Foreign Direct Investment

 Long-term investment by a foreign direct investor in a foreign economy  A source of capital and investment involving foreign control of production  A channel of technology transfer and industrial development  It usually involves participation in management, joint-venture, transfer of

technology and expertise.

Types of FDI
 Greenfield Investment  Direct investment in new facilities or the expansion of existing facilities.  Create new production capacity and jobs, transfer technology, etc.  Profit flows out of the host nation  Horizontal Foreign Direct Investment  Investment in the same industry abroad as a firm operates in at home.

 Vertical Foreign Direct Investment
 Backward Vertical - Industry abroad provides inputs for a firm's domestic production process  Forward Vertical - Industry abroad sells the outputs of a firm's domestic production  Strategic Asset Seeking  To prevent the loss of resource to a competitor. Like OPEC

Types of FDI
 Resource Seeking  Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm.  When resources may not be available in the home economy at all.  Market Seeking  Investments which aim at either penetrating new markets or maintaining existing ones.  Large market to capture  Global Presence

 Expansion
 Efficiency Seeking  To increase their efficiency by exploiting the benefits of economies of scale and scope, etc  For increasing the profitability of the firm.  Mostly widely practiced between developed economies

Mode of Entry  Joint Venture  Green Field Strategy  Wholly owned subsidiary  Project Office  Mergers and Acquisitions .

Export Processing Zones  Investment financial subsidies  Soft loan or loan guarantees  Free land or land subsidies  Job training & employment subsidies  Infrastructure subsidies  R&D support .FDI Incentives  Low corporate tax and income tax rates  Special Economic Zones SEZ  EPZ .

• In the first two months of 2010-11 fiscal. construction activities and computer software and hardware. India as the second most important FDI destination (after China) for transnational corporations during 2010-2012.88 billion was lower by 5% from USD 27. FDI for 2009-10 at USD 25. FDI inflow into India was at an all-time high of $7. the lowest in 2010 fiscal. the US and the UK are among the leading sources of FDI.78 billion up 77% from $4. • • Mauritius. .Foreign Direct Investment in India • • Started with less than USD 1 billion in 1990.33 billion in the previous fiscal.4 billion during the corresponding period in the previous year. • Foreign direct investment in August dipped by about 60 per cent to aprox. industry department data released showed. USD 34 billion. Singapore. telecommunication. • Sectors which attracted higher inflows were services.

 India has a large pool of skilled managerial and technical expertise.919 crore (US$27. .41 billion).  In March 2005. the country attracted $178 billion as FDI. a growth of 25% in rupee terms over the previous period.  During last 10 years.  The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalised FDI regime. including built-up infrastructure and construction development projects.Foreign Direct Investment in India  India has positioned itself as one of the front-runners of the rapidly growing Asia-Pacific region.  India's recently liberalised FDI policy (2005) allows up to a 100% FDI stake in ventures. the government amended the rules to allow 100% FDI in the construction sector.  The total FDI equity inflow into India in 2008–09 stood at 122.

Why India an attraction for FDI?  Liberal.  Second largest English-speaking. scientific. technical and executive manpower  Low costs & Tax exemptions in SEZ  Tax incentives for IT . business process outsourcing and KPO companies . Knowledge processing etc.  Growth over the past few years averaging 8%  Destination for business process outsourcing.S. largest democracy. Political Stability  Second largest emerging market (US$ 2.4 trillion)  Skilled and competitive labors force  Second largest group of software developers after the U.

Major Inflow from Different Countries .

British & cairn Essar power Toyota Panasonic Sector Retail I.T Oil & Energy Power sector Automobile Investment US$ 10 Billion US$ 40 Billion US$ 2 Billion US$ 2 Billion US$ 10.Marks Intel Corp.Major Investments Companies Wal mart.51 Billion Telecommunication US$ 200 million 3/13/2012 Source: 10 .

 Retail Trading (Recently Allowed 2011).Forbidden Territories  Arms and ammunition  Atomic Energy  Railway Transport  Coal and lignite  Mining of iron. chrome. manganese. zinc.  Lottery Business  Gambling and Betting  Business of Chit Fund  Nidhi Company (Non-Banking Financial Company) . copper. sulphur. diamonds. gypsum. gold.

income level etc  Government Policies .Political Stability. foreign collaboration. tariffs etc  Political Factors .Samsung  Costs of Production/Operations – DBOI in Jaipur  Economic Conditions . infrastructure. etc . taxation. remittances.Policies like foreign investment. size of population.Factors affecting FDI  Profitability – Electronic Gadgets . profits. foreign exchange control.Market potential. Relations with other countries.

FDI in Various Industries .

