FDI & ITS
Akhil Mehta 11112001
Ankit Agarwal 11112002
Jasvinder Singh 11112016
What is FDI?
Foreign direct investment (FDI) is investment
directly into production in a country by a company
located in another country, either by buying a
company in the target country or by expanding
operations of an existing business in that country.
It is cross border investment, where foreign assets
are invested into the organizations of the domestic
market excluding the investment in stock.
What is FDI?
• It brings private funds from overseas into products
or services. The domestic company in which
foreign currency is invested is usually being
controlled by the investing foreign company.
• Foreign direct investment (FDI) plays an
extraordinary and growing role in global business.
It can provide a firm with new markets and
marketing channels, cheaper production facilities,
access to new technology, products, skills and
What is FDI?
Why is FDI important for any consideration of going global?
The simple answer is that making a direct foreign investment allows
companies to accomplish several tasks:
• Avoiding foreign government pressure for local production.
• Circumventing trade barriers, hidden and otherwise.
• Making the move from domestic export sales to a locally-based national sales office.
• Capability to increase total production capacity.
• Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;
What is FDI?
How is FDI beneficial to the host nation…
For a host country or the foreign firm which receives
the investment, it can provide a source of new
technologies, capital, processes, products,
organizational technologies and management skills,
and as such can provide a strong impetus to
• Liberal, largest democracy, Political Stability
• Second largest emerging market (US$ 2.4 trillion)
• Skilled and competitive labors force
• highest rates of return on investment
• one hundred of the Fortune 500 have R & D facilities in India
• Second largest group of software developers after the U.S.
• lists 6,500 companies on the Bombay Stock Exchange (only the NYSE
Why India (cont.)
• World's fourth largest economy & second largest
• growth over the past few years averaging 8%
• has a middle class estimated at 300 million out of a total
population of 1 billion
• Destination for business process outsourcing, Knowledge
• Second largest English-speaking, scientific, technical and
• Low costs & Tax exemptions in SEZ
• Tax incentives for IT , business process outsourcing and
INVESTMENT RISKS IN INDIA
• Sovereign Risks
• Political Risks
• Commercial Risks
• Risk due to Terrorism
• Direct investment in new facilities/ expansion of existing facilities.
• Objective to create new production capacity and jobs and to transfer
• Profits from production do not feed back into local economy but to the MNC’s
• Industry provides inputs for or sells output from a firm’s domestic
• Investment in the same industry abroad as a firm operates in at home.
Factors Affecting FDI
• Financial incentives (Funds from local Government)
• Fiscal incentives (Exemption from import duties)
• Indirect incentives (Provides land and labour)
• Political stability
• Market potential & accessibility
• Large economy
• Market size
Liberalization in FDI
• In 1991 the government allowed FDI upto 51% wherein
automatic permission was granted in high technology and
high investment priority industries.
• The limit was raised from 51% to 74% and subsequently to
• The 1991 policy invited foreign equity holdings upto 51% by
international trading companies.
Reforms in 2012
• On 14 September 2012, Government of India allowed FDI in aviation up
to 49%, in the broadcast sector up to 74%, in multi-brand retail up to
51%, in single-brand retail up to 100%.
• The choice of allowing FDI in multi-brand retail up to 51% has been left
to each state. But the Government of India does not allow foreign e-commerce
companies to pick-up 51% stake in multi-brand retail sector in
business-to-consumer space citing regulatory issues, problems in
checking inter-state transactions in e-commerce activities.
• In its supply chain sector, the government of India had already approved
100% FDI for developing cold chain.
FDI Investment Sectors
• Atomic energy
• Arms and ammunition
• Lottery business
• Betting and Gambling
• Aircraft and warships
• Coal lignite
• Atomic minerals
FDI Investment Sectors
Fully permitted Activities
Cigar and cigarettes of tobacco
Coal, Roads & Highways
Diamond, Gold, Silver , Minerals
Oil & Energy
Pharmaceuticals & Chemicals
FDI in Retail….WHY INDIA?
Low share of organized retailing
Increase in disposable income and customer aspiration
Increase in expenditure for luxury items
FDI in Retail….Benefits
Generate huge employment
Increased investment in technology
The huge tax revenue generated.
The consumer gains from the wide variety of choices and a more
The indirect benefits like better roads, online marketing, expansion of
telecom sector etc. Will give a ‘big push’ to other sectors like agriculture,
small and medium size enterprises.
FDI in Retail….Drawbacks
Foreign Players would displace the unorganized retailers
because of their superior financial strengths.
The entry of large global retailers such as Wal-Mart would
kill local shops and millions of jobs.
Induce unfair trade practices like predatory pricing, in the
absence of proper regulatory guidelines.
Increase in real estate prices and marginalize domestic
FDI in telecommunication sector
• FDI inflow from 1991 to 2010 in telecommunication sector amounted to
US$ 131,220 million.
