Edit Foreign Direct Investment Final Project

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FOREIGN DIRECT INVESTMENT

IS BETTER THAN

FOREIGN INSTITUTIONAL INVESTMENT

Submitted By F10 Students:1.Siddharth Joshi (58

2. Vikas Yadav (70

3. Pushkar Gogia (44

4. Gaurav Dua (18

5. Akshat Ghai (02

ACKNOWLEDGEMENT


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We thank Prof. Pankaj Upadhaya in particular for assigning

us this topic and encouraging us to write in the first place.

We owe much to Prof. Pankaj Upadhaya for his helpfulcomments.

We are indebted to all those who have been helpful

throughout the process of writing this Report, but as the

clich goes, we are solely responsible for any remainingerrors of fact or judgment.


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Foreign direct investment ( FDI )

It is defined as a company from one country making a physica

investment into building a factory in another country. It is thestablishment of an enterprise by a foreigner.

Its definition can be extended to include investments made t

acquire lasting interest in enterprises operating outside of th

economy of the investor. The FDI relationship consists of parent enterprise and a foreign affiliate which together form a

international business or a multinational corporation (MNC)

International business

International business is a term used to collectively describtopics relating to the operations of firms with interests i

multiple countries. In its simplest form, international busines

occurs when a business sells its product or service to

purchaser who lives in a different country, such as, through

mail-order catalogue or by way of an e-commerce transaction.

Multinational Corporation
http://en.wikipedia.org/wiki/International_businesshttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Firmshttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/International_businesshttp://en.wikipedia.org/wiki/International_businesshttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Multinational_corporationhttp://en.wikipedia.org/wiki/Firmshttp://en.wikipedia.org/wiki/Firmshttp://en.wikipedia.org/wiki/Firmshttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/International_business


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A multinational corporation (MNC) or transnational corporatio

(TNC), also called multinational enterprise (MNE), is

corporation or enterprise that manages production or deliver

services in more than one country. It can also be referred to aan international corporation .

In order to qualify as FDI the investment must afford the paren

enterprise control over its foreign affiliate. The IMF define

control in this case as owning 10% or more of the ordinarshares or voting power of an incorporated firm or its equivalen

for an unincorporated firm; lower ownership shares are know

asportfolio investment.

History of FDIForeign direct investment (FDI) is a measure of foreigownership of productive assets, such as factories, mines anland. Increasing foreign investment can be used as one measurof growing economic globalization. Maps below show neinflows of foreign direct investment as a percentage of gros

domestic products (GDP). The largest flows of foreiginvestment occur between the industrialized countries (NortAmerica, North West Europe and Japan). But flows to nonindustrialized countries are increasing.
http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Production,_costs,_and_pricinghttp://en.wikipedia.org/wiki/Servicehttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Incorporation_(business)http://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Production,_costs,_and_pricinghttp://en.wikipedia.org/wiki/Production,_costs,_and_pricinghttp://en.wikipedia.org/wiki/Production,_costs,_and_pricinghttp://en.wikipedia.org/wiki/Servicehttp://en.wikipedia.org/wiki/Servicehttp://en.wikipedia.org/wiki/Servicehttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Incorporation_(business)http://en.wikipedia.org/wiki/Incorporation_(business)http://en.wikipedia.org/wiki/Incorporation_(business)http://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Portfolio_investment


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US International Direct Investment Flows

Period FDI Outflow FDI Inflows Net

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn2000-07 $ 1,629.05 bn$ 1,421.31 bn+ $ 207.74 bnTotal $ 2,950.69 bn$ 2,703.81 bn+ $ 246.88 bn

Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector o

the economy and could be any one of the following:

1) an individual

2) a group of related individuals


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3) an incorporated orunincorporated entity

4) apublic company orprivate company

5) a group of related enterprises

6) a government body

7) an estate (law)

8) trust or other societal organization

9) any combination of the above

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of th

voting power of an enterprise in an economy through any o

the following methods:

1) By incorporating a wholly owned subsidiary orcompany

2) By acquiring shares in an associated enterprise

3) Through a merger or an acquisition of an unrelateenterprise

4) Participating in an equity joint venture with anothe

investor or enterprise

Foreign direct investment incentives may take thfollowing forms:

1) Low corporate tax and income tax rates

2) Tax holidays
http://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holiday


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3) Other types of tax concessions

4) Preferential tariffs

5) Special economic zones

6) Investment financial subsidies

7) Soft loan or loan guarantee

8) Free land or land subsidies

9) Relocation & expatriation subsidies

10) Job training & employment subsidies

11) Infrastructure subsidies

12) R&D support13) Derogation from regulations (usually for very larg

projects)

The importance of foreign direct investment

Foreign direct investment (FDI) provides a major source ocapital which brings with it up-to-date technology. It woul

be difficult to generate this capital through domestic savingsand even if it were not, it would still be difficult to importhe necessary technology from abroad, since the transfer otechnology to firms with no previous experience of using is difficult, risky, and expensive.

Over a long period of time FDI creates many externalities ithe form of benefits available to the whole economy whicthe TNCs cannot appropriate as part of their own incomeThese include transfers of general knowledge and of specifitechnologies in production and distribution, industria
http://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Infrastructure


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upgrading, work experience for the labor force, thintroduction of modern management and accountinmethods, the establishment of finance related and tradinnetworks, and the upgrading of telecommunications services

FDI in services affects the host country's competitiveness braising the productivity of capital and enabling the hoscountry to attract new capital on favorable terms. It alscreates services that can be used as strategic inputs in thtraditional export sector to expand the volume of trade and tupgrade production through product and process innovation.

ADVANTAGES OF FDI

Attracting foreign direct investment has become an integrapart of the economic development strategies for India. FD

ensures a huge amount of domestic capital, production leveand employment opportunities in the developing countrieswhich is a major step towards the economic growth of thcountry. FDI has been a booming factor that has bolsterethe economic life of India, but on the other hand it is als

being blamed for ousting domestic inflows. FDI is alsclaimed to have lowered few regulatory standards in terms o

investment patterns. The effects of FDI are by and largtransformative. The incorporation of a range of wellcomposed and relevant policies will boost up the profit ratifrom Foreign Direct Investment higher. Some of the bigges


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advantages of FDI enjoyed by India have been listed aunder:

Economic growth -

This is one of the major sectors, which is enormousl benefited from foreign direct investment. A remarkabinflow of FDI in various industrial units in India has boostethe economic life of country.

Trade

Foreign Direct Investments have opened a wide spectrum oopportunities in the trading of goods and services in Indi

both in terms of import and export production. Products osuperior quality are manufactured by various industries iIndia due to greater amount of FDI inflows in the country.

Employment and skill levelsFDI has also ensured a number of employment opportunitie

by aiding the setting up of industrial units in various cornerof India.

Technology diffusion and knowledge transfer -

FDI apparently helps in the outsourcing of knowledge fromIndia especially in the Information Technology sector. Ihelps in developing the know-how process in India in termof enhancing the technological advancement in India.


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Linkages and spillover to domestic firms- Various foreigfirms are now occupying a position in the Indian markethrough Joint Ventures and collaboration concerns. Thmaximum amount of the profits gained by the foreign firm

through these joint ventures is spent on the Indian market.

Disadvantages of FDI

The disadvantages of foreign direct investment occur mostl

in case of matters related to operation, distribution of thprofits made on the investment and the personnel. One of thmost indirect disadvantages of foreign direct investment ithat the economically backward section of the host country ialways inconvenienced when the stream of foreign direcinvestment is negatively affected

The situations in countries like Ireland, Singapore, Chile anChina corroborate such an opinion. It is normally thresponsibility of the host country to limit the extent oimpact that may be made by the foreign direct investmentThey should be making sure that the entities that are makinthe foreign direct investment in their country adhere to thenvironmental, governance and social regulations that hav

been laid down in the country.


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The various disadvantages of foreign direct investment arunderstood where the host country has some sort of nationasecret something that is not meant to be disclosed to threst of the world. It has been observed that the defense of

country has faced risks as a result of the foreign direcinvestment in the country.

