FOREIGN INVESTMENT IN INDIA

INDIAN ECONOMY
Eleventh largest ECONOMY GDP growth 8.9% (2010, Q2) 4th largest by PPP - $4.00 trillion

Capital CAPITAL
1.Cash or goods used to generate income either by investing in a business or a different income property.

2. The net worth of a business; that is, the amount by which its assets exceed its liabilities.
3. The money ,property, and other valuables which collectively represent the wealth of an individual or business.

Importance OF CAPITAL IMPORTANCEof capital

Capital helps achieve strategic-financial goals To meet trade deficit To sustain economic growth

Types of foreign capitals TYPES OF FOREIGN CAPITAL

FOREIGN DIRECT INVESTMENT(FDI)

FOREIGN INSTITUTIONAL INVESTMENT(FII)

WHY INDIA REQUIREFOREIGN CAPITAL WHY INDIA NEED FOREIGN CAPITAL

Pre-liberalization Liberalization of economy Post liberalization

SHORTAGE OF CAPITAL IN INDIA

1980s crisis due to growing fiscal imbalance. Fiscal deficits during the 2nd half of the 80s. Borrowing by the Govt from the RBI, IMF, WB.

SHORTAGE OF CAPITAL IN INDIA

During 1980s, Govt Expenditure - Revenues Subsidies grew at a rate faster than Govt Expenditures.

Expenditure on subsidies rose from Rs.19.1 bn in 1980-81 to Rs. 107.2 bn in 1990-91.

SHORTAGE OF CAPITAL IN INDIA

The Indian economy was indeed in deep trouble due to: Lack of foreign reserves Gold reserve was empty

Before 1991, India was a closed economy

SHORTAGE OF CAPITAL IN INDIA

The Govt was close to default. The Govt of India decided to bring reforms termed as liberalization.

Why FDI and FIINEED FDI ANDIndia WHY INDIA important for FII
India is labour abundant country Labour force of 478 million (2nd; 2009)

Labour force by occupation :Agriculture (52%), Industry (14%), Services (34%) (2009 est.) India has a large pool of skilled managerial and technical expertise

WHY INDIA NEED FDI AND FII

Large unexploited natural resource To share technical know-how To bring in new technology in country To share good foreign relation

Foreign exchange reserves (US$ billion) 150 100

118.3 75.4 54.1 17.0

1995-96 2001-02 2002-03 2003-04

50

2.2
0 1990-91

Total Foreign Investment (US$ million) US$ million

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

15,872

5,138 103
1990-91 1994-95

5,385

6,789

8,152 5,639

1997-98

2000-01

2001-02

2002-03

2003-04

Total Foreign Investment (US$ million) US$ million

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

15,872

5,138 103
1990-91 1994-95

5,385

6,789

8,152 5,639

1997-98

2000-01

2001-02

2002-03

2003-04

FDI (DEFINITION)
Foreign Direct Investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage the asset.

WHY FDI ?
Gain a foothold in a new geographic market Global competitiveness & positioning Fill gaps in companys product lines in a global industry Reduce costs- R&D, production and distribution

CONTD..
Inadequate domestic fund Foreign funds guide the investment flow Speed-up and initiate the domestic fund flow Foreign funds help to bring in technicalknow how and new trends

FACTORS REQUIRED TO ATTRACT FDI

Low cost Qualified, educated/skilled labor pool Long term market potential Access to natural resources Population of a country plays an important role

CONTD
Political & environment stability Financial incentives (funds from local govt.) Fiscal incentives (exemption from import duties) Indirect incentives (provides land & other resources)

MAJOR BODIES CONSTITUTED FOR FDI

1991- Foreign Investment Promotion Board (FIPB) 1996- Foreign Investment promotion council (FIPC) 1999- Foreign Investment implementation Authority (FIIA) 2004- Investment Commission Secretariat of Industrial Assistance (SIA)

TYPES OF FDI
Purchase of existing assets New investment Participation in an international jointventure

MERITS
Inflow of equipment & technology Competitive advantage & innovation Financial resources for expansion Employment generation Contribution to exports growth

CONTD
Access to global marketplace Access to low cost resources Access to new market/distribution channel for products Improved consumer welfare Advantage of increasing levels of FDI

DEMERITS
Crowding of local industry Repatriation of profits/dividends by investor Conflicts of codes/laws Loss of control

CONTD
Possible exploitation of resourcesmaterial/wages Effect on natural environment Socio cultural effect

WHY FDI IN INDIA ?

Liberal, Largest Democracy, Political Stability Second Largest emerging market (US$2.4 trillion) Skilled & Competitive labors force Highest rates of return on investment

WHY FDI IN INDIA ?(CONT)

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 BSE (only the NYSE has more) Worlds fourth largest Economy & second largest Pharmaceutical Industry

WHY FDI IN INDIA ?(CONT)

Growth over the past few years averaging 8% Destination for BPO, KPO, etc Second largest English speaking, scientific, technical &executive manpower Low costs & Tax exemptions in SEZ

FDI in India are approved through two routes

Automatic approval by RBI The FIPB route processing of nonautomatic approval cases

FDI : INDIAN SCENARIO

FDI is permitted as under the following forms of Investments:

Through Financial collaborations Through joint ventures & technical collaborations Through Capital markets via Euro issues Through private placements or preferential allotments

FORBIDDEN TERRITORIES
FDI is not permitted in the following Industrial sectors: Arms & ammunition Atomic energy Railway transport Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc Retail Trading (except single brand product retailing) Lottery business Gambling & Betting Business of Chit Fund Nidhi company

FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR 2010-11:

Financial Year 2010-11 ( April-March )

