Fdi and fpi – india perspective


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Fdi and fpi – india perspective

  1. 1. By : Prabhat Kumar PGDM-Exe 2013-14 LBSIM,New Delhi 1
  2. 2. Flow of Presentation  What are foreign investors looking for.  Definition-FDI  Advantages and Disadvantages.  Green Field and Brown field investments.  FDI caps in different Industries.  Definition-FPI  Advantages and Disadvantages.  Difference between FDI and FPI 2
  3. 3. What are Foreign Investors looking for? Factors affecting foreign investment  Good projects •Rate of interest  Demand Potential •Speculation  Revenue Potential •Profitability  Stable Policy Environment/Political Commitment  Optimal Risk Allocation Framework •Costs of production •Economic conditions •Government policies •Political factors 3
  4. 4. What Is FDI?  Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country  the firm becomes a multinational enterprise  The flow of FDI refers to the amount of FDI undertaken over a given time period  Outflows of FDI are the flows of FDI out of a country  Inflows of FDI are the flows of FDI into a country  The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time 7-4
  5. 5.  FDI can be in the form of    Greenfield investments - the establishment of a wholly new operation in a foreign country acquisitions or mergers with existing firms in the foreign country Brown field Investments - When a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment. 5
  6. 6. How Does FDI Benefit The Host Country?  1. There are main benefits of inward FDI for a host country Resource transfer effects - FDI brings capital, technology, and management resources Employment effects - FDI can bring jobs Balance of payments effects - FDI can help a country to achieve a current account surplus Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers 2. 3. 4.  can lead to increased productivity growth, product and process innovation, and greater economic growth 7-6
  7. 7. Contd…..  Inflows of foreign stable capital into the country  Helps in the transition to privatization (when state owned firms are sold to foreign investors)  Improves the countries’ infrastructures  Brings foreign executives into the country with sufficient knowledge of macroeconomic global and local situations 7
  8. 8. What Are The Costs Of FDI To The Host Country?  1. Inward FDI has three main costs: Adverse effects of FDI on competition within the host nation  subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization Adverse effects on the balance of payments 2.  when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments Perceived loss of national sovereignty and autonomy 3.  decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control 7-8
  9. 9. How Does Government Influence FDI?  Governments can encourage outward FDI  government-backed insurance programs to cover major types of foreign investment risk  Governments can restrict outward FDI  limit capital outflows, manipulate tax rules, or outright prohibit FDI  Governments can encourage inward FDI  offer incentives to foreign firms to invest in their countries  gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries  Governments can restrict inward FDI  use ownership restraints and performance requirements 7-9
  10. 10. How Do International Institutions Influence FDI?  Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI  Today, the World Trade Organization is changing this by trying to establish a universal set of rules designed to promote the liberalization of FDI 7-10
  11. 11. An Overview of India-FDI  UNCTAD ranked India at 3rd position in 2010 as the attractive destination for FDI, which further rose to secondmost attractive destination for FDI in 2012, as ranked by A.T. Kearney FDI Confidence Index.  As a directinvestment in to production or business in India, by purchasing the stocks or buying a company or expanding the business  The investment is done either through purchase of shares or purchase of stocks or through participationin management and working.  India allows FDI through mergers and acquisitions, joint ventures, Greenfieldinvestment, etc. The major participation is seen inSEZ’s, EPZ’s, and sectors which are lucrative for higher returns. 11
  12. 12. …Foreign Direct Investment Policy… FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture Automatic Route Government Route No Prior Regulatory Approval,RBI automatic appraval for equity holding upto 51% Foreign Investment Promotion Board (FIPB) for more than 51 %   Limits : Sectoral caps/ stipulated sector specific guidelines  Inward remittances through proper banking channels  Post facto filing with 30 days of fund receipt  Filings within 30 days of share allotment  Includes Technical Collaboration/ Brand Name/ Royalty Applies to cases with existing venture/ tie up in ‘same filed’ Pricing valuations prescribed   Allowed for Most sectors  Only for cases other than Automatic Route and those mentioned in sectoral policy  12
  13. 13. FDI Policies and Limits in india  Foreign Direct Investment (FDI) in India is subject to certain Rules and Regulations and is subject to predefined limits ('Limits') in various sectors which range from 20% to 100%.  There are also some sectors in which FDI is prohibited.  The FDI Limits are reviewed by the Government from time to time.  FDI is allowed in new sectors where the limits of investment in the existing sectors are modified accordingly. 13
  14. 14.  In order to revise the FDI Limits to attract more foreign investment in India, the Union Government constituted a committee named, Arvind Mayaram Committee headed by the Economic Affairs Secretary.  On 16th July, 2013, the Government approved the recommendations given by the Arvind Mayaram Committee to increase FDI limits in 12 sectors out of the proposed 20 sectors, including crucial ones such as defense and telecom. 14
