project onforeign direct investment

8/8/2019 Project Onforeign Direct Investment

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PROJECT

ON

FOREIN DIRECT INVESTMENT

SUBMITTED TO

SAKET COLLEGE OF MANAGEMENT

SAKET VIDYANAGRI MARG,

CHINCHPADA RD., KATEMANIVALI

KALYAN (EAST)

GUIDED BY PREPARED BY

PROF. SWANAND D. SAPNA NALAVADE

POONAM MANDHARE

VIVEKANAND THOKAL

YOGESH DUBEY

AMIT VARMA


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About FDI

Enhanced international response and powerful sectoral productivity ratios

in India are incessantly drawing the attention of the global investors in

India. Other aspects being characterized to the resumption in foreign direct

investment (FDI) recently entail growing client assurance in the market.

Investment in production in one country by firms based abroad. FDI forms

a major part of investment in most industrial and some developing

countries. Some FDI is intended to utilize local natural resources.

Sometimes it is to employ relatively cheap labour, and sometimes to

produce goods near to markets, particularly if trade barriers hinder exports.

FDI may involve additions to a country's capital, but is sometimes locallyfinanced, so that what is imported is techniques and management skills.

FDI is often criticized in both home and host countries. In home countries

trades unions criticize FDI as exporting jobs; in host countries there are

complaints that it is hard for local firms to compete with the know-how

and financial resources of multinational companies. In both home and host

countries the point is made that their multinational location improves the

bargaining power of businesses in dealing with both government and

trades unions.


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What is FDI

Foreign direct investment (FDI) occurs when an investor based in one

country (the home country) acquires an asset in another country ( the host

country).

OR

FDI or Foreign Direct Investment is any form of investment that earns

interest in enterprises which function outside of the domestic territory of

the investor.

FDIs require a business relationship between a parent company and its

foreign subsidiary. Foreign direct business relationships give rise to

multinational corporations. For an investment to be regarded as an FDI,

the parent firm needs to have at least 10% of the ordinary shares of its

foreign affiliates. The investing firm may also qualify for an FDI if it owns

voting power in a business enterprise operating in a foreign country.


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Investment in India - Investing in India - Venturing

into the Indian Market

Investment in Indian market

India, among the European investors, is believed to be a good investment

despite political uncertainty, bureaucratic hassles, shortages of power and

infrastructural deficiencies. India presents a vast potential for overseas

investment and is actively encouraging the entrance of foreign players into

the market. No company, of any size, aspiring to be a global player can,

for long ignore this country which is expected to become one of the top

three emerging economies.

Success in India

Success in India will depend on the correct estimation of the country's

potential, underestimation of its complexity or overestimation of its

possibilities can lead to failure. While calculating, due consideration

should be given to the factor of the inherent difficulties and uncertainties

of functioning in the Indian system.Entering India's marketplace requires a

well-designed plan backed by serious thought and careful research. For

those who take the time and look to India as an opportunity for long-term

growth, not short-term profit- the trip will be well worth the effort.

Market potential

India is the fifth largest economy in the world (ranking above France,

Italy, the United Kingdom, and Russia) and has the third largest GDP in

the entire continent of Asia. It is also the second largest among emerging

nations. (These indicators are based on purchasing power parity.) India is


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also one of the few markets in the world which offers high prospects for

growth and earning potential in practically all areas of business.Yet,

despite the practically unlimited possibilities in India for overseas

businesses, the world's most populous democracy has, until fairly recently,

failed to get the kind of enthusiastic attention generated by other emerging

economies such as China.

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India

developed a highly protected, semi-socialist autarkic economy. Structural

and bureaucratic impediments were vigorously fostered, along with a

distrust of foreign business. Even as today the climate in India has seen a

seachange, smashing barriers and actively seeking foreign investment,

many companies still see it as a difficult market. India is rightfully quoted

to be an incomparable country and is both frustrating and challenging at

the same time. Foreign investors should be prepared to take India as it is

with all of its difficulties, contradictions and challenges.

Developing a basic understanding or potential of the Indian market,

envisaging and developing a Market Entry Strategy and implementing

these strategies when actually entering the market are three basic steps

to make a successful entry into India.

Developing a basic understanding or potential of the Indian market

The Indian middle class is large and growing; wages are low; many

workers are well educated and speak English; investors are optimistic and


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local stocks are up; despite political turmoil, the country presses on with

economic reforms.But there is still cause for worries-

Infrastructural hassles.