At times it has been observed that certain foreign policies aradopted that are not appreciated by the workers of threcipient country. Foreign direct investment, at times, is als

disadvantageous for the ones who are making the investmenthemselves.

Foreign direct investment may entail high travel ancommunications expenses. The differences of language anculture that exist between the country of the investor and th

host country could also pose problems in case of foreigdirect investment.

Yet another major disadvantage of foreign direct investmenis that there is a chance that a company may lose out on itownership to an overseas company. This has often causemany companies to approach foreign direct investment wit

a certain amount of caution.


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At times it has been observed that there is considerablinstability in a particular geographical region. This causes lot of inconvenience to the investor.

The size of the market, as well as, the condition of the hoscountry could be important factors in the case of the foreigdirect investment. In case the host country is not weconnected with their more advanced neighbors, it poses a loof challenge for the investors.

At times it has been observed that the governments of th

host country are facing problems with foreign direc

investment. It has less control over the functioning of th

company that is functioning as the wholly owned subsidiar

of an overseas company.

This leads to serious issues. The investor does not have to b

completely obedient to the economic policies of the countr

where they have invested the money. At times there hav

been adverse effects of foreign direct investment on th

balance of payments of a country. Even in view of th

various disadvantages of foreign direct investment it may b

said that foreign direct investment has played an importan


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role in shaping the economic fortunes of a number o

countries around the world.

Foreign Institutional Investor (FII)

Foreign Institutional Investor (FII) is used to denote ainvestor - mostly of the form of an institution or entity

which invests money in the financial markets of a countr

different from the one where in the institution or entity wa

originally incorporated.

FII investment is frequently referred to as hot money for threason that it can leave the country at the same speed a

which it comes in.

In countries like India, statutory agencies like SEBI hav

prescribed norms to register FIIs and also to regulate suc

investments flowing in through FIIs. In 2008, FII

represented the largest institution investment category, wit

an estimated US$ 751.14 billion.
http://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/SEBI


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FEMA norms include maintenance of highly rated bond

(collateral) with security exchange.

History of FII

The Year 2004 has been the most remarkable year in th

history of Indian capital markets with the BSE SensitivIndex closing at another record high and FII Flows at ove$8.6 billion, a 13.7 per cent growth over previous recoryear. It is particularly interesting to note that India attracte30 per cent of the foreign flows that washed the shores of thAsia Pacific region during 2004.At a time when Indi

witnessed a major election reversal and a lean monsooseason. This is a testament to the resilience of the Indianeconomy and its well managed corporate sector whiccontinues to show a high earnings growth compared to th

peers in the Asia Pacific region. In addition the followinfactors contributed significantly to the FII flows to India.

Regulation and Trading Efficiencies:Indian stock markets have been well regulated by the stock


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exchanges, SEBI and RBI leading to high levels oefficiency in trading, settlements and transparent dealingenhancing the confidence level of FIIs in increasinallocations to India.

F and O Segment:The highly successful derivatives market in India ha

provided additional depth to the markets with high tradevolumes and multiple instruments by which investors ca

participate in the Indian equity markets. In fact the SinglStock Futures (SSF) market in India is one of the mostsuccessful SSF market in Asia after Korea.

New Issuance: We have witnessed extremely high qualitissuance during the year from companies such as NTPC

ONGC and TCS leading to strong FII participation witsuccessful new issuance of over $ nine billion, yet anotherecord for the year.

Importance of FII

Post 1991, our country has succeeded in striking the righ

chord with foreign investors, though the pace of suc

development was slow. FII money flowing into the India

stock markets is definitely not a new phenomenon, an

much is written about this issue in the media and academia


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Basically the coefficient was very low at 0.18, which ca

hardly be said to be a strong correlation. Further, I also ran

regression between the two variables, and found that FI

flows explain only 3% of the Sensex movements. Howeverthis 3% was STATISTICALLY significant.

It's a bit difficult to reach at a final conclusion when such

issues are concerned. I personally feel that we do at time

over-react to FII flows. However, FIIs are more than jus

money. They represent something unquantifiable known a

investors' sentiment. I guess thats why we get a bit anxiou

when there are sudden FII outflows, since such behavio

may reflect a change in investor sentiment.

