FOREIGN CAPITAL
Rama Mittal
Assistant Professor
Meaning of FDI
Foreign
direct investment (FDI) in its classic
form is defined as a company from one country
making a physical investment into building a
factory in another country. It is the
establishment of an enterprise by a foreigner.
It is the movement of capital across national
frontiers in a manner that grants the investor
control over the acquired asset
Apr 15, 2015
Its
definition can be extended to include
investments made to acquire lasting
interest in enterprises operating outside
of the economy of the investor.
The FDI relationship consists of a parent
enterprise and a foreign affiliate which
together form an international business
or a multinational corporation (MNC).
In order to qualify as FDI the investment
must afford the parent enterprise control
over its foreign affiliate.
Apr 15, 2015
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; or
Any combination of the above.
Type of Foreign Direct
Investors
Apr 15, 2015
Classification of FDI
FDI
Inward
Outwar
d
Apr 15, 2015
Inward FDI
Foreign
direct investment, which is inward, is a
typical form of what is termed as 'inward
investment'. Here, investment of foreign
capital occurs in local resources.
The
factors propelling the growth of Inward
FDI comprises tax breaks, relaxation of
existent regulations, loans on low rates of
interest and specific grants. The idea behind
this is that, the long run gains from such a
funding far outweighs the disadvantage of the
income loss incurred in the short run. Flow of
Inward FDI may face restrictions from factors
like restraint on ownership and disparity in the
performance standard
Apr 15, 2015
Outward FDI
Foreign
direct investment, which is outward, is also
referred to as direct investment abroad. In this case
it is the local capital, which is being invested in some
foreign resource.
It may also find use in the import and export dealings
with a foreign country.
Apr 15, 2015
Some other forms of FDI
Horizontal FDI :
FDI in the same industry abroad as
that in which a firm operates at home
Vertical FDI:
When a multinational operates
in some other related fields
Apr 15, 2015
Advantages of FDI
Bringing
infrastructure into the country
Bring advanced technology into the country which can
be used later on in the economy
Generates healthy competition in the recipient country
Creates more industrial units in the country
Creates more employment in the economy
Eg- Hyundai (South Korean company) has established its new car
manufacturing plant at Chennai in India because of low wages rates,
guaranteed power supply, cheap land and providing employment in
India.
Note:- It is estimated that very dollar of FDI increases domestic investment by
80% of the amount of FDI.
Apr 15, 2015
Disadvantages of FDI
Inflation may increase slightly
Breeds bribery and corruption
Domestic firms may suffer if they are
relatively uncompetitive
Small and marginal firms are made to exit
May lead to social and cultural disruption
Too much dependency may arise and cause
problems
Apr 15, 2015
10
FDI Flow in India
Apr 15, 2015
Sources: Department of Industrial policy and promotion
11
SECTORS ATTRACTING HIGHEST
FDI EQUITY INFLOWS
Apr 15, 2015
12
FDI POLICY IN INDIA
FDI has helped the Indian economy grow, and the
government continues to encourage more investments of
this sort - but with $5.3 billion in FDI in 2004 India gets less
than 10% of the FDI of China.
FDI has allowed India to focus on the areas that may have
needed economic attention, and address the various
problems that continue to challenge the country.
India has continually sought to attract FDI from the worlds
major investors. In 1998 and 1999, the Indian national
government announced a number of reforms designed to
encourage FDI and present a favorable scenario for
investors.
Apr 15, 2015
13
Policy regarding Foreign
Capital
Industrial
Policy 1991 announced by the Govt. accepted
the fact that foreign investment is essential for
modernization, technology upgradation and industrial
development of India. The main points of policy were:
a. Approval will be given for direct foreign
investment up to 51% foreign equity in high
priority industries.
b. The payment of dividend would be monitored
through the RBI.
c. Automatic permission would be given for
foreign technology agreements in high priority
industries up to a lump sum payment of Rs.
1crore, 55 royalty for domestic sales and 8%
for foreign sales over a period of 10 years.
Foreign Investment
Inflows
After the announcement of Industrial
Policy 1991, there has been an
acceleration in the flow of foreign
capital in India.
During 1991-92 to 2012-13 total
foreign investment flows were $456.9
billion, out of which about $270.2
billion (59.1%) were in the form of FDI
and the remaining (40.9%) were in
the form of portfolio investment.
