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FDI (Foreign Direct Investement)

INDEX
Sr. no. 1 2 3 Chapter Name INTRODUCTION OF FDI FOREIGN DIRECT INVESTMENT FOREIGN DIERCT Page no. 2 7

INVESTMENT; 9

THEORITICAL SETTINGS 4 ADVANTAGE AND DISADVANTAGE OF FDI 21 FOR THE HOST COUNTRY 5 6 7 FOREIGN DIERCT INVESTMENT IN INDIA POLICTES AND PROCEDUERS OF FDI 25 27

SECTOR SPECIFIC GUDELINESS FOR FDI IN 40 INDIA

8 9 10 11 12

FACTORS AFFECTING FDI CASE STUDY SUGGESTIONS AND RECOMMENDATIONS CONCIUSION WEBLJOGRAPY

51 56 64 66 68

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FDI (Foreign Direct Investement)

CHAPTER 1: INTRODUCTION ON FDI


The last two decades of the 20thcentury witnessed a dramatic worldwide increase in foreign direct investment (FDI), accompanied by a markedchang e in the attitude of most developing countries towards inward FDI. As against a highly suspicious attitude of these countries towards inward FDI in the past, most countries now regard FDI as beneficial for their development efforts and compete with each other to attract it. Such shift in attitude lies inthe changes in political and economic systems that have occurred during theclosing years of the last century. The wave of liberalization and globalization sweeping across the world has opened many national markets for international business. Global private investment, in most part, is now made by multinational corporations (MNCs). Clearly these corporations play a major role in world trade and investments because of their demonstrated management skills, technology, financial resources and related advantages. Recent developments in globalmarkets are indicative of the rapidly growing international business. The endof the 20th Century has already marked a tremendous growth in internationalinvestments, trade and financial transactions along with the integration and openness of international markets.FDI is a subject of topical interest. Countries of the world, particularlydeveloping economies, are vying with each other to attract foreign capital to boost their domestic rates of investment and also to acquire new technology and management skills. Intense competition is taking place among the fundstarved less developed countries to lure Foreign investors by offering.

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Repatriation facilities, tax concessions and other incentives. However, FDI is not an unmixed blessing. Governments in developing countries have to bevery careful while deciding the magnitude, pattern and conditions of private foreign investment. In the 1980s, FDI was concentrated within the Triad (EU, Japan and US).However, in the 1990s, the FDI flows to developed countries declined, whilethose in developing countries increased in response to rapid growth andfewer restrictions. Most FDI flows continue still to be concentrated in 10 to15 host countries overwhelmingly in Asia and Latin America.

South, East and Southeast Asia has experienced the fastest economic growth in theworld, and emerged as the largest host region. China is now the largest host country in the developing world. However, small markets with low growth rates, poor infrastructure, and high in debtness, slow progress in introducing market and private-sector oriented economic reforms and low levels of technological capabilities are not attractive to foreign investors. The remarkable expansion of FDI flows to developing countries had belied the fear that the opening of central and Eastern Europe and the efforts of the countries of that region to attract such investment would divert investment flows from developing countries. The most important factors making developing countries attractive to foreign

investors are rapid economicgrowth, privatization programmes open to forei gn investors and theliberalisation of the FDI regulatory framework. In India, prior to economic reforms initiated in1991, FDI was discouraged by Imposing severe limits on equity holdings by foreigners and Restricting FDI to the production of only a few reserved items.

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The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by the Foreign Exchange Management Act [FEMA]), prescribed the detailed rules in this regard and the firms belonging to this group were known as FERA firms. All foreign investors were virtually driven out from Indian industries by FERA. Technology transfer was possible only through the purchase of foreign technology. However, due to severe limits on royalty payments to foreigners to reduce foreign exchange use, this option was ineffective. However, the government granted liberal

tax incentives to encourage indigenous generation of technology by domestic firms. In the absence of foreign technology, Indian industry suffered both in terms of cost of production and quality. The initial policy stimulus to foreign direct investment in India came in July1991 when the new industrial policy provided, inter alia, automatic approval for project with foreign equity participation up to 51 percent in high priority areas.

In recent years, the government has initiated the second generation reforms under which measures have been taken to further facilitate and broaden the base of foreign direct investment in India. The policy for FDI allows freedom of location, choice of technology, repatriation of capital and dividends. As a result of these measures, there has been a strong surge of international interest in the Indian economy. The rate at which FDI inflow has grown during the post-liberalization period is a clear indication that India is fast emerging as an attractive destination for overseas investors.

Encouragement of foreign investment, particularly for FDI, is an integral part of ongoing economic reforms in India. Though India has one of the most transparent and liberal FDI regimes among the developing
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countries with strong macro-economic fundamentals, its share in FDI inflows is dismally low. The country still suffers from weaknesses and constraints, in terms of policy and regulatory framework, which restricts the inflow of FDI. Foreign investment policies in the post-reforms period has emphasized greaterencouragement and mobilization of non-debt creating private inflows for reducing reliance on debt flows. Progressively liberal policies have led to increasing inflows of foreign investment in the country

The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country.

1.1 History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI
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(including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries.FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The figure below shows net inflows of foreign direct investment

as a percentage of gross domestic products (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, European Japan). But flows to non-industrialized increasing sharply. A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise that is, a subsidiary, associate or branch operating in a country other than the country or countries of residence of the foreign direct investor or investors. countries are

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CHAPTER-2: FOREIGN DIRECT INVESTMENT


FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country)

2.1. IMF Definition According to the BPM5, FDI is the category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise

2.2. UNCTAD Definition The WIRO defines FDI as an investment involving a long-term

relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investment or parent enterprise) in an enterprise resident in an economy other than that of

the FDI enterprise, affiliate enterprise or foreign affiliate. FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them amongforeign affiliates, both incorporated and unincorporated. Individuals as well as business entities may undertake FDI. Flows of FDI comprise capital provided (either directly or through
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other related enterprises) by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a foreign direct investor. FDI has three components viz., equity capital, reinvested earnings and intracompany loans Equity capital is the foreign direct investors purchase of share of an enterprise in a country other than its own. Reinvested earnings comprise the direct investors share (in proportion to direct equity participation) of earnings not distributed as dividends by the affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested. Intra-company loans or intra-company debt transactions refer to short or long term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.

2.3 OECD Benchmark Definition of FDI (Third Edition) FDI reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise). The lasting interest implies the existence of a long term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transactions between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. As is evident from the above definitions, there is a large degree of commonality between the IMF, UNCTAD and OECD definitions of FDI. The IMF definition is followed internationally.

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CHAPTER-3: FOREIGN SETTINGS


Most of the present day underdeveloped countries of the world have set out a planned program for accelerating the pace of their economic development. In a country planning for industrialization and aiming to achieve a target rate of growth, there is a need for resources. The resources can be mobilized through domestic as well as foreign sources. So far as, the domestic sources are concerned, they may not be sufficient to acquire the fixed rate of growth. Generally domestic savings are less than the required amount of investment. Also the very process of industrialization calls for import of capital goods which cannot be locally produced. Hence comesthe need for foreign sources. They not only supplement the domestic savings but also provide the recipient country with extra foreign exchange to buy imports essential for filling the saving investment gap and the foreign exchange gap. The means of getting foreign resources available to a developing country are mainly three: 1. through export of goods and services 2. External aid 3. Foreign investment

DIRECT

INVESTMENT

:THEORITICAL

Export of goods and services do contribute to foreign resources but they can meet only a small part of the total demand for foreign resources. External Aid from foreign governments and international institutions, by increasing the rate of home savings and removing the foreign gap allows the utilization of previously underutilized resources and capacity. But generallythe aid is

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tied and distorts the allocation of resources. So its use has been on the decline. Foreign investment is of following two types 1. Foreign Direct Investment (FDI) and 2. Portfolio Investment.

