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Presented by: 10003 - Abhishek Pore 10022 - Arpita Shah 10026 - Atman Shah 10030 - Chintan Anjaria 10132

- Richa Chugh 10159 - Suchi Jain 10170 - Varun Iyer

FDI POLICY OF INDIA: PROS & CONS

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 longterm 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.

Contd.
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.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments: Through financial collaborations

Through joint collaborations

ventures

and

technical

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

Forbidden Territories
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

The Entry Process


CCFI Route FIPB Route Automatic 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

Illustrative List Of Sectors Under Automatic Route For FDI upto 100%
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

The Entry Process: FIPB Route


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: CCFI 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 Strategy


Forms in which Business can be conducted
in India: Wholly owned subsidiary Joint Venture Company Branch Office Project Office India Presence: Liaison Office

Pros of FDI in India


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

Contd.
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

Cons of FDI in India


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

FDI in India SECTOR WISE

FDI in Service Sector


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

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 & Cons of FDI in Housing & Real Estate Sector


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

Contd.
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

FDI in Automobile Sector


FDI inflows in this sector has been at an increasing rate High performing sector, international players Prime destination for the

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

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 in Telecom Sector


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

Pros of 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

FDI in Power 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 .

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

FDI in Computer Software & Hardware Sector


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

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 1. Computer Software Industry 2. Computer Hardware 463.77 41,346.67

US $ in millions 9,325.99 8.80

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 RBIs Regions (With State Covered) Attracted FDI Inflows For Computer Software & Hardware
Rank RBIs Regional Office States Covered Amount of FDI inflows
Rupees in crores 1. Mumbai Maharashtra, Dadra & Nagar Haveli, Daman & Diu Karnataka 9,334.00 US $ in million 2,118.72 22.13

%age with FDI inflows in Computer Software & Hardware

2.

Bangalore

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 Andhra Pradesh

3,858.26

855.03

8.93

5.

Hyderabad

1,463.37

339.13

3.54

Total of above

24,148.60

5,447.15

56.89

FDI in Insurance Sector


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%

Pros & Cons of 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

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

Inflation

Competition

Taxation Policy

Real Estate

Supply Chain Management

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

FDI Equity Inflows (Month Wise) during Financial Year 2010 2011:
Financial Year 2010 2011 (April March) Amount of FDI Inflows (in Rs. Crore) (in US$ mn)

1 April 2010
2010 2011 (upto April 2010) 2009 2010 (upto April 2009) %age growth over last year

9,854
9,854 11,708 (-) 16%

2,214
2,214 2,339 (-) 05 %

FDI Equity Inflows (Month Wise) during Financial Year 2011 2012:
Financial Year 2011 2012 (April March)
1 April 2011 2011 2012 (upto April 2011)

Amount of FDI Inflows


(in Rs. Crore) 13,846 13,846 (in US$ mn) 3,121 3,121

2010 2011 (upto April 2010)


%age growth over last year

9,697
(+) 43 %

2,179
(+) 43 %

Recommendations
Attract Quality FDI Attract Technology And Localize Production The Spillover Illusion Focus On Export-oriented FDI Target Specific Sectors Increase Ease Of Doing Business

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 MNCs 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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