This document provides an overview of foreign direct investment (FDI) and foreign portfolio investment (FPI) in India. It defines FDI and FPI, discusses their advantages and disadvantages, and compares the key differences between them. FDI refers to direct investment in facilities and assets in a foreign country, while FPI is the purchase of stocks and bonds on foreign exchanges. The document outlines India's policies and limits on FDI in different industries, as well as factors influencing FDI inflows into India.

1. By :
Prabhat Kumar
PGDM-Exe 2013-14
LBSIM,New Delhi
1

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. 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. 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. 
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. 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. 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. 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. 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. 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. 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. …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. 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.  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. 
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.  * 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

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. 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. 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.  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. Figure in million dollars
22

23. 23

24. Country-wise FDI inflows in India from April, 2000 to June, 2012
24

25. 25

26. 26

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. 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. 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. 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. 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. 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