, under automatic route. This increase bucked the downward trend in global FDI as a whole. This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.
Investments which aim at either penetrating new markets or maintaining existing ones.
Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. These companies play a major and growing role in the world economy. In FY2009, the real estate and construction investments are estimated to be at US$4.8 billion compared with US$3.9 billion in FY2008 and US$1.5 billion in FY2007.
3. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.
It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. Even as today the climate in India has seen a seachange, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. There were 26 companies on the 2008 list, as opposed to 14 in 1993, with Vodafone Group and Electricité de France among the biggest. However, Issue of equity shares against lump sum fee, royalty payable and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.
WHY FDI PREFERED OVER FII?
1. As for TNCs from developing countries, 7 featured in the list, among them large diversified companies such as Hutchison Whampoa and CITIC Group, as well as important electronics manufacturers like LG Corporation and Samsung Electronics.
Global FDI prospects are set to remain gloomy in 2009, with inflows expected to fall below $1.2 trillion. The main reason for the sharp decline was that the financing of leveraged buyouts – that contributed most to the dynamic growth of cross-border MAs by these funds in previous years – nearly dried up in the second half of 2008.
SWFs, on the other hand, recorded a rise in FDI in 2008, despite a fall in commodities prices, the export earnings of which often provide them with finance. FDI inflows into India have largely focused on meeting domestic demand, unlike in China, where a significant part of FDI has been attracted in exports business.
Sectors attracting FDI
1. FDI in the services sector remained largely stable at US$10.3 billion in FY2009 compared with US$10.2 billion FY2008, but increased from US$7.9 billion in FY2007. Lottery Business, or
iii. TNCs appear hesitant and bearish about expanding their international operations.
This is confirmed by the results of WIPS: a majority (58%) of large TNCs reported theirintentions to reduce their FDI expenditures in 2009 from their 2008 levels, with nearly onethird of them (more than 30%) even anticipatinga large decrease. Service
Although the share of the services sector has been declining when compared with FY2007, it still has the largest share at 29.4% as of FY2009 (12-months ended March 2009). Lower profits by foreign affiliates drove down reinvested earnings, contributing to the 46% drop in FDI outflows from developed countries in the first quarter of 2009. This paper reviews developments in FDI flows and their impacts in developing Asia, and the importance of the policy context in which those flows occur. Prospects for further increases in cross-border MAs by SWFs have deteriorated dramatically, judging by data on MAs for the first half of 2009.
TNCs in international production
Today, there are some 82,000 TNCs worldwide, with 810,000 foreign affiliates. Compared with 2007, the value of their cross-border MAs – the predominant form of FDI by SWFs – was up 16% in 2008, to $20 billion, a small amount in proportion to the size of FDI and other assets under their management. The Nixon Administration, influential members of Congress of both parties, and well-financed lobbying organizations came to the defense of the multinational. 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.
Government approval route
All activities which are not covered under the automatic route, prior Government approval for FDI/NRI shall be necessary. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.
The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret – something that is not meant to be disclosed to the rest of the world. cheap labor and natural resources). 3,93,126
Amount of FDI inflows during 2009-10
(from April 2009 to October 2009)
Rs. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.
FOREIGN DIRECT INVESTMENT IN INDIA
Investment in Indian market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
Total foreign investment and FDI
Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to dols 6 billion in 1996-97. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB
Capitalization of Import Payables
FDI inflows are required to be under the following modes;
I. 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 of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. As per the UNCTAD survey, India is third in global ranking after China and the US for potential FDI investments during 2009-2011. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998.
Factors affecting FDI Inflows in India
· Domestic market potentials
· Low 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.
· Fourth largest economy in terms of PPP adjusted GDP after USA, China and Japan
· One of ten fastest economies of the world
· Largest pool of technical manpower
· Demographic dividend- youngest workforce
· Rich in mineral and natural resources
· Major country in agrl and industrial products
· Fiscal incentives and investment environment
· Low wage rates and low production costs
· High Return and Huge domestic market
· Well developed banking and capital market.
· Dynamic private sector
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. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.
