Transcript
FDI POLICY OF INDIA:
PROS & CONS
Presented by:
10003 - Abhishek Pore
10022 - Arpita Shah
10026 - Atman Shah
10030 - Chintan Anjaria
10132 - Richa Chugh
10159 - Suchi Jain
10170 - Varun Iyer
Index
Introduction
Types of FDI
Major Bodies Constituted to FDI
India as a FDI destination
Entry Process
Entry Strategy
Pros & Cons of FDI in India
Sectorial Analysis
Special Investment Avenues
FDI Equity Inflow
Country Wise FDI Inflows
Recommendations
Conclusion
Introduction
It is defined as an investment involving a long-
term relationship and reflecting a lasting interest
and control of a resident entity of one economy
in an enterprise resident of another economy
other than that of the foreign direct investors.
FDI implies that the investor exerts a significant
degree of influence on the management of the
enterprise resident in the other economy.
Generally speaking FDI refers to capital inflows
from abroad that invest in the production
capacity of the economy and are:
Usually preferred over other forms of
external finance because they are:
Non-debt creating, non-volatile and their returns
depend on the performance of the projects
financed by the investors
FDI also facilitates international trade and
transfer of knowledge, skills and technology.
Contd.
The FDI relationship consists of a parent
enterprise and a foreign affiliate which together
form a multinational corporation (MNC).
In order to qualify as FDI the investment must
afford the parent enterprise control over its
foreign affiliate.
The IMF 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.
Contd.
Foreign Direct Investment (FDI) is permitted as
under the following forms of investments:
Through financial collaborations
Through joint ventures and technical
collaborations
Through capital markets
Through private placements or preferential
allotments
Types of FDI
Greenfield Investment
Mergers & Acquisitions
Horizontal Foreign Direct Investment
Vertical Foreign Direct Investment
Major Bodies Constituted For FDI
1991- Foreign Investment Promotion Board FIPB
1996- Foreign Investment Promotion Council
FIPC
1999- Foreign Investment Implementation
Authority FIIA
2004- Investment Commission
Secretariat for Industrial Assistance (SIA)
Factors Responsible for Attracting
Global Companies to India
FDI has been considered as the magic wand that will
transform "under-developed" India into an advanced
nation with a "modern" infrastructure. The factors
responsible for attracting global companies to India are as
follows:
Atmosphere Conducive For Business
Labour
Political Stability
World - Class Human Resources
Leadership In Technology Innovation
Multifaceted Financial Sector
Infrastructure
Government Incentives
FDI is not permitted in the following industrial
sectors:
Arms and ammunition
Atomic Energy
Railway Transport
Coal and lignite
Mining of iron, manganese, chrome,
Gypsum, Sulphur, Diamonds, Copper, Zinc
Forbidden Territories
The Entry Process
Automatic
Route
FIPB
Route
CCFI
Route
The Entry Process: Automatic Route
All items/activities for FDI investment up to 100% fall
under the Automatic Route except the following:
All proposals that require an Industrial License
All proposals in which the foreign collaborator has a
previous venture/tie up in India
All proposals relating to acquisition of existing shares
in an existing Indian Company by a foreign investor
All proposals falling outside notified sectoral policy/
caps or under sectors in which FDI is not permitted
Most manufacturing activities
Drugs and pharmaceuticals
Food processing
Electronic hardware
Software development
Film industry
Advertising
Hospitals
Pollution control and management
Management consultancy
Computer related Services
Construction and related Engineering Services
Health related & Social Services
Travel related services
Illustrative List Of Sectors Under
Automatic Route For FDI upto 100%
Government Approval:
For all activities, which are not covered under the
Automatic Route
The FIPB also grants composite approvals involving
foreign investment/ foreign technical collaboration
RBI has granted general permission under Foreign
Exchange Management Act (FEMA) in respect of
proposals approved by the Government.
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.
The Entry Process: FIPB Route
Investment proposals falling outside the automatic
route
And
Having a project cost of Rs. 6,000 million or more
would require prior approval of Cabinet Committee
of Foreign Investment (“CCFI”)
Decision of CCFI is usually conveyed in 8-10 weeks.
