MAJOR RESEARCH PTOJECT

ON
FOREIGN DIRECT INVESTMENT
AND ITS GROWTH IN INDIA
FOR PARTIAL FULFILLMENT OF THE REQUIRMENT FOE THE
DEGREE OF MASTER OF BUSINESS ADMINISTRATION (
FULL TIME )
BATCH 2020-2021

SUBMITTED TO : SUBMITTED BY :
MR. KALICHARAN MODAK ANJALI YADAV

IB ME /TES/SOC, IPS ACADEMY

RAJENDRA NAGAR , A.B. ROAD ., INDORE -452001
 FOREIGN DIRECT INVESTMENT
AND ITS GROWTH IN INDIA

• Foreign direct investment(FDI) in all over the world in general and in

India in particular after the opening up of our market with the adoption
of the policies namely globalization, privatization and liberalization has
no doubt emerged as one of the most significant source and
contributor of external inflow of resources and is one of the most
crucial contributors to the capital formation despite their share in the
world arena still catching up. When we talk about the term FDI we are
talking about a bundle of resources that usually flow into a country
including besides capital, production technology, global managerial
skills, innovative marketing strategies and access to new markets.
•
• In this project it has been tried to provide a comprehensive
picture about the foreign direct investment ranging from its conception
as a potent source of investment the world over, its various types, the
methodology adopted top FDI countries and agencies engaged and
other important aspects.
•
• A cumulative and an exhaustive study of the over all scenario of
FDI in India starting from the introduction of FDI in the country, share
of top investing countries, sectors attracting highest FDI flows, sector
wise technology transfer and approvals.
•
• We will also look at the determinants for attracting FDI in the
country and also the causes for low flow of FDI and the mechanisms
that can be undertaken to make our country attractive enough for
investors. This study entirely relies on secondary data collected after a
thorough and exhaustive study of various websites, text books, journals,
newspapers, magazines and great inputs form various professors and
professionals specializing In this area.
 ACKNOWLEDGEMENT

•
• I take this opportunity to thank all those who
have been of help to me in the completion of
this project.
•
• I would like to appreciate the guidance and co-
operation provided to me by our project guide
Mr. V. XXXXX (faculty of Business Management)
in the completion of this project.
•
• I am also grateful to XXXX, Director XXX and
all the faculty members who have directly or
indirectly helped me in preparing this project
report.
•
•
•
•
•
 TABLE OF CONTENTS:

• 1. LIST OF TABLES
• 2. LIST OF FIGURES
• 3. INTRODUCTION
• 4. REVIEW OF LITERATURE
• 5. DATA ANALYSIS AND
PRESENTATION
• 6. SUMMARY AND CONCLUSION
• 7. BIBLOGRAPHY
 OBJECTIVES

• To study the trends in the inflow of foreign

direct investment
• To study the share of top investing countries
of FDI during the period 2003-2006.
• The sector attracting highest FDI equity inflow
• Foreign technology transfer
• Country wise technology transfer
• Country wise technology transfer approvals
• Sector wise technology transfer approvals
• To study the causes and reasons for low FDI
inflow in the country
• To study the determinants for attracting the FDI
• To study and understand mechanism
of approvals of FDI by RBI and FIPB
• To study the FDI policy in brief.
 METHODOLOGY:

•
This project is entirely based on freelance work done by the student and
therefore no organisation has been taken as a base for doing the project.
AN exhaustive amount of data available on the internet, from the text
books, news papers, and various magazines and suggestions from a few
experts in the field has been taken in doing this project.
As this is a free lance project, the data has been entirely collected from
secondary sources and therefore its authenticity can be vouched for only
by going through the same literature which has been used.
• SCOPE OF THE STUDY
• as this study is aimed to analyze the trends in the FDI inflows, the main
focus is given on the recent trends in the inward FDI inflows, sectors
attracting highest FDI, and the share of top investing countries, it covers
only equity capital components. The scope is limited to the availability
of the secondary data.
• LIMITATIONS OF THE STUDY
• the study is conducted in a short period, which was not detailed in all
aspects.
• Non-availability of accurate data to FDI
• Data in one secondary source do not match with that of another source.
•
 FOREIGN DIRECT
INVESTMENT
• INTRODUCTION:
Foreign direct investment (FDI) is defined as
"investment made to acquire lasting
interest in enterprises operating outside of
the economy of the investor." The FDI
relationship consists of a parent enterprise
and a foreign affiliate which together form
a Multinational corporation (MNC). In
order to qualify as FDI the investment must
afford the parent enterprise control over its
foreign affiliate. The UN defines control in
this case as owning 10% or more of the
ordinary shares or voting power of an
incorporated firm or its equivalent for an
unincorporated firm; lower ownership
shares are known as portfolio investment.
 HISTORY:

• In the years after the Second World

War global FDI was dominated by
the United States, as much of the
world recovered from the
destruction brought by the conflict.
The US accounted for around three-
quarters of new FDI (including
reinvested profits) between 1945
and 1960. Since that time FDI has
spread to become a truly global
phenomenon, no longer the
exclusive preserve of OECD
countries. FDI has grown in
importance in the global economy
with FDI stocks now constituting
over 20 percent of global GDP.
 BY TARGET:

