India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
SUCCESS IN INDIA
Success in India will depend on the correct estimation of the country’s potential, underestimation of its complexity or overestimation of its possibilities can lead to failure. While calculating, due consideration should be given to the factor of the inherent difficulties and uncertainties of functioning in the Indian system. Entering India’s marketplace requires a well-designed plan backed by serious thought and careful research. For those who take the time and look to India as an opportunity for long-term growth, not short-term profit- the trip will be well worth the effort.
MARKET POTENTIAL
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business.Yet, despite the practically unlimited possibilities in India for overseas businesses, the world’s most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
LACK OF ENTHUSIASM AMONG INVESTORS
The reason being, after independence from Britain 60 years ago, India developed a highly protected, semi-socialist economy. Structural and bureaucratic impediments were vigorously fostered, along with a distrust of foreign business. Even as today the climate in India has seen a sea-change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to take India as it is with all of its difficulties, contradictions and challenges.
Developing a basic understanding or potential of the Indian market, envisaging and developing a Market Entry Strategy and implementing these strategies when actually entering the market are three basic steps to make a successful entry into India.
The Indian middle class is large and growing; wages are low; many workers are well educated and speak English; investors are optimistic and local stocks are up; despite political turmoil, the country presses on with economic reforms. But there is still cause for worries.
INFRASTRUCTURAL HASSLES
The rapid economic growth of the last few years has put heavy stress on India’s infrastructural facilities. The projections of further expansion in key areas could snap the already strained lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country’s roads are surfaced), low telephone penetration (1.4% of population).
INDIAN BUREAUCRACY
Although the Indian government is well aware of the need for reform and is pushing ahead in this area, business still has to deal with an inefficient and sometimes still slow-moving bureaucracy.
DIVERSE MARKET
The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from beginning to end—performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.
MARKET STUDY
Is there a need for the products/services/technology? What is the probable market for the product/service? Where is the market located? Which mix of products and services will find the most acceptability and be the most likely to generate sales? What distribution and sales channels are available? What costs will be involved?
CHECK ON ECONOMIC POLICIES
The general economic direction in India is toward liberalization and globalization. But the process is slow. Before jumping into the market, it is necessary to discover whether government policies exist relating to the particular area of business and if there are political concerns which should be taken into account.
FOREIGN DIRECT INVESTMENT
Foreign Direct Investment (FDI) is permitted as under the following forms of investments:
- Through financial collaborations
- Through joint ventures and technical collaborations
- Through capital markets via Euro issues
- Through private placements or preferential allotments
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.
FOREIGN INVESTMENT THROUGH GDRs (EURO ISSUES)
Foreign Investment through GDRs is treated as Foreign Direct Investment.
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
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. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
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 and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
RESTRICTIONS
However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.
FOREIGN DIRECT INVESTMENT
Foreign direct investments in India are approved through two routes:
AUTOMATIC APPROVAL BY RBI
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:
- q foreign equity up to 50% in 3 categories relating to mining activities.
- q foreign equity up to 51% in 48 specified industries.
- q foreign equity up to 74% in 9 categories.
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.
OPENING AN OFFICE IN INDIA
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.
THE FIPB ROUTE
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met.
India presents a vast potential for foreign investment
PROCESSING OF NON-AUTOMATIC APPROVAL CASES
Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.
OPPORTUNITIES FOR FOREIGN INVESTORS IN INDIAN STOCKMARKETS
Direct Investment : Foreign companies are now permitted to have a majority stake in their Indian affiliates except in a few restricted industries. In certain specific industries, foreigners can even have holding up to 100 per cent.
Investment through Stock Exchanges : Foreign Institutional Investors (FII) upon registration with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are allowed to operate in Indian stock exchanges subject to the guidelines issued for the purpose by SEBI.
IMPORTANT REQUIREMENTS
Portfolio investment in primary or secondary markets will be subject to a ceiling of 30 per cent of issued share capital for the total holding of all registered FII’s. In any one company an FII holding is subject to a ceiling of 10 percent of the total issued capital.
However, in applying the ceiling of 30 per cent, the following are excluded:
Foreign investment under a financial collaboration which is permitted up to 51 per cent in all priority areas.
Investment by FII’s through offshore single/regional funds, GDR’s and euro convertibles.
Disinvestment is allowed through a broker of a Stock Exchange.
A registered FII is required to buy or sell only for delivery. It is not allowed to offset a deal. It is also not allowed to sell short.
Investment in Euro Issues/Mutual Funds floated overseas: Foreign investors can invest in Euro issues of Indian companies and in India-specific funds floated abroad.
Broking Business : Foreign brokers upon registration with the SEBI are now allowed to route the business of registered FIIs. Guidelines for the purpose have been issued by SEBI.
Asset Management Companies/Merchant Banking : Foreign participation in Asset Management Companies and Merchant Banking Companies is permitted.
