VOLUME, CONSUMPTION & DIRECTION OF FDI & OVERSEAS

INVESTMENT IN INDUSTRY

EFFORTS BY- NIKHIL SHARMA AMREEN SHAHID AKSHAY CHAWLA

SHAILJA SINGH MANALI SOMANI SMRITI KHATTAR

ANKITA SINGH TRISHA AGGARWAL

Foreign Direct Investment

Foreign direct investment is investment made by a foreign individual or company in productive capacity of another country.

Types of FDI1. Greenfield investment 2. Mergers and Acquisition

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

• Arms and ammunition.• Atomic Energy.• Railway Transport.• Coal and lignite.• Mining of iron, manganese, chrome, gypsum,

sulphur, gold, diamonds, copper, zinc.

APPROVAL ROUTES FOR FDI IN INDIA

Automatic Route•Under delegated powers exercised

by RBI.

•FDI up to 100% for new and

existing industries, JVs firms are

permitted under automatic route

for all items except for those where

approval from SEBI or FIPB is

required.

Approval by FIPB•Under Foreign Investment Promotion

Board

•Required for the project that do not

qualify for automatic approval route

•A proposal to be made to FIPB which

studies the project and conveys its

decision within 30 days of submitting

application.

•Preference is given to projects in high

priority area.

INDUSTRIAL POLICY

• The Government’s Liberalization and Economic Reforms Program was initiated in July 1991, under the new Industrial Policy Resolution.

• It has substantially – reduced the industrial licensing requirements– removed restrictions on expansion – facilitated easy access to foreign technology and

foreign direct investment.

CONSOLIDATED FDI POLICY(2010):AN ANALYSIS

• 100% FDI is permitted under automatic route in most of the sector while some sectors do have sectoral caps such as

Banking (74%) Insurance (26%)

Telecom (49%) Aviation (74%)

Single brand retail (51%) etc.• Government is looking forward to allow FDI in media as well

as to facilitate the entry of foreign newspapers or Indian editions of foreign newspapers being printed.

• FDI in multi brand retail and banking &insurance are another sector that is thought to be strengthened by the government.

Investment in India

• Government of India recognizes the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and transparent FDI policy.

FDI trends in India

• Third most attractive destination ,after China and United

States respectively.

• Acc. To DIPP, India recorded an 11 percent increase in FDI in

2008-09, despite the global recession and liquidity crunch.

• India received approximately US$25 billion worth of FDI in

2007-2008; that number increased to US$27 billion in 2008-

2009, highlighting India's ability to remain resilient and

attract investment despite the global slowdown.

• Almost a third share of the investment in India is by NRI.

• Total NRI FDI inflows for 2010 stood at US$ 320.05 million.

• Many wealth managers such as Barclays recommend that banking, infrastructure and real estate would be major avenues for foreign investment in 2011.

• Top 3 region attracting highest FDI in India are: Mumbai-US$ 38,074 million

Delhi-US$ 21,460 million

Karnataka-US$ 6,750 million

• These 3 regions have accounted for 62% of total FDI for last 10

years.

• Other upcoming regions are: Gujarat-US$ 6,382 million

Tamil Nadu-US$ 5,309 million

Pros & Cons

Pros.

• Play a complementary role in overall capital formation

• Employment generation and productivity enhancement

• Encourages the transfer of management skills, intellectual property,

and technology

• Improves Forex position of the country

• Promotion of the competition within the local input market

• Development of the human capital resources Increase in exports

Increases tax revenue

Cons.

• A company may lose out on its ownership to an overseas company

• Government has less control over the functioning of the company that

is functioning as the wholly owned subsidiary of an overseas company

• FDI entering and taking the control of already established market,

where local companies are meeting the requirements of the market

• Invest in machinery and intellectual property, not in wages

• Large giants can set up monopolies in highly profitable sector

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN INDIA

FDI in Hotel & Tourism sector in India

• 100% FDI is permissible in the sector on the automatic route.

• For foreign technology agreements, automatic approval is granted if:

1. up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc.

