FOREIGN DIRECT INVESTMENT (FDI) IN INDIA

FOREIGN DIRECT INVESTMENT (FDI) IN INDIA 2014

Introduction The Foreign Direct Investment means cross border investment made by a resident in one economy in an enterprise in another economy, with the objective of establishing a lasting interest in the investee economy. FDI is also described as investment into the business of a country by a company in another country. Mostly the investment is into production by either buying a company in the target country or by expanding operations of an existing business in that country. Such investments

can take place for many reasons, including to take advantage of cheaper wages, special investment privileges (e.g. tax exemptions) offered by the country. Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. Though India stands today as the largest democracy, its administrative as well as the political set up have many flaws and shortcomings. The Indian system of administration and governance is

impregnated with flaws like shortages of power, bureaucratic hassles, political uncertainty, and infrastructural

deficiencies .In spite of all these political shortcomings, India is perceived to be one of the most lucrative grounds for investing, in the eyes of the wealthy European as well as American investors. This is the true reason why the researches made into the sector establishes more and more foreign investors coming to India and investing liberally into the various sectors of the Indian economy. Various Indian market sectors have experienced a recent progress and boom, owing to the investment made in them as well as due to the relaxation of rules and regulations that had been levied on the foreign direct investment in India, by the Indian government. One of such sectors of the Indian economy that has seen a sudden booming phase of prosperity and sustained growth, owing to these factors is the real estate as well as the construction business in India. It was the 2 Soft vision college.

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year of 2005, when the Indian Central government finally realized the economic prosperity that foreign direct investment in India would bring about. Thus, in an effort to encourage this, the government made a crucial amendment to some of the governing laws on the subject, in order to allow one hundred per cent foreign direct investment in India, in the real estate and construction sector.Untill this point of time, the Indian law permitted only the non resident Indians (NRIs) or persons of Indian origin (PIOs) to make foreign direct investment in India. Even these people had been levied with many restrictions. With the upliftment of these restrictions, a host of foreign investors and companies stormed India with their products, services and business ideas along with their money. This money in turn helped the Indian economy to grow in volume as well as statures. India has been ranked at the second place in global foreign direct investments in 2010 and will continue to remain among the top five attractive destinations for international investors during 2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012'. The 2010 survey of the Japan Bank for International Cooperation released in December 2010, conducted among Japanese investors, continues to rank India as the second most promising country for overseas business operations. A report released in February 2010 by Leeds University Business School,

commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14. According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010. However, it is ranked the 2nd most attractive destination following China in the next three years. Moreover, according
Foreign direct investment in e-commerce will boost infrastructure development and spur manufacturing facility among other advantages, says a discussion paper by DIPP.

to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, 3 Soft vision college.

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more and more Canadian firms are now focusing on India as an investment destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010. India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP). The services sector comprising financial and non-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December 2010, while telecommunications including radio paging, cellular mobile and basic telephone services attracted second largest amount of FDI worth US$ 1,327 million during the same period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066 million followed by power sector which garnered US$ 1,028 million during the financial year AprilDecember 2010. The Housing and Real Estate sector received FDI worth US$ 1,024 million. During April-December 2010, Mauritius has led investors into India with US$ 5,746 million worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with US$ 1,055 million, according to data released by DIPP.

Foreign Investment in India Schematic Representation

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Advantages Increase economic growth by dealing with different international products 1 million (1 Crore) employment will create in three years UPA Government Billion dollars will be invested in Indian market Spread import and export business in different countries Agriculture related people will get good price of their goods Disadvantages

Will affect 50 million merchants in India Profit distribution, investment ratios are not fixed An economically backward class person suffers from price raise Retailer faces loss in business Market places are situated too far which increases traveling expenses Workers safety and policies are not mentioned clearly Inflation may be increased Again India become slaves because of FDI in retail sector

A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Types of FDI Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.

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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.

Vertical FDI

Platfor m FDI Horizontal FDI

Different Types of FDI Procedure for receiving Foreign Direct Investment in an Indian company A foreign company planning to set up business operations in India may: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000. An Indian company may receive Foreign Direct Investment under the two routes as given under: 1. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted. 6 Soft vision college.

