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					Foreign Direct Investment in India

Phases of Indian Economy 1947-1980
• Command and Control Economy
– Allocation of resources by the Government (budgetary grants) – Government took active part in setting priorities for the economy – Self-Reliance was the buzz word – Nationalisation of Banks – Limited scope for private participation
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Phases of Indian Economy 1991-2000
• Liberalization and Globalization of Indian Economy
– Increased emphasis on private sector participation – Limited extent of FDI participation – Gradual improvement in the enabling environment

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Phases of Indian Economy post 2000
• Political Coalitions have started providing stable governments • Government to get out of owning and managing businesses: Disinvestment Policy • Gradual relaxation in the FDI Policy

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Progressive Liberalisation
Pre-1991 1991 FDI was allowed selectively up to 40% under FERA This period was dominated by the Congress party 35 high priority industry groups were placed on the Automatic Route for FDI up to 51% Minority Congress government: Initiated economic reforms in a big way Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/ 51%/50% United Front Government: Inclusive of ‘left parties’, was perceived as traditionally opposed to FDI, but continued with the reforms. All sectors placed on the Automatic Route for FDI except for a small negative list BJP coalition government:(coalition of Left and Right wing parties) was traditionally seen as opposed to FDI, but continued with economic reforms. Many new sectors opened to FDI; viz., insurance (26%), integrated townships (100%), mass rapid transit systems (100%), defence industry (26%), tea plantations (100%), print media (26%). Sectoral caps in many other sectors relaxed; BJP coalition government: pursued reforms vigorously and initiated second generation reforms. Luthra & Luthra Law Offices 5

1997

2000

Post 2000

Consensus on Economic Liberalisation
• Change in perception
– Indian Business Houses – Government – Legal Framework: shift from a Positive List to a Negative List (FERA  FEMA)

• Gradually all sectors moving to „Choice‟ and „Competition‟ (Multiple Player Model)

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Current economic situation in india

Present Picture
• India: Fourth largest economy in terms of Purchasing Power Parity • Tenth most industrialized economy • GDP growth rate of 8.1% - Second highest in the world. • Considerable improvement in FDI inflows • FII inflows:
– For the period, July 2003 – Jan 2004 FII inflow has exceeded USD 7 bn, which is more than the cumulative FII inflow in the last five years.

• Still a big gap between India and China
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Foreign Direct Investment
Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating in the host economy of the investor.“ The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. 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.
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Foreign Direct Investment
The IMF definition of FDI includes as many as twelve different elements, namely: equity capital, reinvested earnings of foreign companies, inter-company debt transactions, short-term and long-term loans, financial leasing, trade credits, grants, bonds, non-cash acquisition of equity, investment made by foreign venture capital investors, earnings data of indirectly held FDI enterprises and control premium, non-competition fee, and so on.
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Foreign Direct Investment
FDI definition in India is restricted mainly to hard cash unlike other countries which include noncash such as technology and machinery in the FDI flows. It also excludes; -reinvested earnings -subordinated debt -overseas commercial borrowings which are included in other country statistics.
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Entry Process & Entry Strategies

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The Industrial Policy
Industrial Licensing
• All Industrial undertakings exempt from obtaining an industrial license to manufacture, except for:
– Industries reserved for the Public Sector – Industries retained under compulsory licensing – Items of manufacture reserved for the Small Scale Sector – If the proposal attracts locational restriction

• Industrial Entrepreneur Memorandum
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The Industrial Policy
• Industries reserved for the Public Sector: (1) Atomic Energy and (2) Railway Transport • Compulsory licensing needed in the following industries:
– – – – Distillation and brewing of alcoholic drinks Cigars and cigarettes and manufactured tobacco substitutes Electronic aerospace and defence equipment of all types Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches – Certain hazardous chemicals
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The Industrial Policy
Locational Policy
• Industrial undertakings are free to select the location • Location to be 25 km away from any city with a million strong population – Exceptions:
• When located in an area designated as an “Industrial Area” before the 25th July, 1991. • Electronics, Computer Software and Printing (and any other industry which may be notified in future as „non polluting industry‟).
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The Industrial Policy
Small Scale Industries
• Suitable for Foreign Investment?
– Cap on Investment in fixed assets (plant and machinery) is Rs. 10 million (approx. SGD 3,70,000)

– Not more than 24 per cent of total equity can be held by any industrial undertaking either foreign or domestic – Upon such equity exceeding 24% the SSI status is lost. Carry-on-Business (COB) Licence required.

• Various items reserved exclusively for SSIs.

