INTERNATIONAL INVESTMENT

(IN INDIA)
 Types of Foreign Investment in India

• Foreign Direct Investment (FDI)

• FDI is an investment made by a company or
individual who us an entity in one country, in
the form of controlling ownership in business
interests in another country. FDI could be in
the form of either establishing business
operations or by entering into joint ventures
by mergers and acquisitions, building new
facilities etc.
 Foreign Portfolio Investment (FPI)

• Foreign Portfolio Investment (FPI) is an

investment by foreign entities and non-
residents in Indian securities including shares,
government bonds, corporate bonds,
convertible securities, infrastructure securities
etc. The intention is to ensure a controlling
interest in India at an investment that is lower
than FDI, with flexibility for entry and exit.
 Foreign Institutional Investment (FII)

• Foreign Portfolio Investment (FPI) is an

investment by foreign entities in securities, real
property and other investment assets. Investors
include mutual fund companies, hedge fund
companies etc. The intention is not to take
controlling interest, but to diversify portfolio
ensuring hedging and to gain high returns with
quick entry and exit. The differences in FPI and FII
are mostly in the type of investors and hence the
terms FPI and FII are used interchangeably. The
Securities Market in India is regulated by
Securities and Exchange Board of India (SEBI).
 Factors affecting FDIs in India

• Opposition from the Traders on FDI: Many of

the traders fear that the presence of FDI will
drive them out of the market. At present,
there is a move on the part of the government
to allow FDls in retail business and this will
certainly hamper the growth of domestic
traders
 Scope for Expansion:

• The FDIs are entering the country with the

hope that there will be more scope for
expansion as they have a wider market. But, in
the process, it will also affect the economy in
the form of inflation and increasing demand
for luxury products. But for the purpose of
expansion, FDIs require more investment and
more facilities in the form of infrastructure
which are not in the hands of FDIs
 Total Convertibility of Currency:

• Any Foreign Direct Investor would like to take a part of

his earnings back to his country for which there should
be adequate provision in the foreign exchange reserve.
Though at present India has 350 billion dollars Forex
reserve , this may be eroded with the increasing
international oil price. As such, it will not be possible
for the country to adopt a policy of total convertibility
of currency whereby the FDls can take back any
amount of foreign currency. Even now, the government
and RBI are finding it difficult to maintain exchange
rate stability. Unless total convertibility is adopted, FDIs
will not be keen to invest in India.
 TRIPS and TRIMS:

• In view of the TRIPS (Trade related intellectual

property rights) and TRIMS (Trade related
investments) there cannot be any discrimination
between domestic and foreign industry. Some of
the medicines manufactured by the domestic
industry will now be taken over by the foreign
companies due to TRIPS, if not the domestic
company will have to pay patent fee which will
increase the cost of the medicine. Thus, the
presence of FDIs will not be helpful to the
domestic consumers who may have to pay a
higher price for essential products like medicine.
 Foreign Direct Investment (FDI)
vs Foreign Portfolio Investment
(FPI)
• FDI vs. FPI: Of the two, FDI is more desirable
• FDI means real investment; whereas FPI is monetary or
financial investment–Here, FDI means the investor
makes investment in buildings and machineries directly
in the company in which he has made the investment.
FPI doesn’t create such productive asset creation
directly. It is just financial investment. FDI is certain,
predictable, takes production risks, have stabilizing
impact on production. It directly augments
employment, output, export etc. The major merit of
FDI is that it is non debt creating as well as non-volatile
(less fluctuating).
• FPI on the other hand is investment aimed at
getting profits from shares, interests from
deposits etc. It is otherwise known as hot money.
The portfolio investors stays his money in the
capital market only for a short period of time. Its
destination period is so small and is empirically
considered as fluctuating (often short term)
capital . It is highly volatile, a fair weather friend ,
speculative, involves exchange risks and may lead
to capital flight and currency crisis affecting real
economic variables.
• It is destabilizing in the foreign exchange market.
Fluctuations in the mobility of FPI affects foreign
exchange rate, domestic money supply, value of
rupee, call money rates, security market etc. FII
(Foreign Institutional Inflows)inflows depend on
two factors: first, return potential of the
destination market (host country) and second
availability of risk capital at source geographies
(home market; countries like the US). A change in
environment in any of these will result in quick
reversal of the flows.
 Cross-border mergers and
acquisitions
• Cross-border mergers and acquisitions have emerged
as a way to rapid expansion and global trends point to
increasing deal volume...
• Cross-border M&As are defined as M&As that involve
an acquirer firm and a target firm whose headquarters
are located in different home countries. Cross-border
mergers and acquisitions (M&As) have emerged as a
way to quickly gain access to new markets and
customers, and global trends point to increasing deal
volume. These are deals between foreign companies
and domestic firms in the target country. The trend of
increasing cross-border M&A has accelerated with the
globalization of the world economy.
• Top Strategic Deal Objectives
• Some benefits which companies derive out of cross-border M&A are
around the
• following objectives:
• 1. Portfolio diversification
• 2. Favorable regulatory environment in the target
• 3. Improving cost synergies
• 4. Get scale of operations and related efficiencies
• 5. Acquiring intellectual property and technology
• 6. Get access to new talent pool
• 7. Ability to add and enhance the distribution network
• 8. Get new production capacity
• 9. Get new product technology
• 10. Overall geographic growth
• Top Risk Factors For Cross-Border M&A
• 1. Risk on taxes and tax laws
• 2. Regulatory risks
• 3. Political risks 4. HR-related risks on
integration including culture and talent
• 5. Overall business risk
• 6. Due diligence risk
 There are two routes by which India
gets FDI
1. Automatic route : By this route FDI is allowed without
prior approval by Government or Reserve Bank of
India .
2. Government route : Prior approval by government is
needed via this route.
• The application needs to be made through Foreign
Investment Facilitation Portal, which will facilitate
single window clearance of FDI application under
Approval Route. The application will be forwarded to
the respective ministries which will act on the
application as per the standard operating procedure.
• Foreign Investment Promotion Board (FIPB) which was the
responsible agency to oversee this route was abolished on May 24,
2017. It held its last meeting on 17th April, which was the 245th
meeting of the Board. On 24 May 2017, Foreign Investment
Promotion Board was scrapped by the Union Government.
Henceforth, the work relating to processing of applications for FDI
and approval of the Government thereon under the extant FDI
Policy and FEMA, shall now be handled by the concerned
Ministries/Departments in consultation with the Department for
Promotion of Industry and Internal Trade(DPIIT) , Ministry of
Commerce, which will also issue the Standard Operating Procedure
(SOP) for processing of applications and decision of the
Government under the extant FDI policy
 Government initiatives

• The Government of India has amended FDI policy to increase FDI

inflow. In 2014, the government increased foreign investment
upper limit from 26% to 49% in insurance sector. It also launched
Make in India initiative in September 2014 under which FDI policy
for 25 sectors was liberalised further. As of April 2015, FDI inflow in
India increased by 48% since the launch of "Make in India“
initiative.
• India was ranking 15th in the world in 2013 in terms of FDI inflow, it
rose up to 9th position in 2014, while in 2015 India became top
destination for foreign direct investment. The Department for
Promotion of Industry and Internal Trade and Invest India has
developed the India Investment Grid (IIG) which provides a pan-
India database of projects from Indian promoters for promoting and
facilitating foreign investments.
 INDIAN INVESTMENT ABROAD -
OVERSEAS DIRECT INVESTMENT BY
INDIAN COMPANIES
• There has been a perceptible shift in Overseas
Investment Destination (OID) in last decade or
so. While in the first half, overseas
investments were directed to resource rich
countries such as Australia, UAE, and Sudan, in
the latter half, OID was channelled into
countries providing higher tax benefits such as
Mauritius, Singapore, British Virgin Islands,
and the Netherlands.
• Indian firms invest in foreign shores primarily
through Mergers and Acquisition (M&A)
transactions. With rising M&A activity,
companies will get direct access to newer and
more extensive markets, and better
technologies, which would enable them to
increase their customer base and achieve a
global reach.
 Market size

• According to the data provided by Reserve

Bank of India (RBI), India’s outward Foreign
Direct Investment (OFDI) in equity, loan and
guaranteed issue stood at US$ 12.59 billion in
2018-19 and US$ 2.841 million in April-June
2019. Foreign investment of Indian companies
grew 18 per cent to US$ 2.69 billion in March
2019 as compared to year-on-year