Thereafter, filings have to be made by the Indian
company with the RBI
The Entry Process: CCFI Route
The Entry Strategy
Forms in which Business can be conducted
in India:
Wholly owned subsidiary
Joint Venture Company
Branch Office
Project Office
India Presence: Liaison Office
Stable democratic environment over 60 years of
independence
Large and growing market
World class scientific, technical and managerial
manpower
Cost-effective and highly skilled labor. Increase in
Domestic Employment/Drop in unemployment
Abundance of natural resources
Pros of FDI in India
Well-established legal system with independent
judiciary
Developed banking system and vibrant capital
market
India among the top three investment hot spots
and one of the fastest growing economies in the
world
Large English speaking population
Contd.
Industrial Sector Dominance in the Domestic
Market
Technological Dependence on Foreign
Technology Sources
Disturbance of Domestic Economic Plans in Favor
of FDI-Directed Activities
“Cultural Change” Created by “Ethnocentric
Staffing” The Infusion of Foreign Culture and
Foreign Business Practices
Cons of FDI in India
FDI in India
SECTOR WISE
In the private banking sector of India, FDI is allowed
up to a maximum limit of 74 % of the paid-up capital
of the bank
Foreign Direct Investment and Portfolio Investment in
the public or nationalized banks in India are subjected
to a limit of 20 % in totality
Indian operations by foreign banks can be executed by
any one of the following three channels
Branches in India
Wholly owned subsidiaries
Other subsidiaries
FDI in Service Sector
Pros & Cons of FDI in Services Sector
Pros:
FDI limits in the banking sector of India were
increased with the aim to bring in more FDI inflows
in the country along with the incorporation of
advanced technology and management practices
The Reserve Bank of India governs the investment
matters in the banking sector
Cons:
Constant FDI inflow in the country has lead to
increased liquidity & its subsequent strikes of inflation
Also there has been immense pressure on our rupees
Structure & Segment – Indian Real
Estate Segment
FDI in Housing & Real Estate Sector
The housing and real estate sector in India witnessed FDI of
US$ 640 million in April-September 2010-11
Housing and real estate sector including cineplex, multiplex,
integrated townships and commercial complexes etc,
attracted a cumulative FDI worth US$ 8,996.46 million from
April 2000 to September 2010
Aggregate FDI inflows into the real estate sector are recorded
at approximately 7.42 per cent of the total inflows
India allows 100% FDI through the automatic route in:
townships
housing
built-up infrastructure
construction-development projects
Pros:
To make the real estate sector in India more
organized
To increase professionalism in the sector
To introduce advanced technology in the
construction business
To create a healthy and competitive market
environment for both Indian and foreign
investors
Pros & Cons of FDI in
Housing & Real Estate Sector
Cons:
FDI regulations currently in force allow an
entity to receive FDI in construction
development only if the minimum built-up area
of the project is 50,000 square meters
Many real estate projects have failed to take-off
due to the delay in obtaining statutory
clearances and conversion of land usage
Current FDI regulations provide for a three-year
lock-in for each tranche of foreign investment,
and early exit needs government approval
FDI policy for investment in hotels and hospitals
is far less stringent than the one for housing
projects
Contd.
FDI inflows in this sector has been at an increasing rate
High performing sector, Prime destination for the
international players
Opened to foreign investment in the year 1991
The production level of this sector has increased from 2
million 1991 to 9.7 million in 2006 and to 11.1 million in
2010
FDI upto 100 % - turnover of USD 12 billion in the Indian
auto industry and USD 3 billion in the auto parts industry
Manufacturing – 100 % FDI and Imports are encouraged
FDI in Automobile Sector
Pros of FDI in Automobile Sector
Advanced Technology, Cost effectiveness, efficient
manpower
Well developed and competent automotive
ancillary industry along with automobile testing
and R&D centers
Increase in the manufacturing capacity
Opportunities of FDI in Automobile Sector
Establishing engineering centers
Two wheeler segment, Heavy truck segment,
Passenger car segment
Research and Development centers
FDI increased from 49% to 74% in 2005 by the Department of
Industrial Policy and Promotion(Ministry of Commerce and
Industry)
Telecom sectors - National/ International Long Distance, Basic,
Cellular, V-Sat, Unified Access Services, Public Mobile Radio Trunked
Services (PMRTS), Global Mobile Personal Communications Services
(GMPCS) and other value added Services
Foreign investment in Indian market - Foreign Institutional Investors
(FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible
Bonds (FCCBs), American Depository Receipts (ADRs), Global
Depository Receipts (GDRs) and convertible preference shares held
by foreign entity
FDI up to 49 percent will be allotted to certain telecom sectors in
India under automatic route
In case of the license companies, FDI will require the FIPB approval
provided it has a total ceiling of 74 percent
FDI investments will be entitled to the laws of the Government of
India and not the overseas countries
FDI in Telecom Sector
Benefit to the customer
Technology transfer & market access
Rural areas
Harmonious relationship with country from which
foreign investment is being made
Opportunities of FDI in Telecom Sector
Manufacturing of equipments and components
Tele – education, Tele - banking, Tele – Medicine
Long distance Bandwidth capacity in India
Pros of FDI in Telecom Sector
There are huge opportunities of FDI in power sector in India
Past few years have witnessed an outstanding growth in the power
sector especially the sectors based on renewable sources of energy.