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The Entry Process
Investing in India

Automatic Route
General rule •Inform RBI within 30 days of inflow/issue of shares • Pricing: FEMA Regulations •Unlisted – CCI (Comp Comm of India) •Listed – SEBI • Cap of Rs. 600 Crore

Prior Permission
By exception Approval of Foreign Investment Promotion Board needed. Decision generally within 4-6 weeks

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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 Licence. – 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.

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The Entry Process: Government Approval

Foreign Investment Promotion Board (FIPB) Approval
• For all activities, which are not covered under the Automatic Route • Composite approvals involving foreign investment/ foreign technical collaboration • Published Transparent Guidelines vs. Earlier Case by Case Approach • Downstream Investment
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Acquisition of shares in a Listed Company
Takeover Code
• Acquisition of more than specified equity stakes would entail public offer • Pricing: Average of 26 weeks or 2 weeks, whichever is higher • No takeover of management before completion of Takeover Code formalities

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Foreign Technology Collaboration
• Foreign technology collaborations are permitted either through the automatic route or by the Government.
Policy for Automatic Approval
• To all industries for foreign technology collaboration agreements, irrespective of the extent of foreign equity in the shareholding, subject to:
– The lump sum payments not exceeding US $ 2 Million;

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Foreign Technology Collaboration
Policy for Automatic approval (contd.)
– Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, subject to a total payment of 8 per cent on sales – No restriction on the duration of the royalty payments – The aforesaid royalty limits are net of taxes and are calculated according to standard conditions.

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Foreign Technology Collaboration
Policy for Automatic approval (contd.)
– Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. – Registration of FC Agreement with RBI.

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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
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Exit Issues
• Transfer of shares from non-resident to non-resident does not require RBI approval for pricing • Transfer of shares from non-resident to resident does not require any FIPB Approval, though RBI approval is required for pricing
– Pricing as per FEMA – listed and unlisted securities – RBI permission not required if sale through Stock Exchange

• Mauritius Route: Capital Gain Advantage

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Legal Structures facilitating FDI

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Facilitating FDI in India
Emergence of Independent Regulators: Electricity, Telecom, Insurance, Capital Market and Competition Law
• Ensuring level playing field vis-à-vis Government Corporations and inter se private players • Expertise in the subject matter involved • Expeditious resolution of dispute
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Facilitating FDI in India
Emergence of Independent Regulators (Contd.) • Regulators under consideration: Petroleum, Railways, Information and Broadcasting • Regulator to curb Anti-Competitive Practices • Government Directives

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Facilitating FDI in India
Labour laws – a more contractual approach.
• Move towards: hire and fire
• Progressive use of discretionary executive powers
– – – – Permissions granted for closure of unviable units Inspections only upon workers‟ grievances Voluntary Retirement Schemes EPZs, SEZs etc may be exempted from application of certain labour laws – Amendment to Industrial Disputes Act under consideration – Amendment to Contract Labour (Regulation & Abolition) Act, 1970 under consideration.

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Investment Incentives

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Incentives for investment in Telecom Sector
Permission for Inter-Circle & Intra-Circle Mergers • Exemplary growth in teledensity, subscriber base etc. • Companies commencing operations before 31st March, 2004, would enjoy tax benefits:
– 100% deduction for first five years – 30% deduction for next five years

• Exemption from tax on interest income and long term capital gains in certain cases • Import duty rates have been reduced for various telecom equipment
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Investment Incentive for IT Industry
• Software companies have a ten year tax holiday on their export income • In 1998 the Government set up a new Ministry of Information Technology • The Information Technology Act, 2000 was passed to tackle cyber crimes and facilitate ecommerce

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Incentives for Investment in Power Sector
• New Legal Regime: Electricity Act, 2003 • The Act provides for: Multiple Buyer Model, Independent Regulatory Body, Open Access, Power Trading as an independent business, delicensing of generation • 100% FDI Automatic Route in:
– Hydro-electric power plants; – Coal/lignite based thermal power plants; – Oil/gas based thermal power plants.
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Incentives for Investment in Power Sector
• Other investment incentives:
– New Power Projects eligible for 100% tax holiday in any block of ten years, within first fifteen years of operation. – The Deadline for income tax exemption for new power projects extended from 2006 to 2012. – Various indirect tax incentives:
• Concessional rate of import duties • Special project import scheme • Deemed export benefit for certain categories of power projects.
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Reforms in Financial Sector
• FIIs allowed in Capital Market, can invest both in Debt and Equity • FDI cap in private sector banks raised to 74%
– 10% cap on voting rights