• Greenfield investment
• Direct investment in new facilities or the expansion of
existing facilities. Greenfield investments are the
primary target of a host nation’s promotional efforts
because they create new production capacity and
jobs, transfer technology and know-how, and can lead
to linkages to the global marketplace. The
Organization for International Investment cites the
benefits of greenfield investment (or insourcing) for
regional and national economies to include increased
employment (often at higher wages than domestic
firms); investments in research and development; and
additional capital investments. Criticism of the
efficiencies obtained from greenfield investments
include the loss of market share for competing
domestic firms. Another criticism of greenfield
investment is that profits are perceived to bypass
local economies, and instead flow back entirely to the
multinational's home economy. Critics contrast this to
local industries whose profits are seen to flow back
entirely into the domestic economy.
Mergers and Acquisitions
• Transfers of existing assets from local firms to
foreign firms takes place; the primary type of FDI.
Cross-border mergers occur when the assets and
operation of firms from different countries are
combined to establish a new legal entity. Cross-
border acquisitions occur when the control of
assets and operations is transferred from a local
to a foreign company, with the local company
becoming an affiliate of the foreign company.
Unlike greenfield investment, acquisitions
provide no long term benefits to the local
economy-- even in most deals the owners of the
local firm are paid in stock from the acquiring
firm, meaning that the money from the sale
could never reach the local economy.
Nevertheless, mergers and acquisitions are a
significant form of FDI and until around 1997,
accounted for nearly 90% of the FDI flow into the
United States. Mergers are the most common
way for multinationals to do FDI.
boeting ihe eonomic 8 //^/§ of:1e+ Ind›a

70
 OPPOSITION:

• The late 1960s and early 1970s foreign

direct investment became increasingly
politicized. Organized labor, convinced that
foreign investment exported jobs,
undertook a major campaign to reform the
tax provisions which affected foreign direct
investment. The Foreign Trade and
Investment Act of 1973 (or the Burke-
Hartke Bill) would have eliminated both
the tax credit and tax deferral. The Nixon
Administration, influential members of
Congress of both parties, and well-financed
lobbying organizations came to the defense
of the multinational. The massive
counterattack of the multinational
corporations and their allies defeated this
first major challenge to their interests.
 FACTORS THAT ENOCURAGE FDI:
LOCATION SPECIFIC ADVANTAGES:

• The location specific advantages involve a number of factors

that favor a location in comparison to an alternative
location. The factors deciding location of the foreign direct
investment involve labor costs, marketing factors, trade
barriers and government policy.
• MARKET FACTORS:
• The size of a country’s market acts as the most important
determinant for attracting foreign investors, market related
variables are the most important fundamentals and the
scope of investment depends upon two factors i.e, current
market size and potential market size. while a large market
size generates scale economies , a growing market
improves the prospects of market potential and there by
attracts FDI inflows. In some markets domestic brands are
preferred and a presence in a specific market is needed for
success. The location of FDI in that specific market is
essential to be able to label products “made locally”
• TRADE BARRIERS:
• The existence of trade barriers is a factor that influences
the choice of locations for FDI. Trade barriers encourage
companies to make FDI in markets that would be too
expensive to export to due to tariffs and quotas.
• 3. LABOUR COSTS:
• Labor costs are affected by an imperfection in the
international market for labor. Since regulations for
immigration exist worldwide, the mobility of labor is
reduced and differences in wage costs arise. This creates
different production clusters around the world, each
specialized in different wage levels. An example of this is
the low wage area in the south east Asia producing toys and
clothing and on the other hand western Europe with its high
tech production and high wage levels.
• 4. COST FACTORS:
• Cost factors are nothing but factors that cause investment
cost differentials across countries . They usually
include factors like cost of labour, cost of capital and cost of
infrastructure. Cost factors most significantly influence the
choice of an investment location for the resource seeking
and efficiency- seeking foreign direct investment.
• Usually it is seen that higher lending rates may have a
positive impact on the FDI inflows i.e. higher the cost of
capital in the host country the more capital can be brought
in by the foreign firms. Alternatively It can also be said that
the hostr country’s cost of capital impact directly on the
domestic consumption. Thus the lower the interest rates,
the higher the domestic consumption and hence higher the
FDI inflows. As far as infrastructure costs are concerned, it is
found that higher the availability of infrastructure lower is
the infrastructure cost and higher is the ability of the host
country to attract FDI
• EXCHANGE RATES:
• This factor presents a rather ambiguous picture as far as the impact of
depreciation of real exchange rate in the host country on FDI inflows is
concerned. A devalued exchange rate may or may not be gainful for the
foreign investors. The investor may gain because of factors like huge
purchasing power of the host country, cheap production costs which
would lead to easy exports and this surely catches the fancy of the
resource and efficiency seeking investor. But then the foreign firms may
get taken aback if they believe that depreciation may continue to be
too high to justify their investments in the first place and their
continuation.
• MACRO ECONOMIC STABILITY:
• Macro economic variables like inflation, budget deficit, balance of
payments etc. have a big impact on the FDI across countries. The
volatility of the macro economic conditions presents both opportunities
and impediments to companies investing in the host country. They
require not only the ability to manage the risk inherent in volatile
countries but also present an opportunity of moving production to
lower cost facilities. Exchange rate volatility is one of the macro
economic volatility where in if exchange rate changes merely offset price
movements so that real purchasing power parity is maintained, the
exchange rate movements would have little real effects.
• RATE OF INFLATION:
• Low inflation is taken to be a sign of internal economic stability in
the host country. High inflation indicates inability of the government
to balance its budget and failures of the central bank to conduct
appropriate monetary policy.
• OVERALL ECONOMIC STABILITY:
• The financial well being of the host country is gauged by external debts
to Exports. It is expected that lower this ratio higher is the probability
of economic stability in the country
 ELIMINATION OF
RESTRICTIONS:
• Developing countries have applied various
forms of restrictions to FDI in the pre liberalized
era mostly because of their troubled past and
exploitation by their colonial rulers. Various
controls like ownership and control and other
operational restrictions like closing down
certain sectors to private enterprises, screening
regularization authorization of investment and
minimum capital requirements. For example
allowing only fixed percentage of foreign owned
capital in an enterprise, compulsory joint
ventures, compulsory transfer of ownership to
local private firms and restrictions on
reimbursement of capital upon liquidation. Even
when the foreign firms enter the host country’s
market they could face certain restrictions on
their operations such as restrictions on
employing key foreign personnel and
performance requirements such as sourcing or
local content requirements, training
requirements and export targets.
 FACTORS THAT
DISCOURAGE FDI:

• Country experiences indicate that while

favorable economic environment and regulatory
or policy framework help induce foreign direct
investment flows, there are a number of forces
that tend to discourage such flows.
• Many developing countries have, during the past
decade or so, begun liberalizing their national policies
to establish a hospitable regulatory framework for
foreign direct investment by relaxing rules regarding
market entry and foreign ownership, improving the
standards of treatment accorded to foreign firms and
improving the functioning of markets. These core
policies are important because FDI will not take place
where it is forbidden or strongly impeded. However,
changes in policies have an asymmetric effect on the
location of foreign direct investment, changes in the
direction of greater openness allows firms to establish
themselves in a particular location. In contrast,
changes in the direction of less openness will ensure a
reduction in foreign direct investment (UNCTAD, 1998)
 FOREIGN DIRECT
INVESTMENT

• As the third-largest economy in PPP terms, India

is a preferred destination for foreign direct
investments (FDI) with strengths being
information technology and other significant
areas such as auto components, chemicals,
apparels, pharmaceuticals and jewellery. But its
rigid FDI policies were a significant hindrance in
this regard. However, as a result of a series of
ambitious and positive economic reforms aimed
at deregulating the economy and stimulating
foreign investment, India has positioned itself as
one of the front-runners of the rapidly growing
Asia Pacific Region. India has a large pool of
skilled managerial and technical expertise. The
size of the middle-class population at 300 million
exceeds the population of both the US and the
EU, and represents a powerful consumer
market.
 FACTORS MAKING INDIA A FAVOURED FDI
DESTINATION:

• India, the largest democracy and 4th largest

economy (in terms of purchase power parity) in
the world is also the tenth most industrialized
country in the world. With its consistent growth
performance and abundant high-skilled
manpower, India provides enormous
opportunities for investment, both domestic and
foreign.
•
• Since the beginning of economic reforms in
1991, major reform initiatives have been taken in
the fields of investment, trade, financial sector,
exchange control simplification of procedures,
enactment of competition and amendments in
the intellectual property rights laws, etc. India
provides a liberal, attractive, and investor
friendly investment climate. Main features of
policy on Foreign Direct Investment are dealt
with in this chapter.
•
 FOREIGN INVESTMENT
ACTS- FERA AND FEMA:

• India’s foreign investment policy since independence has

been guided by two important acts namely foreign exchange
regulation act 1973 and Foreign exchange management act
1999 among other acts and regulations. As we discuss
elaborately the various factors of foreign direct investment
it is pertinent to have an overview of these two acts.
• FOREIGN EXCHANGE REGULATION ACT-1973
• The Foreign Exchange Regulation Act, 1947, was enacted as
a temporary measure and later placed permanently in the
year 1957. At that time the limited objective of the Act was
to regulate the inflow of foreign capital in the form of
branches and concerns with the substantial non-resident
interest, and the the employment of foreigners. The country
attained freedom in 1947, after two centuries of foreign
rule and protracted freedom struggle stretched over
decades. The prevailing mood then was one of preserving
and consolidating the freedom and not to permit once again
any type of foreign domination, political or economic. Initial
approach on foreign capital was negative to a not-
interested attitude. Prime Minister explained that "the
stress on the need to regulate, in the national interest, the
scope and manner of foreign capital and control (as per the
Industrial Policy Statement 48) arose from the past
association of foreign capital and control with foreign
domination of the economy of the country."
 FOREIGN INVESTMENT IMPLEMENTATION
AUTHORITY (FIIA):

• FIIA was established in the Department of

Industrial policy and Promotion, Ministry
of commerce and Industry to facilitate
quick translation of Foreign Direct
Investment approvals in implementation,
provide a proactive one- stop after care
service to foreign investors by helping
them obtain necessary approvals, sort out
operational problems and meet with
various government agencies to find
solution to problems of the investors. The
FIIA may co- opt other secretaries to the
Government of India, Chief Commissioner
(NRI), top functionaries of financial
institutions and professional experts from
industry and commerce, as and when
necessary. The secretariat for Industrial
Assistance (SIA) functions as the
secretariat of the FIIA.
 FOREIGN INVESTMENT PROMOTION
COUNCIL (FIPC):

• Apart from making the policy framework investor

friendly and
• Transparent, promotional measures are also taken to
attract Foreign Direct
• Investment into the country. The Government has
constituted a Foreign
• Investment Promotion Council (FIPC) in the
Department of Industrial
• Policy and Promotion, Ministry of Commerce and
Industry. This comprises
• of professionals from industry and trade. It has
been set up to have a more
• target oriented approach toward Foreign Direct
Investment promotion. The
• basic functions of the Council are to identify the
sectors/projects within
• the country requiring Foreign Direct Investment
and target specific regions/
• countries of the world from where FDI can be brought
in through special efforts.
•
 ENTREPRENEURIAL ASSISTANCE UNIT
(EAU):