Macro-economic importance of FII flows for India

A survey of literature on portfolio investments revealed th

importance of such investments for a developing econom

like Indias. Foremost, FII investments are non-debt creatin

flows, also a reason why Indian policy makers sought tliberalize such flows in the wake of the BoP crisis in 1990

91. Theoretically, FII investments bring in global liquidit

into the equity markets and raise the price-earning ratio an


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thereby reduce the cost of capital domestically. FII inflow

help supplement domestic savings and smoothen inter

temporal consumption. Studies indicate a positiv

relationship between portfolio flows and the growtperformance of an economy, though such specific studies fo

India were not found.

India, in the recent past few years seems to have received

disproportionately large part of its foreign investment flowvia the FII investments in the equity markets. While in th

last three years the average share of FII in the total foreig

investments was above 70%, this is almost double th

average share of around 36% of FII investments in the thre

years of FY01 to FY03. More so, FII inflows hav

significantly contributed to the Balance of Payments surpluin the last three years. Our analysis indicates that FII inflow

as a percentage of the BOP surplus was at around 35% in th

most recent last three years while the average from FY95 t

FY03 had been only around 4.5%. Exhibit 3 also indicate

that FII inflows had significantly contributed to the sharincrease in the foreign exchange reserves of the economy.

The large build-up of foreign exchange reserves through FI


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inflows poses a potential threat of destabilization of th

economy. Portfolio flows are most often referred to as ho

money that can be notoriously volatile when compared t

other forms of capital flows. The Mexican crisis and the EasAsian crisis are classic examples of the damage that sudde

outflows of portfolio money can do to an economy.

Without immediately implicating any significant withdrawa

of funds out of India of crisis precipitating proportions, ineeds to be noted that outflows of FII capital from th

market could adversely impact the value of the India

currency, as FII inflows form the most significant part o

foreign inflows into the economy. Indeed, the recent sof

trends in FII inflows in May had led the Indian currency t

depreciate against the US dollar The risk of a largdepreciation is even more as we are in a situation where th

higher international price of crude oil has led to a significan

weakening of the current account deficit. In other words, i

the event of a significant tapering off of FII inflows, $/R

could depreciate sharply in consonance to a widening currenaccount deficit, as the other forms of capital inflows into th

economy are not significant enough.


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There are likely to be repercussions on the growt

momentum of the Indian economy if FII inflow

significantly slow down. This is because a large extent obuoyancy in consumption was possible due to the positiv

wealth effects of a booming stock market and a decline i

the interest rates due to a large overhang of rupee liquidity i

the system (also a byproduct of large FII inflows over th

last few years). Therefore, if FII inflows were to slow down

it will reduce the wealth generated by the stock market, thIndian currency will depreciate and RBI will have to draw

down on the foreign exchange reserves or hike interest rate

to prevent wild swings in the exchange rate.

R es trictions faced by FII in India -

FIIs can buy/sell securities on Indian stock exchanges, bu

they have to get registered with stock market regulator Seb

They can also invest in listed and unlisted securities outsid

stock exchanges if the price at which stake is sold has bee

approved by RBI.

No individual FII/sub-account can acquire more than 10% o

the paid up capital of an Indian company. All FIIs and thei


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sub-accounts taken together cannot acquire more than 24%

of the paid up capital of an Indian Company, unless th

Indian Company raises the 24% ceiling to the sectoral cap o

statutory ceiling as applicable by passing a board resolutioand a special resolution to that effect by its general body i

terms of RBI press release of September 20, 2001 an

FEMA Notification No.45 of the same date.

In addition, the government also introduces new regulation

from time to time to ensure that FII investments are in orderFor example, investment through participatory notes (PNs

was curbed by SEBI recently.


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FDI S are better than FII S are shown by answerin

following Questions.

Q.1 How does the Indian government classify foreig

investment?

The Indian government differentiates cross-border capitainflows into various categories like foreign direct investmen(FDI), foreign institutional investment (FII), non-residen

Indian (NRI) and person of Indian origin (PIO) investment.