3.1 Foreign Direct versus Portfolio Investment


By Foreign Direct Investment (FDI) we mean any investment in a foreign country where the investing party (corporation, firm) retains control over investment. A direct investment typically takes the form of a foreign firm starting a subsidiary or taking over control of an existing firm in the country in question. FDI consists of equity capital, technical and managerial services, capital equipment and intermediate inputs and legal rights to patents or secret products, processes or trademarks. It is the direct type of foreign investment which is associated with multinational corporations of foreign investment which is associated with multinational corporations because most of FDI is transferred through firms and remains outside of ordinary, functioning markets. FDI can be done in the following ways: 1. In order to participate in the management of the concerned enterprise, the stocks of the existing foreign enterprise can be acquired. 2. The existing enterprise and factories can be taken over. 3. A New subsidiary with 100% ownership can be established abroad. 4. It is possible to participate in a joint venture through stock holding 5. New foreign branches, offices and factories can be established. 6. Existing foreign branches and factories can be expanded.

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7.Minority stock acquisition, if the objective is to participate in the management of the enterprise. 8. Long term lending, particularly by a parent company to its subsidiary, when the objective is to participate in the management of the enterprise. Portfolio investment, on the other hand, does not seek management control ,but is motivated by profit .Portfolio investment occurs when when individual investors invest, mostly through stockbrokers ,in stocks of foreign companies in foreign lands in search of profit opportunities.

FDI flows are usually preferred over other forms of external finance becausethey are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors.

FDI also facilitates international trade and transfer of knowledge, skills and technology. In a world of increased competition and rapid technological change, their complimentary and catalytic role can be very valuable.

3.2 Superiority of FDI over Other Forms of Capital Inflows


FDI is perceived superior to other types of capital inflows for several reasons: 1.In contrast to foreign lenders and portfolio investors, foreign direct

investors direct investors typically have a longer-term perspective when engaging in a host country. Hence, FDI inflows are less volatile and easier to sustain in times of crisis. 2. While debt inflows may finance consumption rather than investment in the host country, FDI is more likely to be used productively.

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3. FDI is expected to have relatively strong effects on economic growth, asdic provides for more than just capital. FDI offers access to internationally available technologies and management know-how, and may render it easier to penetrate world markets. A recent United Nations report has revealed that FDI flows are less volatile than portfolio flows. To quote, FDI flows to developing and transition economies in 1998 declined by about 5 percent from the peak in 1997, a modest reduction in relation to the effects on the other capital flows of the spread of the Asian financial crisis to global proportions. FDI flows are generally much less volatile than portfolio flows. The decline was modest in all regions, even in the Asian economies most affected by the financial crisis.

3.3 Macroeconomic and Micro-economic Aspects of FDI


In judging the significance of FDI, especially from the viewpoint of developi ng countries, it is useful to make a distinction between macro-economic and micro-economic effects. The former is connected with issues of domestic capital formation, balance of payments, and taking advantage of external markets for achieving faster growth, while the latter is connected with the issue of cost reduction, product quality improvement, making changes in industrial structure and developing global inter-firm linkages .In this context, it needs to be recognized that FDI is an aggregate entity, the sum total of the investments made by many diverse multinationals, each with its own corporate stratergy.The micro-economic effects of the investment made by one multinational may be quite different from that of another multinational even if the investments are made in the same industry. Also,

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what benefits the local economy will depend on the capabilities of the host country in regard to technology transfer and industrial restructuring.

3.4 Resource-seeking and Market-seeking FDI


Two major types of FDI are typically differentiated: resource-seeking FDI and market-seeking FDI. Resource-seeking FDI is motivated by the availability of natural resources in the host countries. This type of FDI was historically important and remains a relevant source of FDI for various developing countries. However, on a worldwide scale,

the relative importance of resource-seeking FDI has

decreased

significantly.The relative importance of market-seeking FDI is rather difficult to assess. It is almost impossible to tell whether this type of FDI has already become less important due to economic globalization. Regarding the history of FDI in developing countries, various empirical studies have shown that the size and growth of host country markets were among the most important FDI determinants. It is debatable, however, whether this is still true with ongoing globalization.

Globalization essentially means that geographically dispersed manufacturing, slicing up the value chain and the combination of markets and resources through FDI and trade are becoming major characteristics of the world economy. Efficiency-seeking FDI, i.e. FDI motivated by creating new sources of competitiveness for firms and strengthening existing ones, may then emerge as the most important type of FDI.

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Accordingly, the completion for FDI would be based increasingly on the cost differences between locations, the quality of infrastructure and business-related services, the ease of doing business and the availability of skills. Obviously, this scenario involves major challenges for developing countries, ranging from human capital formation to the provision of business-related services such as efficient communication and distribution systems.

3.5 Nature of FDI


Almost all modern (FDI) is carried out by corporations rather than individuals. Somewhat like portfolio investment, the flows of FDI have historically been highly concentrated, both in terms of geography and by industry and at both the investor and receptor poles. Geographically, the ownership of global stocks of FDI is highly skewed towards only a few large, high income countries. Each investing country has, whether by accident or design , tended to direct the major part of its FDI to only a very few receiving country; in fact the pattern of global distribution of FDI has been highly similar to historical relationships based on colonial ties or other forms of political hegemony.

Viewed industrially, for any given country, FDI generally comes from less than four or five out of twenty or so major industry groups and inflows into those same industries in the receptor country. General attributes of FDI is that it has evoked by type over time. Prior to First World War, a crude but valid generalization would that a large part of FDI was in the service sector of the host economy (particularly transportation, power , communication and trading) while most of the rest was of thebackward vertical integration
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type. During the inter-war period, most of the currently largest multinational corporations (MNCs)made their initial foreign investments, b ut these horizontal or market extension types of investments have now become major category.The fourth recognized intensive, skill oriented characteristic of

manufacturing FDI is that it originates in industries that are technologically or progressive. In addition, the FDI

prone industries are typically more concentrated, have higher advertising outlays per unit of sales and exhibit above average export propensities. Industries from which FDI tends to originate display many characteristics associated with oligopoly .Another universal property of FDI is that it is really a package of complementary inputs, a collective flow of both tangible and intangible assets& services.

3.6Types of FDI

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Types of Foreign Direct Investment: An Overview


FDIs can be broadly classified into two types: Outward FDIs Inward FDIs This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. Outward FDIs: An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the

domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad. Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related to ownership patterns Other categorizations of FDI exist as well. Vertical Foreign DirectInvestmen t takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.

By Motive Resources seeking looking for resources at a lower real cost. Market seeking secure market share and sales growth in target foreign market.
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Efficiency seeking seeks to establish efficient structure through useful factors, cultures, policies, or markets.