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FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. 2. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors. The Indian company having received FDI either under the Automatic route or the Government route is required to report in the Advance Reporting Form, the details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category I Bank, together with copy/ ies of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances. Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO. Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which:

gives an option to the investor to convert or not to convert it into equity or does not involve upfront pricing of the instrument

as a date would be reckoned as ECB and would have to comply with the ECB guidelines. The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of

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conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations

FOREIGN DIRECT INVESTMENT Policy in India

Foreign direct investment (FDI) has become an integral part of national development strategies for almost all the countries globally. Its global popularity and positive output in augmenting of domestic capital, productivity and employment; has made it an indispensable tool for initiating economic growth for nations. India is evolving as one of the most favored destination for FDI in Asia and the Pacific (APAC). It has displaced US as the second-most favored destination for foreign direct investment (FDI) in the world after China. FDI in India has contributed effectively to the overall growth of the economy in the recent times. FDI inflow has an impact on India's transfer of new technology and innovative ideas; improving infrastructure, a competitive business environment. India has among most liberal and transparent policy on FDI among the emerging economies. FDI upto 100% is allowed under the automatic route in all sectors except the following which require prior approval of government:

Manufacturing of tobacco products and its substitutes. Manufacturing of electronic aerospace and defence equipments.

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Manufacturing of item exclusively meant for small scale industries with more than 24% FDI.

Proposals in which the foreign collaborator has an existing joint venture, technology transfer, trade mark in India in same field.

An ongoing review of the FDI policy is carried out so as to initiate more liberalization. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes. This is done by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt. They will have to file the required documents with that office within 30 days after issue of shares to foreign investors.

FDI is not permissible in the following cases: Gambling and Betting. Lottery Business. Business of chit fund. Housing and Real Estate business. Atomic Energy. Agricultural or plantation activities and plantations(other than Tea plantations). Retail Sector

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TRENDS IN FDI FLOWS TO INDIA
With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalisation of the economy since the early 1990s as well as gradual opening up of the capital account. As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year.
Table 1: Equity FDI Inflows to India (Percent) Sectors 2006- 200707 08 Sectoral shares (Percent) 17.6 56.9 15.5 9.9 100.0 1.6 5.3 1.4 0.9 9.3 19.2 41.2 22.4 17.2 100.0 3.7 8.0 4.3 3.3 19.4 200809 21.0 45.1 18.6 15.2 100.0 4.8 10.2 4.2 3.4 22.7 200910 22.9 32.8 26.6 17.7 100.0 5.1 7.4 6.0 4.0 22.5 201011 32.1 30.1 17.6 20.1 100.0 4.8 4.5 2.6 3.0 14.9

Manufactures Services Construction, Real estate and mining Others Total Manufactures Services Construction, Real estate and mining Others Total Equity FDI

Equity Inflows (US$ billion)

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From a sectoral perspective, FDI in India mainly flowed into services sector (with an average share of 41 per cent in the past five years) followed by manufacturing (around 23 per cent) and mainly routed through Mauritius (with an average share of 43 per cent in the past five years) followed by Singapore (around 11 per cent). However, the share of services declined over the years from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing, and others largely comprising electricity and other power generation increased over the same period (Table 1). Sectoral information on the recent trends in FDI flows to India show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as construction, real estate and mining and services such as business and financial services. Manufacturing, which has been the largest recipient of FDI in India, has also witnessed some moderation (Table 1).
I. A. CUMULATIVEFDIFLOWSINTOINDIA(2000-2013): TOTALFDIINFLOWS(fromApril, 2000toMarch, 2013): US$290,078 million -

1. CUMULATIVEAMOUNTOF FDIINFLOWS (Equityinflows+Re-investedearnings+Othercapital)*

2. CUMULATIVEAMOUNTOFFDI EQUITY INFLOWS (excluding,amountremittedthroughRBIs-NRI Schemes) B. 1.

Rs. 896,38 crore

US$193,282 million

FDIINFLOWSDURINGFINANCIALYEAR 2012-13(fromApril, 2012to March,2013):

TOTAL FDI INFLOWSINTOINDIA (Equityinflows+Re-investedearnings+Othercapital) (asper RBIsMonthly bulletindated: 13.05.2013). FDI EQUITY INFLOWS C.

US$36,860 million

2.

Rs. 121,907 crore

US$22,423 million

FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE FINANCIALYEAR2012-13: Financial Year2012-13 (April-March) AmountofFDIEquityinflows (InRs.Crore) (InUS$mn) 9,620 7,229 6,971 8,182 12,578 25,552 10,295 1,857 1,327 1,244 1,475 2,264 4,679 1,942

1. 2. 3. 4. 5. 6. 7.

