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Foreign Direct Investment



          ----- Presented By -----
            Roll No. S-32 to S-37
       Faculty of Management Studies
           IInd Year – Part Time
Contents
• FDI Concept
• Types of FDI
• FDI – Advantages Vs Disadvantages
• FDI Procedure in India
• Current Indian FDI Limits
• FDI Trend in India
• Global FDI Trend
• FDI Case Studies – Coke & IBM
• FDI in India – A Reality Check
• FDI in India – Future Potential
• FDI – India Vs China comparison
FDI - Concept
    Long term investment by a foreign direct investor in an enterprise resident in an economy other than that
     in which the foreign direct investor is based

    The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a
     transnational corporation (TNC)

    Parent enterprise investment must afford the parent enterprise control over its foreign affiliate (owning
     10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an
     unincorporated firm- UN definition)
    FDI                                                    FII

    • Direct investment by a controlling Parent            • Investment in the capital/debt stock of a
    enterprise in the assets of an affiliate enterprise    company/govt securities by an investor that is from or
    located in an economy other than where Parent          registered in a country outside of the one in which it is
    enterprise is based                                    investing
    • Investment by any Corporation that proposes to       • Includes hedge funds, insurance companies, pension
    carry out business in the country other than its own   funds and mutual funds
    • Long term & direct investment in plant &             • Short term investment (generally) made under
    machinery aimed to carry out/expand business in        portfolio management to earn profits from value
    the affiliate’s country                                appreciation
    • Regulated by RBI and FIPB (Foreign Investment        • SEBI registration is required to operate as an FII in
    Promotion Board) of the Dept of Commerce under         India
    Ministry of Finance                                    • Aggregate investment ceiling for FII investment is 10%
    • Sector specific limits prescribed for FDI under      (5% for single) of the paid up capital of a company (upto
    automatic/approval route                               24% in case of listed Indian companies under a General
                                                           Body Resolution
Types of FDI
Greenfield Investment
   Direct investment in new facilities/ expansion of existing facilities
   Objective to create new production capacity and jobs, transfer technology and know-how and form
   linkages to the global marketplace
   Leads to crowding out of local industry due to production of goods more cheaply (due to advanced
   technology and efficient processes) and uses up resources (labor, intermediate goods, etc)
   Profits from production do not feed back into the local economy but to the multinational's home
   economy

Mergers & Acquisitions
   Primary type of FDI involving transfer of existing assets from local firms to foreign firms
   Assets and operation of firms from different countries are combined to establish a new legal entity
   (Cross-border merger)
   Control of assets and operations is transferred to foreign company by its local affiliate company
   (Cross-border acquisition)
   No long term benefits to the local economy, unlike Greenfield investment, as mostly the owners of the
   local firm are paid in stock from the acquiring firm

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 processes
   Forward vertical: Industry abroad sells the outputs of a firm's domestic production processes
FDI – Advantages Vs Disadvantages

Advantages                                       Disadvantages
    Inflow of equipment & technology               Crowding of local industry
    Competitive advantage & innovation
    Financial resources for expansion
                                                    Loss of control
    Employment generation                          Repatriation of profits/dividends by
    Contribution to exports growth                  investor
    Access to global marketplace for domestic      Conflicts of codes/laws
     players                                        Possible exploitation of resources-
    Access to low cost resources for investor
                                                     material/ wages
    Access to new market/distribution channel
     for products                                   Effect on local culture/sentiments –
    Improved consumer welfare through               socio cultutal effect
     reduced costs, wider choice and improved       Effect on natural environment
     quality
FDI Procedure in India
Foreign Direct Investment (FDI) is permitted as under the following forms of investments:
   Through financial collaborations
   Through joint ventures and 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 and ammunition
   Atomic Energy
   Railway Transport
   Coal and lignite
   Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

Foreign Investment through GDRs is treated as Foreign Direct Investment
   Indian companies are allowed to raise equity capital in the international market
    through the issue of Global Depository Receipt (GDRs)
   GDRs are designated in dollars and are not subject to any ceilings on investment
   Applicant company seeking approval should have consistent track record for good performance
    (financial or otherwise) for a minimum period of 3 years (this condition is relaxed for
    infrastructure projects such as power generation, telecommunication, petroleum exploration and
    refining, ports, airports and roads)
   GDR proceeds can be used for financing capital goods imports, capital expenditure including
    domestic purchase/installation of plant, equipment and building and investment in software
    development, prepayment or scheduled repayment of earlier external borrowings, and equity
    investment in JV/WOSs
FDI Procedure in India
Foreign direct investments in India are approved through two routes:
   Automatic approval by RBI:

    The Reserve Bank of India accords automatic approval within a period of two weeks
    (provided certain parameters are met) to all proposals involving:
        foreign equity up to 50% in 3 categories relating to mining activities
        foreign equity up to 51% in 48 specified industries
        foreign equity up to 74% in 9 categories

The lists are comprehensive and cover most industries of interest to foreign companies.
Investments in high- priority industries or for trading companies primarily engaged in
exporting are given almost automatic approval by the RBI.