100% FDI is permitted to this sector under automatic route in
almost all the power sectors in India except the Atomic energy.
Important aspects of FDI in the power sector of India are –
Power projects involving generation and distribution tasks are
allowed in all types and sizes
As per the Electricity Act 2003, trading in power is activated
Thermal power plants will get a return of 16 percent on equity
The import of equipments will be entitled to 20 percent of
import duty
A duration of 30 years will given as a renewable license period
Power generating projects will have a five year tax holiday .
FDI in Power Sector
Opportunities of Foreign Direct Investment (FDI) in
the Power Sector in India exist in -
Hydro Projects
Captive Power
Ultra Mega Power Projects
Nuclear Power
National Grid Program
Rural Electrification
Trading
Renewable
The government of India aims at reaching 2,00,000
MW by the year 2012
Over the past few years the computer software
industry has been one of the fastest growing sectors in
Indian economy.
100 percent FDI is permitted under automatic route
to the E-Commerce activities in India
Software Technology Parks have been a major
initiative in India to drive FDI in computer software
industry .
India constitutes 0.6 percent of the entire
international market in terms of manufacturing
electronics hardware
High growth prospects, in terms of increased
consumption in the India as well as increasing
demand for exports are expected to lead to more
Foreign Direct Investments in this sector
FDI in Computer
Software & Hardware Sector
Sub Sectors Of FDI Inflows In Computer
Software & Hardware
Sr.No. Sub Sectors Amount of FDI inflows
%age with total FDI
inflows in Computer
Software & Hardware
Sector
Rupees in crores US $ in millions
1. Computer Software
Industry
41,346.67 9,325.99 8.80
2. Computer Hardware 463.77 105.69 0.10
3. Others (Software) 648.18 141.60 0.13
Total of the above 42,458.62 9,573.28 9.03
Share Of Top Five RBI‟s Region‟s (With State Covered)
Attracted FDI Inflows For
Computer Software & Hardware
Rank
RBI‟s Regional
Office
States Covered Amount of FDI inflows
%age with FDI inflows
in Computer Software &
Hardware
Rupees in
crores
US $ in
million
1. Mumbai Maharashtra, Dadra & Nagar
Haveli, Daman & Diu
9,334.00 2,118.72 22.13
2. Bangalore Karnataka 5,076.08 1,129.83 11.80
3. Chennai Tamil Nadu, Pondicherry 4,416.89 1,004.44 10.49
4. New Delhi Delhi, Part of UP and
Haryana
3,858.26 855.03 8.93
5. Hyderabad Andhra Pradesh 1,463.37 339.13 3.54
Total of above 24,148.60 5,447.15 56.89
FDI up to 26% allowed on the automatic
route
However, license from the Insurance
Regulatory & Development Authority (IRDA)
has to be obtained
There is a proposal to increase this limit to
49%
FDI in Insurance Sector
Pros:
Greater foreign investments would help in
training and skills up gradation of the agents
Raising the FDI cap will enable expertise in the
Indian insurance industry (e.g. underwriting,
actuarial, claims management, data
standardization, etc.)
