Project Report

On

“Foreign Direct Investment”

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Page 2
 DECLARATION

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Page 3
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Page 4
Chapter Nr. TOPIC Page Nr.

1 Introduction of foreign direct investment 6

2 History of foreign direct investment 9

3 Impact of FDI on Indian economy 22

4 Factors responsible for FDI inflow to INDIA 26

5 Overview of the regulatory framework by the government for 29

FDI in India
6 Benefits of Foreign Direct Investment and Disadvantages of 32
Foreign Direct Investment (Host Country)
7 Policy reforms on foreign direct investment in India 36

8 FDI and its role in the economic development 45

9 Role of Foreign Direct Investment in Indian Stock Market 48

10 Guidelines for FDI in banking 51

11 Sector wise distribution of FDI inflows in India 54

12 Foreign institutional investors 63

13 Difference between FDI and FII 66

14 Depository receipts 68

15 Global depository receipts. 70

16 American Depository Receipt 76

17 Indian Depository Receipts 85

18 A comparative analysis of India’s and China’s FDI flow 92

19 Conclusion 95

20 Bibliography 97

Page 5
Chapter - 1

Page 6
 CHAPTER-1
INTRODUCTION OF FDI

Direct investments in productive assets by a company

incorporated in a foreign country, as opposed to investments in shares of local companies by
foreign entities. An important feature of an increasingly globalized economic system. Any
investment flowing from one country to another country is foreign investment. The
management of a business enterprise in a foreign country is foreign investment. Indian
Government classifies foreign investment in the following form:
Foreign direct investment (FDI)
Foreign institutional investment (FII)
Non-resident Indian (NRI) investment 

Foreign investments in the country can take the form of investments in listed companies (i.e.,
FII investments), investments in listed/unlisted companies other than through stock exchanges
(i.e., through the foreign direct investment or private equity/foreign venture capital investment
route), investments through American Depository Receipts/Global Depository Receipts
(ADR/GDR), or investments by non-resident Indians (NRIs) and Persons of Indian Origin
(PIOs) in various forms.

Foreign Direct Investment in India increased by 3081 USD Million in December of 2016.
Foreign Direct Investment in India averaged 1218.87 USD Million from 1995 until 2016,
reaching an all-time high of 5670 USD Million in February of 2008 and a record low of -60
USD Million in February of 2014.

Page 7
India Foreign Direct Investment - actual values, historical data, forecast, chart, statistics,
economic calendar and news. India Foreign Direct Investment - actual data, historical chart
and calendar of releases - was last updated on February of 2017.

Actual Previous Highest Lowest Dates Unit Frequency

3081.00 2043.00 5670.00 -60.00 1995 - 2016 USD Million Monthly

Page 8
Chapter -2

Page 9
 CHAPTER-2 HISTORY OF FDI IN INDIA

At the time of independence, the attitude towards foreign capital was one of fear and
suspicion. This was natural on account of the previous exploitative role played by it in
‘draining away’ resources from this country. 

The suspicion and hostility found expression in the Industrial Policy of 1948 which, though
recognizing the role of private foreign investment in the country, emphasized that its
regulation was necessary in the national interest. Because of this attitude expressed in the 1948
resolution, foreign capitalists got dissatisfied and as a result, the flow of imports of ca[ital
goods got obstructed. As a result, the prime minister had to give following assurances to the
foreign capitalists in 1949:

1. No discrimination between foreign and Indian capital. The government o India will not
differentiate between the foreign and Indian capital. The implication was that the
government would not place any restrictions or impose any conditions on foreign
enterprise which were not applicable to similar Indian enterprises.
2. Full opportunities to earn profits. The foreign interests operating in India would be
permitted to earn profits without subjecting them to undue controls. Only such restrictions
would be imposed which also apply to the Indian enterprises.
3. Guarantee of compensation. If and when foreign enterprises are compulsorily acquired,
compensation will be paid on a fair and equitable basis as already announced in
government’s statement of policy.

Though the Prime Minister stated that the major interest in ownership and effective control of
an undertaking should be in Indian hands, he gave assurance that there would be “no hard and
fast rule in this matter.” By a declaration issued on June 2, 1950, the government assured the
foreign capitalists that they can remit the he foreign investments made by them in the country
after January 1, 1950. in addition, they were also allowed to remit whatever investment of
profit and taken place.

Page 10
Despite the above assurances, foreign capital in the requisite quantity did now flow into India
during the period of the First plan. The atmosphere of suspicion had not changed substantially.
However, the policy statement of the Prime Minister issued in 1949 and continued practically
unchanged in the 1956 Industrial Policy Resolution, had opened up immense fields to foreign
participation. In addition, the trends towards liberalization grew slowly and gradually more
strong and the role of foreign investment grew more and more important. 

The government relaxed its policy concerning majority ownership in several cases and granted
several tax concessions for foreign personnel. Substantial liberalization was announced in the
New Industrial Policy declared by the government on 24th July 1991 and doors of several
industries have been opened up for foreign investment. 

Prior to this policy, foreign capital was generally permitted only in the those industries where
Indian capital was scarce and was not normally permitted in those industries which had
received government protection or which are of basic and/or strategic importance to the
country. The declared policy of the government was to discourage foreign capital in certain
inessential‘ consumer goods and service industries.

However, this provision was frequently violated as a number of foreign collaborations even in
respect of cosmetics, toothpaste, lipstick etc. were allowed by the government. It was also
stated that foreign capital should help in promoting experts or substituting imports. 

The government also laid down that in all those industries where foreign capital investment is
allowed, the major interest in ownership and effective control should always be in Indian
hands (this condition was also often relaxed). 

The foreign capital investments and technical collaborations were required to be so regulated
as to fit into the overall framework of the plans. In those industries where foreign technicians
and managers were allowed to operate as Indians with requisite skills and experience were not
available, vital importance was to be accorded to the training and employment of Indians in
the quickest possible manner.

Page 11
The economic liberalisation in India refers to ongoing economic reforms in India that started
on 24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts
were made to liberalize economy in 1966 and 1985. The first attempt was reversed in 1967.
Thereafter, a stronger version of socialism was adopted. Second major attempt was in 1985 by
Prime Minister Rajiv Gandhi. The process came to a halt in 1987, though 1966 style reversal
did not take place. In 1991, after India faced a balance of payments crisis, it had to pledge 20
tons of gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout
deal with the International Monetary Fund (IMF). In addition, the IMF required India to
undertake a series of structural economic reforms. As a result of this requirement, the
government of P. V. Narasimha Rao and his finance minister Manmohan Singh (currently the
Prime Minister of India) started breakthrough reforms, although they did not implement many
of the reforms the IMF wanted. The new neo-liberal policies included opening for
international trade and investment, deregulation, initiation of privatization, tax reforms, and
inflation-controlling measures. The overall direction of liberalisation has since remained the
same, irrespective of the ruling party, although no party has yet tried to take on powerful
lobbies such as the trade unions and farmers, or contentious issues such as reforming labour
laws and reducing agricultural [Link], unlike the reforms of 1966 and 1985 that were
carried out by the majority Congress governments, the reforms of 1991 carried out by a
minority government proved sustainable.

India in 1997 allowed foreign direct investment (FDI) in cash and carry wholesale. Then, it
required government approval. The approval requirement was relaxed, and automatic
permission was granted in 2006. Between 2000 to 2010, Indian retail attracted about $1.8
billion in foreign direct investment, representing a very small 1.5% of total investment flow
into India.

Single brand retailing attracted 94 proposals between 2006 and 2010, of which 57 were
approved and implemented. For a country of 1.2 billion people, this is a very small number.
Some claim one of the primary restraint inhibiting better participation was that India required
single brand retailers to limit their ownership in Indian outlets to 51%. China in contrast

Page 12
allows 100% ownership by foreign companies in both single brand and multi-brand retail
presence.

Indian retail has experienced limited growth, and its spoilage of food harvest is amongst the
highest in the world, because of very limited integrated cold-chain and other infrastructure.
India has only 5386 stand-alone cold storages, having a total capacity of 23.6 million metric
tons. However, 80 percent of this storage is used only for potatoes. The remaining
infrastructure capacity is less than 1% of the annual farm output of India, and grossly
inadequate during peak harvest seasons. This leads to about 30% losses in certain perishable
agricultural output in India, on average, every year.

Indian laws already allow foreign direct investment in cold-chain infrastructure to the extent
of 100 percent. There has been no interest in foreign direct investment in cold storage
infrastructure build out. Experts claim that cold storage infrastructure will become
economically viable only when there is strong and contractually binding demand from
organized retail. The risk of cold storing perishable food, without an assured way to move and
sell it, puts the economic viability of expensive cold storage in doubt. In the absence of
organized retail competition and with a ban on foreign direct investment in multi-brand
retailers, foreign direct investments are unlikely to begin in cold storage and farm logistics
infrastructure.

Until 2010, intermediaries and middlemen in India have dominated the value chain. Due to a
number of intermediaries involved in the traditional Indian retail chain, norms are flouted and
pricing lacks transparency. Small Indian farmers realize only 1/3rd of the total price paid by
the final Indian consumer, as against 2/3rd by farmers in nations with a higher share of
organized retail. The 60%+ margins for middlemen and traditional retail shops have limited
growth and prevented innovation in Indian retail industry.

India has had years of debate and discussions on the risks and prudence of allowing innovation
and competition within its retail industry. Numerous economists repeatedly recommended to
the Government of India that legal restrictions on organized retail must be removed, and the

Page 13
retail industry in India must be opened to competition. For example, in an invited address to
the Indian parliament in December 2010, Jagdish Bhagwati, Professor of Economics and Law
at the Columbia University analysed the relationship between growth and poverty reduction,
then urged the Indian parliament to extend economic reforms by freeing up of the retail sector,
further liberalization of trade in all sectors, and introducing labor market reforms. Such
reforms Professor Bhagwati argued will accelerate economic growth and make a sustainable
difference in the life of India’s poorest.,

A 2007 report noted that an increasing number of people in India are turning to the services
sector for employment due to the relative low compensation offered by the traditional
agriculture and manufacturing sectors. The organized retail market is growing at 35 percent
annually while growth of unorganized retail sector is pegged at 6 percent.

The Retail Business in India is currently at the point of inflection. As of 2008, rapid change
with investments to the tune of US $ 25 billion were being planned by several Indian and
multinational companies in the next 5 years. It is a huge industry in terms of size and
according to India Brand Equity Foundation (IBEF), it is valued at about US$ 395.96 billion.
Organised retail is expected to garner about 16-18 percent of the total retail market (US $ 65-
75 billion) in the next 5 years.

India has topped the A.T. Kearney’s annual Global Retail Development Index (GRDI) for the
third consecutive year, maintaining its position as the most attractive market for retail
investment. The Indian economy has registered a growth of 8% for 2007. The predictions for
2008 is 7.9%.The enormous growth of the retail industry has created a huge demand for real
estate. Property developers are creating retail real estate at an aggressive pace and by 2010,
300 malls are estimated to be operational in the country.

 After 2011
For years, India had prevented innovation and organized competition in its consumer retail
industry. Several studies claim that the lack of infrastructure and competitive retail industry is
a key cause of India’s persistently high inflation. Furthermore, because of unorganized retail,

Page 14
in a nation where malnutrition remains a serious problem, food waste is rife. Well over 30% of
food staples and perishable goods produced in India spoils because poor infrastructure and
small retail outlets prevent hygienic storage and movement of the goods from the farmer to the
consumer.