The rapid economic growth of the last few years has put heavy stress on

India's infrastructural facilities. The projections of further expansion in key

areas could snap the already strained lines of transportation unless massive

programs of expansion and modernization are put in place. Problems

include power demand shortfall, port traffic capacity mismatch, poor road

conditions (only half of the country's roads are surfaced), low telephone

penetration (1.4% of population).

Indian Bureaucracy.

Although the Indian government is well aware of the need for reform and

is pushing ahead in this area, business still has to deal with an inefficient

and sometimes still slow-moving bureaucracy.

Diverse Market .

The Indian market is widely diverse. The country has 17 official

languages, 6 major religions, and ethnic diversity as wide as all of Europe.

Thus, tastes and preferences differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian

market and overall economy before taking the plunge. Research firms in

India can provide the information to determine how, when and where to

enter the market. There are also companies which can guide the foreign

firm through the entry process from beginning to end --performing the

requisite research, assisting with configuration of the project, helping


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develop Indian partners and financing, finding the land or ready premises,

and pushing through the paperwork required.

Developing up-front takes:

Market Study

Is there a need for the products/services/technology? What is the probable

market for the product/service? Where is the market located? Which mix

of products and services will find the most acceptability and be the most

likely to generate sales? What distribution and sales channels are

available? What costs will be involved? Who is the competi

Check on Economic Policies

The general economic direction in India is toward liberalization and

globalization. But the process is slow. Before jumping into the market, it is

necessary to discover whether government policies exist relating to the

particular area of business and if there are political concerns which should

be taken into account.


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Foreign Direct Investment (FDI) is permited as

under the following forms of investments.

y Through financial collaborations.y Through joint ventures and technical collaborations.y Through capital markets via Euro issues.y Through private placements or preferential allotments.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

y Arms and ammunition.y Atomic Energy.y Railway Transport.y Gambling & Bettingy Agriculture & Plantation (other than Tea plantation)y Coal and lignite.y Housing & Real Estatey Mining of iron, manganese, chrome, gypsum, sulphur, gold,

diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct

Investment

Indian companies are allowed to raise equity capital in the international

market through the issue of Global Depository Receipt (GDRs). GDRs are

designated in dollars and are not subject to any ceilings on investment. An

applicant company seeking Government's approval in this regard should


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have consistent track record for good performance (financial or otherwise)

for a minimum period of 3 years. This condition would be relaxed for

infrastructure projects such as power generation, telecommunication,

petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a

company or a group of companies in the financial year . A company

engaged in the manufacture of items covered under Annex-III of the New

Industrial Policy whose direct foreign investment after a proposed Euro

issue is likely to exceed 51% or which is implementing a project not

contained in Annex-III, would need to obtain prior FIPB clearance before

seeking final approval from Ministry of Finance.

Use of GDRs

The proceeds of the GDRs can be used for financing capital goods

imports, capital expenditure including domestic purchase/installation of

plant, equipment and building and investment in software development,

prepayment or scheduled repayment of earlier external borrowings, and

equity investment in JV/WOSs in India.

Restrictions

However, investment in stock markets and real estate will not be

permitted. Companies may retain the proceeds abroad or may remit funds

into India in anticiption of the use of funds for approved end uses. Any

investment from a foreign firm into India requires the prior approval of the

Government of India.


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Investment in India - Foreign Direct Investment - Approval

Foreign direct investments in India are approved through two routes:

Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of

two weeks (provided certain parameters are met) to all proposals

involving:

y foreign equity up to 50% in 3 categories relating to mining activities(List 2).

y foreign equity up to 51% in 48 specified industries (List 3).y foreign equity up to 74% in 9 categories (List 4).y where List 4 includes items also listed in List 3, 74% participation

shall apply.

The lists are comprehensive and cover most industries of interest to

foreign companies. Investments in high-priority industries or for trading

companies primarily engaged in exporting are given almost automatic

approval by the RBI.

Opening an office in India

Opening an office in India for the aforesaid incorporates assessing the

commercial opportunity for self, planning business, obtaining legal,

financial, official, environmental, and tax advice as needed, choosing legal

and capital structure, selecting a location, obtaining personnel, developing

a product marketing strategy and more.


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The FIPB Route:

Processing of non-automatic approval cases

FIPB stands for Foreign Investment Promotion Board which approves all

other cases where the parameters of automatic approval are not met.

