fdi and fiis

7/29/2019 Fdi and Fiis

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FDI And FIIs

PRESENTED BY:


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Foreign Direct Investment

Long-term investment by aforeign direct investorin 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.


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Modes of FDI

1) By Direction* Inward

*Outward

2) By Target

* Mergers and Acquisitions

* Horizontal FDI

* Vertical FDI

(a) Backward Vertical FDI

(b) Forward Vertical FDI

3 )By Motive

* Resource-Seeking

* Market-Seeking

* Efficiency-Seeking


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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


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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


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Mode of Entry

Joint Venture

Green Field Strategy

Wholly owned subsidiary

Project Office

Mergers and Acquisitions


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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


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Foreign Direct Investment inIndia

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.


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Foreign Direct Investment inIndia

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 200809 stood at 122,919 crore (US$27.41 billion), a growth

of 25% in rupee terms over the previous period.


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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


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Benefits and Cost of FDI

FDI has costs and benefits to the home country as well as hostcountry.

Benefits to Home Country:-

Inflow of foreign currencies.

Enhances industrial activity of home country.

Skills learn from host country can be transferred to homecountry.

Costs to Home Country:-

Home countrys industry and employment position are at stake. Current account position suffers.


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Benefits to Host Country:-

Resource-transfer effects.

Employment effects.

Balance of payment effects.

Improvement in foreign exchange earning.

Costs to Host Country:-

Intensifying competition. Negative effects on the balance of payments.


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FDI in India

India has been ranked at the second place in global FDIin 2010 and will continue to remain among the top fiveattractive destinations for international investors during2010-12 period, according to United Nations Conference

on Trade and Development (UNCTAD) in a report onworld investment prospects titled, 'World InvestmentProspects Survey 2009-2012'.

According to the data released by the Department ofIndustrial Policy and Promotion (DIPP), India attractedFDI equity inflows of US$ 2,014 million in December2010. The cumulative amount of FDI equity inflows fromApril 2000 to December 2010 stood at US$ 186.79billion.


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Sector-wise FDI inflows from April 2000 TO January2011

Sr.no

Sector Amount of FDI inflows % withtotal FDIinflows

In Rs.crore

In US$million

1 Service sector 118,923.46

26,597.42 20.8

2 Computer software & hardware 47,340.34 10,643.83 8.36

3 Housing and real estate 46,746.29 10,262.19 8.06

4 Construction activity 42,162.77 9,405.20 7.38

5 Automobile industry 40,233.46 9059.07 7.11

6 Power 26,197.64 5,787.72 4.54

7 Metallurgical industries 25,714.51 5,680.08 4.46

8 Petroleum and natural gas 18,072.87 4,141.18 3.25

9 Chemicals 13,584.83 3,119.76 2.45

10 trading 13,007.39 2,876.41 2.26


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Share of top investing countries in FDIequity inflow from April 2000- Jan2011

Sr.no

country Amount of FDI inflows % with totalFDI inflowsIn Rs. crore In US$

million

1 MAURITIUS 238,876.20 53,368.91 41.90

2 SINGAPORE 51,963.99 11,693.83 9.183 U.S.A 42,190.39 9,370.69 7.36

4 UNITED KINGDOM 28,298.45 6,387.08 5.01

5 NETHERLANDS 24,877.41 5,534.70 4.35

6 JAPAN 23,074.84 5,081.56 3.997 CYPRUS 21,235.09 4,654.74 3.65

8 GERMANY 13,012.80 2,918.42 2.29

9 FRANCE 10,067.92 2,220.07 1.74

10 UAE 8,525.84 1,875.09 1.47


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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:


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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)


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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


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FDI in Various Industries


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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 Consultancy Stock 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


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Major M&A Deals Undertaken Abroad by India Inc.

USD 12.1 billionTata Steel buys Corus Plc

USD 6 billionHindalco acquired Novelis Inc.

USD 1.58 billionEssar Steel acquired Algoma Steel

USD 730 millionVideocon Industries acquired Daewoo

Electronics Corporation Limited

USD 1.6 billionSuzlon Energy Ltd. acquires REpower


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Major M&A and Investments Announcements in India

USD 11 billionVodafone buys Hutch

USD 0.98 billionAditya Birla Group increased its stake in Idea

Cellular by acquiring 48.14-percent stake

USD 1 billion

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

USD 1.7 billionPlans to spend on its development operations

in India over the next four years

USD 0.905 billion

Renault, Nissan and Mahindra & Mahindrahas initiated a Greenfield automobile plantproject in Chennai.

Mylan Laboratories acquired a majority stakein Matrix Laboratories

USD 0.74 billion


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Foreign Institutional Investors

An institution established outside

India, which invests in securitiestraded on the markets in India


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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.


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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.


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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.


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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)


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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


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A Foreign Institutional Investor mayinvest 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


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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.


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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 Instruments

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


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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


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Types

Pension fund

Mutual fund

Investment trust - Collective Investment

Unit trust and Unit Investment TrustStocks and Bonds

Investment bankingHigh 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


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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


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Difference between FDI and FII

FDI FIIFDI is an investment that a parentcompany makes in a foreigncountry.

FII is an investment made by aninvestor in the markets of a foreignnation.

FDI or Foreign Direct Investment isan investment that a parentcompany makes in a foreign country

FII or Foreign Institutional Investor isan investment made by an investorin the markets of a foreign nation.

FDI invest in a foreign nation. The companies only need to get

registered in the stock exchange tomake investments.

But FDI cannot enter and exit thateasily.

FII can enter the stock market easilyand also withdraw from it easily.

investors have the liberty to sell itand take it back.


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Latest news about FDI and FII

The insurance legislation would increase the FDI limit to 49 percentfrom the current 26 per cent. The LIC bill would increase the sharecapital of Life Insurance Corporation (LIC) to Rs 100 crore from itscurrent Rs 5 crore.

It has been decided to permit SEBI registered Mutual Funds to

accept subscriptions from foreign investors who meet the KYCrequirements for equity schemes. This would enable Indian MutualFunds to have direct access to foreign investors and widen the classof foreign investors in Indian equity market.

FII limit for investment in corporate bonds is raised by additional limitof 20 billion $ taking the limit to 25 billion $.

Recently, India has allowed Foreign Direct Investment up to 100% inmany manufacturing industries which were designated as SmallScale Industries.


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The foreign investment limit in Public Sector Units (PSU) refinerieshas been raised from 26% to 49%.

FDI in Civil aviation up to 74% will now be allowed through theautomatic route for non-scheduled and cargo airlines, as also forground handling activities.

100% FDI in aircraft maintenance and repair operations has alsobeen allowed. But the big one.

India has decided to allow 26% FDI and 23% FII investments incommodity exchanges, subject to the proviso that no single entity willhold more than 5% of the stake.

Sectors like credit information companies, industrial parks andconstruction and development projects have also been opened up tomore foreign investment.

India has also allowed 100% FDI in mining of titanium, a mineralwhich is abundant in India.


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