global services-13!14!15 prof. tarun das

8/9/2019 Global Services-13!14!15 Prof. Tarun Das

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Global Services- Lectures 13-14-15Indias Outward Investment-Policy,Regulatory Regime and Prospects

Presented by

Prof. Tarun Das, IILM, New Delhi.Formerly, Economic Adviser, Ministry of Finance


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Outward FDI - Tarun Das 2

CONTENTS

1. Outward investments by developingcountries

2. Indias outward investment

3. Modes of Indian outward investment

4. Host / Home country policies

5. country policies


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1.1 Outward Investment

Since 1990, a number of developing

countries have begun exporting capital, both inthe form of portfolio investments and FDI,

According to UNCTAD, the outward FDIstock from developing countries increased from

$60 billion in 1980 to $129 billion in 1990 andfurther to $859 billion in 2003.

The share of developing countries in global

outward FDI flows reached about 10%. SouthKorea, Malaysia and Singapore have beenoutward investors for some time; Brazil, China,India and South Africa are now following suit.


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1.2 Outward Investment A recent IMF report also stated that outward

FDI from Asian emerging market countries isexpanding rapidly.

FDI flows from India, China, Korea, Malaysia,Singapore and Thailand are expanding rapidly

and go beyond the well-publicized investmentsby Koreas POSCO in other countries.

Nature of such emerging multinationals(EMNCs) also changed over the years.

In the past, FDI flows from developingcountries resulted from political commitmentsrather than as an exploration of businessopportunities, involved green field investmentsin other developing countries.


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1.3 Outward Investment However, recent years witnessed emergence

of global players from the developing countriesfacilitated by their production, marketing,financial and networking skills supplemented bya specialized knowledge of doing business in

non-OECD countries. Growing trends of M&As by the developingcountries as evidenced by the merger betweenSouth African Breweries & Miller, that betweenTata Steel & Corus Steel, the takeover of International Steel Group by Mittal of India, orthe acquisition of the IBM-PC business byLenovo of China, and the attempts to take overUS multinationals in oil and domestic appliances.


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1.4 India is emerging as a major player inglobal outward investment

Buoyed by the success of IT, ITES, biotech,auto ancillary, oil companies, India has becomenot only a favorable destination for foreigninvestment but also is emerging as a majorplayer in global outward investment.

Indian overseas investments span not onlyacross the developing world, but also to the US,the UK,and Germany.

With annual outflows averaging at $1 billion

since the turn of the century, Indias ranking inUNCTAD's outward FDI performance index shotup from the 107th rank in 1999 to the 61st in2003 and further to the 54th rank in 2004.


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1.5 India is emerging as a major player inglobal outward investment

Indian firms have been investing abroad for

many years. But it is only since the late 1990sthat outward FDI flows have risen rapidly.

Indias outward FDI stock increased fromUS$600 million in 1996 to $6.6 billion in2004, taking India to the 15th rank in terms ofoutward FDI stock among the developingeconomies.

Its outward FDI flows in 2004 at $2.2 billionexceeded that of China at $1.8 billion and that

of Malaysia at $2.1 billion (UNCTAD 2005).


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1.6 Top 16 developing countriesoutward FDI in 2004 (US$ billion)

Country OutwardFDI stock

Stock as% of GDP

OutwardFDI Flow

1.HongKong 405.6 246.5 39.8

2.Singapore 100.9 94.5 10.7

3.Taiwan 91.2 29.9 7.1

4.Russian Fed. 81.9 14.0 9.6

5.Brazil 64.4 10.7 9.5

6.Korean Rep. 39.3 5.8 4.8

7.China 38.8 2.4 1.8

8.South Africa 28.8 13.5 1.6


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1.7 Top 16 developing countriesoutward FDI in 2004 (US$ billion)

Country OutwardFDI stock

Stock as% of GDP

OutwardFDI Flow

9.Argentina 21.8 14.4 0.3

10.Mexico 15.9 2.3 2.2

11.Chile 14.5 15.4 0.9

12.Malaysia 13.8 11.7 2.1

13.Venezuela 9.2 8.6 0.4

14.Turkey 7.0 2.3 0.9

15.India 6.6 1.0 2.2

16.Nigeria 4.8 6.8 0.3


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2.1 Indias Outward Investment Policy It is well known that since 1991 Indiaadopted an open door policy for foreigninvestment and trade and initiated crediblereforms in industry, trade, fiscal and financialsectors to enhance efficiency, productivity andcompetitiveness of Indian industries and to

induce dynamism to the overall growth process. As a part of the ongoing reforms program,India liberalized significantly both inward andoutward foreign investment policies.