 Up to 3% of net turnover is payable for franchising and marketing/publicity support fee.  For foreign technology agreements. automatic approval is granted if up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects. including incentive fee. and up to 10% of gross operating profit is payable for management fee. supervision. Insurance Sector  FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA) . design. etc.Hotel & Tourism  100% FDI is permissible in the sector on the automatic route.

Private Sector Banking Non-Banking Financial Companies  49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.  Allowed in the following 19 NBFC activities  Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Credit Reference Agencies Credit rating Agencies  Financial Consultancy Stock Broking  Asset Management  Factoring Venture Capital Custodial Services  Leasing & Finance  Credit card business  Rural Credit Housing Finance Micro Credit Foreign Exchange Brokering Money changing Business .

and  Voice Mail .  FDI up to 100% is allowed for the following activities in the telecom sector :  ISPs not providing gateways (both for satellite and submarine cables).Telecommunication  FDI is limited to 49% subject to licensing and security requirements and adherence by the companies to the license conditions for foreign equity cap and lock. radio-paging and end-to-end bandwidth.  ISPs with gateways.  Electronic Mail. FDI is permitted up to 74% with FDI.  Infrastructure Providers providing dark fiber (IP Category 1).in period for transfer and addition of equity and other license provisions. beyond 49% requiring Government approval.

and the undertaking is an export house/trading house/super trading house/star trading house.  FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years.  other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales. .Trading  Permitted up to 51% provided it is primarily export activities.  cash and carry wholesale trading.  100% FDI is permitted in case of trading companies for the following activities:  exports  bulk imports with ex-port/ex-bonded warehouse sales.

vehicular bridges. Highways.Drugs & Pharmaceuticals  FDI up to 100% is permitted on the for manufacture of drugs and pharmaceutical  Provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology. Call Centres in India  FDI up to 100% is allowed subject to certain conditions . highways. toll roads. ports and harbours. Roads. Ports and Harbours  FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads. and specific cell / tissue targeted formulations. and specific cell / tissue targeted formulations will require prior Government approval.  FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology. vehicular tunnels.

There is no limit on the project cost and quantum of foreign direct investment. other than atomic reactor power plants. Business Process Outsourcing  FDI up to 100% is allowed subject to certain conditions. . transmission and distribution.Power  Up to 100% FDI allowed in respect of projects relating to electricity generation. Pollution Control and Management  FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.

04 6.396 5.427 12.041 Ranks Sector Electrical Equipments 1.32.95 3. Food Processing Industries 10.FDI Flows in Various Sectors Cumulative Inflows (from August 1991 to March 2007) Amount in rupees in crore 36.77 17.281 5.238 16.105 9.143 4. (other than fertilizers) Construction activities 7.68 2. (radio paging. cellular mobile.7 8. basic telephone services) 4 Transportation Industry Fuels 5.034 34.26 Services Sector 2.84 8.75 2. (including roads & highways) 8. (financial & non-financial) Telecommunications 3.33 2.691 15.31 4.329 2.510 6. (power + oil refinery) Chemicals 6. (including computer software & electronics) %age with total inflows 18. Cement and Gypsum Products TOTAL FDI INFLOWS . Drugs & Pharmaceuticals 9.

India: Vibrant Economy Driving M&A Activities Growth Drivers:  Globalisation of competition  Concentration of companies to achieve economies of scale  Lower interest rates and vibrant global markets  Cash Reserves with Corporates Number of Deals and Values 30 25 20 18. Food and Beverages IT and ITES USD Billion 15 10 5 0 2004 2005 Deal Values 2006 No.327 SECTOR Manufacturing Media Oil & Gas Pharma & biotech Telecom Others USD (Mn) 933 630 384 2.305 Trends:  Ratio of the Size of acquisition to the size of acquirer has grown from 10 percent in 2004 to 25 percent in 2006.903 Total 20.520 2. of Deals 2.3 306 467 28.375 1.006 Number of deals Banking and Financial Chemicals and Plastics Electrical and Electronics Energy FMCG.3 12.2 782 900 800 700 600 500 400 300 200 100 0 SECTOR Automotive USD (Mn) 518 1.484 1.133 896 1. there were a total of 480 M&A deals and 302 private equity deals… … Average deal size close to USD 36 million… …Contribution of private equity deals to total number of deals have increased from nearly 9 percent in 2004 to 28 percent in 2006 .  Cross-border deals are growing faster than domestic deals  Private Equity (PE) houses have funded projects as well as made a few acquisitions in India In 2006.198 4.

acquires REpower USD 1.1 billion Hindalco acquired Novelis Inc.6 billion Videocon Industries acquired Daewoo Electronics Corporation Limited USD 730 million .58 billion Suzlon Energy Ltd. Tata Steel buys Corus Plc USD 12. USD 6 billion Essar Steel acquired Algoma Steel USD 1.Major M&A Deals Undertaken Abroad by India Inc.