Normal processing time is 4 to 6 weeks. Its approach is liberal for all

sectors and all types of proposals, and rejections are few. It is not

necessary for foreign investors to have a local partner, even when the

foreign investor wishes to hold less than the entire equity of the company.

The portion of the equity not proposed to be held by the foreign investor

can be offered to the public.

Setting up of froreign Investment Promotion Board

(FIPB)

The Indian government has set up Foreign Investment Promotion Board

(FIPB). FIPB is the only agency in the country that deals with foreign

direct investments and investments into India.

The main objective of Foreign Investment Promotion Board (FIPB) is to

encourage foreign direct investment into the country by taking up

activities that promote investment. The chairman of Foreign Investment

Promotion Board (FIPB) is the Secretary Industry of the Department of

Industrial Promotion and Policy, government of India.


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Functions of Foreign Investment Promotion Board

(FIPB):

y To quickly approve the foreign investment proposals.y To review the foreign direct investment polices and to communicate

with other agencies such as the Administrative Ministries in order to

set up guidelines that are transparent and which encourage FDI into

the various sectors of the country.

y To look over the implementation of the various proposals that have

been approved by it.y To take up such activities that encourage FDI into the country such

as establishing contact with international companies and also

inviting them to invest in India.

y To communicate with government, non- government, and IndustryBodies in order to increase the flow of foreign direct investment into

the country.

y To communicate with the Foreign Investment Promotion Councilthat has been set up in the Industry Ministry.

y To identify the various sectors that require foreign direct investment.y To take up all other activities that help in increasing the flow of

foreign direct investment into the country.


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Cabinet Committee Of Foreign Investment (CCFI)

Investment proposals falling outsidethe automatic route and having a

project cost of Rs. t6,000 million or more would require prior approval of

Cabinet Committee of Foreign Investment (CCFI).

.Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings

have to be made by the Indian company with the RBI.

Investment proposals falling within the automaticroute and having a

project cost of Rs. 6,000 million or more do not require to be approved by

CCFI.

Total foreign investment and FDI

Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion

in 1997-98, compared to dols 6 billion in 1996-97. Foreign Direct

Investment (FDI) in 1997-98 was an estimated dols 3.1 billion, up from

dols 2.7 billion in1996-97. The government is likely to double FDI inflows

within two years. Foreign portfolio investment by foreign institutional

investors was significantly lower at dols 752 million for fiscal 1997-98,

down compared to dols 1.9 billion in1996-97, partly reflecting the effect of

the recent crisis in Asia.

Foreign institutional investors

Foreign institutional investors (FIIs) were net sellers from November 1997

through January 1998. The outflow, prompted by the economic and

currency crisis in Asia and some volatility in the Indian rupee, was modest


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compared to the roughly dols 9 billion which has been invested in India by

FIIs since 1992.

FII investments

FII net investment declined to dols 1.5 billion for IFY 1997-98, compared

to dols 2.2 billion in 1996-97. The trend reversed itself in February and

March 1998, reflecting the renewed stability of the rupee and relatively

attractive valuations on Indian stock markets.

Large outflows of capital

Large outflows began again in May 1998, following India's nuclear tests

and volatility in the rupee/dollar exchange rate. In an effort to avoid

further heavy outflows, the RBI announced in June that FIIs would be

allowed to hedge their incremental investments in Indian markets after

June11, 1998.

FDI In India Across Different Sectors

Hotel & Tourism

Hotels include restaurants, beach resorts and business ventures providing

accommodation and food facilities to tourist. Tourism would include travel

agencies, tour operators, transport facilities, leisure, entertainment,

amusement, sports and health units.

100 per cent FDI is permitted for this sector through the automatic

route.


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Trading

For trading companies 100 per cent FDI is allowed for

y Exportsy Bulk Importsy Cash and Carry wholesale trading.

Power

For business activities in power sector like electricity generation,

transmission and distribution other than atomic plants the FDI allowed is

up to 100 per cent.

Drugs & Pharmaceuticals

For the production of drugs and pharmaceutical a FDI of 100 per cent is

allowed, subject to the fact that the venture does not attract compulsory

licensing, does not involve use of recombinant DNA technology.

Private Banking

FDI of 49 per cent is allowed in the Banking sector through the automatic

route provided the investment adheres to guidelines issued by RBI.

Insurance Sector

For the Insurance sector FDI allowed is 26 per cent through the automatic

route on condition of getting license from Insurance Regulatory and

Development Authority (IRDA).

