INTRODUCTION

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firms home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privitazation of many industries, has probably been the most significant catalyst for FDIs expanded role.One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. This unprecedented growth of global FDI in 1990 around the world

make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. Infact, FDI provides a win win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The home countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the host countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange. Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a sole visible panacea for all their scarcities. Further, the integration of global financial markets paves ways to this explosive growth of FDI around the globe.

A SHORT HISTORY
After getting independence in 1947, the government of India envisioned a socialist approach to developing the countries economy broadly based on the USSR system. The government decided to adopt an economic agenda that would follow five year plans. Each five year plan was focused on certain sectors of the economy that the government felt needed to be developed for the countries progress. The government followed an interventionist policy and dictated most of the norms of running a business by favoring certain sectors and ignoring others.

Until 1991, India was primarily a closed economy. The industrial environment in India was highly regulated and a license system known as licence raj - was in place to ensure compliance with the government regulations and directives. Under the Industries Development and Regulations act (1951) starting and operating any industry required approval - in the form of a licence - from the government. Any change in production capacity or change in the product mix also called for obtaining government approval.

This led to the development of increasingly complex and opaque procedures for obtaining a licence and led to a burgeoning bureaucracy. The licence system thus shifted lot of power and perverse incentives in the hands of file pushing bureaucrats (or Babus). This directly led to increased corruption as the procedure for obtaining a licence was vaguely defined and left open to individual interpretations. In addition, there was no monitoring system in place to ensure speedy disposal of licence applications. Also, the labor markets were highly regulated and the government did not allow the companies to lay off its workers. This meant that even in severe downturns the companies kept bleeding but could not rationalize its workforce. Eventually these companies - majority of them public sector companies would become chronically sick and the government kept subsidizing them at huge costs to the taxpayer.

One draconian measure was the introduction of the Foreign Exchange Regulation act (FERA) of 1973 which curtailed foreign investment to 40% in Indian companies. in 1973. Foreign companies also came under the Monopolies and Restrictive Policy (MRTP), 1969 Act during this period. MRTP (1969) Act restricted companies on the size of operation and the pricing of products and services. The Reserve Bank of India geared itself to implement the above act. As a result, many companies that did not want to increase equity participation of Indians as per section (2) of FERA, 1973 decided to cease their operations in India. As many as 54 companies applied to wind up their operations by 1977-78 since the implementation of the above Act in 1974 and 9 companies applied to wind up their operations in 1980-81 (Annual Reports, Reserve Bank of India 1977, 1978, 1981). This had a very adverse impact and companies such as Coca-Cola and IBM exited the country. The government also adopted a policy of import substitution and the idea was to help the domestic industry improve in a safe environment until the local industries could compete internationally. This was implemented by levying extremely high tariffs or completely banning imported goods.Due to the governments protection most of the industries failed to catch up with the technological innovations taking place around the world. As they were shielded from imports due to extremely high import tariffs the

industries had no incentive to improve their operations. This led to a vicious circular logic where the tariffs were not reduced since domestic companies could not compete and the high tariffs prevented industries from innovating. Corruption and opaqueness of the system added to the difficulties and the situation became extremely complex.

THE BOP CRISIS

Gulf war broke out in 1990 and the resulting oil shock was enough to trigger a serious balance of payment (BoP) crisis for India in 1991. The cost of oil imports went up to 10,820 crores from the estimated 6,400 crores . Traditionally, India received lot of remittances from the expatriates working in the Gulf countries and this source also dried up as the migrant Indian workers were forced to return home due to the war. The problem was compounded due to an extremely high inflation of about 16% and a fiscal deficit of about 8.5%. The situation was so severe that India had foreign reserves of only around $1 Billion - barely enough to cover two weeks of its payment obligations. Indias credit rating was downgraded as its debt servicing capability was critically impaired and the government had to pledge its gold reserves to soothe creditors. Ostensibly, the trigger for the BoP crisis was the oil shock but the deeper issue was that the governments heavy hand in trying to regulate businesses and to move the country towards economic progress had failed to produce results and drastic measures were now called for. Faced with these insurmountable problems, the Indian government turned to the IMF and thus began a series of far reaching reforms in the India economy which envisioned transforming the countrys economy from an interventionist and overly-regulated economy to a more market oriented one.

