INTERNATIONAL

BUSINESS

INDIAN SCENARIO IN FDI

SUBMITTED TO
Dr. D. BHANU SREE REDDY .
ASSISTANT PROFESSOR.
VIT BS.
Submitted by:
S.Mahendran
07mba059
On: 7-8-2008

FDI in INDIA:
Compared to most industrializing economies, India followed a fairly restrictive foreign
private investment policy until 1991 – relying more on bilateral and multilateral loans with long
maturities. Inward foreign direct investment (FDI, or foreign investment, or foreign capital hereafter) was
perceived essentially as a means of acquiring industrial technology that was unavailable through licensing
agreements and capital goods import. Technology imports were preferred to financial and technical
Collaborations. Even for technology licensing agreements, there were restrictions on the rates of royalty
payment and technical fees.
However, the 1980s witnessed a gradual relaxation of the foreign investment rules perhaps
best symbolised by the setting up of Maruti, a central government joint venture small car project with
Japan’s Suzuki Motors in 1982. It was followed by Pepsi’s entry in the second half of the decade, to
primarily export processed food products from Punjab, and also to bottle its well known beverages for the
domestic market.
Reforms in FDI:
All this changed since 1991. Foreign investment is now seen as a source of scarce capital,
technology and managerial skills that were considered necessary in an open, competitive, world economy.
India sought to consciously ‘benchmark’ its policies against those of the rapidly growing south-east Asian
economies to attract a greater share of the world FDI inflows. Over the decade, India not only permitted
foreign investment in almost all sectors of the economy (barring agriculture, and, until recently, real
estate), but also allowed foreign portfolio investment – thus practically divorcing foreign investment from
the erstwhile technology acquisition effort. Further, laws were changed to provide foreign firms the same
standing as the domestic ones.
India's FDI outflow to exceed inflow in 2007-08:
As a confident India Inc has started bidding for more and bigger deals abroad, in 2007-08
overseas investment from India will be around $15 billion - surpassing foreign direct investment (FDI)
inflows in the country, says a study. As a confident India Inc has started bidding for more and bigger deals
abroad, in 2007-08 overseas investment from India will be around $15 billion - surpassing foreign direct
investment (FDI) inflows in the country, says a study. The bulk of outward FDI flow will be driven
mainly by India's booming manufacturing sector, said the 'Study on FDI Outflow and amp; Role of
Manufacturing in the Mergers and amp; Acquisitions Front, 2007', by the Associated Chambers of
Commerce and Industry (Assocham). Indian companies' preferred investment destinations are the
European countries and the US, as also Africa taking advantage of its cost competitiveness. Sectors such
as pharma and automobiles will give a major thrust to the FDI outflow, though IT will continue to
dominate the scene, said the report released Friday. 'Riding on strong balance sheets, good credit ratings
and confidence shown by global business community, Indian manufacturing is leading India Inc.'s global
quest,' said Venugopal Dhoot, president, Assocham.
 The main factors fuelling the growing hunger for mergers and acquisitions (M and amp;A)
among Indian companies are huge fund supply, globally competitive business practices and favourable
regulatory environment, besides higher margins, revenue, volumes and growth prospects. 'The number of
outbound M and amp;A deals has increased sharply over the past six years from about 37 in 2001 to more
than 170 in 2006. The transactions gathered tremendous momentum in 2005,' the report said. The total
number of deals actually doubled in 2005 from 2004 to reach a figure of close to 150 from 70 in previous
year. According to Assocham, the Indian conglomerates that are upbeat on inorganic growth are the Tata
group, Bharat Forge, Ranbaxy, ONGC, Infosys and Wipro. 'The sectors attracting investments by
Corporate India include a whole gamut of sectors - metal, pharmaceuticals, industrial goods, automotive
components, beverages, cosmetics and energy in manufacturing; and mobile communications, software
and financial services in services,' the report said. Talking about specific examples, the study noted: 'The
Apollo Group of Hospitals may strike cross border deals to expand its global footprint through strategic
partners with some of the local hospital chains overseas while pursuing mergers and acquisitions in the
US and Europe. 'Nicholas Piramal India Ltd plans to invest $50 million over a three-year period in its
plants in the UK. In the energy sector, India's Suzlon Energy Limited, the world's fifth largest wind
turbine manufacturer, has offered $1.3 billion for Germany's REpower.

