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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