• The Entrepreneurial Assistance Unit functioning under

the Secretariat for Industrial
• Assistance, Department of Industrial Policy and
Promotion provides assistance to entrepreneurs on
various subjects concerning investment decisions. The
unit receives all papers/applications related to
industrial approvals and immediately issues a
computerised acknowledgement, which also has an
identity/reference number. All correspondence with
the SIA should quote this number. In case of papers
filed by post, the acknowledgement will be sent by
post. The Unit extends this facility to all
papers/applications relating to IEMs, Industrial
Licenses, Foreign Investment, Foreign Technology
Agreements, 100 per cent EOUs, EHTP, STP Schemes,
etc.The Unit also attends to enquiries from
entrepreneurs relating to a wide range of subjects
concerning investment decisions. It furnishes
clarifications and arranges meetings with nodal
officers in concerned Ministries/Organizations. The
Unit also provides information regarding the current
status of applications filled for various industrial
approvals.
R@i4‹i2I FDI fl»w ‹i\ ItJ'r „

M
INVESTMENT COMMISSION:

• The Investment commission was set up in 2004 with a view to make the
environment in India attractive for investors. The commission has the
broad authority of the government to engage, discuss with and invest in
India. The recommendations of the commission are to be processed in
the Ministry of finance and will be put up to the competent authority
for approval. All policy decisions emerging from the recommendations
of the Commission would be put up to Cabinet Committee On Economic
Affairs for approval.
•
• The commission studied 25 key sectors spanning Infrastructure,
Manufacturing, Services, Natural Resources and the Knowledge
Economy. These sectors are significant and would require an
aggregate investment of US $ 550 billion over the next five years.
•
• The commission has recommended a need to identify a few National
Thrust Areas where all impediments for growth are removed, and
where appropriate incentives are provided, to encourage investment.
The Thrust Areas could include:
•
• Tourism
• Power
• Textiles
• Agro-processing
 NRI UNIT:

• Major functions of the NRI Unit which is

a part of the Investment Division are as
under:
•
• Euro-equity/foreign currency
convertible bonds policy.
• Foreign Institutional Investors
Portfolio Investment Policy.
• Investment policy for Non-Resident Indian.
• Policy governing opening up of
branch/liaison/project office by the
foreign companies and coordination in
respect of individual proposals referred to
Government by RBI
• Matters related to Indian Investment
Centre, an autonomous body under
the Ministry of Finance.
 FOREIGN DIRECT
INVESTMENT POLICY:

• The government of India has recently undertaken a

comprehensive review of the FDI policy and associated
procedures. As a result, a number of rationalization
measures like dispensing with the need of multiple
approvals from Government and/or regulatory agencies
that exist in certain sectors, extending the automatic route
to more sectors, and allowing FDI in new sectors.
•
• As per the extant policy, FDI up to 100% is allowed, under
the automatic route in most sectors/ activities. FDI under
the automatic route does not requires prior approval
either by the government or the reserve bank of India.
Investors are only required to notify the concerned
Regional office of RBI within 30 days of issue of shares to
foreign investors.
•
• Under the Government approval route, applications for FDI
proposals, other than by Non-Resident Indians, and
proposals for FDI in “Single Brand” product retailing, are
received in the Department of Economic Affairs, Ministry of
Finance. Proposals for FDI in “Single Brand” product
retailing and the NRI’S are received in the Department of
Industrial policy and Promotion, Ministry of Commerce and
Industry.
 SECTOR SPECIFIC
GUIDELINES FOR FDI IN
INDIA:
•
• FDI up to 100% is allowed under the
automatic route in all
activities/sectors except the following
which will require approval of the
following:
• Activities or items that require an
industrial license;
• Proposals in which the foreign
collaborator has a previous/ existing
venture/ tie up in India or allied field.
• All proposals relating to acquisitions of
shares in an existing Indian company by
a foreign/ NRI investor.
• All proposals falling outside notified
sectoral policy/ caps or under sectors in
which FDI is not permitted.
 AUTOMATIC ROUTE:

• All activities which are not covered

under the automatic route
according to para 2.1, prior approval
of the Government for FDI shall be
compulsory. Areas/ Sectors/
Activities hitherto not open to FDI
investment shall continue to be so
unless otherwise decided and
notified by Government. An
investor can make an application for
prior government approval even
when the proposed activity is under
the automatic route.
 PROCEDURE TO GET
GOVERNMENT APPROVAL:
• The Foreign Investment Promotion Board (FIPB)
considers approving all proposals for foreign
investment, which requires Government
approval. The FIPB also grants composite
approvals involving foreign investment, foreign
technical collaboration. For seeking the approval
for FDI other than NRI Investments and 100%
EOU, applications in form FC-IL should be
submitted to the department of Economic
Affairs (DEA), Ministry of Finance.
•
• Application for proposals requiring prior
government approval should be submitted to
FIPB in FC-IL from, plain paper applications
carrying all relevant particulars are also
accepted, no fee is charged. The following
information should form part of the proposals
submitted to FIPB:
 FOREIGN CURRENCY
CONVERTIBLE BONDS:
• FCCBs are issued in accordance with the [Scheme
for issue of Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993, and
subscribed by a non-resident in foreign currency
and convertible into ordinary shares of the
issuing company in any manner, either in whole,
or in part, on the basis of any equity related
warrants attached to debt instruments;
•
• The eligibility for issue of Convertible Bonds or
Ordinary Shares of Issuing Company is as
under:
•
• A) An issuing company desirous of raising
foreign funds by issuing Foreign Currency
Convertible Bonds or ordinary shares for equity
issues through Global Depositary Receipt.
• i. Can issue FCCBs up to US$50 Million under the
Automatic route,
 PREFERENCE SHARES:

• Foreign investment through preference shares is:

•
• • treated as Foreign Direct equity for the purposes of sectoral caps on
foreign equity, where such caps are prescribed, provided they carry a
conversion option. Preference shares structured without such
conversion option fall outside the foreign direct equity cap.
•
• • considered as part of the share capital and fall outside the External
Commercial Borrowing (ECB) guidelines/cap.
•
• The route, whether Automatic or Government approval depends
upon the activity / sector of the company.
•
• The Duration of conversion shall be as per the maximum limit
prescribed under the Companies Act or what has been agreed to in
the shareholders agreement, whichever is less.
•
• The dividend rate would not exceed the limit prescribed by the Ministry
of Finance.
•
• Issue of preference shares should conform to the guidelines prescribed
by the SEBI and RBI and other statutory requirements.
•
 INDUSTRIAL LICENSING:

• Industrial licensing policy:

•
• Industrial Licenses are regulated under the
Industries (Development & Regulation)
Act, 1951. With progressive liberalization
and deregulation of the economy the
requirement of industrial licensing have
been substantially reduced. At present
industrial license for manufacturing is
required only for the following:
• i. Industries retained under
compulsory licensing,
• ii. Manufacture of items reserved for
small scale sector by non-SSI units; and
• iii. When the proposed location
attracts locational restriction.
•
 Procedure for obtaining
Industrial License:

• Industrial License is granted by the Secretariat

for Industrial Assistance (SIA) on the
recommendation of the Licensing Committee.
• Application in the prescribed form. (Form FC-IL)
accompanied with a crossed demand draft of
Rs.2500/- may be submitted to the PR&C section
in SIA.
• Decisions are usually taken within 4-6 weeks of
filing the application...
•
• Policy for Industries exempt from licensing - IEM
•
• Industrial undertakings exempt from
industrial license are only required to file an
Industrial
Entrepreneur Memoranda (IEM) in Part ‘A’, in the
prescribed format (Form IEM).
IO i¥erhduX
 Payment of prescribed fee:

• The fee prescribed for various applications, licenses are to be paid

through crossed demand draft drawn in favor of the Pay & Accounts
Officer, Department of Industrial Policy & Promotion, Ministry of
Commerce & Industry, payable at New Delhi.
•
• Environmental Clearances:
•
• Entrepreneurs are required to obtain Statutory clearances relating to
Pollution Control and Environment as may be necessary, for setting up
an industrial project for 31 categories of industries in terms of
Notification
S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the
Ministry of Environment & Forests under The Environment (Protection)
Act, 1986. This list includes petrochemical complexes, petroleum
refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes,
paper, etc.
• However, if investment in the project is less than Rs. 1 billion, such
Environmental clearance is not necessary, except in cases of pesticides,
bulk drugs and pharmaceuticals, asbestos and asbestos products,
integrated paint complexes, mining projects, tourism projects of certain
parameters, tarred roads in Himalayan areas, distilleries, dyes,
foundries and electroplating industries.
• Setting up industries in certain locations considered ecologically fragile
(e.g. Aravalli Range, coastal areas, Doon valley, Dahanu, etc.) are
guided by separate guidelines issued by the Ministry of Environment
and Forests.
• Details can be obtained at the website of Ministry of Environment and
Forests (http://envfor.nic.in ).
 FOREIGN TECHNOLOGY AGREEMENTS

• General Policy:
•
• For promoting technological capability and competitiveness of the Indian industry, acquisition of foreign
technology is encouraged through foreign technology collaboration agreements. Induction of know-how
through such collaborations is permitted either through automatic route or with prior Government approval.
•
•
•
• Scope of Technology Collaboration:
•
• The terms of payment under foreign technology collaboration, which are eligible for approval through
the automatic route and by the Government approval route, includes technical know how fees, payment
for design and drawing, payment for engineering service and royalty.
•
• Payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing of
indigenous raw material, products, and indigenously developed technology in foreign countries are governed
by separate RBI procedures and rules pertaining to current account transactions and are not covered by the
foreign technology collaboration approval. For details please refer to the website of the RBI.
•
•
• Automatic Route:
•
• Payments for foreign technology collaboration by Indian companies are allowed under the automatic
route subject to the following limits:
•
• (i) The lump sum payments not exceeding US$2 million;
•
• (ii) Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without
any restriction on the duration of the royalty payments. The royalty limits are net of taxes and are
calculated according to standard conditions.[Press Note No.19 (1998 series) and Press Note No. 2 (2003
series)].
•
• The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise
duties, minus the cost of the standard bought-out components and the landed cost of imported
components, irrespective of the source of procurement, including ocean freight, insurance, custom duties,
etc.
 ENTRY OPTIONS FOR FOREIGN
INVESTOR