3.7 FDI in Developing Countries


FDI is now increasingly recognized as an important contributor to a developing countrys economic performance and international competitiveness. After the debt-crisis that hit developing world in 1980s, the conventional wisdom quickly became that it had been unwise for countries to borrow so heavily from international banks or international bond markets. Rather countries should try trying to attract non-debt-

creating private inflows (DFI). The financial advantage is that such capital inflows need not be repaid and that outflow of funds (remittance of profits) would fluctuate with the cycle of the economy. It has also been widely observed that the structural adjustment efforts of the 1980s failed to lead to new patterns of sustained growth in developing countries. In particular, structural adjustment programs failed to restore private investment to desirable levels. Again it is hoped thatd could play an important role; the World Bank observes that FDI can be an important complement to the adjustment effort, especially in countries having difficulty in increasing domestic savings Against this background of balance of payments problems and low level of private investment, it is probably not surprising that attitudes in developing countries towards FDI have shifted. In the 1960s and 1970s many countries maintained a rather cautious, and sometimes an outright negative position with respect to FDI. In the 1980s, however the attitudes shifted radically towards a more welcoming policy stance. This change was not so much due to new research finding on the impact of FDI but to the
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economic problems facing the developing world.Developing countries are liberalizing their foreign investment regimes and are seeking FDI not only as a source of capital funds and foreign exchange but also as a dynamic and efficient vehicle to secure the much needed industrial technology, managerial expertise and marketing know-how and networks to improve on growth , employment,productivity and export performance.

At the global level the flows of FDI and PFI to developing countries have indeed increased. The average net inflow of FDI in developing countries had been US$ 11 billion in 1980-86, but in 1987 it started to increase, by 1991the annual net inflow had risen to US$ 35 billion and by 2004 to US$ 233 billion. The share of developing economies in total inflow of Foreign Direct Investment in the world has risen continuously since 1989.

3.8 Investment risk in India


Sovereign Risk India was an effervescent parliamentary democracy since its political freedom from British rule more than50 years ago. The country does not face any real threat of a serious revolutionary movement which might lead to a collapse of state machinery. Sovereign risk in India is hence nil for both "foreign direct investment" and "foreign portfolio investment." Many Industrial and Business houses have restrained themselves from investing in the North-Eastern part of the country due to unstable conditions. Nonethelessinvesting in these parts is lucrative due to the rich mineral reserves here and high level of literacy. Kashmir to the northern tip is a

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militancy affected area and hence investment in the state of Kashmir are restricted by law. Political Risk India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999 , with strong and healthy coalition government emerging,

Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy.

Economic liberalization which mostly interested foreign investors have been accepted as essential by all political parties including the Communist Party of India Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or a foreign dictatorship are minimal. Hence, political risk in India is practically absent.

Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every product or service is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. In India one can avail the facilities of a large number of market research firms in exchange for a
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professional fee to study the state of demand /supply for any product. As it is, entering the consumer market involves some kind of gamble and hence involves commercial risk.

Risk Due To Terrorism


In the recent past, India has witnessed several terrorist attacks on its soil which could have a negative impact on investor confidence. Not only business environment and return on investment, but also the overall security conditions in a nation have an effect on FDI's. Though some of the financial experts think otherwise. They believe the negative impact of terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro economic conditions of the Indian economy that would decide the flow of Foreign investment and in this regard India would continue to be a favorable investment destination

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CHAPTER-4: ADVANTAGES & DISADVANTAGES OF FDI FOR THE HOST COUNTRY 4.1 Advantages of Foreign Direct Investment
Foreign Direct Investment has the following potential benefits for less developed nation.

1. Raising the Level of Investment


Foreign investment can fill the gap between desired investment and locally mobilized savings. Local capital markets are often not well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can be difficult. FDI solves both these problems at once as it is a direct source of external capital. It can fill the gap between desired foreign exchange requirements and those derived from net export earnings.

2. Upgradation of Technology
Foreign investment brings with it technological knowledge while transferring machinery and equipment to developing countries. Production units in developing countries use out-

dated equipment and techniques that can reduce the productivity of workers and lead to the production of goods of a lower standard.

3.Improvement in Export Competitiveness


FDI can help the host country improve its export performance. By raising the level of efficiency and the standards of product quality, FDI makes a positive impact on the host countrys export competitiveness.
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Further, because of the international linkages of MNCs, FDI provides for the host country better access to foreign markets. Enhanced export possibility contributes to the growth of the host economies by relaxing demand side constraints on growth. This is important for those countries which have a small domestic market and must increase exports vigorously to maintain their tempo of economic growth.

4.Employment Generation
Foreign investment can create employment in the modern sectors of developing countries. Recipients of FDI gain training of employees of in the course of operating new enterprises, which contributes to human capital formation in the host country.

5.Benefits to Consumers
Consumers in developing countries stand togain from FDI through new products, and improved quality of goods at competitive prices.

6.Resilience Factor:
FDI has proved to be resilient during financial crisis. For instance, in East Asian countries such investment was remarkably stable during the global financial crisis of 1997-98. In sharp contrast, other forms of private capital flows like portfolio equity and debt flows were subject to large reversals during the same crisis. Similar observations have been made in Latin America in the 1980s and inMexico in 1994-95. FDI is considered less prone to crises because direct investors typically have a longer-term

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perspective when engaging in ahost country. In addition to risk sharing properties of FDI, it is widely believed that FDI provides a stronger stimulus to economic growth in thehostcountries than other types of capital inflows. FDI is more than just capital, as it offers access to internationally available technologies and management know-how.

7.Revenue to Government
Profits generated by FDI contribute tocorporate tax revenues in the host country.

4.2 Disadvantages of Foreign Direct Investment


FDI is not an unmixed blessing. Governments in developing countries haveto be very careful while deciding the magnitude, pattern and conditions of private foreign investment. Possible adverse implications of foreign investment are the following: 1.When foreign investment is competitive with home investment, profits the domestic industries fall, leading to fall in domestic savings. 2.Contribution of foreign firms to public revenue through corporate taxes is comparatively less because of liberal tax concessions, investmentallowances, disguised public subsidies and tariff protection provided by the host government. 3. Foreign firms reinforce dualistic socioeconomic structure and increase in

increase income inequalities. They create a small number of highly paid modern sector executives. They divert resources away from priority sectors to the manufacture of sophisticated products for consumption of the local elite. As they are located in urban areas, they create imbalances between

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rural and urban opportunities, accelerating the flow of rural population to urban areas. 4.Foreign firms stimulate inappropriate consumption patterns through excessive advertising and monopolistic market power. The products made by multinationals for the domestic market are not necessarily lowin price and high in quality. Their technology is generally capital-intensive which does not suit the needs of a labor-surplus economy. 5.Foreign firms able to extract sizeable economic and politicalconcessions fr om competing governments of developing countries.Consequently, private p rofits of these companies may exceed social benefits. 6.Continual outflow of profits is too large in many cases, putting pressure on foreign exchange reserves. Foreign investors are very particular about profit repatriation facilities. 7. Foreign firms may influence political decisions in developing Countries. In view of their large size and power, national sovereignty andcontrol over economic policies may be jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure unduefavors. Similarly, they may contribute to a friendly political parties and subvert the political process of the host country. Key question, therefore, is how countries can minimize possible negative effects and maximize the positive effects of FDI through appropriate policies

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CHAPTER-5: FOREIGN DIRECT INVESTMENT IN INDIA


Since independence till 1990, the performance of the Indian economy has been dominated by a regime of multiple controls, restrictive regulations and wide ranging state intervention. Industrial economies of the country was protected by the state and insulated from external competition. As a result of which, India was thrown a long way behind the world of rapid expanding technology. The cumulative effect of these policies started becoming more and more pronounced. By the year 1989-90, the situation in the balance of payment and foreign exchange reserves became precarious and the country was driven to the brink of default. The credibility reached the sinking level that no country was willing to advance or lend to India at any cost. In such

circumstances, the government quickly followed a liberalized economic poli cy in July 1991.The main objectives of the liberalized economic policy are two fold. At the country level the reform aims at freeing domestic investors from all the licensing requirements, the virtual abolition of MRTP restrictions on the investment by large houses, and a competitive industrial structure for Indian companies to achieve a global presence by becoming as competitive as their counterparts worldwide. Secondly, the focus on structural reforms intended to tap foreign investment for economic growth and development

