Foreign Direct Investment, FDI, FDI Inflow, Multi Brand Retailing, Constitution of India vs Business, Right to Business, Budget 2014 budget 2014, constitution of india vs business, fdi, fdi inflow, foreign direct investment, multi brand retailing, right to business

1. Foreign Direct
Investment : in respect
with Constitution of
India
Koushik Dutta
School of Management Sciences,
Indian Institute of Engineering Science and Technology, Shibpur

2. FDI in a nutshell
• Foreign direct investment (FDI) is a
• direct investment into production or business in a country by a foreign individual or
company either by buying a company in the target country or by expanding
operations of an existing business in that country.
• Foreign direct investment is in contrast to portfolio investment which is a passive
investment in the securities of another country such as stocks and bonds.
Major Bodies Constituted for FDI
1991- Foreign Investment Promotion Board FIPB
1996- Foreign Investment Promotion Council FIPC
1999- Foreign Investment Implementation Authority FIIA
2004- Investment Commission- Secretariat for Industrial Assistance (SIA)

3. Genesis of “Doing Business” in India
1. Part III, Fundamental Rights
• Right to Business (19-1-g)
• to practise any profession, or to carry on any occupation, trade or business.
2. Part XI, Chapter 1
• Distribution of Legislative Powers (245-255)
• Lists - Union List, State List and Concurrent List
3. Industrial Policy Resolution 1948
• Declared Indian Economy as Mixed Economy
• Small scale industries and cottage industries were given higher importance
• Govt. imposed restriction on foreign investment

4. Genesis of “Doing Business” in India
Economic Constitution of India
• This laid down the basic framework of Industrial Policy
• It is classified into three sectors
• Schedule A – which covers Public Sector (17 Industries)
• Schedule B – covering Mixed Sector (i.e. Public & Private) (12 Industries)
• Schedule C – only Private Industries
• Public Sector
• Small Scale Industry (SSI)
• Foreign Investment in India (FII)
• Special Provisions (Exclusive Public Sector enterprises)
• Rail Transport | Atomic Energy
• Minerals (Coal and Lignite) | Arms and Ammunition

5. FORBIDDEN TERRITORIES
FDI is not permitted in the following industrial sectors:
• Arms and ammunition.
• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
• Lottery Business
• Agricultural or plantation activities
• Housing and Real Estate Business (except development of townships, construction of
residential/commercial premises, roads or bridges to the extent specified in
Notification No. FEMA 136/2005-RB dated July 19, 2005).

6. Entry Strategies for Foreign Investor
• Foreign Company has the following options to set up business operations in India :
• By incorporating a company under the Companies Act, 1956
• A wholly owned subsidiary
• Joint venture company - existing company or new company with domestic partner
• As an unincorporated entity
• Liaison Office - approval by RBI
• not permitted to undertake any commercial/trading/industrial activity
• Does the job of informational role
• promote export/import from/to India and also facilitate technical/financial collaboration between
parent company/Group companies and companies in India
• Project Office
• Temporary in nature
• Branch Office - approval by RBI
• Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up
Branch Offices in India for specified purposes
• Permitted to remit outside India profit of the branch

7. FOREIGN INVESTMENTS THROUGH GDRS (EURO ISSUES)
Foreign Investment through GDRs is treated as Foreign Direct Investment
• A Global Depository Receipt (GDR) also known as International Depository Receipt (IDR), is a
certificate issued by a depository bank, which purchases shares of foreign companies and deposits it
on the account.
• They are the global equivalent of the original American Depository Receipts (ADR.
• Typically 1 GDR is equal to 10 underlying shares, but any ratio can be used.
• It is a negotiable instrument which is denominated in some freely convertible currency.
• GDRs enables a company (issuer) to access investors in capital markets outside of its home country.
• Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, The
Bank of New York Mellon.
• GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the
London Stock Exchange, where they are traded on the International Order Book (IOB).

8. USE OF GDRS
The proceeds of the GDRs can be used for-
• Financing capital goods imports,
• Capital expenditure including domestic purchase/installation of plant.
• Equipment and building
• Investment in software development,
• Prepayment or scheduled repayment of earlier external borrowings, and
• Equity investment in companies in India.
CLEARANCE FROM FIPB
• There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year.
• Annex III of new IPR 1991, if a company engaged in the manufacturing of items whose FDI after a
proposed Euro issue is likely to exceed 51% or else need to prior FIPB clearance before seeking final
approval from Ministry of Finance.