One report estimates the 2011 Indian retail market as generating sales of about $470 billion a
year, of which a minuscule $27 billion comes from organized retail such as supermarkets,
chain stores with centralized operations and shops in malls. The opening of retail industry to
free market competition, some claim will enable rapid growth in retail sector of Indian
economy. Others believe the growth of Indian retail industry will take time, with organized
retail possibly needing a decade to grow to a 25% share. A 25% market share, given the
expected growth of Indian retail industry through 2021, is estimated to be over $250 billion a
year: a revenue equal to the 2009 revenue share from Japan for the world’s 250 largest
retailers.

The Economist forecasts that Indian retail will nearly double in economic value, expanding by
about $400 billion by 2020. The projected increase alone is equivalent to the current retail
market size of France.

In 2011, food accounted for 70% of Indian retail, but was under-represented by organized
retail. A.T. Kearney estimates India’s organized retail had a 31% share in clothing and
apparel, while the home supplies retail was growing between 20% to 30% per year. These data
correspond to retail prospects prior to November announcement of the retail reform. The
Indian market offers endless possibilities for investors.

It might be true that India has the largest number of shops per inhabitant. However we
(locatus) have detailed figures for Belgium, the Netherlands and Luxemburg. In Belgium, the
number of outlets is approximately 8 per 1,000 and in the Netherlands it is 6. So the Indian
number must be far higher.

Page 15
Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience
stores or any retail outlets, to sell multiple products from different brands directly to Indian
consumers.

The government of Manmohan Singh, prime minister, announced on 24 November 2011 the
following:
 India will allow foreign groups to own up to 51 per cent in “multi-brand retailers”, as
supermarkets are known in India, in the most radical pro-liberalisation reform passed by
an Indian cabinet in years;
 single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores,
up from the previous cap of 51 percent;
 both multi-brand and single brand stores in India will have to source nearly a third of their
goods from small and medium-sized Indian suppliers;
 all multi-brand and single brand stores in India must confine their operations to 53-odd
cities with a population over one million, out of some 7935 towns and cities in India. It is
expected that these stores will now have full access to over 200 million urban consumers
in India;
 multi-brand retailers must have a minimum investment of US$100 million with at least
half of the amount invested in back end infrastructure, including cold chains, refrigeration,
transportation, packing, sorting and processing to considerably reduce the post harvest
losses and bring remunerative prices to farmers;
 the opening of retail competition will be within India’s federal structure of government. In
other words, the policy is an enabling legal framework for India. The states of India have
the prerogative to accept it and implement it, or they can decide to not implement it if they
so choose. Actual implementation of policy will be within the parameters of state laws and
regulations.
The opening of retail industry to global competition is expected to spur a retail rush to India. It
has the potential to transform not only the retailing landscape but also the nation’s ailing
infrastructure.

Page 16
A Wall Street Journal article claims that fresh investments in Indian organized retail will
generate 10 million new jobs between 2012–2014, and about five to six million of them in
logistics alone; even though the retail market is being opened to just 53 cities out of about
8000 towns and cities in India.

It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by
millions of small retailers, who see large foreign chains as a threat. The need to control food
price inflation—averaging double-digit rises over several years prompted the government to
open the sector, analysts claim. Hitherto India’s food supplies have been controlled by tens of
millions of middlemen (less than 5% of Indian population). Traders add huge mark-ups to
farm prices, while offering little by way of technical support to help farmers boost their
productivity, packaging technology, pushing up retail prices significantly. Analysts said
allowing in big foreign retailers would provide an impetus for them to set up modern supply
chains, with refrigerated vans, cold storage and more efficient logistics. “I think foreign chains
can also bring in humongous logistical benefits and capital,” Chandrajit Banerjee, director-
general, Confederation of Indian Industry, told Reuters. “The biggest beneficiary would be the
small farmers who will be able to improve their productivity by selling directly to large
organised players,” Mr Banerjee said.

 Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience
stores or any retail outlets, to sell multiple products from different brands directly to Indian
consumers. The government of Manmohan Singh, prime minister, announced on 24
November 2011 the following:
India will allow foreign groups to own up to 51 per cent in “multi-brand retailers”, as
supermarkets are known in India, in the most radical pro-liberalisation reform passed by an
Indian cabinet in years;
single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up
from the previous cap of 51 percent;
both multi-brand and single brand stores in India will have to source nearly a third of their
goods from small and medium-sized Indian suppliers;

Page 17
all multi-brand and single brand stores in India must confine their operations to 53-odd cities
with a population over one million, out of some 7935 towns and cities in India. It is expected
that these stores will now have full access to over 200 million urban consumers in India;
multi-brand retailers must have a minimum investment of US$100 million with at least half of
the amount invested in back end infrastructure, including cold chains, refrigeration,
transportation, packing, sorting and processing to considerably reduce the post harvest losses
and bring remunerative prices to farmers;
the opening of retail competition will be within India’s federal structure of government. In
other words, the policy is an enabling legal framework for India. The states of India have the
prerogative to accept it and implement it, or they can decide to not implement it if they so
choose. Actual implementation of policy will be within the parameters of state laws and
regulations.

The opening of retail industry to global competition is expected to spur a retail rush to India. It
has the potential to transform not only the retailing landscape but also the nation’s ailing
infrastructure.

A Wall Street Journal article claims that fresh investments in Indian organized retail will
generate 10 million new jobs between 2012–2014, and about five to six million of them in
logistics alone; even though the retail market is being opened to just 53 cities out of about
8000 towns and cities in India.

It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by
millions of small retailers, who see large foreign chains as a threat. The need to control food
price inflation—averaging double-digit rises over several years—prompted the government to
open the sector, analysts claim. Hitherto India’s food supplies have been controlled by tens of
millions of middlemen (less than 5% of Indian population). Traders add huge mark-ups to
farm prices, while offering little by way of technical support to help farmers boost their
productivity, packaging technology, pushing up retail prices significantly. Analysts said
allowing in big foreign retailers would provide an impetus for them to set up modern supply
chains, with refrigerated vans, cold storage and more efficient logistics. “I think foreign chains

Page 18
can also bring in humongous logistical benefits and capital,” Chandrajit Banerjee, director-
general, Confederation of Indian Industry, told Reuters. “The biggest beneficiary would be the
small farmers who will be able to improve their productivity by selling directly to large
organised players,” Mr Banerjee said.

 According to Bloomberg, on 3 December 2011, the Chief Minister of the Indian state of West
Bengal, Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19
votes to the ruling Congress party-led coalition, claimed that India’s government may put the
FDI retail reforms on hold until it reaches consensus within the ruling coalition. Reuters
reports that this risked a possible dilution of the policy rather than a change of heart.,
India Today claimed that the resistance to Indian retail reforms is primarily because it has
been badly sold, even though it can help fix the exploitation of Indian farmers by the decades-
old “arhtiya” and “mandi” monopoly system. India Today claims the policy is good for the
small Indian farmer and the Indian consumer.

Pratap Mehta, president of the Centre for Policy Research, claimed any U-turn or
postponement of retail reforms will cause an immense loss of face to the Congress-led central
government of Manmohan Singh. The mom-and-pop farmers of India support these reforms.
The consumers of India want the reforms. The government has already annoyed those who
oppose change and innovation in retail. By putting retail reforms on hold, the government will
additionally alienate much larger segment of India’s population supporting FDI. So they will
now have the worst of both worlds, claims Mehta.

Deepak Parekh, Ashok Ganguly and other economic policy leaders of India, on 4 December
2011, called placing investment and innovation in retail on hold for the sake of vested interests
as unfair and detrimental to vast majority in India. They urged farmers, consumers and the
common people to raise their voice against this false drama of apprehension against
investment and modernising trade in organised retailing. They called upon Indians to come out
and strongly support progressive measures and reforms with the same spirit and gusto with
which we take the liberties to criticize policies or issues we do not appreciate.

Page 19
Several newspapers claimed on 6 December 2011 that India parliament is expected to shelve
retail reforms while the ruling Congress party seeks consensus from the opposition and the
Congress party’s own coalition partners. Suspension of retail reforms on 7 December 2011
would be, the reports claimed, an embarrassing defeat for the Indian government, suggesting it
is weak and ineffective in implementing its ideas.

Anand Sharma, India’s Commerce and Industry Minister, after a meeting of all political
parties on 7 December 2011 said, “The decision to allow foreign direct investment in retail is
suspended till consensus is reached with all stakeholders.”

On January 11, 2012, India approved increased competition and innovation in single-brand
retail. The reform seeks to attract investments in operations and marketing, improve the
availability of goods for the consumer, encourage increased sourcing of goods from India, and
enhance competitiveness of Indian enterprises through access to global designs, technologies
and management practices. In this announcement, India requires single-brand retailer, with
greater than 51% foreign ownership, to source at least 30% of the value of products from
Indian small industries, village and cottage industries, artisans and craftsmen.

 Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or
any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic
process.

In November 2011, India’s central government announced retail reforms for both multi-brand
stores and single-brand stores. These market reforms paved the way for retail innovation and
competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single
brand majors such as IKEA, Nike, and Apple. The announcement sparked intense activism,
both in opposition and in support of the reforms. In December 2011, under pressure from the
opposition, Indian government placed the retail reforms on hold till it reaches a consensus.
In January 2012, India approved reforms for single-brand stores welcoming anyone in the
world to innovate in Indian retail market with 100% ownership, but imposed the requirement

Page 20
that the single brand retailer source 30 percent of its goods from India. Indian government
continues the hold on retail reforms for multi-brand stores.

In June 2012, IKEA announced it has applied for permission to invest $1.9 billion in India and
set up 25 retail stores. Fitch believes that the 30 percent requirement is likely to significantly
delay if not prevent most single brand majors from Europe, USA and Japan from opening
stores and creating associated jobs in India.

On 14 September 2012, the government of India announced the opening of FDI in multi-brand
retail, subject to approvals by individual states. This decision has been welcomed by
economists and the markets, however has caused protests and an upheaval in India’s central
government’s political coalition structure. On 20 September 2012, the Government of India
formally notified the FDI reforms for single and multi brand retail, thereby making it effective
under Indian law

Page 21
Chapter -3

Page 22
 CHAPTER-3
IMPACT OF FDI ON INDIAN ECONOMY

Foreign direct investment in India has grown immensely in the last 5 years due to strong
support from the Union Government. This growth has in turn helped with the progress of the
national economy. Recently, the South-East Asian country has strived hard to draw FDI from
the leading investors of the world. 
 Financial collaborations
 Capital markets via euro issues
 Preferential allotments or private equity
 Joint ventures

In the last few years the following sectors have attracted the maximum FDI as per a fact sheet
brought out by the Department of Industrial Policy and Promotion:
Services
Automobile
Computer hardware and software
 Power
 Telecommunications
 Metallurgical industries
 Real estate and housing
 Petroleum and natural gas
 Construction
 Chemicals with the exception of fertilizers
The FDI laws forbid investment in the following sectors:
 arms
 coal
 nuclear
 mining
 railway

Page 23
3.1 Impact of FDI on Indian Economy
 India has recently liberalized its FDI policy and decided to allow 100 percent
international investment in the single brand retail segment. Reforms to industrial
policies have brought about significant reductions to requirements regarding to
licensing and done away with restrictions related to expansion and made it easy to use
international technology.
 The real estate sector has performed well in recent times and much of the credit in this
instance can be given to the relaxed FDI regulations and the properly performing
economy.
 The Indian government 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 much
thought needs to be given before more FDI is allowed.
 India is the 3rd biggest economy of the world in terms of purchasing power parity and
is thus a popular destination when it comes to FDI. Following are the major economic
sectors where it can attract investment:
 telecommunications
 apparels
 information technology
 pharmaceuticals
 auto components
 jewelry
 chemicals
Foreign investments in India have increased of late but the strict FDI policies have impeded
the possible 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.