A tactical investment to prevent the gain of resource to a competitor. It had also recommended increased FDI cap in FM radio to 49 per cent from 20 per cent.
The IB Ministry will take a final decision on the proposed increase in FDI cap after TRAI submits its new recommendations.
FDI in India seen at $30 billion in 2009-10
India expects to receive foreign direct investment (FDI) to the tune of $30 billion in fiscal year 2009-10, compared to $27.5 billion estimated for 2008-2009.
Despite the global economic slump and severe credit crunch, the ministry of industries is optimistic that there won’t be any decline in foreign direct investment in India and anticipate a 9 per cent increase over 2008-09. Of course the rising size of the domestic market appears to be one reason explaining this trend; we believe the gradual improvement in infrastructure investments and deregulation are also helping improve the business environment. The sectors services, computer, telecommunications, real estate, construction, automobile and power attracted maximum inflows.
For comparison, China’s FDI for 2008 was $92.4 billion, registering a 23 per cent growth of over 2007.
Meanwhile, the finance ministry has raised questions on the new FDI rules, which could give domestic companies room to rework their structure for backdoor activities.
The commerce ministry, revised the FDI regulations in February with a view to make the policy more liberal and user-friendly, allowing up to 100 per cent FDI under automatic route in many sectors. As such, there have been growing calls for a multilateral framework of foreign investment rules to be negotiated under the auspices of the World Trade Organization (WTO). The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.
Foreign Direct Investment (FDI) flows have increased dramatically in last few decades. The 4.8% reduction in inward FDI stock worldwide was reflected in the decline in value of gross product, sales and assets, as well as employment of TNCs’ foreign affiliates in 2008, a marked contrast to huge double-digit growth rates in 2006 and 2007.
In terms of the sectoral composition of the top 100 list for 2007, the majority of the largest TNCs continued to be in manufacturing. Otherwise, the proposal would need Government approval through the FIPB. Plain paper applications carrying all relevant details are also accepted. It also helps in increasing the salaries of the workers. The Foreign Trade and Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminated both the tax credit and tax deferral. A recent Ernst Young study predicts Mumbai and Bangalore to be the next global centres of investment along with Shanghai.
To bolster higher overseas investment into cash-strapped micro and small enterprises (MSEs), the government has liberalised the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding with the sectoral caps. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. 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 Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country’s roads are surfaced), low telephone penetration (1.4% of population).
The Indian market is widely diverse. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system.Entering India’s marketplace requires a well-designed plan backed by serious thought and careful research. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.
Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. A slow recovery is expected in 2010, but should speed up in 2011. FDI is more stable than FII
Investment in the manufacturing sector has improved significantly over the last two years as the investment climate has improved. Moreover, if we measure FDI inflows as a percentage of GDP, India is already receiving more inflows than Brazil, China and US.
India has a relatively open FDI regime compared with many other emerging markets. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB.
Software Technology park Units
All proposals for FDI/NRI investment in STP Units are eligible for approval under automatic route. The government is likely to double FDI inflows within two years. Moreover, the large size of SWFs and their perceived non-economic intentions have aroused concerns in a number of countries.
To counter this concern, in October 2008 a number of SWFs agreed on a set of Generally Accepted Principles and Practices (GAPP) – the socalled Santiago Principles. Mergers are the most common way for multinationals to do FDI.
Horizontal FDI occurs when the multinational undertakes the same production to activities in multiple countries.
Backward Vertical FDI
Where an industry abroad provides inputs for a firm’s domestic productions.
Forward Vertical FDI
Where an industry abroad sells the outputs of a firm’s domestic production.
FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:
Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. An investor can make an application for prior Government approval even when the proposed activity is under the automatic route.
Procedure for obtaining Government approval -FIPB
All proposals for foreign investment requiring Government approval are considered for approval by the Foreign Investment Promotion Board (FIPB). However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.
A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.
