Index

Foreign Capital in India & Economic Growth ................................................................................................ 2 INTRODUCTION ......................................................................................................................................... 2 Investment by NRIs in Immovable Properties .......................................................................................... 3 Eligibility for Investment in India .............................................................................................................. 4 Foreign Investment limits, Prohibited Sectors and investment in MSEs ...................................................... 4 Collateral for FIIs ....................................................................................................................................... 5 Investments by Foreign Venture Capital Investor ........................................................................................ 7 Other Foreign Investments ........................................................................................................................... 8 1. Purchase of other securities by NRIs .................................................................................................... 8 Foreign Investment in Tier I and Tier II instruments issued by banks in India ......................................... 9 Abstract ....................................................................................................................................................... 14 FDIs Importance for a Global Appearance ................................................................................................. 14 Advantages Associated with Small Scale Industries ................................................................................... 15 Importance of SSI in Indian Economy ..................................................................................................... 15 Problems Faced by SSI in Financing ............................................................................................................ 16 Foreign Investment in India .................................................................................................................... 17 Can FDI be an answer to financial problem of SSI .................................................................................. 18 Case Studies of individual enterprises ........................................................................................................ 18 CONCLUDING REMARKS ............................................................................................................................. 20 Bibliography ................................................................................................................................................ 21

Foreign Capital in India & Economic Growth

INTRODUCTION
Foreign capital has significant role for every national economy, regardless of its level of development. For the developed countries it is necessary to support sustainable development. For the developing countries, it is used to increase accumulation and rate of investments to create conditions for more intensive economic growth. To realize the potential exist in the developing countries, foreign capital plays a very crucial role. Capital inflow2 can help developing countries with economic development by furnishing them with necessary capital and technology. Capital flows contribute in filling the resource gap in countries where domestic savings are inadequate to finance investment. Capital inflows allow the recipient country to invest and consume more than it produces when the marginal productivity of capital within its borders is higher than in the capitalrich regions of the world. India is a developing country, like many other developing countries, international capital flows has significant potential benefit on the Indian economy. Under the liberalized foreign exchange transactions regime, the results were dramatic. Some of the important and recent measures taken by Indian government to manage foreign investments in India are as under: 1. Foreign Direct Investment: FDI is permitted under the Automatic Route in items / activities in all sectors up to the sectorial caps except in certain sectors where investment is prohibited. Investments not permitted under the automatic route require approval from Foreign Investment Promotion Board (FIPB). The receipt of remittance has to be reported to RBI within 30 days from the date of receipt of funds and the issue of shares has to be reported to RBI within 30 days from the date of issue by the investee company. Advance against Equity: An Indian Company issuing shares to a person resident outside India can receive such amount in advance. The amount received has to be reported within 30 days from the date of receipt of funds. There is no provision on allotment of shares within a specified time. The
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banks can refund the amount received as advance, provided they are satisfied with the bonafides of the applicant and they are satisfied that no part of remittance represents interest on the funds received. 2. Foreign Portfolio Investment: FIIs: FIIs Investment by non-residents is permitted under the Portfolio Investment scheme to entities registered as FIIs and their sub accounts under SEBI (FII) regulations. Investment by individual FIIs is subject to ceiling of 10 percent of the PUC (Pollution under Control) of the company and limit for aggregate FII investment is subject to limit of 24 percent of PUC of the company. This limit can be increased by the company subject to the sectorial limit permitted under the FDI policy. The transactions are subject to daily reporting by designated ADs (Authorized Dealers) to RBI for the purpose of monitoring the adherence to the ceiling for aggregate investments. NRIs: The investment by NRIs under the Portfolio Investment Scheme is restricted to 5% by individual NRIs/OCBs (not incorporated in Bangladesh and Pakistan) and 10% in aggregate (which can be increased to 24 percent by the company concerned). ADR/GDR: Indian companies are allowed to raise resources through issue of ADR/GDR and the eligibility of the issuer company is aligned with the requirements under the FDI policy. The issues of sponsored ADR/GDR require prior approval of ministry of finance. 3. Foreign Venture Capital Investors: FVCIs (Foreign Venture Capital Investors) registered with SEBI are allowed to invest in units of venture capital funds any limit. FVCI investment in equity of Indian venture capital undertakings is also allowed. The limit for such investments would be based on the sectoral limits under the FDI policy. FVCIs are also allowed to invest in debt instruments floated by the IVCUs (InVacare Corporation-US). There is no separate limit stipulated for investment in such instruments by FVCIs. 4. External Commercial Borrowings: Under the Automatic Route, ECB up to US $ 500 million per borrowing company per financial year is permitted only for foreign currency expenditure for permissible end-uses of ECB. Borrowers in infrastructure sector may avail ECB up to US $ 100 million for Rupee expenditure for permissible end-uses under the Approval Route. In case of other borrowers, the limit for Rupee expenditure for permissible end-uses under the Approval Route has been enhanced to US$ 50 million from earlier limit of US $ 20 million. Entities in the services sector, viz., hotels, hospitals and software companies have been allowed to avail ECB up to US $ 100 million, per financial year, for the purpose of import of capital goods under the Approval Route. The all-in-cost interest ceiling for borrowings with maturity of 3-5 years has been increased from 150 basis points over 6-month LIBOR18 (London Interbank Offered Rate) to 200 basis points over 6-month LIBOR. Similarly, the interest ceiling for loans maturing after 5 years period has been raised to 350 basis points over 6-month LIBOR from 250 basis points over 6-month LIBOR.