Gradually & systematically the government has taken a series of measureslike devaluation of rupee, lowering of import duties and allowing foreigninvestmentupto 51% of the equity in a large number of industries andinvestment of large foreign equity (even up to 100%) in selected
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areasespecially for export oriented products.In India, since the 1960s foreign investment and/or foreign collaborations by the multinationals have been principally viewed as an instrument tofacilitate the much needed transfer of technology. In technological as wellas financial collaborations with foreign firms, the approval and extent of ownership participation had been predominantly determined by the technology component of the respective products. Import of technology as against the direct foreign investment was the main focus of the policies till mid-eighties.The New Industrial Policy (NIP) of July 1991 and subsequent policy amendments have significantly

liberalized the industrial policy regime in the country especially as it applies to FDI. The industrial approval system in all industries has been abolished except for some strategically or environmentally sensitive industries. In 35 high priority industries, FDI up to 51% is approved automatically if certain norms are satisfied. FDI proposals do not necessarily have to be accompanied by technology transfer agreements.Trading companies

engaged primarily in export activities are also allowed up to 51% foreign entity.

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CHAPTER-6: POLICIES AND PROCEDURES OF FDI


The initial policy stimulus to foreign direct investment in India came in July1991 when the new industrial policy provided, inter alia, automatic route approval for projects with foreign equity participation up to 51 percent in high priority areas. In recent years, the government has initiated the second generation reforms under which

measures have been taken to further facilitate and broaden the base of FDI in India. The policy of FDI allows freedom of location, choice of technology repatriation of capital and dividends. The rate at

which FDI inflow has grown during the post-liberalization period is a clear indication that India is a fast emerging as an attractive destination for overseas investors. As part of the economic reform program, policy and procedures governing foreign investment governing foreign investment and technology transfer have been significantly simplified and streamlined. Today FDI is allowed in all sectors including the service sector except in cases where there are sectoral ceilings.

6.1 FDI Policy Regime


Most of the problem for investors arises because of domestic policy, rules and procedures and not the FDI policy per se or its rules and procedure. India has one of the most transparent and liberal FDI regimes among the merging and developing economies. By FDI regime it means those

restrictions that apply to foreign nationals and entities but not to Indian Nationals and Indian owned entities. The differential treatment is

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limited to a few entry rules, spelling out a proportion of equity that the foreign entrant can hold in an Indian company or business. There are a few banned sectors and some sectors with limits on foreign equity proportion.

The entry rules are clear and well defined and equity limits for FDI in selected sectors such as telecom quite explicit and well-known.Subject to these foreign equity conditions a foreign company can set up a registered company in India and operate under the same laws, rules and regulations as any Indian owned company would. There is absolutely no discrimination against foreign invested companies registered in India or infavour of domestic owned ones.

There is however a minor restriction on those foreign entities who entered a particular sub-sector through a joint venture with an Indian partner. If they want to set up another company in the same sector it must get a noobjection certificate from the joint venture

partner. This condition is explicit and transparent unlike many hidden conditions imposed by any other recipients of FDI.

6.2 Routes for Inward Flows of FDI


FDI can be approved either through the automatic route or by the government:-

1. Automatic Route

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Companies proposing FDI under automatic route donot require any government approval provided the proposed foreign equity

iswithin the specified

ceiling and

the requisite documents are filed withReserve Bank of India (RBI) within 30 days of receipt of funds.The automaticroute encompasses all proposals where the proposed items of manufacture/activity does not require an industrial license and is notreserved for small-scale sector.The automatic route of the RBI was introduced to facilitate FDI inflows.

However, during the post-policy period, the actual investment flows throughthe automatic route of the RBI against total FDI flows remained rather insignificant. This was partly due to the fact that automatic route. Another limitation was the ceiling of 51 percent of foreign equity holding.Increasing number proposals were cleared through the FIPB route while the automatic route was relatively unimportant. However, since 2000 automatic route has become significant and accounts for a large part of FDI flows.

2. Government Approval For the following categories, government Proposals attracting compulsory licensing Items of manufacture reserved for small scale sector. Acquisition of existing shares. FIPB ensures a single window approval for the investment and acts as a screening agency. FIPB approvals are normally received in 30 days. Some foreign investors use the FIPB application route where there may be absence ofstate policy or lack of policy clarity.
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for

FDI

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the Foreign Investment Promotion Board (FIPB) is necessary:

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3. Industrial Licensing in FDI Policy Industrial Licensingis regulated by Industries (Development and Regulation) Act 1951. Following are the sectors which require Industrial Licensing: Industries which abide by compulsory licensing Manufacturing of items from the larger industrial units for small sector industries Locational restrictions on the proposed sitesSectors Which Require Industrial Licensing. Electronic aerospace and defense equipment Alcoholics drink Explosives Cigarettes and tobacco products Hazardous chemicals such as, hydrocyanic acid, phosgene, isocynatesand diisocynates of hydro carbon and derivatives.

4. Restricted List of sectors FDI is not permissible in the following cases: Gambling and Betting, or Lottery Business, or Business of chit fund Housing and Real Estate business (to a certain extent) Trading in Transferable Development Rights (TDRs) Retail Trading Railways, Atomic Energy , atomic minerals,

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Agricultural or plantation activities or Agriculture (excluding Horticulture, Development of Seeds, Animal

Floriculture, 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) the new policies have

substantially relaxed restrictions on foreign investment, industrial licensing and foreign exchange. The capital market has been opened to foreign investment and banking sector controls have beeneased. As a result, India has been rapidly changing from a restrictive regime to a liberal one and FDI is encouraged in almost all economic activities under the automatic route.

The Government is committed to promotingthe increased flow of FDI for better technology, modernization, exports and for providing products and services of international standards. Therefore, the policy of the Government has been aimed at encouraging the policy of the

Government has been aimed at encouraging foreign investment, particularly in core infrastructure sectors so as to supplement national efforts.

6.3 Post-approval Procedures


1. Project Clearance After the approval has been obtained, the applicant may get his unit/ company registered with the Registrar of Company.Subsequently, the

company needs to obtain various clearances such as land clearance, building design clearance, pre- construction clearance, labour clearance etc. from different authorities before beginning its operations.These clearances differ from sector to sector and may also differ from stateto state.
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2.Registration and Inspection Each industrial unit is supposed tomaintain records in regard to production, sale and export, use of specifiedraw materials including public utilities like water and electricity, labour related details financial details and details in regard to industrial safety andenvironment.The unit is also subject to periodic inspection by the factories inspector,labour inspector, food inspector, fire inspector, central excise inspector, air and water inspector, mines inspector, city inspector and the like, the list of which may go up to thirty or more.

3.Foreign Exchange Management Act (FEMA), 2000 The additional provisions which apply only to entry of FDI emanate from the provisions of FEMA. According to FEMA, no person resident outside India shall without the approval/knowledge of the RBI may establish in India a branch or a liaison office or a project office or any other place of business.FDI in a particular industry may, however, be made through the automatic route under powers delegated to the RBI or with the approval accorded by the FIPB.