It entered into Bilateral Investment Promotion and Protection Agreements (BIPAs)with a number of countries to promote andprotect foreign investment on reciprocal basis.


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Outward FDI - Tar

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2.2 Routes of Indias Outward Investment (i) Automatic Route: Indian corporates/registered partnership firms are allowed toinvest in entities abroad up to 200% of their networth in a year, without prior approval of Reserve Bank or Government of India.

(ii) ADR/GDR Automatic Route: Indiancompanies can freely utilize up to 100% of

ADR/GDR proceeds for overseas investmentswithout any limit under the automatic routesubject to post facto report to the RBI.

(iii) ADR/GDR automatic stock/ swap route:Indian companies can automatically swap theirfresh issue of ADRs/GDRs for overseas M&As inthe same core activity s.t. report to RBI.


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Outward FDI - Tar

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2.3 Routes of Indias Outward Investment(iv) Normal Route: Proposals not covered

under the above routes are considered by theSpecial Committee on Overseas investmentsheaded by the RBI Deputy Governor, withmembers from the Ministries of Finance,Commerce, External Affairs and the RBI.

(b) Liberalized policies Corporates - Listed Indian companies arepermitted to invest abroad in companies, (a)listed on a recognized stock exchange and (b)which has the shareholding of at least 10% in

an Indian company. Such investments shall notexceed 25% of the Indian companys net worth. Individuals - Resident individuals arepermitted to invest in overseas companiesunder (i) above without any monetary limit.


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Outward FDI - Tar

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2.4 Liberalized Outward Investment Policy

Indian corporates/ Registered partnership

firms up to 200% of their net worth. Indian corporates/ registered partnershipfirms are allowed to undertake agriculturalactivities either directly or through a branch.

Guarantees- The scope of guarantee hasbeen enlarged under the Automatic Route.

Indian entities may offer any forms ofguarantee corporate or personal, primary orcollateral, guarantee by the promoter company,

guarantee by group company, sister concern orassociate company in India.


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Outward FDI - Tar

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2.5 Liberalized Outward Investment Policy

Disinvestment- Indian companies are

permitted to disinvest without prior approval ofthe RBI in cases where (i) the JV/WOS is listedin the overseas stock exchange. (ii) Indianpromoter company is listed on a stock exchangein India and has a net worth of less than Rs.100

crore. (iii) Where the Indian promoter is anunlisted company and the investment inoverseas venture does not exceed $10 million. Proprietorship concerns With a view toenabling recognized star exporters with a

proven track record and a consistently highexport performance to reap the benefits ofglobalization and liberalization, proprietary/unregistered partnership firms are allowed toset up a JV/WOS outside India with prior

approval of RBI.


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Outward FDI - Tar

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3.1 Approvals of Outward FDI ($ Mln)

Year Num-ber

Equity loan Guarantee

Total

1999-00 395 1299 50 408 1757

2000-01 714 1177 90 113 1380

2001-02 908 2712 157 156 3026

2002-03 1034 1299 104 142 1545

2003-04 1214 822 230 414 1451

2004-05 1281 2010 384 410 2804

2005-06 1265 1324 393 322 2039


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Outward FDI - Tar

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3.2 Actual Outward FDI ($ Mln)

Year Equity loan Guarantee

Total AnnualCap

1999-00 314 4 0 319 750

2000-01 1138 69 5 1212 1000

2001-02 860 121 0 982 1000

2002-03 1699 100 -- 1799 1000

2003-04 1237 260 -- 1497 1000

2004-05 1246 388 -- 1634 No cap

2005-06 1381 613 -- 2062 No cap


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Outward FDI - Tar

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3.3 Inflows from JVs/WOSs ($ Mln)

Year Dividend

Others Total Exports (Rs.crore)

