Industrial & Investment Policy

 Industrial policy in India

 Foreign Direct Investment
 Stock exchange
 Introduction
• Industrial policy means rules, regulations, principles, policies,
and procedures laid down by government for regulating,
developing, and controlling industrial undertakings in the country.
• The pattern and pace of development of the economy are
significantly influenced by industrial policy.
• The industrial policy regime of India is broadly divided into
controlled era (until 1991) and liberalized era.
 Objectives of IP
• To augment the industrial production
• Modernization
• Balanced industrial development
• Balanced regional development
• Liberalization and globalization of economy.
 INDUSTRIAL POLICY UP TO 1991
• The industrial policy of India prior to the liberalisation ushered in 1991
was characterised by the following features:
• Reservation of Industries
1. Future development of most of the import industries was exclusively
reserved for the public sector.
2. Manufacture of a large number (over 850 in 1991) of items was reserved
for the small-scale sector.
• Dominance of Public Sector
• arms and ammunition
• atomic energy
• railway transport
• Entry and Growth Restrictions
• There were a number of entry and growth restrictions on the private
sector (particularly on the large firms and foreign firms).
• A licence was mandatory for establishing new units with investments
above a specified limit, for manufacturing new products and for
substantial expansion of existing undertakings.
• Restrictions on Foreign Capital and Technology
• The scope of use of foreign capital and technology was limited. Even in
industries where foreign capital was allowed, it was normally subject to a
ceiling of 40 per cent of the total equity
 THE NEW INDUSTRIAL POLICY 1991
• The Industrial Policy announced on July 24, 1991, which heralded the
economic reforms in India, has enormously expanded the scope of the
private sector by opening up most of the industries for the private sector
and substantially dismantling the entry and growth restrictions.
• Adjectives such as ‘dramatic’, ‘revolutionary’, ‘drastic’ etc. have been
used to describe the nature of the change in the industrial policy.
• Objectives
– To build on the gains already made.
– To correct the distortions or weaknesses that may have crept in.
– To maintain a sustained growth in productivity and gain full employment.
– To attain international competitiveness
• Industrial licensing policy
• Restrictive Provisions: It contains all measure provision to curb unfair trade
practices.
• Registration: The provisions make registration of industries mandatory irrespective of
whether they are private or public in nature. The expansion of the existing business
also required licensing and permission.
• Examination and Monitoring of the Industries: After granting of license, it is the
responsibility of the state to monitor the performance of the industries. If at any point
in time, the industrial unit was found not up to the mark, under utilising its resources
or charging excessive prices, the government could set up an enquiry against the unit.
• Cancellation of the License: The government has the power to cancel the licence
granted to the industrial unit if found, engaging in wrongful behaviour.
• Policy on Public Sector
– 3 industries are reserved for government – 1) Atomic Energy 2) Mining of Atomic
Minerals 3) Railway Transport.
• Delicensing: All but 18 industries were freed from licensing. The
number was later reduced, in stages, to 6.

• Removal of MRTP Act Restrictions.

• Liberalization of Foreign Investment: FDI is allowed in all

industries, except industries falling in a small negative list, in varying
levels, ranging from 26 per cent to 100 per cent of the total equity.

• Privatization/disinvestment
 Industrial Licensing
• Industries that require industrial licensing for manufacturing in India include:
– Industries under compulsory licensing;
• Alcohol
• Tobacco
• Defense
• Explosive
• Hazardous chemicals
– Industrial undertakings attracting locational restrictions.
• Large industries that manufactured items that were exclusively reserved for Micro,
Small, and Medium Enterprises (MSME) also needed to obtain an industrial license.
– However, in April 2015, the government de-reserved these items. E.g. bread, wood,
firework, pickles and chutneys, mustard oil etc.
 Quiz 1
• Which of the following industries are to be given
compulsory licensing?

a. Alcohol
b. Tobacco
c. Drugs and pharmaceuticals
d. All the above
 Quiz 2
• New industrial policy was introduced in__________
a) 1990
b) 1991
c) 1992
d) 1993
Foreign Direct Investment
 Foreign Direct Investment

• 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.

• An investment made to acquire lasting or long-term

interest in enterprises operating outside of the economy of
the investor.
 Definition
• Foreign direct investment (FDI) is a category of cross-border
investment in which an investor resident in one economy
establishes a lasting interest in and a significant degree of
influence over an enterprise resident in another economy.

