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Foreign Direct Investment

Article  in  International Journal of Scientific Research · April 2013

DOI: 10.15373/22778179/APR2013/61

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Research Paper Volume : 2 | Issue : 4 | Apr 2013 • ISSN No 2277 - 8179

Finance
KEYWORDS : FDI, RBI, FIBP
Foreign Direct Investment

B. Sudha Assistant Professor and Head, Department of Commerce, Sri Sarada, Niketan College fo-
Women Amaravathipudur, Karaikudi.

ABSTRACT FDI has a powerful impact not only upon the economy of the investor country, but also upon economic and
social welfare of the host country. The role of FDI has increased considerably in recent years. In fact, FDI has
become an important source of external finance for the developing countries as it not only fulfills the ever-increasing requirements of
various sectors of the economy but also promotes growth, even more through spillovers of technology, improved innovative capacity,
and gives them effective marketing links in highly competitive world markets. Thus, FDI has become an important mechanism for
global economic integration. This paper focuses on top 5 investing countries in FDI equity inflows in India and top 5 sectors attracting
FDI in India.

Introduction from overseas into products or services. The domestic company

The Foreign Direct Investment means “cross border invest- in which foreign currency is invested is usually being controlled
ment made by a resident in one economy in an enterprise in by the investing foreign company. Now, during the course of
another economy, with the objective establishing a lasting in- time, FDI has become a vital part in every country more par-
terest in the investee economy FDI is also described as   “in- ticularly with the developing countries. This is because of the
vestment into the business of a country by a company in an- following reasons:
other country”. Mostly the investment is into production by • Availability of cheap labour.
either buying a company in the target country or by expanding • Uninterrupted availability of raw material.
operations of an existing business in that country”.  Such in- • Less production cost compared with other developed coun-
vestments can take place for many reasons, including to take tries.
advantage of cheaper wages, special investment privileges (e.g. • Quick and easy market penetration.
tax exemptions) offered by the country. Since the introduction
of economic reforms programme in 1991, the investment sce- Foreign Direct Investment (FDI) is permitted as under the
nario in India has been buoyant and moving upwards. The capi- following forms of investments
tal market has become very active and FIIs, foreign investment • Through financial collaborations.
banks and asset management companies have shown increas- • Through joint ventures and technical collaborations.
ing interest in investing in India. • Through capital markets via Euro issues.
• Through private placements or preferential allotments.
The role of Foreign Direct Investment (FDI) in the upgradation
of technology, skills and managerial capabilities is now well Forbidden Territories
accepted. Additional investments, over and above the invest- FDI is strictly prohibited by the Indian Government in the fol-
ments possible with the available domestic resources, help in lowing industrial sectors:
providing much needed employment opportunities. Foreign • Arms and ammunition.
Direct Investment continues to gain in importance as a form • Atomic Energy.
of international economic transaction and as an instrument of • Railway Transport.
international economic integration. Since the launch of the eco- • Coal and lignite.
nomic reforms in 1991, India has been among the fastest grow- • Mining of iron, manganese, chrome, gypsum, sulphur, gold,
ing countries in the World with the active participation of FDI in • diamonds, copper, zinc.
the economy. FDI has been seen as imperative to growing Indian
economy and plays an importance role for Indian economy. Foreign Investment through Global Depository Receipts
Indian companies are allowed to raise equity capital in the in-
Foreign Direct Investment Policy ternational market through the issue of Global Depository Re-
India’s foreign investment policy has been formulated with a ceipt (GDR) with the help of Euro Issues. GDR investments are
view to inviting and encouraging FDI into India. The process of treated as FDI and are designated in dollars and are not subject
regulation and approval has been substantially liberalised. FDI to any ceilings on investment. An applicant company seeking
under automatic route is permitted in most activities/sectors, Government’s approval in this regard should have consistent
except a few where prior approval of the Government is re- track record for good performance (financial or otherwise) for
quired. Government of India welcomes FDI in all sectors where a minimum period of 3 years. This condition would be relaxed
it is permitted, especially for development of infrastructure, for infrastructure projects such as power generation, telecom-
technological upgradation of Indian industry through ‘green- munication, petroleum exploration and refining, ports, airports
field’ investments and in projects having the potential of cre- and roads.
ating employment opportunities on a large scale. Investment
for setting up Special Economic Zones (SEZs) and establishing 1. Clearance from Foreign Investment Promotion Board
manufacturing units are also welcomed. A company engaged in the manufacture of items covered under
Annex-III of the New Industrial Policy whose direct foreign in-
Objectives of the Study vestment after a proposed Euro issue is likely to exceed 51%
1. To know the importance of FDI in Indian Industries. or which is implementing a project not contained in Annex-III,
2. To know entry routes available for FDI in India. would need to obtain prior FIPB clearance before seeking final
3. To know FDI law practice in India approval from Ministry of Finance. But there is no restriction on
4. To know top 5 investing countries and top 5 sectors attract- the number of Euro-issue to be floated by a company or a group
ing FDI. of companies in the financial year.