1999-00 314 4 0 319

2000-01 1138 69 5 1212

2001-02 860 121 0 982

2002-03 1699 100 -- 1799

2003-04 1237 260 -- 1497

2004-05 1246 388 -- 1634

2005-06 1381 613 -- 2062


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Outward FDI - Tar

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3.4 Sector-wise outward FDI ($ Million)Year Manufac

tureFinancial Non-

financialTrading Others Total

2000-01 371 17 877 89 29 1382

2001-02 2211 49 565 139 61 3026

2002-03 1057 2 280 70 62 1470

2003-04 766 35 439 77 134 1451

2004-05 2026 9 548 69 151 2804

2005-06 1111 168 509 133 118 2039

Total 8090 283 4362 635 558 13929


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3.5 Sector-wise outward FDI (in percent)Year Manufac

tureFinancial Non-

financialTrading Others Total

2000-01 31 0 65 3 0 100

2001-02 27 1 63 6 2 100

2002-03 73 2 19 5 2 100

2003-04 72 0 19 5 4 100

2004-05 53 2 30 5 9 100

2005-06 72 0 20 2 5 100

Total 54 8 25 7 6 100


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3.6 Top-10 overseas investorsInvestor Sector $million % share

1.SBI Banking 1179 25.92.Dr.Reddy's Pharma 777 17.1

3.Suzlon Energy 565 12.4

4.Tata Steel Metals 554 12.2

5.Ranbaxy Pharma 324 7.16.Videocon Cons.dur 289 6.3

7.VSNL Telecom 254 5.6

8.Matrix Lab Pharma 253 5.59.TCS IT 207 4.5

10.Wipro IT 154 3.4

Total 4557 100


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3.7 Major sectors for outward investment

Sectors O-Inv % Share

1 Pharmaceuticals 1580 22.2

2 Banking 1180 16.6

3 Infor. Tech. 786 11.0

4 Metals 778 10.9

5 Energy 631 8.8

6 Telecom 308 4.3

7 Consumer durb 289 4.18 Tea and coffee 266 3.7

9 Chemicals 235 3.3

10 Automobiles 205 2.9


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11 Auto ancillaries 159 2.2

12 Fertilisers 153 2.1

13 Petrochemicals 119 1.7

14 Multi products 100 1.415 Hotels 78 1.1

16 Tyres and tubes 72 1.0

17 FMCG 62 0.918 Paints 27 0.4

19 Textiles 20 0.3

20 Refractory 16 0.2


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21 Cement 14 0.2

22 Electrical equipment 13 0.2

23 Foam 12 0.2

24 Packaging 11 0.225 Media/entertainment 5 0.1

26 Gems and jewellery 5 0.1

27 Abrasives 2 0.028 Engineering 2 0.0

Total 7129 100.0


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3.8 Top-20 destinations of Indian O-Inv

Sl. Host Country $ Million % Share

1 United States 1054 18.3

2 United Kingdom 815 14.2

3 Belgium 800 13.9

4 Germany 658 11.4

5 Thailand 487 8.5

6 China 376 6.5

7 Romania 344 6.08 Singapore 192 3.3


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9 Australia 187 3.3

10 Netherlands 171 3.0

11 Canada 118 2.0

12 Cyprus 89 1.513 Mauritius 76 1.3

14 South Africa 74 1.3

15 Sweden 65 1.116 Mexico 59 1.0


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17 Austria 56 1.0

18 Korea 55 1.0

19 Morocco 37 0.6

20 Bermuda 36 0.6Total 5751 100.0


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4.1 Types of FDI Market seeking- to take advantage of huge

domestic markets in host countries Resource exploiting- driven by availability ofmineral and other resources

Export enhancing- to shift production base to

take advantage of low wage rates but technicalmanpower and availability of resources

Efficiency enhancing through technologytransfer and for infrastructure development

Like inward FDI, most of outward FDI aremore of tariff jumping and market seekingrather than efficiency seeking.


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4.2 Modes of Indian O-FDI

Most of the Indian outward investments aremade through mergers and acquisitions (M&As)of the existing firms, as the alternative route ofsetting up a new company or constructing agreen field manufacturing unit would be moretime consuming and possibly more expensive.

Acquisition of already operational entitiesalso allows the overseas investor to benefit from

the existing marketing network, clientele andthe goodwill of the foreign company.


