2. Foreign Investment
What Is Foreign Investment?
• Foreign investment involves capital flows from one country to another, granting the foreign
investors extensive ownership stakes in domestic companies and assets.
• Foreign investment denotes that foreigners have an active role in management as a part of their
investment or an equity stake large enough to enable the foreign investor to influence business
• A modern trend leans toward globalization, where multinational firms have investments in a
variety of countries.
3. Roles of Foreign Investment
• Foreign investment plays extraordinary and growing role in global business.
• It can provide a firm with new market, marketing channels, cheaper production facilities, access to
new technology, products skills and financing.
• In recent year rapid growth change in global investment patterns empowers the acquisition of a
company and enterprise outside the country.
4. Channels of Foreign Investment
• Commercial loans-It is primarily the bank loan issued to foreign businesses and government.
• Official flow-it is the form of assistance that develop nation give to developing nation.
• Foreign direct investment(FDI)-pretends to international investment in which the investor obtains a
lasting interest in enterprise in another country.
• Foreign portfolio investment(FPI)-It is a category of investment instrument that is more easily
traded. These include investment via equity instruments(stocks) or debts(bond) of a foreign
5. Advantage of FDI
1. Provides employment.
The more foreign investment that comes into a country, the more jobs are going to be created. And when
more jobs are created in a given country and more people are working and paying their taxes, this helps in no
small way in strengthening and growing the economy of a country.
2. Source of revenue.
Over the years foreign investments have helped so many developing countries in securing enormous amounts
of revenue that have helped in developing their nations and curbing poverty.
3. Foreign investment allows for the transfer of technology to other countries.
With foreign investment, developing countries can enjoy the transfer of technology from developed countries
into their countries where the level of technology might be very low.
4. Experts in business are also transferred to other countries.
Many developing countries enjoy the transfer of experts in business from developed countries to theirs as a
result of foreign investment. These experts with their tremendous amounts of expertise and experience in
business help in diverse ways in promoting the economic development of the nations they find themselves in.
6. National Foreign Direct Investment Policy
• A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities
which are prohibited. Citizens of Bangladesh and Pakistan can also invest in Indian but via the
government route but cannot invest in sectors like defense, atomic energy and space.
• NRI residents from Nepal and Bhutan as well as residents of Nepal and Bhutan can also invest in
capital of Indian companies.
• A company, trust and partnership firm incorporated outside India and owned and controlled by
NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy
• OCB’s(overseas corporate body)
7. • FII(foreign institutional investor) or FPI(foreign portfolio investor) can invest in Indian companies in
accordance with the schedule 2 of the FEMA(foreign exchange investment act).
• Only registered FIIs/FPIs and NRI’s under the FEMA can trade/invest in Indian companies capital through a
Foreign Exchange Management Act
• The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for
earlier Foreign Exchange Regulation Act (FERA). FEMA came into act on the 1st day of June, 2000.
• The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and amend the
law relating to foreign exchange with objective of facilitating external trade and payments and for promoting
the orderly development and maintenance of foreign exchange market in India.
• FEMA is applicable to the all parts of India. The act is also applicable to all branches, offices and agencies
outside India owned or controlled by a person who is resident of India.
8. Competent Authority
Following are the Competent Authorities for grant of approval for foreign investment for
sectors/activities requiring Government approval:
Activity/Sector Competent Authority
Mining Ministry of Mining
Defence Department of Defence Production, Ministry
Broadcasting/Print media Ministry of Information and broadcasting
Satellites Department of Space
Banking (Public and Private) Department of Financial Services
Pharmaceuticals Department of Pharmaceuticals
Civil Aviation Department of Civil Aviation
Trading (Single brand, Multi brand and Food
Product retail trading), FDI proposals by Non-
Resident Indians (NRIs)/ Export Oriented Units
requiring approval of the Government
Department of Industrial Policy & Promotion
9. Prohibited Sectors
FDI is prohibited in:
a) Lottery Business including Government/private lottery, online lotteries, etc.
b) Gambling and Betting including casinos etc.
c) Chit funds
d) Trading in Transferable Development Rights (TDRs)
e) Real Estate Business or Construction of Farm Houses ‘Real estate business’ shall not include
development of townships, construction of residential /commercial premises, roads or bridges and Real
Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
f) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
g) Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations
10. Permitted Sectors
Sector /Activity % equity/FDI cap Route
Agriculture and Animal husbandry 100% Automatic
Plantation Sector 100% Automatic
Mining and Petroleum and Natural
Defence 100% 49% automatic.
