1.By : Prabhat Kumar PGDM-Exe 2013-14 LBSIM,New Delhi1

2. Flow of Presentation What are foreign investors looking for. Definition-FDI Advantages and Disadvantages. Green Field and Brown field investments. FDI caps in different Industries. Definition-FPI Advantages and Disadvantages. Difference between FDI and FPI2 3. What are Foreign Investors looking for?Factors affecting foreign investment Good projectsRate of interest Demand PotentialSpeculation Revenue PotentialProfitability Stable PolicyEnvironment/Political Commitment Optimal Risk Allocation FrameworkCosts of production Economic conditionsGovernment policies Political factors 3 4. What Is FDI? Foreign direct investment (FDI) occurs when a firm investsdirectly in new facilities to produce and/or market in a foreign country the firm becomes a multinational enterprise The flow of FDI refers to the amount of FDI undertaken over agiven time period Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country The stock of FDI refers to the total accumulated value offoreign-owned assets at a given time7-4 5. FDI can be in the form of Greenfield investments - the establishment of a wholly new operation in a foreign country acquisitions or mergers with existing firms in the foreign country Brown field Investments - When a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment.5 6. How Does FDI Benefit The Host Country? 1.There are main benefits of inward FDI for a host country Resource transfer effects - FDI brings capital, technology, and management resources Employment effects - FDI can bring jobs Balance of payments effects - FDI can help a country to achieve a current account surplus Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers2. 3. 4.can lead to increased productivity growth, product and process innovation, and greater economic growth7-6 7. Contd.. Inflows of foreign stable capital into the country Helps in the transition to privatization (when state owned firms are sold to foreign investors) Improves the countries infrastructures Brings foreign executives into the country with sufficient knowledge of macroeconomic global andlocal situations 7 8. What Are The Costs Of FDI To The Host Country? 1.Inward FDI has three main costs: Adverse effects of FDI on competition within the host nation subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organizationAdverse effects on the balance of payments2. when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host countrys balance of paymentsPerceived loss of national sovereignty and autonomy3. decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host countrys government has no real control7-8 9. How Does Government Influence FDI? Governments can encourage outward FDI government-backed insurance programs to cover major types of foreigninvestment risk Governments can restrict outward FDI limit capital outflows, manipulate tax rules, or outright prohibit FDI Governments can encourage inward FDI offer incentives to foreign firms to invest in their countries gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries Governments can restrict inward FDI use ownership restraints and performance requirements7-9 10. How Do International Institutions Influence FDI? Until the 1990s, there was no consistent involvement bymultinational institutions in the governing of FDI Today, the World Trade Organization is changing this by trying to establish a universal set of rules designed to promote the liberalization of FDI7-10 11. An Overview of India-FDI UNCTAD ranked India at 3rd position in 2010 as the attractivedestination for FDI, which further rose to secondmost attractive destination for FDI in 2012, as ranked by A.T. Kearney FDI Confidence Index. As a directinvestment in to production or business in India, by purchasing the stocks or buying a company or expanding the business The investment is done either through purchase of shares or purchase of stocks or through participationin management and working. India allows FDI through mergers and acquisitions, joint ventures, Greenfieldinvestment, etc. The major participation is seen inSEZs, EPZs, and sectors which are lucrative for higher returns. 11 12. Foreign Direct Investment Policy FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture Automatic RouteGovernment RouteNo Prior Regulatory Approval,RBI automatic appraval for equity holding upto 51%Foreign Investment Promotion Board (FIPB) for more than 51 % Limits : Sectoral caps/ stipulated sector specific guidelinesInward remittances through proper banking channelsPost facto filing with 30 days of fund receiptFilings within 30 days of share allotmentIncludes Technical Collaboration/ Brand Name/ RoyaltyApplies to cases with existing venture/ tie up in same filedPricing valuations prescribedAllowed for Most sectorsOnly for cases other than Automatic Route and those mentioned in sectoral policy 12 13. FDI Policies and Limits in india Foreign Direct Investment (FDI) in India is subject tocertain Rules and Regulations and is subject to predefined limits ('Limits') in various sectors which range from 20% to 100%. There are also some sectors in which FDI is prohibited. The FDI Limits are reviewed by the Government from time to time. FDI is allowed in new sectors where the limits of investment in the existing sectors are modified accordingly. 13 14. In order to revise the FDI Limits to attract moreforeign investment in India, the Union Government constituted a committee named, Arvind Mayaram Committee headed by the Economic Affairs Secretary. On 16th July, 2013, the Government approved the recommendations given by the Arvind Mayaram Committee to increase FDI limits in 12 sectors out of the proposed 20 sectors, including crucial ones such as defense and telecom.14 15. FDI cap in telecom raised to 100 percent from 74 percent; up to 49 percent through automatic route and beyond via FIPB * No change in 49 percent FDI limit in civil aviation* FDI cap in defence production to stay at 26 percent, higher investment may be considered in state-of-the-art technology production by CCS. * 100 percent FDI allowed in single brand retail; 49 percent through automatic, 49-100 percent through FIPB * FDI limit in insurance sector raised to 49 percent from present 26 percent, subject to Parliament approval * FDI up to 49 percent in petroleum refining allowed under automatic route, from earlier approval route * In power exchanges 49 percent FDI allowed through automatic route, from earlier FIPB route. 