    The FIPB Route:
         Processing of non-automatic approval cases by FIPB (Foreign Investment
          Promotion Board) where the parameters of automatic approval are not met
         Normal processing time is 4 to 6 weeks
         Liberal approach for all sectors and all types of proposals with few rejections
         Non-mandatory for foreign investors to have a local partner, even when the
          foreign investor wishes to hold less than the entire equity of the company. The
          portion of the equity not proposed to be held by the foreign investor can be offered
          to the public
Current Indian FDI Limits
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. The term hotels include restaurants, beach resorts, and other
    tourist complexes providing accommodation and/or catering and food facilities to tourists.
    Tourism related industry include travel agencies, tour operating agencies and tourist
    transport operating agencies, units providing facilities for cultural, adventure and wild life
    experience to tourists, surface, air and water transport facilities to tourists,   leisure,
    entertainment, amusement, sports, and health units for tourists and Convention/Seminar
    units and organizations.
    For foreign technology agreements, automatic approval is granted if
     i.  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.
     ii. 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 in19 NBFC activities - Merchant banking, underwriting, portfolio management services,
    investment advisory             services, financial consultancy, stock broking, asset
    management, venture capital, custodial services, factoring, credit reference agencies, credit
    rating agencies, leasing & finance, housing finance, foreign exchange brokering, credit card
    business, money changing business, micro credit and rural credit There are separate
    prescribed minimum capitalization norms for fund/non-fund based NBFCs

   Insurance Sector: Up to 26% FDI is allowed on the automatic route subject to obtaining
    licence from Insurance Regulatory & Development Authority (IRDA)
Current Indian FDI Limits
   Telecommunication Sector: Limited to 49% in basic, cellular, value added services and
    global mobile personal communications by satellite, subject to licensing and security
    requirements and adherence by the companies (by both investor & investee companies) to
    the license conditions, up to 74% in ISPs with gateways, radio-paging and end-to-end
    bandwidth, 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

   Trading Companies: Up to 51% under automatic route 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, 100% FDI is permitted in case of trading
    companies for activities like exports, bulk imports with ex-port/ex-bonded warehouse sales,
    cash and carry wholesale trading etc.

   Power Sector: 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

   Drugs & Pharmaceuticals: Up to 100% under automatic route 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,
    otherwise prior Government approval is required
Current Indian FDI Limits
   Pollution Control and Management: Up to 100% under automatic route in both
    manufacture of pollution control equipment and consultancy for integration of
    pollution control systems

   Call Centers/BPO in India: Up to 100% is allowed subject to certain conditions

   Roads, Highways, Ports and Harbors: Up to 100% under automatic route in projects
    for construction and maintenance of roads, highways, vehicular bridges, toll roads,
    vehicular tunnels, ports and harbors

   Retail Sector: The proposal for FDI in Retail sector has loomed into a controversy
    with the proposal being put on the backburner
FDI Trend in India
   FDI Inflows
   Cumulative amount of FDI inflows (from August 1991 to July2006) Rs. 1,74,466 crores (USD 41.79 billion)
  (equity capital components only)
 Amount of FDI inflows during 2006-07 (from April 2006 to July2006)                                                  Rs. 13,055 crore (USD 2.89 billion)
(equity capital components only)


                                      Year wise FDI Trend                                                             Current Year FDI Trend

             70,000                                                                                 6000
             60,000                                                                                 5000
             50,000
                                                                                                    4000
             40,000
Rs. Crores




                                                                                       Rs. Crores
             30,000                                                                                 3000
             20,000                                                                                 2000
             10,000
                                                                                                    1000
                -
                      1991-   2000-    2001-   2002-   2003-   2004-   2005-   2006-                   0
                      2000    2001     2002    2003    2004    2005    2006    2007*                       Jan-06   Feb-06   Mar-06   Apr-06   May-06   Jun-06   Jul-06


   * 2006-07 amount includes FDI received upto July06                                    124% growth in FDI over last year comparative period
FDI Trend in India
The share of top investing countries FDI inflows is as shown below:                   (Amounts in INR crores / USD’MM)




* Includes inflows under NRI Schemes of RBI, stock swapped and advances pending issue of shares
FDI Trend in India
The top 10 sectors in India attracting highest FDI are as shown below:   (Amounts in INR crores / USD’MM)
FDI Trend in India
The statement on region-wise /state-wise break-up for FDI inflows is as shown below:
Global FDI Trend
     Global FDI inflows rose to $916 billion in 2005, driven by significant increase in both, value and no. of
      deals in both developed and developing countries
     Share of developing countries in world FDI inflows fell slightly (to 36%), thereby increasing the gap in
      FDI inflows between developed and developing countries to over $200 billion in 2005
     FDI inflows, global and by group of economies, 1980–2005 (in USD billion) is as shown below:




    FDI has spread to become a truly global phenomenon with FDI stocks now constituting over 20% of
                                               global GDP
Global FDI Trend
   United Kingdom was the largest recipient of FDI in 2005, ahead of the United States, China and France
   Distribution of FDI by region and selected countries (in USD billion) is as shown below:
Global FDI Trend
   Amongst the developing regions, Asia & Oceania regions witnessed steep increase in FDI inflows while
    there has been a declining trend observed in Africa & Latin America
   48% of FDI inflows to developed countries went to 5 countries – China, Hong Kong, Singapore, Brazil &
    Mexico
   Equity is the main constituent of FDI (65%), followed by intra-company loans (23%) and reinvested
    earnings (12%)
   Investment in services (mainly finance) continued to grow rapidly
   Current FDI growth seems to be led primarily by a few specific industries, rather than being broad-based
    sectorally. Specifically, in 2005, oil and gas, utilities (e.g. telecommunications, energies, transport),
    banking and real estate were the leading industries in terms of inward FDI
   The sectoral breakdown of cross – border M&A sales (in USD billion) from 1987-2005 is as shown below:
Global FDI Trend
FDI Outflows
   FDI outflows stood at USD 779 billion in 2005
   50% of the outflows were from the firms based in USA, UK & Luxembourg
   Developing countries invested USD 117 billion (Mostly China & West Asia)
   Bulk of the outflows from developing countries was intra-regional; or in Africa & Latin America


Reasons for growth in FDI
   Cross border M & A
   Better Investment environment
   Intense competition pressure
   Desire to control & develop rich natural resources in developing countries
   Green FDI
FDI Case Study – Coca Cola
RBI’s move on Foreign                  Non-strategic category of           Coke at Logger Heads with the
Equity Regulation                      foreign companies                   Indian Government

In 1974, Multinationals                  Coke, which operated in           Since this was not in line with
operating in low priority                India through a branch            FERA, which permitted not more
areas like consumer goods                office, submitted its plan        than a 40% holding in all operations
                                         for stepping down                 , Coke was asked to comply properly
were asked by RBI (under
                                         equity to the RBI. It             with the new norms.
FERA) to step down                       offered to hold 40%               Coke decided to wind up its
equity to 40% either                     equity in its bottling and        operations in India, but quit making
through equity dilution or               distribution units, but           allegations that the Indian
through equity sale                      refused to step down              Government was forcing it to share
                                         equity in its technical           its secret formula for making its
                                         and administrative unit           concentrate
Coke re enters India                                                          Blame Game in a Bad Blood
Coke factored in all these issues at             Coke exits India
                                                                              The Indian government slapped
the time of its re-entry. In its                                              its counter charges and accused
                                                 In 1977, Coke left
application to India's Foreign                                                the parent of bleeding profits
                                                 India and did not
Investment Promotion Board (FIPB)                                             and repatriating large sums of
                                                 return for nearly two
in 1997, it voluntarily offered to                                            funds abroad (as administrative
                                                 decades. By which
divest 49 percent in favor of the                                             charges) even when the Indian
                                                 time, the economic
Indian pubic through an IPO at the                                            operations were posting losses.
                                                 situation had
end of three years. This was despite                                          Further, there were allegations
                                                 undergone a major
the fact that the FDI norms for the                                           of Coke abusing import licenses
                                                 transformation. More
soft drink sector did not require                                             - against which it imported the
                                                 importantly, the
mandatory divestment of stake and                                             concentrate - all of which
                                                 particular provision in
nobody was forcing it to do so                                                resulted in bad blood between
                                                 FERA had been
                                                 diluted completely           the two parties.
FDI Case Study – IBM
IBM at loggerheads with Indian                                          IBM’s discontent with FERA
government                                   IBM pulls out of India     regulation provisions
International Business Machines (IBM),               IBM closed its        IBM took this step in
believed that government regulation                  Indian                response to the FERA
which mandated 60% domestic ownership                subsidiaries in       regulation , which limited
of IBM's Indian operations was                                             multinational companies to
                                                     1977-78, leaving
unreasonable. However, according to                                        a maximum of 40%
                                                     behind a host         ownership stake in their
some Indian views, IBM was asked to
leave because Big Blue charged too much              of Indian ex-         Indian subsidiaries, and
money, brought in outdated equipment,                IBMers looking        specified policies for access
and was not interested in negotiating                for something         to foreign exchange for
better terms                                         to do                 imports, and the use of
                                                                           foreign exchange earned
                                                                           through exports
IBM sets up an Indian
subsidiary – high on India                                                   Exit in a bad temper
IBM's proposal to set up a                                                 MNCs had to either choose
wholly-owned subsidiary in                 A new beginning
                                           in India                        between reducing their
India through its Hong Kong-                                               stake to this level by
based subsidiary IBM Products                                              selling their shares to the
AP Ltd for undertaking trading            Under the Industrial
                                          policy 1991 liberalizing         Indian public, or leave the
activities involving FDI worth                                             country.
Rs 66 crore cleared by FIPB in            FDI flow into India, IBM
May2005. IBM plans to triple its          restarted India operations       Several MNCs chose to
investments in India over the             in 1992 and became the           dilute their stakes through
next 3 years by pumping in $6             largest country operation        public offerings on the
billion FDI in India operations           outside IBM’s US base, as        Bombay stock exchange,
                                          part of global strategy for      but IBM decided to quit
                                          emerging markets                 India
FDI Destination – India : A Reality Check
   India, among the European investors, seen as a good investment despite political uncertainty, bureaucratic
    hassles, shortages of power and infrastructural deficiencies