•
• Entry Options:
•
• A foreign company planning to set up business operations in India has the
following options:
•
• As an Incorporated Entity
•
• i) By incorporating a company under the Companies Act,1956 through
•
• i. Joint Ventures; or
•
• ii. Wholly Owned Subsidiaries
•
• Foreign equity in such Indian companies can be up to 100% depending on the
requirements of the investor, subject to any equity caps prescribed in respect of the
area of activities under the Foreign Direct Investment (FDI) policy.
•
• As an Unincorporated Entity
•
• ii) As a foreign Company through
•
• i. Liaison Office/Representative Office
•
• ii. Project Office
•
• iii. Branch Office
•
• Such offices can undertake activities permitted under the Foreign Exchange
Management (Establishment in India of Branch Office of other place of business)
Regulations, 2000.
 EXCHANGE CONTROL

• Foreign Exchange Management Act:

•
• The Reserve Bank of India’s Exchange Control Department, administers
Foreign Exchange Management Act, 1999, (FEMA).
•
• Repatriation of Investment Capital and Profits Earned in India:
•
• (i) All foreign investments are freely repatriable, subject to sectoral
policies and except for cases where NRIs choose to invest
specifically under non-repatriable schemes. Dividends declared on
foreign investments can be remitted freely through an Authorized
Dealer.
•
• (ii) Non-residents can sell shares on stock exchange without prior
approval of RBI and repatriate through a bank the sale proceeds if they
hold the shares on repatriation basis and if they have necessary
NOC/tax clearance certificate issued by Income Tax authorities
•
• (iii) For sale of shares through private arrangements, Regional offices
of RBI grant permission for recognized units of foreign equity in Indian
company in terms of guidelines indicated in Regulation 10.B of
Notification No. FEMA.20/2000 RB dated May ‘2000. The sale price of
shares on recognized units is to be determined in accordance with
the guidelines prescribed
PORTFOLIO INVESTMENT

• Portfolio Investment Scheme(PIS):

•
• Foreign Institutional Investors (FIIs) registered with SEBI and
Non-Resident Indians are eligible to purchase shares and
convertible debentures under the Portfolio Investment
scheme. The FII should apply to the designated AD for
opening a foreign currency account and/or a Non Resident
Rupee Account.
•
• Investment by FIIs is regulated under SEBI (FII)
Regulations, 1995 and Regulation 5(2) of FEMA Notification
No.20 dated May 3, 2000. SEBI acts as the nodal point in
the entire process of FII registration. FIIs are required to
apply to SEBI in a common application form in duplicate.
RBI approval is also required under FEMA to enable an FII
to buy/sell securities on Stock Exchanges and open foreign
currency and Indian Rupee accounts with a designated
bank branch.
•
• Foreign Institutional Investors (FII):
•
• FIIs include Asset Management Companies, Pension Funds,
Mutual Funds, Investment Trusts as Nominee Companies,
Incorporated/Institutional Portfolio Managers or their
Power of Attorney holders, University Funds, Endowment
Foundations, Charitable Trusts and Charitable Societies.
 INCORPORATION OF
COMPANY
• Company’s Act 1956:
• Incorporation of a company in India is governed by the Companies
Act, 1956. Part II of the Act deal with the incorporation of a company
and matters related to.
• Private Company:
• Private company means a company which has a minimum paid-
up capital of Rs,1,00,000/- or such higher paid-up capital as may
be prescribed, and by its articles,
• (a) restricts the rights to transfer its shares, if any;
• (b) Limits the number of its members to fifty, not including
• i) Persons who are in the employment of the company; and
• ii) persons who, having been formerly in the employment of the
company, were members of the company while in that
employment have continued to be members after the employment
ceased; and
• (c) prohibits any invitation to the public to subscribe for any shares in,
or debentures of, the company;
• (d) Prohibits any invitation or acceptance of deposits from persons other
than its members, directors or their relatives.
• Public Company:
• A public company is a company which is not a private company and has
a minimum paid-up capital of Rs,5,00,000/-or such higher paid-up
capital, as may be prescribed.
• Formation of a Private Limited Company:
• A private Company can be formed either by
 SETTING UP OF INDUSTRIAL PARKS,
INDUSTRIAL MODEL TOWNS AND
GROWTH CENTRES

• Policy under Automatic Route:

• The Government notified Industrial Park scheme on 1.4.2002
(available at www.dipp.gov.in) for setting up Industrial Parks/ Industrial
Model Towns. SIA in DIPP accord approval to set up the Industrial
Parks/ Industrial Model Towns, which meet the criteria laid down for
approval under the automatic route within fifteen days.
•
•
• Approval by Empowered Committee:
• Proposals not meeting any or all of the parameters for automatic
route require approval of Empowered Committee set up in the DIPP,
Ministry of Commerce & Industry. The decision of the Committee is
usually conveyed within six weeks.
• Procedure for Approval and availing 100% Tax Exemption:
• Application in the Form-IPS-1, available on this Department’s web site
(http://dipp.gov.in), for obtaining approval for setting up an Industrial
Park and for availing 100% tax exemption available under section 80 IA
of the Income Tax Act, should be made to the PR&C Section of the DIPP.
Application for automatic route has to be submitted in duplicate and for
non-automatic approval, in six sets. The application must be
accompanied by a fee of Rupees 6,000/- by a demand draft drawn in
favor of the Pay and Accounts Officer, DIPP payable at New Delhi.
 TAXATION IN INDIA

• Taxation System in India:

• India has a well developed tax structure Income Tax (except tax on agricultural income, which the State
Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax are the main taxes
levied by the Central Government. Value Added Tax, (Sales Tax where VAT is yet not in force), Stamp Duty,
State Excise, Land Revenue, and Tax on Professions are the principal taxes levied by the State Governments.
Local Bodies are empowered to levy tax on properties, Octroi and for utilities like water supply, drainage,
etc.
• Personal Income Tax:
• The rates of personal income tax are:
• Income range (Rupee) Tax rate(%)
•
• 0 -1, 00,000 NIL
•
• 1, 00,000 -1, 50,000 10
•
• 1, 50,000 - 2, 50,000 20
•
• 2, 50,000 and above 30
•
• A surcharge of 10% is levied on income exceeding Rs.10, 00,000.
•
• Senior citizens with income up to Rs.1, 85,000 are exempt from Income Tax.
•
• Rates of Withholding Tax:
•
• Current rates for withholding tax for payment to non-residents are:
•
• (i) Interest 20%
•
• (ii)Dividends Dividends paid by domestic companies: Nil
•
• (iii)Royalties 20%
•
• (iv) Technical Services 10%
•
• (v) Any Other Services Individuals: 30% of the income
• Companies: 40% of the net income
• The above rates are general and in respect of countries with which India does not have a
Double Taxation Avoidance Agreement (DTAA).
•
 TAX CONCESSIONS:

• India offers attractive tax incentives to encourage investments in

Special Economic Zones, priority industries and to promote
industrialization of industrially dis-advantageous areas.
•
• Special Economic Zones (SEZs):
•
• ‘THE SPECIAL ECONOMIC ZONES ACT, 2005’, notified by the
Government of India in June 2005, provides following concessions for
the establishment, development and management of the Special
Economic Zones for the promotion of exports. The tax concessions
available to developers of Special Economic Zones and units located in
such zones are as follows:
•
• Units which begin to manufacture or produce articles or things or
provide any services, on or after 01-04-2005 are eligible for 15 year
tax benefit in relation to export profits, in the following manner :-
•
• (i) 100 % deduction for 5 years, 50 % deduction for next 5 years, 50
% deduction of the profits ploughed back into business for the next 5
years.
•
• (ii) 100 % deduction of profits derived by an undertaking / enterprise
from the business of developing an SEZ, notified on or after 1st April,
2005. The deduction is available for 10 out of 15 years beginning
from the year in which SEZ has been notified.
•
• (iii) Exemption of capital gains arising on transfer of capital assets in
case of shifting of industrial undertaking from urban area to any Special
Economic Zone.
 F0reign Birectlnvestnent

\ior j

'' ltf hé i7ifi

 Capital Gains On
Infrastructure Funds
• Income by way of dividend, interest, or long-term capital gain of an
infrastructure capital company or an infrastructure capital fund is 100%
tax-exempt. However infrastructure capital companies are liable to pay
minimum alternative tax. Income of Venture Capital Company or
venture capital fund set up to raise funds for investment in a venture
capital undertaking is also tax-exempt.
•
• Tax Exemptions:
•
• Following tax exemptions are available for priority sectors
and incentives to industries located in special area/regions:
•
• Deduction of 100% of the profit from business of
•
• a. Development or operation and maintenance of ports, airports ,
roads, highways, bridges, rail systems, inland waterways, inland ports,
water supply projects, water treatment systems, irrigation projects,
sanitation and sewage projects, solid waste management systems..
•
• b. Generation, distribution and transmission of power
•
• c. Development, operation and maintenance of an Industrial Park or SEZ
• d. By undertakings set up in certain notified areas or in certain thrust
sector industries in the North-eastern states and Sikkim.
•
• e. By undertakings set up in certain notified areas or in certain
thrust sector industries in Uttaranchal & Himachal Pradesh
•
• f. By undertakings set up in Jammu & Kashmir
•
• g. Derived from export of articles or software by undertakings in FTZ
/ EHTP / STP
•
• h. Derived from export of articles or software by undertakings in SEZ
•
• i. Derived from export of articles or software by 100% EOU
•
• j. An offshore banking unit situated in a SEZ from business activities with
units located in the SEZ.
•
• k. Derived by undertakings engaged in the business of developing
and building housing projects.
•
• l. By undertakings from the business of operating and
maintaining Hospital.
•
• m. Derived by an undertaking engaged in the integrated business
of handling, storage and transportation of food grains...
•
• n. Derived by an undertaking engaged in the commercial production
or refining of mineral oil
•
• o. Derived by an undertaking from export of woodbased handicraft.
•
 Double Taxation Relief:

• India has entered into DTAA with

69 countries including countries
like U.S.A., U.K., Japan, France,
Germany, etc. In case of countries
with which India has double
taxation avoidance agreements.
The Comprehensive DTAA’s,
country wise, may please be seen
thru website of Income Tax India
at http://incometaxindia.gov.in
•
 AUTHORITY FOR ADVANCE
RULING:

• With a view to avoid a dispute in respect

of assessment of income-tax liability in the
case of a non-resident ( and also specified
categories of residents), a Scheme of
Advance Ruling was incorporated in the
Income Tax Act. The Authority for Advance
ruling (AAR) pronounces rulings on the
applications of the non-resident/residents
submitted and such rulings are binding
both on the applicant and the Income-Tax
Department. Thus, the applicant can avoid
expensive and time consuming litigation
which would have arisen from normal
income tax assessment proceedings. The
application in such cases should be
addressed to:
•
H0It bMnty