15 16. * FDI up to 100 percent through automatic route allowed in courier services* FDI in tea plantation up to 49 percent through automatic route; 49-100 percent through FIPB route . * FDI limit increased in credit information companies to 74 percent from 49 percent * FDI up to 49 percent in stock exchanges, depositories allowed under automatic route * Raised FDI in asset reconstruction companies to 100 percent from 74 percent; of this up to 49 percent will be under automatic route16 17. 17 18. FDI not allowed in.. Rail Transport. Arms and Amunition. Atomic Energy. Coal and lignite. Mining of metals like iron,chrome,gypsum,diamondsetc18 19. Indias FDI Hottest Destinations 1. Maharashtra Maharashtra received the lion's share of the FDI $2.43 billion (Rs 11,154 crore), which is 35% of the total FDI inflows in to the country,. 2. National Capital Region NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region accounted for 20% of the total FDI. 3. West Bengal, Sikkim, Andaman & Nicobar Islands These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050 crore) 4. Karnataka - $936 million (Rs 4,333 crore) 5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore) Data: Jan Jun 2010 19 20. Factors Affecting FDI In india Favourable: Unfavourable: Larze size of economy. Beuracratic Culture. Rich resource base. High Tax Rate Cheap Labour. Poor governance Removal of barrier to High degree offoreign trade. Abundant technical supply of manpowercorruption.20 21. India should welcome FDI as it has huge benefits for theIndian economy. FDI participation always brings prosperity for any emerging country. Various benefits which India can entice by liberalising FDI are use of advanced technology, expertise, better infrastructural developments, widened product basket, improving standard of living, uplifting the brand quality, improving competitiveness, better foreign relations, boosting exports, and providing India with a global platform. The debated views of FDI in multi brand have certainly hindered the flow in retailing 21 22. Figure in million dollars 22 23. 23 24. Country-wise FDI inflows in India from April, 2000 to June, 201224 25. 25 26. 26 27. What is FPI Foreign Porfolio Investment (FPI):1. FPI denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. 2. In economics foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the countrys stock and bond markets, sometimes for speculation 3. Foreign Portfolio Investment (FPI): passive holdings of securities and other financial assets, which do NOT entail active management or control of the securities's issuer. 4. FPI is positively influenced by high rates of return and reduction of risk through geographic diversification. The return on FPI is normally in the form of interest payments or non-voting dividends.5. SEBIs definition of FPIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf. 27 28. Advantage of FPI Enhanced flows of equity capital FIIs have a greater appetite for equity than debt.. It improve capital structures. Managing uncertainty and controlling risks. FPI inflows help in financial innovation and development of hedging instruments. Improving capital markets. FPIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development. FPIs can help in the process of economic development. Improved corporate governance. FPIs constitute professional bodies, improve corporate governance. 28 29. Disadvantages of FPI Problems of Inflation Hot Money Political Risk represented by the possibility of change in the political environment resulting in change in investment norms and repatriation regulations. Emerging markets which are the beneficiaries of most FPI traditionally sufferfrom low retail participation which results in inadequate liquidity which results in price volatility. Due to the unpredictable nature of such funds there is a tendency to shift from one market to another at short intervals. Volatility arising out of FPI inflows and outflowshas adverse effects on the host country economy. Emerging economics tend to have depreciation prone currencies. This exposes the foreign investor to exchange rate risk on both principal and returns.29 30. FII Investments & Market Reaction While strong inflow of funds from foreign institutional investors (FIIs) has been acheerreason to , it could turn into a nightmare and if the global investors make a sudden exit can send the boursescrashing.30 31. FII Inflows Vs Sensex120000 100000FII Investment from Rs. in 2005 - 2010 (Crores)BSE Sensex80000 60000 40000 20000 Rs. in (Crores)0 -20000200520062007200820092010-40000 -60000 -80000FII Investment Vs SensexFII average holding in BSE 50031 32. Distinction between FDI and FPI FDIFPI1. It is long-term investment1. It is generally short-term investment2. Investment in physical assets2. Investment in financial assets3. Aim is to increase enterprise capacity or productivity or change management control3. Aim is to increase capital availability4. Leads to technology transfer, access to markets and management inputs4. FPI results in only capital inflows5. FDI flows into the primary market5. FPI flows into the secondary market6. Entry and exit is relatively difficult6. Entry and exist is relatively easy7. FDI is eligible for profits of the company7. FPI is eligible for capital gain8. Does not tend be speculative 9. Direct impact on employment of labour and wages8. Tends to be speculative 9. No direct impact on employment of labour and wages 10.Fleeting interest in mgt.32 32