Kaushik Sir - Foreign Investment
Kaushik Sir - Foreign Investment
Kaushik Sir - Foreign Investment
Dial a number, order a pizza and you have it delivered to your door within minutes. Though not a traditional India cuisine, it has barged into our daily lives as a major churner. The Pizza has given the traditional Parantha a run for its money. Have we ever pondered on how this outsider made into our homes to be a part of our lives? How a nation driven by traditions has accepted this breakthrough? This is a resultant of the foreign companies testing Indian waters. The Foreign Direct Investment policy has opened the sluice gates for all the major players across the world to explore India. FDI (Foreign Direct Investment) is a corporate governance mechanism for a company on foreign soil, the resultant of which is a mutual benefit for the company and the economy of the country.
Foreign companies in India have opened a plethora of choices be it consumer goods, jobs, business opportunities etc. Indian Corporate and the Government(s) have benefited from the FDIs. India after independence in 1947 had adopted a socialistic approach. There were stringent license regulations and import duties/tariffs. The year 1991 saw the economic liberalization of India, the new policies included international trade and investment, Tax reforms, privatization and inflation control. The international trade and investment has led to the foreign direct investments in India. As a result of these policies the world was at the doorsteps of India, the total foreign investments grew from a paltry $132 million in 1991-92 to $5.3 billion in 1994-95, The FDIs raised from 1 percent of the countries gross fixed capital formation as in 1991 to 4 percent in 1993, and now FDI inflows stood at US$ 19.38 billion in April-November 2009. Thus all sectors are pounded with multiple companies; giving scope for more investments, saw the rise of many entrepreneurs, increased the quality of products and services rendered to the consumers. Thus The Pizza hut has made its way into our kitchen, The Samsung/LG/Philips have made their way into our living rooms, The Honda/Fiat/Chevrolet have made their way into our garages, Microsoft, Google and other IT giants have chosen our cities as their working hubs.
FDI has the potential of enhancing economic activity and employment in the country by complementing and supplementing domestic investment. Additional investments brought in through FDI, over and above investments possible with the available domestic resources, assist in providing additional employment opportunities. FDI also plays a vital role in: Up gradation of technology Enhancing Skills Enhancing managerial capabilities
TYPES
Inward FDIs : Inward foreign investment is the investment of foreign capital that occurs in local resources. Different economic factors encouraging inward FDIs include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Outward FDIs : In this case it is the local capital, which is being invested in some foreign resource, also referred to as direct investment abroad. It is backed by the government against all types of associated risks and subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs.
Vertical FDI : It takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal FDI : It happens when a multinational company carries out a similar business operation in different nations. Market-seeking FDIs : FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets. Resource-seeking FDIs : FDIs that are aimed at factors of production which have more operational efficiency than those available in the home country of the investor.
FDI has boomed in post-reform India. Moreover, the composition and type of FDI has changed considerably since India has opened up to world markets. This has fuelled high expectations that FDI may serve as a catalyst to higher economic growth. Growth implications of FDI can be assessed in India by subjecting industry-specific FDI and output data to Granger causality tests within a panel co-integration framework. It turns out that the growth effects of FDI vary widely across sectors. FDI stocks and output are mutually reinforcing in the manufacturing sector.
According to global services location index by AT Kearney, India continues to be the best place to start a business.
The 2009 survey of the Japan Bank for International Cooperation conducted among Japanese investors continues to rank India as the second most promising country for overseas business operations, after China.
According to United Nations Conference on Trade and Development (UNCTAD), World Investment Prospects Survey 2009-2011, India has been ranked at the third place in global foreign direct investments this year , following the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years.
Union Commerce Minister Anand Sharma has disclosed that the flow of foreign direct investment to India during the month of July 2009 has been registered at $3.52 billion, which is 56.5% higher than the $2.25 billion, which was registered during the corresponding period last year. India attracted foreign direct investment (FDI) inflows of US$ 1.74 billion during November 2009, a 60 per cent increase over the US$ 1.08 billion achieved in same month last year. FDI equity inflows as a percentage of GDP has grown from 0.75 per cent in 2005-06 to nearly 2.49 per cent in 2008-09.
