FOREIGN INVESTMENTS

Group 2 Nidish (1021024) Apurva(1021055) Apurva(1021055) Sandeep(1021128) Sandeep(1021128) Apoorv(1021207 Apoorv(1021207 Deekshit(1021233) Deekshit(1021233)

FDI versus Portfolio Investment

According to IMF FDI is an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor's purpose being to have an effective voce in the management of the enterprise. Portfolio Investment does not seek management control;motvated by proft. FDI is preferred over other forms of external finance because they are
Non debt creating Non volatile Their returns depend on the performance of the projects FDI also facilitates internatonal trade and transfer of knowledge skills and technology

Advantages of FDI for the Host Country

Raising the level of Investment: Local capital markets are not well developed thus access to hard currency s not available. Upgradation of technology Improvement in export competitiveness Employement generation Benefits to consumers Resilience factor Revenue to Government

Disadvantages of FDI


When foreign investment is competitve with home investment profits in domestic industries fall Contribution of foreign firms is comparitively less because of liberal tax concessions, investment allowances.

Foreign firms reinforce dualistic socio- economic structure and increase income inequalities.


Foreign firms stimulate inappropriate consumption patterns through excessive advertising.



Foreign firms are able to extract a sizeable economic and political concessions

Determinants of FDI Size of the market Political Stability

Macroeconomic environment Access to basic Inputs

Legal ad Regulatory Framework



Advantage of FII(Portfolio Investment)

Improvement in Corporate Capital Structure



Competition in Financial Markets

Enhanced efficiency in capital markets

Improvement in Corporate Governance

Disadvantages of FII

Management Control : FII act as agents on behalf of their principles as financial investors maximising returns.


Volatility of portfolio inflows.

Comparison between India and China



Reasons for China being a more attractive market for FDI rather than India:


Higher total and per capita GDP

Higher literacy and education rates for efficiency seeking investors



Large resource endowments.

More competitive physical infrastructure

Key centre for hardware design and manufacturing

Business oriented and FDI friendly policies than India



Easy procedures flexible labor laws

Better market oppurtunities and easy entry and exit procedures.

India has an advantage in



Technical manpower

Better English language skills

Better political environment as compred to China also in terms of taxes and financing.


Recent improvements in enforcing debt contratcs and bankruptcy laws



But still it has a heavy regulatory burden in terms of entry and exit

 The need for FDI is because India is at a stage where it needs US investments, technology, and management policies to sustain and enhance its economic growth.  In 2006, Foreign Direct Investment (FDI) in India amounted to US$37 billion, out of which only $5 billion was from the US. The need for FDI calls for major issues and areas to be taken into consideration, such as: Market potential and accessibility Political stability Market infrastructure Easy currency conversion

India is the ideal country to make Foreign Direct investments in because of its features like : Developing economy Low salaried employees Low wage workers Abundant human resources Big private economy

An Indian company may receive Foreign Direct Investment under the two routes. Automatic Route : FDI up to 100 per cent is allowed under the automatic route in almost all the activities/sector. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. Sectors /Activities not permitted under automatic route have to take approval from FIPB (Government Route) for investing in India. Government Route: FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors.

The Reserve Bank can, by regulations, regulate

Transfer or issue of any foreign security by a person resident in India Transfer or issue of any security by a person resident outside India

Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India Any borrowing or lending in foreign exchange in whatever form or by whatever name called. Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India Deposits between persons resident in India and persons resident outside India Export, import or holding of currency or currency notes. Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India

1. These Regulations may be called the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Amendment) Regulations, 2010. 2. They shall come into force from the date of their publication in the Official Gazette.

The offer on right basis to the persons resident outside India shall be: (a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company; (b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

Issue price
Price of shares issued to persons resident outside India under this Schedule, shall not be less than (a) the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognized stock exchange in India; (b) the fair valuation of shares done by a SEBI registered Category I Merchant Banker or a

Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognized stock exchange in India ; and (c) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India
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.

Private Sector Banking: Non-Banking Financial Companies (NBFC) 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. A. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below:
Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies

Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)

Telecommunication: FDI in Telecommunication sector

In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) 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. These services would be subject to licensing and security requirements. No equity cap is applicable to manufacturing activities.

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

The above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. The above services would be subject to licensing and security requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading: FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i. 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. ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: Companies for providing after sales services (that is not trading per se) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. Trading of hi-tech items/items requiring specialized after sales service Trading of items for social sector Trading of hi-tech, medical and diagnostic items.

Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

ADR & GDR

Depository Receipts : Depository Receipts are a type of negotiable (transferable) financial security, representing a security, usually in the form of equity, issued by a foreign publiclylisted company. However, DRs are traded on a local stock exchange though the foreign public listed company is not traded on the local exchange. Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other countries. This type of instruments first started in USA in late 1920s and are commonly known as American depository receipt (ADR). Later on these have become popular in other parts of the world also in the form of Global Depository Receipts (GDRs). Some other common type of DRs are European DRs and International DRs. In nut shell we can say ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but these can also be denominated in Euros.

How do Depository Receipts Created? When a foreign company wants to list its securities on another country s stock exchange, it can do so through Depository Receipts (DR) mode. To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR. On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

What are ADRs : American Depository Receipts popularly known as ADRs were introduced in the American market in 1927. ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are one or more units of a foreign security traded in American market. They are traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or brokerage. ADRs were introduced with a view to simplify the physical handling and legal technicalities governing foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in foreign securities is prone to number of difficulties like different prices and in different currency values, which keep in changing almost on daily basis. In view of such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these shares into groups, and reissue them and get these quoted on American stock markets. For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without converting them from rupees. Such companies are required to declare financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990.