Statement of the Problem 2. Use of Global Depository Receipts

FDI can be defined as a cross border investment, where foreign The proceeds of the GDRs can be used for financing capital
assets are invested into the organizations of the domestic mar- goods imports, capital expenditure including domestic pur-
ket excluding the investment in stock. It brings private funds chase/installation of plant, equipment and building and invest-

IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH 175

 Volume : 2 | Issue : 4 | Apr 2013 • ISSN No 2277 - 8179
Research Paper

ment in software development, prepayment or scheduled re-

Japan Singapore
payment of earlier external borrowings, and equity investment
2. 11,295 (2,379) 7,730 (1,705) 20,020 72,896
(4,307) (16,203) 10%
in JV/WOSs in India.

3. Restrictions
Any investment from a foreign firm into India requires the 3. 5,670 (1,183) 7,063 (1,562) 13,007 56,769
(2,754) (12,095) 8%
prior approval of the Government of India. Investment in stock
markets and real estate will not be permitted. Companies may 4. 9,230 (1,943) 5,353 (1,170) 4,338 46,880 6%

U.K U.S.A
retain the proceeds abroad or may remit funds into India in an- (913) (10,362)
ticipation of the use of funds for approved end uses. 12,484 41,916
5. 3,094 (657) 3,434 (755) (2,750) (9,389) 6%
Foreign direct investments in India are approved through
two routes The Table-1 shows the country-wise distribution of FDI equity
1. Automatic approval by Reserve Bank of India inflows in India. The study reveals Mauritius (39%), Singapore
Investments in high-priority industries or for trading compa- (10%), Japan (8%), U.S.A (6%) and U.K. (6%).
nies primarily engaged in exporting are given almost automatic
approval by the Reserve Bank of India (RBI). The RBI accords TABLE-2
automatic approval within a period of two weeks (subject to TOP 5 SECTORS ATTRACTING HIGHEST FDI EQUITY IN-
compliance of norms) to all proposals and permits foreign equi- FLOWS IN INDIA
ty up to 24%; 50%; 51%; 74% and 100% is allowed depending

Cumulative inflows
on the category of industries and the sectoral caps applicable.

% to total inflows
(in terms of US $)
2011-12 (April-
The lists are comprehensive and cover most industries of inter-

(April- March)

(April- March)

(April 2000-
(April- Aug)
est to foreign companies.

Aug 2012)
2009-10

2010-11

2012-13
Sectors

March)
Ranks
2. The FIPB Route – Processing of non-automatic approval
cases
19,945] 15,053 24,656 12,480 158,252

Services
Foreign Investment Promotion Board (FIPB) which approves 1. 19%

Sector
(4,176) (3,296) (5,216) (2,280) (34,633)
all other cases where the parameters of automatic approval are
not met. Normal processing time is 4 to 6 weeks. Its approach is Construction
liberal for all sectors and all types of proposals, and rejections are
2. 13,469 4,979 15,236 3265 97028 12%
Activities
few. It is not necessary for foreign investors to have a local partner, (2,852) (1,103) (3,141) (601) (21,340)
even when the foreign investor wishes to hold less than the entire
equity of the company. The portion of the equity not proposed to
be held by the foreign investor can be offered to the public.
Telecomm

