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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 200809 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

Major Investments
Companies
Wal mart,Marks Intel Corp. British & cairn Essar power Toyota Panasonic

Sector
Retail I.T Oil & Energy Power sector Automobile

Investment
US$ 10 Billion US$ 40 Billion US$ 2 Billion US$ 2 Billion US$ 10.51 Billion

Telecommunication US$ 200 million

4/28/2012

Source:

10

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 Consultancy Stock Broking


Asset Management Factoring Leasing & Finance Credit card business Rural Credit Venture Capital Custodial Services Housing Finance Micro Credit

Investment Advisory Services


Credit Reference Agencies Credit rating Agencies Foreign Exchange Brokering Money changing Business

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


Cumulative Inflows (from August 1991 to March 2007) Amount in rupees in crore 36,034 34,238 16,691 15,427 12,105 9,510 6,396 5,281 5,143 4,329 2,32,041

Ranks

Sector Electrical Equipments 1. (including computer software & electronics)

%age with total inflows 18.77 17.84 8.7 8.04 6.31 4.95 3.33 2.75 2.68 2.26

Services Sector 2. (financial & non-financial) Telecommunications 3. (radio paging, cellular mobile, basic telephone services)
4 Transportation Industry Fuels 5. (power + oil refinery) Chemicals 6. (other than fertilizers) Construction activities 7. (including roads & highways) 8. Drugs & Pharmaceuticals 9. Food Processing Industries 10. Cement and Gypsum Products TOTAL FDI INFLOWS

India: Vibrant Economy Driving M&A Activities


Growth Drivers: Globalisation of competition Concentration of companies to achieve economies of scale Lower interest rates and vibrant global markets Cash Reserves with Corporates SECTOR
Automotive Banking and Financial Chemicals and Plastics Electrical and Electronics Energy FMCG, Food and Beverages IT and ITES

USD (Mn)
518 1,375 1,133 896 1,484 1,327

SECTOR
Manufacturing Media Oil & Gas Pharma & biotech Telecom Others

USD (Mn)
933 630 384 2,520 2,198 4,006

2,903

Total

20,305

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

In 2006, there were a total of 480 M&A deals and 302 private equity deals Average deal size close to USD 36 million Contribution of private equity deals to total number of deals have increased from nearly 9 percent in 2004 to 28 percent in 2006

Major M&A Deals Undertaken Abroad by India Inc.

Tata Steel buys Corus Plc

USD 12.1 billion

Hindalco acquired Novelis Inc.

USD 6 billion

Essar Steel acquired Algoma Steel

USD 1.58 billion

Suzlon Energy Ltd. acquires REpower

USD 1.6 billion

Videocon Industries acquired Daewoo Electronics Corporation Limited

USD 730 million

Major M&A and Investments Announcements in India


Vodafone buys Hutch
USD 11 billion

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

USD 1.7 billion

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

USD 1 billion

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

USD 0.98 billion

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

USD 0.905 billion

Mylan Laboratories acquired a majority stake in Matrix Laboratories

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

Taxation
Nature of Income Long-term capital gains Short-term capital gains Dividend Income Tax Rate 10% 30% 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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