Page 24
3.2 How FDI is calculated?
Foreign direct investment can be defined, according to national accounting principles, as the
net investment inflow that is necessary for acquiring long term management interest in an
organization that is operating in a different country. Long term management interest can be
calculated as at least 10% of the voting stock of a company.

It is the aggregate of equity capital and other long term and short term capital that are reflected
in the balance of payments. A foreign direct investor normally takes part in the following
areas of an organization’s operations:
 management
 technology transfer
 joint ventures
 expertise transfer
There are two major types of FDI – inward FDI and outward FDI. Together these values are
used to calculate the stock of foreign direct investment and the net FDI inflow. Direct
investment, however, does not include buying shares. FDI can be cited as an example of
international factor movement

3.3 Union Government FDI Measures

The Union Government has allowed 100 percent FDI in cash and carry wholesale trade sector
apart from the single brand retail market. It has also opted to allow 51% FDI in the multi
brand retail segment. However, this will be implemented in accordance to certain
predetermined conditions. At present, it is trying to come to a consensus on this matter with
the various state governments.

Page 25
Chapter -4

Page 26
 CHAPTER-4
FACTORS RESPONSIBLE FOR FDI INFLOW TO INDIA

A large number of factors are held responsible for FDI Inflow to India. Foreign Direct
Investment inflow made its entry in India for the first time during the year 1991-92 with the
aim to bring together the intended investment and the actual savings of the country. 

4.1 AN OVERVIEW OF FACTORS RESPONSIBLE FOR FDI INFLOW TO INDIA

To pursue a growth of around 7 percent in the Gross Domestic Product of India, the net capital
flows should increase by at least 28 to 30 percent on the whole. The savings of the country
stood at 24 percent. The gap formed between intended investment and the actual savings of
the country was lifted up by portfolio investments by foreign institutional investors, loans by
foreign banks and other places, and foreign direct investments. Among these three forms of
financial assistance INDIA prefers as well as possess the maximum amount of foreign direct
investments.

Advantages of foreign direct investments

FDI inflows raise the capital for investment. Foreign capital has taken over the domestic
capital in terms of purchasing issue. Domestic capital is usually used for invested in other
sectors of the Indian market.

Foreign direct investment in Greenfield ventures, has introduced technological advancement

and contemporary techniques for management in INDIA which the country lacked badly
before FDI made its entry.

The inflow of foreign capital in INDIA has opened up a plethora of options in the Indian
market by ensuring foreign capital shares which stabilizes the country’s economy.

India ranks 17th in terms of foreign direct investments inflows, and has 1.4 percent shares in
FDI inflows among all other developing nations.

Page 27
India attracts the maximum FDI inflows
India is potentially active in terms of investments and provides a galore of opportunities to the
foreign players into the market. Foreign companies who aspire to become a global player
would grab the opportunities, INDIA provides in terms of investments. The foreign companies
enjoy the rights to set up branch offices, representative offices, and also carry out outsourcing
activites in terms of software developmental programmes in INDIA . All these have opened up
innumerable options for the foreign investors to expand their businesses at a global level.
These are some of the factors which led to FDI inflows in INDIA.

Market potential in INDIA for attracting FDI inflows.

India is claimed to be the fifth largest economy across the globe and ranks third in the gross
domestic product in the entire ASIA, which is one of the most significant factors responsible
for FDI inflows in India. Besides, India belongs to those rarest of countries, which offers
maximum opportunities through various industrial units. India offers maximum opportunities
for foreign investments, which have been a major cause behind the flourishing economy of the
country. The FDI inflows in Indian market as accounted for the year 2006-07, stood at USD
2,171 million.

4.2 FDI inflows in 2016-17 to be higher than 15.3% in 2015-16

FDI inflows in the current fiscal will top 15.3 per cent rise in 2015-16 on the back of reforms
and liberalisation of FDI norms, Economic Affairs Secretary Shaktikanta Das said. Stating
that the current account deficit (CAD) at 1.1 per cent of GDP is a "robust macro economic
indicator", Das said efforts will continue on the reforms front. "Net FDI inflow rose by 15.3
per cent in 2015-16 over the previous year. Should be more this year due to full-year impact of
FDI liberalisation in November 2015," Das tweeted. For the full year, CAD stood at $22.1
billion (1.1 per cent of GDP) as against $26.9 billion (1.8 per cent) in 2014-15. Net FDI
inflows during 2015-16 stood at $36 billion, up sharply by 15.3 per cent over 2014-15,
according to RBI data. In November, the government had unveiled sweeping liberalisation of
foreign investment norms by relaxing FDI rules in 15 sectors, including civil aviation,
banking, defence, retail and news broadcasting, and eased the process for FDI approval.

Page 28
Chapter -5

Page 29
 CHAPTER-5
OVERVIEW OF THE REGULATORY FRAMEWORK BY THE GOVERNMENT
FOR FDI IN INDIA

From 1991, trade liberalisation in India has been accompanied by a process of gradual
liberalisation of capital flows management regulations. Foreign Direct Investment (FDI) by
non-resident in resident entities through transfer or issue of securities to persons resident
outside India is a „capital account transaction‟ and Government of India and RBI regulate the
same under the Foreign Exchange Management Act, 1999 (FEMA) and various regulations
framed under the Act. RBI is given primary authority to regulate capital flows through FEMA.
Notably, Section 6 of FEMA authorizes the RBI to manage foreign exchange transactions and
capital flows in consultation with the Ministry of Finance. SEBI (Foreign Institutional
Investors) Regulations, 1995 (FII Regulations) have facilitated the regulation of portfolio
investments and strengthened India’s opening to world markets. Supplementing RBI and
SEBI, the other institutional bodies regulating capital flows include the Forward Markets
Commission (FMC), the Insurance Regulatory and Development Authority (IRDA) and the
Pension Fund Regulatory and Development Authority (PFRDA).

The two routes for foreign investments - the foreign direct investment route and foreign
portfolio investment route are the key constituents of this concept paper.

5.1 Figures That Count:

As per data sourced from DIPP, the cumulative amount of FDI equity inflows from August
1991 to November 2010 stood at US$ 140.9 billion. India received FDI inflows of US$ 393
million in the financial year 1992-93 which have substantially increased to US$ 25.8 billion in
the financial year 2009-10. During the financial year 2010-11 (April-November), FDI equity
inflow of US$ 14 billion has already been attracted by India. As on November 2010, the
service sector (financial and non-financial) has been the prominent sector staying at the top in
terms of FDI inflows standing at 21.07% of the total inflows since the year 2000. Computer
software and hardware follows the list with 8.40% share closely followed by
telecommunication and housing & real estate at 8.06% and 7.53% respectively. This clearly

Page 30
reflects that the key sectors viz. the service sector, IT, telecommunication and infrastructure
which provide attractive profit margins to foreign investors, have attracted greater FDI inflows
and the foreign investors have a great opportunity to further participate in India’s growing
economy by investing in these key sectors along with the other strategic areas like defense,
insurance, retail etc. Opening up and widening of several important sectors like infrastructure,
townships, housing, cash and carry trading, wholesale trading, E-Commerce, single brand
retail, commodity exchanges etc. have further spurred the interest in India as the FDI capital of
world. More interest is being shown in retail sector which India is gradually opening up. Plans
to introduce FDI in multi brand retail seem to be on the horizon. As a result of opening up of
several key sectors, substantial investments have been received and this in turn has assisted in
re-iterating the India growth story even during the financial turmoil. The key sectors in India
have been adequately capitalized and insulated from external jitters of the likes of global
slowdown of 2008-09.

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Chapter -6

Page 32
 CHAPTER-6
BENEFITS OF FOREIGN DIRECT INVESTMENT AND DISADVANTAGES OF
FOREIGN DIRECT INVESTMENT (HOST COUNTRY)

There are several benefits of FDI over the economy of the receiving country. These
benefits could be classified mainly in four types:

Integration into global economy - Developing countries, which invite FDI, can gain access
to a wider global and better platform in the world economy.

Economic growth - This is one of the major sectors, which is enormously benefited from
foreign direct investment. A remarkable inflow of FDI in various industrial units in India has
boosted the economic life of country.

Trade - Foreign Direct Investments have opened a wide spectrum of opportunities in the
trading of goods and services in India both in terms of import and export production. Products
of superior quality are manufactured by various industries in India due to greater amount of
FDI inflows in the country.

Technology diffusion and knowledge transfer – FDI apparently helps in the outsourcing of
knowledge from India especially in the Information Technology sector. Developing countries
by inviting FDI can introduce world-class technology and technical expertise and processes to
their existing working process. Foreign expertise can be an important factor in upgrading the
existing technical [Link] example, the civilian nuclear deal led to transfer of nuclear
energy know-how between the USA and India.

Increased competition - FDI increases the level of competition in the host country. Other
companies will also have to improve on their processes and services in order to stay in the
market. FDI enhanced the quality of products, services and regulates a particular sector.
Linkages and spillover to domestic firms- Various foreign firms are now occupying a position
in the Indian market through Joint Ventures and collaboration concerns. The maximum

Page 33
amount of the profits gained by the foreign firms through these joint ventures is spent on the
Indian market.

Human Resources Development - Employees of the country which is open to FDI get
acquaint with globally valued skills.

Employment - FDI has also ensured a number of employment opportunities by aiding the
setting up of industrial units in various corners of India..

Disadvantages of Foreign Direct Investment (Host Country)

Foreign direct investment may be very advantageous to the host country that is the country
which receives the investment flows in terms of helping the country progress economically
and financially. However, foreign direct investment can remain beneficial only when the
governments of the host countries put in needed regulations so as to prevent the country from
being exploited and used as a profit generating machine for such corporate giants. The past
has given many examples of how foreign direct investment can also at times be detrimental to
the economy of a country, some examples of which are highlighted below:

Political Lobbying: In the past, there have been many instances in which MNCs have resorted
to political lobbying in order to get certain policies and laws implemented in their favor. At
times, these MNCs are so large that their revenues even exceeded the Gross Domestic Product
(GDP) of some smaller nations and compel or threaten them to pass judgments and policies in
their favor.

Exploitation of Resources: Exploitation of natural resources of a host country is not an very

uncommon phenomenon in the case of FDI. MNCs of other countries have been known to
indiscriminately exploit the resources of hosts countries in order to get short run gains and
profits and have even chosen to ignore the sustainability factors associated with the local
communities and local habitat, very much like what happened in the 17th century colonialism.
Threaten Small Scale Industries: MNCs have large economic and pricing power due to their
large sizes. They do not have much problem with regards to financial capital and can hence

Page 34
resort to using advertising which is a costly affair. Also, these companies are global players
who have their operations spread across countries and have effective supply chains which
enable them to have economies of scale which smaller players in the domestic market of the
host country cannot compete with. All this results in the MNC having cheaper products and
more visibility due to the higher amounts of advertising and have been known to push out
smaller industries out of business.