Investment by NRIs in Immovable Properties

The NRIs are permitted to freely acquire immoveable property (other than agricultural land, plantations and farmhouses). There are no restrictions regarding the number of such properties to be acquired. The only restriction is that where the property is acquired out of inward remittances,
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the repatriation is restricted to principal amount for two residential properties. There is no such restriction in respect of commercial property. NRIs are also permitted to avail of housing loans for acquiring property in India and repayment of such loans by close relatives is also permitted. Added to the above-mentioned developments in the regulatory framework, recently the government of India has decided to restrict the entry of foreign investors (effective from 31st March 2009) in some sector like multi-brand retail, atomic energy, lottery, gambling and betting.

Eligibility for Investment in India

(i) A person resident outside India (other than a citizen of Pakistan) or an entity Incorporated outside India, (other than an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with the prior approval of the FIPB. (ii) NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels. (iii) Overseas Corporate Bodies (OCBs) have been de-recognized as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under adverse notice of the Reserve Bank can make fresh investments under the FDI Scheme as incorporated nonresident entities, with the prior approval of the Government of India, if the investment is through the Government Route; and with the prior approval of the

Foreign Investment limits, Prohibited Sectors and investment in MSEs

a) Foreign Investment Limits The details of the entry route applicable and the maximum permissible foreign investment / sectoral cap in an Indian Company are determined by the sector in which it is operating. b) Investments in Micro and Small Enterprise (MSE) A company which is reckoned as Micro and Small Enterprise (MSE) (earlier Small Scale Industrial Unit) in terms of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, including an Export Oriented Unit or a Unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, , subject to the prescribed limits as per FDI Policy, in accordance with the Entry Routes and the provision of Foreign Direct Investment Policy, as notified by the Ministry of Commerce & Industry, Government of India, from time to time. Any Industrial undertaking, with or without FDI, which is not an MSE, having an
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industrial license under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for the MSE sector may issue shares to persons resident outside India (other than a resident/entity of Pakistan and to a resident/entity of Bangladesh with prior approval FIPB), to the extent of 24 per cent of its paid-up capital or sectoral cap whichever is lower. Issue of shares in excess of 24 9 per cent of paid-up capital shall require prior approval of the FIPB of the Government of India and shall be in compliance with the terms and conditions of such approval. c) Prohibition on foreign investment in India (i) Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities6: (a) Business of chit fund, or (b) Nidhi company, or (c) Agricultural or plantation activities, or (d) Real estate business, or construction of farm houses, or (e) Trading in Transferable Development Rights (TDRs). (ii) It is clarified that real estate business means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. It is further clarified that partnership firms /proprietorship concerns having investments as per FEMA regulations are not allowed to engage in print media sector. (iii) In addition to the above, Foreign investment in the form of FDI is also prohibited in certain sectors (a) Retail Trading (except single brand product retailing) (b) Lottery Business including Government /private lottery, online lotteries, etc. (c) Gambling and Betting including casinos etc. (d) Business of Chit funds (e) Nidhi company (f) Trading in Transferable Development Rights (TDRs) (g) Real Estate Business or Construction of Farm Houses (h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (i) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Collateral for FIIs