Foreign Direct Investment in India is permitted as under the following forms of investments:
• Through financial collaborations.
• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
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.
Foreign direct investments in India are approved through two routes:
1. 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:
• Foreign equity up to 50% in 3 categories relating to mining activities.
• Foreign equity up to 51% in 48 specified industries.
 • Foreign equity up to 74% in 9 categories.
Investments in high-priority industries or for trading companies primarily engaged in exporting are given
almost automatic approval by the RBI.
FDI in India on automatic route is not allowed in the following sectors:
• Proposals that require an industrial licence and cases where foreign investment is more than 24%
in the equity capital of units manufacturing items reserved for the small scale industries.
• Proposals in which the foreign collaborator has a previous venture/tie-up in India.
• Proposals relating to acquisition of shares in an existing Indian company in favour of a
Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and
• Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not
permitted and/or whenever any investor chooses to make an application to the Foreign
Investment Promotion Board and not to avail of the automatic route.
2. FIPB Route: Foreign Investment Promotion Board (FIPB) is a competent body to consider and
recommend foreign direct investment, which do not come under the automatic route. Normal processing
time of an FDI proposal in FIPB is 4 to 6 weeks. FIPB is located in the Department of Economic Affairs,
Ministry of Finance. Its constitution is as follows:
• Secretary, Department of Economic Affairs (Chairman)
• Secretary, Department of Industrial Policy & Promotion (Member)
• Secretary, Department of Commerce (Member)
• Secretary, (Economic Relation), Ministry of External Affairs (Member)
FIPB can co-opt Secretaries to the Govt. of India and other top officials of financial institutions, banks
and professional experts of industry and commerce, as and when necessary.

Foreign Investment Implementation Authority (FIIA):

Government has set up Foreign Investment Implementation Authority (FIIA) to facilitate
quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-
active one stop after care service to foreign investors, help them obtain necessary approvals and by
sorting their operational problems. FIIA is assisted by Fast Track Committee (FTC), which have been
established in 30 Ministries/Departments of Government of India for monitoring and resolution of
difficulties for sector specific projects.

Country Sources of FDI

Among countries, Mauritius has been the largest direct investor in India. Firms based in
Mauritius invested over US$20 billion in India between August 1991 and July 2007 or over two-fifth of
total FDI inflows during that period (Table 2). However, this data is rather misleading. Mauritius has low
rates of taxation and an agreement with India on double tax avoidance regime. To take advantage of that
situation, many companies have set up dummy companies in Mauritius before investing to India. Also, a
major part of the investments from Mauritius to India are actually round-tripping by Indian firms, not
unlike that between Mainland China and Hong Kong.
The United States (US) is the second largest investor in India. The total capital flows from the US
was around US$6. billion between August 1991 and July 2007, which accounted for 12 percent of the FDI
inflows. Most of the US investments were directed to the fuels, telecom, electrical equipment, food
processing, and services sectors. The United Kingdom (UK) and the Netherlands are India’s third and
fourth largest FDI inflows. The investments from these countries to India are primarily concentrated in
the power/energy, telecom, and transportation sectors. Japan was the fourth largest source of cumulative
FDI inflows in India between 1991 and 2007, but inflows from Japan to India have decreased during this
time period. This is opposite to the general trend. This is particularly interesting because Japan’s FDI
outflows in 2006 increased by 10 percent to reach a record US$50 billion, the second highest since 1990.3
It is hard to explain the recent decline of Japanese FDI to India and it might as well be a temporary
anomaly.4 India, however, continues to be one of the biggest recipients of Japanese Official Development
Assistance (ODA). Most of the assistance was in building infrastructure, including electricity generation,
transportation, and water supply. It is plausible that Japanese government assistance has crowded out
some private sector investment from Japan. The top sectors attracting FDI inflows from Japan to India
(January 2000 to November 2006) have been transportation (54 percent), electrical equipment (7 percent),
telecom, and services (3 percent).

