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Foreign Direct Investment

WHAT IS FDI?
Why it is a topic of debate now a days? Is it important to India? If yes then how? Who all can invest? Possible means of investing? What if some are the defaulters? Where does India stands on a whole? The recent scenario reveals what? What are the future possible plans?

FDI MEANS INVESTMENT BY NON-RESIDENT ENTITY/PERSON RESIDENT OUTSIDE INDIA IN THE CAPITAL OF THE INDIAN COMPANY UNDER SCHEDULE 1 OF FEMA(TRANSFER OR ISSUE OF SECURITY BY A PERSON RESIDENT OUTSIDE INDIA) REGULATIONS 2000.

A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI.

Differences between FDI and FII:


1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.

A foreign direct investor may be classified in any sector of the economy and could be any one of the following: an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organization; or any combination of the above.

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms: low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ - Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees..

. free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

FDI is quite heterogeneous and one should distinguish several kinds, e.g. by looking at the following factors:
a. whether the activity in the host country is just an intermediate phase in a longer production chain or it gives rise to a finished good; b. the production phase performed in the host country (design, manufacture, distribution); c. where the outcome of the process in the host country will be sold (there or abroad).

Inflow of Foreign Direct Investments increases with the attractiveness of the country, due to the following factors in different proportions depending on the industry and the country:
1. 2.1. 2.2. 3.1. 3.2. 3.3. 4. 5.1. 5.2. large GDP and market potential; advanced know-how; skilled work-force; low labour cost and wages; low taxation; lower environmental protection; high tariff protection; favourable laws and public incentives; intentional and professional territorial marketing.

FDI has three components: -equity capital; -reinvested earnings, the investor's share of earning not distributed as dividends by affiliates, in proportion to its share in the equity (say for instance 50% in a certain joint venture); - intra-company loans, when the investor borrows funds to the affiliate, usually without the intention of asking the money back.

TYPES OF FDI CLASSIFIED BY MOTIVES OF MNEs:

1. Market seeking 2. Resource seeking 3. Efficiency seeking 4. Strategic asset seeking

Determinants At investor's level, a firm can decide to make a foreign investment because of many factors, including:
1. upstream integration, by purchasing a provider, whose input will now be sold cheaper (or exclusively) to it or be differentiated along particular features; 2. horizontal integration, by purchasing a firm making the same product, to expand its production, reduce costs, improving logistics;

..

. 3. downstream integration, by purchasing a firm using or distributing its products, to get higher value added along the chain and to aggressively push distribution; 4. diversification, by purchasing a firm doing somewhat different activities than the purchaser, to seize new opportunities.

At country level, outflows of FDI are high when:


firms have sound financial conditions but consider that other countries have more favourable investment conditions; the exchange rate is "high" in an historical perspective (e.g. after a re-valuation) so foreign firms are "cheap" and exports are braked - in this case FDI substitutes exports; the trade balance is positive, with exports higher then imports, since capital flows usually compensate the commercial flows;

POLICY ON ROUTE, CAPS AND ENTRY CONDITIONS


FDI is prohibited in the following activities/sectors: Retail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Business of chit fund Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport

SECTOR-SPECIFIC POLICY FOR FDI Agriculture & Animal Husbandry


Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aquaculture and Cultivation of Vegetables & Mushrooms under controlled conditions and services related to agro and allied sectors etc. has 100% equity in Automatic route
Note: Besides the above, FDI is not allowed in any other agricultural sector/activity

INDUSTRY

Mining and Exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores; subject to the Mines and Minerals( Development & Regulation) Act, 1957. 100 % equity share with Automatic route

MANUFACTURING
FDI in MSEs will be subject to the sectoral caps, entry routes and other relevant sectoral regulations. MSE sector would require Government route where foreign investment is more than 24% in the capital. The issue of Industrial License is subject to a few general conditions and the specific condition that the Industrial Undertaking shall undertake to export a minimum of 50% of the new or additional annual production of the MSE reserved items to be achieved within a maximum period of three years.

BANKING SECTOR
Banking Private sector 74% equity participation including investment by FIIs having;  Automatic route up to 49%, Government route beyond 49% and up to 74% Banking- Public Sector Subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associate Banks.  20% cap/equity in (FDI and Portfolio Investment) with only government route

NON- BANKING FINANCE COMPANIES




Foreign investment in NBFC is allowed under the automatic route in the following activities: Merchant Banking Under Writing Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodian Services Factoring ..

..

Credit Rating Agencies Leasing & Finance Housing Finance Forex Broking Credit Card Business Money Changing Business Micro Credit Rural Credit

Investment under all above is 100% equity participation under automatic route

SINGLE BRAND PRODUCT TRADING


51% of FDI cap/equity entry under government route Foreign Investment in Single Brand product trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.

