Indian Securities Market
Chapter
3
INCENTIVES FOR
ATTRACTING
FOREIGN CAPITAL
Learning Contents
Foreign Capital : Introduction
Foreign Capital : Meaning
Types or Classification of ForeignCapital
Need or Role or Objectives of Foreign Capital
Recent Incentives Extended by Government of India for Attracting
Foreign Capital
Routes for Inward Flow of FDI
Sectoral Specific Limits of Foreign Capital in India
/ FOREIGNCAPITAL: INTRODUCTION
Foreign Capital plays a constructive role in the economicgrowth and development of a country.
Everywhere in the world, including the developed countries, governments are made great efforts to
uCT Toreign capital in their initial stages of development. In this era of globalization, there is a great
belief thatforeign
capital transforms the productive structures ofthe developing economies leading to
ees of growth. In most developing countries like India, domestic capital is inadequate for the
ot economic development. Hence, foreign capital is amean of flling the gaps between the
domestical y
available supplies of savings, foreign exchange, government revenue and the planned
Stment essential to attain developmental targets.
Incentives for A
Attracting
Pape 3.2|
Investment
Forelgn ata
Foreign Capital
Productivity
Economic
Growth
FOREIGN CAPITAL: MEANING
Ihe term foreign capital is a comprehensive term. It includes any inflow of
from abroad. Foreign capital may beinthe form of foreign aid or loans and grants from capital in a
an institution at the the countryot
government level as well as foreign investment and commercial
country
business enterprise level. Foreign capital may flow also in any Country with
collaboration. Hence, foreign is the money entering the country in the form of
assistance or non-concessional capital
1borrotwiechnngsologieai
at the
as banking and NRI
deposits.
flows. There are many forms of foreign
capital flowing into India sud concessional
ATYPES OR CLASSIFICATION OF FOREIGN CAPITAL
Types of Foreign Capital
Foreign Aid Commercial
Borowings Foreign
Investment
Grants Advances from
Foreign Banks Foreign Direct
Investment
Concessional Non-Resi
Depositsdent
Loans Foreign Portfolio
Investment
Incentives for
Attracting Foreign Capital Page 3.3 |
1. Foreign Aid
Foreign capital may tlow to acountry in the
form of foreign aid. Itconsists of loans and grants.
Loans
Foreign
Aid
Grants
Eoreign aid involves concessional loans and
:d is provided by foreign grants recejved by a country from
governments
Rank and International Financial and institutions like International Monetaryabroad. Foreign
ladoed on the basis of its purpose, Corporation. Any foreign capital in the form of aidFund, World
should be
mode of repayment, cost to the
considerations. borrower and political
(i) Grants : A segment of toreign aid is
received by the country in form of grants. Grants are
provided by public or private charitable
and immediate use. Grants may be organizations. They are given for purposes
time bound and can be utilized onlyrelief
purpose. No repayment of principal amount is needed on for particular
Grants are non-refunded. the part of recipient country.
(ii) Loans : Loans may be taken from
Word Bank, IMF, Asian Development individual countries or from institutional agencies like
Bank etc. Loans are generally availed to meet the
medium and long term capital requirements of a country. Loans
the borrower country because they are to be impose a heavy burden on
repaid alongwith interest. Loans involve
repayment obligations. The rate of interest on soft loans or concessional loans is
the market rate of interest. The repayment period is lower than
also long.
Loans from Foreign Government
Loans
Loan from International institutions
(a) Loans from Foreign Government: Under this category, the government of onecountry
advances loans to the government of another country. These loans may be project loans
Page 3.4| Incentives for. Attracting Foreign
Capital
which are granted for specific projects or non-project loans which can be utilized for
any purp0se.
(b) Loans from International Institutions :Under this type of loan, different
are given by various international institutions like World Bank, types of loans
Development Bank etc. in the form of foreign capital. These loan are givenIME, Asian
private as well as public sectors. to both
2. Commercial Borrowings
Commerci
short-term al borrowings are raised at market rate of interest from international banks. These .
loans.
loans under foreignForeign
aid.
Banks charge higher rate of interest on commercial borrowings
than on
Commercial borrowings involve:
Loans trom Foreign Agencies
Commercial
Borrowings
NRI Deposits
(i) Loans from Foreign
external commercial
Japanese EXIM Bank etc. Agencies:Government
borrowings from
has been getting
various agencies like USforeign capital in the form of
(i) NRI EXIM Bank, ECGC of UK,
Deposits :NRIhave always been a
Government has been making
efforts
making significant
schemes are specially designed encourage their deposits
to cont ributio n in Indian
attract NRI deposits and which ensure higher and economy.
investm ent s investments. Different
in primary and returns and simplified
3. Foreign Investment secondary market. procedure to
Foreign Investmernt refers to the
ownership stakes in
nvest their money in domestic
flow of capital from one
the shares,comparies and assets. Under country
to another. It
grants extensive
nvestment explains that foreignersdebentures and bonds of the foreign investment,
nvestment. have an companies of other foreign investors
active role in the
management ascountries.