Amount of FDI inflows* (In ` Crore) 9,697 10,135 6,429

Amount of FDI inflows* (In US$ mn) 2,179 2,213 1,380

April 2010 May 2010 June 2010

July 2010 August 2010

September 2010 October 2010 November 2010 2010-11 (up to November 2010) # 2009-10 (up to November 2009) %age growth over last year

8,359 6,196
9,754 6,185 7,328 64,083 93,096 ( - ) 31 %

1,785 1,330
2,118 1,392 1,628 14,025 19,326 ( - ) 27 %

SHARE OF 10 TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

FDI Limit in Different Sector

Sector/Activity Airports Construction Development Petroleum & Natural Gas (b) Refining Other than Refining Power ( Except Atomic energy); regulations transmission, distribution and Power Trading Ports Roads & Highways Shipping 26% (For PSUs 100% ( Private companies) 100% 100% ) FIPB Automatic Automatic Automatic FDI Cap/Equity 100% 100% Entry Route Automatic Automatic

100% 100% 100%

Automatic Automatic Automatic

Sector/Activity Agriculture and animal husbandry Tea plantation Mining Drugs & pharmaceuticals Hazardous chemical

FDI Cap/Equity 100% 100% 100% 100% 100% 100% 24%

Entry Route Automatic FIPB Automatic Automatic Automatic Automatic FIPB Automatic

FDI Limit in Different Sector

Industrial Explosives
MANUFACTURING Alcohol Distillation & Brewing Cigars & Cigarettes Manufacture Defense Industry

100% 100%
26%

FIPB
FIPB

FII
FIIs are defined under SEBI Regulations as
an institution that is a legal entity established or incorporated outside India proposing to make investments in India only in securities.

WHO CAN GET REGISTERED AS FII ?

Pension funds Mutual funds Investment Trust Insurance companies Endowment funds University funds Foundations or Charitable trusts Asset management companies Power of Attorney holders Bank

CATEGORIES OF REGISTERED FIIs

Normal FIIs:
- not less than 70% in equity related instruments - 30% in non-equity instruments

100% Debt FIIs:

- permitted to invest only in debt instruments

AN FII CAN INVEST ONLY IN THE FOLLOWING :

Securities in the Primary & Secondary markets Units of schemes floated by Domestic mutual funds & Collective investment scheme Dated Government Securities Derivatives traded on a recognized stock exchange Commercial paper Security receipts Indian Depository receipts

FORBIDDEN AREAS FOR FII

Govt Bonds Chit fund Nidhi Company Agricultural or plantation activities Real estate business or construction of farm houses Trading in Transferable Development Rights (TDRs).

What are the parameters on which SEBI decides FII applicants eligibility?

What are the restrictions that FIIs face in India?

ADVANTAGES OF FII
Large availability of capital Unavailability of Corporate Debt Increases FOREX reserves Increases domestic saving and investments

DISADVANTAGES OF FII
Problems of Inflation Hot money Adverse impact on exports Problem for small investor Revival of developed economies

TRENDS IN FII INVESTMENTS

FII Investment Activity in 2010
Equity Investment Debt Investment

CURRENT SCENARIO
FIIs investments worth US$ 4.11b in equities. Poured US$ 667.71m into the debt market. Number of registered FIIs - 1,738. Number of registered sub-accounts - 5,592 as of November 10, 2010.

CURRENT SCENARIO(cont)
India has received more FII funds as compared to its Asian peers. According to Bloomberg, Net FII inflow in INDIA -US$ 28.5 billion, far ahead of South Korea (US$ 16 billion) and Japan (US$ 13 billion). Net FII inflows as a percentage of the market capitalization are also the highest in India. ( 1.8 per cent in 2010, followed by South Korea at 1.6 per cent.)

Related Articles
FII money pushes Sensex to all-time high
Cumulative FII inflows into India cross $100 bn mark (14 NOV, 2010,
07.45AM IST, ASHISH GUPTA,ET BUREAU)

FII investments touch US$ 17.19 billion in Jan 2011 IBEF: January 31, 2011

FIIs net buyers of Rs 539 cr in cash mkt

BS Reporter / Mumbai February 3, 2011, 17:42 IST

GLOBAL PLAYERS IN INDIAN MARKET

Holdings of world's top investment banks and brokerages in Indian firms

Deutsche group Citigroup HSBC Global Investments Morgan Stanley and Co. International Merrill Lynch Capital Markets CLSA Asia-Pacific Goldman Sachs Investments Mauritius JPMorgan Chase UBS Securities Asia Ltd** Bear Stearns Asset Management Ltd ABN Amro NV Lehman Brothers Asia Ltd

84
184 126

154 142 42
104 20 88 86 45 1

Source: Capitaline

OTHER PLAYERS..
IL&FS Investment Managers (IIML) Ltd - laundry services business of FMCG player Jyothy Laboratories Limited One97 Communications - an agreement with Mauritius-based PE firm SAIF Partners to launch a US$ 107.9 million fund to provide seed capital to start-up technology companies Olympus Capital Investment in companies in infrastructure supply chain management

DIFFERENCE BETWEEN FDI & FII

FDI FII 1 FDI is when foreign company brings capital into a country or an economy to set up a production or some other facility. FDI gives the foreign company some control in the operations of the company FII is when a foreign company buys equity in a company through the stock markets. Therefore, in this case, FII would not give the foreign company any control in the company

FDI involves in the direct production FPI is a short term investment mostly in activity & also of medium to long the financial markets & it consist of FII term nature It enables a degree of control in the company FDI brings-long term capital It does not involve obtaining a degree of control in a company FII brings short-term capital

OTHER DIFFERENCES

Government Preference Stability