ADVANTAGES OF ADRs: There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company. It reduces administrative costs and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they get more U.S. exposure and it allows them to tap the American equity markets. The shares represented by ADRs are without voting rights. However, any foreigner can purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right.

Some Major ADRs issued by Indian Companies : Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR), WIT (the Wipro ADR), Rdy(the Dr Reddy s Lab ADR), and Say (the Satyam Computer ADS)

Indian Depository Receipts (IDR) :

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a Domestic Depositories in India against the underlying equity shares of the issuing company which is incorporated outside India. Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company. The shares will not be listed in India , but have to be listed in the home country. The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market. Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility is not permitted.

SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track record with respect to securities market regulations and companies not meeting the criteria will not be allowed to raise funds from the domestic market If the IDR issuer fails to receive minimum 90 per cent subscription on the date of closure of the issue, or the subscription level later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the company has to refund the entire subscription amount received, SEBI said. Also, in case of delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay.

TwoTwo-way Fungibility Scheme

Two-way fungibility Scheme : Under the limited Two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/ GDRs. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only as many shares into ADRs/ GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/ GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long the ADRs/ GDRs are quoted at discount to the value of shares in domestic market, an investor will gain by converting the ADRs/ GDRs into underlying shares and selling them in the domestic market. In case of ADRs/ GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/ GDRs. The scheme is operationalised through the Custodians of securities and stock brokers under SEBI.

Sponsored ADR/GDR issue

An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue is remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs.

The regulations pertaining to issue of ADRs/ GDRs by Indian companies

Indian companies can raise foreign currency resources abroad through the issue of ADRs/ GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time. A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier.

After the issue of ADRs/GDRs, the company has to file a return in Form DR as indicated in the RBI Notification No. FEMA.20/ 2000-RB dated May 3, 2000, as amended from time to time. The company is also required to file a quarterly return in Form DR- Quarterly as indicated in the RBI Notification. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. Erstwhile OCBs which are not eligible to invest in India and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies. The pricing of ADR / GDR issues including sponsored ADRs / GDRs should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.

Types of Tax benefits for FDI

Tax holidays are most widely used incentives. fast write-offs of investment expenditures. lowering the effective corporate tax. Lowering of import duty.

Problems of Tax incentives.

Incentive regimes generally impose a large administrative burden. Tax revenues will drastically fall. Fiscal burden may increase. It can distort the allocation of resources because private company may have short term motive.

International Taxation
The ability and evident willingness of taxpayers to relocate activity, to shift taxable income between jurisdictions, and to respond to incentives created by the interaction of domestic and foreign tax rules, mean that the tax policies of other countries obviously must be considered in the formulation of domestic policy. In the current environment, almost every U.S. tax provision influences foreign direct investment (FDI) or provides incentives for international tax avoidance.

Impact of tax policy

FDI:Countries with lower tax rates receive much more FDI than do countries with higher tax rates.

International tax avoidance:Sophisticated international tax avoidance typically entails reallocating taxable income from countries with high tax rates to countries with low tax rates, and may include changing the timing of income recognition for tax purposes.

Economic efficiency:Tax treatment of foreign income is often criticized that foreign tax credits encourages foreign investment by American companies at the expense of domestic investment.

FDI procedures and policies

WHO CAN INVEST IN INDIA? A non-resident entity (other than pakistan citizen and entity) NRIs resident as well as citizens in Nepal and Bhutan No person other than registered FII/NRI as per Schedules II and III of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations of FEMA 1999, can invest/trade in capital of Indian Companies A SEBI registered Foreign Venture Capital Investor upto 100%

Some of the important FDI announcements:

The Government has approved a total of 31 FDI proposals worth US$ 871.71 million (Rs 3,844.7 crore). The Centre's approval to the Reliance-BP deal may bring around US$ 7.2 billion FDI in India In the fiscal year 2011, the US Export Import Bank's (Ex-Im) has approved financing totalling about US$ 75 million for four solar power projects in India. Major investments so far this year include the US$ 828 million investment by GIC and Bain Capital investment in Hero Investments in March 2011

GE India plans to invest around US$ 158.70 million to set up a multi-product manufacturing facility at Chakan near Pune Policy initiatives foreign investors can inject their funds though the automatic route in the Indian economy (no prior gvt permi & co.s shoul intimate RBI) the Government has eased norms for investments by foreign companies that are present in India through a JV or a technical collaboration.

Now, the foreign company will not have to seek a no-objection certificate from the Indian partner for investing in the sector where the joint venture operates. The Government has also relaxed norms for downstream investments and convertible instruments, giving foreign companies more powers Pricing of convertible instrument (CCPS & CCDs)

SEBI has permitted both existing mutual funds and non-banking finance companies (NBFCs) to launch infrastructure debt funds (IDFs). 51 per cent(will be 74%) FDI in single-brand retail has been allowed by the Committee of Secretaries (CoS)

References: SEBI, Consolidated FDI Policy, Department of Industrial Policy & Promotion (DIPP), Press Information Bureau (PIB), Media Reports, UNCTAD Report

FINANCIAL YEAR-WISE FDI INFLOWS DATA YEAR-

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Sources and References

RBI Notification No. FEMA.20/ 2000-RB dated May 3, 2000. A.P. (DIR Series) Circular No.21 dated February 13, 2002. FAQs Foreign investments in India (updated to Oct 13, 2010.(http://www.rbi.org.in/scripts/faqview.aspx?id=26) Master Circular for Foregin Investments in India by Reserve Bank of India (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MFI300611F.pdf) Two-way fungibility for ADRs/GDRs operational / Business Standard February 14,2002 (http://www.businessstandard.com/india/news/two-way-fungibility-for-adrsgdrsoperational/172394/) ADR/GDR/FCCB Issues, Reserve Bank of India, Exchange Control Department, November 23, 2002 (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/32777.pdf)

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