Inflow of investment from other countries is encouragesince it complements domestic investments in capital-scarceconomies of developing countries, India opened up tinvestments from abroad gradually over the past tw

decades, especially since the landmark economiliberalization of 1991.Apart from helping in creating additional economic activitand generating employment, foreign investment alsfacilitates flow of technology into the country and helps thindustry to become more competitive.

Q.2 Why does the government differentiate betwee

various forms of foreign investment?


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FDI is preferred over FII investments since it is considered t

be the most beneficial form of foreign investment for th

economy as a whole.

Direct investment targets a specific enterprise, with the aim

of increasing its capacity/productivity or changing it

management control. Direct investment to create or augmen

capacity ensures that the capital inflow translates int

additional production. In the case of FII investment thaflows into the secondary market, the effect is to increas

capital availability in general, rather than availability o

capital to a particular enterprise.

Translating an FII inflow into additional production dependon production decisions by someone other than the foreiginvestor some local investor has to draw upon thadditional capital made available via FII inflows to augmen

production. In the case of FDI that flows in for the purpose oacquiring an existing asset, no addition to productio

capacity takes place as a direct result of the FDI inflow.

Just like in the case of FII inflows, in this case too, additioto production capacity does not result from the action of thforeign investor the domestic seller has to invest th


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proceeds of the sale in a manner that augments capacity oproductivity for the foreign capital inflow to boost domestiproduction. There is a widespread notion that FII inflows arhot money that it comes and goes, creating volatility in th

stock market and exchange rates.While this might be true of individual funds, cumulativelyFII inflows have only provided net inflows of capital. FDtends to be much more stable than FII inflows.

Moreover, FDI brings not just capital but also bettemanagement and governance practices and, often, technolog

transfer. The know-how thus transferred along with FDI ioften more crucial than the capital per se. No such benefiaccrues in the case of FII inflows, although the search by FIIfor credible investment options has tended to improvaccounting and governance practices among listed Indiacompanies.

According to the Prime Ministers Economic AdvisorCommittee, net FDI inflows amounted to $8.5 billion i

2006-07 and is estimated to have gone up to $15.5 billion i

07-08 . The panel feels FDI inflows would increase to $19.

billion during the current financial year. FDI up to 100% i

allowed in sectors like textiles or automobiles while thgovernment has put in place foreign investment ceilings i

the case of sectors like telecom (74%). In some areas lik

gambling or lottery, no foreign investment is allowed.


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According to the governments definition, FIIs include asse

management companies, pension funds, mutual funds

investment trusts as nominee companiesincorporated/institutional portfolio managers or their powe

of attorney holders, university funds, endowmen

foundations, charitable trusts and charitable societies.

FIIs are required to allocate their investment between equit

and debt instruments in the ratio of 70:30. However, it is als

possible for an FII to declare itself a 100% debt FII in whic

case it can make its entire investment in debt instruments

The government allows greater freedom to FDI in variou

sectors as compared to FII investments. However, there ar

peculiar cases like airlines where foreign investmenincluding FII investment, is allowed to the extent of 49%

but FDI from foreign airlines is not allowed.

How FDI helping Indian Economy

FDI usually is associated with export growth. It comes onl

when all the criteria to set up an export industry are met

That includes, reduced taxes, favorable labor law, freedom t


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move money in and out of country, government assistance t

acquire land, full grown infrastructure, reduced bureaucrati

involvement etc. IT, BPO, Auto Parts, Pharmaceuticals

unexplored service sectors including accounting; drutesting, medical care etc are key sectors for foreig

investment. Manufacturing is a brick and mortar investmen

It is permanent and stays in the country for a very long time

Huge investments are needed to set this industry. It provide

employment potential to semi skilled and skilled labor. O

the other hand the service sector requires fewer but highlskilled workers. Both are needed in India. Conventiona

wisdom is that China will have an upper hand i

manufacturing for a long time. If India plays its cards righ

India may be the hub for the service sector. Still high en

manufacturing in auto parts and pharmaceuticals should bIndias target.

The FII (Foreign Institutional Investor) is monies, whic

chases the stocks in the market place. It is not exactly bric

and mortar money, but in the long run it may translate intbrick and mortar

Period 1998 to 2004


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All the above will happen, if the planned structural change

to the Indian economy are concurrently made and country

bureaucratic structure is made investor friendly. Othe

legislative changes needed to ensure the safety of investormoney are made concurrently. The recent changes in India

patent rules and regulation are steps in the right direction.