April,2012 May, 2012 June, 2012 July,2012 August,2012 September,2012 October,2012

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8. 9. 10 . 11 . 12 . November, 2012 December, 2012 January,2013 February,2013 March, 2013 2012-13(uptoMarch, 2013) # 2011-12(up to March, 2012)# %age growthover lastyear D. 5,798 6,012 11,719 9,654 8,297 121,907 165,146 (-)28% 1,058 1,100 2,157 1,795 1,525 22,423 35,121 (-)38%

FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE CALENDAR YEAR 2013: Amount of FDI Equity inflows (In Rs. Crore) (In US$ mn) 11,719 2,157 9,654 1,795 8,297 1,525 29,670 5,477 29,354 5,844 ( + ) 01 % ( - ) 06 %

1. 2. 3.

Calendar Year 2013 (Jan.-Dec.) January, 2013 February, 2013 March, 2013 Year 2013 (up to March, 2013) # Year 2012 (up to March, 2012) # %age growth over last year

Note:

Country &Sectorspecificanalysisisavailablefromtheyear2000onwards, asCompanywisedetailsareprovidedbyRBI fromApril,2000onwards only. *Dataon Re-investedearnings&Othercapital, are theestimateson anaveragebasis, basedupondata for the previoustwoyears, published by RBI in monthlybulletindated: 10.12.2012. #Figuresareprovisional, subject toreconciliationwith RBI,Mumbai. ^Inflows forthemonthofMarch,2012areasreportedbyRBI, consequent to the adjustmentmadein thefiguresofMarch, 11,August,11andOctober,11.

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FDI Detail In e-Commerce "Allowing FDI in e-commerce will provide e-commerce players complete geographical reach which will be against the spirit of FDI in multi-brand retail trade, i.e. being restricted to cities with a population of more than one million or any other city as per the choice of consenting states," Foreign

players like Amazon and eBay have been lobbying the

government for a pie of this potentially big market that is expected to make up about 4% of gross domestic product by 2020. The department will accept comments on the paper till January 30. It has also sought views on whether to restrict multi-brand online sales by foreign-funded companies to states which allow FDI in multi-brand retail. After the central government changed its policy to allow up to 51% FDI in the multi-brand retail

segment, only 12 states have opened their doors to such investments.

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Decoding FDI Detail In Retail Foreign direct investments are one of the world largest private industries in retailing. In a typical model of technology diffusion, the rate of economic growth of backward country depends on the extent of adoption and implementation of new technologies that are already in use in leading countries. That is where foreign direct investment (FDI) is a form strategic method but then also it will effect domestic production life cycle and economy badly. Though it helps to come up with new technologies and it involves transmission of ideas. Some researchers have shown that imports of high- technology products, adoption of foreign technology and acquisition of human capital. Hence the model highlights the roles of both the introduction of more advanced technology and requirement of absorptive capability in the host country as determinants of economic growth, and suggests the empirical investigation of the complementarily between FDI and human Capital in the process of productivity growth. FDI more particularly concern with developing countries because of the following benefits. Availability of cheap labor Uninterrupted availability of raw material Less production cost compared with other developed countries Quick and easy market penetration

Much has been said and written about what foreign direct investment (FDI) in retail can do. Depending on which side of the ideological divide is speaking, the assertions are either that it is a magic wand to fix many big problems or that it is a destroyer of honest livelihoods, with little benefits of its own. What is common to both sides is that they are mostly low on fact, high on opinion and generate enormous amounts of confusion. Which is why, we think it is necessary to sift through all of the noise and look truth in the eye. The facts, as we see it, tell us that it has become a symbolic issue, far beyond what reality demands it ought to be; and that there is no need for either great celebration or for deep despair over the idea that FDI in retail is now a reality. Our analysis tells a fairly straightforward story. The government has hugely exaggerated the quantum and immediacy of benefits it put on the table to sell the policythat aam admi consumers will benefit enormously, employment generation will be huge, the countrys supply chain will be transformed and large numbers of