a) Derivative Segment: FIIs are allowed to offer foreign sovereign securities with AAA rating as collateral to the recognized Stock Exchanges in India in addition to the cash for their transactions in derivatives segment of the market. SEBI approved clearing corporations of stock exchanges and their clearing members are allowed to undertake

the following transactions subject to the guidelines issued from time to time by SEBI in this regard: a. to open and maintain demat accounts with foreign depositories and to acquire, hold, pledge and transfer the foreign sovereign securities, offered as collateral by FIIs; b. to remit the proceeds arising from corporate action, if any, on such foreign sovereign securities; and c. to liquidate such foreign sovereign securities, if the need arises. Clearing Corporations have to report, on a monthly basis, the balances of foreign sovereign securities, held by them as non-cash collaterals of their clearing members to the Reserve Bank. The report should be submitted by the 10th of the following month to which it relates. b) Equity Segment: The above guidelines are also applicable to the equity segment. Further, Domestic Government Securities (subject to the overall limits specified by the SEBI from time to time; the current limit being USD 20 billion) also can be kept as collateral to the recognized Stock Exchanges in India in addition to the cash for their transactions in cash segment of the market. However, cross-margining of Government Securities (placed as margins by the FIIs for their transactions in the cash segment of the market) shall not be allowed between the cash and the derivative segments of the market. Custodian banks are allowed to issue Irrevocable Payment Commitments (IPCs) in favor of Stock Exchanges / Clearing Corporations of the Stock Exchanges, on behalf of their FII clients for purchase of shares under the PIS. Issue of IPCs should be in

Investments by Foreign Venture Capital Investor

(i) A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from the Reserve Bank can invest in Indian Venture Capital Undertaking (IVCU) or Venture Capital Fund (VCF) or in a scheme floated by such VCFs subject to the condition that the domestic VCF is registered with SEBI. These investments by SEBI registered FVCI, would be subject to the respective SEBI regulations and FEMA regulations and sector specific caps of FDI. (ii) An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI. A VCF is defined as a fund established in the form of a trust, a company including a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capital raised in a manner specified under the said Regulations and which invests in Venture Capital Undertakings in accordance with the said Regulations. (iii) FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF or in units of schemes / funds set up by a VCF through initial public offer or private placement or by way of private arrangement or purchase from third party. Further, FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI(FVCI) Regulations,2000, as amended from time to time.
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(iv) At the time of granting approval, the Reserve Bank permits the FVCI to open a noninterest bearing Foreign Currency Account and/or a non-interest bearing Special Non- Resident Rupee Account with a designated branch of an AD Category I bank, subject to certain terms and conditions. (v) A SEBI registered FVCI can acquire / sale securities (as given in (iii) above) by way of public offer or private placement by the issuer of such securities and /or by way of 36 private arrangement with a third party at a price that is mutually acceptable to the buyer and the seller. (vi) AD Category I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered. (vii)The investments made by FVCI under Schedule I of Notification No. FEMA 20 / 2000- RB dated May 3, 2000, as amended from time to time, would be governed by the norms as stated therein.

Other Foreign Investments

1. Purchase of other securities by NRIs
(i) On non-repatriation basis (a) NRIs can purchase shares / convertible debentures issued by an Indian company on non-repatriation basis without any limit. Amount of consideration for such purchase shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR(B) / NRO account maintained with the AD Category - I bank. (b) NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. Government of India has notified that NRIs are not permitted to make Investments in Small Savings Schemes including PPF. In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon will not be allowed to be repatriated abroad.
NRI can also invest in non-convertible debentures both on repatriation basis and on no repatriation basis, which has been issued by an Indian Company subject to the other terms and conditions stated under Notification no FEMA 4/2000-RB dated May 3,2000 (as amended from time to time).

(ii) On repatriation basis An NRI can purchase on repatriation basis, without limit, Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds; bonds issued by a public sector undertaking (PSU) in India and shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.

Foreign Investment in Tier I and Tier II instruments issued by banks in India

(i) FIIs registered with SEBI and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India and denominated in Indian Rupees, subject to the following conditions: a. Investment by all FIIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 49 per cent of each issue, and investment by individual FII should not exceed the limit of 10 per cent of each issue. b. Investments by all NRIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 24 per cent of each issue and investments by a single NRI should not exceed 5 percent of each issue. c. Investment by FIIs in Rupee denominated Debt Capital instruments (Tier II) shall be within the limits stipulated by SEBI for FII investment in corporate debt instruments. d. Investment by NRIs in Rupee denominated Debt Capital instruments (Tier II) shall be in accordance with the extant policy for investment by NRIs in other debt instruments. (ii) The issuing banks are required to ensure compliance with the conditions stipulated above at the time of issue. They are also required to comply with the guidelines issued by the Department of Banking Operations and Development (DBOD), Reserve Bank of India, from time to time.