• Third largest sector to attract FDI in India.
• India has 100% FDI allowed in networking components and 74% FDI in
• FDI in telecom services has been raised to 74%.
• Introduction of unified access licencing for telecom services on a pan-
• Foreign telecom companies can bid for 3G spectrum without partnering
with Indian companies
Targets set by the Government
1. Network expansion
• 800 million connections by the year 2012.
2. Rural telephony
• 200 million rural subscribers by 2012
• 20 million Broadband connections by 2010.
• Broadband coverage for all secondary & higher secondary schools and
public health care centres by the end of year 2010.
• Broadband coverage for all Grampanchayats by the year 2010
• Making India a hub for telecom manufacturing by facilitating more and
more telecom specific SEZs.
• Quadrupling production in 2010.
5. Research & Development
• Pre-eminence of India as a technology solution provider.
• Comprehensive security infrastructure for telecom network.
• Tested infrastructure for enabling interoperability in Next Generation
6. International Bandwidth
• Facilitating availability of adequate international bandwidth at competitive
prices to drive ITES sector at faster growth.
Raised to $120mn
Major source of employment
Third largest earner of foreign exchange
Private investments through public private partnership
Need for FDI in Tourism
Foreign tourist arrivals are expected to grow to 10 million by 2012-14
Estimated that tourism in India could contribute Rs.8,50,000 crores to the
GDP by 2020
Reasons for low FDI
Multitude of taxes
Highest import duty on imported liquor used in
Service Tax on Tour Operators
Inland Air Travel Tax
Attract more FDI in Tourism Sector
Rationalize the taxation on the hotel industry
Service Tax should be computed based on the value
of service provided
Inland Air Travel Tax should be applied at the rate
of 5% of the basic ticket price
Incentives for Investment in Power
• New Legal Regime: Electricity Act, 2003
• The Act provides for: Multiple Buyer Model, Independent
Regulatory Body, Open Access, Power Trading as an independent
business, delicensing of generation
• 100% FDI Automatic Route in:
• Hydro-electric power plants;
• Coal/lignite based thermal power plants;
• Oil/gas based thermal power plants.
• Other investment incentives:
• New Power Projects eligible for 100% tax holiday in any
block of ten years, within first fifteen years of operation.
• The Deadline for income tax exemption for new power
projects extended from 2006 to 2012.
• Various indirect tax incentives:
• Concessional rate of import duties
• Special project import scheme
• Deemed export benefit for certain categories of power
PROS of FDI
• It reduces the gap between farm prices and retail prices.
• Gives best management practices from all over the world.
• It makes market intelligent and also provides good
understanding and practical knowledge to he domestic
• To achieve expected growth in India GDP: India is targeting
for its GDP to grow by 8 to10 percent per year. This requires
raising the rate of investment as well as generating demand
for the increased goods and services produced.
• Provide an aid to Indian agriculture to become lowest cost
source of farm produce.
• To bring trade balance and to increase liquidity by the way of
foreign exchange reserves .
• The status of the human resources in a country is also
instrumental in attracting direct investment from overseas
countries like China that have taken an active interest in
increasing the quality of their workers and have made
compulsory for every Chinese citizen to receive at least nine
ears of education. This has helped in enhancing the
standards of the laborers in China.
• If a particular country has plenty of natural resources it
always finds investors willing to put their money in them. A
good example would be Saudi Arabia and other oil rich
countries that have had overseas companies investing in
them in order to tap the unlimited oil resources at their
• Infrastructure is very important for FDI. So if a country
keens to have overseas investors they have to focus on
CONS OF FDI
• Threats on organized and unorganized retail players
• Replacement of established national brands by the brands of the
retail gains. For e.g Wal-Mart is committed to buying the best
goods at the cheapest prices to give its customers the best value
for money. That is why it sources so heavily from China. 70% of
merchandise in Wal-Mart contains components made in China.
Even though Wal-mart may not continue heavy operations in
china but would continue heavy sourcing from china market to
cater to the world markets at lower prices. Low prices of Chinese
products can easily convince Indian price consciousness mentality.
Acceptance towards Chinese brands can create a direct threat on
Indian established brands providing best quality products with
• While the levels of FDI tend to be resilient during periods of
economic uncertainty, it has the potential of adversely
affecting the net capital flow of a developing economy
especially if it does not have a healthy and sustainable FDI
• FDIs may enter the host country for unique strategic reasons
but there is ultimately the need to achieve returns on
investments. For e.g. paying a premium for the price of labor
may improve the consumption power of workers, but it also
has the detrimental ability of disrupting the local
employment market. When prices rise, supply increases
while demand falls. Similarly, when the price of labor
increase, wage premiums in this case, this creates a
distortion and creates disequilibrium in he labor market. Job
matching stops being efficient and may even create
What is an FII??
