A STUDY ON FORIGRN DIRECT INVESTMENT IN FINANCIAL

SECTOR IN INDIA

SUBMITTED BY:
NAME: S. MITHRA

REG NO:
171RCMD025
TO: PROF. SAMIR R PRADHAN

INTERNATIONAL INSITITUTE OF BUSINESS

STUDIES #75, MUTHUGADAHALLI, BANGALORE-
560032.

BANGALORE
UNIVERSITY 2017-2019
 OBJECTIVES
 To evaluate the contribution of FDI in the economic growth in India.
 To find nature of contribution made by these investments.
 To evaluate the rate of inflow of these investment in India.
 To study the significance of FDI with other economic growth indicators.
 To distinguish the flow of FDI pre and post reform period.

INTRODUCTION:

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in

a business in one country by an entity based in another country.[1] It is thus distinguished from
a foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition, as an FDI: the investment may be
made either "inorganically" by buying a company in the target country or "organically" by
expanding the operations of an existing business in that country.
DEFINITION
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas operations, and intra company loans". In a narrow
sense, foreign direct investment refers just to building new facility, and a lasting management
interest (10 percent or more of voting stock) in an enterprise operating in an economy other than
that of the investor.
FDI, a subset of international factor movements, is characterized by controlling ownership of a
business enterprise in one country by an entity based in another country. Foreign direct
investment is distinguished from foreign portfolio investment, a passive investment in the
securities of another country such as public stocks and bonds, by the element of "control".

CRITISISM

1. Firm-specific advantages: Once domestic investment was exhausted, a firm could

exploit its advantages linked to market imperfections, which could provide the firm with
market power and competitive advantage. Further studies attempted to explain how firms
could monetize these advantages in the form of licenses.
2. Removal of conflicts: conflict arises if a firm is already operating in foreign market or
looking to expand its operations within the same market. He proposes that the solution
for this hurdle arose in the form of collusion, sharing the market with rivals or attempting
to acquire a direct control of production. However, it must be taken into account that a
reduction in conflict through acquisition of control of operations will increase the market
imperfections.
3. Propensity to formulate an internationalization strategy to mitigate risk: According
to his position, firms are characterized with 3 levels of decision making: the day to day
supervision, management decision coordination and long term strategy planning and
decision making. The extent to which a company can mitigate risk depends on how well
a firm can formulate an internationalization strategy taking these levels of decision into
account.
TYPES OF FDI

1. Horizontal FDI arises when a firm duplicates its home country-based activities at the
same value chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination country
for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.

METHODS

The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:

 by incorporating a wholly owned subsidiary or company anywhere

 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
 participating in an equity joint venture with another investor or enterprise

IMPORTANCE AND BARRIARES

 The rapid growth of world population since 1950 has occurred mostly in developing
countries.

 This growth has been matched by more rapid increases in gross domestic product, and
thus income per capita has increased in most countries around the world since 1950.

 An increase in FDI may be associated with improved economic growth due to the influx
of capital and increased tax revenues for the host country.

 Besides, the trade regime of the host country is named as a important factor for the
investor's decision-making.
  Host countries often try to channel FDI investment into new infrastructure and other
projects to boost development.

 Greater competition from new companies can lead to productivity gains and greater
efficiency in the host country and it has been suggested that the application of a foreign
entity’s policies to a domestic subsidiary may improve corporate governance standards.

 Furthermore, foreign investment can result in the transfer of soft skills through training
and job creation, the availability of more advanced technology for the domestic market
and access to research and development resources.

 The local population may benefit from the employment opportunities created by new
businesses.

 In many instances, the investing company is simply transferring its older production
capacity and machines, which might still be appealing to the host country because of
technological lags or under-development, in order to avoid competition against its own
products by the host country/company.

FDI IN INDIA:
 Foreign investment was introduced in 1991 under Foreign Exchange Management Act
(FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the
prime minister, this has been one of his top political problems, even in the current times. India
disallowed overseas corporate bodies (OCB) to invest in India. India imposes cap on equity
holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is
limited to a maximum of 49%.

Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected
India as the second most important FDI destination (after China) for transnational corporations
during 2010–2012. As per the data, the sectors that attracted higher inflows were services,
telecommunication, construction activities and computer software and hardware. Mauritius,
Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI
flows were $10.4 billion, a drop of 43% from the first half of the last year.

