Foreign Direct Investment (FDI) Presented By : Ghanshyam Gupta

Definition Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin.

Definition (contd..) Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.

Types of FDI a) By direction : - i) Inward – when foreign capital is invested in local resources. - ii) Outward – sometimes called “direct investments abroad”, when local capital is invested in foreign resources.

Types of FDI (contd..) b) By target : - i) Greenfield investment - ii) Mergers and Acquisitions - iii) Horizontal FDI - iv) Vertical FDI - v) Backward Vertical FDI -vi) Forward Vertical FDI

Need for FDI in India  1. Improvement of economical infrastructure  2. Technological up gradation.  3. Exploitation of Natural Resources  4. Scope of Employment  5. Improvement of export competitiveness  6. Benefit to consumers

Phases of Indian Economy 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

Phases of Indian Economy Liberalization and Globalization of Indian Economy ◦ Increased emphasis on private sector participation ◦ Limited extent of FDI participation ◦ Gradual improvement in the enabling environment

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

Present Picture The World Bank has projected an 8 per cent growth for India in 2010, which will make it the fastest-growing economy for the first time, overtaking China’s expected 7.7 per cent growth. The India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world economy, according to the World Bank. Considerable improvement in FDI inflows FII inflows: ◦ For the period, April 09 – October 09 FII inflow has exceeded USD 17,000 million whereas it was 18,708 for the same period in the last FY.

The Entry Process Automatic RoutePrior Permission Investing in India 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 By exception Approval of Foreign Investment Promotion Board needed. Decision generally within 4-6 weeks

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.

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

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

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;

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.

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.

Sector Wise Limits of investments Banking - 74% Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100% Insurance - 26% Telecommunications - 74% Private petrol refining - 100% Construction development - 100% Coal & lignite - 74% Trading - 51% Electricity - 100% Pharmaceuticals - 100%

Continued…. Transportation infrastructure % Tourism - 100% Mining - 74% Advertising - 100% Airports - 74% Films - 100% Domestic airlines - 49% Mass transit - 100% Pollution control - 100% Print media - 26% for newspapers and current events, 100 % for scientific and technical periodicals

FDI in major sectors in India The major sectors of the Indian economy that have benefited from FDI in India are - Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and Information Technology.

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, gold, diamonds, copper, zinc. Gambling and Betting Lottery Business Atomic Energy Agriculture (with certain exceptions) and Plantations (Other than Tea plantations

Luthra & Luthra Law Offices22 FDI IN INDIA: FACTS AND FIGURES

Luthra & Luthra Law Offices23 FDI IN INDIA: FACTS AND FIGURES

Conclusion 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.

References References

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