THE BEGINING OF A NEW ERA

The year 1991 marks a new growth phase of FDI in India with an all time high flow of FDI. Following the Industrial Policy (1991) , a large number of foreign companies from different parts of the world rushed into India. In this period, in addition to thousands of

foreign collaborations in India, as many as 145 foreign companies registered in India within a span of 10 years from 1991-2000. Companies like General Motors, Ford Motors, and IBM that divested from India in the 1950s and 1970s reentered India during this period. A large number of Asian companies like Daewoo Motors, Hyundai Motors and LG Electronics from S. Korea, Matsushita Television and Honda Motors from Japan invested in India during this period. With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high priority industries and the concept of phased manufacturing requirement on foreign companies was removed. Further, the tariffs on imports have been steadily reduced in every budget since 1991. Subsequently, GOI replaced FERA, 1973 that regulated all foreign exchange transactions with Foreign Exchange Management Act (FEMA), 1999. The objectives of FEMA have been to facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market. The total number of foreign collaborations increased from 976 in the year 1991 to 2144 in the year 2000.

WHAT IS FOREIGN DIRECT INVESTMENT?

Is the process whereby residents of one country (the source 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). The international monetary funds balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors purpose being to have an effective voice in the management of the enterprise. The united nations 1999 world investment report defines FDI as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

TYPES OF FDI

A)BY DIRECTION Inward FDIs: Inward FDI for an economy can be defined as the capital provided from a foreign direct investor (i.e. the coca cola company) residing in a country, to that economy, which is residing in another country. (i.e. India's economy). EXAMPLE: General Motors decides to open a factory in India. They are going to need some capital. That capital is inward FDI for India. Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations.

Outward FDIs: A business strategy where a domestic firm expands its operations to a foreign country either via a Green field investment, merger/acquisition and/or expansion of an existing foreign facility. Employing outward direct investment is a natural progression for firms as better business opportunities will be available in foreign countries when domestic markets become too saturated.

In recent years, emerging market economies (EMEs) are increasingly becoming a source of foreign investment for rest of the world. It is not only a sign of their increasing participation in the global economy but also of their increasing competence. More importantly, a growing impetus for change today is coming from developing countries and economies in transition, where a number of private as well as state-owned enterprises are increasingly undertaking outward expansion through foreign direct investments (FDI). Companies are expanding their business operations by investing overseas with a view to acquiring a regional and global reach.

B) BY TARGET Greenfield investment: A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. Green field investments occur when multinational corporations enter into developing countries to build new factories and/or stores.Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up green field investments. Governments often see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to boost the country's human capital.

Horizontal 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. For example, Ford assembles cars in the United States. Through horizontal FDI, it does the same thing in different host countries such as the United Kingdom (UK), France, Taiwan, Saudi Arabia, and India. Horizontal FDI therefore refers to producing the same products or offering the same services in a host country as firms do at home.

Vertical FDI: Vertical Foreign Direct Investment takes two forms: 1. Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process like exploiting the available raw materials in the host country.

2. Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production i.e to be nearer to the consumers through the aquisition of distribution outlets.

C) BY MOTIVE Resource seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. natural resources, anover words - naturally occurring materials such as coal, fertile land, etc., that can be used by man, and cheap labor). This characterizes Foreign Direct Investment into developing countries, for example seeking cheap labor in India and China, or natural resources in the Middle East and Africa.

Market seeking: Market seeking FDI is driven by access to local or regional markets. Investing locally can be driven by regulations or to save on operational costs such as transportation. General Motors investment in China is market seeking because the cars built in China are sold in China,the size and growth of host country markets are among the most important FDI determinants. Efficiency seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this kind of Foreign Direct Investment comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Efficiency seeking FDI is commonly described as offshoring, or investing in foreign markets to take advantage of a lower cost structure. A credit card company opening a call center in India to serve U.S. customers is a form of efficiency seeking FDI.

