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FDI in India
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Rajesh Goyal

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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 Such production by either buying a company in the target country or by expanding operations of an existing business in that country. 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 ;
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investments can take place for many reasons, including to take advantage of cheaper wages, special investment privileges (e.g. tax

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(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 : Domestic companies fear that they may lose their ownership to overseas company Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business; Large giants of the world try to monopolise and take over the highly profitable sectors; Such foreign companies invest more in machinery and intellectual property than in wages of the local people; 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,"

(a) (b) (c) (d) (e)

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 :
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(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: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company

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.
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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:Telecommunications Apparels Information Technology Pharma Auto parts Jewelry Chemicals 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
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sector to FDI slowly through a series of steps: 1995 : World Trade Organisations (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 under the Government Route?

allowed in India, both under the Automatic Route as well as

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
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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
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(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
.

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FDI Equity Inflows from 2000-2012


% age growth over Amount of FDI Inflows previous year (in terms of US $)

S. No

Financial Year (April March)

In Rs, crores 1 2 3 4 5 6 7 8 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 10733 18654 12871 10064 14653 24584 56390 98642

In US$ million 2463 4065 2705 2188 3219 5540 12492 24575 ( + ) 65 % ( - ) 33 % ( - ) 19 % ( + ) 47 % ( + ) 72 % (+ )125 % ( + ) 97 %
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2008-09 *

142829 123120 88520 122307

31396 25834 19427 26192 160096

( + ) 28 % ( - ) 18 % ( - ) 25 % -

10 2009-10 # 11 2010-11 # 12 2011-12 # (April - January 2012)

CUMULATIVE TOTAL (from April 723367 2000 to January 2012)

(a) including amount remitted through RBIs-NRI Schemes (2000-2002). (ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of monthly average rate provided by RBI (DEAP), Mumbai. (iii) Variation in equity inflows reported in above Table II-A & II-B for 2006-07, 2007-08, 2008-09, 2009-10 & 2010-11 is due to difference in reporting of inflows by RBI in their monthly report to DIPP & monthly RBI bulletin. (IV) # Figures for the years 2009-10, 2010-11 & 2011-12 are provisional subject to reconciliation with RBI. (V) * An additional amount of US$ 4,035 million pertaining to the year 2008-09, since reported by RBI, has been included in FDI data base from February 2012.

Which country tops in inflow of FDI Since 2000-2010? Top 5 Countries for FDI :
Iinflow in % age Inflows terms in absolute Terms

Country

(million US dollars)
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Mauritius Singapore USA UK Netherlands

42% 9 7 5 4

50164 11275 8914 6158 4968

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) News About Civil Aviation and Broadcasting can be read from this link. (b) Second Link for the details can be checked by clicking here

(A)

26% FDI is permitted in

Defence Newspaper and media ** Petroleum refining


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Pension sector (allowed in October 2012 as per cabinet decision) (B)49% FDI is permitted in : Banking Cable network** DTH ** Infrastructure investment Telecom Insurance (Enhanced from 26% to 49% in October, 2012) 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) Petro-pipelines (D) 74% FDI is permitted in Atomic minerals Science Magazines /Journals Petro marketing
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Coal and Lignite mines Telecom (E)100% FDI is permitted in Single Brand Retail (Increased to 100% from 51% in December 2011). Advertizement Airports Cold-storage BPO/Call centres E-commerce Energy (except atomic) export trading house Films Hotel, tourism Metro train Mines (gold, silver) Petroleum exploration Pharmaceuticals Pollution control Postal service Roads, highways, ports. Township Wholesale trading
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Source : RBI website, Newpaper reports, GoI data You can give your feedback / comments about this Article. Please give only relevant comments as irrelevant comments are waste of time for yourself and our other readers.

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36 comments Leave a message...


Newest Community Kiran Kumar Yakkala
11 days ago

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Hi Sir, Could you please share us the latest info about tht increase/decrease in the % changes in FDI in various categories..

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a month ago

YOGESH PATEL

i m yogesh student of tybms as i m working on my 200marks project topic of FDI so please help me by giving some recent issue in fdi of india

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a month ago

haroon afinwala 1

Thank you Sir . great work :)

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avinash

a month ago

thank you so much sir.... its very useful information about FDI...


arun dixit

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a month ago

very very thankful to providing information regarding FDI..... thank u so much


2

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kanchan kaur

a month ago

very clear information and data to understand... thanku soo much for that... well done.


suresh

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2 months ago

really informative and easy to understand even to a layman. Good work.

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Jitesh 1 rajesh

2 months ago

Well put information. It offers good clarity

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2 months ago

its too awesome information


TEENA

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2 months ago

excellent


TEENA

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2 months ago

THANKS A LOT....THE INFORMATION IS VERY APPROPRIATR AND SIMPLE TO BE UNDERSTOOD BY A LAY MAN

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3 months ago

tanu raj kulshreshtha

How nike and adidas are able to open stores in india if single brand retail FDI is allowed now?

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> tanu raj kulshreshtha 2 months ago

the franchisee stores or rather the trade marketers who purchased from the cash and carry stores and sold to the end customers..


saro

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3 months ago

greatful .thanks a lot sir.


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arun

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3 months ago

great
1

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vicky joy 1

3 months ago

This is good one for students as well as Bankers.

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4 months ago

Lakshminarayana 1

Thank u very much sir, for sharing with us such a useful information

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Kriti Kundu 8

4 months ago

Telecom is in both 74% and 49% sectors. I am confused.

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Kriti Kundu 1

4 months ago

Telecom is in both 74% and 49% sections. I am confused.

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LAKSHMI

4 months ago

NEAT REPORT ABOUT FDI THANK Y OU SO MUCH


prasa

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4 months ago

maza aa gaya

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Remya 1

5 months ago

thank u so much.... it gave me a clear picture about FDI

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5 months ago

phanindra kulkarni

Thank you for providing this(FDI) information with clear and perfect explanation ....it is very helpful to many aspirants


azgar

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5 months ago

Fdi heipful to India in growth of ECONOMY And empoyement oppurtunitys

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5 months ago

rohan kumar gurjar

very much useful,thanks


preet

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5 months ago

thanks 4 this much information

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6 months ago

Karan Keswani

FDI is an opportunity for the country's growth in all ways.We should grab it

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7 months ago

stanzin motup

good information ..like it. thanks

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rocks 1

8 months ago

I hope it will not repeat our India history.

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8 months ago

Biswajyoti Sarmah 1

Great.. it was helpful...Thanx

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8 months ago

disqus_5WHNExVmNW 2

FDI gives more oppertunity and create new innovation

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8 months ago

Shashi kant srivastava

very informative article thanks for sharing.

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8 months ago

disqus_A7BTFFRY3h

Artical very helpful.Thanks


Latha

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8 months ago

The confusion is about telecom sector... article is very helpful.. thanks a lot


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chandra rao 1

8 months ago

Thanks for the information. Telecom is given in both 46% and 74%.

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Vivek Sahu 1

8 months ago

telecom is given in both 26 as well as 74% slot of FDI rest article was very helpful. Thanks

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