July August
September October November December 2009-10(upto dec 09) 2008-09(upto dec 08) % growth over last year
17045 15796
7326 10895 8081 7185 100539 92326 (+)09%
3516 3268
1512 2332 1735 1542 20921 21153 (-)01%
2002-03 2003-04
2004-05 2005-06 2006-07 2007-08 2008-09
5035 4322
6051 8961 22826 34835 35810
(-)18 (-)14
(+)40 (+)48 (+)146 (+)53 (+)01
FDI OUTFLOWS
Indian companies are increasingly buying up companies abroad as strategic acquisition, indicating the growing competitiveness of the Indian corporate sector. India retains its position as the second highest foreign employer in the UK, after the US, according to the 2009 UK inward FDI official data. This year, Indian inward investors created 4,149 new jobs, with 108 new projects, up 44 per cent from last year. India has been witnessing a surge in outward investment with the number of approved projects on the rise. During the quarter July-September 2009, 1,127 proposals amounting to US$ 4.8 billion were cleared for investments abroad in joint ventures (JVs) and wholly owned subsidiaries (WOSs).
During the first half of 2009-10 (April-September 2009), 2,045 proposals amounting to US$ 7.5 billion were cleared for investments abroad in JVs and WOSs, the number of proposals recorded an increase of 2.3 per cent over the corresponding period of the previous year. Actual outward FDI in JVs and WOSs during the quarter July-September 2009 stood at US$ 3.3 billion.
INVESTMENT SCENARIO
Nine proposals for bringing in a total foreign investment of US$ 112.25 million were cleared in December 2009 by the government. Among those approved is a proposal by Japan's Mitsui and Company to bring in US$ 69.83 million to establish a fully-owned subsidiary in the warehousing sector and the setting up of a joint venture entity in the container freight stations segment. Earlier, seventeen proposals involving FDI of over US$ 944.78 million were approved by the Foreign Investment Promotion Board (FIPB) on November 20, 2009, according to an official statement. These majorly included: Sistema Shyam Teleservices' proposal to issue shares worth over US$ 622.79 million to The Federal Agency for State Property Management for Russian Federation; Gucci's plans to pick-up 51 per cent stake in Luxury Goods Retail Ltd, under single brand retail activity; Proposal of British luxury apparel brand Burberry to set up a joint venture in India for single brand retailing. This involves an FDI inflow of US$ 3.47 million.
Forbidden Territories
Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Retail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries,etc. Gambling and Betting including casinos etc. Business of chit fund Nidhi company Trading in Transferable Development Rights (TDRs) Activities / sectors not opened to private sector investment.
Indian Companies allowed to raise equity capital in the international market through the issue of GDRs/ ADRs/FCCBs. No ceiling on investment No end-use restrictions on GDR/ ADR/ FCCB issue proceeds Except Investment in real estate Stock markets.
The recommendations of FIPB in respect of the project-proposals each involving a total investment of Rs.600 crores or less would be considered and approved by the Industry Minister. The recommendations in respect of the projects each with a total investment of above Rs 600 crores would be submitted to the Cabinet Committee on Foreign Investment (CCFI) for decision.
The Government has constituted a Foreign Investment Promotion Council (FIPC) under the chairmanship of Chairman ICICI, to undertake vigorous investment promotion and marketing activities. FIPC undertakes the investment promotional activity which entails making extensive contact with potential investors, lobbying and interacting with individual companies etc. The Council with distinguished and well known experts as the members will capitalise, manage and coordinate investment promotion and marketing efforts.
4. INVESTMENT COMMISION
The Investment commission of India is a three-member commission set up in the Ministry Of Finance in December 2004 by the govt of India. Mr. Ratan Tata is chairman. This commission advises the govt of India on changes in policies and procedures, recommends projects and proposals to
enhance investment.