Technology: Although, the MNCs have access to new and cutting edge technology, they do
not transfer the latest technology to the host country with a fear that their home country may
loose its competitive advantage, hence the maximum potential of the host economy cannot be
achieved as a result of old technology transferred.

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Chapter -7

Page 36
 CHAPTER-7
POLICY REFORMS ON FOREIGN DIRECT INVESTMENT IN INDIA

Investment in Indian market:-

India, among the European investors, is believed to be a good investment despite political
uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies .India
presents a vast potential for overseas investment and is actively encouraging the entrance of
foreign players into the market. No company, of any size, aspiring to be a global player can,
for long ignore this country which is expected to become one of the top three emerging
economies .India has in the recent years emerged as a favored destination for investment in
various sectors like Power generation, Heavy Machinery, Infrastructure project, Telecom,
Communication, Software etc. Various hurdles that existed in the economy earlier have been
removed as a result of the winds of liberalization sweeping the country. India has now opened
its doors to foreign investment in a major way. Non-Resident Indians and Multinational
Companies have to follow certain rules and regulations prior to investment.

Policy
FDI upto 100% is allowed under the automatic route in all activities/sectors except the
following which will require approval of the Government:
 Activities/items that require an Industrial License;
 Proposals in which the foreign collaborator has a previous/existing venture/ tie up in
India in the same or allied field,
 All proposals relating to acquisition 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 [Link] policy is reviewed on an ongoing basis and measures for its
further liberalization are taken. Change in sectoral policy/ sectoral equity cap is
notified from time to time through Press Notes by the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy & Promotion. Policy
announcement by SIA are subsequently notified by RBI under FEMA. 

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7.1 REFORMS MADE BY THE GOVERNMENT FOR FDI IN INDIA
1. Procedure under automatic route
2. Procedure under Government Approval
3. Prohibited Sectors
4. General permission of RBI under FEMA
5. Industrial Licensing
6. Procedure for obtaining an industrial license
7. Small Scale Sector
8. Locational restrictions
9. Environmental Clearances
10. Foreign currency convertible Bonds
11. Eligibility
12. Preference shares
13. FDI IN EOUs/ SEZs/Industrial Park /EHTP/ STP Special Economic Zones (SEZs)
14. Industrial Park 
15. Strong Debt Markets:
16. Strong Deal destination:
17. Robust Insurance Sector:
18. DTAA:

India has among the most liberal and transparent policies on FDI among the emerging
economies. FDI up to 100% is allowed under the automatic route in all activities/sectors
except the following, which require prior approval of the Government: -
Sectors prohibited for FDI
1. Activities/items that require an industrial license
2. Proposals in which the foreign collaborator has an existing financial/technical
collaboration in India in the same field
3. Proposals for acquisitions of shares in an existing Indian company in financial service
sector and where Securities and Exchange Board of India (substantial acquisition of
shares and takeovers) regulations, 1997 is attracted)

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 4. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI
is not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could
be made without approval of the central government. The sectors that are not in the automatic
route, investment requires prior approval of the Central Government. The approval in granted
by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed. 

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route,
FDI could take place after taking necessary regulatory approvals form the state governments
and local authorities for construction of building, water, environmental clearance, etc.

Procedure under automatic route FDI in sectors/activities to the extent permitted under
automatic route does not require any prior approval either by the Government or RBI. The
investors are only required to notify the Regional Office concerned of RBI within 30 days of
receipt of inward remittances and file the required documents with that office within 30 days
of issue of shares of foreign investors.

Procedure under Government Approval FDI in activities not covered under the automatic
route require prior government approval. Approvals of all such proposals including composite
proposals involving foreign investment/foreign technical collaboration is granted on the
recommendations of Foreign Investment Promotion Board (FIPB). 

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100%
Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of
Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of
Industrial Policy and Promotion. 

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Application can be made in Form FC-IL. Plain paper applications carrying all relevant details
are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the
FIPB are at Annexure-III of the Manual for FDI.

Prohibited Sectors
The extant policy does not permit FDI in the following cases:
1. Gambling and betting
2. Lottery Business
3. Atomic Energy
4. Retail Trading
5. Agricultural or plantation activities of Agriculture (excluding Floriculture,
Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of
Vegetables, Mushrooms etc., under controlled conditions and services related to agro
and allied sectors) and Plantations (other than Tea Plantations)

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do no require any
further clearance from RBI for receiving inward remittance and issue of shares to the foreign
investors. 

The companies are required to notify the concerned Regional Office of the RBI of receipt of
inward remittances within 30 days of such receipt and within 30 days of issue of shares to the
foreign investors or NRIs. 

Industrial Licensing
With progressive liberalization and deregulation of the economy, industrial license is required
in very few cases. Industrial licenses are regulated under the Industries (Development and
Regulation) Act 1951. At present, industrial license is required only for the following: -
1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale sector by larger units
3. When the proposed location attracts locational restriction

Page 40
The following industries require compulsory license: -
1. Alcoholics drinks
2. Cigarettes and tobacco products
3. Electronic aerospace and defense equipment
4. Explosives
5. Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates
of hydro carbon and derivatives

Procedure for obtaining an industrial license Industrial license is granted by the Secretariat
for Industrial Assistance in Department of Industrial Policy and Promotion, Government of
India. Application for industrial license is required to be submitted in Form FC-IL to
Department of Industrial Policy and Promotion.

Small Scale Sector An industrial undertaking is defined as small scale unit if the capital
investment does not exceed Rs. 10 million (approximately $ 222,222). The Government has
reserved certain items for exclusive manufacture in the small-scale sector. Non small-scale
units can manufacture items reserved for the small-scale sector if they undertake an obligation
to export 50% of the production after obtaining an industrial license.

Locational restrictions Industrial undertakings to be located within 25 kms of the standard

urban area limit of 23 cities having a population of 1 million as per 1991 census require an
industrial license. Industrial license even in these cases is not required if a unit is located in an
area designated as an industrial area before 1991 or non-polluting industries such as
electronics, computer software, printing and other specified industries.

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 and Forests under The
Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum
refineries, cement, thermal power, plants, bulk drugs, fertilizers, dyes, papers etc.,

Page 41
However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), 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 issues by the Ministry of Environment and Forests.

Foreign currency convertible Bonds FCCBs are issued in accordance with the scheme [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;

Eligibility The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing
Company is given as under:(i) An issuing company desirous of raising foreign funds by
issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues
through Global Depositary Receipt(ii) Can issue FCCBs upto USD 50 Million under the
Automatic route,(iii) From USD 50 –100 Million, the companies have to take RBI approval,
(iv) From USD 100 Million and above, prior permission of the Department of Economic
Affairs is required.

Preference shares Foreign investment through preference shares is treated as foreign direct
investment. Proposals are processed either through the automatic route or FIPB as the case
may be, as per the following guidelines: -
(i) Foreign investment in preference share are considered as part of share capital and fall
outside the External Commercial Borrowing (ECB) guidelines/ cap.
 
(ii) Preference shares to be treated as foreign direct equity for purpose of sectoral caps on
foreign equity, where such caps are prescribed, provided they carry a conversion option.

Page 42
Preference shares structured without such conversion option fall outside the foreign direct
equity cap.
(iii) Duration for 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.
(iv) The dividend rate would not exceed the limit prescribed by the Ministry of Finance.
(v) Issue of preference shares should conform to guidelines prescribed by the SEBI and RBI
and other statutory requirements.

FDI IN EOUs/ SEZs/Industrial Park /EHTP/ STP Special Economic Zones (SEZs)
100% FDI is permitted under automatic route for setting up of special Economic Zone. Units
in SEZ qualify for approval through automatic route subject to sectoral norms. Details about
the type of activities permitted are available in the Foreign Trade Policy issued by Department
of Commerce. Proposals not covered under the automatic route require approval by FIPB.
100% Export Oriented Units (EOUs). 100% FDI is permitted under automatic route for setting
up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route
would be considered and approved by FIPB

Industrial Park 
100% FDI is permitted under automatic route for setting up of Industrial Park.

Strong Debt Markets:

A deep liquid debt market in India has been generating consistent and safe returns for offshore
investors. Considering the interests of overseas investors, the Government has prescribed high
investment limits of USD 20 billion for investments in corporate debt securities and USD 10
billion for investments in government debt securities.

Strong Deal destination:

India is becoming a hub of both in-bound and out-bound mega M&A deals, private equity
transactions and a thriving Venture Capital Industry.

Page 43
Robust Insurance Sector:
India has a strong insurance sector with liberal FDI policy permitting FDI of 26% with
proposals to raise it upto 49% in the near term. Several private players offer affordable
insurance covers and innovative products and the space is being regulated by IRDA, the key
statutes being Insurance Act, 1938 and Insurance Regulatory and Development Authority Act,
1999.

DTAA:
India has entered into double tax avoidance agreements (DTAAs) with all the major
jurisdictions in the world providing for liberal provisions to avoid any double taxation on
incomes and capital gains and grants exemptions on earnings by foreign investors in India as
per the respective treaty provisions. Key jurisdictions used by foreign investors include
Mauritius and Singapore which have favourable treaties.

Page 44
Chapter -8

Page 45
 CHAPTER- 8
FDI AND ITS ROLE IN THE ECONOMIC DEVELOPMENT

1. Foreign direct investment has a major role to play in the economic development of the
host country. Over the years, foreign direct investment has helped the economies of the
host countries to obtain a launching pad from where they can make further
improvements. This trend has manifested itself in the last twenty years. Any form of
foreign direct investment pumps in a lot of capital knowledge and technological
resources into the economy of a country. 
2. This helps in taking the particular host economy ahead. The fact that the foreign direct
investors have been able to play an important role vis-a-vis the economic development
of the recipient countries has been due to the fact that these countries have changed
their economic stances and have allowed the foreign direct investors to come in and
improve their economies
3. It has often been observed that the economically developing as well as underdeveloped
countries are dependent on the economically developed countries for financial
assistance that would help them to achieve some amount of economical stability.
4. The economically developed countries, on their part, can help these countries
financially by investing in these countries. This financial assistance can be channelized
into various sectors of the economy. The channelization is normally done on the basis
of the requirements of particular sectors. It has been observed that the foreign direct
investment has been able to improve the infrastructural condition of a country. There is
ample scope of technological development of a country as well.
5. The standard of living of the general public of the host country could be improved as a
result of the foreign direct investment made in a country. The health sector of many a
recipient country has been benefited by the foreign direct investment. Thus it may be
said that foreign direct investment plays an important role in the overall economic and
social development of country
6. FDI has an important impact on country’s trade balance, increasing labour standards
and skills, transfer of technology, skills and the general business climate.