Foreign currency convertible Bonds
FCCBs are issued in accordance with the scheme [the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993] and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments;
The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is given as under:
(i) An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt
(ii) Can issue FCCBs upto USD 50 Million under the Automatic route,
(iii) From USD 50 -100 Million, the companies have to take RBI approval,
(iv) From USD 100 Million and above, prior permission of the Department of Economic Affairs is required.
Foreign investment through preference shares is treated as foreign direct investment. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.
Opening an office in India
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.
The FIPB Route:
Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. we should be able to answer those questions and address them properly.”
FDI Inflows Rebounding
Along with the improvement in the global sentiment for business investments, FDI inflows to emerging markets and more specifically to India have also started to recover quickly. We believe that FDI in manufacturing will also improve further over the next 2-3 years as there is progress on critical issues such as infrastructure. India has now opened its doors to foreign investment in a major way.
Non-Resident Indians and Multinational Companies have to follow certain rules and regulations prior to investment.
FDI upto 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 in the same or allied field,
All proposals relating to acquisition of shares in an existing Indian company by a foreign/NRI investor.
All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.
It becomes easier for the business entities to borrow finance at lesser rates of interest. Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible. In the first half of 2009, nearly one third of all cross-border MA deals involved the disposal of foreign firms to other firms (whether based in a host, home or third country). The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves.
Foreign direct investment may entail high travel and communications expenses. Transnational corporations (TNCs) account for an increasing share and, in some cases, a substantial part of the assets, employment, domestic capital formation, research and development, sales and trade of many countries and have become one of the driving forces of integration in the world economy.
http://preetkamal.hubpages.com/hub/pks. In an earlier recommendation,
TRAI had proposed an increased FDI cap in cable network, Direct-to-Home (DTH) and Uplinking Hub/Teleport to 74 per cent from current 49 per cent. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resources. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
Success in India will depend on the correct estimation of the country’s potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. The key sub-segments that are attracting manufacturing investments include metallurgical industries, the automobile industry, electrical equipment and chemicals.
FDI outflow also increasing:
Increasing Forex reserves and rising capital inflows have over the years encouraged the central bank to liberalize the limits for foreign investment abroad. FDI may be undertaken by individuals as well as business entities.
Foreign direct investment (FDI) continues to gain in importance as a form of international economic transactions and as an instrument of international economic integration. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Further information could be obtained at Security and Exchange Board of India’s (SEBI) website : http://www.sebi.gov.in
An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). This depressed FDI flows further. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Since that time FDI has spread to become a truly global phenomenon. Normal processing time is 4 to 6 weeks. The major investing countries included Mauritius, Singapore, the US, Britain, Netherlands, Japan, Germany, Cyprus, France and the UAE. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Along with cash it brings better management, technology etc.
4. The largest FDI of US$ 153.31 million will be brought in by Essel Group-promoted DTH service provider, Dish TV India through issue of foreign currency convertible bonds in collaboration with foreign investors such as Afro-Asian Satellite Communication Ltd, Delgrada Ltd and Lazarus Investment Ltd.
A trade facilitation body UK-India Business Council (UKIBC) survey has ranked Pune as the most suitable place for British investments in India. On the other hand, the share of developing economies increased to 37% as of 2008 from 18% during the same period. Third, the positive trend of globalization of the capital markets will mean increased acquisition of shares by foreign companies ensuring higher FDI inflows. 4,78,399
FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2009-10:
Financial Year 2009-10 ( April-March )
Amount of FDI inflows*
(In Rs. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.
Benefits of Foreign Direct Investment
One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.
This is especially applicable for the economically developing countries. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.
An example of this could be seen in some countries of the East Asian region. Proposals are processed either through the automatic route or FIPB as the case may be, as per the following guidelines:-
(i) Foreign investment in preference share are considered as part of share capital and fall outside the External Commercial Borrowing (ECB) guidelines/ cap.
(ii) Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Retail Trading
viii. Second, there should be a steady increase in FDI focused on growing domestic market opportunities, especially in consumer goods, real estate and infrastructure. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
India has in the recent years emerged as a favored destination for investment in various sectors like Power generation, Heavy Machinery, Infrastructure project, Telecom, Communication, Software etc.