– Organisation for Economic Cooperation and Development (OECD)

“The threshold for a foreign direct investment is a minimum
10% ownership stake in a foreign-based company”

{per guidelines established by the Organization of

Economic Cooperation and Development (OECD)}

FDI investors typically take controlling positions in domestic

firms or joint ventures and are actively involved in their
management.
 Features of FDI
• Invested in foreign country
• To have Management control
• Long term investment
• Locking period
• Investment above 10%
 Types of FDI
• Horizontal FDI
• Vertical FDI
• Conglomerate FDI
• Platform FDI
• Greenfield Investments
• Brownfield Investments
• Horizontal FDI:
• A company establishes the same type of business operation in a
foreign country as it operates in its home country.
• Eg. A U.S.-based cell phone provider buying a chain of phone
stores in India.
• Vertical FDI:
• A business acquires a complementary business in another
country.
• For example, a U.S. manufacturer might acquire an interest in a
foreign company that supplies it with the raw materials it
needs.
• Conglomerate FDI:
• A company invests in a foreign business that is unrelated to its
core business. Because the investing company has no prior
experience in the foreign company’s area of expertise, this
often takes the form of a joint venture.
 Platform FDI
• It is a unique form of FDI—businesses invest in a foreign
company to manufacture goods. They then sell the finished
product in a third country.
 Greenfield Investments
• Many companies start everything from scratch when operating
in a foreign country. They build new factories and train the
workforce.
• McDonald’s and Starbucks India are examples of that. Both
started from scratch and became prominent in a foreign nation.
These are called greenfield investments.
 Brownfield Investments
• It can be viewed as a shortcut. Some foreign businesses decide
not to start from scratch—they save time and effort.
• Instead, they expand their business by going for cross-border
mergers.
• As a result, they can operate right away.
• Tata Motors’ acquisition of Jaguar is one such example. Tata
did not need to build a new factory in the UK. Instead, they
picked up where Jaguar left; from the existing factory.
• The more recently relaxed FDI regulations in India now allow
100% foreign direct investment in single-brand retail without
government approval.
FDI IN INDIA
 Introduction
• Foreign Investments in India was introduced in India by the
then Finance minister Dr. Manmohan Singh in 1991, under
Foreign Exchange Management Act to increase such
investments thereby increasing the supply of domestic capital
and increase the economic growth.
In India, foreign investments can be made through any of the
following methods:
• Incorporate a wholly owned subsidiary (WOS) or a
company
• Result of merger or an acquisition of an unrelated
enterprise
• Acquire shares in an associated enterprise
• Participate in an equity joint venture with another investor
or enterprise
 Entry Routes
• “Automatic route” means Non Resident entities can invest in the capital
of resident entities without the prior approval of Government i.e. Foreign
Investment Promotion Board (FIPB), Department of Economic Affairs
(DEA), Ministry of Finance or Department of Industrial Policy &
Promotion, as the case may be.

• “Government approval route” means that investment in the capital of

resident entities by non-resident entities can be made only with the prior
approval of Government i.e. Foreign Investment Promotion Board
(FIPB), Department of Economic Affairs (DEA), Ministry of Finance or
Department of Industrial Policy & Promotion, as the case may be.
 Sector-wise cap for FDI’s
100% 74% 49% Others
Agriculture Pvt bank Power Radio 26%
Education Credit Rating Insurance Print Media
Civil Aviation Stock 26%
Courier Exchange PSB 20%
Defence Pvt Security
Pharmacy
Railway
Single brand
Tourism
Telecom
Food
Products
 Investment Portal of India

