B.Com Ist Year Foreign Investment And Its Regulation Question Answer Notes

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Foreign Investment and Its Regulation

Q,32. Explain the role of foreign capital in the industrial development of India. What is the policy of Indian government in this regard.


Examine the role of foreign capital in the development of Indian Economy.

Ans. Most of the developing countries need foreign capital for rapid industrialization and economic development as these

intries suffer from low level of income and low level of capital Becumulation. The need of foreign capital, however varied with the extent to which domestic resources could be mobilised, state of technical progress and the attitude of the governments etc.


Investment made by foreign countries and multilateral institutions in the industries of a country is known as foreign capital. It includes transfer of resources including technical know-how from one country to another country.


The foreign investment in India can be summarised into following two heads:

(1) Foreign Direct Investment: It refers to investment in a foreign country where the investor retains control over the investment. When foreigners invest their funds for any project by way of equity capital, it is called direct foreign investment. Direct investment comes in the form of financial investment and transfer of technology. Multinational corporations make this type of investment. It typically takes the form of starting a subsidiary, acquiring a stake in an existing firm or starting a joint venture in the foreign country. Direct Investment is governed by long term considerations because this investment cannot be easily liquidated. Hence factors like political stability, government policy, industrial and economic prospects etc. influence the direct investment.

(2) Portfolio Investment: It refers to investment made by non-resident indians in joint stock companies of our country. In other words, when the investor has only a sort of property interest investing the capital in buying equities, bonds or other securiti abroad, it is termed as portfolio investment. In such a case investor uses his capital to get a return on it, but has no mu control over the use of the capital. The investment by Forein Institutional Investors and amount received through Gloh Depository Receipts constitute portfolio investments. Portfoli investments, which can be liquidated fairly easily, are influenced short term gains and do not have direct involvement with the promotion and management.


The need for foreign capital for a developing economy like India arises on account of the following reasons:

(1) Sustaining a High Level of Investment : Since the underdeveloped countries want to industrialise themselves within a short period of time, it becomes necessary to raise the level of investment substantially. In the developing country like India, the rate of saving is too small, therefore capital formation is not adequate to give a big push to the economy. Therefore, this gap has to be filled up through foreign capital.

(2) To Fill up the Technological Gap : Technology is an important determinant of economic growth. India is deficient in skills and in trained and technical manpower. Foreign capital brings technical experts and technical know-how and thus help the country to bridge up the technological gap.

(3) Exploitation of Natural Resources : A number of developing countries possess huge mineral resources which await exploitation. But these countries do not have required technical skill and expertise to accomplish this task. Therefore, foreign capital is required for the exploitation of natural resources.

(4) For Undertaking the Initial Risk : India suffer from acute scarcity of private entrepreneurs. This create obstacles in the programme of industrialization. Once the programme of industrialisation gets started with the initiative of foreign capital, domestic industrial activity starts picking up as more and more people enter the industrial field.

(5) Improvement in the Balance of Payment Position : Foreign capital also plays a vital role in removing the foreign exchange crisis. In the initial phase of their economic development, we need much larger imports than exports. This creates a gap between the earnings and expenditure of foreign exchange. Foreign capital presents a short-run solution to the problem.

(6) To Accelerate the Pace of Economic Growth: Foreign capital is needed to accelerate the pace of economic growth. Foreign investment constitutes a net addition to investible resources in host countries and as such raise their rates of growth.

(7) Price Stability : Foreign capital enables to plan for development without the inherent inflationary pressure of the developmental outlay. It helps to maintain price stability in the country.


New liberalised foreign investment policy was announced in 1991 in Industrial Policy Statement. The policy has been further liberalised in various respects to increase inflow of FDI and Flls into India. Main efforts to boost the Foreign Capital can be summarised as follows:

(1) Increase in Foreign Equity Participation : To attract foreign capital, foreign equity participation had been increased from 40% to 51 percent or even more up to 74 percent. This help to reduce technical gap and will provide international market to Indian goods.

(2) Automatic Clearance : In order to invite foreign investment in 34 high priority industries, Government has allowed automatic clearance to direct foreign investment upto 51 percent in such industries. However, such clearance will be available if foreign equity covers the foreign exchange requirements for import of capital goods.

(3) Automatic Permission for Foreign Technology Agreements : Automatic permission will be given for foreign technology agreements in high priority industries upto lumpsum payment of Rs. 1 crore.

(4) Investment Cap for FII Raised: The foreign institutional investors have been allowed to invest in shares of Indian companies from existing 40% to 49 percent.

(5) Permission for 100 percent FDl: The government had allowed 100 FDI in Business to Business, E-Commerce, Power Sector. Oil refining. Special Economic Zones for all manufacturing activities. The government has also allowed 100% FDI in tea garderns for the modernisation of Tea Industry.

(6) Permission to Non-Resident Indians for Investment: The non-resident Indians (NRIs) are allowed equity holding upto 100 percent in 100 percent export oriented units, oil exploration services and advanced diagonistic centres with full repatriation benefits.

(7) Repatriation of Capital : Foreign investors are permitted, repatriation of capital at the time of disinvestment of equity at market rates on stock exchange.

(8) Remittances : Freely remittances of technical know-how fees, royalty and dividend are permitted to attract the foreign capital.

(9) Foreign Brand Name : Government had allowed the foreign companies to use their brand name or trade marks on goods sold in the domestic market.


However, foreign capital has played an important role in the economic development of the country, it create some problems and dangers also. The following criticism are levelled against foreign capital:

(1) Approvals in Non-essential Items : Private foreign capital tends to flow to the high profit areas rather than to the priority sectors. Most of the foreign capital are employed in cosmetics, recorders, tooth paste, ice-cream, toys and other consumer goods. Foreign capital has not been attracted much into capital goods and infrastructural industries.

(2) Unfavourable Effect on Balance of Payment: Foreign investment, sometimes have unfavourable effect on the balance of payment of a country as the drain of foreign exchange by way of royalty, dividend etc. is more than the investment made by the foreign concern.

(3) Concentration of Economic Power: Sometimes foreign investment can result in the dangerous situation of minimizing or eliminating competition and create monopolies.

(4) Interferance of Developed Countries : To get the foreign capital, India has to face the interferance of developed countries in its economic activities. Devaluation of rupee is made under the pressure of international institutions to get the foreign aid. This create danger to the security of the country.

(5) Problems to Make Independent Economic Policies. The country dependent on foreign aid and capital, will not frame independent economic policies. The country has to frame its policies in such a way which do not create any hurdles in the flow of foreign capital.

(6) Fear of Economic Crisis : Foreign capital cannot be considered as a permanent part of the economy. It can create economic problems in the country as it flights at the time of crisis.

(7) Harmful to the Domestic Industries : Foreign capital also prove harmful for the growth of domestic industries as they could not compete with the multinational corporations. FDI can also potentially displace domestic producers by pre-empting their investment opportunities.

Q.33. Evaluate the present policy of Government of India with regard to foreign investment.


Explain critically foreign investment and its regulation in India. (Meerut, 2013 Back)

Ans. The objective of new FDI policy is to promote foreign direct investment through a consolidated policy which is transparent, predictable, simple, clear ‘and reduces regulatory burden. The present policy is investor-friendly, as investor has to study only one policy. The main provisions/features of this policy are as follows:

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