ADVANTAGES OF FDI
1. Raising the Level of Investment: Foreign investment can fill the gap between desired investment and locally mobilised 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. Further, because of the international linkages of MNCs, FDI provides to 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/Development: Foreign investment can create employment in the modern sectors of developing countries. Recipients of FDI gain training of

employees 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 to gain from FDI through new products, and improved quality of goods at competitive prices.

6. Revenue to Government: Profits generated by FDI contribute to corporate tax revenues in the host country.

DISADVANTAGES OF FDI
FDI is not an unmixed blessing. Governments in developing countries have to 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 in 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, investment allowances, disguised public subsidies and tariff protection provided by the host government.

3. Foreign firms reinforce dualistic socio-economic structure and 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 the consumption of the local elite. As they are located in urban areas, they create imbalances between rural and urban opportunities, accelerating 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 low in price and high in quality. Their technology is generally capital-intensive which does not suit the needs of a laboursurplus economy.

5. Foreign firms able to extract sizeable economic and political concessions from competing governments of developing countries. Consequently, private profits of these companies may exceed social benefits.

6. Profit distribution, investment ratios are not fixed: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. Political Lobbying:Foreign firms may influence political decisions in developing countries. In view of their large size and power, national sovereignty and control over economic policies may be jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure undue favours. Similarly, they may contribute to friendly political parties and subvert the political process of the host country.

DETERMINANTS OF FDI
To understand the scale and direction of FDI flows, it is necessary to identify their major determinants. The relative importance of FDI determinants varies not only between countries but also between different types of FDI. Traditionally, the determinants of FDI include the following.

1. Size of the Market: Large developing countries provide substantial markets where the consumers demand for certain goods far exceed the available supplies. This demand potential is a big draw for many foreign-owned enterprises. In many cases, the establishment of a low cost marketing operation represents the first step by a multinational into the market of the country. This establishes a presence in the market and provides important insights into the ways of doing business and possible opportunities in the country.

2. Political stability: In many countries, the institutions of government are still evolving and there are unsettled political questions. Companies are unwilling to contribute large amounts of capital into an environment where some of the basics political questions have not yet been resolved.

3. Macro-economic Environment: Instability in the level of prices and exchange rate enhance the level of uncertainty, making business planning difficult. This increases the perceived risk of making investments and therefore adversely affects the inflow of FDI.

4. Legal and Regulatory Framework: The transition to a market economy entails the establishment of a legal and regulatory framework that is compatible with private sector activities and the operation of foreign owned companies. The relevant areas in this field include protection of property rights, ability to repatriate profits, and a free market for currency exchange. It is important that these rules and their administrative procedures are transparent and easily comprehensive.

5. Access to Basic Inputs: Many developing countries have large reserves of skilled and semi-skilled workers that available for employment at wages significantly lower than in developed countries. This provides an opportunity for foreign firms to make

investments in these countries to cater to the export market. Availability of natural resources such as oil and gas, minerals and forestry products also determine the extent of FDI.

The determinants of FDI differ among countries and across economic sectors. These factors include the policy framework, economic determinants and the extent of business facilitation such as macro-economic fundamentals and availability of infrastructure.

METHODOLOGY
In order to accomplish this project successfully we will take following steps.

Data collection: Secondary Data: Internet, newspapers, journals and books, other reports and projects, literatures

FDI: The study takes into account a sample of top 10 investing countries e.g. Mauritius, Singapore, USA etc. and top 10 sectors e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger inflow of FDI from different countries.It also takes into account the impact of FDI on the GDP growth of India,Poverty reduction and also makes a comparative study of the various states in India as to how they have harnessed the benefits of FDI.

FII:

Correlation: We have used the Correlation tool to determine whether two ranges of data move together that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII which may be positive relation, negative relation or no relation.

We will use this model for understanding the relationship between FII and stock indices returns. FII is taken as independent variable. Stock indices are taken as dependent variable

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market. This will help the investors to decide on their investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses.