FDI Vs FII
A foreign institutional investor means an institution established or incorporated in foreign country that proposes to make investments in the country in securities. FDI flows into the primary market whereas FII flows into the secondary market, that is, into the stock market.
FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrip's.
Net outflow of FFIs in February, 2010 stood at Rs 7216.67 Cr.
FDI DETERMINANTS
Growth Prospects Of An Economy Population Of A Country Size Of The Market Political Stability Legal And Regulations Access To Basic Inputs Infrastructural Facilities Status Of Human Resource Inexpensive Labor Force
Counting of indirect foreign Investment: (a) The foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are owned and controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens . (b) For cases where condition (a) above is not satisfied or if the investing company is owned or controlled by non resident entities, the entire investment by the investing company into the subject Indian Company would be considered as indirect foreign investment.
Economic Reforms
Liberalization of Industrial Policy
More sectors opened ; Equity caps raised in many other sectors Procedures simplified Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors FDI up to 51% allowed under the Automatic route in 35 Priority sectors Allowed selectively up to 40% FDI Policy Liberalization
37
2000
1997
1991
Pre 1991
PROHIBITED SECTORS
Sectors prohibited for FDI i. Retail Trading (except single brand product retailing) ii. Atomic Energy iii. Lottery Business iv. Gambling and Betting v. Business of chit fund vi. Trading in Transferable Development Rights (TDRs). vii. Activity/sector not opened to private sector investment
AGRICULTURE
Agriculture & Animal Husbandry 100% FDI is allowed under automatic route in Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aquaculture and Cultivation of Vegetables & Mushrooms under controlled conditions and services related to agro and allied sectors. Besides the above, FDI is not allowed in any other agricultural sector/activity. Plantation - including tea plantation. 100% FDI is allowed in the Tea sector including tea plantations under Government route subject to the conditions of : (i) Compulsory divestment of 26% equity of the company in favour of an Indian partner/Indian public within a period of 5 years (ii) Prior approval of the State Governement concerned in case of any future land use change. Besides the above, FDI is not allowed in any other plantation sector/activity.
INDUSTRY
MINING
Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals. 100% Automatic Subject to Mines & Minerals (Development & Regulation) Act, 1957 Coal & Lignite mining for captive consumption by power projects, and iron & steel, cement production and other eligible activities permitted under the Coal Mines (Nationalisation) Act, 1973. 100% Automatic Subject to provisions of Coal Mines (Nationalization) Act, 1973 Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities . 100% FIPB Subject to sectoral regulations and the Mines and Minerals (Development & Regulation) Act, 1957
INDUSTRY
MANUFACTURING
Alcohol- Distillation & Brewing 100% Automatic Subject to license by appropriate authority Cigars & Cigarettes- Manufacture 100% FIPB Subject to industrial license under the Industries (Development & Regulation) Act, 1951 Coffee& Rubber processing & warehousing 100% Automatic Defence production 26% FIPB Subject to licensing under Industries (Development & Regulation) Act, 1951 and guidelines on FDI in production of arms & ammunition.
INDUSTRY
MANUFACTURING contd.
Hazardous chemicals, viz., hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanates and di isocyantes of hydrocarbon. 100%
Automatic Subject to industrial license under the Industries (Development & Regulation) Act, 1951 and other sectoral regulations.
Drugs & Pharmaceuticals including those involving use of recombinant DNA technology
100% Automatic
Major players
Electronic Hardware
Major international players Siemens, Texas Instruments, Matsushita, Alcatel, LG, Samsung, Sharp and Lenovo. Nokia, Sony Ericsson (OEM by Foxconn and Flextronics), LG Electronics, Samsung Mobile and Motorola have set up manufacturing facilities for mobile handsets in India. 100% FDI under automatic route is allowed excepting for aerospace and defence equipment manufacturers which require an industrial license. New SEZ Act with duty-free imports and income tax concessions. International contract manufacturers like Flextronics (Chennai) and Jabil Circuit (Pune) have set up base in India.