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small producers and farmers will gain. As things stand, even if modern retail were to take off on all cylinders, these arguments would still not hold water for the next 10 years. For one, there is the fact that aside from very old markets like America and Europe, in most newly developed markets, modern trade accounts for only 20-25 percent of all retail. India is already at 8 percentwhich is significantbut the impact hasnt been as dramatic as one would have assumed. Then there is the fact that the economics of the Indian market is such that it makes little sense for global retailers to focus on all consumers. Were convinced they will focus their energies on the top 33 percent of urban Indian

households (a mere 10 percent of all Indian households); investing in the others isnt quite what they know how to do profitably yet. As for small manufacturers, we dont see that huge numbers of them will benefit. Retailers across the world like to work with a small group of select vendors because it makes for better profitability. So yes, a small number will benefit significantly. And yes, employment will be generated. But it wont be anywhere close to the numbers now being touted. Then there is the argument that encouraging modern retail to invest will provide the much-needed booster shot for the countrys dismal supply chain infrastructure. Here again, lets face it. Retailers arent in the business of building national infrastructure. About the only infrastructure theyd be interested in is their last mile. The only argument that holds true is that kiranas or the small, traditional shopkeepers who are now an Indian staple, will not die. But that is a tribute to the small shopkeeper rather than prescience on the part of the government. A more honest case for FDI in modern retail would be that it will lay the foundations for a new industry, guaranteed to grow for at least the next five 15 Soft vision college.

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decades. Do we need it? The question is rhetorical. Did we need cheaper air travel, more television entertainment, cellphones, and air-conditioned cars? Now that weve stated our assessment upfront, wed like to explain how and why we came to these conclusions. Without doubt, it will immediately save the indigenous modern retail industry that has been built until now. What has been built until now? Between all the modern retailers in India, they now manage to generate Rs 2 lakh crore in revenuesa very impressive number by any reckoning and growing at a compounded rate of 25 percent each year, according to India Retail Report 2012 from Images. But the problem is, most players in the Indian retail business just arent making any money yet, and are carrying large amounts of debt, not having had enough equity to fund business losses that are par for the course in the build-up phase of retailing businesses. Retail businesses guzzle a lot of cash for a long time and then return it handsomely. If not carefully funded with patient capital, of the equity kind, the investment phase can be life threatening. Kishore Biyani, the largest, most ambitious modern Indian retailer, is a victim of precisely this phenomenon. His business managed to generate Rs 14,000 crore in sales, but in the process incurred expensive and debilitating debt of almost Rs 9,000 crore. Just paying off the accumulated interest was wiping out all the profits the business was generating. Unable to sustain the business, he was forced to sell a part of it to the competing Aditya Birla Nuvo group, and reduce debt to a manageable amount. However, his business still needs a lot of money to grow to get to serious profitability. Biyani is not alone. Foodworld, the first Indian supermarket chain, and one that consumers loved languished at a boutique scale by modern retail standards, with 60 stores mostly in South India, and lost all early-mover advantages and is now a minor player. Shoppers Stop has just 52 stores in 21 years of operations. In contrast, Tesco, for example, has 3,054 stores in just the UK, with revenues of 42 billion in 2011. In India, a country that is so much bigger, all modern supermarket and hypermarket stores put together would not add up to this number.

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FDI in Aviation, Multi-brand retail The retail FDI policy stipulated that at least half the investments be made in back-end infrastructure, such as cold-chain and warehousing and stores could be set up only in cities with a population of at least one million. In states that do not have cities with population of more than 1 million according to the 2011 census, retail outlets may be set up in the cities of their choice, preferably the largest city. The government also eased the FDI norms for single-brand retail, including the condition that global firms will have to source 30% of their merchandise from local small firms and artisans. Globally, single-brand retail follow a business model of 100% ownership and retail giants, such as Swedish furniture major IKEA, had cited the 30% mandatory sourcing clause from Indian small firms as restrictive condition. Conclusion India needs to take a lesson from China where organized and unorganized retail seem to co-exist and grow together. Further, India's local enterprises will potentially receive an up gradation with the import of advanced technological and logistics management expertise from the foreign entities. In our view, the government has an opportunity to utilize the liberalization for achieving certain of its own targets:

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improve its infrastructure; access sophisticated technologies; generate employment for those keen to work in this sector

FDI would lead to a more comprehensive integration of India into the worldwide market and, as such, it is imperative for the government to promote this sector for the overall economic development and social welfare of the country. If done in the right manner, it can prove to be a boon and not a curse.

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