(iii) The issue-wise details of the amount raised as Perpetual Debt Instruments qualifying for Tier I capital by the bank from FIIs / NRIs are required to be reported in the prescribed format within 30 days of the issue to the Reserve Bank 16. (iv) Investment by FIIs in Rupee denominated Upper Tier II Instruments raised in Indian Rupees will be within the limit prescribed by SEBI for investment in corporate debt instruments. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million. (v) The details of the secondary market sales / purchases by FIIs and the NRIs in these instruments on the floor of the stock exchange are to be reported by the custodians and designated banks respectively, to the Reserve Bank through the soft copy of the Forms LEC (FII) and LEC (NRI).

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Abstract
FDI plays an important role in any countrys economic activities. Companies big or small cann ot solely depend on the conventional source of finance all together. For financial and technological support they have to depend on foreign resources. For big companies getting FDI is not difficult issue because of financial security, reach in global market and business experience but in SME/SSI is still an unsolved puzzle or a buzzword. The paper is concerned with one of the ways of contributing to strengthening the indigenous SME sector in a situation of resource scarcity. Specifically, the paper is concerned with the potential role of foreign direct investment (FDI) in relation to the long term competitive development and inter-nationalization of the SME sector in transition and developing countries.

FDIs Importance for a Global Appearance:

The simple answer is that making direct foreign investment allows companies to accomplish several tasks: Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally -based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing etc. A more complete response might address the issue of global business partnering in very general terms .while it is nice that many
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business writers like the expression, think globally act locally, this often used clich does not really mean very much to the average business executive in a medium and small size companies. MNCs almost always concerned with world wide manufacturing capacity and proximity to major markets .SMEs tends to be more concerned with selling their products in overseas markets. The advent of internet has ushered in a new very different mindset that tends to focus more on

Advantages Associated with Small Scale Industries:

Small Scale Industries -may sound small but actually plays a very important part in the overall growth of an economy. Small Scale Industries can be characterized by the unique feature of labor intensiveness. The total number of people employed in this industry has been calculated to be near about one crore and ninety lakhs in India, the main proponents of Small scale industries. The importance of this industry increases manifold due to the immense employment generating potential. The countries which are characterized by acute unemployment problem especially put emphasis on the model of Small Scale Industries. It has been observed that India along with the countries in the Indian continent have gone long strides in this field. This industry is especially specialized in the production of consumer commodities. Small scale industries can be characterized with the special feature of adopting the labor intensive approach for commodity production. As these industries lack capital, so they utilize the labor power for the production of goods. The main advantage of such a process lies in the absorption of the surplus amount of labor in the economy who were not being absorbed by the large and capital intensive industries. This, in turn, helps the system in scaling down the extent of unemployment as well as poverty.

Importance of SSI in Indian Economy

The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points. The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 0.87 million units in the year 1980-81 to over 3 million in the year 2000. When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the small-scale sector.

It would surprise many to know that non-traditional products account for more than 95% of the SSI exports.

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The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jeweler units from this sector. The product groups where the SSI sector dominates in exports, are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products.

Problems Faced by SSI in Financing

Finance is a key input of product distribution and development. It is therefore, aptly described as the life blood of industry and is a prerequisite for accelerating the process of industrial development. An important problem faced by small scale industries in the country is that of finance. The problem of finance in small sector is mainly due to two reasons. Firstly, it is party due to scarcity of capital in the country as a whole .Secondly it is party due to weak credit worthiness of small units in the country. Due to this weak economic base , they find it difficult to take financial assistance from the commercial banks and financial institutions. As such they are bound to obtain credit from the money lenders on a very high rate of interest and are thus exploited in practice. The small scale industries facing problems are regarding problem of raw material, problem of finance, problem of marketing, problem of underutilization of capacity, outdated technology, poor project planning and absence of vertical growth. Ancillary units face the problems of this own types ,like delayed payment by parent units, inadequacy of technological support extended by parents unit ,non-adherence to quality and delivery schedules ,disturbing the programs of parent unit and absence of a well-defined pricing system and regulatory laws. The lack of effective coordination among the various support organizations set up for the development of small scale industries .the problem of periodic markets ,location problem ,problem of space, infrastructural problems, market participants problem ,lack of storage facility and quick post-harvest disposal ,problem of quick and cheap transportation ,problem of delayed payment, finance problem, inadequate market intelligence ,slow performance of operation and costly and inefficient labour are the major problem in financial performance. The role of foreign investments in a developing economy is very vital and especially in its industrialization process. Since Independence India pursued a policy of overcaution mixed skepticism. Thus our policies towards inflow of foreign funds did not encourage the entry of foreign capital into the country. The Reserve Bank of India through its regulatory mechanism guided and controlled the flow of foreign capital in India. Whatever might have been the wisdom in pursuing such policy it was learned through experience in the later decades that foreign capital is an important means to achieve faster economic development of the country.