.) .i' .ii.':.
 INVESTMENT GUIDANCE
AND FACILITATION:
• INVESTMENT GUIDANCE:
•
• Secretariat for Industrial Assistance (SIA)
•
• Secretariat for Industrial Assistance (SIA) has been set up in the
Department of Industrial Policy & Promotion (DIPP) in the Ministry of
Commerce and Industry to provide a single window for
entrepreneurial assistance, investor facilitation, conveying
Government decisions on applications filed, assisting entrepreneurs
and investors in setting up projects, (including liaison with other
organisations and State Governments) and in monitoring
implementation of projects. It also notifies all Government policy
relating to investment and technology.
•
• Assistance to Entrepreneurs
•
• PR&C Section of the SIA provides assistance to entrepreneurs on
various subjects concerning investment decisions. It receives all papers/
applications related to industrial approvals i.e. IEMs, Industrial Licenses,
Foreign Investment, Foreign Technology Agreements, EHTP, STP
Schemes, etc. and immediately issues a computerized
acknowledgement, which also has an identity/reference number. All
correspondence with the SIA should quote this number.
•
• It also provides information regarding the current status of
applications filed for various industrial approvals.
•
 Information about Various
Other Clearances and
Approvals:
• In addition to the approval for bringing FDI in India, other clearances and approvals, such as registration
of company, environment and forest clearance, land acquisition, power and water connection, etc., may
be required for starting a business in India. Details of concerned Departments/Agencies along with their
web site addresses are given in Annex-IV.
•
• Publications:
•
• Following publications are brought out by DIPP and updated regularly for the guidance of investors:
•
• a. Foreign Direct Investment in India – Policy & Procedure.
•
• b. Investing in India –Flyer
•
• c. Entry Strategies for foreign Investors –Flyer
•
• d. Taxation in India –Flyer
•
• e. Investment Opportunities in infrastructure sectors
•
• . Single Window System in States & Union Territories
•
• g. Compendium of Press notes on FDI policy.
•
• These publications are available through the PR&C of the SIA or Investment Promotion Cell, DIPP; as also
from Indian Missions abroad. These can also be down loaded from the web site www.dipp.gov.in
• SIA News Letter:
•
• This is a monthly publication on Foreign Direct Investment / NRI Investment / sectoral breaks-ups /
country- wise break-ups, all actual FDI inflows and policy notifications issued during the month. The
monthly
publication is uploaded on Department’s website at www.dipp.gov.in.
INVESTMENT FACILITATION:

• FIIA has been established to

facilitate quick implementation of
FDI approvals and assist foreign
investors in getting necessary
approvals. Fast Track Committees
have been set up in 30
Ministries/Departments for regular
review of FDI mega projects (with
proposed investment of Rs. 1 billion
and above), and resolution of any
difficulties. Details of the fast track
committees set up in various
ministries is available at
http://dipp.gov.in. Investors can
approach FIIA through website
http://dipp.gov.in.
 FDI Permitted in Various
Sectors/ Activities
• I. FDI prohibited-
• i. Retail trading(except Single Brand
Product retailing)
•
• ii. Atomic energy
•
• iii. Lottery business
•
• iv. Gambling and betting sector
•
• II. FDI up to 26 % allowed-
•
• i.Broadcasting
•
• (a) FM Radio – FDI + FII investment up to 20% with
prior Government approval subject to guidelines
by Ministry of Information & Broadcasting.
•
• (b) Uplinking news and current affairs TV Channel – up
to 26% (FDI + FII) with prior FIPB approval.
 INTERPRETATIONS

• The FDI scenario in India has changed drastically in

the last decade. For the first time in 15 years, the
government has simplified and rationalized FDI
procedures while liberalizing the existing sectors such
as retail, television, diamond and coal mining,
airports, wholesale and export trading, and opening
new ones such as power trading, processing and
warehousing of coffee and rubber to foreign
investment.
•
• Aggregate FDI inflows into India were somewhat lower
during 2003-04 as compared to that during 2002-03,
FDI inflows into India, improved from US$ 2634 million
to US$ 3755 million from the year 2003-04 to 2004-05.
•
• Notwithstanding the upturn, India’s capital account in
recent years has gained far more strength from short-
term portfolio flows that from long- term FDI flows.
This probably necessitates revisiting the FDI policy
and identifying constraints impeding higher FDI
inflows. Procedural simplifications are likely to
encourage much greater FDI flows.
Summary and Conclusion

• The most important determinants for attracting FDI

are the Cost Factors, Market Size, Real Exchange
Rates, Macro Economic Stability, Rate of Inflation,
Overall Economic Stability, National FDI Policy,
Investment Incentive, and Removal of Restrictions like
Access to few industries, foreign ownership
restrictions, ease of entry performance requirements.
•
• The policy on Foreign Direct Investment has been
reviewed on a continuing basis and several measures
announced from time to time for rationalization/
liberalization of the policy and simplification of
procedures.
•
• As a result, a number if rationalization measures have
been undertaken which, inter alia include, dispensing
with the need to multiple approvals from
Government and/or regulatory agencies that exist in
certain sectors, extending the automatic route to
more sectors and allowing FDI in new sectors.
•
 BIBLIOGRAPHY:

• PRASSANA CHANDRA: FINANCIAL

MANAGEMENT THEORY AND PRACTICE,
TATA MC GRAW HILL 1997
• JOHN J HAMPTON: FINANCIAL
DECISION MAKING PRENTICE HALL
INDIA, 1992
• INDIA YEAR BOOK-PUBLICATIONS DIVISION,
GOVERNMENT OF INDIA 2007
• PRATIYOGITA DARPAN ECONOMY EDITION
• WEBSITES:
• www.dipp.nic.in
• www.commerce.nic.in
• www.finmin.nic.in
• www.india.gov.in
• www.rbi.org.in
• www.wikipedia.org
• Directory of government websites.
•
THE END