Page 46
7. FDI also provides an opportunity for technological transfer and up gradation, access to
global managerial skills and practices, optimal utilization of human capabilities and
natural resources, making industry internationally competitive, opening up export
markets, access to international quality goods and services and augmenting
employment opportunities.
8. India’s share in global FDI has increased considerably, but the pace of FDI inflows has
been slower than China, Singapore, Brazil, and Russia.
9. Indian economy is largely agriculture based and there is plenty of scope in food
processing, agriculture services and agriculture machinery. FDI in this sector should be
encouraged.
10. Research and Development expenditure shows unexpected negative sign. This could
be attributed to the fact that R&D sector is not receiving enough FDI as per its
requirement. But this sector is gaining more attention in recent years

Page 47
Chapter -9

Page 48
 CHAPTER-9
ROLE OF FOREIGN DIRECT INVESTMENT IN INDIAN STOCK MARKET

The Indian stock markets has increased the development of Indian stock market to many
folds. FDI has helped Indian economy to grow, develop and attain financial stability globally.
Foreign Direct Investment in India has helped India in overcoming many of the problems
which our economy was suffering and in facing the global challenges from the global
economy. Money from FDI has helped to boost those sectors of economy which needed
financial motivation or boost. Indian stock market has always attracted the world’s powerful
and major investors to come and invest in Indian economy. India has always tried to promote
the business environment which is healthy and favourable for foreign investors and provoked
them to invest in our Indian economy. Presently, FDI is allowed to invest in financial services
which include banking also along with financial sector which does not include banking
services. Expanding markets of India from business point of view is attracting large number of
foreign investors to put their money in Indian stock market. Indian government is supporting
Foreign Direct Investment in India by giving liberty to foreign investors in trade policies.
Government is also trying to loosen restrictions on foreign investment which is a benefit for
foreign investors and is giving them a golden opportunity to invest in Indian stock market.
Technological development in India along with strong telecommunication networks is helping
the foreign investors to reap benefits from Indian stock market.

There are several benefits of foreign direct investment in Indian stock market which can be
listed as:
a) India’s access to global market – a developing country like India is benefitted by inviting
FDI as Indian economy got the access to the global market which will help Indian economy to
grow at a fast rate.
b) Advancement in technology – FDI’s have the power from which they have the ability to
introduce the advanced and world class technology along with its technical knowhow which
help Indian economy to progress at a faster rate. Experts from foreign also help in the up
gradation of the existing technology in India which helps in saving the cost which would have
been incurred if we have opted for the new technology.

Page 49
c) Competition increases – Foreign Direct Invest in Indian stock market has allowed in
increasing competition amongst the investors in domestic market. Competition increased due
to up gradation of technology and invention of technology in India which acted a major jolt
for the Indian economy and has enhanced the chances of growth of Indian economy. FDI’s
have provoked the domestic companies to improve their technology in order to be competitive
in the market which is a good sign o development for a developing economy.
d) Human resources in India have improved many folds – FDI provides the host country with
valuable skills which are used globally and this has upgraded the skill sets of the people of
host country by making them more competent and efficient. Biggest disadvantage of Foreign
Direct Investment in Indian stock market is that it is increasing the aggregate demand for short
run, the day foreign investors will start recovering their investment which they invested in
initial outlay, and our economy will suffer to a very large extent. If the FDI schedule is not
healthy it will affect the capital flow our country. All the FDI’s come with a view to earn high
return on investment; if foreign investors come with this motive they will actually hamper the
Indian economy in long run.

Page 50
Chapter -10

Page 51
 CHAPTER-10
GUIDELINES FOR FDI IN BANKING

In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the
paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio
Investment in the public or nationalized banks in India are subjected to a limit of 20 % in
totality. This ceiling is also applicable to the investments in the State Bank of India and its
associate banks. FDI limits in the banking sector of India were increased with the aim to bring
in more FDI inflows in the country along with the incorporation of advanced technology and
management practices. The objective was to make the Indian banking sector more
competitive. The Reserve Bank of India governs the investment matters in the banking
sector. -
According to the guidelines for FDI in banking sector, Indian operations by foreign banks can
be executed by any one of the following three channels: -
 Branches in India
 Wholly owned subsidiaries.
 Other subsidiaries.
In case of wholly owned subsidiaries (WOS), the guidelines for FDI in the banking sector
specified that the WOS must involve a capital of minimum ` 300 crores and should ensure
proper corporate governance.

10.1 Problems faced by the Indian banking sector

FDI in Indian banking sector resolves the following problems often faced by various
banks in the country:
Inefficiency in management
Instability in financial matters
Innovativeness in financial products or schemes
Technical developments happening across various foreign markets
Non-performing areas or properties
Poor marketing strategies

Page 52
 Changing financial market conditions
10.2 Benefits of FDI in banking sector in India:-
Transfer of technology from overseas countries to the domestic market
Ensure better and improved risk management in the banking sector
Assures better capitalization
Offers financial stability in the banking sector in India

Page 53
Chapter -11

Page 54
 TOP INVESTING CHAPTER-11
SECTOR WISE DISTRIBUTION OF FDI INFLOWS IN INDIA

COUNTRIES
4% 4% 3%2%2% Ma
5% uriti
7% us
9% Sin
53%
11% gap
SECTOR WISE ore

DISTRIBUTION
6% 4% 4% 3%
6%
10% 31% Services
11% Sector
12% 13%

Page 55
Manufacturing sector

 India ranks 2nd most favored destination for foreign investments after China.
 India ranks among the top 12 producers of manufacturing value added (MVA).
 In textiles, the country is ranked 4th after China, USA and Italy.
 Ranked 5th in electrical machinery and apparatus.
 6th position in the basic metals category
 7th in chemicals and chemical products
 10th in leather, leather products, refined petroleum products and nuclear fuel
 12th in machinery and equipment and motor vehicles.

SERVICE SECTOR
 India's large service industry accounts for more than 50% of the country's GDP.
 Attracted $3.12 billion FDI in the first seven months
 22 per cent of the total FDI inflows of $17.64 billion in the April-October for service
sector
 attracted the maximum FDI worth USD 6.11 billion

Current issues with FDI in Services Sector

 Very weak linkages of service sector with the Indian economy (only few cities).
 Requires highly skilled workers.
 Employee Welfare in time of crisis.

FDI IN RETAIL- ADVANTAGES

 Generates huge employment
 Increased investment in technology
 The huge tax revenue generated.
 The consumer gains from the wide variety of choices and a more diversified basket.

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FDI IN RETAIL-DRAWBACKS
 Foreign Players would displace the unorganized retailers because of their superior
financial strengths.
 The entry of large global retailers such as Wal-Mart would kill local shops and
millions of jobs.
 Increase in real estate prices and marginalize domestic entrepreneurs

TRADING SECTOR
 This sector shows an exponential rise in inflows from 2006 onwards.
 Total numbers of 20 technical and 1111 financial collaborations have been approved
since 2005.
 Trading for wholesale received highest percentage (84.25%) of total FDI inflow
followed by trading (for exports) with 9.04%, e-commerce with (2.38%) during 2006-
08 2008.

CONSULTANCY SECTOR
 Consultancy Sector received US$ 1.1 bn which is 1.14% of total inflows received since
2008.
 Mumbai (38.76%) and New Delhi (13.01%) received major percentages of inflow .
 Out of the 125 technology transfers, 40 technical collaborations are approved with
USA, 21 with UK, and 14 with Germany.

EDUCATION SECTOR
 100% FDI is allowed in education sector.
 India with the added advantage of having large pool of skilled people with secondary
and tertiary level of education attracts foreign firms in science, R & D, and high
technology products and services.

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CONSTRUCTION SECTOR
 The amount of FDI till Dec. 2008 is US$ 4.9 billion which is 6.15% of the total
inflows received .
 In India Delhi, Mumbai, and Hyderabad receives maximum amount (viz. US$
1245.61, 1000.5, and 943.22 billion) of investment.
 Out of the total technology transfers ,9 technical and 223 financial collaborations have
been approved till December 2008

AUTOMOBILE INDUSTRY
 FDI inflows during Jan 2005 to Dec. 2009 is US$ 3.2 billion which is 4.09% of the
total inflows received.
 It ranks 5th in the list of sectors in terms of cumulative FDI approved from August
1991 to Dec 2008.
 In India Mumbai, New Delhi and Ahmedabad received major chunks of investment i.e.
36.98%, 26.63% and 9.47%).

COMPUTER HARDWARE AND SOFTWARE

 This industry fetched 3636 numbers of foreign collaborations out of which, 125 are
technical and 3511 are financial in nature.
 Also it received US$ 8.9 billion which constitute 11.43% of the total FDI inflows
during the period during 2005-2007.
 Among Indian locations Mumbai received 22.44% of investment followed by
Bangalore (10.8%), and Chennai (9.90%).

TELECOMMUNICATION SECTOR
 Telecommunication sector ranks 2nd in the list of sectors in terms of cumulative FDI.
 Out of cumulative FDI inflows , this Sector received an inflow of US$ 8.2 billion,
which is 8.4% of the total FDI inflows during last few years.
 New Delhi attracts highest percentage (32.58%) of FDI inflows after 2005

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 SECTORAL
ANALYSIS
11.1 INDIAN SECTORS ATTRACTING HIGHEST FDI INFLOWS
Indian Sectors Attracting Highest FDI Inflows are service, chemicals, food processing and
telecommunications. FDI inflows to different sectors in India have increased over the
years.

Foreign direct investment can increase the economic growth of a country and the
government of India realized this fact and this is the reason that it started a series of
financial and economic reforms in the country in 1991.

In 2003, the Indian government started the second generation reforms in order to increase
the flow of foreign direct investment in the country which in turn, helped to integrate the
country's economy with the economy of the world.

Sectors In INDIA That Are Attracting The Highest Amount Of FDI

Indian Sectors Attracting Highest FDI Inflows are many such as, electrical equipment’s,
transportation industries, telecommunication, fuels, food processing industries, and
services. Further the Indian Sectors Attracting Highest FDI Inflows are cement and gypsum
products, metallurgical industries, chemicals, and drugs and pharmaceuticals

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Amount of Foreign Direct Investment In The Major Sectors of India From August, 1991
To September, 2005:
 The amount of foreign direct investment in the sector of electrical equipment’s was
US$ 4,266 million
 Foreign direct investment in the sector of transportation industry was US$ 3,070
million
 FDI in the service sector was US$ 2,840 million
 The amount of foreign direct investment in the sector of telecommunications stood
at US$ 2,730 million
 The amount of foreign direct investment in the sector of fuels that included oil
refinery and power came to US$ 2,505 million
 Foreign direct investment in the sector of chemicals was US$ 1,818 million
 The amount of foreign direct investment in the sector of food processing industries
came to US$ 1,172 million
 FDI to drugs and pharmaceuticals was US$ 936 million
 The amount of foreign direct investment in the sector of cement and gypsum
products came to US$ 715 million
 Foreign direct investment in the sector of metallurgical industries was US$ 544
million

India Trade Last Previous Highest Lowest Unit

Balance of Trade -10369.40 -13008.90 258.90 -20210.90 USD Million

Exports 23884.97 20009.58 30541.44 59.01 USD Million

Imports 34254.30 33018.50 45281.90 117.40 USD Million

Current Account -3400.00 -300.00 7360.00 -31857.20 USD Million

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India Trade Last Previous Highest Lowest Unit

