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For Knowledge Level I :
What is the full form of FDI :
The full form of FDI is Foreign Direct Investment.
What is the meaning of FDI ?
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 of a 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.
Why Countries Seek FDI ?
(a) Domestic capital is inadequate for purpose of economic growth;
(b) Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;
(c) Foreign capital usually brings it with other scarce productive factors like technical know how, business expertise and knowledge
What are the major benefits of FDI :
(a) Improves forex position of the country;
(b) Employment generation and increase in production ;
(c) Help in capital formation by bringing fresh capital;
(d) Helps in transfer of new technologies, management skills, intellectual property
(e) Increases competition within the local market and this brings higher efficiencies
(f) Helps in increasing exports;
(g) Increases tax revenues
Why FDI is Opposed by Local People or Disadvantages of FDI :
(a) Domestic companies fear that they may lose their ownership to overseas company
(b) Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;
(c) Large giants of the world try to monopolise and take over the highly profitable sectors;
(d) Such foreign companies invest more in machinery and intellectual property than in wages of the local people;
(e) Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;
Brief Latest Developments on FDI (all sectors including retail):-
2012 – October: In the second round of economic reforms, the government cleared amendments to raise the FDI cap
(a) in the insurance sector from 26% to 49%;
(b) in the pension sector it approved a 26 percent FDI;
Now, Indian Parliament will have to give its approval for the final shape,"
2012 - September : The government approved the
(a) Allowed 51% foreign investment in multi-brand retail,
(b) Relaxed FDI norms for civil aviation and broadcasting sectors. – FDI cap in Broadcasting was raised to 74% from 49%;
(c) Allowed foreign investment in power exchanges
2011 – December :(i) The Indian government removed the 51 percent cap on FDI into single-brand retail outlets and thus opened the market fully to foreign investors by permitting 100 percent foreign investment in this area.
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For Knowledge Level II
Explain the forms in which business can be conducted by a foreign company in India
A foreign company planning to set up business operations in India may:
What is the procedure for receiving Foreign Direct Investment in an Indian company?
An Indian company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
ii. Government Route
FDI 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.
What is Scope of FDI in India? Why World is looking towards India for Foreign Direct Investments :
India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India, has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies.
Some of the major economic sectors where India can attract investment are as follows:-
In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.
Background and Recent Developments for FDI in Retail Sector which has raised lot of controversies in political circles :
As part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps:
1995 : World Trade Organisation’s (WTO) General Agreement on Trade in Services, which includes both wholesale and retailing services, came into effect
1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route;
2006 : FDI in cash and carry (wholesale) was brought under automatic approval route; Upto 51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series)
2011 : 100% FDI in Single Brand Retail allowed’
2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment in multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]’
Name the sectors where FDI is NOT allowed in India, both under the Automatic Route as well as under the Government Route?
FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:
i) Atomic Energy
ii) Lottery Business
iii) Gambling and Betting
iv) Business of Chit Fund
v) Nidhi Company
vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
vii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification
viii) Trading in Transferable Development Rights (TDRs).
ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.
For Knowledge Level III :
Name the authorities Dealing With Foreign Investment:
(a) Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible for expeditious clearance of FDI proposals and review of the implementation of cleared proposals. It also undertake investment promotion activities and issue and review general and sectoral policy guidelines;
(b) Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in India and assists the entrepreneurs and investors in setting up projects. SIA also liaison with other government bodies to ensure necessary clearances;
(c) Foreign Investment Implementation Authority (FIIA) : The authority works for quick implementation of FDI approvals and resolution of operational difficultieis faced by foreign investors;
(d) Investment Commission
(e) Project Approval Board
(f) Reserve Bank of India
What are the instruments for receiving Foreign Direct Investment in an Indian company?
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 instruments 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 conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].
What are the Total Inflows of FDI in India :
a. For the FY 2012-13 (for the month of July, 2012) was US$ 1.47 billion.
b. Amount of FDI equity inflows for the financial year 2012-13 (from April 2012 to July 2012) stood at US$ 5.90 billion.
c. Cumulative amount of FDI (from April 2000 to July 2012) into India stood at US$ 176.76 billion
FDI Equity Inflows from 2000-2012
including amount remitted through RBI‟s-NRI
Which country tops in inflow of FDI Since 2000-2010? Top 5 Countries for FDI :
Majority of the foreign direct investment comes through Mauritius as it enjoys several tax advantages, which works well for the international investors.
What are the Limits for FDI in different Sectors :
** Note / Caution : The below is only broad categorization and may need fine tuning and updations, For example in Civil Aviation and Broadcasting there are subcategories with different %ag of FDI allowed. These needs to be checked for further and updated knowledge.
(A) 26% FDI is permitted in
· Defence (In July 2013, there has been no change in FDI limit but higher investment may be considered in state of the art technology production by CCS)
· Newspaper and media **
· Pension sector (allowed in October 2012 as per cabinet decision)
(B)49% FDI is permitted in :
Insurance (in July 2013 it was raised to 49% from 26% subject to Parliament approval)
Petroleum Refining (49% allowed under automatic route)
Power Exchanges (49% allowed under automatic route)
Stock Exchanges, Depositories allowed under automatic route upto 49%
49% (FDI & FII) in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible. [Permitted in September 2012]
(C ) 51% is Permitted in
Multi-Brand Retail (Since September 2012)
(D) 74% FDI is permitted in
(E)100% FDI is permitted in
Single Brand Retail (100% FDI allowed in single brand retail; 49% through automatic route; 49-100% through FIPB)
Telecom (raised from 74% to 100% in July, 2013 by GoI)
Asset Reconstruction Companies (increased from 74% to 100 in July, 2013. Out of this upto 49% will be under automatic route)
Source : RBI website, Newpaper reports, GoI data