9. Approval of FDI in India
1. Automatic Route by RBI
• No need of Prior Approval From FIPB, RBI or GOI.
• Only need to notify RBI-RO within 30 days of receipt of inward remittances.
• And File the required documents along with form FC-GPR* with that Office within 30
days of issue of shares to the non-resident investors.
The Reserve Bank of India accords automatic approval within a period of two weeks
(provided certain parameters are met) to all proposals involving:
• Foreign equity up to 50% in 3 categories relating to mining activities .
• Foreign equity up to 51% in 48 specified industries.
• Foreign equity up to 74% in 9 categories .
* FC-GPR- Foreign Collaboration - General Permission Route

10. Approval of FDI in India
2. The FIPB Route
• FDI in activities not covered under the automatic route require prior government
approval.
• Approvals of all such proposals including composite proposals involving foreign
investment/foreign technical collaboration is granted on the recommendations of
FIPB.
• Application for all FDI cases, except NRI investments and 100% EOUs, should be
submitted to the FIPB Unit, DEA, Ministry of Finance.
• Application for NRI and 100% EOU cases should be presented to SIA in Department of
Industrial Policy and Promotion (DIPP).
• Application can be made in Form FC-IL. Plain paper applications carrying all relevant
details are also accepted.
• No fee is payable.

11. Approval of FDI in India
3. CCFI Route
• Investment proposals falling outside the automatic route.
• Having a project cost of Rs. 6,000 million or more would require prior approval of
Cabinet Committee of Foreign Investment (“CCFI”).
• Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made
by the Indian company with the RBI.

12. Why FDI ? From Firm’s PoV
1. Gain a foothold in a new geographic market.
2. Increase a firm’s global competitiveness and
positioning.
3. Fill gaps in a company’s product lines in a
global industry.
4. Reduce costs in areas such as R&D,
production, and distribution.
Factors required to attract FDI
• Low cost BUT Qualified, Educated/Skilled Labor
Pool.
• Long-term Market Potential OR Yields greater than
can be achieved Domestically.
• Access to Natural Resources.
• Geographical advantage
• Stability of the economic and Political Environment.

13. SECTORIAL GUIDELINES FOR FDI
• Airports- Automatic Route: 100% in green field, 74% in existing project (else permission from GoI)
• Telecom- Automatic Route: 49% in basic services (49% - 74% FIPB), 100% in manu. of tel. equipment.
• Domestic Airlines- Automatic Route: 49% by all, 100% by NRIs. [foreign airlines are not allowed to have
any direct or indirect equity participation.]
• Drugs & Pharma- Automatic Route: 100% manufacture of drugs and pharmaceuticals. 74% in the case of
bulk drugs, their intermediates Pharmaceuticals and formulations (else permission from GoI).
• Insurance- Automatic Route: 49%. [license from the Insurance Regulatory & Development Authority
(IRDA) has to be obtained.]
• Petroleum and natural gas sector- Automatic Route: 100% - Petroleum and natural gas sector, other
than refining and including market study and formulation; setting up infrastructure for marketing.
• Automatic Route: 100% FDI is permitted in Indian Private Companies, 26% FDI is permitted in Public
Sector Undertakings with Government approval
• Trading- Automatic Route: 100% in Wholesale / cash & carry trading, 100% in Exports,
• Govt. approval: 100% in trading of items sourced from small scale sector and 51% single brand
product retailing.

14. SECTORIAL GUIDELINES FOR FDI
• Print Media- Subject to the guidelines issued by the Ministry of Information and Broadcasting: 100% in
publishing/printing scientific & technical magazines, periodicals & journals and 26% in publishing news
papers and periodicals dealing in news and current affairs.
• Private Sector Banking- Automatic Route: 74% subject to guidelines for setting up of branches &
subsidiaries of foreign banks issued by RBI from time to time like minimum 25% must be in rural.
• Broadcasting- Govt. approval route: 49% in setting up hardware facilities such as up-linking, HUB etc.
• 49% in Cable network, 20% in FM radio and 49% FII & 20% FDI in Direct to Home service providers.
• Infrastructure: Automatic Route: 100% FDI in following sector.
• Electricity Generation (except Atomic energy)
• Electricity Transmission & Electricity Distribution
• Mass Rapid Transport System
• Roads & Highways (incl. Toll Roads)
• Vehicular Bridges
• Ports & Harbors
• Hotel & Tourism

15. SPECIAL INVESTMENT AVENUES
• Electronic Hardware and Software Technology Parks- Automatic Route: 100% in electronics and
software industries set up exclusively for exports.
• Eligible to purchase, free of customs duty/ excise duty, of their entire requirement of capital goods, raw
materials and components, spares and consumables, office equipment etc.
• Special Economic Zones- SEZ is deemed to be foreign territory for the purposes of trade operations and
duties and tariffs.
• No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from
industrial licensing.
• An SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and
rendering of services.
• Export Oriented Units- Automatic Route: 100% in EOUs even if it is manufacturing an item reserved for
the small scale sector.
• Enjoy several privileges like duty exemption on import and domestic procurement.
• Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify
to be considered under EOU scheme
• Not applicable in agriculture, floriculture, IT, services, hand made jewellery, etc. industry.
• Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors.