Major Players
Automobile
100% FDI through the automatic route. Major domestic players Tata Motors, Hero Honda, Bajaj Auto, Ashok Leyland and TVS. Major international private players Suzuki, Hyundai, Ford, General Motors, Toyota and Honda Vehicle production expected to increase from 8.6M in 2004-05 to 15M by 2010-11. Hyundai and Suzuki are considering India as a global hub for the manufacture of small cars.
Major Players
Auto Components
Expected to grow to over 3% by 2015-16. International players Delphi, Visteon, Bosch and Meritor have set up operations in India. General Motors, Ford, Toyota etc. have set up IPOs in India to feed their global operations. GM, Daimley Chrysler, Bosch, Suzuki, Johnson Controls etc. have set up R&D centres in India. 100% FDI through the automatic route.
INDUSTRY
POWER
Power including generation (except Atomic energy); transmission, distribution and Power Trading. 100% Automatic
FDI upto 100% is permitted under automatic route for: Generation and transmission of electric energy produced in-hydro electric, coal/lignite based thermal, oil based thermal and gas based thermal power plants. Non-Conventional Energy Generation and Distribution. Distribution of electric energy to households, industrial, commercial and other users. This does not include generation, transmission and distribution of electricity produced in atomic power plant/atomic energy since private investment in this sector/activity is prohibited and is reserved for public sector.
POWER contd..
India's power sector is set to emerge as a key destination for private equity (PE) players with close to US$ 1.64 billion worth of infrastructure funds set to be launched. Voith, the German engineering corporation, is shortly to inaugurate its Vadodara plant that will make runners for hydro power plants Toshiba (in a joint venture with JSW Group) is drawing up plans for commencing manufacturing operations in the country. -- India Brand Equity Foundation
Service sector
.
RBI
Central bank 1)bank of government. fiscal policy 2)bank of banks. monitory policy.
Why ?
Govt. needs FDIs? Govt. needs FIIs? FII :-they does not provide stability to market. FDI:-e.g. in banks to control lending rate, fluctuations of economy. E.g. Defense :-dont want to give participation to any other countries for strategic policy of country. E.g. 3G.
A foreign bank may operate in India through only one of the three channels viz., (i) branches (ii) a wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank. e.g. RBS, Standard Chartered, Deutsche Bank, CITI Bank, HSBC.
conti
E.g. Air-Asia, Malasyia Airlines-Banglore, KLM Bombardier Mumbai.
Broadcasting
29.1Terrestrial Broadcasting FM (FM Radio): Foreign investment, including FDI, NRI and PIO investments and portfolio investments are permitted up to 20% equity for FM Radios Broadcasting Services with prior approval of the Government. E.g. Radio Mirchi:-Star Group (U.S.A.)
Cable Network:
Foreign investment, including FDI, NRI and PIO investments and portfolio investments are permitted up to 49% for Cable Networks under Government route subject to Cable Television Network Rules, 1994.
Direct to-Home
Foreign investment, including FDI, NRI and PIO investments and portfolio investments are permitted up to 49% for Direct to Home under Government route. Within the limit of 49% FDI will not exceed 20%. E.g. TATA SKY:-SKY network U.S.A.(20+9.8) Star world, Fox History, UTV Bloomberg.
Business Services
100% FDI under the automatic route is allowed in Data processing, software development and computer consultancy services; Software supply services; Business and management consultancy services, Market Research Services, Technical testing& Analysis services. E.g. Standard & Poor company: Crisil Goldman & Sachs
Commodity Exchanges
Futures trading in commodities are regulated under the Forward Contracts (Regulation) Act, 1952. Commodity Exchanges, like Stock Exchanges, are infrastructure companies in the commodity futures market. With a view to infuse globally acceptable best practices, modern management skills and latest technology, it was decided to allow foreign investment in Commodity Exchanges. Mutual funds :-SBI Life-BNP Paribus
Courier services
100% FDI is allowed under the Government route. 34.2 This will be subject to existing Law i.e Indian Post Office Act 1998 and exclusion of activity relating to the distribution of letters. E.g. Fed-Ex, DTH, DTDC.