All in all India has to become investor friendly. It is need o

the hour. Left leaning politics will not help. Opportunism i

politics, which endangers the welfare of the people, is to b

thoroughly discouraged.

FDI will increase in insurance sector by US$ 0.46 billion

The Associated Chambers of Commerce and Industry o

India (ASSOCHAM) has projected that foreign direc

investment (FDIs) will increase in insurance sector by US0.46 billion in next 2 years and likely to touch US$ 0.9

billion as it is still regulated.

A paper on FDIs Prospects in Insurance Sector brought ou

by the ASSOCHAM says that currently the total insuranc

market in India is about US$ 30 billion, in which the elemen

of FDIs is US$ 0.5 billion. This is 1.6% of total insuranc

business in India.


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Despite, insurance being a highly regulated sector, however

in the first five months of current calendar, i.e. betwee

January to May, it could attract FDIs of US$ 217.97 millio

which by any standard is not too insignificant.Releasing the Paper, the ASSOCHAM President, Mr. Sajja

Jindal said that if the insurance sector is opened up to a

extent of 49% for FDIs, in next 2 years, i.e. by 2010, th

Chamber expects that FDIs contribution to insuranc

business would touch nearly US$ 2 billion. Currently, onl

26% of FDIs are permitted in insurance sector.

The reason for this is that the domestic insurance sector ha

been growing at an average speed of nearly 200% and that i

why the ASSOCHAM is of the view that by 2012, the tota

insurance business would touch US$ 60 billion size.

In the US$ 30 billion insurance business, nearly 29 insuranc

companies are taking part of which 14 are in private lif

insurance sector, 9 private non-life insurance sector and

public sector insurance companies. Mr. Jindal said that in th

life insurance sector particularly on FDIs front, the growt

that has taken between 2006 and 2007 is estimated to b

around 270%. This itself speaks the significance an

importance, investors are attaching to both life insurance an

non-life insurance sector.


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Opening the FDI in the insurance sector would be good fo

the consumers, in a lot of ways. Increasing FDI limit woul

affect a lot of industries in a positive way and that we coul

even do without the FDI in many other sectors for some foexample in real estate.

Indias insurance market lags behind other economies in th

baseline measure of insurance penetration. At only 3.1%

India is well behind the 12.5% for the UK, 10.5% for Japan

10.3% for Korea and 9.2% for the US. Currently, FD

represents only Rs.827 core of the Rs.3179 crorcapitalizations of private life insurance companies.

FDI in insurance would increase the penetration of insuranc

in India, where the penetration of insurance is abysmally low

with insurance premium at about 3% of GDP against abou

8% global average. This would be better through marketineffort by MNCs, better product innovation, consume

education etc.

FDI can meet Indias long term capital requirements to fun

the building of infrastructures. Infrastructure or the lack of

has been the brake, which have hindered the leap of th

Indian economy. Despite shortcomings, Indian economy ha

come a long way but every industry leader would crib at th

infrastructure bottlenecks that they have face everyday i

their effort for growth.


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Insurance sector has the capability of raising long term

capital from the masses as it is the only avenue where peopl

put in money for as long as 30 years even more. An increas

in FDI in insurance would indirectly be a boon for the Indiaeconomy, the investments not withstanding but by makin

more people invest in long term funds to fuel the growth o

the Indian economy.

Some articles given below give us an idea how FDI i

good for an Indian economy.

The improved sentiment for the country's economic outloobacked by strong political mandate and fiscal reforms iexpected to help India enhance its overall share in capitaflows marked for emerging markets. Despite the globaslowdown, India has managed to display resilience anattract good investments.

The foreign direct investment (FDI) inflows during 2008-0(from April 2008 to March 2009) stood at approx. US$ 27.

billion, according to the latest data released by Departmenof Policy and Promotion (DIPP). FDI inflows for the lasquarter alone of 2008-09 stood at approx. US$ 6.2 billion.