2. up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking : Non Banking Financial Companies

• 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

• (A) FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies

Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit

(B) Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $

7.5 million to be brought upfront and the balance in 24 months

(C) Minimum capitalization norms for non-fund based activities: • Minimum capitalization norm of US $ 0.5 million is applicable in respect

of all permitted non-fund based NBFCs with foreign investment

FDI in Insurance sector in India

• FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)

FDI in Telecommunication sector• In basic, cellular, value added services and global mobile personal

communications by satellite, FDI is limited to 49% subject to licensing and security requirements .

• ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval.

• No equity cap is applicable to manufacturing activities. • FDI up to 100% is allowed for the following activities in the telecom sector :

– ISPs not providing gateways (both for satellite and submarine cables); – Infrastructure Providers providing dark fiber (IP Category 1); – Electronic Mail; and – Voice Mail

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

FDI IN TRADING COMPANIES IN INDIA

• Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house.

• However, under the FIPB route100% FDI is permitted in case of trading companies for the following activities:

1. exports; 2. bulk imports with ex-port/ex-bonded warehouse sales; 3. cash and carry wholesale trading; 4. other import of goods or services provided at least 75%

is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.

FDI in Drugs & Pharmaceuticals

• FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI in Roads, Highways, Ports and Harbors

• FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

FDI IN -• Pollution Control and Management FDI up to 100% in both manufacture of pollution control

equipment and consultancy for integration of pollution control systems is permitted on the automatic route.

• Call Centers in India FDI up to 100% is allowed subject to certain conditions.

• Business Process Outsourcing BPO in India FDI up to 100% is allowed subject to certain conditions.

Foreign Direct Investment in Small Scale Industries (SSI's) in India

• Recently, 100% FDI in many manufacturing industries

designated as Small Scale Industries has been allowed.

• India further ended in February 2008 the monopoly of small-

scale units on 79 items, leaving just 35 on the reserved list that

once had as many as 873 items.

• Now, only 35 items remain reserved for the small scale

industries sector. For foreign investors, it means that in those

35 reserved sectors foreign investment is allowed on a limited

basis, except where certain conditions are met.

India Further Opens Up Key Sectors for Foreign Investment

• New opportunity for FDI in following sectors:Commodity exchanges.Credit information services.Aircraft maintenance operation.Credit Information companies. Industrial Parks.Construction and Development projects.

• 74% FDI in civil aviation to be allowed through automatic route.• 26% FDI and 23% FII investments in commodity exchanges, provided

that that no single entity will hold more than 5% of the stake. • 100% FDI in mining of titanium, keeping India's civilian nuclear

ambitions in mind

SECTORS ATTRACTING HIGHEST FDIRanks Sector 2006-07

(Apr- Mar) 2007-08 (Apr- Mar)

2008-09 (Apr- Mar)

2009-10 (Apr- Mar'09)

Cumulative Inflows (Apr ’00 to May ‘09)

% age to total Inflows (In Rs.)

1. SERVICES SECTOR (financial & non-financial)

21,047 (4,664)

26,589 (6,615)

28,411 (6,116)

5,308 (1,073) 89,761 (20,322) 23 %

2. COMPUTER SOFTWARE & HARDWARE

11,786 (2,614)

5,623 (1,410) 7,329 (1,677) 733 (149) 40,229 (9,103) 10 %

3. TELECOMMUNICATIONS (radio paging, cellular mobile, basic telephone services)

2,155 (478) 5,103 (1,261) 11,727 (2,558)

3,055 (612) 31,422 (6,989) 8 %

4. HOUSING & REAL ESTATE 2,121 (467) 8,749 (2,179) 12,621 (2,801)

2,801 (566) 26,583 (6,078) 7 %

5. CONSTRUCTION ACTIVITIES(including roads & highways)

4,424 (985) 6,989 (1,743) 8,792 (2,028) 2,694 (551) 24,871 (5,742) 6 %

6. AUTOMOBILE INDUSTRY 1,254 (276) 2,697 (675) 5,212 (1,152) 497 (101) 15,564 (3,489) 4 %

7. POWER 713 (157) 3,875 (967) 4,382 (985) 777 (159) 14,789 (3,349) 4 %

8. METALLURGICAL INDUSTRIES 7,866 (173) 4,686 (1,177) 4,157 (961) 113 (23)

11,618 (2,746) 3 %

9. PETROLEUM & NATURAL GAS 401 (89) 5,729 (1,427) 1,931 (412) 869 (174) 11,046 (2,567) 3 %

10. CEHMICALS(other than fertilizers)

930 (205) 920 (229) 3,427 (749) 247(50)

9,814 (2,184) 3 %

GRAPH SHOWING SECTOR-WISE FDI INFLOW IN INDUSTRY

Challenges

• India is focusing on maximizing political and social stability along with a regulatory environment.