Various hurdles that existed in the economy earlier have been removed as a result of the winds of liberalization sweeping the country. In some cases, these resources may not be available in the home economy at all (e.g. Preference shares structured without such conversion option fall outside the foreign direct equity cap.
(iii) Duration for conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement whichever is less.
(iv) The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
(v) Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.
FDI in EOUs/SEZs/Industrial Park/EHTP/STP
Special Economic Zones (SEZs)
100% FDI is permitted under automatic route for setting up of special Economic Zone.
Units in SEZ qualify for approval through automatic route subject to sectoral norms. Real estate Construction
Liberalization of laws related to FDI investments over the last few years has helped to increase foreign investments into the real estate and construction sector. Six applicants, including the US$ 24.67 million-FDI proposal of Network18 Media Investments, have been advised to access automatic route.
Earlier, the government had cleared 10 foreign direct investment (FDI) proposals which will bring in US$ 229.67 million. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Business of chit fund
iv. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. Critically, the proportionate decline in equity investments today is larger than that registered during the previous downturn.
Since mid-2008, divestments, including repatriated investments, reverse intra-company loans and repayments of debt to parent firms, have exceeded gross FDI flows in a number of countries. Thus, tastes and preferences differ greatly among sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Private equity funds were hit especially hard, as the financial crisis struck at their lifeblood: easy capital, which shrank as lenders became more risk conscious.
Cross-border MAs by these funds fell to $291 billion in 2008, or by 38%, from a peak of $470 billion in 2007. Proposals not covered under the automatic route require approval by FIPB..
100% Export Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. This enables them to get access to a better lifestyle and more facilities in life. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets.
Large outflows of capital
Large outflows began again in May 1998, following India’s nuclear tests and volatility in the rupee/dollar exchange rate. Foreign direct investment (FDI) is aiso defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms.
Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. For instance, infrastructure investments have increased to 5.8% of GDP (US$68 billion) in FY2009 from 3.4% of GDP (US$15.4 billion) in FY2000. Atomic Energy
ix. Areas/sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise decided and notified by Government. 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 following information should form part of the proposals submitted to FIPB: –
(a) Whether the applicant has had or has any previous/existing financial technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought; and
(b) If so, details thereof and the justification for proposing the new venture/ technical collaboration (including trade marks).
(c) Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing.
(d) Foreign investment proposals received in the DEA are placed before the Foreign Investment Promotion Board (FIPB) within 15 days of receipt. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy.
Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges.
Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India.
Developing a basic understanding or potential of the Indian market
The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms.But there is still cause for worries-
The rapid economic growth of the last few years has put heavy stress on India’s infrastructural facilities. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. In case of countries that make foreign direct investment in other countries this process has positive impact as well. There is also some scope for new research activities being undertaken.
Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. In some cases, the restructuring of parent companies and their headquarters led to repayments of outstanding loans by foreign affiliates and a reduction in net intra-company capital flows from TNCs to their foreign affiliates. Greenfield investments (new investments and expansion of existing facilities) were resilient overall in 2008, but have also succumbed to the crisis since late 2008.
Available cross-border MA data by sector indicate that companies in a limited number of industries increased their FDI activities in 2008.Industries exhibiting rising cross-border MA sales (by value) during the year included food,beverages and tobacco, buoyed by the $52 billion purchase of Anheuser Busch (United States) by Stichting Interbrew (Belgium); precision instruments; mining, quarrying and petroleum; motor vehicles and other transportation equipment; business services; other services; agriculture, hunting, forestry and fisheries; coke, petroleum and nuclear fuel; and public administration and defence. There were, however, also a few policy measures that restrict private (including foreign) investment in certain highly sensitive sectors, or introduce new criteria and tests for investments that cause national security concerns.
Concerned with the sensitivity linked to the broadcasting sector, the Telecom Regulatory Authority of India (TRAI) is examining whether or not to keep out this sector from the foreign direct investment (FDI) regulations notified under Press Notes 2 and 4.
