Post on 13-Sep-2014
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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10
15
20
25
30
2004 2005 2006
US
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100
200
300
400500
600
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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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