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

Countries Seek FDI for the purpose of three (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 knowhow,
business expertise and knowledge.

EVOLUTION OF FDI IN INDIA

Historically, India had followed an extremely careful and selective approach while
formulating FDI policy in view of the governance of “import-substitution strategy” of
industrialisation. The regulatory framework was consolidated through the enactment of
Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a joint
venture was allowed only up to 40 per cent. Subsequently, various exemptions were
extended to foreign companies engaged in export oriented businesses and high technology
and high priority areas including allowing equity holdings of over 40 per cent. Moreover,
drawing from successes of other country experiences in Asia, Government not only
established special economic zones (SEZs) but also designed liberal policy and provided
incentives for promoting FDI in these zones with a view to promote exports. The
announcements of Industrial Policy (1980 and 1982) and Technology Policy (1983) provided
for a liberal attitude towards foreign investments in terms of changes in policy directions.
The policy was characterised by de-licensing of some of the industrial rules and promotion
of Indian manufacturing exports as well as emphasising on modernisation of industries
through liberalised imports of capital goods and technology. This was supported by trade
liberalisation measures in the form of tariff reduction and shifting of large number of items
from import licensing to Open General Licensing (OGL).

Post-Liberalisation Period

A major shift occurred when India embarked upon economic liberalisation and reforms
program in 1991 aiming to raise its growth potential and integrating with the world
economy. Industrial policy reforms slowly but surely removed restrictions on investment
projects and business expansion on the one hand and allowed increased access to foreign
technology and funding on the other. A series of measures that were directed towards
liberalizing foreign investment.
LEGAL AS WELL AS REGULATORY FRAMEWORK FOR FDI IN INDIA

The Government has put in place a policy framework on Foreign Direct Investment which is
embodied in the Circular on Consolidated FDI Policy, issued which is updated every six months, to
capture and keep pace with the regulatory changes. The latest Consolidated FDI policy has been in
effect from 28 August 2017. The Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce & Industry, Government of India makes policy pronouncements on FDI through Press
Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign
Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations,
2000 (notification No.FEMA 20/2000-RB dated May 3, 2000).

The procedural instructions are issued by the Reserve Bank of India vide A.P. DIR. (series) Circulars.
Thus, regulatory framework for FDI consists of Acts, Regulations, Press Notes, Press Releases,
Clarifications, etc.

The Indian companies can receive FDI under two routes-

1. Automatic route- Also called ‘Entry route for investment’ there are sectors where the government
of India make’s provision for FDI to enter without the approval of either RBI or Government.

2. Government route- It is in contrast of automatic route as in it prior approval for investment must
be taken either from the Foreign Investment Promotion Board (FIPB), Ministry of Finance, DIPP as
the case may be.
What is a depository system?

There are essentially four players in the depository system:

(i) The Depository

(ii) The Participant
(iii) The Beneficial Owner, and
(iv) The Issuer.

(i) The Depository

A Depository is an organization which holds the securities of a shareholder in electronic form at the
request of the shareholder. The depository acts as a de facto owner of the securities lodged with it
for the limited purpose of transfer of ownership. It functions as a custodian of securities of its
clients.

The development of Information technology has paved the way for many innovative things in the
stock exchange. The stocks scam which shook the stock market during the 1990s also made the
government to take preventive measures to avoid the recurrence of such scams. All these resulted in
the introduction of a new type of stock trade called dematerialization.

At present there are two depositories in India:

(a) National Securities Depository Ltd. (NSDL), and (b) Central Depository Services (India) Ltd. (CDSL).

National Securities Depository Limited which commenced operations during November 1996 was
promoted by IDBI, UTI and National Stock Exchange (NSE). Central Depository Services (India)
Limited commenced operations during February 1999. It was promoted by Mumbai Stock Exchange
in association with Bank of Baroda, Bank of India, State Bank of India and HDFC Bank.