The Press Notes 2 and 4 had stated that downstream foreign investment into a non-operating Indian holding company would not be considered while determining the FDI cap in each sector.
However, the Information and Broadcasting (IB) Ministry has sought TRAI’s views on implementing Press Notes 2 and 4 for the broadcasting sector.
The TRAI had earlier recommended that FDI cap on broadcasting carriage services be brought up to 74 per cent.
This was done to bring it at par with the FDI norms governing the telecom sector. Proposals not covered under the automatic route would be considered and approved by FIPB.
100% FDI is permitted under automatic route for setting up of Industrial Park
Electronic Hardware Technology Park (EHTP) Units
All proposals for FDI/NRI investment in EHTP Units are eligible for approval under automatic route. By inward remittances through normal banking channels or
ii. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.
At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. 85,273
Cumulative amount of FDI inflows
(updated up to October 2009)
Rs. For existing companies with an expansion programme, the additional requirements include
(i) The increase in equity level resulting from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/foreign investors,
(ii) The money to be remitted should be in foreign currency and
(iii) proposed expansion programme should be in the sector(s) under automatic route. Any investment from a foreign firm into India requires the prior approval of the Government of India.
Investment in India – Foreign Direct Investment – Approval
Foreign direct investments in India are approved through two routes:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:
foreign equity up to 50% in 3 categories relating to mining activities (List 2).
foreign equity up to 51% in 48 specified industries (List 3).
foreign equity up to 74% in 9 categories (List 4).
where List 4 includes items also listed in List 3, 74% participation shall apply.
The lists are comprehensive and cover most industries of interest to foreign companies. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country.
Foreign direct investment can also bring in advanced technology and skill set in a country. It also assists in the promotion of the competition within the local input market of a country.
The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The company has lined up US$ 346.57 million for its proposed expansion plan in the country.
The Road Ahead
With the government planning more liberalisation measures across a broad range of sectors and continued investor interest, the inflow of FDI into India is likely to further accelerate.
FDI inflows into India in April-May 2009-10 have surged by 13 per cent at US$ 4.2 billion as against the previous two months driven by recovery in the global financial markets. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India by FIIs since 1992.
FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in 1996-97. The decision of the Government in all cases is usually conveyed by the DEA within 30 days.
FDI is not permissible in the following cases
i. 20 allows an Indian company to issue its Rupee denominated shares to a Singapore Pools Result person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:
The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Singapore Pools Result Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time
The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring
Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.
There is no limit upto which an Indian company can raise ADRs/GDRs. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95.
Foreign direct investment also permits the transfer of technologies. It is also the second largest among emerging nations. The massive counterattack of the multinational corporations and their allies defeated this first major challenge to their interests.
Different Types of FDI
Inward foreign direct investment is a particular form of inward investment when foreign capital is invested in local resources.
Inward FDI is encouraged by:
Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions
The thought is that the long term gain is worth more than the short term loss of income
Inward FDI is restricted by:
Ownership restraints or limits
Differential performance requirements
Outward foreign direct investment, sometimes called “direct investment abroad”, is when local capital is invested in foreign resources. In FY2009, total FDI outflows rose to US$17.5 billion from US$5.9 billion in FY2006.
India is likely to further improve its position in global FDI ranking, for several reasons such as India is continuing to expand as a major destination for services sector outsourcing. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world’s most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
The reason being, after independence from Britain 50 years ago, India developed a highly protected, semi-socialist autarkic economy. While divestments are not uncommon (affecting between one quarter and four fifths of all FDI projects), they became especially noticeable during a crisis. The country has attracted foreign direct investment (FDI) worth US$ 2.58 billion in June 2009, an eight per cent increase over the same month last year as against the FDI inflow of US$ 2.39 billion in June 2008, according to the Department of Industrial Policy and Promotion (DIPP). FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.
In the US, in the late 1960s and early 1970s, foreign direct investment became increasingly politicized. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.
At times it has been observed that the governments of the host country are facing problems with foreign direct investment. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational’s home economy. Cumulative FDI in India from April 2000 to March 2009 stood at about US$ 90 billion.
