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Index........................................................................................................................... 1 Foreign Capital in India & Economic Growth...............................................................1 INTRODUCTION ....................................................................................................... 2 Investment by NRIs in Immovable Properties..........................................................4 Eligibility for Investment in India............................................................................. 4 Foreign Investment limits, Prohibited Sectors and investment in MSEs.....................4 Collateral for FIIs..................................................................................................... 6 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 Importance of SSI in Indian Economy ...................................................................15 Problems Faced by SSI in Financing.........................................................................16 Foreign Investment in India................................................................................... 17 Case Studies of individual enterprises......................................................................19 Bibliography ............................................................................................................ 21
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 inflow 2 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 capital-rich 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 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 Inter-bank 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.
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 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 activities 6: (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).
(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.
(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
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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.
(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 cannot 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.
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Capability to increase total production capacity. Opportunities for coproduction, 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 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
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. 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.
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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. After a long wait of nearly 45 years pragmatism finally prevailed in the highest portal of decision-making 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.
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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 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.
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.
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 fairlyfragmented, diffuse and incomprehensive. It lacks sufficient perspective to determine the globalmagnitudes of the absolute and relative importance of MNE affiliates oper ating in themanufacturing 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. Broadgeneralizations 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 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
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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.
Bibliography
The Economic times The times of India 21
Wikipedia Role of foreign capital, FDI, FII text books by Michal Vaz Moneycontrol.com RBI website Investopdeia.com
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