   A vast potential for overseas investment attracting the entrance of foreign players into this market slated to
    become one of the top three emerging economies

   In terms of market potential based on purchasing power parity, India is the fifth largest economy in the
    world (ranking above France, Italy, UK and Russia) and has the third largest GDP in the Asian continent. It
    is also the second largest among emerging nations

   India is also one of the few markets in the world which offers high prospects for growth and earning
    potential in practically all areas of business

   Yet until fairly recently, India failed to get the kind of enthusiastic attention from investors, as generated by
    other emerging economies such as China due to reasons such as - a highly protected, semi-socialist autarkic
    economy, structural and bureaucratic impediments and distrust of foreign business

   Present climate in India has seen a sea change, smashing barriers and actively seeking foreign investment,
    many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country
    and is both frustrating and challenging at the same time. Foreign investors should be prepared to estimate
    India’s potential with due consideration to the inherent difficulties, contradictions and challenges in the
    system
FDI Destination – India : Future Potential
Investment opportunity of USD 500 billion expected to emerge in India in the next 5 years in major
economic sectors, of which USD 250 billion is expected in the infrastructure sector alone

Indian auto industry with a turnover of USD 12 billion and the auto parts industry with a turnover of USD 3
billion offer excellent scope for FDI

Investment commission has identified 93 foreign companies across various sectors as potential investors.
These include Norsk Hydro, Singapore Power, select Japanese and Korean companies for road development
projects, Deutsche Telecom, China Telecom, SK Telecom, BT, NEC and Toshiba, Alcan, RusAl, Burlington,
Petronas, Sumitomo, Hanwa, Degussa, Renault, Scania and EADS among others

In Power sector, peak demand is expected to increase by a staggering 77% to 157,107 MW by 2012. Similarly,
the energy requirement is also expected to increase by 274% to 975,222 MU by 2012. The total investment
required in over 100,000 MW capacity creation, along with necessary investments in T&D segments is
estimated at USD 200 billion

Total estimated investment opportunity in the retail sector is around USD 5-6 billion in the next five years.
Certain segments that promise a high growth are Food and Grocery (91 per cent), Clothing (55 per cent),
Furniture and Fixtures (27 per cent), Pharmacy (27 per cent), Durables, Footwear & Leather, Watch &
Jewellery (18 per cent)
FDI Destination – India : Future Potential
The Indian pharmaceutical market has been forecast to grow to as much as USD 25 billion by 2010 as
per Organization of Pharmaceutical Producers of India (OPPI) estimates. However, Espicom's market
projections forecast more modest but stable annual market growth of around 7.2 per cent, putting the
market at USD 11.6 billion by 2009

Health tourism presents significant investment potential. At the current pace of growth, medical tourism,
currently pegged at USD 350 million, has the potential to grow into a USD 2 billion industry by 2012

Healthcare sector provides another investment outlet and could rise from USD 22.2 billion currently (5.2
percent of GDP) to USD 50 billion- 69 billion (6.2-8.5 percent of GDP) by 2012 . Healthcare spending in the
country will double over the next 10 years. Private healthcare will form a large chunk of this spending,
rising from USD 14.8 billion to USD 33.6 billion in 2012. This figure could rise by an additional USD 8.4
billion if health insurance cover is available to the rich and the middle class

Total investment opportunity in the port sector is estimated at USD 20 billion upto 2012. The Maritime
sector (Ports and Shipping, Inland waterways) requires an investment of USD 22 billion for future
development
FDI - India Vs China comparison
China opened its doors to FDI in 1979 and has been progressively liberalizing its investment regime. India
allowed FDI long before that but did not take comprehensive steps towards liberalization until 1991


Different development strategies - China has focused on export-oriented industrialization and favored more
export-oriented FDI, while India has historically been more inclined toward import-substitution
industrialization and has encouraged FDI mostly in high tech sectors and has been restrictive towards FDI in
export-oriented sectors


China has “more business-oriented” and better FDI policy framework along with more attractive
macroeconomic environment and market opportunities compared to India. China has more flexible labor
laws, better consumer purchasing power, better labor climate, better rate of return and tax regime and better
entry and exit procedures for business


China has a higher per capita GDP, higher literacy rate, large natural resource endowment, better physical
infrastructure augmented with a gigantic domestic market – all enabling a system of mass production with
substantially reduced cost of production


China is a large recipient of FDI mostly because of the investments from her non-resident Chinese (NRC),
chiefly resident in East Asian countries against non-resident Indian (NRI), who have mostly preferred to
invest in bank deposits in India as opposed to FDI

China scores better than India only in macro management and low taxes. But India scores better than China in
FDI - India Vs China comparison
                              China       India                                China   India
Economic Indicators                                 Institutional indicators

   GDP per capita            2962.1      3843.8       Govt stability          0.69    0.55
   FDI/GDP                   0.016       0.003        Corruption              0.5     0.64
   Per capita GDP growth     0.062        0.026
   Inflation                 3.86        8.01
                                                       Law and Order           0.67    0.51
   Wage                      575.5       880.7        Democracy               0.41    0.73
   Schooling                 1.24        0.64         Bureaucracy             0.52    0.74
   Openness                  22.87       18.47        Political right         0.06    0.79
   Trade protection 0.09     0.36                     Civil Liberty           0.09    0.62
   Infrastructure            34.59       13.59
   Population                1,054,798   771,155
   Population growth         1.45        2.08