What is Dematerialization:

Dematerialization on the other hand is a process wherein the shares, after being handed over to the
depository will be used at the time of sale or transfer of the shares from one shareholder to another.
Since the physical transfer of share / stock does not occur, it is called Scripless transfer or scripless
trade. Under dematerialization of shares, physical transfer of shares is avoided and the transactions
take place through the electronic media. This saves time and stationery and also prevents the loss of
documents in transit.

(ii) Depository Participant:

In India, a Depository Participant (DP) is described as an Agent (law) of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs and the
depository is governed by an agreement made between the two under the Depositories Act. In a
strictly legal sense, a DP is an entity who is registered as such with SEBI under the sub section 1A of
Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depository-related
services only after obtaining a certificate of registration from SEBI. As of 2012, there were 288 DPs of
NSDL and 563 DPs of CDSL registered with SEBI.
SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T
agents and non-banking finance companies (NBFC), for granting them a certificate of registration to
act as DPs. If a stockbroker seeks to act as a DP in more than one depository, he should comply with
the specified net worth criterion separately for each such depository. No minimum net worth
criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net
worth criterion for their DPs.

(iii) The Beneficial Owner:

Beneficial owner means a person whose name is recorded as such with a depository. A beneficial
owner is the real owner of the securities who has lodged his securities with the depository in the
form of book entry. He has all the rights and liabilities associated with the securities.

(iv) The Issuer:

The issuer is the company which issues the security. It maintains a register for recording the names
of the registered owners of securities, the depositories. These issuers send a list of shareholders,
who opt for the depository system, to the depositories.

Benefits of Depository system:

1. Depository system takes hold of all securities in the country listed in that particular stock
exchange. 2. Introduction of electronic system enables speedy transactions and accuracy. 3. In a
depository system, the security holders can sell and buy securities by which liquidity is brought to
the securities. 4. Blank transfers are avoided and holding of shares in Benami names is also
prevented. 5. Registration and stamp charges for the sale of securities could be easily collected by
the government which was evaded under the previous system. 6. Depository promotes more activity
in the capital market as trading in genuine share. is ensured under Depository system. 7. Depository
avoids use of stationery and prevents delay in registration of transfers. 8. Dividend and interest on
securities are properly distributed through this system and in the case of convertible debentures, on
the due date, the securities are converted into company shares. 9. Depository acts as collateral
security for the raising of loans from any financial institution.

Services provided by Depository

 Dematerialisation (usually known as demat) is converting physical certificates of Securities to

electronic form
 Rematerialisation, known as remat, is reverse of demat, i.e. getting physical certificates from
the electronic securities
 Transfer of securities, change of beneficial ownership
 Settlement of trades done on exchange connected to the Depository
 Pledging and Unpledging of Securities for loan against shares
 Corporate action benefits directly transfer to the Demat and Bank account of customer

What are ADRs or GDRs?

American Depositary Receipts (ADRs) are securities offered by non-US companies who want to
list on any of the US exchange. Each ADR represents a certain number of a company's regular
shares. These are deposited in a custodial account in the US. ADRs allow US investors to buy
shares of these companies without the costs of investing directly in a foreign stock exchange.
ADRs are issued by an approved New York bank or trust company against the deposit of the
original shares. When transactions are made, the ADRs change hands, not the certificates. This
eliminates the actual transfer of stock certificates between the US and foreign countries. Global
Depositary Receipts (GDRs) are negotiable certificate held in the bank of one country
representing a specific number of shares of a stock traded on the exchange of another country.
This is a financial instrument used by the companies to raise capital in either dollars or Euros.
GDRs are also called European Depositary Receipt. These are mainly traded in European
countries and particularly in London. However, ADRs and GDRs make it easier for individuals to
invest in foreign companies, due to the widespread availability of price information, lower
transaction costs, and timely dividend distributions.

Why do Companies go for ADRs or GDRs?