Current Account to -1.25 -1.31 2.28 -4.82 percent

GDP

External Debt 484300.00 479658.00 485078.00 96392.00 USD Million

Terms of Trade 57.90 60.20 100.00 57.90 Index Points

Capital Flows -17.51 155.56 766.96 -271.46 USD Million

Foreign Direct 3081.00 2043.00 5670.00 -60.00 USD Million

Investment

Remittances 9942.81 9686.59 12293.40 5999.10 USD Million

Tourist Arrivals 891000.00 754000.00 913000.00 129286.00

Gold Reserves 557.77 557.77 557.77 357.75 Tonnes

Crude Oil 736.00 746.00 813.00 526.00 BBL/D/1K

Production

Terrorism Index 7.48 7.75 8.09 7.22

Weapons Sales 33.00 53.00 53.00 1.00 USD Million

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11.3 Percentage of FDI Allowed In Different Sectors
 Banking - 74%Banking - 74%
 Non-banking financial companies (stock broking, credit cards, financial consulting
etc.) - 100%etc.) - 100%
 Insurance - 26%Insurance - 26%
 Telecommunications - 74% Telecommunications - 74%
 Private petrol refining - 100%Private petrol refining - 100%
 Construction development - 100%Construction development - 100%
 Coal & lignite - 74%Coal & lignite - 74%
 Trading - 51% Trading - 51%
 Electricity - 100%Electricity - 100%
 Pharmaceuticals - 100%Pharmaceuticals - 100%
 Transportation infrastructure - 100 %
 Tourism - 100%
 Mining - 74%Mining - 74%
 Advertising - 100%Advertising - 100%
 Airports - 74%Airports - 74%
 Films - 100%Films - 100%
 Domestic airlines - 49%Domestic airlines - 49%
 Mass transit - 100%Mass transit - 100%
 Pollution control - 100%Pollution control - 100%
 Print media - 26% for newspapers and current events, 100 % for scientific and
technical l periodicals

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Chapter -12

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 CHAPTER-12
FOREIGN INSTITUTIONAL INVESTORS

12.1 Introduction of foreign institutional investors

 An institution established outside India, which invests in securities traded on the
markets in India e.g.
 Pension Funds
 Mutual Funds
 Investment Trust
 Insurance companies
 Endowment Funds
 University Funds
 Foundations or Charitable Trusts
 Asset Management Companies
 Power of Attorney Holders
 Bank
 Foreign Institutional Investors (FII)
 FIIs may invest in:
 securities in the primary and secondary markets (shares, debentures, warrants
of listed and unlisted companies)
 units issued by domestic mutual funds
 dated Government securities
 derivatives traded on a recognized stock exchange
 commercial paper
 debt instruments – provided a 70/30 equity/debt ratio is maintained
 Foreign Institutional Investors (FII) Limits on the type and amount of
investments apply to FIIs
 no more than 10% of the equity in any one company
 no more than 10% in the equity in any one company on behalf of a fund sub-
account

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  no more than 5% in the equity in any one company on behalf of a
corporate/individual sub-account
 no more than 24% in the aggregate of the total issued capital of a company to
be held by FIIs

12.2 Investment by FIIs under Portfolio Investment Scheme

The RBI has given general permission to SEBI-registered FIIs/sub-accounts to invest
under the Portfolio Investment Scheme (PIS).
• The total holding of each FII/sub-account under this scheme should not exceed 10
percent of the total paidup capital or 10 percent of the paid-up value of each series of
convertible debentures issued by the Indian company.
• The total holding of all the FIIs/sub-accounts put together should not exceed 24
percent of the paid-up capital or the paid-up value of each series of convertible
debentures. This limit of 24 percent can be increased to the sectoral cap/statutory limit
as applicable to the Indian company concerned, by passing a resolution of its Board of
Directors, followed by a special resolution to that effect by its General Body.
• A domestic asset management company or portfolio manager who is registered with
the SEBI as an FII for managing the funds of a sub-account can make investments
under the scheme on behalf of: a person resident outside India who is a citizen of a
foreign state; or a corporate body registered outside India.
• However, such investment should be made out of the funds raised, collected, or
brought from outside through a normal banking channel. The investments by such
entities should not exceed 5 percent of the total paid-up equity capital or 5 percent of
the paid-up value of each series of convertible debentures issued by an Indian
company, and should also not exceed the overall ceiling specified or FIIs.

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Chapter -13

Page 66
 CHAPTER-13
DIFFERENCE BETWEEN FDI AND FII
FDI vs FII
Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct
Investment is an investment that a parent company makes in a foreign country. On the
contrary, FII or Foreign Institutional Investor is an investment made by an investor in the
markets of a foreign nation.
In FII, the companies only need to get registered in the stock exchange to make investments.
But FDI is quite different from it as they invest in a foreign nation.
The Foreign Institutional Investor is also known as hot money as the investors have the liberty
to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple
words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot
enter and exit that easily. This difference is what makes nations to choose FDI’s more than
then FIIs

FDI is more preferred to the FII as they are considered to be the most beneficial kind of
foreign investment for the whole economy. Foreign Direct Investment only targets a specific
enterprise. It aims to increase the enterprises capacity or productivity or change its
management control. In an FDI, the capital inflow is translated into additional production. The
FII investment flows only into the secondary market. It helps in increasing capital availability
in general rather than enhancing the capital of a specific enterprise.

The Foreign Direct Investment is considered to be more stable than Foreign Institutional
Investor. FDI not only brings in capital but also helps in good governance practises and better
management skills and even technology transfer. Though the Foreign Institutional Investor
helps in promoting good governance and improving accounting, it does not come out with any
other benefits of the FDI. While the FDI flows into the primary market, the FII flows into
secondary market. While FIIs are short-term investments, the FDI’s are long term.

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Chapter -14

Page 68
 CHAPTER-14
DEPOSITORY RECEIPTS

Depository receipts is a negotiable (transferable) financial security that is traded on a local

stock exchange but represents a security, usually in the form of equity, which is issued by a
foreign publicly listed company. The DR, which is a physical certificate, allows investors to
hold shares in equity of other countries. One of the most common types of DRs is the
American depository receipt (ADR), which has been offering companies, investors and traders
global investments opportunities since the 1920s.

Since then, DRs have spread to other parts of globe in the form of global depository receipts
(GDRs), European DRs and international DR’s. ADRs are typically traded on a u.s. national
stock exchange, such as the New York Stock Exchange (NYSE) or the American stock
exchange, while GDRs are commonly listed on European stock exchanges such as the London
Stock Exchange. Both ADRs and GDRs are usually denominated in U.S. dollars, but can also
be denominated in euros. Now depository receipts are very popular and foreign firms go to the
U.S.A or European market, issue shares to depository. Depository makes a public issue and
gets funds from the investors. Funds are made available to the issuing firm (called as
‘sponsor’).depository receipts are issued to the investors. These receipts are listed and traded
on the stock exchange (in U.S .A or in europe, wherever).

Each DR is issued by a domestic depositary bank when the underlying shares are deposited in

a foreign custodian bank, usually by a broker who has purchased the shares in the open market
local to the foreign company. A DR can represent a fraction of a share, a single share, or
multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying
foreign security that the DR represents, but investors usually find it more convenient to own
the DR. The price of a DR generally tracks the price of the foreign security in its home
market, adjusted for the ratio of DRs to foreign company shares. In the case of companies
domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax
(SDRT)charge by the UK government. Depositary banks have various responsibilities to DR
holders and to the issuing foreign company the DR represents.

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Chapter -15

Page 70
 CHAPTER-15
GLOBAL DEPOSITORY RECEIPTS

A global depository receipt or global depositary receipt (GDR) is a certificate issued by

a depository bank, which purchases shares of foreign companies and deposits it on
the account. GDRs represent ownership of an underlying number of shares.

Global depository receipts facilitate trade of shares, and are commonly used to invest in
companies from developing or emerging markets.

Prices of global depositary receipt are often close to values of related shares, but they are
traded and settled independently of the underlying share.

Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche

Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock
Exchange, Luxembourg Stock Exchange and in the London Stock Exchange, where they are
traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always.
It is a negotiable instrument which is denominated in some freely convertible currency. It is a
negotiable certificate denominated in US dollars which represents a non-US Company's
publicly traded local equity.

Global Depository Receipt (GDR) - certificate issued by international bank, which can be
subject of worldwide circulation on capital markets. GDR’s are emitted by banks, which
purchase shares of foreign companies and deposit it on the accounts. Global Depository
Receipt facilitates trade of shares, especially those from emerging markets. Prices of GDR’s
are often close to values of related shares.

GDRs are securities available in one or more markets outside the company’s home country.
The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise
capital on two or more markets simultaneously, which increases his shareholder
base. They gained popularity also due to the flexibility of their structure.

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GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs are
commonly listed on European stock exchanges such as the London stock exchange(LSE)or
Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)In
ternational, and traded at two other places besides the place of listing, e.g. On the OTC Market
in London and on the private placement market in the US..

15.1 Issue Process Of GDR’s

1. To find the Depository bank
Depository bank has only right to issue the GDRs. So, it is necessary to find depository
bank in USA and other European countries.
2. Issue the Shares to Depository bank
Shares cannot be issued to foreign investors. But shares are issued to depository bank
and depository bank will accept the shares of Indian companies as the custodian of
foreign investors. 
3. Deposit the fees 
For issuing GDRs, either investors or Company has to deposit the fees for issuing the
certificate named global depository receipt. 
4. Issue of GDRs and Record
Depository bank has right to issue one GDR certificate for 2 to 10 shares. The issue of
GDRs to those investors who will pay the amount of shares of Indian companies. After
this, it will be assumed that USA or other foreign countries' investors have acquired the
shares of Indian companies. Indian company gets money of shares through depository
banks. On the other side, foreign investors' name registered and they will get dividend
through this bank in USA Dollar. Not only Indian companies but many other developing
countries' companies are using same procedure for getting fund through GDRs. This
year, a Kuwaiti investment company successfully issued shares in the form of Global
Depository Receipts (GDRs) to foreign investors. After issuing GDRs, these shares can
deal in any foreign stock exchange and GDRs will be one of the security type in stock
exchange list of stocks. 

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15.2 How GDRs are traded
A GDR holder can sell in two ways:
• The GDR can be sold to another investor in the market in which the GDR trades. This is
known as an intra-market transaction, and will be settled in the same way as any other security
purchase in that market.
• The GDR can be cancelled and the underlying shares can be sold to a foreign investor
through a cross-border transaction. In this case, the GDR certificate would be surrendered to
the depositary bank. The shares held with the local custodian bank would be released back
into the home market of the company whose shares are being released, and sold to a broker
there. Furthermore, the GDR holder would be able to request delivery of the actual shares at
any time. This exchange facility – i.e. the ability to exchange the GDRs for the shares they
represent in their home market – is important because it ensures a price linkage between the
two markets. Price differentials between the two markets do occur, but the exchange facility
provides a channel whereby some price equilibrium can be reintroduced between the two
markets, and the continuous buying and selling of GDRs in either market tends to keep the
price differential between the two markets to a minimum.

15.3 Advantages Of GLOBAL DEPOSITORY RECEIPTS

Benefits to a Company
Currently, there are over 2,000 Depositary Receipt programs for companies from over 70
countries. The establishment of a Depositary Receipt program offers numerous advantages to
[Link]. The primary reasons to establish a Depositary Receipt program can be
divided into two broad considerations: capital and commercial.
Advantages may include:
 Expanded market share through broadened and more diversified investor exposure
with potentially greater liquidity, which may increase or stabilize the share price.
 Enhanced visibility and image for the company's products, services and financial
instruments in a marketplace outside its home country.
 Flexible mechanism for raising capital and a vehicle or currency for mergers and
acquisitions.