  15. 15.  FDI cap in telecom raised to 100 percent from 74 percent; up to 49 percent through automatic route and beyond via FIPB * No change in 49 percent FDI limit in civil aviation * FDI cap in defence production to stay at 26 percent, higher investment may be considered in state-of-the-art technology production by CCS. * 100 percent FDI allowed in single brand retail; 49 percent through automatic, 49-100 percent through FIPB * FDI limit in insurance sector raised to 49 percent from present 26 percent, subject to Parliament approval * FDI up to 49 percent in petroleum refining allowed under automatic route, from earlier approval route * In power exchanges 49 percent FDI allowed through automatic route, from earlier FIPB route. 15
  16. 16.  * FDI up to 100 percent through automatic route allowed in courier services * FDI in tea plantation up to 49 percent through automatic route; 49-100 percent through FIPB route .  * FDI limit increased in credit information companies to 74 percent from 49 percent * FDI up to 49 percent in stock exchanges, depositories allowed under automatic route  * Raised FDI in asset reconstruction companies to 100 percent from 74 percent; of this up to 49 percent will be under automatic route 16
  17. 17. 17
  18. 18. FDI not allowed in…..  Rail Transport.  Arms and Amunition.  Atomic Energy.  Coal and lignite.  Mining of metals like iron,chrome,gypsum,diamonds etc… 18
  19. 19. India’s FDI Hottest Destinations 1. Maharashtra Maharashtra received the lion's share of the FDI $2.43 billion (Rs 11,154 crore), which is 35% of the total FDI inflows in to the country,. 2. National Capital Region NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region accounted for 20% of the total FDI. 3. West Bengal, Sikkim, Andaman & Nicobar Islands These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050 crore) 4. Karnataka - $936 million (Rs 4,333 crore) 5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore) Data: Jan – Jun 2010 19
  20. 20. Factors Affecting FDI In india  Favourable:  Unfavourable:  Larze size of economy.  Beuracratic Culture.  Rich resource base.  High Tax Rate  Cheap Labour.  Poor governance  Removal of barrier to  High degree of foreign trade.  Abundant technical supply of manpower corruption. 20
  21. 21.  India should welcome FDI as it has huge benefits for the Indian economy.  FDI participation always brings prosperity for any emerging country.  Various benefits which India can entice by liberalising FDI are use of advanced technology, expertise, better infrastructural developments, widened product basket, improving standard of living, uplifting the brand quality, improving competitiveness, better foreign relations, boosting exports, and providing India with a global platform.  The debated views of FDI in multi brand have certainly hindered the flow in retailing 21
  22. 22. Figure in million dollars 22
  23. 23. 23
  24. 24. Country-wise FDI inflows in India from April, 2000 to June, 2012 24
  25. 25. 25
  26. 26. 26
  27. 27. What is FPI Foreign Porfolio Investment (FPI): 1. FPI denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. 2. In economics foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets, sometimes for speculation 3. Foreign Portfolio Investment (FPI): passive holdings of securities and other financial assets, which do NOT entail active management or control of the securities's issuer. 4. FPI is positively influenced by high rates of return and reduction of risk through geographic diversification. The return on FPI is normally in the form of interest payments or non-voting dividends. 5. “SEBI’s definition of FPIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.” 27
  28. 28. Advantage of FPI  Enhanced flows of equity capital  FIIs have a greater appetite for equity than debt.. It improve capital         structures. Managing uncertainty and controlling risks. FPI inflows help in financial innovation and development of hedging instruments. Improving capital markets. FPIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development. FPIs can help in the process of economic development. Improved corporate governance. FPIs constitute professional bodies, improve corporate governance. 28
  29. 29. Disadvantages of FPI  Problems of Inflation  Hot Money  Political Risk represented by the possibility of change in the political environment resulting in change in investment norms and repatriation regulations.  Emerging markets which are the beneficiaries of most FPI traditionally suffer from low retail participation which results in inadequate liquidity which results in price volatility.  Due to the unpredictable nature of such funds there is a tendency to shift from one market to another at short intervals. Volatility arising out of FPI inflows and outflowshas adverse effects on the host country economy.  Emerging economics tend to have depreciation prone currencies. This exposes the foreign investor to exchange rate risk on both principal and returns. 29
  30. 30. FII Investments & Market Reaction While strong inflow of funds from foreign institutional investors (FIIs) has been a cheer reason to , it could turn into a nightmare and if the global investors make a sudden exit can send the bourses crashing. 30
  31. 31. FII Inflows Vs Sensex 120000 100000 FII Investment from Rs. in 2005 - 2010 (Crores) BSE Sensex 80000 60000 40000 20000 Rs. in (Crores) 0 -20000 2005 2006 2007 2008 2009 2010 -40000 -60000 -80000 FII Investment Vs Sensex FII average holding in BSE 500 31
  32. 32. Distinction between FDI and FPI FDI FPI 1. It is long-term investment 1. It is generally short-term investment 2. Investment in physical assets 2. Investment in financial assets 3. Aim is to increase enterprise capacity or productivity or change management control 3. Aim is to increase capital availability 4. Leads to technology transfer, access to markets and management inputs 4. FPI results in only capital inflows 5. FDI flows into the primary market 5. FPI flows into the secondary market 6. Entry and exit is relatively difficult 6. Entry and exist is relatively easy 7. FDI is eligible for profits of the company 7. FPI is eligible for capital gain 8. Does not tend be speculative 9. Direct impact on employment of labour and wages 8. Tends to be speculative 9. No direct impact on employment of labour and wages 10.Fleeting interest in mgt. 32 32