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FOREIGN INVESTMENT IN INDIA

Final Project work Macroeconomics
Term-II

Table of content
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Content
Introduction
Foreign direct investments (FDI)
Foreign Portfolio Investment (FPI)
Foreign venture capital investments
Other Investments (G-secs and NCDs)
Investments on non-repatriation basis

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Introduction
The Foreign Investment in India is undertaken in accordance with Policy which is formulated and
announced by the Government of India. The Indian government has allowed different channels of
Investment in India .The foreign investment refers to the direct and indirect investments done by a
company or an individual in some other country. Foreign investments can be classified into five broad
categories as follows
1.
2.
3.
4.
5.

Foreign Direct Investments (FDI)

Foreign Portfolio Investments (FPI)
Foreign Venture Capital Investments (FVCI)
Other Investments
Investments on non-repatriable basis

Foreign Direct Investment (FDI)

FDI is a type of investment where a firm directly invests in production or other facilities in a foreign
country and maintains effective control over it. FDI helps in global economic integration. It is usually
referred to the investments in tangible assets, so the entry and exit for the company is relatively
difficult as compared to other investments. These are typically long term investments as the investors
have the long lasting interest in the company. Lasting interest implies significant influence over the
company. FDI is beneficial because it boosts the manufacturing, brings in abundant and better
products and services besides increasing various factors like employment opportunities and revenue
for the Government in the form of taxes. FDI is a flow of money in primary market and the investors
are eligible for the profits made by the company.

Routes through which FDI inflows:

FDI can be under the approval route or the automatic route. In case of approval route the foreign
investor should obtain a prior approval of the Foreign Investment Promotion Board (FIPB). Approval
is generally granted within 30 days. Whereas in case of automatic route no prior approval is required.
However, the company needs to notify RBI within 30 days from the issue of the shares to foreign
investors.

FDIs strategies:
FDI can be achieved by two strategies which are green field investments and Brown field investments.
Green field investments refer to the investments by foreign parent company into the host country
initiating a new venture by constructing new manufacturing facilities from the ground up. This helps
in creating new long term jobs in the host country. Whereas Brown field investments refers to
purchasing or leasing of the existing manufacturing facilities typically to launch a new production
activity.

Types of FDI:
There are two types of FDI viz. Vertical and Horizontal. Horizontal FDI refers to investments in the host
country to produce the same type of goods that it produces at home. Whereas Vertical FDI refers to
the investment to produce intermediate goods to be used in their final products. Horizontal FDI is

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usually made in the case when there exists high barriers to trade (i.e. tariffs, transportation costs,
import quotas). Vertical FDI is more likely when there are few trade barriers and the different
production factors exist at various prices in different economies.

Factors affecting FDI:

The favorable factors for FDI are large size of the economy, rich resource base and cheap labor,
removal of trade barriers to foreign trade and abundant technical supply of manpower. The factors
that are unfavorable are bureaucratic culture and high tax rate, poor governance and high corruption.
FDI leads to increase in Balance of payment account as it is a capital inflow. FDI can be a threat to
national sovereignty and autonomy as it leads to loss of economic independence.

Trends in FDI:

FDI Investment Trends

46.5

Investment (in Billion USD)

50

44.8

41.8

45
40

37.7

34.8

34.8

34.2

36

35
30

22.8

25
20
15

8.9

10
5
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Financial Year
FDI has seen growth since the LPG reforms in 1991mbut the significant increase has started in early
2000s. As we can see the growth trends in the above graph, post 2008-09 FDI inflows have declined
due to the recession. There has been sluggish growth up to 2013-14 except in the year 2011-12, which
is due to some of the big deals that have happened in that year. Some of them are London listed
Vedanta acquired stake in cairn India for $9 billion, British Petroleum paid $7.2 billion for a stake in oil
and gas fields of Reliance Industries and Vodafone Group acquired Essar's shares in their joint venture.
In the last financial year the growth has been high due the stable government and other initiatives like
Make in India.

Foreign Portfolio Investment (FPI)

FPI was introduced by SEBI by merging Foreign Institutional Investors (FIIs), Qualified
Foreign Investors (QFIs) and sub-accounts of the FIIs. FPI entails buying of securities, traded in some
another country, whose liquidity is high and allow investors to make quick money. Hot money is the
flow of capital (or funds) from one country to another in the aim of earning a short-term profit
on differences in interest rates and/or anticipated shifts in exchange rates . These speculative capital

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flows are called 'hot money' because they can move very quickly in and out of markets, creating a
potential market instability.

Categories of FPI:
a. Low Risk
b. Medium Risk
c. High Risk
Massive capital inflow with short investment horizon (hot money) could cause asset prices to rally and
a rise in inflation. The sudden inflow of foreign money in large amounts would lead to an increase in
the monetary base of the receiving country by which credit boom will be created. This, in turn, would
result in such a situation where "too much money chases too few goods".
Sudden outflow of hot money, which would always certainly happen, would deflate asset prices and
could cause the value of the currency of respective country to collapse. This is especially so in countries
with relatively scarce internationally liquid assets. There is huge agreement that this was the reason
for the 1997 East Asian Financial Crisis. In the run-up to the crises, firms and private firms in South
Korea, Thailand and Indonesia accumulated large amounts of a type of hot money (short-term foreign
debt). The common characteristic between the three countries is having large ratio of short term
foreign debt to international reserves. When the flowing out of capital started, it caused a collapse in
asset prices and exchange rates.

Trends in FPI:
FPI / FII Investment Details (Financial Year)
Total Investment(in crores)

200000
150000
100000
50000
0
-50000
-100000

Financial Year
Equity

Debt

The above graph again shows the increasing growth since the post LPG reforms. The dip in
the graph in the year 2008-09 is due to the recession. The investors withdrew their money and no new
investments came in through FPI. The dip in 2013-2014 is due to the general elections as in the
investors are not sure of the political stability and the stand of the upcoming government on FPI. Post
elections due to the formation of the stable government again the investment started increasing.

Foreign venture capital investments

Foreign Venture capital (VC) is money provided by foreign investors to seed early-stage, emerging
growth and emerging companies. VC funds invest in companies in exchange for equity in the
companies they invest in. Increase in the FVCI results in favorable amendments in the rules governing
these investments to improve effective trade relationships between foreign investing countries and
India.
A bond issued by a government authority, with a promise of repayment upon maturity that is backed
by the said government. Non-Convertible debentures (NCD) are the debentures which can't be
converted into equities or shares are called NCDs. Global Depository Receipt (GDRs) are certificates
issues by the depositary banks and these receipts represent the ownership of the underlying number
of shares of a foreign company. American depository Receipts (ADRs) are similar o GDRs but ADRs are
specific to the US. According to the recent news RBI is set to increase investment limit in G-Secs. RBI
has also allowed Foreign Institutional Investors to invest in primary insurances of NCDs

Investments on non-repatriation basis

In these type of investments, NRIs cannot convert their invested money back to the foreign currency
(to an investors home country). This type of investments will not have to worry about sectoral
restrictions and caps, or about government approvals needed for FDI because of the fact that these
are non-repatriable.

References
https://en.wikipedia.org/wiki/Institutional_investor
https://en.wikipedia.org/wiki/Qualified_Foreign_Institutional_Investor
https://en.wikipedia.org/wiki/Cold_money
https://en.wikipedia.org/wiki/Hot_money
www.researchgate.net/.../235037576_China's_'Hot_Money'_Problems
www.rbi.org
www.nsdl.co.in