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  Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in
the parent company.
Benefits to an Investor
Increasingly, investors aim to diversify their portfolios internationally. However, obstacles
such as undependable settlements, costly currency conversions, unreliable custody services,
poor information flow, unfamiliar market practices, confusing tax conventions and internal
investment policy may discourage institutions and private investors from venturing outside
their local market.
Depositary Receipt advantages may include:
 Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.
 Diversification without many of the obstacles that mutual funds, pension funds and
other institutions may have in purchasing and holding securities outside of their local
market.
 Elimination of global custodian safekeeping charges, potentially saving Depositary
Receipt investors up to 10 to 40 basis points annually.
 Familiar trade, clearance and settlement procedures.
 Competitive U.S. dollar/foreign exchange rate conversions for dividends and other
cash distributions.
 Ability to acquire the underlying securities directly upon cancellation.

15.4 DISADVANTAGES OF GLOBAL DEPOSITORY RECEIPTS

Despite the disadvantages related to investing in foreign companies such as political risk
and economic risk, there are specific disadvantages related to depository receipts that
affect mainly investors.
1. Dividend distribution.
Dividends distributed by foreign companies are not directly distributed to the Domestic
Receipts' holders rather, a percentage is deducted as commission for the depository
bank. That makes Depository Receipts have a lower value relative to the original stock.
2. Currency risk.

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 Although Domestic Receipts are traded and quoted in terms of the domestic currency,
dividends are declared in terms of the foreign currency which makes the return on the
investment volatile and therefore risky.
3. Double taxation.
This risk occurs when the home country of the issuing company and the home country
of the Domestic Receipts' holders do not have a treaty to eliminate double taxation.
Comparing the advantages and the disadvantages of Depository Receipts, and
Especially. Global Depository Receipts depends on the conditions of the offer made by
the issuing company because as we have indicated it is so flexible and each case should
be studied apart to evaluate its attractiveness

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Chapter -16

Page 76
 CHAPTER-16
AMERICAN DEPOSITORY RECEIPT

An American depositary receipt (ADR) is a negotiable security that represents securities of a

non-US company that trade in the US financial markets. Securities of a foreign company that
are represented by an ADR are called American depositary shares (ADSs).

Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are
denominated and pay dividends in US dollars and may be traded like regular shares of stock.
Over-the-counter ADRs may only trade in extended hours.

The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.
The stock of many non-US companies trade on US exchanges through the use of ADRs.
ADRs enable US investors to buy shares in foreign companies without undertaking cross-
border transactions. The shares of the non-US corporation trade on a non-US exchange, while
the ADRs trade on a US exchange. ADRs are one type of depositary receipt (DR), which is
any negotiable securities that represents securities of companies that is foreign to the market
on which the DR trades. DRs enable domestic investors to buy securities of foreign companies
without the accompanying risks or inconveniences of cross-border and cross-currency
transactions.

This is an excellent way to buy shares in a foreign company while realizing any dividends and
capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic
risks for the underlying shares in another country. For example, dividend payments in euros
would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or
Nasdaq as well as OTC.

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ADR RATIO

Single
1 ADR = 1 SHARE
ADR Ratio = 1:1

• Multiple
1 ADR = 5 SHARES
ADR Ratio = 1:5

• Fraction
1 ADR = ½ SHARE
ADR Ratio = 2:1

16.1 PROCEDURE AND MECHANISM OF ISSUING ADR’S

ADR’S are issued by a US bank, such as J.P. Morgan or the bank of New York, which
functions as a depository, or stock transfer and issuing agent for the ADR program. The
foreign, or local shares, remain on deposit with the depository’s custodian issuer’s home
market.

Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR
representing one share, one ADR representing ten shares, etc.) This is the ADR ratio, which is
designed to set the price of each ADR in US dollars. Financial information, including annual
reports and proxies are delivered to US holders on a consistent basis by the Depositary. The
dividends are converted into dollars and paid to ADR holders by the Depositary.

16.2 How Does ADR Work?

Let us take Infosys example – trades on the Indian stock at around Rs.2000/-
 This is equivalent to US$ 40 – assume for simplicity

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  Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio
of 10:1
 This means each ADR purchased is worth 10 Infosys shares.
 Quick calculation means 1 ADR = US $400
 ADR are priced and sold, its subsequent price is determined by supply and demand
factors, like any ordinary shares.

16.3 TYPES OF ADR’S

When a company establishes an ADR program, it must decide what exactly it wants out of the
program, and how much time, effort, and other resources they are willing to commit. For this
reason, there are different types of programs, or facilities, that a company can choose.

TYPES of ADR:
Unsponsored ADR
Sponsored ADR
Level 1
Level 2
Level 3
Unsponsored ADRs
Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in
accordance with market demand, and the foreign company has no formal agreement with a
depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each
depositary services only the ADRs it has issued.

As a result of an SEC rule change effective October 2008, hundreds of new ADRs have been
issued, both sponsored and unsponsored. The majority of these were unsponsored Level I
ADRs, and now approximately half of all ADR programs in existence are unsponsored.

Sponsored Level I ADRs ("OTC" facility)

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Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a
company issues sponsored ADRs, it has one designated depositary who also acts as its transfer
agent.

A majority of American depositary receipt programs currently trading are issued through a
Level 1 program. This is the most convenient way for a foreign company to have its equity
traded in the United States.

Level 1 shares can only be traded on the OTC market and the company has minimal reporting
requirements with the U.S. Securities and Exchange Commission (SEC). The company is not
required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the
company must have a security listed on one or more stock exchange in a foreign jurisdiction
and must publish in English on its website its annual report in the form required by the laws of
the country of incorporation, organization or domicile.

Companies with shares trading under a Level 1 program may decide to upgrade their program
to a Level 2 or Level 3 program for better exposure in the United States markets.

Sponsored Level II ADRs ("Listing" facility)

Level 2 depositary receipt programs are more complicated for a foreign company. When a
foreign company wants to set up a Level 2 program, it must file a registration statement with
the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form
20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S.
company. In their filings, the company is required to follow U.S. GAAP standards or IFRS as
published by the IASB.

The advantage that the company has by upgrading their program to Level 2 is that the shares
can be listed on a U.S. stock exchange. These exchanges include the New York Stock
Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).
While listed on these exchanges, the company must meet the exchange’s listing requirements.
If it fails to do so, it may be delisted and forced to downgrade its ADR program.

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Sponsored Level III ADRs ("offering" facility)
A Level 3 American Depositary Receipt program is the highest level a foreign company can
sponsor. Because of this distinction, the company is required to adhere to stricter rules that are
similar to those followed by U.S. companies.

Setting up a Level 3 program means that the foreign company is not only taking steps to
permit shares from its home market to be deposited into an ADR program and traded in the
U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the
company is required to file a Form F-1, which is the format for an Offering Prospectus for the
shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or
IFRS as published by the IASB. In addition, any material information given to shareholders in
the home market, must be filed with the SEC through Form 6K.

Foreign companies with Level 3 programs will often issue materials that are more informative
and are more accommodating to their U.S. shareholders because they rely on them for capital.
Overall, foreign companies with a Level 3 program set up are the easiest on which to find
information. Examples include the British telecommunications company Vodafone (VOD),
the Brazilian oil company Petrobras (PBR), and the Chinese technology company China
Information Technology, Inc. (CNIT).

Restricted Programs
Foreign companies that want their stock to be limited to being traded by only certain
individuals may set up a restricted program. There are two SEC rules that allow this type of
issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under
one of these 2 rules make up approximately 30% of all issued ADRs.

Privately placed (SEC Rule 144A) ADRs

Some foreign companies will set up an ADR program under SEC Rule 144A. This provision
makes the issuance of shares a private placement. Shares of companies registered under Rule
144-A are restricted stock and may only be issued to or traded by Qualified Institutional
Buyers (QIBs).

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US public shareholders are generally not permitted to invest in these ADR programs, and most
are held exclusively through the Depository Trust & Clearing Corporation, so there is often
very little information on these companies.

Offshore (SEC Regulation S) ADRs

The other way to restrict the trading of depositary shares to US public investors is to issue
them under the terms of SEC Regulation S. This regulation means that the shares are not, and
will not be registered with any United States securities regulation authority.

Regulation S shares cannot be held or traded by any “U.S. person” as defined by SEC
Regulation S rules. The shares are registered and issued to offshore, non-US residents.
Regulation S ADRs can be merged into a Level 1 program after the restriction period has
expired, and the foreign issuer elects to do this.

Sourcing ADRs
One can either source new ADRs by depositing the corresponding domestic shares of the
company with the depositary bank that administers the ADR program or, instead, one can
obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing
the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the
company on their primary exchange and then swapping them for ADRs; these swaps are
called cross book swaps and on many occasions account for the bulk of ADR secondary
trading. This is especially true in the case of trading in ADRs of UK companies where creation
of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government;
sourcing existing ADRs in the secondary market (either via cross book swaps or on exchange)
instead is not subject to SDRT.

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16.4 RISKS INVOLVED IN ISSUING ADR’S

ADRs' Special Risks

Of course, even though they trade in US dollars and can, at least on the surface, closely mimic
the look and feel of American stocks, ADRs come with their own set of special considerations
to keep in mind.
Currency risk: If the value of the US dollar rises against the value of the company's home
currency, a good deal of the company's intrinsic profits might be wiped out in translation.
Conversely, if the US dollar weakens against the company's home currency, any profits it
makes will be enhanced for a US owner. For more information on how this could damage or
inflate your results, read The Danger of Investing in International Bonds.

Political risk: ADR status does not insulate a company's stock from the inherent risk of its
home country's political stability. Revolution, nationalization, currency collapse or other
potential disasters may be greater risk factors in other parts of the world than in the US, and
those risks will be clearly translated through any ADR that originates in an affected nation.

Inflation risk: Countries around the globe may be more, or less, prone to inflation than the
US economy is at any given time. Those with higher inflation rates may find it more difficult
to post profits to an US owner, regardless of the company's underlying health.
In other words, ADRs are just what they seem: a representation of a foreign stock, rather than
an actual holding in the company. Because of all of the considerations listed above, an ADR
of a foreign company in the US. may trade a little ahead or a little behind the price the
company commands in its own currency in its own home base. But it's safe to say that buying
an ADR is the closest an American investor can come to participating directly in the rest of the
world's economy.

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16.5 INDIAN COMPANIES USING ADR/GDR
COMPANY ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes

Infosys Technologies Yes Yes

ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes

Page 84
Chapter -17

Page 85
 CHAPTER-17
INDIAN DEPOSITORY RECEIPTS

An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a

depository receipt created by a Domestic Depository (custodian of securities registered with
the Securities and Exchange Board of India) against the underlying equity of issuing company
to enable foreign companies to raise funds from the Indian securities Markets.

The foreign company IDRs will deposit shares to an Indian depository. The depository would
issue receipts to investors in India against these shares. The benefit of the underlying shares
(like bonus, dividends etc.) would accrue to the depository receipt holders in India.

The Ministry of Corporate Affairs of the Government of India, in exercise of powers available

with it under section 642 read with section 605A had prescribed the Companies (Issue of
Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E)
dated February 23, 2004.

Standard Chartered PLC became the first global company to file for an issue of Indian
depository receipts in India.

