FDI in Multi Brand Retail Sector in

INDIA

• By • Sambit Patnaik• Biswajit Podder• Anil Dora • Aseet Choudhary• Nitish Nadar• Shashank Singh• Vivek Kumar Singh• Dilip Kumar Singh

FDI in Multi Brand Retail Sector in INDIA

By Sambit PatnaikBiswajit PodderAnil Dora Aseet ChoudharyNitish NadarShashank SinghVivek Kumar SinghDilip Kumar Singh

Introduction• What is FDI?

Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region.

What is FII?

• Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.

• Types of typical investors include banks, insurance companies, retirement, pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.

• Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company.

Difference b/w FDI and FII

FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation.

FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.

Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.

Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

Basic Facts• Mauritius has been the largest direct investor in India

(US$20billion)• The USA is the second largest investor in India (US$6billion)

and on the contrary US is the world’s largest recipient of FDI.• Mumbai and New Delhi are the two major cities where FDI

inflows is heavily concentrated. • FDI inflows in India for

Jan-Dec 2010 stood at $21.4 billion.Jan-Dec 2011 stood at $28.0 billion. Jan-June 2012 stood at $4.43 billions

What does 51% FDI in multi-brand retail mean?• Minimum investment of $100 million.• 50% of the investment is to be in the backend infrastructure

development. • 30% of all raw material has to be procured from India’s small

and medium industries• Permission to set up malls only in cities with a minimum

population of 10lakhs • Government has the first right to procure material from the

farmers. • Products should be sold under the same brand internationally• Foreign investor should be the owner of the brand.

Advantages of FDI• Direct Benefits to Farmers• Reduction in food Inflation• Earning of FOREX• Huge Employment Benefits• Drop in Food Wastage• Better Consumer Choice

Advantages to FDI cntd..• Benefits to Small Grocery Stores• Creation of Backend Infrastructure• More purchase from SME• Overall Growth

Disadvantages of FDI (Nitish) pending

Impact of FDI on India• To increase Job Opportunities.• To Strengthen Infrastructure of Country.• To Impact on Farmers and Consumers.• To Impact Local Retailers.• To Impact Country Growth

Inflow of FDI Patterns (DILIP) pending

The Sectors Where FDI is Allowed in India• MULTI-BRAND : 51%• SINGLE BRAND : 100%• BANKING : 49%• NON BANKING FINANCIAL

COMPANIES : 100%• INSURANCA : 26%• TELECOMMUNICATION : 49% &

74%• PRIVATE PETROL REFINING :

100%• CONSTRUCTION DEVELOPMENT :

100%• TRADING : 51%• ELECTRICITY : 100%• PHARMACEUTICALS : 100%

• TRANSPORTATION INFRASTRUCTURE : 100%

• TOURISM : 100%• ADVERTISEMENT : 100%• AIRPORT : 74%• DOMESTIC AIRLINES : 49%• MASS TRANSIT : 100%• POLLUTION CONTROL : 100%• PRINT MEDIA : 26% FOR

NEWSPAPER AND CURRENT EVENTS, 100% FOR SCIENTIFIC AND TECHNICAL PERIODICALS

The Sectors where FDI is Not Allowed• ARMS & AMMUNATIONS• ATOMIC ENERGY• RAIL TRANSPORT• MINING OF METAL LIKE IRON, MANGANESE, CHROME, GYPSUM,

GOLD, DIAMONDS, COPPER ZINC, SULPHUR• COAL & MINING• LOTTERY BUSINESS INCLUDING GOVT./PRIVATE LOTTERY,

ONLINE LOTTERY, ETC• GAMBLING & BETTING INCLUDING CASINO• BUSINESS OF CHIT FUND• MANUFACTURING OF CIGARS, CIGARATTES OF TOBACCO OR

TOBACCO SUBSTITUTE

History of FDI in ChinaExperiment Stage (1978 -1983)• 1979 - Equity Joint Venture Law• 1981 - four Special Economic Zones (SEZs): Shen Zhen, Shan Tou, Zhu Hai and Xia Men established

Growth Stage (1984 – 1991)•1984 - Fourteen coastal cities opened to the outside world•1986 - Wholly Owned Subsidiaries (WOS) Law•1987 - Hainan, China’s second largest island, became the biggest SEZ

Peak Stage (1992 – 1993)• 1992 - Adoption of Trade Union Law• 1993 - Company Law and Provisions regulating value-added tax,

consumption tax, business tax andenterprise income tax

Adjustment Stage (1994 – 2000)• 1995 - Provisional Guidelines for Foreign Investment Projects

enacted• 4 categories - encouraged, restricted, prohibited and permitted

History of FDI in China

• Encouraged - infrastructure or underdeveloped agriculture and with advanced technology or manufacturing under-supplied new equipment

• Restricted - Projects whose production exceeded domestic demand and which required exploration of rare and valuable resources

• Prohibited - projects involving national security or public interest or arable land

• Permitted – Any project not coming in above categories

History of FDI in China

Post-WTO Stage (2001 – present)• 2001 - China became an official member of the World Trade

Organization (WTO)• China has gradually reduced its industrial tariffs in a wide range of

sectors and areas• Foreign firms were granted direct trading rights for the first time in

the history

History of FDI in China

History of FDI in India• 1947 to 1948 - British owned private foreign capital, Swadeshi

movement & Industrial policy resolution

• 1949 to 1953 - Domestic business houses and the nationalist sentiments in government policies kept foreign investment away

• 1957 - Second Economic Plan: “Industrialization though import substitution” encouraged private investment

• 1960s - Selective industries got foreign collaboration and JV mostly in manufacturing with Indian participation retained

• After 1960s -Devaluation of Rupee encouraged socialist idealism in banks and foreign oil majors were nationalized

History of FDI in India

• 1968 - Establishment of Foreign Investment Board –encouraging investments on own terms and conditions

• 1973 - Foreign Exchange Regulation Act (FERA) new clause introduced, All foreign firms were made to dilute their stake to 40 %,Exit of IBM, Coca Cola

• 1980s - Restrictive licensing procedures softened, technology transfer and royalty payments relaxed, wherever possible foreign investment was encouraged

History of FDI in India

• 1990s - Rupee devalued, NRI money withdrew, India turned to IMF, Trade regime and regulatory frame work was liberalized, FDI invited in wide range of industry, limit was increased from 51% to 100% in some cases, service sector reopened for FDI, FIIs also encouraged

• After 1995 - Political instability but perception towards FDI changed, changing government kept focus on FDI

FDI: India v/s China• In the year 2002 China received US$ 52.7 billion of FDI inflows

while India received US$ 4.67 billion of FDI inflows in the same year

• In 2010, India attracted FDI worth US$ 25 billion

• In the same year China secured FDI inflows worth US$ 106 billion.

FDI: India v/s China• FDI Inflows only contributes to 0.8 percent of India's GDP as

compared to 3.5 percent of the same in China

• India's high-tech industries claim for 2.3 percent of Gross Domestic Product whereas the high-tech industries in China contributes to around 7.9 percent in the GDP of the country

FDI: India v/s ChinaThe majority of the foreign investors preferChina over India for investment opportunities as • China has a bigger market size than India• Offers easy accessibility to export market • Better government incentives• Developed infrastructure• Cost-effectiveness• macro-economic climate

FDI: India v/s China

India on the other hand has • Skilled and efficient manpower• Talented management system• Rule of law• Transparent system of work• Cultural affinity • Regulatory environment

Conclusion(Anil) Pending