a part Foreign
of their
Foreign
Investment Investment Shares
" Debentres
in
Bonds of companes
o oher countries
Attracting Foreign Capital
ncontiveslor
Page 3.5 |
investments can be made by
with individuals,
Foreign but are most often
Companies
and business corporations
in countries substantial assets
looking to endeavours pursued by
expand their reach. More and
companies have branches around the world as
moremanufacturing and production plants in a
different globalization
country is attractiveincreases. Opening of
oporationsbecause of
nes the
as
oDportunities
under.
for cheaper for some
production, labour and lower taxes. business
can be classified
investmentt Foreign
Foreign Direct Investment (FLDD Foreign direct
(6)
business operations or acquires
establishes foreign investment takes place when an investor
establishing ownership or controlling interest in a foreign business assets. It
production or business by the foreign company. Under FDI, includes
is made in country in another country by investment
purchasing a company or expanding its business in the either means of
means of bonds and shares. It i
is also defined as cross foreign country. it is
of countrvin an enterprisein another country. border investment made byusually by
a resident
Foreign
Investment
Foreign Foreign
Direct
Portfolio
Investment
Investment
(FDI) (FPI)
(i) Foreign Portfolio Investment (FPI) :Foreign portfolio investment is one of the
ways to invest in an overseas economy. t consists of common
securities and other financial assets
held by investors in another country. It does not provide the
investor with direct ownership
of a company's assets. FPI holdings can includes, stocks,
ADRs (American Depository
Receipts), GDRs (Global Depository Receipts), Euro Issues, bonds, mutual
exchange traded funds. It simply refers to investing in the financial assets offunds and
a foreign
COuntry, such as stock or bonds available on an
exchange.
l4) FPl involves holding financial assets from a country
outside the investor's own.
ri holding can include stocks, ADRS, GDRIRs bonds, mutual funds and
traded funds. exchange
*11S One of the common wavs for investors to participate in an overseas
econoy
especially retail investors along with foreign direct investmernt.
OSStS of passive ownership; investors have no control over ventures or direct
oWnership of property or astake in acompany.
Incentives for Attracting Foreign Capital
NEED OR ROLE OR OBJECTIVES OF FOREIGN CAPITAL
Increase in Investment
Risk Takings
Technical Know-How
High Standards
Marketing Facilities
Reduces Trade Deficit
Need or Role or
Objectives of Increases Competition Level
Foreign Capital
Development of Basic Industries
Gap Filing Function
To Develop Infrastructure
Supplement to Domestic ResOurces
Improvement in Balance of Payment
Improvement in Social Conditions
Improvement in Financial System
1. Increase in Investment : Foreign
income arnd employment in the capital helps toincrease the investment level and
FDI. It results into an
addition recipient country. Country gets thereby
2. Risk Takings :
to the foreign
productive assets of the country. exchange through
Foreign capital undertakes the initial risk of
manufacturing.
business lines.
It has with its
experience, initiative and financialdeveloping new lines or
3. resources find new
to
Technical Know-How : Foreign capital
host country. It assists the brings technical and
efficient ways. It also providesrecipient country to organize itsmanagerial
limited know-how in the
High Standards : Foreign trairing facilities to the local employees. resources mos
4. in
capital brings with it the
respect of quality of products, tradition of keeping high standards
higher wages and salaries
It plays a
significant role in raising the quality of productstoandworkers and business practce
in better ways. serve the interest of investo
ncentivesfor. Attracting Foreign Capital Page3.7|
5. Marketing Facilities:
Foreign capital offers new marketing facilities and outlets for goods.
It assists in the exports and
funded by the same businessimports among the industrial units located in different countries
enterprise.
6. Reduces Trade Deticit : Foreign
of the country. It reduces the capital plays a significant role in reducing the trade deficit
trade deficit by helping the host countryto
Exports are raised by improving the quality and improve expot
- quantity of products.
Increases Competition Level : Foreign capital may assist to
and remove the domestic monopoly. It is an increase the competition level
important indicator of world's perception
about the potential of country.
s Development of Basic
Industries : Foreign capital encourages developmernt of basic
industries with development of technology, managerial expertise, export of goods and
higher growth of country's economy.
a Gap Filing Function : Foreign Capital
performs three gap filing function, i.e. saving gap
trade gap and technological gap in the recipient country's
10 To Develop Infrastructure : The economic economy.
infrastructure inyolves the system of
and communications generation and distribution of electricity etc. Foreign capitaltransport
helps in
developing the basic infrastructure in country.
11. Supplement to Domestic Resources : Foreign Capital inflows in the recipient
country add
to the domestic resources. It helps to raise the sufficient investible funds to improve the
economic development process in poor and developing nations. Acountry can increase the
level of capital formation with the help of foreign capital.
12. Improvement in Balance of Payment : Foreign capital is needed to improve the balance of
payment position of recipient country. It raises the capacity of recipient countries to import
goods and updated technology by providing capital goods and technical know-how.
13. Improvement in Social Conditions : Foreign capital generates more job opportunities,
reduce poverty and improve the working conditions which result into better social
conditions in the country.
