An Overview

What is FDI Why we need FDI Process of the Inflow of FDI Benefits Types Advantages and disadvantages FII Diff between FII and FDI
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Yesterday Slow rate of growth Bureaucratic Protected and slow Small consumer markets Weak infrastructure Today Strong macro economic fundamentals Encouraging foreign investment Outsourcing destination Growing consumerism

Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the World!
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Foreign Direct Investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country.
FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations

Foreign Direct Investment (FDI) cross border investment with an objective to establish lasting interest Objective - to encourage FDI to promote industrial & socio-economic development; supplement domestic capital/ technology Foreign investment in India is regulated by Government of Indias FDI policy. The FDI guidelines administered by the Ministry of Commerce and Industry. Department of Industrial Policy & Promotion (DIPP), Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI Policy GoI has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a one-window to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies Administrative and compliance aspects of FDI monitored by RBI Since 1991, policy has been liberalized substantially to facilitate foreign investment
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Liberal, largest democracy, Political Stability Second largest emerging market (US$ 2.4 trillion) Skilled and competitive labors force highest rates of return on investment one hundred of the Fortune 500 have R & D facilities in India Second largest group of software developers after the U.S. lists 6,500 companies on the Bombay Stock E xchange (only the NYSE has more)
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World's fourth largest economy & second largest pharmaceutical industry growth over the past few years averaging 8% has a middle class estimated at 300 million out of a total population of 1 billion 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

Investing in India

Automatic Route Automatic Route Automatic Route

Prior Permission Prior Permission Prior Permission (FIPB) (FIPB) (FIPB)

General Rule General Rule

No prior permission No No prior permission prior permission required required required Inform Reserve Bank Inform Reserve Bank within days of within 30 30 days of inflow/issue of shares inflow/issue of shares

By Exception

Prior Government Approval needed. Decision generally within 4-6 weeks

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FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture
Automatic Route Government Route

No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD Allowed for Most sectors Limits : Sectoral caps/ stipulated sector specific guidelines Inward remittances through proper banking channels Pricing valuations prescribed Post facto filing with 30 days of fund receipt Filings within 30 days of share allotment Includes Technical Collaboration/ Brand Name/ Royalty

Foreign Investment Promotion Board (FIPB) Only for cases other than Automatic Route and those mentioned in sectoral policy Applies to cases with existing venture/ tie up in same filed Applies to investment over 24% in SSI reserved items

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 Engineering & Manufacturing sectors Roads & Highways, Ports and Harbors Industrial model towns/industrial parks Hotels & Tourism Pollution Control and Management Advertising & Film industry Power generation (hydro-electric, coal/lignite, oil or gas based)

Information Technology including E-Commerce

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Profitability: Attract where return on investment is higher Costs of production: Encouraged by lower costs of production like raw materials, labor .

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, nature of important political parties and relations with other countries.

FDI equity limitAutomatic route

Insurance 26% Domestic airlines 49% Telecom services- Foreign equity 74% Private sector banks- 74%

Mining of diamonds and precious stones- 74%

Exploration and mining of coal and lignite for captive consumption- 74%

Defense production 26% FM Broadcasting - 20% News and current affairs26% Broadcasting- cable, uplinking 49% Trading- wholesale cash and carry, export trading, etc., 100% Tea plantation 100% Development of airports100% Courier services- 100%

FDI requiring prior approval

Flow to high profit areas rather than main concern areas Through their power and flexibility, MNC can undermine economic autonomy and control

Sometimes interferes in the national politics Sometimes engage in unfair and unethical trade practices Sometimes result in minimizing / eliminating competition and create monopolies or oligopolistic structures

Increase investment level and thereby income & employment Increase tax revenue of government Facilitates transfer of technology

Encourage managerial revolution through professional

management

Increase exports and reduce import requirements

Increase competition and break domestic

Improves quality and reduces cost of inputs

monopolies

FDI limits Illustrative list

Automatic Route (Illustrative) Prior Approval (Illustrative) Negative List (Illustrative)
100% 49% 100% 100% 100%
(a)