Region wise Breakup of
FDI
(From
Region
April 2000 toShare
March
% 2013)
Maharashtra (Mumbai)
33%
Delhi-NCR
19%
Tamil Nadu and
Pondicherry
(Chennai)
6%
Karnataka
(Bengaluru)
6%
Gujarat
(Ahmadabad)
4%
Andhra Pradesh
(Hyderabad)
4%
Others
28.6
Source: Department of Industrial policy and promotion, March 2013.
destinations comprising of
Mumbai, Delhi, Chennai,
Bengaluru, Ahmedabad and
Hyderabad had a total 71.4% FDI
inflow.
In other words, there was heavy
concentration of FDI inflows in
these 6 regions.
Foreign Direct Investment
Incentives
Low
corporate tax and income tax rates
Tax holidays
Other types of tax concessions
Preferential tariffs
Special economic zones
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.
Apr 15, 2015
18
Main Sectors with FDI
Equity/Route Limit
FDI equity limitautomatic Route
Insurance 49%
Domestic airlines 49% (74%)
Telecom services- Foreign equity
74%
Private sector banks- 74%
Mining of coal and lignite for captive
consumption- 100%
Coffee and rubber processing-100%
Civil Aviation-100%
Manufacture of Telecom Equipment100%
Non Banking Finance Companies100%
FDI requiring prior
approval
Defense production 26%
FM Broadcasting - foreign equity
20%
News and current affairs- 26%
Broadcasting- cable, DTH, uplinking foreign equity 49%
Trading- wholesale cash and carry,
export trading, etc., 100%
Tea plantation 100%
Development of airports- 100%
Courier Services-100%
Cigars & cigarettes manufacture100%
Apr 15, 201519
Foreign portfolio investment (FPI)
It is the passive holding of securities
such as foreign stocks, bonds, or other
financial assets ,none of which entails
active management or control of the
securities issues by the investor.
It is also called Foreign Institutional
Investment (FIIs).
It represent movement of financial
resources and do not have much effect
on productive capacity and employment.
Starting up
In
1992, India opened up its
economy and allowed foreign
portfolio investment in its
domestic stock market
Since
then ,FPI has emerged as a
major source of private capital
inflow in this country
Apr 15, 2015
21
Factors affecting Institutional
Investment
Tax
rates on interest or dividends
Interest
rates
Exchange
rates
Note: FII is the part of capital account of BOP
Apr 15, 2015
22
How FPI flow can help an
economy?
Apr 15, 2015
23
Regulations regarding
Investment
by FIIs
RBI
has granted permission to SEBI
registered (FIIs) invest in India
under Portfolio investment scheme.
All
FIIs and their sub-accounts
taken together cannot acquire
more than24% of the paid up
capital of an Indian economy
Apr 15, 2015
24
Regulations regarding
Portfolio Investments by
NRIs/PIOs
NRIs/PIOs can purchase/ sell shares /
convertible debentures of Indian
companies on stock exchanges.
An
NRI or PIO can purchase shares
upto5% of the paid up capital of Indian
company.
All
NRIs/PIOs taken together cannot
purchase more than 10% of the paid up
value of the company.
Apr 15, 2015
25
Difference Between FDI & FII
Basis
FDI
FII
Stands for
Foreign Direct Investment
Foreign Institutional Investment
Sell off:
It is more difficult to sell off or pull out.
It is fairly easy to sell securities and pull out
because they are liquid.
Comes from
Tends to be undertaken by Multinational Comes from more diverse sources e.g.a small
organisations
company's pension fund or through mutual funds
held by individuals; investment via equity
instruments (stocks) or debt (bonds) of a foreign
enterprise.
What is invested
Involves the transfer of non-financial
assets [Link] and intellectual
capital, in addition to financial assets.
Only investment of financial assets.
Volatility
Having smaller in net inflows
Having larger net inflows
Management
Projects are efficiently managed
Projects are less efficiently managed
Involvement - direct or
indirect:
Involved in management and ownership No active involvement in management.
control; long-term interest
Investment instruments that are more easily
traded, less permanent and do not represent a
controlling stake in an enterprise.
Apr 15, 2015
26
Apr 15, 2015
27