Cons:
Non-executive Directors of a Corporate Agent
are not permitted to be the Director/s of Life
Insurance Company
Pros & Cons of FDI in Insurance Sector
FDI in Retail Sector
FDI up to 100% for cash and carry wholesale
trading and export trading
FDI up to 51 % with prior Government
approval for retail trade of „Single Brand‟
products
FDI is not permitted in Multi Brand Retailing
FDI in Retail Sector
Source: McKinsey & Company
Challenges
Skilled
Workers
Competition
Real Estate
Supply Chain
Management
Taxation
Policy
Inflation
Pros & Cons of FDI in Retail Sector
Pros:
Enables the Indians to spend the same money in India
Reduce the pressure from its trading partners in bilateral/
multilateral negotiations
Permitting foreign investment in food-based retailing is
likely to ensure adequate flow of capital into the country
Flourish in terms of quality standards and consumer
expectations
Cons:
Large-scale exit of domestic retailers
Threat for the growth of domestic retail sector
Lead to unemployment
Special Investment Avenues
Electronic Hardware and software
technology Parks
Export oriented units
Special Economic zones
Electronic Hardware And Software
Technology Parks
100% foreign investment under automatic route is
allowed in electronics and software industries set up
exclusively for exports
Eligible to purchase, free of customs duty/ excise duty,
their entire requirement of capital goods, raw materials
and components, spares and consumables, office
equipments etc.
Export Oriented Units
100% foreign equity (is permitted through Automatic
Route similar to SEZ units) in Export Oriented Units
(“EOUs”) even if it is manufacturing an item reserved for
the small scale sector
EOUs enjoy several privileges like duty exemption on
import and domestic procurement and also Income tax
exemption till 31.03. 2009
Project with minimum investment of Rs.10 million and
above in building, plant and machinery qualify to be
considered under EOU scheme
Not applicable in case of certain industries like agriculture,
floriculture, information technology, services, hand made
jewellery, etc.
Exemption of Industrial Licensing for manufacture of items
reserved for SSI sectors
Special Economic Zone
Special Economic Zone (“SEZ”) is deemed to be foreign
territory for the purposes of trade operations and
duties and tariffs
No cap on Foreign investment for manufacturing items
reserved for SSI as well as exemption from industrial
licensing
An SEZ unit can be set up to undertake trading
activities in addition to manufacturing of goods and
rendering of services
FDI Equity Inflow
Financial Year 2010 – 2011
(April – March)
Amount of FDI Inflows
(in Rs. Crore) (in US$ mn)
1 April 2010 9,854 2,214
2010 – 2011 (upto April 2010) 9,854 2,214
2009 – 2010 (upto April 2009) 11,708 2,339
%age growth over last year (-) 16% (-) 05 %
FDI Equity Inflows (Month – Wise)
during Financial Year 2010 – 2011:
Financial Year 2011 – 2012
(April – March)
Amount of FDI Inflows
(in Rs. Crore) (in US$ mn)
1 April 2011 13,846 3,121
2011 – 2012 (upto April 2011) 13,846 3,121
2010 – 2011 (upto April 2010) 9,697 2,179
%age growth over last year (+) 43 % (+) 43 %
FDI Equity Inflows (Month – Wise)
during Financial Year 2011 – 2012:
Attract Quality FDI
Attract Technology And Localize Production
The “Spillover” Illusion
Focus On Export-oriented FDI
Target Specific Sectors
Increase Ease Of Doing Business
Recommendations
Conclusion
India is continuously gaining its position as a preferred
investment destination. The trend line shows a positive
growth of inward FDI in India and even in the time of global
economic crises it was able to attract investment higher that
the previous years.
The service sector came up as the front runner in terms of
receiving FDI followed by telecommunication and electrical
equipments. The main reason behind the success of Service
sectors lies in the huge skilled labour pool having good
education and knowledge of English. Many MNC‟s are
setting up their BPO and KPO in India to utilize the skilled
labours to support their business activities.
Mauritius emerged as the highest investing country using FDI
route. The main reason is DTAA agreement as per this treaty
the capital gain arising in India from the sale of securities can
be taxed only in Mauritius. Since in Mauritius such gains are
not taxed this becomes tax free income. In case of other
countries they levied tax on such gains.
THANK YOU
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