The automatic route means that foreign investors only need to informthe RBI within 30 days of bringing in their investment. Companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to foreign investors.

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RBI has granted general permission under FEMA with respect to proposals approved by FIPB. Such companies are, however, required to notify the concerned regional office of the RBI of receipt of inward remittances within 30 days of such receipts and again within 30 days of issue of shares to the foreign investors.

6.4 Entry Options for Foreign Investors


A foreign company planning to set up business operations in India has the following options: By incorporating a company under the Companies Act, 1956 through Joint Ventures Wholly Owned Subsidiaries Foreign equity in such Indian companies can be up to 100% depending onthe requirements of the investor, subject to equity caps in respect of the areaof activities under the Foreign Direct Investment (FDI) policy.Enter as a foreign Company through Liaison Office/Representative Office Project Office Branch Office Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000.

1.Incorporation of Company For registration and incorporation, an application has to be filed with the Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable toother domestic Indian companies.

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2.Liaison Office/Representative Office The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. Itcan promote

export/import from/to India and also facilitate

technical/financial

collaboration between parent company and companies in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

3.Project Office Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

4.Branch Office Foreign companies engaged in manufacturing andtrading activities abroad are allowed to set up Branch Offices in India for the following purposes: Export/Import of goods Rendering professional or consultancy services Carrying out research work, in which the parent company is engaged.
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Promoting technical or financial collaborations between Indiancompanies and parent or overseas group company. Representing the parent company in India and acting as buying/selling agents in India. Rendering services in Information Technology and development of software in India. Rendering technical support to the products supplied by the parent/group companies. Foreign airline/shipping Company.A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelinesPermission for setting up branch offices is granted by the Reserve Bank of India (RBI).

5.Branch office on Stand-Alone Basis in Special Economic Zones(SEZs) Such branch offices would be isolated and restricted to the SEZand no business activity/transaction will be allowed outside the SEZ in India, which include branches/subsidiaries of their parent office in India. No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities,subject to specified conditions.

6.Investment in a Firm or a Proprietary Concern by NRIs A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:
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The amount is invested by inward remittance or out of specified account types (NRE/FCNR/NRO accounts) maintained with an Dealer. The firm of proprietary concern is not engaged in any agricultural/ plantation or real estate business, i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom. The amount invested shall not be eligible for repatriation outside India. NRIs/PIOs may invest in sole proprietorship concerns/partnership Authorized

firms with repatriation benefits with the approval of Government/ RBI.

7.Investment in a Firm or a Proprietary concern Other Than NRIs No person resident outside India other than NRI/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The RBI may, on an application made to it, permit a person resident outside India to make such an investment subject to such terms and conditions as may be considered.

6.5 Other Modes of Foreign Direct Investments


1. Global Depository Receipts (GDR)/American Deposit Receipts(ADR) /Foreign Currency Convertible Bonds (FCCB) Foreign investment through GDRs/ADRs, Foreign Currency

Convertible Bonds(FCCBs) are treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's

approval in this regard should have a consistent track record for good
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performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for Infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.There is no restriction on the number

of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under the Automatic Route, whose direct foreign investment after a proposed GDR/ADR/FCCBs issue is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be, or which is implementing a project not contained in project falling under Government Approval Route, would Need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.

2. 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. The following guidelines apply to issues of such shares: Foreign investment in preference share is considered as part of share capital and fall outside the External Commercial Borrowing (ECB)guidelines/cap Preference shares to be treated as foreign direct equity for the purpose of sectoral caps on foreign equity, where such caps are prescribed, provided
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they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap. 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. The dividend rate would not exceed the limit prescribed by the Ministry of Finance. Issue of Preference Shares should conform to guidelines prescribed by the SEBI and RBI and other statutory requirements.

6.6 Foreign Technology Agreements


Foreign technology induction is encouraged both through FDI and through foreign technology agreements. India has one of the most liberal policy regimes in regard to technology agreements.Foreign technology

collaboration is permitted either through automatic route or through FIPB.

1.Automatic Approval RBI accords automatic approval for foreign technology collaboration

agreements for all industries subject to the following: The lump sum payment should not exceed US$ 2 million. Royalty payable is limited to 5 percent for domestic sales and 8 percent for exports subject to total payment of 8 percent of sales over a 10 year period. The period for payment of royalty not exceed 7 years from the date of commencement of commercial production, or 10 years from the dateof agreement whichever is earlier.

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2.FIPB Route For the following categories, Government approval Is necessary: Proposals attracting compulsory licensing. Items of manufacture reserved for small-scale sector. Proposals involving any previous joint venture or technologytransfer/trade mark agreement in the same or allied field in India. Extension of foreign technology collaboration agreements. Proposals not meeting any or all of the parameters for automatic approval. The different components of foreign technology collaboration such as technicalknow how fees, payment for design and drawing, payment for engineering service and royalty are eligible for approval throughTheauto matic route, and by the Government.

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CHAPTER-7: SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA 7.1 Hotel & Tourism Sector
100% FDI is permissible in the sector on the automatic route.The term hotels include restaurants , beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wildlife experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement,sports, and health units for tourists and Convention/Seminar units andorganizations.For foreign technology agreements, automatic approval is granted if 1.Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design,supervision, etc. 2.Up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

7.2 Private Sector Banking


49% FDI is allowed from all sources on the automatic route subject toguidelines issued by RBI from time to time. 1.FDI/NRI/OCB investments allowed in the following 19 NBFC Activities shall be as per levels indicated below: a.Merchant banking

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b.Underwriting c.Portfolio Management Services d. Investment Advisory Services. e. Financial consultancy. f.Stock Broking g.Asset Management h.Venture Capital i.Custodial Services j.Factoring k.Credit Reference Agencies l.Credit rating agencies. m.Leasing& Finance n.Housing Finance o.Foreign Exchange Brokering p.Credit card business Q. Money changes Business r.Micro Credit s.Rural Credit

2. Minimum Capitalization Norms for fund based NBFCs: a.For FDI up to 51% - US$ 0.5million to be brought up front b.For FDI above 51% and up to 75% - US $ 5million to be broughtupfront. c.For FDI above 75% and up to 100% - US $ 50million out of which US $ 7.5million to be brought up front and the balance in 24 months

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3.Minimum

capitalization

norms

for

non-fund

based

activities:Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.

4.Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities,subject to bringing in US$ 50 million as at 2.(c) above (without any restriction on number of operating subsidiaries without

bringing inadditional capital)

5.Joint Venture operating NBFC's that have 75% or less than 75%foreign investment will also be allowed to set up subsidiaries for undert aking other NBFC activities, subject to the subsidiaries also Complying with the applicable minimum capital inflow

i.e.2.(a)and2.(b)above.

6.FDI in the NBFC sector is put on the automatic route subject to compliance with the guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard

7.3 Insurance Sector


FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining a license from Insurance Regulatory & the Development Authority (IRDA)

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7.4 Telecommunication sector


1. In basic, cellular, value added services and global mobile personal Communications by satellite, FDI is limited to 49% subject to licensingand security requirements and adherence by the companies (who is investing and the companies in which investment is being made) to thelicense conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions. 2.ISPs with gateways, radio-paging and end-to- end bandwidth, FDI is permitted up to 74% with FDI, beyond the 49% requiring Government

approval. These services would be subject to licensing and security requirements. 3. No equity cap is applicable to manufacturing activities. 4.FDI up to 100% is allowed for the following activities in the telecom sector :a.ISPs not providing gateways (both for satellite and submarine cables); b.Infrastructure Providers providing dark fiber (IP Category 1); c.Electronic Mail; and d.Voice MailThe above would be subject to the following conditions: FDI up to 100% is allowed subject to the condition that such companies

would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. e.The above services would be subject to licensing and security requirements, wherever required.Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

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7.5 Trading Companies


Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house. However, under the FIPB route:-

1.100% FDI is permitted in case of trading companies for the following activities: a. Exports; b. Bulk imports with ex-port/ex-bonded warehouse sales; c. Cash and carry wholesale trading; d.Another import of goods or services provided at least 75% is for the procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/

distribution/sales.