12,270 7,542 9,012 111 57,188

unication

3. (2,539) (1,665) (1,997) (20) (12,572) 7%

FDI Law Practice India
At present, the most lucrative business sectors for FDI in India
are, Infrastructure (Power, Steel, Railways, etc.); Telecommu-
Software &
Drugs & Pharma- Computer
Hardware

4. 4,127 3,551 3,804 1,032 51,149 6%

nications; Hospitality sector; Education; Retail; Real Estate; (872) (780) (796) (188) (11,393)
Retail sector, Petroleum and Petroleum Products; Biotechnol-
ogy; Alternative Energy, etc. The foreign direct investment in
Indian business sectors can easily be made in a variety of ways,
through the Governmental and Automatic Routes. However, 5. 1,006 961 14,605 2,572 45,440 5%
(213) (209) (3,232) (487) (9,682)
ceuticals

the Joint Ventures are the most popular and preferred forms
of making investment in Indian industry. Global Jurix can help
well-rounded the foreign investors of all class and categories for
getting highly lucrative and secure FDI in India, through provid- The Table-2 shows top 5 sectors attracting highest FDI equity inflows
ing the following legal services reliably and economically: in India were service sector at first place with 19%, construction ac-
• Company Formation and Company Law services tivities with 12%, Telecommunication with 7%, Computer software
• Establishment of Joint ventures and hardware with 6% and Drugs and Pharmaceuticals with 5%.
• Corporate and Commercial Law services
• For making all mandatory Compliances Conclusion
• Drafting all requisite Contracts, Agreements, and other Doc- The fast and steadily growing economy of India in majority of
uments its sectors, has made India one of the most famous and popu-
• Setting up Subsidiaries lar destinations in the whole world, for Foreign Direct Invest-
• Tax Planning ment. India’s ever-expanding markets, liberalization of trade
• Project Finance policies, development in technology and telecommunication,
• Dispute Resolution and loosening of diverse foreign investment restrictions, have
• Private Equity further collectively made India, the apple of investors’ eye, for
most productive, profitable, and secure foreign investment. In-
TABLE-1 dia has been ranked at the second place in global foreign direct
SHARE OF TOP 5 INVESTING COUNTRIES---FDI EQUITY IN- investments in 2010 and will continue to remain among the top
FLOWS IN INDIA five attractive destinations for international investors during
2010-12 periods. According to a recent survey by the United
% to total inflows(in

Nations Conference on Trade and Development (UNCTAD), In-

2011- Cumulative
dia has conspicuously emerged out as the second most popular
terms of US $)

2009-10 2010-11 12 inflows

(April- March) (April- March) (April- (April 2000 and preferable destination in the entire world FDI as a strategic
Country
Ranks

March) -Jan 012) component of investment is needed by India for achieving the
objectives of its second generation of economic reforms. But the
current institutional system does not provide a mechanism for
aggressive marketing of India as an FDI location. Therefore a fa-
vorable business environment is required to attract FDI flow by
1. 49,633 (10,376) 31,855 (6,987) 41,621 284,381 39%
Mauritius

(8,919) (63,146) providing hassle-free government procedures and most impor-

tantly, a degree of autonomy and freedom in various decision
making process

176 IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH

Research Paper Volume : 2 | Issue : 4 | Apr 2013 • ISSN No 2277 - 8179

REFERENCE 1. Foreign Direct Investment in India, Foreign Direct Investment in Indian Business retrieved from www.globalijurix.com/foreign-direct-invest-
ment-india-fdi.php. 2. Foreign Investment in India – Reserve Bank of India retrieved from www.rbi.org.in. 3. Foreign Direct Investment in India
retrieved from www.investingindia.in/fdi.htm.

IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH 177

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