02. FDI in India and Its Pros & Cons

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.

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