With the initiation of economic liberalization in India in 1991, the Indian economy started to shift towards a more market oriented economy, while expanding the role of private and foreign investment in the process.

Due to this change in the Indian market economy, foreign direct investment was encouraged through several reforms like introducing the SEBI Act of 1992, introduction of the National Stock Exchange and by increasing the maximum limit on share of foreign capital into joint ventures from 40% to 51% with cent percent foreign equity permitted in priority sectors.[1]

In 1992, the Government of India in order to promote cross-border investment, allowed the foreign institutional investors to invest in the equity market and gave permission to Indian firms to raise capital from the international market by issuing Global Depository Receipts (GDRs). Along with this, marginal tax rates were reduced and privatization of large, inefficient and loss-inducing government corporation was initiated.[2] The United Front (UF) Government continued with privatization, reduction of taxes, a sound fiscal policy aimed at reducing and debts increased for public works.[3]

The ever expanding global market saw a tremendous expansion, diversification and integration in the last three decades. Between 1980 and 2007, the volume of global capital flows increased dramatically. This surge in the global economy has fuelled, in part, by worldwide financial market liberalization coupled with the rapid-fire economic growth and burgeoning global influence of India and other emerging economies. Because the free flow of capital is the life-blood of sustainable economic growth and expanding prosperity, the world community at large, especially the G20 nations, needs to continue to facilitate and safeguard the flow of capital across borders. And India has a pivotal role to play in this regard.[4]

Important reforms like abolishing the import licensing policy, gradual and systemic rationalization of the country’s tariff and customs duty structure with the highest rate coming down from 400% to less than 25% on an average and convertibility of the country’s current account, allowed foreign investment capital to flow into India combined with continuous financial sector reforms leading to both financial deepening and widening.

The capital market is significant for comprehensive growth in terms of wealth distribution and creating capital safer for investors. India as an emerging economy has seen a spate of innovations in the area of financial engineering.[5] These financial innovations are a result of reforms like these that encouraged the flow of investment capital into India and helped stimulate the recent era of dramatic economic process. Inbound FDI increased to 3.26 billion in August 2009 alone. India’s international merger and acquisition activities have magnified markedly over the past twenty years, and the trend is probably going to accelerate. Indian companies are creating billion-dollar-plus deals in industries as diverse as automotive, steel and tea. Indian outbound deals were valued at $0.7 billion in 2000, jumped to $4.3 billion in 2005 and then increased to $35 billion in 2007. Investments have been made in a wide variety of industries, including metals, pharmaceuticals, industrial goods, automobile components, beverages, energy, mobile communications, software and financial services. Indian IT companies have been buying smaller IT outfits in Europe, Latin America and Asia to gain global customers.[6]

In the current year, overseas investors have pumped in a net Rs 2,741 crore into the Indian capital markets within the initial 5 commerce session of March, chiefly thanks to positive market sentiment. As per analysts, the positive modification is triggered by domestic as well as global factors and the trend is probably going to continue for some time. In February 2019, foreign portfolio investors (FPIs) had invested a net amount of Rs. 11,182 crore in equities during March 1-8. However, they pulled out a net sum of Rs. 2,741 crore in the capital markets.[7]

Matching with cross border expansion of Indian Companies, the Indian Capital Markets have also grown exponentially in the last few years. The growth has been in every sphere – the amount of capital raised through primary issuances, exchange trading turnovers, the market indices and market capitalization, mutual fund assets, access to foreign markets for raising funds, foreign listing and foreign institutional investment.

A significant development in Indian Capital Markets have been coining by setting up of SME exchange. The SME Exchange is a welcome move for the Small and Medium Scale Enterprises. In India BSE and NSE have created SME exchanges BSESME and EMERGE respectively. Setting up of SME platform by two leading Stock Exchanges, have opened avenues for SMEs to raise funds from the market. It is an effective booster for Small and Medium Enterprises where raising of capital is a primary concern. Creating a trading platform for SMEs would enable the growth of SMEs and thereby the growth of Economy.