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):

Amount Rupees in crore Country 2005-06 2006-07 2007-08 2008-09 Cumulative %age with
(US$ in million) Ranks (April- (April- (April- (for April Inflows total
March) March) March) 2008) (from April. Inflows
2000 to (in terms of
April 2008) rupees)
1. MAURITIUS 11,441 28,759 44,483 5,183 115,556 44.26 %
(2,570) (6,363) (11,096) (1,295) (26,930)
2. U.S.A. 2,210 3,861 4,377 799 20,757 (4,733) 7.95 %
(502) (856) (1,089) (200)
3. SINGAPORE 1,218 2,662 12,319 1,653 19,778 7.58 %
(275) (578) (3,073) (413) (4,770)
4. U.K. 1,164 8,389 4,690 190 19,254 (4,410) 7.38 %
(266) (1,878) (1,176) (48)
5. NETHERLAN 340 2,905 2,780 18 11,939 4.57 %
DS (76) (644) (695) (4) (2,709)
6. JAPAN 925 382 3,336 59 9,395 3.60 %
(208) (85) (815) (15) (2,141)
7. GERMANY 1,345 540 2,075 202 6,940 2.66 %
(303) (120) (514) (50) (1,594)
 8. CYPRUS 310 266 3,385 474 4,541 1.74 %
(70) (58) (834) (118) (1,104)
9. FRANCE 82 528 583 143 3,527 1.35 %
(18) (117) (145) (36) (797)
10. U.A.E. 219 1,174 1,039 211 3,084 1.18 %
(49) (260) (258) (53) (716)
TOTAL FDI INFLOWS * 24,613 70,630 98,664 15,005 285,105 -
(5,546) (15,726) (24,579) (3,749) (66,259)