• The Mutual Fund market is also open now to foreign players. • Equity issue pricing is market determined
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FDI in Real Estate: Policy & Issues
• Press Note 4 (2002 Series)
– 100% FDI under Automatic Route PERMITTED FOR Integrated Townships, subject to following conditions:
• Foreign company to be registered as Indian company under Companies Act, 1956 • Core Business - Integrated Township Development with a successful track record. • Minimum area of development: 100 acres as per local bylaws/rules. In absence of such by laws/rules, minimum of 2000 dwelling houses for about 10,000 population to be developed by the investor.
• Conditions post acceptance of FDI proposal

• • • •

Minimum capitalization norms Upfront payment Minimum lock-in period Time bound completion of project

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FDI in Hotel and Tourism:Policy and Issues
• 100% FDI under Automatic Route • “Hotel” includes Restaurant, beach resorts and other tourist complexes providing accommodation and/or Catering • “Tourism related industries” includes travel agencies, tour operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists; surface, air and water transport facilities to tourists; leisure, entertainment, amusement, sports and health units for tourists and Convention/ Seminar units and organizations. • Automatic approval for Technical, Consultancy, Marketing, Publicity, Managerial services subject to specified limits.
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Conclusion
• Economics occupies centre stage in various elections • Rising expectations; rising prosperity • Legal regime: more stable and predictable • Bureaucracy: changing with the times • The Future beckons

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FDI IN INDIA: FACTS AND FIGURES

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FDI IN INDIA: FACTS AND FIGURES

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FDI IN INDIA: FACTS AND FIGURES

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LOCATIONAL DETERMINANTS OF FDI
A firm becomes multinational mainly for three reasons. -Ownership advantages, -Location-specific advantages -Internalization. Large market size, proximity to home market, lowcost labor and favorable tax treatment in the host country are all considered as location advantages
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LOCATIONAL DETERMINANTS OF FDI
Location-specific advantages are further classified by three types of motives of FDI. First, market-seeking investment is undertaken to sustain existing markets or to exploit new markets. For example, due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting
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LOCATIONAL DETERMINANTS OF FDI
Second, when firms invest abroad to acquire resources not available in the home country, the investment is called resource- or asset-seeking.

Resources may be natural resources, raw materials, or low-cost inputs such as labor.

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LOCATIONAL DETERMINANTS OF FDI
Third, the investment is rationalized or efficiencyseeking when the firm can gain from the common governance of geographically dispersed activities in the presence of economies of scale and scope.

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The Model
FDI = f (MS, OE/FT, I, DMA, EE, IE) • • • • • • • Where FDI = Foreign direct Investment, MS = Size of domestic market, OE/FT = openness of the economy to foreign trade, I = Infrastructure of the host country, DMA = Domestic market Attractiveness, EE = External economic stability, IE = Internal economic stability.
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The Model
The economic theory suggests that a positive relationship between FDI and size of domestic market, openness of the economy to foreign trade, and infrastructure of the country.

While a negative relationship between FDI and External economic stability, internal economic stability.
The larger the market size, the more demand for the products or services to be provided by the FDI.
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Share of Five Top States Attracting FDI Approvals (January 1991 to March 2004)
No. of FDI Approvals Amount of FDI

Rank

Name of the State

Total

Technical

Financial

Rs. In Crores

US $ in Bill ion

% FDI Approv al

1
2 3 4 5

Maharashtra
Delhi Tamil Nadu Karnataka Gujarat

4,816
2,638 2,607 2,467 1,204

1,308
304 613 494 556

3,508
2,334 1,994 1,973 648

51,114.68 13.18 17.48
35,250.74 9.78 25,071.77 6.52 24,138.44 6.15 18,837.30 4.81 12.06 8.58 8.26 6.44
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Source: Economic Survey-2003-04
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LOCATIONAL DETERMINANTS OF FDI
Four states namely Karnataka, Maharashtra, Tamilnadu and Gujarat accounted for over one-third of total FDI approvals. The shares of these individual states were, respectively, 7.6%, 13.7%, 6.7% and 5.3%. The shares of other major states were considerably lower: West Bengal (3.7%), Andhra Pradesh (4.2%), Madhya Pradesh (4.5%) and Orissa (3.8 %). The shares of Kerala, Haryana, Punjab and Rajasthan were comparatively smaller whereas the flow of FDI into populous states such as Bihar and Uttar Pradesh has been virtually negligible.
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Conclusion As far as the economic interpretation of the model is concerned, the size of the domestic market is positively related to foreign direct investment.
The greater the market, the more customers and the more opportunities to invest. Since FDI is mostly in the form of physical investment, investors would prefer the markets with better infrastructure.
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