14. Improvement in Financial System : Foreign capital improves the financial system of the
COuntry through greater liquidity and trading volumes in the stock market. It facilitates to
enhance investment avenues for domestic saver and allow business firms to raise capital
from foreign market.
RECENT INCENTIVES EXTENDED BY GOVERNMENT OF INDIA
FOR ATTRACTING FOREIGN CAPITAL
The Government of India is taking various measures for bringing investments to the country.
Some of the recent incentives are listed follow:
1. Transformative Reforms Across Sectors : Government of India has implemented several
transformative reforms under the FDI policy regime across sectors such as insurance,
Incentives for Attracting Foreign Capital
detence. telecom, financial services, pharnmaceuticals, retail trading,
construction
Regula forv
and
development, civil aviation and manufacturing. e-commerce,
restrictions, Relaxations Government of India continues to liberalise
eliminate
business environnnent. regulatory barriers, nurture international relations and investment
3. FDI Policv
changes improve the
stakeholders Changes
are made in FDI policy after
including apex industry
and other orgarnisations. having consultations
chambers, associations, representatives of with
4
Production linked
the various sectors Incentive (PLD Scheme :The
that gives large
industries
5. Rail Government
impetus to the FDI inflow. introduced a PLI scheme for
Infrastructure
automatic route in the Projects
:
specified Government
of India has
rail been allowed 100% FDI under
6.
Investment under FEMA infrastructure projects.
Origin. Overseas Citizen of India :Investment made by
by Persons under scheduleNon-Residents of India,
Persons of Indian
be domesticResident Outside India)
4 of
FEMA (Transfer or
investment
at par with the Regulations on Issue of Security
non-repatriation
basis is
Rail Infrastructure Projects investment made by now deemed to
residents.
Transformative
Reforms Across
Investment under FEMA Sector Regulatory
Relaxation Sale of Products
Special Dispension of NRIs Single Brand Retail
Trading
Medical Devices Duty Free Shops
Insurance Sector Re ent
WholesaleActivities
Cash &Carry
One Composite Cap Incentives Limited Liability Partnership
Extended by
Government
of India for
(LLP)
White Label ATM attracting Regional Air Transport
Foreign Capital Service
ConstructioSector
ns Development Satellites Establishment
and Operation
Investmnent in Defence Credit Information
Sector
Companies
Investment in Banking
Private Sector Infusior of Foreign
Investment
Investment inPlantation FDI Policy Establishment and
Activities Ownership of Indian
Changes ProductionScheme
Incentive Linked Companies
Incentives forr Attracting Foreign Capital
Page 3.9
7. Special Dispension
of
companies, trusts and NRIs: The special
partnership firms, whichdispension
of NRIs has been extended to
owned and controlled by NRIs. are incorporated outside India and are
e Medical Devices :
100%% foreign direct
af medical devices has been investment under
allowed by Government of automatic route for manufacturing
o Insurance Sector : India.
Foreign
the sectoral cap of foreign direct investment policy on insurance sector reviewed to raise
investment from 26% to 49%
he under automatic
route. Similar changes have also with foreign investment upto 26% to
Pension Sector. been brought in the FD0 policy on
0 One Composite Cap :
under one composite capDifferent types of foreign investments have
in order to provide been made replaced
n applicationof simplicity to the FDI policy arnd
bring clarity
4 White Label ATM :
conditionalities and approval requirements across different sectors.
Foreign direct investment upto 100%
permitted in white label ATM operations. through automatic route has beern
12 Constructions
Development Sector : The following are the main reforms in FDI
Constructions Development Sector : Policy on
(i) Remnoval of
conditions of area restriction of floor area of 20000 sq.
development projects and minimum capitalization of US $ 5 million mtrs in construction
within the period of 6 months of the to be brought in
(ii) Exit and repatriation of foreign commencenment business.
of
vears. Transfer of stake from one
investment is now allowed after a lock-in period of 3
non-resident to
repatriation of investment is also neither to be subjectedanother non-resident, without
to any lock-in period nor to
any govermment approval.
(üü) Exit is allowed at any time if projcct is
(iv) 100% FDI under automatic route is
completed before lock-in period.
allowed in completed project for operation and
management of townships, malls, shopping complexes and business centres.
13. Investment in Defence Sector: FDI upto 49%
in defence sector has been
automatic route alongwith specified conditions. FDI in access of 49% has allowed under
case to case basis with government approval in case of been permitted on
access to modern and State-of-art
technology related manufacturing.
H Investment in Banking-Private Sector : Government has decided to introduce full
replacement of foreign investment in Banking-Private Sector. Accordingly, Financial
Institutional Investors or Foreign Portfolio Investors or QFIs, following due
now invest upto sectoral limit of 74% provided that there is no procedure, can
change of control and
management of the investee company.
Investment in Plantation Activities : Government has opened certain plantation activities
lamely : Coffee, rubber, cardamon, palm oil tree and olive oil tree plantations for 100%
toreign investment under automatic route.