2. The following kinds of trading are also permitted, subject to the provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c.Trading of hi-tech items/items requiring specialized after sales serviced. d. Trading of items for social sector e. Trading of high-tech, medical and diagnostic items. f.Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, acompany can market that item under its brand name.
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g. Domestic sourcing of products for exports. h.Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a periodof two years, and investment in setting up manufacturing facility commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the conditionthat such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only

in business to business (B2B) e-commerce and not in retail trading.

7.6 Power Sector


Up to 100% FDI allowed in respect of projects relating to electricitygenerati on, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.

7.7 Drugs & Pharmaceuticals


FDI up to 100% is permitted on the automatic route for the manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve the use of recombinant DNA technology, and specific cell /tissue targeted formulations. FDI proposals for the manufacture of licensabledrugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

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7.8 Infrastructure Sector


FDI up to 100% under automatic route is permitted in projects for constructi on and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

7.9 Pollution Control and Management


FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route

7.10 Call Centers in India / Call Centers in India


FDI up to 100% is allowed subject to certain conditions

7.11 Business Process Outsourcing BPO in India


FDI up to 100% is allowed subject to certain conditions.

7.12 Special Facilities and Rules for NRI's and OCB's


NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc.. 2.Up to 100% equity with full repatriation facilities for capital and dividends in the following sectors: a.34 High Priority Industry Groups b.Export Trading Companies c.Hotels and Tourism-related Projects d.Hospitals, Diagnostic Centers

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e.Shipping f.Deep Sea Fishing g.Oil Exploration h.Power i.Housing and Real Estate Development j.Highways, Bridges and Ports k.Sick Industrial Units l.Industries Requiring Compulsory Licensing m.Industries Reserved for Small Scale Sector n.Up to 40% Equity with full repatriation: New Issues of ExistingCompanies raising Capital through Public Issue up to 40% of the newCapital Issue. O.On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. p.Portfolio Investment on repatriation basis: Up to 1% of the Paid upValue of the equity Capital or Convertible Debentures of theCompany by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. q.On Non- Repatriation Basis : acquisition of shares of an IndianCompany, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. r.Other Facilities: Income Tax is at a Flat Rate of 20% on Income Arising from Shares or Debentures of an Indian Company.Certain terms and conditions do apply.

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7.13 Foreign Direct Investment in Small Scale Industries (SSI's) in India


Recently, India has allowed Foreign Direct Investment up to 100% in many manufacturing industries which were designated as Small Scale Industries. India further ended in February 2008 the monopoly of small-scale units on79 items, leaving just 35 on the reserved list that once had as many as 873 item.

Foreign Direct Investment (FDI) in India is subject to certain Rules and Regulations and is subject to predefined limits ('Limits') in various sectors which range from 20% to 100%. There are also some sectors in which FDI is prohibited. The FDI Limits are reviewed by the Government from time to time and as and when the need is felt and FDI is allowed in new sectors where the limits of investment in the existing sectors are modified accordingly. In order to revise the FDI Limits to attract more foreign investment in India, the Union Government constituted a committee named, Arvind Mayaram Committee headed by the Economic Affairs Secretary. On Tuesday, 16th July, 2013, the Government approved the recommendations given by the Arvind Mayaram Committee to increase FDI limits in 12 sectors out of the proposed 20 sectors, including crucial ones such as defense and telecom. Some of the important changes made in the Existing FDI Limits are provided below: FDI Limit in Telecom Sector is increased from 74 per cent to 100 percent, out of which up to 49 per cent will be allowed under automatic route and the remaining through Foreign Investment Promotion Board (FIPB) approval. A

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similar dispensation would be allowed for asset reconstruction companies and tea plantations. FDI in 4 sectors i.e. gas refineries, commodity exchanges, power trading and stock exchanges have been allowed via the automatic route. In case of PSU oil refineries, commodity exchanges, power exchanges, stock exchanges and clearing corporations, FDI will be allowed up to 49 per cent under automatic route as against current routing of the investment through FIPB. FDI in single brand retail is to be allowed up to 49 percent under the automatic route and beyond that shall be through FIPB. In credit information firms, 74 per cent FDI under automatic route will be allowed. In respect of courier services, FDI of up to 100 per cent will be allowed under automatic route. Earlier, similar amount of investment was allowed through FIPB route. FDI cap in defense sector remained unchanged at 26%, however higher limits of foreign investment in state-of-the-art manufacturing would be considered by the Cabinet Committee on Security (CCS). Technically, the decision leaves it open for CCS to even allow 100% foreign investment in what the defence ministry will define as "state-of-the-art" segments with safeguards built in to ensure that the technology and equipment are not shared with other countries. In the contentious insurance sector, it was decided to raise the sectoral FDI cap from 26 per cent to 49 per cent under automatic route under which companies investing do not require prior government approval. A Bill to raise FDI cap in this sector is pending in the Rajya Sabha.

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7.14 Forbidden Territories:


Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

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CHAPTER-8: FACTORS AFFECTING FDI


The factors that can narrow the gap between FDI approvals and actual foreign direct investment inflos and indeed make India a preferred

destination for global capital are, 1.Availability of infrastructure in all areas i.e. transports

hospitality,telecom, power, etc. 2.Transparency of processes, policies and decision making andreduction government decision making lead time. 3.Stability of policies i.e. entry, exit, labor laws, etc. over a definite time horizon so that definite plans can be made. 4.Acceptance of International Standards including accountingstandards. 5.Capital account convertibility so that all capitals and payments can flow easily in and out of the economy. 6.Simplification of the regulatory framework in general and tax laws. 7.Improvement in bandwidth for internet and data communication. 8.Improvement in the enforcement of intellectual property rights. 9.Implementation of the WTO agreement full. of

All investments foreign and domestic are made under the expectation of future profits. The economy benefits if economy policy fosters completion, creates a well functioning modern regulatory system and discourage sartificial monopolies created by the government through entry barriers. A Recognition and understanding of these facts can result in a more positive attitude towards FDI. The future policies should be designed in the light of the above observations. The most important initiatives that need attention are:
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1.Empowering the State Governments with regard to FDI. 2. Developing a fast track clearance system for legal disputes. 3. Changing the mindset of bureaucracy through HR practices. 4.Developing basic infrastructure. 5.Improving Indias image as an investment destination.While the magnitudes of inflows have recorded impressive growth, they are still at a small level compared to Indias potential. The policy reforms undertaken have undoubtedly enabled the country to widen the sectoraland source composition of FDI inflows. Within a generation, the countries of East Asia transformed themselves. China, Indonesia, Korea, Thailand and Malaysia today have living standards much above ours.

8.1 FDI TRENDS IN INDIA


India is the second most populous country and the largest democracy in the world. The far reaching and sweeping economic reform undertaken since1991 have unleashed the enormous growth potential of the economy. There has been a rapid, yet calibrated, move towards deregulation and

liberalization, which has resulted in India becoming a favoritedestination for investment. Undoubtedly, India has emerged as one of the most vibrant and dynamic of the developing economies.

