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

FDI Incentives

Low corporate tax and income tax rates

Special Economic Zones SEZ

EPZ - 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

Foreign Direct Investment in India

• Started with less than USD 1 billion in 1990,

• India as the second most important FDI destination (after China) for transnational corporations during

2010-2012.

• Sectors which attracted higher inflows were services, telecommunication, construction activities and

computer software and hardware.

• Mauritius, Singapore, the US and the UK are among the leading sources of FDI.

• FDI for 2009-10 at USD 25.88 billion was lower by 5% from USD 27.33 billion in the previous fiscal.

• Foreign direct investment in August dipped by about 60 per cent to aprox. USD 34 billion, the lowest

in 2010 fiscal, industry department data released showed. 

• In the first two months of 2010-11 fiscal, FDI inflow into India was at an all-time high of $7.78 billion

up 77% from $4.4 billion during the corresponding period in the previous year.

Foreign Direct Investment in India

India has positioned itself as one of the front-runners of the rapidly growing Asia-Pacific region.

India has a large pool of skilled managerial and technical expertise.

During last 10 years, the country attracted $178 billion as FDI.

India's recently liberalised FDI policy (2005) allows up to a 100% FDI stake in ventures.

The upward moving growth curve of the real-estate sector owes some credit to a booming economy and

liberalised FDI regime.

In March 2005, the government amended the rules to allow 100% FDI in the construction sector,

including built-up infrastructure and construction development projects.

The total FDI equity inflow into India in 2008–09 stood at 122,919 crore (US$27.41 billion), a growth

of 25% in rupee terms over the previous period. 

Why India an attraction for FDI?

Liberal, 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.S.

Growth over the past few years averaging 8%

Destination for business process outsourcing, Knowledge processing etc.

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

Major Inflow from Different Countries

04/07/2023 10

Major Investments

Companies Sector Investment

Wal mart,Marks Retail US$ 10 Billion

Intel Corp. I.T US$ 40 Billion

British & cairn Oil & Energy US$ 2 Billion

Essar power Power sector US$ 2 Billion

Toyota Automobile US$ 10.51 Billion

Panasonic Telecommunication US$ 200 million

Source:

Forbidden Territories

Arms and ammunition

Atomic Energy

Railway Transport

Coal and lignite

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Retail Trading (Recently Allowed 2011).

Lottery Business

Gambling and Betting

Business of Chit Fund

Nidhi Company (Non-Banking Financial Company)

Factors affecting FDI

Profitability – Electronic Gadgets - Samsung

Costs of Production/Operations – DBOI in Jaipur

Economic Conditions - Market potential, infrastructure, size of population, income level etc

Government Policies - Policies like foreign investment, foreign collaboration, remittances,

profits, taxation, foreign exchange control, tariffs etc

Political Factors - Political Stability, Relations with other countries, etc

FDI in Various Industries

Hotel & Tourism 100% FDI is permissible in the sector on the automatic route.

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,

design, supervision, etc.

Up to 3% of  net turnover is payable for franchising and marketing/publicity support fee, and up to

10% of gross operating profit is payable for management fee, including incentive fee.

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)

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

Financial ConsultancyStock Broking Investment Advisory Services

Asset Management Venture Capital Credit Reference Agencies

Factoring Custodial Services Credit rating Agencies

Leasing & Finance Housing Finance Foreign Exchange Brokering

Credit card business Micro Credit Money changing Business

Rural Credit

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- in period for transfer and addition of equity and

other license provisions.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI,

beyond 49% requiring Government approval.

FDI up to 100% is allowed for the following activities in the telecom sector :

ISPs not providing gateways (both for satellite and submarine cables);

Infrastructure Providers providing dark fiber (IP Category 1);

Electronic Mail; and

Voice Mail

Trading Permitted up to 51% provided it is primarily export activities, and the undertaking is an export

house/trading house/super trading house/star trading house.

100% FDI is permitted in case of trading companies for the following activities:

exports

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

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.

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.

 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, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced

by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior

Government approval.

Roads, Highways, Ports and Harbours FDI up to 100% under automatic route is permitted in projects for construction and maintenance of

roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours.

Call Centres in India FDI up to 100% is allowed subject to certain conditions

Power Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and

distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum

of foreign direct investment.

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.

Business Process Outsourcing FDI up to 100% is allowed subject to certain conditions.

FDI Flows in Various Sectors

Ranks Sector

Cumulative Inflows (from August 1991 to March 2007) Amount in rupees in crore

%age with total inflows

1.Electrical Equipments (including computer software & electronics) 36,034 18.77

2.Services Sector (financial & non-financial) 34,238 17.84

3.Telecommunications (radio paging, cellular mobile, basic telephone services) 16,691 8.7

4 Transportation Industry 15,427 8.04

5.Fuels(power + oil refinery) 12,105 6.31

6.Chemicals (other than fertilizers) 9,510 4.95

7.Construction activities (including roads & highways) 6,396 3.33

8. Drugs & Pharmaceuticals 5,281 2.75

9. Food Processing Industries 5,143 2.68

10. Cement and Gypsum Products 4,329 2.26

  TOTAL FDI INFLOWS 2,32,041  

India: Vibrant Economy Driving M&A Activities

SECTOR USD (Mn) SECTOR USD

(Mn)