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4.3 Sector-wise acquisitions 2000-2006

Sector FocusRegion

M&As in theregion

Totalnumber

1. IT/ BPO USA 51 90

2.Pharma Europe 36 62

3. Automotive Europe 18 27

4. Chemicalsand Fertilisers

USA, LA,EU, Africa

13 19

5. Con. goods Europe 8 17

6.Metals/mining

Australia 8 15

7. Oil and gas Africa 6 14


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4.4 Geographical distributions ofIndia Incs M&As

Country No.of M&As Country No.of M&As1.USA 100 9.SAARC 42.EU (except UK) 82 10.Canada 3

3.UK 40 11.Russia 34.SE Asia 20 12.Mid.East 25.Australia 14 13.Japan 16.Africa 13 14.Others 5

7.Lat.Am 118.China 8 Total 306


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4.5 Top Indian Companies in termsof number of M&As

Company No.of M&As Company No.of M&As1.Teledata Inf. 11 9.Bharat Forg 52.Ranbaxy 10 10.Essel 5

3.ONGC 9 11.Glen.Phar. 54.Un.Phosphoros 8 12.Nich.Piram 55.Wipro 8 13.Subex Sys 5

6.Godrej 7 14.Sun Pharm 57. 3i Infotech 6 15.Dr.Reddys 48.Asian Paints 5 Total 98


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4.6 Crucial Acquisitions by Indian MNCs

1. Amtek Auto with Zelter GmbH (Germany),GWK Group (UK), Lloyds (Brierly Hill) (UK),Midwest Mfg. Co. (USA).

2. Asian Paints with Delmege Forsyth (Sri

Lanka), Pacific Paints (Australia), BergerInternational, SCIB Chemical (Egypt),Taubmans Paints (Fiji)

3. Aurobindo Pharma with Milpharm (UK)

4. Bharat ForgeCDP Aluminiumtechnik(Germany), Federal Forge (USA), ImaraForging Group (Sweden and Scotland)


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4.7 Crucial Acquisitions by Indian MNCs

5. Dr. Reddys Lab with Roches API BusinessCo. (Mexico), Beta Pharm Group (Germany)

6. Glenmark Pharmaceutical Laboratories withKlinger (Brazil), Servycal SA (Argentina),

Bouwer Bartlett (South Africa).7. Indian HotelsHotels in Zambia and Australia

8. M&MJiangling Tractor Company (China)

9. MaricoSundari LLC (USA)10. Motherson SumiReiner Parizision GmbH and

G+S Kunstofftechnik GmbH (Germany))


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4.7 Crucial Acquisitions by Indian MNCs11. Nicholas Piramal with Rhodias IA (UK and

India), Avecia (UK)12. Sanam Computer with Citisoft (UK)13. Sterlite Industries with Monte Cello

Corporation (Netherlands), Holding Co. ofCopper Mines (Australia)

14.Sundaram Fasteners with Dana Spire (UK),Peiner Umformtechnik GmbH (Germany)15. Tata Motors with Daewoo Commercial

Vehicles (Korea), Hispano Carrocera (Spain)16. Tata Steel with NetSteel Asia, Corus (UK,

Netherlands)17.Tata Tea with Tetley, Good Earth. JEM-A.Glaceau


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4.7 Crucial Acquisitions by Indian MNCs18. Tata Consultancy Services with Comicrom

(Chile), FNS (Australia)19.United Phosphorus with MTM Agrochem(UK), Agrodan (Denmark), MidlandFumigants (Europe), Cequisa (Spain), ShawWallace Agrochem (India), Advanta (seed

business) (Netherlands)20. VSL with Teleglobe International Holdings,Tyco Global Network

21. Wipro with Spetramind, GEs healthcaresoftware arm, global Energy practice of

American Management Systems, Nervewire(USA), Ericssons Indian R&D arm.


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5.1 Drivers of Foreign Investment-

Host Country Policies

FDI inflows are determined by a complex setof economic, political and social factors. Foreign investors look beyond the array offiscal incentives offered by the host country. FDI is attracted by sound macro-economicpolicies, stable economic systems, sustainedhigh growth,liberalisation of trade, investmentand industry, particularly by liberal FDI regimes. Full currency convertibility, free repatriation,

less performance criteria, tax holidays and otherincentives, abolition of screening requirements,relaxation of sectoral limits on foreign equity.


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5.2 Other Factors Attracting FDI

Domestic market potentials

Skilled labor & reasonable wage rates Low transactions costs High rates of return Labour mobility

Matured capital market Modern financial system Efficient infrastructure Established legal and institutional set-up

Transparent rules and regulations Administrative speed and efficiency Special economic zones, EPZs etc.


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5.3 Other Factors Attracting FDI

National treatment to foreign investors

Most favored nation treatment (MFN)

Free transfer of profits and dividends

International standards for laws

International arbitration in the case of disputesProtection of intellectual property rights (IPR)

Right to employ management of its choice

The formation of regional trading blocks such

as NAFTA, ASEAN, APEC, SAARC etc. had alsoan important impact on the FDI pattern

In future, countries outside the regional blocksmight have disadvantages in attracting FDI.