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After a long wait of nearly 45 years pragmatism finally prevailed in the highest portal of decisionmaking with the announcement of the New Industrial Policy in 1991. and took a radically different attitude towards foreign capital. The foreign direct investment was allowed under the new regime in almost all sectors of the economy. The economy was opened up to bring it in tune with the global economy. And changes were effected in industrial and trade policies which were substantially liberalized .In the liberalized atmosphere the change in the attitude of the government was inevitable.

Foreign investments can be of two types direct as well indirect. The direct foreign investment which is also known as FDI and includes investments from non-Resident Indians and Overseas Corporate Bodies (OCB) . These are parts of the government efforts to supplement the domestic resources for the economic development of the country. Now FDI is permitted in all sectors including service sector with some sectoral caps. Even foreign investments are allowed in the SSI sector. Similarly such investments are allowed for trading activities with a cap. There are other modes of FDI like Global Depository Receipts, American Depository Receipts, Foreign Currency Convertible Bonds etc. Although India is endeavouring to catch up with China in attracting foreign capital but it is still way behind it.

Foreign Investment in India

India provides one of the safest and best investment opportunities in the world and particularly amongst the developing economies. Due to pro-active government policy for foreign investment and liberalization of the economy, India has become an attractive destination for investment. It's large English speaking population and huge pool of skilled man power makes it better positioned than other destinations. India, the largest democracy and 10th largest economy in the world, with its consistent growth performance and abundant high skilled manpower provides enormous opportunities for investment, both domestic and foreign. India is the fourth largest economy in terms of purchase power parity and the tenth most industrialized country in the world. The policy of reforms followed by Government of India in the post-1991 period recognizes the important role of foreign capital in the industrial & economic development of the country. Foreign capital inflow is encouraged not only as source of financial capital but also as a tool of knowledge and technology transfer. Government of India has taken several initiatives and measures during this period to encourage foreign investment inflows, particularly the flow of Foreign Direct Investment (FDI) into India. Major thrust areas include infrastructure development, particularly energy, power, telecom and
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township development. FDI in most of the sectors/activities including manufacturing sectors are under the automatic route and require only notifying the Reserve Bank of India. Initiatives have also been taken to make procedures related to transfer of shares and repatriation more simple. The policy & procedures for induction of foreign technology have also been progressively simplified. To create a more conducive investment climate, the procedures governing approvals/clearances are continuously reviewed. FDI up to 100% is allowed under the automatic route in all activities/sectors except few sectors, which require Government Approvals. Recent changes have allowed Foreign Direct Investments even in retail sector, which had been a long pending demand of Foreign Investors. Infini Juridique, being one of the leading Corporate Law Firms in India, is well equipped to advise and assist its clients on matters related to investment in India. The Firm not only advises how to structure the investment, but also provides necessary assistance in incorporating the Company in India, provide secretarial assistance and temporary address for registered office. The Firm also handles liaison activity with various government offices for necessary clarification/approval.

Can FDI be an answer to financial problem of SSI :

The current FDI norms impose a ceiling of 24 per cent FDI for companies in the SSI sector i.e. small scale units having capital investment in plant and machinery not exceeding Rs. 50,000,000 (USD 1,250,000). Further, SSI units with foreign investment exceeding the notified sectoral cap are liable to lose their status as SSI units. With a view to liberalizing the SSI sector and augmenting economic activity in the country, it is announced that FDI norms governing SSIs would be relaxed and a notification is likely to be tabled before Parliament, enabling an increase in the limits of FDI in the SSI sector. If such notification is passed, SSI units would be eligible to raise foreign equity in accordance with caps governing the sectors in which they operate, thereby improving their access to technology and capital and assisting in the growth and modernization of the sector.