OBJECTIVES
Examines the trends and patterns in the FDI across different sectors and from different countries in India during 2002 to 2011. To study how FDI has impacted the GDP growth,Poverty etc Influence of FII on movement of Indian stock exchange during period that is March 2006 to March 2011.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route Processing of non-automatic approval cases FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the

Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors. Trend of Equity inflow through FIPB and Automatic route

SECTOR SPECIFIC CONDITIONS ON FDI

PROHIBITED SECTORS. 1. Retail Trading (except single brand product retailing) 2. Lottery Business including Government /private lottery, online lotteries, etc. 3. Gambling and Betting including casinos etc. 4. Chit funds 5. Nidhi company 6. Trading in Transferable Development Rights (TDRs) 7. Real Estate Business or Construction of Farm Houses 8. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

9. substitutes 10. Activities / sectors not open to private sector investment e.g. Atomic Energy and 11. Railway Transport (other than Mass Rapid Transport Systems).

PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionalities. In sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditions. Sr. No. 1. 2. 3. 4. Hotel & Tourism NBFC Insurance Telecommunication: cellular, value added services ISPs with gateways, radio-paging Electronic Mail & Voice Mail 74% 100% 5. Trading companies: primarily export activities bulk imports, cash and carry 100% atomic reactor 100% 100% 100% 100% 100% Automatic Automatic Automatic Automatic Automatic Automatic 51% Automatic 49% Above 49% need 100% 49% 26% Automatic Automatic Automatic Automatic Sector/Activity FDI cap/Equity Entry/Route

Govt. licence

wholesale trading 6. Power(other power plants) 7. 8. 9. 10 Drugs & Pharmaceuticals Roads, Highways, Ports and Harbors Pollution Control and Management Call Centers than

11. 13.

BPO Airports: Greenfield projects Existing projects

100%

Automatic

100% 100% 49% 100% 100%

Automatic Beyond 74% FIPB FIPB FIPB FIPB FIPB

14 15. 16. 17.

Assets reconstruction company Cigars and cigarettes Courier services

Investing companies in infrastructure 49% (other than telecom sector)

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Source: Department of Industrial Policy & Promotion

Source: Department of Industrial Policy & Promotion

The sectors receiving the largest shares of total FDI inflows up to January 2012 were the services sector, Telecommunications each accounting for 20 % and 8% respectively. These were followed by the Computer software and Hardware, real estate, construction and Drugs and Pharma sectors.

ANALYSIS OF THE TOP 5

Service sector The services sector covers a wide range activities from the most sophisticated information technology (IT) to simple services provided by thunorganized sector, such as the services of the barber and plumber. National Accoun classification of the services sector incorporate trade, hotels, and restaurants; transport, storagand communication; financing, insurance, reestate, and business services; and communitsocial, and personal services. In World Trade Organization (WTO) and Reserve Bank of India RBI classifications, construction is also included.

TELECOM SECTOR

FDI policy for the Telecom Sector is as under: Sr. No. 1. Sector/Activity Basic and cellular, Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS) Global Mobile Personal Communications Services (GMPCS) and other value added telecom services FDI Cap/Equity 74% (including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters /Investing Company) Entry route Automatic upto 49%.

FIPB beyond 49%.

2.

ISP with gateways, radiopaging, end-to-end bandwidth.

74%

Automatic upto 49% FIPB beyond 49%

3.

a) ISP without gateway,

100%

Automatic up to 49%

b) Infrastructure provider providing dark fibre, right of way, duct space, tower (Category I);

FIPB beyond 49%

4.

c) Electronic mail and voice mail Manufacture of telecom equipments

100%

Automatic

India is one of the world's fastest growing telecom markets, and this has acted as the primary driver for foreign and domestic telecommunication companies investing into the sector. Massive investments have been made in the telecom sector of India, both by the private and government sector. The telecom industry has witnessed significant growth in subscriber base over the last decade, with increasing network coverage and a competition-induced decline in tariffs acting as catalysts for the growth in subscriber base. The growth story and the potential have also served to attract newer players in the industry, with the result that the intensity of competition has kept increasing. The sector is expected to witness up to US$ 56.3 billion investments and the market will cross the US$ 101 billion mark in five years, according to consultancy firm Boston Consulting Group (BCG). BCG India's Partner and Director, Arvind Subramanian said the industry will continue to grow at 12-13 per cent annually. The market share of the telecom companies reflects the fragmented nature of the industry, with as many as 15 players. As of January 31, 2012, Bharti telecom led the market with 19.6 per cent share, Reliance (16.7 per cent), Vodafone (16.4 per cent), Idea (11.9 per cent), BSNL (10.8 per cent), Tata (9.3 per cent), Aircel (6.9 per cent), with the remaining share being held by other smaller operators, according to Telecom Regulatory Authority of India (TRAI) database.