Indian companies need capital from time to time to expand their business. If any foreign investor
wants to invest in any Indian company, they follow two main strategies. Either the foreign
investors can buy the shares in Indian equity markets or the Indian firms can list their shares
abroad in order to make these shares available to foreigners. But the foreign investors often find
it very difficult to invest in India due to poor market design of the equity market. Here, they have
to pay hefty transaction costs. This is an obvious motivation for Indian firms to bypass the
incompetent Indian equity market mechanisms and go for the well-functioning overseas equity
markets. When they issue shares in forms of ADRs or GDRs, their shares commanded a higher
price over their prices on the Indian bourses.
 STOCK EXCHANGE

Stock exchange is the term commonly used for a secondary market, which provide a place where
different types of existing securities such as shares, debentures and bonds, government
securities can be bought and sold on a regular basis. A stock exchange is generally organised as
an association, a society or a company with a limited number of members. It is open only to
these members who act as brokers for the buyers and sellers. The Securities Contract
(Regulation) Act has defined stock exchange as an “ association, organisation or body of
individuals, whether incorporated or not, established for the purpose of assisting, regulating and
controlling business of buying, selling and dealing in securities”.

Chutiye ke notes---1st Stock Exchange -1875 in Bombay- by native share and stockbrokers
association. At world level, first stock exchange in 1675.

FUNCTIONS OF A STOCK EXCHANGE

The functions of stock exchange can be enumerated as follows:

1. Provides ready and continuous market: By providing a place where listed securities can be
bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous
market for various shares, debentures, bonds and government securities. This lends a high
degree of liquidity to holdings in these securities as the investor can encash their holdings as and
when they want.

2. Provides information about prices and sales: A stock exchange maintains complete record of
all transactions taking place in different securities every day and supplies regular information on
their prices and sales volumes to press and other media. In fact, now-a-days, you can get
information about minute to minute movement in prices of selected shares on TV channels like
CNBC, Zee News, NDTV and Headlines Today. This enables the investors in taking quick decisions
on purchase and sale of securities in which they are interested. Not only that, such information
helps them in ascertaining the trend in prices and the worth of their holdings. This enables them
to seek bank loans, if required.

3. Provides safety to dealings and investment: Transactions on the stock exchange are
conducted only amongst its members with adequate transparency and in strict conformity to its
rules and regulations which include the procedure and timings of delivery and payment to be
followed. This provides a high degree of safety to dealings at the stock exchange. There is little
risk of loss on account of non-payment or non- delivery. Securities and Exchange Board of India
(SEBI) also regulates the business in stock exchanges in India and the working of the stock
brokers. Not only that, a stock exchange allows trading only in securities that have been listed
with it; and for listing any security, it satisfies itself about the genuineness and soundness of the
company and provides for disclosure of certain information on regular basis. Though this may
not guarantee the soundness and profitability of the company, it does provide some assurance
on their genuineness and enables them to keep track of their progress.
4. Helps in mobilisation of savings and capital formation: Efficient functioning of stock market
creates a conducive climate for an active and growing primary market. Good performance and
outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which
helps in mobilising savings for investment in industrial and commercial establishments. Not only
that, the stock exchanges provide liquidity and profitability to dealings and investments in shares
and debentures. It also educates people on where and how to invest their savings to get a fair
return. This encourages the habit of saving, investment and risk-taking among the common
people. Thus it helps mobilising surplus savings for investment in corporate and government
securities and contributes to capital formation.

5. Barometer of economic and business conditions: Stock exchanges reflect the changing
conditions of economic health of a country, as the shares prices are highly sensitive to changing
economic, social and political conditions. It is observed that during the periods of economic
prosperity, the share prices tend to rise. Conversely, prices tend to fall when there is economic
stagnation and the business activities slow down as a result of depressions. Thus, the intensity of
trading at stock exchanges and the corresponding rise on fall in the prices of securities reflects
the investors’ assessment of the economic and business conditions in a country, and acts as the
barometer which indicates the general conditions of the atmosphere of business.

6. Better Allocation of funds: As a result of stock market transactions, funds flow from the less
profitable to more profitable enterprises and they avail of the greater potential for growth.
Financial resources of the economy are thus better allocated.