• In spite of the obvious advantages of FDIs, there are quite a few challenges facing larger FDIs in India, such as:

1. Resource challenge2. Equity challenge3. Political challenges4. Federal Challenges

Cont…

• India must also focus on areas of Poverty reduction. Trade liberalization.Banking and insurance liberalization.

• Challenges facing larger FDI are not just restricted to the ones mentioned above, because trade relations with foreign investors will always bring in new challenges in investments.

Authorities dealing with FDI1. Foreign Investment Promotion Board:• Expedite clearance processes.• Periodically review implementation of cleared proposal.• Review general and sectoral policy guidelines.• Undertake investment promotion activities.

2. Secretariat for Industrial Assistance(SIA):• Acts as gateway to industrial assistance to India.• Assists entrepreneurs and investors in setting up

projects.• Liaises with govt. bodies to seek necessary clearance.

Cont…3. Foreign Investment Implementation

Authority(FIIA):• Quick implementation of FDI approvals.• Resolution of operational difficulties faced by

foreign investors.• Gather feedback from foreign investors.4. Other authorities:• Investment commission.• Project approval Board• RBI

Department of Industrial Policy and Promotion(DIPP):

• Formulation and implementation of industrial policy and strategies

for industrial development in conformity with the development

needs and national objectives;

• Monitoring the industrial growth, in general, and performance of

industries specifically assigned to it, in particular, including advice on

all industrial and technical matters;

• Formulation of Foreign Direct Investment (FDI) Policy and

promotion, approval and facilitation of FDI;

• Encouragement to foreign technology collaborations at enterprise

level and formulating policy parameters for the same;

Cont…

• Formulation of policies relating to Intellectual Property Rights in the

fields of Patents,

• Trademarks, Industrial Designs and Geographical Indications of Goods

and administration of regulations, rules made there under ;

• Administration of Industries (Development & Regulation) Act, 1951

• Promoting industrial development of industrially backward areas and

the North Eastern Region including International Co-operation for

industrial partnerships and Promotion of productivity, quality and

technical cooperation.

Foreign Exchange Management Act(FEMA)

The object of the Act is to • consolidate and amend the law relating to

foreign exchange • facilitating external trade and payments • promoting the orderly development and

maintenance of foreign exchange market in India.

Case Study

POSCO – India’s Biggest FDI

• Posco is Pohang Steel Company, the world's fifth largest steel company based in South Korea.

• The environment ministry on January 31, 2011gave its clearance to the 12 billion i.e. Rs 52,000-crore Posco integrated steel plant in Orissa on Monday, relenting on its tough insistence on absolute compliance with environment laws.

• The project will include iron ore mine development over 30 years (total 600 million tons) at captive mines located in the Keonjhar and Sundergarh districts of Orissa, as well as development of related infrastructure.

Cont…• Posco had claimed that its project in Jagatsinghpura would bring

unemployment down from 9.9 lakh to a mere 1.2 lakh. • It would further downstream industries like automobile, shipping and

construction

India will derive significant benefits from the

POSCO India project, as it will create an estimated 48,000 direct and indirect jobs in the region. In addition, the construction phase will create about 467,000 man years of employment for the local population.

ArcelorMittal

• The world’s largest steel maker, ArcelorMittal has planned to invest about $26 Billion in its proposed greenfield steel manufacturing projects in India.

• This Luxembourg-based company plans to setup two steel plants with capacity of 12 million tonne each in Orissa and Jharkhand.

• It has also signed a MoU to build a third plant with a capacity of 6-million tonne in Karnataka at an investment of Rs 30,000 crore ($6.4 billion).

Cont…

• This Project will generate more than 50,000 employment in Orrisa & Jharkhand.

• Meanwhile, Mr Mittal had also indicated to abandon his two projects in Orissa and Jharkhand due to problem in land acquisition.

• The project is still under consideration and is expected to start in first or second quarter 0f year 2011.