• An investor or investment fund that is from or registered in a
country outside of the one in which it is currently investing.
Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds.
• The term is used most commonly in India to refer to outside
companies investing in the financial markets of India.
• International institutional investors must register with the
Securities and Exchange Board of India to participate in the
• One of the major market regulations pertaining to FIIs
involves placing limits on FII ownership in Indian companies.
Foreign Institutional Investors (FII)
• FIIs may invest in:
• securities in the primary and secondary markets (shares,
debentures, warrants of listed and unlisted companies)
• units issued by domestic mutual funds
• dated Government securities
• derivatives traded on a recognized stock exchange
• commercial paper
• debt instruments – provided a 70/30 equity/debt ratio is
Foreign Institutional Investors (FII)
• Limits on the type and amount of investments apply to FIIs
• no more than 10% of the equity in any one company
• no more than 10% in the equity in any one company on
behalf of a fund sub-account
• no more than 5% in the equity in any one company on
behalf of a corporate/individual sub-account
• no more than 24% in the aggregate of the total issued capital
of a company to be held by FIIs
FDI Vs FII
• FDI is an investment that a parent company makes in a foreign country.
On the contrary, FII is an investment made by an investor in the markets
of a foreign nation.
• FII can enter the stock market easily and also withdraw from it easily. But
FDI cannot enter and exit that easily.
• Foreign Direct Investment targets a specific enterprise. The FII increasing
capital availability in general.
• The Foreign Direct Investment is considered to be more stable than
Foreign Institutional Investor.
OUTWARD FLOW OF FDI
• The outward FDI of developing and transition companies has risen
tremendously over the last few years. For India the absolute terms of FDI
have risen, but compared to the GDP of India there is still a lot of
potential for more outward FDI, according to the World Investment
Report 2006 by the United Nations Conference on Trade and
OUTWARD FLOW OF FDI (REASONS)
The main reasons for Indian companies to engage in outward FDI are-
Market related factors, more and more companies are looking for a niche
market for their product, and especially the IT-sector finds a growing
More companies realize that they operate in a global economy and not in
a domestic one. Therefore specialization from abroad are used to
improve the way of doing business of the company.
Supportive host-governments. Most host-governments are very
supportive towards incoming FDI because it adds to their economy.
There is a growing concern about running short of key resources and
inputs for the company’s economic expansion.
OUTWARD FLOW OF FDI CONTD..
RANGE FDI INFLOWS FDI OUTFLOWS
Over $ 50 billion China
$ 10-$ 49 billion Hong Kong ( China ) and Singapore Hong Kong ( China ) and
$ 1.0- $ 9.9 billion India , Republic of Korea, Indonesia,
Malaysia, Thailand, Pakistan, Vietnam,
Taiwan Province of China and
India , Taiwan Province of
China , Singapore , Republic
of Korea , Indonesia and
$ 0.1- $ 0.9 billion Macao ( China ), Bangladesh , Cambodia
, Myanmar , Brunei , Darussalam , Sri
Lanka , Mongolia , Marshall Islands and
New Caledonia .
Less than $ 0.1
French Polynesia, Papua New Guinea,
Lao People’s Democratic Republic,
Kiribati, Vanuatu, Maldives, Tuvalu,
Pakistan, Sri Lanka, Fiji,
Bangladesh, New Caledonia,
Cambodia, Papua New
INDIAN INVESTORS IN FOREIGN MARKET
• The companies that invested overseas in the month of July included JSW
Steel, Bharti Airtel, Tata Steel, Global Green Company, Religare Capital
Markets, Reliance Industries, Spice Invest and Finance Advisors.
• JSW Steel invested $163.39 million through its wholly-owned
subsidiaries and joint-venture in Mauritius, the Netherlands and the US
for its businesses in manufacturing, wholesale and retail trade besides
the hotel segment.
• Bharti Airtel invested $150.01 million through its wholly owned unit in
Mauritius in the areas of communication, storage and transportation.
• Tata Steel made an investment of $96.79 million via its wholly owned
subsidiary in Singapore in financial services, insurance and real estate
INDIAN INVESTORS IN FOREIGN
• Global Green Company, which is into wholesale, retail trade, restaurants
and hotels invested $70.73 million through its joint venture in Belgium.
• Religare Captial Markets invested $64.11 million in its wholly owned
business in Mauritius. The subsidiary is into financial, insurance, real
estate and business services.
• Reliance Industries undertook an investment of $45.15 million in its
wholly owned subsidiaries in the United Arab Emirates and Australia.
The subsidiaries are into financial services, insurance, real estate and
• Spice Invest and Finance Advisors invested $37.55 million through its
wholly owned subsidiary in Singapore in the areas of financial,
insurance, real estate services.