• https://www.investindia.gov.in/foreign-direct-investment
 Prohibited Sectors
• Lottery Business including Government/private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Chit funds
• Nidhi company
• Real Estate Business or Construction of Farm Houses (Real estate business
does not include development of townships, construction of
residential/commercial premises, roads or bridges )
• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes
• Activities/sectors not open to private sector investment e.g. Atomic Energy
and Railway operations (other than permitted activities)
 Foreign Portfolio Investment (FPI)
• Portfolio is a grouping of assets such as stocks, bonds, and
cash equivalents.
• Foreign portfolio investment is the entry of funds into a
country where foreigners make purchases in the country’s
stock and bond markets.
 Quiz1
• Which of the following types of FDI includes creation
of new assets and production facilities in the host
country?
A. merger and acquisition
B. brownfield investment
C. strategic alliances
D. greenfield investment
 Quiz2
• Which of the following forms of FDI is a co-operative
agreement between firms?
A. merger
B. strategic alliance
C. joint venture
D. acquisition
 Quiz3
• Both foreign direct investment (FDI) and foreign institutional
investment (FII) are related to investment in a country. Which
of the following is incorrect regarding FDI and FII?
a) Both FII and FDI bring capital into the economy.
b) FII invests in technology-oriented enterprises, whereas FDI
invests in traditional business set ups.
c) The restrictions on the entry of FDI are lower than that on FII.
d) FDI is considered to be more stable than FII. FII can be
withdrawn even at a short notice.
 Quiz4
• Participatory notes (PNs) are associated with which one
of the following?
a) Consolidated Fund of India
b) Foreign institutional investors
c) United Nations Development programme
d) Kyoto Protocol
 Quiz5
• Which of the following statements is/are correct regarding FDI under automatic
route?
1. FDI in India under the automatic route does not require prior approval either by
the Government of India or the Reserve Bank of India.
2. Investors are only required to notify the concerned regional office of the RBI
before receipt of inward remittances and file required documents with that office
before the issue of shares to foreign investors.
• Select the correct answer using the codes given below.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Stock Exchange
 Stock Exchanges
• Form of exchange which provides services for stock brokers &
traders to trade stocks, bonds, & other securities.
• It facilitates the transaction between traders of financial
instruments and targeted buyers.
• The stock exchange serves as a market where financial
instruments like stocks, bonds and commodities are traded.
• A stock exchange in India adheres to a set of rules and regulations
directed by Securities and Exchange Board of India or SEBI.
 Functions of Stock Exchanges
• Ensures liquidity of capital
• Mobilises surplus savings
• Listing of securities
• Platform for public debt
 Types of Financial Markets
• Money Market
– Interbank lending
– Helps to implement monetary policy
• Capital Market
– Primary Market
– Secondary Market
– Capital formation in economy
– Valuation of a company
• Money Market
• Money markets include markets for such instruments as bank
accounts, including term certificates of deposit; interbank
loans (loans between banks); money market mutual funds;
commercial paper; Treasury bills; and securities lending and
repurchase agreements (repos).
1. Primary market – This market creates securities and acts as a platform
where firms float their new stock options and bonds for the general
public to acquire. It is where companies enlist their shares for the first
time.

2. Secondary market – The secondary market is also known as the stock

market; it acts as a trading platform for investors. Here, investors trade in
securities without involving the companies who issued them in the first
place with the help of brokers.
 Features of Stock Exchanges
• A market for securities- It is a wholesome market where securities of
government, corporate companies, semi-government companies are bought
and sold.
• Second-hand securities- It associates with bonds, shares that have already
been announced by the company once previously.
• Regulate trade in securities- The exchange does not sell and buy bonds and
shares on its own account. The broker or exchange members do the trade on
the company’s behalf.
• Dealings only in registered securities- Only listed securities recorded in the
exchange office can be traded.
 Features of Stock Exchanges
• Dealings only in registered securities- Only listed securities recorded in the
exchange office can be traded.
• Transaction- Only through authorised brokers and members the transaction
for securities can be made.
• Recognition- It requires to be recognised by the central government.
• Measuring device- It develops and indicates the growth and security of a
business in the index of a stock exchange.
• Operates as per rules– All the security dealings at the stock exchange are
controlled by exchange rules and regulations and SEBI guidelines.
 Functions of Stock Exchange
• Role of an Economic Barometer
• Valuation of Securities
• Transactional Safety
• Contributor to Economic Growth
• Making the public aware of equity investment
• Facilitates liquidity
• Better Capital Allocation
• Encourages investment and savings
 How Stock exchange works?

• https://www.youtube.com/watch?v=p7HKvqRI_Bo
 Quiz1
• A market where new securities are bought and sold
for the first time is known as a __________ market.
A. primary
B. secondary
C. tertiary
D. capital
 Quiz2
• A market for existing (used) securities, rather than
new issues is known as the __________ market.
A. primary
B. secondary
C. tertiary
D. capital
 Quiz3
• Which of the following is responsible for the
fluctuations in the Sensex?
(a) Rain
(b) Monetary policy
(c) Political instability
(d) All of the above
 Quiz4
• Which of the following words does not belong to the
stock exchange?
• (a) NAV
• (b) NSE
• (c) IPO
• (d) KPO
 Quiz5
• Which of the following might be a reason for a stock
market to lose value suddenly?
A. A big company going bankrupt
B. Fear of a global recession
C. A terrorist attack
D. All of these
Thank you