FDI , ECB , Indian Investments Abroad
Foreign Capital
Portfolio Investments by FIIs
What is portfolio?
In finance, a portfolio is an appropriate mix or collection
of investments held by an institution or an individual.
Holding a portfolio is a part of an investment and risk-
limiting strategy called diversification. By owning several
assets, certain types of risk (in particular specific risk) can
be reduced. The assets in the portfolio could include
stocks, bonds, options, warrants, gold certificates,
real estate, futures contracts, production facilities, or any
other item that is expected to retain its value.
Portfolio Management
Portfolio management involves deciding what assets to
include in the portfolio, given the goals of the portfolio
owner and changing economic conditions. Selection involves
deciding what assets to purchase, how many to purchase,
when to purchase them, and what assets to divest.
These decisions always involve some sort of performance
measurement, most typically expected return on the
portfolio, and the risk associated with this return (i.e. the
standard deviation of the return). Typically the expected
return from portfolios of different asset bundles are
compared.
What are the regulations regarding Portfolio
Investments by Foreign Institutional Investors (FIIs)?
FIIs include Asset Management Companies, Pension Funds, Mutual Funds, and
Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio
Managers or their Power of Attorney holders, University Funds, Endowment
Foundations, Charitable Trusts and Charitable Societies.
SEBI acts as the nodal point in the registration of FIIS.
RBI has granted General Permission to SEBI Registered FIIs invest in India under the
Portfolio Investment Scheme.
All FIIs and their sub-accounts taken together cannot acquire more than 24% of the
paid up capital of an Indian Company.
Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap /
Statutory Ceiling as applicable by passing a resolution by its Board of Directors
followed by passing a Special Resolution to that effect by its General Body.
Foreign Direct Investment
FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor
FDIs can be broadly classified into two types: outward FDIs and inward FDIs..
An outward-bound FDI is backed by the government against all types of associated risks.
This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk
coverage provided to the domestic industries and subsidies granted to the local firms stand
in the way of outward FDIs, which are also known as 'direct investments abroad.'
Different economic factors encourage inward FDIs. These include interest loans, tax
breaks, grants, subsidies, and the removal of restrictions and limitations. Factors
detrimental to the growth of FDIs include necessities of differential performance and
limitations related with ownership patterns .
Policy on Foreign Direct Investment
India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up
to 100% is allowed under the automatic route in all activities/sectors except the following, which require
prior approval of the Government:-
1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical
collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service
sector and where Securities and Exchange Board of India (substantial acquisition of
shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is
not permitted
Policy on Foreign Direct Investment (Cont.)
Most of the sectors fall under the automatic route for FDI.
In these sectors, investment could be made without approval of the central government.
The sectors that are not in the automatic route, investment requires prior approval of the
Central Government.
The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI
is not allowed.
After the grant of approval for FDI by FIPB or for the sectors falling under automatic route,
FDI could take place after taking necessary regulatory approvals form the state
governments and local authorities for construction of building, water, environmental
clearance, etc.
Manual for FDI brought out by the Department of Industrial Policy and Promotion provides
details about FDI Policy and Procedures and is available at
External Commercial Borrowings (ECB)
An Indian enterprise borrowing in foreign exchange has to comply with
the external commercial borrowings (ECB) policy announced by the
regulator, the Reserve Bank of India (RBI).
ECBs encompass commercial bank loans, buyers’ credit, suppliers’
credit, securitized instruments such as floating rate notes and
fixed rate bonds, credit from official export credit agencies,
foreign currency convertible bonds and commercial borrowings
from the private sector lending arms of multilateral financial
institutions—for instance, the International Finance Corporation and
the Asian Development Bank.
The ECB policy is monitored and updated by RBI on a regular basis,
according to the macroeconomic conditions and foreign exchange
liquidity situation.
ECB (Cont.)
Applicants are free to raise ECB from any internationally recognized
source like banks, export credit agencies, suppliers of equipment,
foreign collaborations, foreign equity - holders, international capital
markets etc. (Only for Capital Purpose not for Working Capital Facilities)
REGULATOR
The department of Economic Affairs, Ministry of Finance, Government
of India with support of Reserve Bank of India, monitors and regulates
Indian firms access to global capital markets. From time to time, they
announce guidelines on policies and procedures for ECB and Euro-
issues.
Indian Investments Abroad
Direction of investment proposals
indicated that Mauritius, Singapore, the US
and the UAE together accounted for 72 per
cent of the amount of proposals for outward
FDI (US$ 5 million and above) during April-
June 2009
Emerging pattern of India's outward
foreign direct investment
In fact, the Indian planning has made long
concerted effort to develop strategic and
competitive capabilities in the agents of
production .e.g. TATA , AVBirla, Airtel
Such trends became more lucid with the
strengthening of Indian capital especially
abroad as the Indian capital has initiated
collaborations and mergers with the global
players.
Indian Investments Abroad
Indian companies are increasingly buying up
companies abroad as strategic acquisition,
indicating the growing competitiveness of
the Indian corporate sector. India retains its
position as the second highest foreign
employer in the UK, after the US, according
to the 2009 UK inward FDI official data.
Global Financial Crisis and India
India, like most other emerging market economies, has so far,
not been seriously affected by the recent financial turmoil in
developed economies.
The Indian economy is now a relatively open economy,
despite the capital account not being fully open.
With this degree of openness, developments in
international markets are bound to affect the Indian economy
and policy makers have to be vigilant in order to minimize the
impact of adverse international developments on the
domestic economy.