Government route beyond 49%
wherever it is likely to result in
access to modern technology or for
other reasons to be recorded.
Print Media 26% Government
E-commerce activities 100% Automatic
2. Brownfield 100% Automatic up to 74% Government
route beyond 74%
11. What is Foreign Portfolio Investment (FPI)?
Who is a Foreign Portfolio Investor?
• Foreign Portfolio Investment (FPI) is investment by non-residents in Indian securities including
shares, government bonds, corporate bonds, convertible securities, infrastructure securities etc.
• The class of investors who make investment in these securities are known as Foreign Portfolio
• SEBI has recently stipulated the criteria for Foreign Portfolio Investment. According to this, any
equity investment by non-residents which is less than or equal to 10% of capital in a company is
12. • All FPI taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company.
As per SEBI regulations, FPIs are not allowed to invest in unlisted shares and investment in unlisted
entities will be treated as FDI.
• Qualified Foreign Investor- QFI is an individual, group or association which is a resident in a foreign
country. The QFI should compliant with the Financial Action Task Force standard and should be a
signatory to the International Organization of Securities Commission.
• Foreign Institutional Investor- FIIs comprised of a pension fund, a mutual fund, investment trust,
insurance company or a reinsurance company.
13. Why does Indian Economy need FPIs?
• Companies must raise investment when they do not have sufficient funds to sustain the operations.
When there is a limitation on the domestically available investors, companies look forward to
receiving foreign investment in the form of FPIs.
The advantages of FPI are:-
• The investor can earn returns from the investment.
• He can make a profit on the investment based on the current exchange rate between the currencies.
15. Foreign Aid/ External Aid
Transfer of resources from one country to another
Can be form of loan / grant
HARD LOAN Soft Loan
16. Types of External Aid or Foreign Aid
Bilateral Multilateral Tied Project Military
Helps to ease poverty in poor countries
Beneficial to involved countries, the donor
as well as recipient
Helps countries to become more
Helps other nations fight drugs and other
problems like HIV/ AIDS
Favoring selected countries over other
Giving financial aid like loans only leave
those poor countries deeper in debt &
Foreign aid amounts to 20% of American
people’s money & it is wasteful
19. Debt Capital
Business has two ways to raise funds:
Debt financing: Borrowing money &
repaying with interest
Equity financing: Raising capital by giving
away some ownership of the company
20. Advantages Disadvantages
Maintain company ownership Repayment of principal and
Tax deductions for interest
Impacts on credit rating
Great freedom & flexibility Cash on hand requirement
Advantages and Disadvantages of Debt Capital
• There are lots of business opportunities in India for foreign investors, Non-Resident Indians (NRIs),
Persons of Indian Origin (PIO) and Overseas Corporate Bodies (OCBs).
• High number of individuals with disposable income, emergent middle class, low cost competitive
labor force and investment friendly strategies
• Handiness of rich natural resources
• Obtainability of a substantial section of population adept in English
• A well-established banking system comprising of public and private banks and other financial
• Competitive lead in Information Technology, which can be used to augment productivity in
• To entice foreign investment into India, the Government is offering numerous facilities to NRIs,
PIOs and OCBs.
• created an investment-friendly atmosphere, which leads to more business opportunities in India.
22. Challenges of FDI in Host Country
• Bad effects on Domestic industries
• Increase in foreign dependence
• Harmful for domestic producers
• Imbalance development
Challenges of FDI in Home Nation
• Negative effects on balance of payment
• Negative effect on employment generation
• FDI may provide better access to latest technologies for the local economy.
• FDI provides competition to the local industries which intern make them competent. Hence
product quality improvement.
• The increased flow of FDI in a country has given a major boost to the country's economy.
• Hence measures must be taken in order to ensure that the flow of FDI in the country to
continue to progress in all perspectives.