The mobile subscriber base in India is estimated rise by 9 per cent to 696 million connections this year, according to technology researcher Gartner. The country's mobile subscriber base stood at 638 million connections in calendar year 2011. The mobile service penetration in the country is currently at 51 per cent and is expected to grow to 72 per cent by 2016.

Evolution of Telecom in India

Source:Asshocham

Over the last few years, a phenomenal growth has been witnessed in the number of mergers and acquisitions taking place in the telecommunications industry. The reasons behind this development include the following:

Deregulation Introduction of sophisticated technologies (Wireless land phone services) Innovative products and services (Internet, broadband and cable services) Economic reforms have spurred the growth in the mergers and acquisitions industry of the telecommunications sector to a satisfactory level.

Telecom Sector FDI Equity Inflows (uS $ Million)

FDI in telecom
3000 2558 2500 2000 1665 1500 1000 500 0 2007-08 2008-09 2009-10 YEAR 2010-11 2011-12 1261 FDI in telecom 1,992 2554

Source: Department of Industrial Policy & Promotion Note:FDI inflow for 2011-12 only uptil january 2012

US$ in million

Top 5 fdi deals in telecom sector

The NTT DOCOMO-Tata Teleservices joint venture worth $2.70 billion NTT Docomo, Japan, to subscribe to and acquire 27 per cent of the equity (about 110 crore shares) in Tata Teleservices and acquire 20.25 per cent of the equity (about 38 crore shares) in Tata Teleservices (Maharashtra) and convert it from an operating company into an operating-cum-holding company. These would result in an FDI inflow of about Rs. 12,924 crore and about Rs. 949 crore respectively. The Cabinet Committee on Economic Affairs (CCEA) has approved a proposal by Japanese telecom major NTT DoCoMo Inc. to acquire 27.31 per cent (1097043742 equity shares) of Tata Teleservices Limited. The CCEA, which met last night under the chairmanship of External Affairs Minister Pranab Mukherjee, in the absence of Prime Minister Manmohan Singh who is convalescing after a coronory bypass surgery last month, also approved a proposal by the Japanese company to acquire upto 384,241,919 equity shares (20.25%) of Tata

Teleservices (Maharashtra) Limited and to convert it into an operating cum holding company from an operating company. The two proposals would result in foreign direct investment (FDI) of about Rs 12924 crore and Rs 949.07 crore in the country, an official statement said. This would be one of the largest FDI inflows into India in the last one year. On November 12, Tokyo-based NTT DoCoMo announced it was entering into a strategic alliance with the Tatas. The Japanese telecom giant which, with 53 million customers and 51.5% of the Japanese market, is one of the world's largest players in the telecommunications industry, bought a 26% stake in Tata Teleservices Ltd (TTSL) for $2.7 billion. NTT DoCoMo followed up this deal with an open offer for 20% in Tata Teleservices (Maharashtra) Ltd -- TTML -- the listed subsidiary of TTSL. At Rs24.70 (50 cents) a share, this means another $191 million. The offer will open in January. "We are hoping that this will be a long-term partnership as we are like-minded companies," Tata group chief Ratan Tata told a media briefing soon after the deal was struck. (Published: November 27, 2008 in India Knowledge@Wharton)

Indian pharmaceutical industry is third largest in the world and is one of the most developed industries.Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. Indian pharmaceutical industry today is ranked world class, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. The industry today can boast of producing the entire range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations. The pharmaceutical industry in India is stated to be valued at approximately US$ 12.26 billion as per industry estimates. This industry is growing @ 10-11% per annum on compounded growth rate basis. Although total turnover of pharmaceutical industry is estimated at 21.04 billion, about 65% of this revenue is from exports. It spends around 18 % of this revenue on research and development (R&D) activities. Additionally, Indias clinical research industry is estimated to be a US$ 2.2 billion with a high growth rate of 23%. Moreover, Indian pharmaceutical off-shoring industry is slated to become a US$ 2.5 billion opportunity by 2012, due to low R&D costs and a high-talent pool.