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5.4 Foreign Investors Dislike Most Any screening of investment except for

national security, public health, individualsafety, and environmental protection.

Performance requirements such as exportorientation, local content, value addition, foreign

exchange, as these distort international tradeand investment flows, and result in diminishedreturns to both home and host countries.

Since 1980, countries that guaranteed fullrepatriation of profits attracted 95% of foreign

investment, countries adhering to Convention ofSettlement of Investment Disputes attracted90% of foreign investment from USA.


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5.5 Role of Fiscal Incentives Fiscal and other incentives remain an

important part of a countrys investment promotion package, and can tilt the balance ininvestors location choices, particularly for

footloose industries such as automobiles andfood processing industries.

Incentives play, however, only a minor rolefor FDI and attract only those fly-by-nightfirms, which exist on exploitation of incentives.

As incentives represent substantial economic

costs, a rational, efficient, equitable andinternationally competitive tax system is moreconducive to FDI than fiscal incentives.


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5.6 Home Country Policies

Developing countries like India have paiddue attention to outward FDI policies byliberalizing outward capital flows. They are liberalizing debt, bond, capitalmarkets and foreign exchange regulations to

move towards full capital account convertibility. They are also liberalizing policies forcontractual savings and institutional investorssuch as insurance, pension and provident fundsleading to a multiple increase of foreign

investment.


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6.1 FDI Inflows as % of GDI

Country 1984-1989 1990 2004

India 0.1 0.1 3.4China 1.8 2.6 8.2Hong Kong 12.2 8.5 92.1

Indonesia 1.6 2.8 1.9

Korea, Rep. 1.4 0.8 3.8Malaysia 8.8 23.8 23.4Philippines 5.1 5.2 3.3

Singapore 28.3 47.1 62.7Taiwan 3.3 3.8 3.1

Thailand 4.4 7.1 2.5

6 fl f


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6.2 FDI Outflows as % of GDI

Country 2002 2003 2004

India 1.0 0.7 1.4China 0.5 - 0.2Hong Kong 47.6 15.9 107.6

Indonesia 0.5 - 0.2

Korea, Rep. 1.6 1.9 2.4Malaysia 8.6 6.0 8.5Philippines 0.4 1.5 2.9




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6.3 FDI Inward Stock as % of GDP

Country 1980 1990 2004

India 0.7 0.6 5.9China 3 7 14.9Hong Kong 487 218 277.6Indonesia 14 34 4.4

Korea, Rep. 2 2 8.1Malaysia 21 24 39.3

Philippines 4 7 14.9

Singapore 53 77 150.2Taiwan 6 6 12.8

Thailand 3 10 29.7


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6.4 FDI Outward Stock as % of GDP

Country 1990 2000 2004

India 0.0 0.4 1.0China 1.3 2.6 2.4Hong Kong 15.9 234.9 246.5Indonesia 0.1 4.6 0

Korea, Rep. 0.9 5.8 5.8Malaysia 6.1 23.6 11.7

Philippines 0.3 2.1 1.9




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6.5. Concluding Remarks As the first generation reforms take root and

second generation reforms unfold, India isemerging not only as a favourite destinationfor foreign investment, but also a majorplayer in outward investment among thedeveloping countries.

India should maintain its open door policy ingoods and services production, investmentand trade.

Carried to their logical ends, reforms wouldmake India as one of the most dynamic and

fastest growing economies of the world by2010. India is an economic miracle waiting to

happen. All of you are welcome to participatein this process of development.


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8.1 Review Questions1. (a) Discuss different modes for outward

investment.(b) Which one is the dominant mode forIndian overseas investment, and what arethe main reasons for that?(c) Indicate the major destinations forIndian overseas investment.(d) Indicate the major sectors for Indianoverseas investment.

2. (a) Indicate the names of top Indian

companies in terms of cross-border M&As.(b) Indicate some of the crucial cross-borderacquisitions made by Indian companiessince 2000.


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8.1 Review Questions

3. (a) Discuss the general host country policiesencouraging Indian outward investment.(b) Discuss the important home countrypolicies encouraging Indian outwardinvestment.

4. (a) Discuss policies, strategy and regulatoryregime for Indian overseas investment.

(b) What has been their impact on theIndian overseas investment?


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Thank you

Have a Good Day

global services-13!14!15 prof. tarun das

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