Foreign direct investment in india - Free Essay Example

INTRODUCTION Foreign direct Investment is direct investment in productive assets by a company incorporated in a foreign country, as opposed to investment in shares of local companies by foreign entities. It is an important feature of an increasingly globalize economic system. A Foreign company is which has been from outside India and want to start business in India. Such companies have to follow the roles or the provisions of the Indian Companies Act, 1956 as far as the Indian business are concerned (Charles 2000). According to Moosa (2002) Foreign Direct Investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). Balasubramanyam (2004) says that even 10 years after launching Free market, Indian economy is still no were on the map when it comes to inviting foreign investment. Indian plan makers are working to their best to try to show the attractiveness of Asias third largest economy. There are many advantages in FDI as we can stable over external sector, over monetary and financial sector and also the corporate sector to face the challenges of the globalize economy. As rightly said by Sukomal C Basu, Chairman Managing Director, Bank of Maharashtra ; India is one of the top five economy in the world and has one of the finest GDP among developing countries, in purchasing terms. Since the economic reforms initiated in July 1991 which has generated numerous business opportunities, which has lead to closing of various with removal of most licensing procedures. Today almost all sectors have been opened to foreign investment and the government has promised to further opening of its foreign goods, services and investments. This move aims for faster and substantial economic growth. We have the required setup to absorb the kind of money coming from China as foreign direct investment. as said by Nikhil Kharrau, CEO of Sun FC Asset management , which has over ten billion rupees invested in Indian Markets. Various analysts says that government must be aggressively privatization of state running firms, reforms of labor laws and cutting done on the huge debts and lowering of tariff which is among the highest in the world. The other hurdles is keeping the economy from realizing its potential and leaving the space for credit numbering agencies to improve Indias rating that are at scrap levels (Greenaway 2004). Foreign Direct Investment in India India invites foreign investors to invest in the economy with some specific exceptions. The most important sector and also where we can improve are Information Technology, Telecommunication, Insurance and financial services, etc. The process of economic rules has made the Indian policy makers concentrate on attracting capital from outside India and making Indian a globalize industrial base. The result in inflow of foreign direct investment and technological transfer has created an atmospheric growth and has increased competitiveness of Indian industry. Several foreign MNC has established their presence in the Indian market. While some of the foreign companies have established their office operations in India as the owner while other have successfully teamed with local companies to make their presence in the country. Earlier a more MNC presence in non base sectors such as consumer goods and services was observed as one of the base sector were reserved for the public sector. At present foreign investment is being encouraged in the base sectors such as basic infrastructure. This has helped to the entry of a huge number of foreign investor in many sectors of Indian market, which has fortune 500 companies, as well as small and medium companies from around the world (Ray 2005) Since 1991 the government has launch Manmohanmics on Foreign Direct Investment has been transformed and has done magic wonders by making under-developed India into developing nation. Even the government has taken the responsibility by encouraging and expanding the FDI. With the liberalization of the Indian economy, various Indian markets have been opened up to the foreign investors. Many companies are starting or they have already setup their business operation in India to do business in the Indian market. Since liberalization and industrial reforms process which started in 1990s the licensing and investment restrictions in many Indian markets have been lifted. The Industrial policy resolution of 1956 and the Industrial policy statement of 1991 give the basic overview of the overall industrial policy of the government of India. There is various ways by which we can start the foreign enterprise in India (Manmohanmic 2004). Broadly, entry strategies may be classified in two main types: 1. A foreign investor can directly start to office operation in India by opening its branch office or representative office or liaison office of the foreign company; or 2. It may do so through an Indian arm i.e. by setting up a subsidiary company setup in India under the rules of the Indian laws. According to Mukherjee (2005) foreign companies can start their Indian operation through opening of branch office. Companies like this can register themselves with the registrar of companies (ROC), New Delhi within 30 days of starting their business in India. Foreign Direct Investment (FDI) is allowed as under the following forms of investment. 1. Through financial collaborations. 2. Through joint ventures and technical collaboration. 3. Through private placement or preferential allotments. 4. Through capital markets via Euro issues. List of industrial companies for which industrial licensing are mandatory or compulsory: 1. Brewing and Distillation of alcoholic drinks. 2. Cigarettes and Cigars of tobacco and manufacturing of tobacco substitutes. 3. Defense equipment and electronic aerospace; all types 4. Industrial explosives including safety fuses, detonating fuses, nitrocellulose, gun powder and matches. 5. Hazardous chemicals. 6. Pharmaceuticals and Drugs. Foreign Direct Investment (FDI) are forbidden / not permitted to do business in the following industrial territories: 1. Ammunition and Arm 2. Atomic Energy 3. Railway Transport 4. Coal and lignite 5. Mining of iron, manganese, chrome, gypsum, gold, diamond etc. According to Chopra (1995), the Liberalization of the foreign investment regime has been anoth er major advance in Indias industrial policy since 1991. Key measures include allowing up to 51 percent foreign participation in 35 high priority industries on an automatic approval basic, with the possibility of approval up to 100 percent on a case by case basis. FDI in India are approved through two routes: * Direct Approval by Reserve bank of India: The Reserve Bank of India registers and gives approval within a period of 2 weeks if all the conditions and parameters are met to any proposal which involves: 1. Foreign investment in equity up to 50% in 3 categories relating to mining activities. 