Automotive 518 Manufacturing 933

Banking and Financial 1,375 Media 630

Chemicals and Plastics

1,133 Oil & Gas 384

Electrical and Electronics

896 Pharma & biotech

2,520

Energy 1,484 Telecom 2,198

FMCG, Food and Beverages

1,327 Others 4,006

IT and ITES 2,903 Total 20,305

Growth Drivers: Globalisation of

competition Concentration of

companies to achieve economies of scale

Lower interest rates and vibrant global markets

Cash Reserves with Corporates

…Contribution of private equity deals to total number of deals have increased from nearly 9 percent in 2004 to 28 percent in 2006

In 2006, there were a total of 480 M&A deals and 302 private equity deals…

… Average deal size close to USD 36 million…

Trends: Ratio of the Size of

acquisition to the size of acquirer has grown from 10 percent in 2004 to 25 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

Number of Deals and Values

12.3

18.3

28.2

306

467

782

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15

20

25

30

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200

300

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900

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Deal Values No. of Deals

Major M&A Deals Undertaken Abroad by India Inc.

USD 12.1 billion USD 12.1 billion Tata Steel buys Corus PlcTata Steel buys Corus Plc

USD 6 billion USD 6 billion Hindalco acquired Novelis Inc.Hindalco acquired Novelis Inc.

USD 1.58 billion USD 1.58 billion Essar Steel acquired Algoma Steel Essar Steel acquired Algoma Steel

USD 730 million USD 730 million Videocon Industries acquired Daewoo Electronics Corporation Limited

Videocon Industries acquired Daewoo Electronics Corporation Limited

USD 1.6 billion USD 1.6 billion Suzlon Energy Ltd. acquires REpower Suzlon Energy Ltd. acquires REpower

Major M&A and Investments Announcements in India

USD 11 billion USD 11 billion Vodafone buys HutchVodafone buys Hutch

USD 0.98 billion USD 0.98 billion Aditya Birla Group increased its stake in Idea Cellular by acquiring 48.14-percent stake

Aditya Birla Group increased its stake in Idea Cellular by acquiring 48.14-percent stake

USD 1 billionUSD 1 billionPlans investment in private equity, real estate, and private wealth management

Plans investment in private equity, real estate, and private wealth management

USD 1.7 billionUSD 1.7 billionPlans to spend on its development operations in India over the next four years

Plans to spend on its development operations in India over the next four years

USD 0.905 billionUSD 0.905 billionRenault, Nissan and Mahindra & Mahindra has initiated a Greenfield automobile plant project in Chennai.

Renault, Nissan and Mahindra & Mahindra has initiated a Greenfield automobile plant project in Chennai.

Mylan Laboratories acquired a majority stake in Matrix Laboratories

Mylan Laboratories acquired a majority stake in Matrix Laboratories

USD 0.74 billionUSD 0.74 billion

Foreign Institutional Investors

An institution established outside India, which invests in

securities traded on the markets in India

Background

Started September 14, 1992 with suitable restrictions

Permitted to invest in all the securities traded on the primary and secondary markets

Reputed foreign investors, such as Pension Funds etc., were allowed to invest in Indian capital

market.

Since 1995 the flow of FII is being increasing with new investors coming into the market.

Financial Institutional Investors

Financial Institutional Investors are organizations which pool large sums of money and

invest those sums in securities, real property and other investment assets.

They can also include operating companies which decide to invest their profits to some degree

in these types of assets.

Types of typical investors include banks, insurance companies, retirement or pension

funds, hedge funds, investment advisors and mutual funds.

FII Route

As FII

Overseas pension funds, mutual funds, investment trust, asset management company,

nominee company, bank, institutional portfolio manager,etc

As Sub-accounts

The sub account is generally the underlying fund on whose behalf the FII invests. The

following entities are eligible to be registered as sub-accounts, viz. partnership firms, private

company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

Regular FIIs- those who are required to invest not less than 70 % of their investment in

equity-related instruments and 30 % in non-equity instruments.

100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

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,

construction of residential/commercial premises, roads or bridges)

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, and which go under.

Influencing the conduct of listed companies

Providing capital to companies

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

Foreign Institutional Investments in India  

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global

Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds.

Before 1992, 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.

They were allowed to invest in all the securities traded on the primary and the secondary market.

Investment Limits

Equity Instruments FII, on its own behalf, shall not invest in equity more than 10% of total issued

capital of an Indian company. Investment on behalf of each sub-account shall not exceed 10% of total issued

capital of an India company. For the sub-account registered under Foreign Companies/Individual category,

the investment limit is fixed at 5% of issued capital. These limits are within overall limit of 24% / 49 % / or the sectoral caps a

prescribed by Government of India / Reserve Bank of India.

Debt InstrumentsFor corporate debt the investment limit is fixed at US $ 500 million

Taxation

Nature of Income Tax Rate

Long-term capital gains 10%

Short-term capital gains 30%

Dividend Income Nil

Interest Income 20%

Economic Theory

Institutional investors as financial intermediaries

Act as intermediaries between lenders and borrowers.

Important in the functioning of the financial markets.

Economies of scale imply that they increase returns on investments and diminish the cost of capital for

entrepreneurs.

Acting as savings pools, they also play a critical role in guaranteeing a sufficient diversification of the

investors’ portfolios.

Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they

help diminish agency costs

Types

Pension fund

Mutual fund

Investment trust - 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 - transfer of money or property donated to an institution like

charity,University

Insurance Companies

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. 3 lac Crores with 1662 foreign institutional investors in

2010

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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