16. ILLUSTRATIVE LIST OF SECTORS UNDER AUTOMATIC ROUTE
FOR FDI UP TP 100%
• Most manufacturing activities
• Drugs and pharmaceuticals
• Food processing
• Electronic hardware
• Software development
• Film industry
• Advertising
• Hospitals
• Pollution control and management
• Management consultancy
• Computer related Services
• Research and Development Services
• Construction and related Engineering Services
• Pollution Control and Management Services
• Health related & Social Services
• Travel related services

17. ADVANTAGES OF FDI
• Employment opportunity
• Investment in Needed Infrastructure.
• Positive Influence on BoP.
• New Technology and “Know How”
Transfer.
• Increased Capital Investment.
• Targeted Regional and Sectoral
Development.
DISADVANTAGES OF FDI
• Industrial Sector Dominance in the
Domestic Market.
• Technological Dependence on Foreign
Technology Sources.
• Disturbance of Domestic Economic Plans in
Favor of FDI-Directed Activities.
• “Cultural Change” Created by “Ethnocentric
Staffing” The Infusion of Foreign Culture ,
and Foreign Business Practices

18. ADVANTAGES OF INDIA
• Stable democratic environment over 60 years of independence
• Large and growing market
• World class scientific, technical and managerial manpower
• Cost-effective and highly skilled labor
• Abundance of natural resources
• Well-established legal system with independent judiciary.
• Developed banking system and vibrant capital market .
• India among the top three investment hot spots and one of the fastest growing
economies in the world.
• Large English speaking population

19. TYPES OF FDI
• Horizontal FDI- arises, when a firm duplicates its home country based activities at
the same value chain stage in a host country through FDI.
• Platform FDI- FDI from a source country into a destination country for the purpose
of exporting to a third country.
• Vertical FDI- takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage
in a vertical fashion in a host country.

20. FORMS OF FDI
• Greenfield Investment
• Brownfield Investment

21. FDI EQUITY INFLOW

23. BUDGET 2014 & FDI
• Defence Sector: FDI increased from 26% to 49% through FIPB route.
• Insurance Sector: FDI increased from 26 to 49 & offering full management control through FIPB route.
• Manufacturing and e-Commerce Segment: Automatic route to encourage small manufacturers and
MSMEs in order to promote entrepreneurship and also encourage to enter in online market, banking
on the marketplace business model of e-commerce portals but there must be a need for that
particular model.
FDI in Retail in India
• The policy of allowing FDI up to 51 per cent in multibrand retailing (MBRT) said it would be allowed
in each state or UT if the government there had no objection. – State List
• Delhi and Rajasthan are already included as FDI-approved states. And, FDI is a central subject. Thus,
the FDI policy and FEMA will need to be amended to remove these from the list.
• So far, 12 states and UTs had agreed to implement the policy, the majority under Congress rule —
Andhra Pradesh, Assam, Haryana, Uttarakhand, Maharashtra and Karnataka, Haryana and
Maharashtra.
• So far, only UK-based Tesco’s proposal to invest in the sector was cleared by the central government.

24. VIOLATION OF CONSTITUTION
• Entrance of Multinational Multi Brand Retailing Company
• Increase huge competition in domestic market
• Leads to closure of unorganised sector (contributes 60% of Indian retail sector) due to technology.
• MBRT MNCs will enjoy economies of scale
• Domestic firms have to reduce their price and bear loss
• No domestic player in the market
• Creation of MBRT MNC with monopolistic competition violation of Competition Act.
• Violation of
• Article 19(1)(g)[3] of the Indian domestic retailers
• Article14(Right to equality),
• 39(b) (that the ownership and control of the material resources of the community are so distributed as best to subserve the
common good),
• 39(c) (that the operation of the economic system does not result in the concentration of wealth and means of production to
the common detriment).
• Example- USA: Walmart in US follows a strategy of acquisition. They acquire small traders and charges lower
prices initially, thereby reduces the competitors and creates dominance or monopoly and increases the prices
later on.

25. VIOLATION OF CONSTITUTION
• Indian retail sector contributes 13% to GDP and employs 6% of nation’s workforce.
• Indian retail is valued at US$450 million (6.5% is from organised sector).
• So the majority contribution is from the unorganised sector, the persons employed in unorganised sector are so
incompetent that they cannot be employed in any other field.
• Efforts should be made to convert unorganised sector into organised sector then only it would be able to compete
foreign entrants. But without putting any effort giving ticket to foreign players in multi brand retail will
destroyed already imbalanced India’s retail sector.
• Violation of
• Right to livelihood, defined under Article 21[5]
• Directive principle of article 39(a) (that the citizens, men and women equally, have the right to an adequate
means to livelihood).

26. THANK YOU 