The recent framework on cross border insolvency, which is still in the proposal stage, is expected to attract more cross-border deals and help in making India an attractive FDI target by reducing the risks associated with insolvency.[8]

The Corporate Affairs Ministry is looking to introduce a globally accepted and well recognized cross-border insolvency framework, fine tuned to suit the needs of aspirational Indian economy. The draft of the proposed cross border insolvency framework has been exposed for stakeholder comments by June 30, 2019.[9]

The best example to understand the benefits of cross-border investments is the relation between India and China. It is well known that companies in India and China continue to develop and build their competitive positioning domestically. Entrepreneurs in both countries are increasingly looking to acquire skills and assets outside their domestic markets. In this regard, there is significant untapped potential for commercial collaboration between Indian and Chinese companies. Corporate collaboration in these sectors could help companies develop domestic markets on the one hand and strengthen the value proposition of companies seeking to compete abroad.[10]

While the Chinese companies have emerged as global leaders across a range of scaled manufacturing industries, including electronics and certain capital goods, Indian companies have built leading businesses in knowledge-based and services industries, such as IT and healthcare services. It is for these kinds of industries that collaboration may vary from a most popular vender to a cross-border merger making a world business leader. As business owners/managers in the India and China seek to transform their businesses for domestic leadership and international competition, the number of commercial partnerships between Indian and Chinese companies will likely increase significantly.[11]

But there are certain challenges regarding maximizing the benefits of cross-border investment. Some countries attract large quantities of foreign investment and never move up the value chain. In order to maximize the development of foreign investment, an acceptable investment policy framework is required. The issue starts once decision-makers try and establish what “investment policy” is, or ought to be. A huge range of stakeholders, problems, institutions, legal instruments, and administrative tools are captured in that concept. Countries get lost. Even if policy-makers can identify a destination, it can be difficult to know where to start, to know which concrete actions will have the most impact.[12]

Over the last decade, the FII equity flows into our country have averaged around a meager ½ per cent of GDP per annum. This figure is the lowest among the emerging markets. China, where most of the stock markets were closed to foreign investors till December 2002, accounted for more than 40 per cent of all developing-country portfolio equity in 2002 and almost 75 per cent of the East Asia’s region. Hence, the policy makers of our country have to craft appropriate strategies to attract more foreign portfolio flows, which can strengthen our domestic capital markets.[13]

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[1]Economic liberalization in India, Daily Excelsior, March 03, 2017, <https://www.dailyexcelsior.com/economic-liberalization-india/>, last accessed on May 07, 2019.

[2] Ibid.

[3] Ibid.

[4] Jim Quigley, Cross-border capital flows and the ascendancy of India, The Economic Times, November 16, 2009, < https://economictimes.indiatimes.com/opinion/et-commentary/cross-border-capital-flows-and-the-ascendancy-of-india/articleshow/5233876.cms>, last accessed on May 07, 2019.

[5] Role of Capital Market, Investor Education and Protection Fund Authority, Ministry of Corporate Affairs, Government of India, < http://www.iepf.gov.in/IEPF/Role.html> last accessed on May 07, 2019

[6] Jim Quigley, Cross-border capital flows and the ascendancy of India, The Economic Times, November 16, 2009, < https://economictimes.indiatimes.com/opinion/et-commentary/cross-border-capital-flows-and-the-ascendancy-of-india/articleshow/5233876.cms>, last accessed on May 07, 2019.

[7] Overseas investors pour in over Rs 2,700 crore into Indian capital markets in March so far, Business Today, March 10, 2019, < https://www.businesstoday.in/current/economy-politics/overseas-investors-pour-in-over-rs-2700-crore-into-indian-capital-markets-in-march-so-far/story/326250.html>, last accessed on May 07, 2019.

[8] KR Srivats, Cross-border insolvency framework will help attract more FDI: Experts, Business Line, June 27, 2018, <https://www.thehindubusinessline.com/economy/cross-border-insolvency-framework-will-help-attract-more-fdi-experts/article24273079.ece>, last accessed on May 07, 2019.

[9] Ibid.

[10] Rebecca Furtado, What is cross-border investment? , IPleaders, November 3, 2016, < https://blog.ipleaders.in/cross-border-investment/>, last accessed on May 07, 2019.

[11] Ibid.

[12] Christine Qiang, Roberto Echandi, Jana Krajcovicova, Foreign direct investment and development: Insights from literature and ideas for research, The World Bank, November 24, 2015, < https://blogs.worldbank.org/psd/foreign-direct-investment-and-development-insights-literature-and-ideas-research>, last accessed on May 07, 2019.

[13] K Lakshmi,  FIIs Portfolio Investment Trends in Indian Companies, National Stock Exchange of India Ltd. (NSE), May 2004, < https://www.nseindia.com/content/press/may2004a.pdf>, last accessed on May 08, 2019.