... FDI in Single Brand products retail trade would be subject to the following conditions:
 

Products to be sold should be of a Single Brand only. Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. Single Brand product-retailing would cover only products which are branded during manufacturing.

REMITTANCE, REPORTING AND VIOLATION


Sale proceeds of shares and securities and their remittance is remittance of asset governed by The Foreign Exchange Management (Remittance of Assets) Regulations 2000 under FEMA. FDI is a capital account transaction and thus any violation of FDI regulations are covered by the penal provisions of the FEMA. Reserve Bank of India administers the 79 FEMA and Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of FEMA. The Directorate takes up investigation in any contravention of FEMA.

RECENT TRENDS IN FDI


FDI flows into India from April 2000 to July 2010 aggregates to US$ 172.11 billion (NRIs) among the overseas Indians accounted for US$ 4.68 billion, almost 4% of the total FDI inflows sector-wise FDI equity inflows services at 21% of the total FDI inflows, followed by computer software and hardware sector at 9% and telecommunications at 8%.

RECENT TRENDS IN FDI


Recently India has emerged as favorite destination for FDI Not been commensurate with her economic potential problems of comparability have been noted Like : still well below Chinas high Chinese FDI might well be concealing difficulties raising investment is more important than just raising the FDI component

OTHER AREAS OF INVESTMENT


India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. In general Indias FDI share are as follows:

POSSIBLE FUTURE INVESTMENTS One such example Equity investment

OTHER AREAS OF INVESTMENT

* Depicts Only - Technological environment

SURVEY FINDINGS AND FUTURE TRENDS


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Prospects for respondent companies FDI expenditures in 20102012, as compared to 2009 (as a percentage of responses from the TNCs surveyed)

PROSPECTS FOR RESPONDENT COMPANIES FDI EXPENDITURES IN 20102012


Although still limited, the number of TNCs from developing countries carrying out large-scale international investment programmes is increasing.

The growing presence of developing and transition economies among the home countries for FDI is confirmed by the responses of IPAs on the most promising investors in their country. Among the top 20 most promising investor countries nearly half were developing and transition economies. China occupies the second position in the global ranking, while India is ranked 6th and the Russian Federation 9th

PROSPECTS FOR RESPONDENT COMPANIES FDI EXPENDITURES IN 20102012 AS COMPARED TO 2009, BY HOME REGION*

*(average of responses from the TNCs surveyed) -4: very large decrease; + 4: very large increase

UNCTAD ESTIMATES THE LEVEL OF FDI INFLOWS IN 2011 WILL FALL IN THE RANGE OF $1.31.5 TRILLION, RISING IN 2012 TO BETWEEN $1.6 AND 2 TRILLION.

ALTHOUGH STILL LIMITED, THE NUMBER OF TNCS


FROM DEVELOPING COUNTRIES CARRYING OUT LARGESCALE INTERNATIONAL INVESTMENT PROGRAMMES IS INCREASING.

The most promising investor-countries for the next three years ahead according to IPAs *

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TOP 10 INVESTMENT BANKING MOVIES


1) Wall Street 2) American Psycho 3) Rogue Trader 3) Boiler Room 4) Barbarians at the Gate 5) Enron: The Smartest Guys in the Room 6) The Ascent of Money: The Financial History of the World 7) Other Peoples Money 8 ) Bonfire of the Vanities 9) Wall Street Warriors: Season 1 10) Wall Street Warriors: Season 2

MOVIE-I : STONE MADE THE FILM AS A TRIBUTE TO HIS FATHER, LOU STONE, A STOCKBROKER DURING THE GREAT DEPRESSION. THE CHARACTER OF GEKKO IS SAID TO BE A COMPOSITE OF SEVERAL PEOPLE, INCLUDING OWEN MORRISSEY, DENNIS LEVINE, IVAN BOESKY, CARL ICAHN, ASHER EDELMAN, MICHAEL OVITZ, MICHAEL MILKEN, AND STONE HIMSELF.

MOVIE-II - SET IN NEW YORK CITY, THE FILM TAKES PLACE 23 YEARS AFTER THE ORIGINAL AND REVOLVES AROUND THE 2008 FINANCIAL CRISIS. THE FILM'S
PLOT MAINLY CENTERS ON THE REFORMED GEKKO ACTING AS MORE OF AN ANTIHERO RATHER THAN A VILLAIN AND FOLLOWS HIS ATTEMPTS TO HELP WALL STREET BEFORE ITS SOON-TO-BE STOCK MARKET CRASH

REFERENCES
India Year Book 2010 : Ministry of India Department of Information and Broadcasting World Investments Prospects Survey 2010-12 Internet