Case Studies of individual enterprises

The micro-economic effects on employment are largely determined by the motivations and corporate strategies underlying the decision to invest abroad with the overall objective of improving the firms return on investment and exploiting each host countrys comparativeadvant ages at world level (Alter, 1994; Hatzichronoglou, 1997). Thus, since the size and level
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of industrial development of a HDC appear to be among the most important factors, which determine the strategy, behavior and mode of operation of MNE subsidiaries, the evidence of the case-studies is being examined on a country-by-country basis (ILO, 1984). The approach taken in the study of Buckley&Artisien(1987), which is another ILO working paper, is to examine individual investments at the micro-level. Both parent firm and local affiliate were interviewed wherever possible. External information was also utilized to check on statements or to provide objective rather than subjective information. The sample of firms consists of a total of 19 firms were interviewed. Three broad industry groupings werecovered: chemicals (including pharmaceuticals); Engineering; and automobiles. The sampleincl udes: Five British firms; Five from the Federal Republic of Germany; and Nine French firms;10 of the firms affiliates were in Spain; 8 in Portugal and 1 in Greece. The structuredquestion naire examines the major variables, which determine the employment of a FDI. Theseinclude: the nature of integration within a MNE; the size and speed of tariff reductions; elasticity of supply and demand for outputs; market sizes; transport costs; differential costs of labour; technical progress; government policies, and the macro-economic environment and the relevant alternative position. It is likely that the employment impact of inward FDI on host countries will be greater than that of outward FDI on home countries. In view of this, it is surprising that remarkably few studies have used the alternative position approach to assess the job consequences of MNE activity on host countries (Dunning, 1993). The existing empirical research the impact of theaffiliates on the generation of employment in LDCs presented in this paper is still fairlyfragmente d, diffuse and incomprehensive. It lacks sufficient perspective to determine the globalmagnitudes of the absolute and relative importance of MNE affiliates operating in themanufa cturing sector of the HDCs (cf. Meller & Mizala, 1982). This is a reflection of both the lack of data availability and the relatively recent growth of FDI. Consequently, the view among mosteconomists is still marked by divergence about the net employment effects of FDI. Broadgener alizations are difficult because of the very different employment effects one obtains from various plausible alternative assumptions about what will happen in the absence of FDI The Trends of The Geographical Distribution of International Production The activities of MNEs drive the economic globalization process to a very large degree (Kleinert, 2001). In an economic sense, globalization, or more specifically the increasing output share of MNEs (Hatzius, 1997), can best be defined as an increase in the international division of labor, caused by a surge of international flows of FDI accompanied by steadily increasing international trade flows (Nunnenkamp et al, 1994 referred to in Gundlach& Nunnenkamp, 1997).To highlight some of the driving forces behind recent developments in globalization in general and FDIs in particular, it is useful to take a longer perspective, which we intend to take in the following four sub-sections

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covering the patterns of respectively FDI, employment, gross domestic investment (GDI) and gross domestic production (GDP)

CONCLUDING REMARKS
Foreign capital has a key role to play in the economic development of India. Indian government has been continuously proceeding for economic reforms and is quiet assured to secure legislation to allow more foreign investment in various sectors. The size of net capital inflows to India has increased significantly in the post reform period. Total foreign investments into India in 2007-08 stood at US $ 59288 million (about Rs 2.5 lakh crore), up by a whopping 162 per cent over the previous year. October 2007 witnessed the highest inflow - US $ 11591 million (Rs 48682 crore), CMIE data shows. Capital inflows, however, are not an unmitigated blessing. The management of capital inflows is a complex process encompassing a spectrum of policy choices, which inter alia include: the appropriate level of reserves, monetary policy objectives related to liquidity management and maintenance of health financial market conditions with financial stability. There is precious little in terms of economic reforms, but the government has gone to great lengths to encourage more capital inflows. Of course, it is a different matter that it was totally overwhelmed when it got what it had wished for. It is important for the government to move forward by adequately preparing the economy for capital inflows. Not doing anything is not an option, and such an approach risks the government being blamed for spoiling the India story.

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Bibliography
The Economic times The times of India Wikipedia Role of foreign capital, FDI, FII text books by Michal Vaz Moneycontrol.com RBI website Investopdeia.com

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