2. Foreign investment in equity up to 51% in 48 specified industries. 3. Foreign investment in equity up to 74% in 9 categories. 4. List 4 includes items also listed in List 3, 74% participation shall apply. The given lists are completely comprehensive and cover most of the industries of interest for the foreign companies. Investment done in high priority industries or for foreign trading companies who are primarily engaged in exporting are given automatic approval by the RBI. ÂÂ · The Foreign Investment Promotion Board (FIPB): The Indian Foreign Investment Promotion Board (FIPB) approves almost all the other cases where the rule and regulation of automatic approval are not met. Normally processing time for all Application takes around four to six weeks and their approach is liberal for any given sectors and any type of proposals and the rejections are very less. It is not necessary for the foreign investors to have local partner, even the foreign investor can also hold less than the entire equity of the company. If the parts of the equity are not ready to hold by the foreign investor can be offered to the public. The role of the government and its policy: The policies recommended to the Indian government on Foreign Direct Investment are mainly based on the approach adopted since 1949. The basic policy is to welcome Foreign Direct Investment on a selective basis in areas advantage to the Indian economy. The term and conditions under which foreign Direct Investment is welcome are as follows: 1) All undertakings (Indian or foreign) have to confirm to necessary requirements of the governments Industrial policy. 2) Foreign company must be treated as the normal Indian company. 3) Foreign company should have the freedom to make profits and invest capital subject to the foreign exchange considerations. As per the Industrial Policy of 1991, which is based on the view that while making free Indian industry from its official controls, opportunities for exploiting and promoting foreign investment in India should be done till the fullest extent. It should be felt that foreign investment would bring additional advantages of technological transfer, marketing expertise, introduction of new managerial strategies and new ways to promote exports. On Capitalization of the governments assurance for early implementation of the next phase of the economic reforms and with a view to further control of the Indian industry from the rigorous approvals and controls, the Indian government has allowed the Foreign Direct investment except in respect of the small negative list of company. Indian economic policies are specially designed to attract capital inflows into India and also to promote technological collaboration between India and the foreign companies. Initiatives taken over the last few years to promote the economic policy have helped in bringing significant inflows of foreign investment in to various areas of the Indian economy. India has always welcomed Foreign Direct Investment in mostly every sector possible, except those which require an approval for the government such as defense, railway, transport etc. and also the required areas which does not permit Foreign Direct Investment. (Mattoo 2003) According to Nagesh (1998) the government of India has a department of Foreign Investment Implementation Authority (FIIA) in the department of Commerce and Industry for providing an excess door for foreign investor to get quick approval for the foreign direct investment. The process of the application for FDI have been made easy and streamlined to facilitate business. The Salient features of the policy which would assist in achieving such objectives are outlined below: 1) Approval should be given to Foreign Direct Investment up to 51% to foreign equity in at least 36 high priority industries. There should not be a hidden amendment in any kind of this process. Such approvals can be made available if foreign equity covers the foreign exchange requirements for imported goods. 2) Other Foreign Equity proposals which include proposals involving 51% foreign equity which does not meet the terms of point 1) should be continued to get proper clearance. Foreign Equity proposals now should not be accompanied by the foreign technology agreements. 3) To get an access in the international market, most of the foreign equity holding companies to 51% equity should be allowed for the trading companies who are basically engaged in the export activities and such trading companies shall be at the same level with the domestic trading and export companies in compiling with the Import-Export Policy. 4) A special empowered investment promotion board has been appointed to deal and negotiate with various large international companies and approve Foreign Direct Investment in the selected areas. This special event is aimed to attract various foreign investors that would provide access to the world market and the new technology. 5) Recently, in a major initiative taken by the Government of India, in the field of capital market, a new scheme is introduced in India, which will make foreign investment in stock market easier. This scheme allows foreign institutional investors (FIIs) to invest in securities trade in the primary and secondary markets, including the equity other securities companies listed or to be listed on the stock exchanges in India as also Over the Counter Exchange of India (OTCEI). FIIs include institutions such as pension funds, mutual funds, investment trusts, asset management companies, nominee companies incorporated portfolio managers. The securities include shares, debentures, warrants and the schemes floated by domestic mutual funds. 6) To consolidate the reforms and to give a lip to the liberalization process, the government of India has to pass an act of parliament to amend the Foreign Exchange Regulation Act, 1973 (FERA), to regulate provisions and by bringing it in line with the new line liberalized industries, trade and exchange rate policies. The amendment has removed a large number of restrictions on companies with more than 40% nonresident equity, removed FERA controls of Indian firms setting up joint ventures abroad and allowed Indians to hold immovable property abroad, subject to certain conditions to be stipulated by the RBI. Facilities were also extended to nonresident Indians (NRIs), Indian companies and residents for opening of foreign currency accounts in India following the introduction of partial convertibility on the current account. Notifications were issued exempting NRIs returning to the country from declaring their assets abroad on their arrival in India and also exempting them from the requirement of prior approval for acquisition of immovable property in India. All these changes are now incorporated in the amendment. 