Sectoral Composition of FDI
FDI - India Vs China comparison
Year        FDI    net inflow       % of GDP              % of gross capital
                  (USD’MM)                                     formation
            China        India      China      India      China      India
1994       33,787        973        6.2         0.3       15.1       1.3
1995       35,849        2144       5.1         0.6       12.5       2.3
1996       40,180        2426       4.9         0.6       12.4       2.8
1997       44,237        3577       4.9         0.9       12.9       3.8
1998       43,751        2635       4.6         0.6       12.3       2.8
1999       38,753        2169       3.9         0.5       10.4       2.0
2000       38,399        2315       3.6         0.5       9.9        2.1
2001       44,240        3403       3.8         0.7       10.1       3.2
Note: India's FDI inflows were not adjusted for equality capital and reinvestment earning. Source: World Development Indicators 2003

Comparability of Statistics on FDI
   IMF definition of FDI includes 12 different elements: equity capital, reinvested earnings of foreign companies,
inter-company debt transactions, ST & LT loans, financial leasing, trade credits, grants, bonds, non-cash
acquisition of equity, investment made by foreign venture capital investors, earnings data of indirectly held FDI
enterprises and control premium, non-competition fee, and so on. Indian FDI definition includes issue/transfer of
equity/preference shares to foreign direct investors and excludes all others while China includes all of above
   China's FDI inflows are somewhat inflated - over-valuation of capital equipment contributed and because of
’round-tripping’ through Hong Kong (to avail preferential tax treatment) in form of under-invoicing exports,
over-invoicing imports, and overseas affiliates of Chinese companies borrowing funds or raising capital in the
stock market and reinvesting them in China
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Fdi Presentation

