FDI and FII investments rules, are they good, do they have an impact on the Rupee/ Dollar rate

Presented By: Bhupendra Choubisa 06 Jitesh Jain 13 Rishon Bhastekar 32 Shoeb Pathan 40

Types of Inflows

Foreign Direct Investment

Foreign direct investment (FDI) in its classic



Ø Automatic Route No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of shares Ø FIPB Route Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion

Illustrative List of Sectors Under Automatic Route for FDI Upto 100%
Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Most manufacturing activities Non-banking financial services Drugs and pharmaceuticals Food processing Electronic hardware Software development Film industry Advertising Hospitals Pollution control and management Management consultancy Computer related Services Research and Development Services Construction and related Engineering Services Pollution Control and Management Services Health related & Social Services Travel related services

FDI Prohibited Sectors

FDI is not permissible in the following cases   Ø Gambling and Betting, or Ø Lottery Business, or Ø Business of chit fund Ø Housing and Real Estate business. Ø Trading in Transferable Development Rights (TDRs) Ø Retail Trading Ø Atomic Energy

Ø AIRPORTS Ø Foreign Investment upto 100% is allowed in green field projects under automatic route Ø Foreign Direct Investment is allowed in existing projects - upto 74% under automatic route - beyond 74% and upto 100% subject to Government approval   Ø TELECOM - Automatic upto 49% - FIPB beyond 49% but upto 74%

Ø INSURANCE FDI upto 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained   Ø PETROLEUM For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and upto 26% FDI is permitted in Public Sector Undertakings with Government approval

Ø PRIVATE SECTOR BANKING Foreign Investment upto 74% is permitted from all sources (FDI +FII) under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time. Ø PRINT MEDIA FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs subject to verification of antecedents of foreign investor and keeping editorial and management control in the hands of resident Indians

Advantages of FDI
Ø Ø Ø Ø Ø Ø Ø Ø Large and growing market World class scientific, technical and managerial manpower Cost-effective and highly skilled labor Access to global market place for domestic players Contribution to exports growth Large availability of capital Increase domestic savings and investments Increase in Forex Reserves

Disadvantage of FDI
Ø Crowding of local industry Ø Loss of control Ø Repatriation of profits ( dividends by investor) Ø Effects on local culture / sentiments – socio cultural effects

Foreign Institutional Investor (FII) 
Foreign Institutional Investment is used to denote an investor mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in. Agencies Regulating FII in India
Ø RBI: the apex bank Ø FIPB: reviews all foreign investment proposals Ø SEBI: which regulates India's capital markets

Difference between FDI and FII

Advantages of FII
Ø Trading and delivery volume raises Ø Volatility will be curtailed Ø More liquidity will created Ø Standard will be improved because of investors quality

Disadvantages of FII
Ø Ø Ø Ø Ø Problems of Inflation. Hot Money. False representation of economy. Cannot be utilized for long term. Problem for small investor.

Areas affected by FII
Ø Stock market
The FII’s profit from investing in emerging financial stock markets, say the Indian stock Exchange. If the cap on FII is high then they can bring in lot of funds in the countries stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. So this is how influencing FII can be, as is seen in the present downtrend of the stock markets in India courtesy heavy FII selling.

Ø Exchange Rates
The simple way of understanding is through Demand

Areas affected by FII
Ø Exports & Imports
The FII lead to appreciation of the currency, they lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. For e.g. if 1 USD = Rs.40 and a soap costs 1 USD. Now when the rupee appreciates 1 USD = Rs. 20, I will have to sell the same soap to the US for 2 US Dollars in order to sustain the same income that I have been making i.e. Rs.40. Thus excess FII fund inflow in the country can also make a negative impact on the economy of the country.

Ø Inflation
The huge amount of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created