Some of the major Indian private companies are Alembic Chemicals, Aurobindo Pharma, Ambalal Sharabhai Limited, Cadila Healthcare, Cipla, Dr. Reddys, IPCA Laboratories, Kopran, Lupin Labs, Lyka Labs, Nicholas Piramal, Matrix Laboratories, Orchid Chemical and Pharmaceuticals, Sun Pharmaceuticals, Ranbaxy Laboratories, Torrent Pharma, TTK Healthcare, Unichem Labs, and Wockhardt. The foreign companies in India include Abott India, Astra Zeneca India, Aventis Pharma India, BurroughWellcome, Glaxo SmithKline, Merck India, Novartis, Pfizer Limited, and Wyeth Ledele India. Investment Policy The Indian Government is very proactive for boosting growth and investment in Indian pharmaceutical sector. It allows 100 per cent FDI under the automatic route in the drugs and pharmaceuticals sector. The DIPP data suggests that the drugs and pharmaceuticals sector has attracted an impressive level of FDI worth US$ 1,882.76 million during April 2000 to March 2011. Industrial licenses are not required in India for most of the drugs and pharmaceutical products. Manufacturers are free to produce any drug duly approved by the Drug Control Authority.

MAJOR FDI INVESTMENT

Since 2006, as many as six big Indian pharma companies have been taken over by foreign firms. About $4.73 billion or 50 percent of the recorded FDI in the sector since the year 2000 has been in the form of mergers and acquisitions. In the year 2006, Matrix Lab was sold to the US-based company Mylan. In 2008, Dabur Pharma was bought by Singaporebased Fresenius Kabi. Again in the same year, Ranbaxy was taken over by the Japanese company, Diachii Sankyo. The year 2009 witnessed two major deals in which Shantha Biotech was taken over by the French major Sanofi Aventis and the US-based company

Hospira took over Orchid Chemicals. The latest example is of Piramal Healthcare, which was bought in the year 2010 by the US multinational, Abbot Laboratories.

COUNTRY-WISE INFLOW OF FDI

SHARE OF TOP COUNTRIES - FDI EQUITY INFLOWS (Cumulative, between April 2000 to February 2011)
6

6 Mauritius Singapore 8 Japan U.S.A 39 U.K

10

Indias 83% of cumulative FDI is contributed by eight countries while remaining 17 perc ent by rest of theworld. Indias perception abroad has been changing steadily over the years. This is reflected in the ever growing list of countries that are showing interest to invest in India. Mauritius emerged as the most dominant source of FDI contributing 39% of the total investment in the country since 2000. Singapore was thesecond dominant source of FDI inflows with 10% of the total inflows. However, USA slipped to fourth position by contributing 6% of the total inflows.Japan moved to third with investments of 8%

FDI from Mauritius to India is the highest in comparison with all the other countries that invest in India. FDI from Mauritius to India is the highest due to the special treatment of tax given in India to the investments that come through Mauritius. The India-Mauritius

Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an important role in facilitating foreign investment in India via Mauritius. It has emerged as the largestsource of foreign direct investment (FDI) in India, accounting for 39 per cent of inflows between April 2000 and February 2011. A large number of foreign institutional investors (FIIs) who trade on the Indian stockmarkets operate from Mauritius A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, Capital Gains arising from the sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no Capital gains tax in Mauritius, the gain will escape tax altogether. For instance, a company from the UK may desire to invest in India. It may initiate, conduct and conclude all negotiations and agreements from the UK. But before the actual investment, it may purchase a shell company in a tax haven, say, Mauritius, and route its investment through that Mauritian company. Since technically or artificially the investment is made from out of a Mauritian company, it may seek to claim the Indo-Mauritian DTAA rather than the Indo-UK DTAA and, as such, would capitalize on the tax-effectiveness of the former treaty. This way, either India or the UK may be deprived of their share of higher revenue available to them under the Indo-UK DTAA. Since such investing company `shop around treaties artificially (rather than DTAA to which they are naturally subject), it is graphically described `treaty shopping.