7 billion Plans investment in private equity. Nissan and Mahindra & Mahindra has initiated a Greenfield automobile plant project in Chennai. and private wealth management USD 1 billion Aditya Birla Group increased its stake in Idea Cellular by acquiring 48.74 billion .905 billion Mylan Laboratories acquired a majority stake in Matrix Laboratories USD 0.14-percent stake USD 0.Major M&A and Investments Announcements in India Vodafone buys Hutch USD 11 billion Plans to spend on its development operations in India over the next four years USD 1. real estate.98 billion Renault. USD 0.

Foreign Institutional Investors An institution established outside India. which invests in securities traded on the markets in India .

were allowed to invest in Indian capital market. .. 1992 with suitable restrictions  Permitted to invest in all the securities traded on the primary and secondary markets  Reputed foreign investors.Background  Started September 14.  Since 1995 the flow of FII is being increasing with new investors coming into the market. such as Pension Funds etc.

Financial Institutional Investors  Financial Institutional Investors are organizations which pool large sums of money and invest those sums in securities. insurance companies. real property and other investment assets.  Types of typical investors include banks.  They can also include operating companies which decide to invest their profits to some degree in these types of assets. investment advisors and mutual funds. retirement or pension funds. hedge funds. .

investment trust. asset management company.those who are permitted to invest only in debt instruments.those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments. nominee company. FIIs registered with SEBI fall under the following categories:  Regular FIIs.FII Route As FII Overseas pension funds. investment trust. viz. partnership firms. and individuals. . mutual funds. institutional portfolio manager. The following entities are eligible to be registered as sub-accounts.  100 % debt-fund FIIs. public company.etc As Sub-accounts The sub account is generally the underlying fund on whose behalf the FII invests. private company. bank. pension fund.

roads or bridges) . construction of residential/commercial premises.Forbidden Territories Not allowed to invest in any company which is engaged or proposes to engage in the following activities:  Business of chit fund  Nidhi Company  Agricultural or plantation activities  Real estate business or construction of farm houses (Except development of townships.

and which go under.  Influencing the conduct of listed companies  Providing capital to companies .Role of FII  Act as highly specialized investors on behalf of others  Act as Funds Management for Pension Investments  Lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company  They can actively engage incorporate governance  Play a large part in which companies stay solvent.

A Foreign Institutional Investor may invest only in the following  Securities in the primary and secondary markets  Units of schemes floated by domestic mutual funds including Unit Trust of India  Dated Government securities  Derivatives traded on a recognized stock exchange  Commercial paper  Security receipts .

 They were allowed to invest in all the securities traded on the primary and the secondary market.Foreign Institutional Investments in India  Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs). only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India.  Thereafter. the Indian stock markets were opened up for direct participation by FIIs. .  Before 1992. Foreign Institutional Investments and investments in offshore funds.

Investment Limits Equity Instruments  FII.  For the sub-account registered under Foreign Companies/Individual category.  These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India. Debt Instruments For corporate debt the investment limit is fixed at US $ 500 million . shall not invest in equity more than 10% of total issued capital of an Indian company. the investment limit is fixed at 5% of issued capital.  Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. on its own behalf.

Taxation Nature of Income  Long-term capital gains  Short-term capital gains  Dividend Income  Interest Income Tax Rate 10% 30% Nil 20% .

 Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs .Economic Theory  Institutional investors as financial intermediaries  Act as intermediaries between lenders and borrowers.  Important in the functioning of the financial markets. they also play a critical role in guaranteeing a sufficient diversification of the investors’ portfolios.  Acting as savings pools.  Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs.

transfer of money or property donated to an institution like charity.Collective Investment  Unit trust and Unit Investment Trust – Stocks and Bonds  Investment banking – High Net worth Investors  Hedge fund  Sovereign wealth fund .State-Owned Investment Fund  Endowment fund .Types  Pension fund  Mutual fund  Investment trust .University  Insurance Companies .

3 lac Crores with 1662 foreign institutional investors in 2010 .Role in Indian Stock Market  Provide exposure to various foreign financial market     Global Importance and attraction Provide liquidity Efficiency in the market Inflow of foreign funds into the domestic markets       Spread the Risk Decrease the Volatility Competence in the Companies to avoid takeovers and acquisitions Inflow of foreign Currency Leading More Regulated Market Net Equity Investment in India was Rs.

Index Correlated with flow of FIIs  S&P CNX Nifty  Bank Nifty  CNX 100  CNX IT  CNX NIFTY JUNIOR  S&P CNX 500 .

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