The rules provide inter alia for (a) Eligibility for issue of IDRs (b) Procedure for making an
issue of IDRs (c) Other conditions for the issue of IDRs (d) Registration of documents (e)
Conditions for the issue of prospectus and application (f) Listing of Indian Depository
Receipts (g) Procedure for transfer and redemption (h) Continuous Disclosure Requirements
(i) Distribution of corporate benefits.

These rules (“principal rules”) were operationalised by the Securities and Exchange Board of
India (SEBI)—the Indian markets regulator in 2006. Operation instructions under the Foreign
Exchange Management Act were issued by the Reserve Bank of India on July 22, 2009.[3] The
SEBI has been notifying amendments to these guidelines from time to time.

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17.1 ELIGIBILITY OF COMPANIES TO ISSUE IDR’S
The regulations relating to the issue of IDRs is contained in Securities and Exchange Board of
India (Issue of capital and disclosure requirements) Regulations, 2009, as revised from time to
time.
According to Clause 26 in Chapter III (“Provisions as to public issue”), the following are
required of any company intending to make a public issue in India:
 it has net tangible assets of at least Indian rupee three crore in each of the preceding
three full years (of twelve months each), of which not more than fifty per cent are held in
monetary assets: Provided that if more than fifty per cent. of the net tangible assets are
held in monetary assets, the issuer has made firm commitments to utilise such excess
monetary assets in its business or project;
 it has a track record of distributable profits in terms of section 205 of the Companies
Act, 1956, for at least three out of the immediately preceding five years: Provided that
extraordinary items shall not be considered for calculating distributable profits;
 it has a net worth of at least INR one crore in each of the preceding three full years (of
twelve months each);
 the aggregate of the proposed issue and all previous issues made in the same financial
year in terms of issue size does not exceed five times its pre-issue net worth as per the
audited balance sheet of the preceding financial year;
 if it has changed its name within the last one year, at least fifty per cent. of the revenue
for the preceding one full year has been earned by it from the activity indicated by the new
name.

17.2 IDR ISSUE PROCESS

According to SEBI guidelines, IDRs will be issued to Indian residents in the same way as
domestic shares are issued. The issuer company will make a public offer in India, and
residents can bid in exactly the same format and method as they bid for Indian shares. The
issue process is exactly the same: the company will file a Draft red herring
prospectus (DRHP), which will be examined by SEBI. The general body of investors will get
a chance to read and review the DRHP as it is a public document, available on the websites of
SEBI and the book running lead managers. After SEBI gives its clearance, the company sets

Page 87
the issue dates and files the document with the Registrar of Companies. In the next step, after
getting the Registrar’s registration ticket, the company can go ahead with marketing the issue.
The issue will be kept open for a fixed number of days, and investors can submit their
application forms at the bidding centers. The investors will bid within the price band and the
final price will be decided post the closure of the Issue. The receipts will be allotted to the
investors in their demat account as is done for equity shares in any public issue. On 256th
October 2010, SEBI notified the framework for rights issue of Indian Depository Receipts
(IDRs). Disclosure requirement for IDR rights would more or less be in line with the reduced
requirement applicable for domestic rights issue.

17.3 ELIGIBILITY FOR INVESTORS

According to SEBI guidelines, the minimum bid amount in an IDR issue is Rs 20,000 per
applicant. Like in any public issue in India, resident Indian retail (individual) investors can
apply up to an amount of INR 2,00,000 and Non-institutional investors (also called high net
worth individuals) can apply above INR 1,00,000 but up to applicable limits.

17.4 RESERVATIONS IN IDR ISSUES

According to current regulations, at least 50% of the Issue is to be allocated to qualified
Institutional Buyers (QIBs), 30% of the issue to the retail individual investors and balance
20% of the issue to non-institutional investors and employees. The ratio of non-institutional
investors and employees is at the discretion of the company to decide. The issue will fail if the
company does not get QIB investors to the extent of 50% of the issue size.

17.5 CASE STUDY:-STANDARD CHARTERED PLC SETS INDIAN DEPOSITORY

RECEIPT
Standard Chartered plc is the first foreign company to have publicly elicited interest in making
an IDR issue in India. The company is already listed on the London and Hong Kong stock
Exchanges. Standard Chartered CEO Peter Sands is quoted in the Indian media as saying the
"IDR listing (is) to enhance StanChart's commitment to India.
Recent news reports suggest Standard Chartered PLC may be inching closer to an issue. "We
have already got advisors and we will file for the IDR issue after our (India) results are

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published by March-end," said Neeraj Swaroop, Regional Chief Executive, India and South
Asia of Standard Chartered. Patrick Hosking, financial editor of the Times reports that
Standard Chartered (may) offer up to $750 million of new shares to Indians. But India’s top
financial portal reported top officials as suggesting the amount could be anywhere between
$500 million and $750 million.

Follow up to earlier reports cited, Standard Chartered Plc files DRHP to issue IDRs in India
with SEBI on March 30, 2010.

Standard Chartered Bank is set to become the first foreign company to list in India through an
Indian depository receipts (IDR) issue. StanChart expects to raise around $500–750 million
(Rs 2,250-3375 crore) to grow its businesses globally.

Standard Chartered opened its IDR offering to Indian investors on May 25, 2010, as reported
by BBC News. The price band for the offering is 100 (£1.47; $2.10) to 115 rupees per IDR.
The bank, which makes most of its profits in Asia, will issue 240 million IDRs through the
offer.

In an interview with NDTV India, Neeraj Swaroop, CEO - South Asia at Standard Chartered
Bank, said that the decision to list in India through an Indian depository receipts (IDR) issue,
was not about raising capital but it is about a message of commitment to India.

Standard Chartered fixed its issue price for Indian Depository Receipts at Rs 104 per unit.
[14]
 At this issue price, the bank will raise Rs. 2,490 crore ($530 million) by selling 24 crore
IDRs. Every 10 IDRs represents one share of the bank.

The IDRs opened at the Bombay Stock Exchange and National Stock Exchange on June 11.
Standard Chartered PLC’s Indian Depository Receipt, listed at Rs 106, exceeded expectations
by Rs 2 or 1.92 per cent on the National Stock Exchange.

Page 89
Problem faced by the Standard Chartered PLC’s
Problems faced by Standard Chartered during the issue as are given below:
1) The pricing and price movement in IDRs was directly linked to the share price of StanChart
in the London Stock Exchange; this led to apprehension because any slowdown in the
European economy would in turn affect the valuation of the bank, which would hamper its
price movement in IDRs.

2) The two risks faced by StanChart were:

• Interest rate risk due to short term borrowing to fund long term assets; and
• Currency risk due to the strengthening of the US Dollar vis-à-vis local currencies in the
countries of its presence.

17.7 Advantages of the IDR

Benefits to the Issuing Company
 It provides access to a large pool of capital to the issuing capita
  It gives brand recognition in India to the issuing company
  It facilitates acquisitions in India
 Provides an exit route for existing shareholders

Benefits to Investors
  It provides portfolio diversification to the investor
  It gives the facility of ease of investment
 There is no need to know your customer norms.
 No resident Indian individual can hold more than $200,000 worth of foreign securities
purchased per year as per Indian foreign exchange regulations. However, this will not
be applicable for IDRs which gives Indian residents the chance to invest in an Indian
listed foreign entity.
 

Page 90
17.8 Dividend Distribution tax be payable on dividend on IDRs
“Under the Income-tax Act, dividends declared by an Indian company (or any other company
which has made the prescribed arrangement for the declaration and payment of dividends in
India ), shall be subject to a dividend distribution tax payable by the company. Such dividends
shall then be exempt from tax in the hands of the shareholder under section 10(34) of the
Income-tax Act.”

“This exemption from dividend income under section 10(34) is not applicable to dividends
paid to IDR Holders and accordingly, the dividends received by the IDR Holders in India shall
be taxable in the hands of the IDR Holders.”

Page 91
Chapter -18

Page 92
 CHAPTER-18
A COMPARATIVE ANALYSIS OF INDIA’s AND CHINA’s FDI FLOW

A Comparative Analysis of India's and China's FDI Flow has been summarized in the
following article. The rise in the industrial sectors of India and China are regarded as one of
the biggest factors which led to the huge amount of FDI inflows in both the countries. Recent
studies on FDI in China have come up with interesting perspectives. Normally, the huge flows
of FDI into China are projected as positive indicators for the Chinese economy; some credit
rating agencies have even suggested that FDI is a reflection of that country's creditworthiness.
A paper by Yasheng Huang, a don at MIT's Sloan School, proposes an amazing thesis — FDI
into China is an indication of economic weakness.

Comparative Analysis of India's and China's FDI Flow at a Glance

China stands on a higher plane than India in terms of economy. India's per capita income is
USD 440 and China's per capita income is USD 990. The population residing below the
poverty line in China is 3 percent whereas in India, the population below poverty line is 30 to
40 percent. China offered investment opportunities to the foreign players much before India
did and thereby attracted a raging FDI Inflows in the country. China received USD 52.7
billion of FDI inflows in the year 2002 while, India received USD 4.67 billion of FDI inflows
in the same year.

India Lagging Behind China in FDI Inflows

According to a new World Bank report, India lags behind China in terms of attracting FDI
Inflows in the country, in spite of having high-tech industries and adept workforce. The main
cause behind this drawback is that India is not skilled enough to adopt the technological
advancements at a fast pace. FDI Inflows only contributes to 0.8 percent of India's GDP as
compared to 3.5 percent of the same in China. India's high-tech industries claim for 2.3
percent of Gross Domestic Product whereas the high-tech industries in China contributes to
around 7.9 percent in the GDP of the country. India did not opened much of economic
activities to the foreign players as compared to other developing nations except liberalizing
trade and foreign investments. 

Page 93
Advantages of India and China in terms of FDI Inflows
The majority of the foreign investors prefer China over India for investment opportunities as
China has a bigger market size than India, offers easy accessibility to export market,
government incentives, developed infrastructure, cost-effectiveness, and macro-economic
climate. India on the other hand has skilled and efficient manpower, talented management
system, rule of law, transparent system of work, cultural affinity and regulatory environment

Page 94
Chapter -19

Page 95
 CHAPTER-19
CONCLUSION

The increased flow of FDI in a country has given a major boost to the country's economy. FDI
has provided better access to technologies for the local economy. FDI has lead to indirect
productivity gains through spillovers. Multinational firms have increased the degree of
competition in host-country markets which will force existing inefficient firms to invest more
in physical or human capital. Service sector has been the most sought after sector in India for
Foreign Direct Investments. India, with its skilled labor and manpower has the potential to
overtake China as the most preferred destination for Foreign Investments Hence measures
must be taken in order to ensure that the flow of FDI in our country continues to grow.

In terms of development, there is a general agreement of the potential benefits of Foreign

Direct Investment. The relationship between GDP Growth and the increase of the relationship
between FDI and GDP (FDI/GDP (%)) can be clearly established. A country competitiveness
which may attract Foreign Direct Investment from Transnational Corporations is determined
by Comparative Factors, Economic Stability and Strong Institutions, the later taking in more
importance year on year. For these reasons, countries have to implement active policies that
can bring Economic Stability and that can build an appropriate investment environment for the
country.
.

Page 96
Chapter -20

Page 97
 CHAPTER-20
BIBLIOGRAPHY

 [Link]
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