7) Foreign Companies are now allowed to open their own office as well as branch offices in India. These can be said as the representative of their parent company or another foreign company office in India, this involves research, undertaking export and import trading activities also for the promotion of possible financial and technical collaboration with foreign and Indian companies. Government control over disinvestment of equity by foreign investors has been relaxed and such disinvestment is now permitted at market price for listed shares. Reserve Bank of Indias approval is required for the disinvestment price of unlisted shares. 8) The liberalized foreign investment policy is complemented by the new trade policy. The main aim of the policy is to enhance the competitiveness of the Indian economy and globalize Indias foreign trade by providing greater transparency and a vastly simplified procedural framework. In addition, licensing requirements for industrial inputs have been removed, allowing free access to capital goods, raw materials, spares, components and other items. 9) Other important features of the trade policy are: Import and export of all industrial inputs is freely permitted, except for a limited Negative List of Imports. Capital goods are no longer in the Negative List of Imports. Even used capital goods can be imported subject to certain conditions. Import duties have been reduced significantly and range from 0 to 85 per cent. Most capital goods attract a tariff of 20 -40 per cent. A number of special incentives are provided to exporters. Foreign Direct Investment Equity Inflow (1991 2009) (From August 1991 to October 2009 with the comparative amount in the last decade) I. FDI Inflows Cumulative amount of FDI Inflows: Rs. 5,39,004c. (From August 1991 to October 2009) (US$ 24,184)((( Cumulative amount of FDI Inflows: Rs. 3,93,126 (From April 2000 to March 2009) (US $ 89,840)9. Cumulative amount of FDI Inflows : Rs. 85,273 (From April 2009 to October 2009) (US $ 17,644)9. Cumulative amount of FDI Inflows : Rs. 4,78,399 (Updated up to October 2009) (US $ 107,484)9. * Figures in Millions. Scope for Improvement: India holds a lot of promise as a business destination. Indian economical market is not only for today but it is for the future. India has a huge market potential together with the existing pool of human resources and the wide variety of resources in India makes us the market for business destination in the years to come. With the ongoing liberalization the inflow of Foreign Direct Investment in India has increased from 3,93,126 crores (April 2000 to March 2009) and has increased to 4,78,399 crores (updated up to October 2009), with the faster move towards full convertibility of rupee, the norms are expected to ease out further. Foreign Direct Investment is expected to grow and the ratio to go up in the years to come. The countrys infrastructure needs to improve on an urgent basis to invite the foreign investors to do business in India. Foreign Direct Investment is very sensitive to such kind of infrastructure and the norm of the country. Foreign Investors are not satisfied by only cheap labour and tax incentives as they are the only major advantage for direct investment. If the other offset by poor i.e. poor roads, congested ports, erratic water and power supply etc. The urban infrastructure also requires large upgrading. If India has to become a globally preferred hub for outsourcing services, good roads, good airports, etc. are required to commit the investor that the destination of the business is perfect. Indian tax system should be further simplified. Further reduction in the rationalization of excise duties, along with the labour policies is also required and there is a requirement in the reduction of the customs duties which helps the tax system to be more simplified. Areas needed for Improvement There is inconsistency exists among the urban and rural population in terms of the earning among the larger organisation to retain customer, projects and market to share; among the agricultural and industrial sectors with regards to investment made in technology used for the development and among the many states in the investment climate. There is a need for the Indians to benefit from the opportunities that has offered by the globalise economy. The infrastructure development contains the problem for the foreign companies to face when it comes to dealing with the various government departments as the major for them lack of further investments into country Success in India Success in India will relay on the right judgment of the countrys ability, taking for granted the difficult or overestimation of its ability can lead to the failure. While estimating, we need to consider the fact and the problem faced, and the uncertainties of functioning the Indian economy. To enter the Indian market requires a well designed plan, with which it requires serious thought and some careful research. For the Foreign companies which has taken time and in deciding as India an opportunity for long term growth and not for short term can make profits than it can help them to success in India. Market Potential India is the 5th largest growing economy in the world; we rank above Italy, France, UK and even Russia, Also the 3rd largest GDP in the whole of Asia. India is the 2nd largest growing economy in the world. All the above factors are based on the purchasing power of the given country. Among all the markets in the world, India is the only market which has high prospers for growth and making profits in almost all the areas of business. Even though with almost all the possibilities of business in India for Foreign Direct Investment we have failed to grasp the opportunity available due to the political instability. BIBLIOGRAPHY REFERENCES: Moosa,I.,A.(2002) Foreign direct investment: theory, evidence and practice. Published by Palgrave Macmillan. Balasubramanyam V. N. (2004) Foreign Direct Investment: Six country case studies. Published by Edward Elgar Publication Limited. Charles O. (2000), Policy competition for Foreign Direct Investment: A study of . 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