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FOREIGN DIRECT INVESTMENT (FDI) IN INDIA 2014

2 Soft vision college.

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 ofa 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


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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 constructionsector.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

to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada,

Foreign direct investment in e-commerce will boost infrastructure

development and spur manufacturing facility among other

advantages, says a discussion paper by DIPP.


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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 April-

December 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 yearsUPA 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 WhollyOwned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office ofthe 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 thesame value chain stage in a host country through FDI.

Platform FDI Foreign direct investment from a source country into a destination countryfor 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 indifferent value chains i.e., when firms perform value-adding activities stage by stage in a

vertical fashion in a host country.

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 RouteFDI 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.

HorizontalFDI

Platform FDI

VerticalFDI


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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 RouteFDI 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 AdvanceReporting 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 instrumentas 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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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 2006-07

2007-

082008-

092009-

102010-

11

Sectoral shares (Percent)

Manufactures 17.6 19.2 21.0 22.9 32.1

Services 56.9 41.2 45.1 32.8 30.1

Construction, Real estate and mining 15.5 22.4 18.6 26.6 17.6

Others 9.9 17.2 15.2 17.7 20.1

Total 100.0 100.0 100.0 100.0 100.0

Equity Inflows (US$ billion)

Manufactures 1.6 3.7 4.8 5.1 4.8

Services 5.3 8.0 10.2 7.4 4.5

Construction, Real estate and mining 1.4 4.3 4.2 6.0 2.6

Others 0.9 3.3 3.4 4.0 3.0

Total Equity FDI 9.3 19.4 22.7 22.5 14.9


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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 theyears 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. CUMULATIVEFDIFLOWSINTOINDIA(2000-2013):

A. TOTALFDIINFLOWS(fromApril, 2000toMarch, 2013):

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

US$290,078 millio

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

Rs. 896,38 crore US$193,282 millio

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

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

- US$36,860 million

2. FDI EQUITY INFLOWS Rs. 121,907 crore US$22,423 million

C. FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE FINANCIALYEAR2012-13:

Financial Year2012-13

(April-March)

AmountofFDIEquityinflows

(InRs.Crore) (InUS$mn)

1. April,2012 9,620 1,857

2. May, 2012 7,229 1,327

3. June, 2012 6,971 1,244

4. July,2012 8,182 1,475

5. August,2012 12,578 2,264

6. September,2012 25,552 4,679

7. October,2012 10,295 1,942
http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T2


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8. November, 2012 5,798 1,058

9. December, 2012 6,012 1,100

10

January,2013 11,719 2,157

11

February,2013 9,654 1,795

12

March, 2013 8,297 1,525

2012-13(uptoMarch, 2013) # 121,907 22,4232011-12(up to March, 2012)# 165,146 35,121

%age growthover lastyear (-)28% (-)38%

D. FDIEQUITYINFLOWS(MONTH-WISE) DURINGTHE CALENDAR YEAR 2013:

Calendar Year 2013

(Jan.-Dec.)

Amount of FDI Equity inflows

(In Rs. Crore) (In US$ mn)

1. January, 2013 11,719 2,157

2. February, 2013 9,654 1,795

3. March, 2013 8,297 1,525

Year 2013 (up to March, 2013) # 29,670 5,477

Year 2012 (up to March, 2012) # 29,354 5,844%age growth over last year ( + ) 01 % ( - ) 06 %

Note: Country &Sectorspecificanalysisisavailablefromtheyear2000onwards, asCompany-wisedetailsareprovidedbyRBI 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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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 isalready 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


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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 ascold-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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