FDI Inflows by Sector

Cumulative FDI inflows reached just over US$60 billion between August 1991 and July 2007.
Since 2002, some sectors such as electrical equipment, services, drugs and pharmaceuticals, cement and
gypsum products, metallurgical industries have also been doing very well in attracting FDI. The electrical
equipment sector and the services sector in particular received the largest shares of total FDI inflows
between August 1991 and July 2007. These were followed by the telecommunications, transportation,
fuels, and chemicals sectors (Figure 3). The Department of Industrial Policy and Promotion has recently
modified the classifications of the sectors and data released from August 2007 has been based on the new
sectoral classifications. According to that classification, the top performers are the services and computer
software & hardware sectors. Clearly, India has attracted significant overseas investment interest in
services. It has been the main destination for off-shoring of most services as back-office processes,
customer interaction and technical support (UNCTAD, 2007). Indian services have also ventured into
other territories such as reading medical X-rays, analyzing equities, and processing insurance claims.
According to some reports, however, increasing competition is making it more difficult for Indian firms to
attract and keep BPO employees with the necessary skills, leading to increasing wages and other costs.
Sectors attracting highest FDI Cumulative FDI Cumulative FDI
inflows (1991-2005) ($ billion) Inflows 1991-2005 Inflows 2002-2005
Sectors
Electrical equipement 4,862 2,734
Transportation Industry 3,124 1,110
Services 2,908 1,462
Telecommunications 2,863 0,624
Fuels (power, oil refinery) 2,514 0,416
Chemicals (other than fertilizers) 1,887 0,538
Food processing industry 1,173 0,222
Drugs and pharmaceuticals 0,946 0,552
Cement and gypsum products 0,746 0,483
Metallurgical Industries 0,624 0,393
Distribution of FDI within India
Mumbai and New Delhi have been the top performers, with the majority of FDI inflows
within India being heavily concentrated around these two major cities. Chennai, Bangalore, Hyderabad
and Ahmedabad are also drawing significant shares of FDI inflows. For statistical purposes, India’s
Department of Industrial Policy and Promotion (DIPP) divides the country into 16 regional offices. The
top 6 regions account for more than two-thirds of all FDI inflows to India between January 2000 and July
2007.
 FDI inflows according to areas from 2000 to %
2005 Regional Office and State covered by FDI
New Delhi (Delhi, part of Uttar Pradesh and 25.9
Haryana)
Mumbai (Maharashtra, Dadra and Nagar Haveli, 21.2
Daman & Diu)
Bangalore (Karnataka) 7.6
Chennai (Tamil Nadu & Pondicherry) 6.0
Ahmenabad (Gujarat) 3.3
Hyderabad (Andhra Pradesh) 3.2
Chandigarh (Punjab,Haryana, Himachal, 1.6
Pradesh)
Kolkata (West Bengal, Sikkim, Andaman & 1.3
Nicobar Islnds
Panaji (Goa) 0.6
Kochi (Kerla, Lakshadweep) 0.4
Bhubaneshwar (Orissa) 0.3
Bhopal (Madhya, Pradesh, Chattisgarh) 0.2
Guwhati (Assam, Arunachal, Pradesh, Manipur, 0.05
Meghalaya, Mizoram,
Nagaland, Tripura)
Jaipur (Rajasthan) 0.02
Patna (Bihar, Jharkhand) 0
Kanpur (Uttar Pradesh, Uttranchal) 0

Why India Gets Limited FDI

In 2006 the Government of India undertook a comprehensive review of the FDI policy
and associated procedures (GOI, 2006). A number of measures have been undertaken to make
India a more attractive destination for FDI. Some key measures include allowing FDI in new
sectors, dispensing with the need of multiple approvals from Government and/or regulatory
agencies that exist in certain sectors, and extending the automatic route to more sectors.
According to the current policy, under the automatic route, FDI up to 100 percent is allowed in
most sectors/ activities. No prior approval from the Government of India or the Reserve Bank of
India (RBI) is required for FDI under the automatic route. Investors are only required to notify
the concerned Regional office of RBI within 30 days of receipt of inward remittances and file
required documents with that office within 30 days of issue of shares to foreign investors. In
some sectors, FDI is allowed, subject to certain equity limits and/or other conditions. For
example, the FDI cap in Air Transport Services is 49 percent. However, there is no restriction in
that sector if there is NRI investment. The FDI limit for the insurance sector is only 26 percent
even though it is under the automatic route. For Single Brand product retailing, the limit is 51
percent. FDI in all sectors/activities is subject to guidelines and requirements. FDI is not
permitted in Retail trade (except Single Brand product retailing); Lottery; Gambling and Atomic
Energy. In the remaining sectors/activities, FDI up to 100 percent would be allowed on the
automatic route.
While the relaxation of these FDI norms may have helped attract greater FDI
inflows, prima facie, India’s inward FDI should be huge or at least much bigger than what it
currently receives. If one goes through research output from investment houses India has been
portrayed as nothing short of the “Promised Land”. Research report after research report from
major investment banks shows the upward potential growth trajectory of India. For instance, the
well-known BRICs report from investment bank Goldman Sachs wrote the following a few years
back:
In US dollar terms, China could overtake Germany in the next four years, Japan by 2015
and the US by 2039. India’s economy could be larger than all but the US and China in 30
years…… India has the potential to show the fastest growth over the next 30 and 50
years. Growth could be higher 13 than 5 percent over the next 30 years and close to 5
percent as late as 2050 if development proceeds successfully. (Wilson and
Purushothamam, 2003).