Telecommunication

y For basic, cellular, value added services and mobile personalcommunications by satellite, FDI is 49 per cent.


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y For ISPs with gateways, radio-paging and end to end bandwidth,FDI is allowed up to 74 per cent. But any FDI above 49 per cent

would require government approval.

Business Processing Outsourcing

FDI of 100 per cent is permitted provided such investments satisfy certain

prerequisites.

NRI's And OCB's

They can have direct investment in industry, trade and infrastructure

Up to 100 per cent equity is allowed in the following sectors

y 34 High Priority Industry Groupsy Export Trading Companiesy Hotels and Tourism-related Projectsy Hospitals, Diagnostic Centersy Shippingy Deep Sea Fishingy Oil Explorationy Powery Housing and Real Estate Developmenty Highways, Bridges and Portsy Sick Industrial Unitsy Industries Requiring Compulsory Licensingy Industries Reserved for Small Scale Sector


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Sector wise Regulation in Foreign Investment

i) Automatic route for specified activities subject to Sectoral cap and

conditions.

Sectors Cap

Airports

y Existingy Greenfie

74%

100%

Air Transport Services

y Non Resident Indiansy Other

100%

49%

Alcohol distillation and brewing 100%

Banking (Private Sector) 74%

Coal and Lignite mining (specified) 100%

Coffee, Rubber processing and warehousing 100%

Construction and Development (Specified

projects)

100%

Floriculture, Horticulture and Animal Husbandry 100%

Specified Hazardous chemicals 100%

Industrial Explosives Manufacturing 100%

Insurance 26%

Mining (Precious metals, Diamonds and stones) 100%

Non banking finance companies ( conditional) 100%

Petroleum and Natural gas

yRefining (private companies)

y Other areas100%

100%

Power generation, transmission, distribution 100%

Trading

y Wholesale cash and carry100%

100%


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y Trading of ExportsSEZs and Free Trade

Warehousing Zones

100%

Telecommunication

y Basic and cellular servicesy ISP with gateways, radio paging, end-end

bandwith (Above 49 % required Govt.

Approval.)

49%

74%

Prior Approval from FIPB where investment is above Sectoral caps

for activities listed below.

Sectors Cap

New Investment by a foreign investor in a field in which the investor

already has an existing joint venture or collaboration with another

Indian partner

New investment sought to be made in manufacture of items reserved

for Small Scale Industries Existing Airports 74% to 100%

Asset reconstruction companies 49%

Atomic Minerals 74%

y Broadcastingo FM Radioo Cable networko Direct-To-Home (DTH)o

Setting up hardware facilitieso Uplinking news and current affairso Uplinking non-news, current affairs

TV channel

20%

49%

49%

49%26%

100%

y Cigarette manufacturing 100 %


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y Courier services other than those under theambit of Indian Post Office Act, 1898

100 %

y Defense production 26 %y Investment companies in infrastructure /

service sector (except telecom)49 %

y Petroleum and natural gas refining (PSU) 26 %y Tea Sector including Tea plantation 100 %y Trading items sourced from Small scale

sector

100 %

y Test marketing for equipment for whichcompany has approval for manufacture

100 %

y Single brand retailing 51 %y Satellite establishment and operations 74 %y Print Media

o Newspapers and periodicals dealingwith news and current affairs

o Publishing of scientific magazines /specialty journals periodicals

26 %

100 %

y Telecommunicationo Basic and unified access serviceso ISP with gateways, radio paging, end

to end bandwidth

o ISP with gateway (specified)

49 % to 74 %

49 % to 74 %

49 % to 100 %


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Benefits of Foreign Direct Investment-

Attracting foreign direct investment has become an integral part of the economic development strategies

for India. FDI ensures a huge amount of domestic capital, production level, and employment

opportunities in the developing countries, which is a major step towards the economic growth of the

country. FDI has been a booming factor that has bolstered the economic life of India, but on the other

hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few

regulatory standards in terms of investment patterns. The effects of FDI are by and large

transformative. The incorporation of a range of well-composed and relevant policies will boost up the

profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by

India have been listed as under:

Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct

investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life

of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of

goods and services in India both in terms of import and export production. Products of superior quality

are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding

the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of

knowledge from India especially in the Information Technology sector. It helps in developing the know-

how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the

Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits

gained by the foreign firms through these joint ventures is spent on the Indian market.

project onforeign direct investment

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