8.2 India as an Investment Destination


FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth and development. FDI benefits domestic industry as well as the Indian consumers by providing opportunities for technological upgradation, access to global managerial skills and

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practices,optimal utilization of human and natural resources, making Indian industry internationally competitive, opening up export markets, providing backward forward linkages and access to international quality goods and services. FDI policy has been constantly reviewed and necessary steps have been taken to make India a most favorable destination for FDI. There are several good reasons for investing in India. 1.Third largest reservoir of skilled manpower in the world. 2.Large and diversified infrastructure spread across the country. 3.Abundance of natural resources and self-efficiency in agriculture. 4.Package of fiscal incentives for foreign investors. 5.Large and rapidly growing consumer market. 6. Democratic government with an independent judiciary. 7.English as the preferred business language. 8. A developed commercial banking network of over 63000 branches supportedby a number of National and State level financial institutions. 9.Vibrant capital market consisting of 22 stock exchanges with over 9400listed companies. 10. A congenial foreign investment environment that provide freedom of entry, investment, location, choice of technology, import and export, and 11.Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal,Pakistan and Sri Lanka.

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Top

Investing

Countries

FDI

Inflows

in India

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CHAPTER-9: CASE STUDY


9.1 HEWLETT- PACKARD INDIA In mid-2006, HP acquired majority stake in MphasiS BFL Limited, a leading Applicationsand Business Process Outsourcing (BPO) Services company based in Bangalore, India.With the addition of MphasiS, the total work force is now more than 30,000.

Slowdown for HP FY 09 was definitely not a year that HP India would like to remember fondly. Theslowdown took an alarming toll on its top line in rupee terms, the group revenue wasalmost flat; in dollar terms, it declined. Result: it was the worst performing group in theDQ Top 5 club. While the others Tatas at 26%, Wipro at 41%, Infosys at 31%, and evenHCL at fared between average to outstanding, HP was left far behind in the race.

Strategy adopted It was unfortunately not a great start for NeelamDhawan, who rejoined HP India after her three-year stint as head of Microsoft India. She took over as the managing director of HPIndia in June, 2008, replacing CEO BaluDoraiswamy who moved on to become MD for Asia Pacific Japan and senior VP for HPs global technology solutions group (TSG).Though on a brighter note, within HP India, the TSG unit that she only headed (whichcontributed maximum to HPs revenues) was the silver lining. Within TSG, it was the ITservices business that shonethe EDS acquisition paid off boosting the services topline bynearly 50%. Acquisitions seemingly did the

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trick for HP India: other than EDS, on theenterprise software front it were the Opsware and Tower Software acquisitions. There waslittle doubt that the EDS takeover placed HP in a stronger position to leverage the domesticmarket. While HP was already a force to reckon with in domestic IT services, it nowgained in terms of new capabilities in manufacturing, transportation, PSUs, healthcare aswell as infrastructure management and BPO. And we are not even counting the impact of MphasiS (which is an EDS company, and at present separately listed); though in FY 09, itwas more for MphasiS that the HP-EDS brand equity worked well, and HP too is sure to benefit from the arrangement. The year even saw HP veteran Ganesh Ayyar taking over asthe CEO of MphasiS.51 Efforts were made though to halt the declining fortunes by launching newer products likeProbooks (for SMBs), EliteBooks (for large enterprises), notebooks targeting women andCQ2000, the touch-smart PCs with QuickPlayer button. HP also undertook an inventorycorrectionin OND and restructured PSG to ensure cross selling by the sales &marketingteams for both desktops and notebooks. IPG (at 20%, the smallest of the three divisions) too was not immune from the negativemarket sentiments mirroring the causes and symptoms afflicting PSG. Remedial measuresadopted included a growing focus on managed printing services, large format printers,color printing and services like Snapfish. The financing scheme offered to resellers of both IPG and PSG by the HP FinancialServices Group did provide some solace to the beleaguered
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partners. Incidentally, thesefinancing options helped HP services too, as it enabled many SMBs to opt for the option tocome into the services bandwagon. Last year was particularly interesting for HP FinancialServices group (HPFS). It got a big push due to inability of companies to shell out instant payments in the backdrop of an economic crisis. HPFS offers desktop PCs and other ITequipment on lease to SMBs, in addition to facilitating deployment of SAP businessenterprise software, though it reports numbers globally. HPFS enabled per quarter payments of bundle of solutions bought from HP, last year. TSGs growth at 33% (primarily because of the EDS acquisition) was however, defeated bythe flat growth of two major groupsimaging& printing solutions and personal solutions52

(desktops and notebooks). TSG with 55% contribution continued to be HP Indiasmainstay,while the pain areas for HP last year were PSG and IPG. Even though PSG accounted for nearly a quarter of its revenues and HP continued to retain its top spot in desktops andnotebooks across all four quarters (according to IDC), the generally down consumer sentiment and the

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overall declining market were big dampeners. Particularly in the case of desktops, the market went sharply down, while in notebooks Dell started offering somecompetition.On the enterprise software side, the information management and BI solutions whichincluded the enterprise records management software that it acquired through itsacquisition of Tower Software in fiscal 2008 and Open Call solutions, which is a suite of carriergrade software platforms also helped a great deal. Though critics claim that whileIBM is already moving ahead with a service as a product model, HP is still evaluating acustomized portfolio. The proof of the pudding was in the eating-more than 30% growth inenterprise software.

Impact Though the collaboration between HP services with enterprise storage & servers and HPsoftware groups, as well as third-party system integrators and software and networkingcompanies to bring solutions were very much there, HPSs synergy with IPG and PSG to provide managed print services, end user workplace services, and mobile workforce productivity solutions to enterprise customers were lacklustre. One positive developmentwas HPs seriousness on the green front. It did start scoring on the efficiency index with theintroduction of products like blade servers with its green touch. Its ewaste strategy addeda further push to its green focus. Amongst some big wins in India, HPFS won the financingand asset management services contract from Subhiksha last year.

9.2SATELLITE TELEVISION ASIA REGION (STAR)


STAR is an Asian TVservice owned by RupertMurdoch's News Corporation. It is headquartered inHong Kong, with regional offices inIndia,
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mainland China, Taiwan, Singapore, as well as in other south Asian countries.According to the STAR website, their service has more than 300 million viewers in 53countries and is watched by approximately 120 million viewers every day.

History Star News is one of the channels in a bouquet of channels run by STAR, a subsidiary of News Corporation. STAR launched in 1991, was the pioneer of satellite television in India. Now it runs channels in almost every genre such as entertainment, movies, news, sports,documentary, music, etc., and has a presence in 53 countries in Asia. Some of its channelsare Star Plus, Star World, Channel V, ESPN.Thecompany was launched in 1 August 1990 as part of Hutchison Whampoagroup. Itstarted broadcasting five television channels in 1 January 1991 fromAsiaSat1 Satellite.Launch of The STAR TV Network pioneered satellite television in Asia and in the processcatalyzed explosive growth in the media industry across the entire region.In 1993 News Corporationpurchased 63.6% of STAR for over $500 million, followed bythe purchase of the remaining 36.4% in 1 January 1993. Murdoch declared that:"(telecommunications) have proved an unambiguous threat to totalitarian regimeseverywhere ... satellite broadcasting makes it possible for information-hungry residents of many closed societies to bypass state-controlled television channels"After this, the former prime minister Li Pengrequested and obtained the ban of satellitedishesthroughout the country. Subsequently the STAR TV network dropped theBBC channels from its satellite offer. This, and many ensuing declaration from Murdoch, led critics to believe the businessman was striving to appease the Chinese government in order to have the ban lifted.
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In August of 2009, STAR Broadcasting Corporation revealed a restructure to its Asian broadcast businesses into three units - Star India, Star Greater China and Fox InternationalChannels (FIC). James Murdoch (NewsCorp chairman) stated, We are now reshaping a big, regional organisation into three highly focused business units..". Paul Aeillo (CEO)was slated to leave in December 2009.