Mauritius was the highest contributor to FDI inflows for thfiscal year 2008-09 totalling almost US$ 11.2 billion, whilservices sector including financial and non-financial service


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Government Initiatives

In India, currently after the policy changes in February 2009many sectors in manufacturing are open to 100 per cent FDunder the automatic route. FDI is allowed up to 100 per cen

in all these industries except defence production where it icapped at 26 per cent. FDI is not allowed in a few serviceincluding retail trading (except single brand), lotter

business and gambling. In the permitted services, foreigequity is allowed below 50 per cent.

FDI is currently allowed only up to 49 per cent in schedule

air transport services or domestic passenger airlinesBroadcasting services also have similar rules. Uplinking onon-news television channels is the only broadcastinservice permitted to have 100 per cent FDI after clearance bthe Foreign Investment Promotion Board (FIPB). Majoritforeign equity is not allowed in cable television network

and direct-to-home (DTH) operations. FDI is allowed onlup to 26 per cent in print media.

FDI is allowed up to 74 per cent in financial services such aprivate banks. Insurance, however, can get FDI only up to 2 per cent. Minority foreign equity up to 49 per cent permitted in asset reconstruction companies (ARCs), stoc

exchanges, depositories, clearing corporations ancommodity. Except for ARCs, the FDI space is capped at 2

per cent for these sectors. In telecommunication servicesboth basic and cellularalthough FDI up to 74 per cent i


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allowed, only 49 per cent is allowed under automatic routwith the rest requiring approval from FIPB.

The new Commerce and Industry Minister, Mr AnanSharma, has ruled out any comprehensive review of th

new foreign direct investment (FDI) policy but said that thgovernment will continue to study the pros and cons of thimpact of the policy especially in retail sector. ThDepartment of Economic Affairs (DEA) and the ReservBank of India (RBI) had recently commented on thimplications of the new FDI norms mandated by Press Note

2, 3 and 4, stating that review was required in certairestricted sectors like telecom and retail.

Investments Scenario

Among 23 FDI (foreign direct investment) proposals wortUS$ 119.6 million cleared by the Government recently arDamas LLCs (single-brand retail) plans to establish a joinventure company with Gitanjali Lifestyle Ltd for retatrading of jewellery and related accessories, Lazard IndiMauritiuss FDI contribution of US$ 26.5 million, FTSingapores plans to make investment up to 100 per cent inthe issued and paid-up capital of Financial Times India, FIM

Bank, Malta (US$ 5.3 million FDI), Era Infra Engineerin(US$ 7.4 million) and Hyatt Group company HP IndiHoldings Ltd, Mauritiuss plans to establish hotels, in a joinventure with Emaar MGF for US$ 26.5 million.


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As India does not allow FDI into multi-brand retai

mega US stores such as Wal-Mart have entered thcountry only for wholesale trading known as 'Cash anCarry'.

Hyatt Group Company HP India Holdings has tied uwith Emaar MGF to form Aashirwad Conbuild Ltdwhich will have foreign equity at 26 per cencorresponding to an investment of US$ 26.5 millionUS$ 31.8 million over the next five years, while the 7

per cent will be held by Indian partner.

The Bharti Wal-Mart joint venture has finally opened itfirst cash-and-carry store, nearly two years afteannouncing its plans, and intends to open 15 sucwholesale stores in the next three years.

Two European retail majors, Tesco and Carrefour, hav

announced similar plans while the German group Metrhas already established an Indian presence.

The entry of foreign companies into retailing has bee

restricted so far to single brand stores such as Reeboand Benetton.

Dow Jones & Co Inc is pumping in foreign direc

investment of US$ 458,114 in setting up the whollowned subsidiary in India.

Renault-Nissan Automotive India, a 50:50 joint venturfloated for a passenger car project in Chennai, is eyein


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5.7 per cent of the market share in India by 2012according to Colin Dodge, Executive Vice Presiden

Nissan.

PepsiCo is doubling its investment in its Indian beverag

business for calendar 2009 to over US$ 220 million tincrease the capacity of the business.

Bosch will maintain its India focus and the company ha

recently made a commitment of US$ 27.1 million to seup manufacturing units for electronic control unit

(ECU).

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