  • 1. Foreign Direct Investment ----- Presented By ----- Roll No. S-32 to S-37 Faculty of Management Studies IInd Year – Part Time
  • 2. Contents • FDI Concept • Types of FDI • FDI – Advantages Vs Disadvantages • FDI Procedure in India • Current Indian FDI Limits • FDI Trend in India • Global FDI Trend • FDI Case Studies – Coke & IBM • FDI in India – A Reality Check • FDI in India – Future Potential • FDI – India Vs China comparison
  • 3. FDI - Concept  Long term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based  The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC)  Parent enterprise investment must afford the parent enterprise control over its foreign affiliate (owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm- UN definition) FDI FII • Direct investment by a controlling Parent • Investment in the capital/debt stock of a enterprise in the assets of an affiliate enterprise company/govt securities by an investor that is from or located in an economy other than where Parent registered in a country outside of the one in which it is enterprise is based investing • Investment by any Corporation that proposes to • Includes hedge funds, insurance companies, pension carry out business in the country other than its own funds and mutual funds • Long term & direct investment in plant & • Short term investment (generally) made under machinery aimed to carry out/expand business in portfolio management to earn profits from value the affiliate’s country appreciation • Regulated by RBI and FIPB (Foreign Investment • SEBI registration is required to operate as an FII in Promotion Board) of the Dept of Commerce under India Ministry of Finance • Aggregate investment ceiling for FII investment is 10% • Sector specific limits prescribed for FDI under (5% for single) of the paid up capital of a company (upto automatic/approval route 24% in case of listed Indian companies under a General Body Resolution
  • 4. Types of FDI Greenfield Investment Direct investment in new facilities/ expansion of existing facilities Objective to create new production capacity and jobs, transfer technology and know-how and form linkages to the global marketplace Leads to crowding out of local industry due to production of goods more cheaply (due to advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc) Profits from production do not feed back into the local economy but to the multinational's home economy Mergers & Acquisitions Primary type of FDI involving transfer of existing assets from local firms to foreign firms Assets and operation of firms from different countries are combined to establish a new legal entity (Cross-border merger) Control of assets and operations is transferred to foreign company by its local affiliate company (Cross-border acquisition) No long term benefits to the local economy, unlike Greenfield investment, as mostly the owners of the local firm are paid in stock from the acquiring firm 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 processes Forward vertical: Industry abroad sells the outputs of a firm's domestic production processes
  • 5. FDI – Advantages Vs Disadvantages Advantages Disadvantages  Inflow of equipment & technology  Crowding of local industry  Competitive advantage & innovation  Financial resources for expansion  Loss of control  Employment generation  Repatriation of profits/dividends by  Contribution to exports growth investor  Access to global marketplace for domestic  Conflicts of codes/laws players  Possible exploitation of resources-  Access to low cost resources for investor material/ wages  Access to new market/distribution channel for products  Effect on local culture/sentiments –  Improved consumer welfare through socio cultutal effect reduced costs, wider choice and improved  Effect on natural environment quality
  • 6. FDI Procedure in India Foreign Direct Investment (FDI) is permitted as under the following forms of investments:  Through financial collaborations  Through joint ventures and 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 and ammunition  Atomic Energy  Railway Transport  Coal and lignite  Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc Foreign Investment through GDRs is treated as Foreign Direct Investment  Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs)  GDRs are designated in dollars and are not subject to any ceilings on investment  Applicant company seeking approval should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years (this condition is relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads)  GDR proceeds can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs
  • 7. FDI Procedure in India Foreign direct investments in India are approved through two routes:  Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:  foreign equity up to 50% in 3 categories relating to mining activities  foreign equity up to 51% in 48 specified industries  foreign equity up to 74% in 9 categories The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high- priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.  The FIPB Route:  Processing of non-automatic approval cases by FIPB (Foreign Investment Promotion Board) where the parameters of automatic approval are not met  Normal processing time is 4 to 6 weeks  Liberal approach for all sectors and all types of proposals with few rejections  Non-mandatory for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public
  • 8. Current Indian FDI Limits 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. The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is granted if i. 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. ii. 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 in19 NBFC activities - Merchant banking, underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services, factoring, credit reference agencies, credit rating agencies, leasing & finance, housing finance, foreign exchange brokering, credit card business, money changing business, micro credit and rural credit There are separate prescribed minimum capitalization norms for fund/non-fund based NBFCs  Insurance Sector: Up to 26% FDI is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)
  • 9. Current Indian FDI Limits  Telecommunication Sector: Limited to 49% in basic, cellular, value added services and global mobile personal communications by satellite, subject to licensing and security requirements and adherence by the companies (by both investor & investee companies) to the license conditions, up to 74% in ISPs with gateways, radio-paging and end-to-end bandwidth, 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  Trading Companies: Up to 51% under automatic route 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, 100% FDI is permitted in case of trading companies for activities like exports, bulk imports with ex-port/ex-bonded warehouse sales, cash and carry wholesale trading etc.  Power Sector: 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  Drugs & Pharmaceuticals: Up to 100% under automatic route 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, otherwise prior Government approval is required
  • 10. Current Indian FDI Limits  Pollution Control and Management: Up to 100% under automatic route in both manufacture of pollution control equipment and consultancy for integration of pollution control systems  Call Centers/BPO in India: Up to 100% is allowed subject to certain conditions  Roads, Highways, Ports and Harbors: Up to 100% under automatic route in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors  Retail Sector: The proposal for FDI in Retail sector has loomed into a controversy with the proposal being put on the backburner