FDI TRENDS, POLICIES AND PROSPECTS
Global FDI flows have been severely affected worldwide by the economic and financial crisis. Considering the 44% fall inactual FDI inflows worldwide in the first quarterof 2009, compared to the same period last year,2009 could end with much lower flows than in2008.
The most recent survey of investment policy developments in the 42 countries of the G-20 conducted by the UNCTAD secretariat shows that the overwhelming majority of policy measures specific and/or related to investment, taken by these countries in the period November 2008 to June 2009 were non-restrictive towards foreign inward and domestic outward investment. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. However, recovery of these flows is expected to begin slowly in 2010 to reach up to $1.4 trillion, and will gather momentum in 2011 when the level could approach an estimated $1.8 trillion – almost the same as in 2008. Housing and Real Estate business.
vi. This has often caused many companies to approach foreign direct investment with a certain amount of caution.
At times it has been observed that there is considerable instability in a particular geographical region. The FIPB also grants composite approvals involving foreign investment/foreign technical collaboration.
For seeking the approval for FDI other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted to the Department of Economic Affairs (DEA), Ministry of Finance.
FDI from NRI for 100% EOU
FDI applications with NRI Investments and 100% EOU should be submitted to the Public Relation Complaint (PRC) Seetion of Secretariat of Industrial Assistance (SIA), Department of Industrial Policy Promotion.
Proposals requiring Govt’s Approval
Application for proposals requiring prior Govt’s approval should be submitted to FIPB in FC-IL form. Gambling and Betting, or
ii. The crisis has also changed the investment landscape, with developing and transition economies’ share in global FDI flows surging to 43% in 2008
Structural features of the decline in FDI
In late 2008 and the first few months of 2009, significant declines were recorded in all three components of FDI inflows: equity investments, other capital (mainly intracompany loans) and reinvested earnings. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Foreign portfolio investment by foreign institutional investors was significantly lower at dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia.
Foreign institutional investors
Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. Yet it can also be used to invest in imports and exports from a foreign commodity country.
Outward FDI is encouraged by:
Government-backed insurance to cover risk
Outward FDI is restricted by:
Tax incentives or disincentives on firms that invest outside of the home country or on repatriated profits
Subsidies for local businesses
Leftist government policies that support the nationalization of industries (or at least a modicum of government control)
Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labour markets and agriculture.
Security industries are often kept safe from outwards FDI to ensure localised state control of the military industrial complex
Direct investment in new facilities or the expansion of existing facilities. This causes a lot of inconvenience to the investor.
The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. The share of Asia in global FDI flows has increased to 23% as of 2008 from 11% as of 2000 and only 1% as of 1980.
Within Asia, over the last few years India has steadily improved its position in attracting FDI
investments. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. The rate of growth of worldwide FDI inflows in the past two decades has substantially exceeded that of worldwide gross domestic product (GDP), exports and domestic investment. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. TRAI had, however, kept the FDI cap for content services at 49 per cent.
In a consultation paper issued last week, TRAI said that some stakeholders had raised concerns that in the light of Press Notes 2 and 4, much higher foreign equity is possible because even up to 49.99 per cent foreign investment in the investing company would be counted as nil as per the new method of calculating indirect foreign investment.
“Another view is that the broadcasting sector, being sensitive in nature, should be taken out of the ambit of Press Notes 2 and 4 of 2009, and the foreign investment limit should be calculated under the earlier methodology,” TRAI said in the consultation paper.
TRAI has invited all stakeholders to respond to the issues raised in the consultation paper by January 30. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI.
Issue and valuation of shares in case of existing companies
In case of listed companies, according to RBI/SEBI guidelines, the issue price shall be either at:
(a) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date or
(b) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
The stock exchange referred to is the one at which the highest trading volume in respect of the share of the company has been recorded during the preceding six months prior to the relevant date.
The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the shareholder is convened.
In all other cases a company may issue shares as per the RBI regulation in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.
Other relevant guidelines of Securities and Exchange Board of India (SEBI)/ RBI including the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, wherever applicable, would need to be followed