Challenges Using Asia Sat for Star-TV created a problem, however, because the satellite was never meant to be used for broadcasting. Under the jurisdiction of the InternationalTelecommunications Union (ITU), it was begun as a telecommunications satellite only.Little has been done about this situation, but criticism has developed in the scholarlycommunity. In a 1992 paper for the International Communication Association, SeemaShrikhande asserted that, "Using telecommunications satellites for broadcasting goesagainst the ruling that national sovereignty includes the state's control over televisionwithin its borders and that satellite footprints should be tailored to national boundaries asfar as possible." Following these assumptions, several countries have attempted to placerestrictions on reception of Star-TV but have found them difficult to enforce.

Impact Today STAR Broadcasting Corporation broadcasts over 60 services in 13 languages.Shows include entertainment, sports, movies, music, news and documentaries.Reaching more than 300 million viewers in 53 countries across Asia, STAR BroadcastingCorporation is watched by approximately 120 million viewers every day.STAR Broadcasting Corporation controls
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over 20,000 hours of Indian and Chinese programming and also owns the world's largest

contemporary Chinese film library, withmore than 600 titles, featuring superstars includingJackieChan,Chow Yun-FatandBruceLee.In partnership with leading companies in Asia, STAR Broadcasting Corporation businesses extend to filmed entertainment, television production, cable systems anddistribution, direct-to-home services, terrestrial TV broadcasting, wireless and digitalservices.In 1994 STAR TV Network removedBBC World Service Television(now BBC World News) from the network following demands from the government of the People's Republicof China. It is alleged that the PRC government was unhappy

withBBCcoverageandthreatened to block Star TV in the hugemainland Chinesemarket if the BBC was notwithdrawn. This is despite technology that is capable of blocking BBC World in China,while making it available in other countries they serve.

Recent developments

Star and similar regional operations add a new layer of complexity to discussions of concepts such as media imperialism, the globalization of culture, and the international flowof television. The system's emphasis on intra-regional cultural flows--across national borders but within language and cultural boundaries--assumes that audiences will respondto the cultural similarity or proximity of the programming. Given further

satellitedevelopments in other regions, Star-TV may be an example of one form of futuretelevision.


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The numerouno status enjoyed by Star Plus for nearly a decade since July 2000, based ontwo long-running spells of KaunBanegaCrorepati (KBC) in 2000 and 2007, and a slew of family melodramas mass-produced by Balaji Telefilms like KyunkiSaasBhiKabhiBahuThi and KahaaniGharGharKii, has ended. STAR TV invested US$ 80 million in building up its Indian operation and has beengrowing at 40-50 per cent per annum for the last 3 years. Star TV India is valued at over US$ 2 billion by Communications Equity Associates, an American investment bank, andrated as the most valuable and profitable investment of Star TV group in all of Asia. Itschannels cover 300 million people in 53 countries in Asia and the Middle East.

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CHAPTER 10: SUGGESTIONS& RECOMMENDATION

According to some of the foreign companies operating in India the deluge of corruption lies in the lack of transparency in the rules of governance, extremely cumbersome official procedures and excessive and unregulated discretionary power in the hands of politicians and bureaucrats. India should have her focus immediately on the infrastructure of airports,

telecommunications, ports and roads in selected areas to make the country more attractive to foreign investors. In fact, in contrast to China, Indian governments have been concentrating more on link roads or local route in rural areas in place of highways, airports and railways joining various states and business centres in India. So, it is high time to have a change in focus. Sectoral FDI caps should be reduced to the minimum and entry barriers eliminated. Also, the special economic zones should be developed as the most competitive destination for export related FDI in the world. Initiate the perception-changing and image-building exercises as well as concrete and tangible steps towards further reforms. To achieve this objective all wings of government have to be made responsible and accountable for increasing private investment in general and FDI in particular. Aggressive marketig strategy focused on changing the investors attitude towards India is the need of the hour. Income-tax rates on foreign company's income are higher than the rates on the domestic company. Therefore, the tax rate shall be same on domestic company and foreign company. It is suggested that a policy targeting export-oriented FDI or high technology FDI may be very favourable for the country's BOP rather than one
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attempting to maximize the magnitude of FDI irrespective of its composition. And to accelerate India's exports, on sustainable basis, the focus has to be centered around "Technology based exports". Indo-Mauritius double taxation avoidance treaty, which provides for Mauritius residents to pay capital gains only in Mauritius has been a major factor behind the increasing inflow of foreign investment into India. Actually, a part from the double tax avoidance treaties the recent move by the Mauritius government, permitting Mauritius-based offshore funds to allocate their capital between various cells should also lead to a sharp spurt in investments into the country through Mauritius. Thus, double tax avoidance treaties have improved the investment climate favourable for foreign investors in general. To what extent they have influenced the inflow of FDI, is uncertain.

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CHAPTER-11: CONCLUSION

Economic reforms in India have deregulated the economy and stimulated domestic and foreign investment, taking India firmly in the forefront of investment destinations. The Government, keen to promote FDI in the country, has radically simplified and rationalized policies, procedure and regulatory aspects. Foreign direct investment is welcome in almost

allsectors; expect those strategic concerns (defense and atomic energy). Since the initiation of the economic liberalization process in 1991, sectors such as automobiles, chemicals, food processing, oil and natural gas, etrochemicals, power, service , and telecommunication chemicals, power, services, and telecommunications have attracted considerable investments. Today, in the changed investment climate, India offers existing business opportunities in virtually every sector of the economy. Telecom, electrical equipment (including computer software),energy and transportation sector have attracted the highest FDI.Despite its market size and potential, India have yet to convert considerable favorable investor sentiment into substantial net flows of FDI.Overall, India remains high on corporate investor radar screens, and is widely perceived to offer ample opportunities for investment.The market size and potential give India a definite advantage over most other comparableinvestment destinations. Indias investment

profile, however, is also conditioned by factors that affect the flow of FDI, which infrastructure are bureaucratic delays, laws, widespread corruption, political risk and poor weak

facilities

pro-labor

intellectual property regime. A perceived slowdown in the process of reforms generates doubts about the markets long-term potential.To

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capitalize on its potential for FDI, would seem that India needs to accelerate efforts to institutionalize government efficiency focusing the market on Indias existing investments and and advance the

implementation of promised reforms. Other strategic efforts should include relatively higher rates of return on long term potential, addressing the

issue of transforming the country into a viable export platform and encouraging strategic alliances with foreign investors. In short,this means accelerating Indias integration with the global economy.

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CHAPTER 12: WEBLIOGRAPHY


www.rbi.org.in

www.Sebi.gov.in

www.economictimes.india times.com

http://www.cefims.ac.uk/documents/sample-15.pdf

http://businesscasestudies.co.uk/business-theory/finance/investmentappraisal.html#axzz2fzrwdqgM

http://homepages.strath.ac.uk/~cds98101/NPV.html

http://www.cefims.ac.uk/documents/sample-36.pdf

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