  • 11. FDI Trend in India FDI Inflows  Cumulative amount of FDI inflows (from August 1991 to July2006) Rs. 1,74,466 crores (USD 41.79 billion) (equity capital components only)  Amount of FDI inflows during 2006-07 (from April 2006 to July2006) Rs. 13,055 crore (USD 2.89 billion) (equity capital components only) Year wise FDI Trend Current Year FDI Trend 70,000 6000 60,000 5000 50,000 4000 40,000 Rs. Crores Rs. Crores 30,000 3000 20,000 2000 10,000 1000 - 1991- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 0 2000 2001 2002 2003 2004 2005 2006 2007* Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 * 2006-07 amount includes FDI received upto July06 124% growth in FDI over last year comparative period
  • 12. FDI Trend in India The share of top investing countries FDI inflows is as shown below: (Amounts in INR crores / USD’MM) * Includes inflows under NRI Schemes of RBI, stock swapped and advances pending issue of shares
  • 13. FDI Trend in India The top 10 sectors in India attracting highest FDI are as shown below: (Amounts in INR crores / USD’MM)
  • 14. FDI Trend in India The statement on region-wise /state-wise break-up for FDI inflows is as shown below:
  • 15. Global FDI Trend  Global FDI inflows rose to $916 billion in 2005, driven by significant increase in both, value and no. of deals in both developed and developing countries  Share of developing countries in world FDI inflows fell slightly (to 36%), thereby increasing the gap in FDI inflows between developed and developing countries to over $200 billion in 2005  FDI inflows, global and by group of economies, 1980–2005 (in USD billion) is as shown below: FDI has spread to become a truly global phenomenon with FDI stocks now constituting over 20% of global GDP
  • 16. Global FDI Trend  United Kingdom was the largest recipient of FDI in 2005, ahead of the United States, China and France  Distribution of FDI by region and selected countries (in USD billion) is as shown below:
  • 17. Global FDI Trend  Amongst the developing regions, Asia & Oceania regions witnessed steep increase in FDI inflows while there has been a declining trend observed in Africa & Latin America  48% of FDI inflows to developed countries went to 5 countries – China, Hong Kong, Singapore, Brazil & Mexico  Equity is the main constituent of FDI (65%), followed by intra-company loans (23%) and reinvested earnings (12%)  Investment in services (mainly finance) continued to grow rapidly  Current FDI growth seems to be led primarily by a few specific industries, rather than being broad-based sectorally. Specifically, in 2005, oil and gas, utilities (e.g. telecommunications, energies, transport), banking and real estate were the leading industries in terms of inward FDI  The sectoral breakdown of cross – border M&A sales (in USD billion) from 1987-2005 is as shown below:
  • 18. Global FDI Trend FDI Outflows  FDI outflows stood at USD 779 billion in 2005  50% of the outflows were from the firms based in USA, UK & Luxembourg  Developing countries invested USD 117 billion (Mostly China & West Asia)  Bulk of the outflows from developing countries was intra-regional; or in Africa & Latin America Reasons for growth in FDI  Cross border M & A  Better Investment environment  Intense competition pressure  Desire to control & develop rich natural resources in developing countries  Green FDI
  • 19. FDI Case Study – Coca Cola RBI’s move on Foreign Non-strategic category of Coke at Logger Heads with the Equity Regulation foreign companies Indian Government In 1974, Multinationals Coke, which operated in Since this was not in line with operating in low priority India through a branch FERA, which permitted not more areas like consumer goods office, submitted its plan than a 40% holding in all operations for stepping down , Coke was asked to comply properly were asked by RBI (under equity to the RBI. It with the new norms. FERA) to step down offered to hold 40% Coke decided to wind up its equity to 40% either equity in its bottling and operations in India, but quit making through equity dilution or distribution units, but allegations that the Indian through equity sale refused to step down Government was forcing it to share equity in its technical its secret formula for making its and administrative unit concentrate Coke re enters India Blame Game in a Bad Blood Coke factored in all these issues at Coke exits India The Indian government slapped the time of its re-entry. In its its counter charges and accused In 1977, Coke left application to India's Foreign the parent of bleeding profits India and did not Investment Promotion Board (FIPB) and repatriating large sums of return for nearly two in 1997, it voluntarily offered to funds abroad (as administrative decades. By which divest 49 percent in favor of the charges) even when the Indian time, the economic Indian pubic through an IPO at the operations were posting losses. situation had end of three years. This was despite Further, there were allegations undergone a major the fact that the FDI norms for the of Coke abusing import licenses transformation. More soft drink sector did not require - against which it imported the importantly, the mandatory divestment of stake and concentrate - all of which particular provision in nobody was forcing it to do so resulted in bad blood between FERA had been diluted completely the two parties.
  • 20. FDI Case Study – IBM IBM at loggerheads with Indian IBM’s discontent with FERA government IBM pulls out of India regulation provisions International Business Machines (IBM), IBM closed its IBM took this step in believed that government regulation Indian response to the FERA which mandated 60% domestic ownership subsidiaries in regulation , which limited of IBM's Indian operations was multinational companies to 1977-78, leaving unreasonable. However, according to a maximum of 40% behind a host ownership stake in their some Indian views, IBM was asked to leave because Big Blue charged too much of Indian ex- Indian subsidiaries, and money, brought in outdated equipment, IBMers looking specified policies for access and was not interested in negotiating for something to foreign exchange for better terms to do imports, and the use of foreign exchange earned through exports IBM sets up an Indian subsidiary – high on India Exit in a bad temper IBM's proposal to set up a MNCs had to either choose wholly-owned subsidiary in A new beginning in India between reducing their India through its Hong Kong- stake to this level by based subsidiary IBM Products selling their shares to the AP Ltd for undertaking trading Under the Industrial policy 1991 liberalizing Indian public, or leave the activities involving FDI worth country. Rs 66 crore cleared by FIPB in FDI flow into India, IBM May2005. IBM plans to triple its restarted India operations Several MNCs chose to investments in India over the in 1992 and became the dilute their stakes through next 3 years by pumping in $6 largest country operation public offerings on the billion FDI in India operations outside IBM’s US base, as Bombay stock exchange, part of global strategy for but IBM decided to quit emerging markets India