Cont..
E.g. La Meridian, Grand Hyatt, Radisson Tourism :-Thomas Cook
Insurance
FDI up to 26% in the Insurance sector, as prescribed in the Insurance Act, 1999, is allowed under the automatic route. This will be subject to the condition that Companies bringing in FDI shall obtain necessary license from the Insurance Regulatory & Development Authority for undertaking insurance activities .
e.g.
Bajaj Allianz Life Insurance Company Limited HDFC Standard life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd. ING Vysya Life Insurance Company Ltd. Max New York Life Insurance Co. Ltd Met Life India Insurance Company Ltd. Kotak Mahindra Old Mutual Life Insurance Limited Tata AIG Life Insurance Company Limited Reliance Life Insurance Company Limited. Aviva Life Insurance Co. India Pvt. Ltd. Bharti AXA Life Insurance Future Generali Life Insurance IDBI Fortis Life Insurance Canara HSBC Oriental Bank of Commerce Life Insurance Religare Life Insurance DLF Pramerica Life Insurance Star Union Dai-ichi Life Insurance Apollo DKV Insurance HDFC Ergo General Insurance Company ICICI Lombard General Insurance IFFCO Tokio General Insurance Reliance General Insurance Tata AIG General Insurance
Print Media
Publishing of Newspaper and periodicals dealing with news and current affairs: Foreign investment, including FDI and investment by NRIs/PIOs/FII, up to 26%, is permitted under the Government route. Publishing/printing of Scientific and Technical Magazines/specialty journals/ periodicals: 100% FDI is permitted under the Government route. E.g. Times Group:- Benetton & Colman. Mint- Wall street Journal. Forbes India.
Telecommunication
Foreign Direct Investment limit in telecom services is 74 per cent subject to the following conditions: This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services . In any case, the `Indian shareholding will not be less than 26 per cent. FDI up to 49 per cent is on the automatic route and beyond that on the Government route. E.g. TATA-DOCOMO, Hutchison-Essar, Bharti Tele-Ventures, Spice Communications, Uninor.
ADVANTAGES OF FDI
Raising the Level of Investment
Fills gap between desired investment and locally mobilized savings. Provides access to hard currency needed to purchase investment goods.
Upgradation of Technology
Provide investment goods that embody advanced technology. Spill over and actual transfers.
ADVANTAGES OF FDI
Employment Generation
Contributes to human capital formation.
ADVANTAGES OF FDI
Economic Growth
Inflow of foreign currency
Revenue to Government
Profits generated by FDI contribute to corporate tax revenues.
Resilience Factor
Helps in Financial Crisis.
DISADVANTAGES OF FDI
Foreign direct investment may entail high travel and communications expenses. The differences of language and culture could also pose problems in case of foreign direct investment. Influence over the political decisions of developing countries by foreign firms because of their large size and power and may even jeopardize the National Sovereignty and control over economic policies.
DISADVANTAGES OF FDI
Causes risk to the Defense of a country. Could increase income inequalities in society. Stimulate inappropriate consumption pattern through excessive advertising and monopolistic/oligopolistic market power.
Infrastructural Bottlenecks
Failure of power reforms. Inadequate quality of transport services.
State Obstacles
Taxes levied on transportation of goods from state to state. Differential sales and excise taxes.
Privatization
FIIA be empowered to fix time frame on completion of all documentation requirements. Enlarge the no. of activities under automatic route.
Mexico
Canada United Kingdom
8
9 10
19
14 4
+11
+5 -6
REFERENCES:
Bhasin, Niti; Foreign Investment in India; New Century Publication, July, 2008. World Investment Report, 2009; United Nations Conference on Trade and Development. Website of Ministry of Commerce and Industry, http://dipp.nic.in/. http://ibef.org/download/fdi_26October.htm www.medianama.com Economic Times The Hindu