Nine from 10 largest foreign companies investing in India (from April 2000- January 2011)
are based in Mauritius. List of the ten largest foreign companies investing in India (from April
2000- January 2011) are as follows

1. TMI Mauritius Ltd. - Rs 7200 crore/$1600 million

2. Cairn UK Holding - Rs6666 crores/$1492 million
3. Oracle Global (Mauritius) Ltd. - Rs 4805 crore/$1083 million
4. Mauritius Debt Management Ltd.- Rs 3800 crore/$956 million
5. Vodafone Mauritius Ltd. – Rs 4000 crore/$801 million
6. Etisalat Mauritius Ltd. – Rs 3228 crore
7. CMP Asia Ltd. – Rs 2638.25 crore/$653.74 million
8. Oracle Global Mauritius Ltd. – Rs 2575.88 crore / $563.94 million
9. Merrill Lynch(Mauritius) Ltd. – Rs 2230.02 crore / $483.55 million
10. Name of the company not given (but the Indian company which got the FDI is Dhabol
Power company Ltd.)

In 2015, India emerged as top FDI destination surpassing China and the US. India attracted FDI
of $31 billion compared to $28 billion and $27 billions of China and the US respectively. India
received $63 billion in FDI in 2015. India also allowed 100% FDI in many sectors during 2016.
RECENT MEASURES

 of Non-Scheduled Air Transport Service, Ground Handling Services increased from 74%
to 100% under the automatic route
 100% FDI under automatic route permitted in Brownfield Airport projects
 FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline
and regional Air Transport Service raised to 100%, with FDI up to 49% permitted under
automatic route and FDI beyond 49% through Government approval
 Foreign airlines would continue to be allowed to invest in capital of Indian companies
operating scheduled and nonscheduled air transport services up to the limit of 49% of
their paid up capital
 In order to provide clarity to the e-commerce sector, the Government has issued
guidelines for foreign investment in the sector. 100% FDI under automatic route
permitted in the marketplace model of e-commerce
 100% FDI under Government route for retail trading, including through e-commerce, has
been permitted in respect of food products manufactured and/or produced in India
 100% FDI allowed in Asset Reconstruction Companies under the automatic route
 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond
74% will be allowed through government approval route
 FDI limit for Private Security Agencies raised to 74% (49% under automatic route,
beyond 49% and up to 74% under government route)
 For establishment of branch office, liaison office or project office or any other place of
business in India if the principal business of the applicant is Defense, Telecom, Private
Security or Information and Broadcasting, approval of Reserve Bank of India would not
be required in cases where FIPB approval or license/permission by the concerned
Ministry/Regulator has already been granted
 Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding
of dogs), Pisciculture, Aquaculture and Apiculture has been waived off
FDI IN COMPARISION WITH OTHER COUNTRIES
ADVANTAGES

 Economic Development Stimulation.

 Easy International Trade.

 Employment and Economic Boost.

 Development of Human Capital Resources.

 Tax Incentives.

 Resource Transfer.

 Reduced Disparity Between Revenues and Costs.

 Increased Productivity.

DISADVANTAGES

 Hindrance to Domestic Investment.

 Risk from Political Changes.

 Negative Influence on Exchange Rates.

 Higher Costs.

 Economic Non-Viability.

 Expropriation.
  Negative Impact on the Country’s Investment.

 Modern-Day Economic Colonialism.

CONCLUSION

FDI provides India with stability in inflow of funds, access to international markets, export
growth, transfer of technology and skills and improves balance of payments. More FDI does not
necessarily guarantee high growth rates. The relative emphasis must shift from a broad (scatter
shot) approach to one of targeting specific companies in specific sectors. Socially responsible
FDI should be encouraged through the development of national and international investment
guidelines and regulations. FDI is beneficial to India’s growth and India’s growth is beneficial
for FDI. India needs to create a talent pool suitable for the investors and it needs to develop
infrastructure that will encourage the investors. These steps taken by India to bring FDI will also
help India to grow on its own. FDI if monitored and nurtured in such a way that it will bring
more skills and resources to India will be mutually beneficial.

Signature of the candida Signature of the faculty

(S. Mithra) ( Prof. Samir R Pradhan)