  • 21. FDI Destination – India : A Reality Check  India, among the European investors, seen as a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies  A vast potential for overseas investment attracting the entrance of foreign players into this market slated to become one of the top three emerging economies  In terms of market potential based on purchasing power parity, India is the fifth largest economy in the world (ranking above France, Italy, UK and Russia) and has the third largest GDP in the Asian continent. It is also the second largest among emerging nations  India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business  Yet until fairly recently, India failed to get the kind of enthusiastic attention from investors, as generated by other emerging economies such as China due to reasons such as - a highly protected, semi-socialist autarkic economy, structural and bureaucratic impediments and distrust of foreign business  Present climate in India has seen a sea change, smashing barriers and actively seeking foreign investment, many companies still see it as a difficult market. India is rightfully quoted to be an incomparable country and is both frustrating and challenging at the same time. Foreign investors should be prepared to estimate India’s potential with due consideration to the inherent difficulties, contradictions and challenges in the system
  • 22. FDI Destination – India : Future Potential Investment opportunity of USD 500 billion expected to emerge in India in the next 5 years in major economic sectors, of which USD 250 billion is expected in the infrastructure sector alone Indian auto industry with a turnover of USD 12 billion and the auto parts industry with a turnover of USD 3 billion offer excellent scope for FDI Investment commission has identified 93 foreign companies across various sectors as potential investors. These include Norsk Hydro, Singapore Power, select Japanese and Korean companies for road development projects, Deutsche Telecom, China Telecom, SK Telecom, BT, NEC and Toshiba, Alcan, RusAl, Burlington, Petronas, Sumitomo, Hanwa, Degussa, Renault, Scania and EADS among others In Power sector, peak demand is expected to increase by a staggering 77% to 157,107 MW by 2012. Similarly, the energy requirement is also expected to increase by 274% to 975,222 MU by 2012. The total investment required in over 100,000 MW capacity creation, along with necessary investments in T&D segments is estimated at USD 200 billion Total estimated investment opportunity in the retail sector is around USD 5-6 billion in the next five years. Certain segments that promise a high growth are Food and Grocery (91 per cent), Clothing (55 per cent), Furniture and Fixtures (27 per cent), Pharmacy (27 per cent), Durables, Footwear & Leather, Watch & Jewellery (18 per cent)
  • 23. FDI Destination – India : Future Potential The Indian pharmaceutical market has been forecast to grow to as much as USD 25 billion by 2010 as per Organization of Pharmaceutical Producers of India (OPPI) estimates. However, Espicom's market projections forecast more modest but stable annual market growth of around 7.2 per cent, putting the market at USD 11.6 billion by 2009 Health tourism presents significant investment potential. At the current pace of growth, medical tourism, currently pegged at USD 350 million, has the potential to grow into a USD 2 billion industry by 2012 Healthcare sector provides another investment outlet and could rise from USD 22.2 billion currently (5.2 percent of GDP) to USD 50 billion- 69 billion (6.2-8.5 percent of GDP) by 2012 . Healthcare spending in the country will double over the next 10 years. Private healthcare will form a large chunk of this spending, rising from USD 14.8 billion to USD 33.6 billion in 2012. This figure could rise by an additional USD 8.4 billion if health insurance cover is available to the rich and the middle class Total investment opportunity in the port sector is estimated at USD 20 billion upto 2012. The Maritime sector (Ports and Shipping, Inland waterways) requires an investment of USD 22 billion for future development
  • 24. FDI - India Vs China comparison China opened its doors to FDI in 1979 and has been progressively liberalizing its investment regime. India allowed FDI long before that but did not take comprehensive steps towards liberalization until 1991 Different development strategies - China has focused on export-oriented industrialization and favored more export-oriented FDI, while India has historically been more inclined toward import-substitution industrialization and has encouraged FDI mostly in high tech sectors and has been restrictive towards FDI in export-oriented sectors China has “more business-oriented” and better FDI policy framework along with more attractive macroeconomic environment and market opportunities compared to India. China has more flexible labor laws, better consumer purchasing power, better labor climate, better rate of return and tax regime and better entry and exit procedures for business China has a higher per capita GDP, higher literacy rate, large natural resource endowment, better physical infrastructure augmented with a gigantic domestic market – all enabling a system of mass production with substantially reduced cost of production China is a large recipient of FDI mostly because of the investments from her non-resident Chinese (NRC), chiefly resident in East Asian countries against non-resident Indian (NRI), who have mostly preferred to invest in bank deposits in India as opposed to FDI China scores better than India only in macro management and low taxes. But India scores better than China in
  • 25. FDI - India Vs China comparison China India China India Economic Indicators Institutional indicators  GDP per capita 2962.1 3843.8  Govt stability 0.69 0.55  FDI/GDP 0.016 0.003  Corruption 0.5 0.64  Per capita GDP growth 0.062 0.026  Inflation 3.86 8.01  Law and Order 0.67 0.51  Wage 575.5 880.7  Democracy 0.41 0.73  Schooling 1.24 0.64  Bureaucracy 0.52 0.74  Openness 22.87 18.47  Political right 0.06 0.79  Trade protection 0.09 0.36  Civil Liberty 0.09 0.62  Infrastructure 34.59 13.59  Population 1,054,798 771,155  Population growth 1.45 2.08 Sectoral Composition of FDI
  • 26. FDI - India Vs China comparison Year FDI net inflow % of GDP % of gross capital (USD’MM) formation China India China India China India 1994 33,787 973 6.2 0.3 15.1 1.3 1995 35,849 2144 5.1 0.6 12.5 2.3 1996 40,180 2426 4.9 0.6 12.4 2.8 1997 44,237 3577 4.9 0.9 12.9 3.8 1998 43,751 2635 4.6 0.6 12.3 2.8 1999 38,753 2169 3.9 0.5 10.4 2.0 2000 38,399 2315 3.6 0.5 9.9 2.1 2001 44,240 3403 3.8 0.7 10.1 3.2 Note: India's FDI inflows were not adjusted for equality capital and reinvestment earning. Source: World Development Indicators 2003 Comparability of Statistics on FDI IMF definition of FDI includes 12 different elements: equity capital, reinvested earnings of foreign companies, inter-company debt transactions, ST & LT loans, financial leasing, trade credits, grants, bonds, non-cash acquisition of equity, investment made by foreign venture capital investors, earnings data of indirectly held FDI enterprises and control premium, non-competition fee, and so on. Indian FDI definition includes issue/transfer of equity/preference shares to foreign direct investors and excludes all others while China includes all of above China's FDI inflows are somewhat inflated - over-valuation of capital equipment contributed and because of ’round-tripping’ through Hong Kong (to avail preferential tax treatment) in form of under-invoicing exports, over-invoicing imports, and overseas affiliates of Chinese companies borrowing funds or raising capital in the stock market and reinvesting them in China