NBFC (minimum capitalization norms) IT / ITes Financial services(a) Telecom Sector (74% cap)(a) Insurance (26 % cap)(a) Real Estate(a) Special Economic Zones Infrastructure Shipping Manufacturing sector Hotels and tourism

Existing Airports Asset Reconstruction Companies Titanium Minerals Broadcasting (a) Cigars & Cigarettes Courier Print Media

Agriculture (b) Atomic energy Retail trading (except single brand up to 51%) Lottery, betting and gambling Chit fund, Nidhi company Trading in Transferable Development Rights

26% 51%

Single brand retailing

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Note: (a) Sector specific guidelines (b) Subject to certain exceptions

Automatic Route Prior Permission (FIPB)

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Investing in India

Automatic Route
General rule No prior permission required
Only information to the Reserve Bank of India within 30 days of inflow/ Issue of shares

Prior Permission (FIPB)

By exception Prior Government Approval needed Decision generally Within 4-6 weeks

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Prohibited activities Atomic energy Arms and ammunition Lottery business Betting and Gambling Aircraft and warships Coal lignite

Fully permitted Activities Cigar and cigarettes of tobacco Coal, Roads & Highways Diamond, Gold, Silver , Minerals Atomic minerals Electricity Hotel, hospitals

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Retail I.T Oil & Energy Power sector Pharmaceuticals & Chemicals

Real state Mining Mobile Sector Automobile Telecommunication

FDI inflows In real estate US$ 5 Billion FDI inflows Retail US$ 20 Billion by 2010 FDI inflows in Mining US$ 2,5 Billion per N.M. FDI inflows in Telecommunication US$ 24 Billion

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Companies
Wal mart,Marks Intel Corp. British & cairn Essar power

Sector
Retail I.T Oil & Energy Power sector

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

Toyota
Panasonic

Automobile

US$ 10.51 Billion

Telecommunicatio US$ 200 million n

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Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India

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List of companies in which FII investment is allowed upto limits fixed by companies as indicated against their names
1 2 3 4 5 Amtek Auto Ltd (74%) Advanta India Limited 49% Amtek India Ltd (74%) Ahmednagar Forgings Ltd (74%) Anant Raj Industries Ltd. (40%)

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ANG Auto Ltd (49%)

Apollo Hospitals (74%) Aptech Ltd (74%)

FDI

FII 1. It is generally short-term investment 2. Investment in financial assets 3. Aim is to increase capital availability

1. It is long-term investment
2. Investment in physical assets 3. Aim is to increase enterprise capacity or productivity or change management control 4. Leads to technology transfer, access to markets and management inputs 5. FDI flows into the primary market

4. FII results in only capital inflows

5. FII flows into the secondary market

6. Entry and exist is relatively easy 7. FII is eligible for capital gain 8. Tends to be speculative 9. No direct impact on employment of labour and wages 10.Fleeting interest in mgt.
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6. Entry and exit is relatively difficult

7. FDI is eligible for profits of the company 8. Does not tend be speculative 9. Direct impact on employment of labour and wages 10.Abiding interest in mgt.

 An institution established outside India, which invests in securities traded on the markets in India e.g.

Pension Funds Mutual Funds Investment Trust Insurance companies Endowment Funds University Funds Foundations or Charitable Trusts Asset Management Companies Power of Attorney Holders Bank

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FII is Foreign Institutional Investment: It is investment made by foreign Mutual Funds in the Indian Market. FDI is Foreign Direct Investment: It is the investment made by Foreign Multinational comapnies in India.

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Foreign Institutional Investors (FII) Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange Makes investments on behalf of foreign investors, referred to as sub-accounts

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Foreign Institutional Investors (FII) FIIs may invest in:

securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies) units issued by domestic mutual funds dated Government securities derivatives traded on a recognized stock exchange commercial paper debt instruments provided a 70/30 equity/debt ratio is maintained

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Foreign Institutional Investors (FII) Limits on the type and amount of investments apply to FIIs
no more than 10% of the equity in any one company no more than 10% in the equity in any one company on behalf of a fund sub-account no more than 5% in the equity in any one company on behalf of a corporate/individual sub-account no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs

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Thank You

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