Foreign Capital Flow

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Study on FDI in India

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  • Foreign direct investment ( FDI ) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. [1] Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. [2] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment . (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Portfolio Investment represents passive holdings of securities such as foreign stocks , bonds , or other financial assets , none of which entails active management or control of the securities' issuer by the investor ; where such control exists, it is known as foreign direct investment . External Commercial Borrowings (ECB) are defined to include commercial bank loans, buyer's credit, supplier's credit, securitised instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds Phase I: 1947 to early 1980s: mainly multilateral and bilateral concessional finance. Widening current account deficit during the 1980s, Phase II: 1980s to 1990 external commercial loans, including short-term borrowings and deposits from NRIs the proportion of short-term debt in India’s total external debt had increased significantly Phase III: from 1991 Balance of Payment crisis
  • Since the introduction of the reform process in the early 1990s, India has witnessed a significant increase in cross-border capital flows, a trend that represents a clear break from the previous two decades. Net capital inflows increased from $7.1 billion2 in 1990/91 to $45.8 billion in 2006/07, and further to $108.0 billion during 2007/08 (Graph 1). India has one of the highest net capital flows among the emerging market economies (EMEs) of Asia.
  • Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of shares.
  • 1. In all other cases of foreign investment, where the project does not qualify for automatic approval, as given above, prior approval is required from FIPB. Decision of the FIPB is normally conveyed within 30 days of submitting the application. The proposal for foreign investment is decided on a case-to-case basis depending upon the merits of the case and in accordance with the prescribed sectoral policy. 2. CCFI – Cabinet committee for foreign Investment
  • Foreign direct investment ( FDI ) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. [1] Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. [2] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment . (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. A Greenfield Investment is the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist. [1] [2] The name comes from the idea of building a facility literally on a "green" field, such as farmland or a forest. Over time the term has become more metaphoric. Greenfield Investing is usually offered as an alternative to another form of investment, such as mergers and acquisitions, joint ventures, or licensing agreements. Greenfield Investing is often mentioned in the context of Foreign Direct Investment
  • Foreign Capital Flow

    1. 1. FOREIGN CAPITAL FLOW In India Group 6 Sachin Arun Balaji Swapnil Arobinda
    2. 2. SCHEME OF PRESENTATION <ul><li>Introduction </li></ul><ul><li>Trends & Composition </li></ul><ul><li>Foreign Capital Flows </li></ul><ul><li>FDIs / FPIs / ECBs </li></ul><ul><li>Capital Account - Controls </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    3. 3. INTRODUCTION <ul><li>FCF in India comprises </li></ul><ul><ul><li>Foreign Direct Investment (FDI) </li></ul></ul><ul><ul><li>Foreign Portfolio Investment (FPI) </li></ul></ul><ul><ul><li>External Commercial Borrowings (ECB) </li></ul></ul><ul><ul><li>Non Resident Indian deposits (NRI) </li></ul></ul><ul><li>FCF in India – 3 Phases </li></ul><ul><ul><li>1 st Phase (till 1980s) – Restricted bilateral or multilateral aid finances </li></ul></ul><ul><ul><li>2 nd Phase (till 1991) – Includes S.T Loans , NRI Deposits </li></ul></ul><ul><ul><li>3 rd Phase (After 1991) – Balance of Payment Crisis </li></ul></ul><ul><ul><ul><li>Allowing FDIs </li></ul></ul></ul><ul><ul><ul><li>Portfolio Investment restricted to only Institutional Investors </li></ul></ul></ul><ul><ul><ul><li>Monitored ECBs </li></ul></ul></ul><ul><ul><ul><li>Generally FCF thro’ JVs and Wholly owned Subsidiary </li></ul></ul></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    4. 4. TREND & COMPOSITION 01 Jun 09 Group 6 - Business Environment : FCF in India
    5. 5. TRENDS & COMPOSITION <ul><li>Capital Inflows increase from 7% GDP in 1990 to 37% in 2007 </li></ul><ul><li>Capital Outflow increase from 5% GDP in 1990 to 27% in 2007 </li></ul><ul><li>Sustained Growth due to </li></ul><ul><ul><li>Good Domestic activity </li></ul></ul><ul><ul><li>Better Corporate Performance </li></ul></ul><ul><ul><li>Positive Investment Climate </li></ul></ul><ul><ul><li>Favorable Liquidity conditions </li></ul></ul><ul><ul><li>Global Interest rates </li></ul></ul><ul><li>Excess capital flow over and above current fiscal deficit, add up to foreign reserves </li></ul><ul><ul><li>As on July 2008, Foreign reserves of India are $308.4 billion </li></ul></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    6. 6. INTERNATIONAL INVESTMENT POSITION –DEC’08 01 Jun 09 Group 6 - Business Environment : FCF in India
    7. 7. COMPOSITION OF FCF 01 Jun 09 Group 6 - Business Environment : FCF in India
    8. 8. FOREIGN CAPITAL FLOW <ul><li>Need </li></ul><ul><li>Improvement of Economical infrastructure </li></ul><ul><li>Technological Up gradation </li></ul><ul><li>Managing Balance of Payments </li></ul><ul><li>Exploitation of Natural Resources </li></ul><ul><li>Scope of Employment </li></ul><ul><li>Improvement of export competitiveness </li></ul><ul><li>Benefit to consumers </li></ul><ul><li>Why in India? </li></ul><ul><li>Stabilized democratic government </li></ul><ul><li>Low penetrated market </li></ul><ul><li>Low labor cost </li></ul><ul><li>Skill population </li></ul><ul><li>Availability of resources </li></ul><ul><li>Supportive policies and rules </li></ul><ul><li>Very Low Yield in developed countries </li></ul><ul><li>Resilient Financial Sector </li></ul><ul><li>Improved financial performances of corporate </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    9. 9. F.C.F. ENTRY TO INDIA 01 Jun 09 Group 6 - Business Environment : FCF in India
    10. 10. FCF – ENTRY PROCESS 01 Jun 09 Group 6 - Business Environment : FCF in India Investing in India Automatic Route Prior Permission <ul><li>Inform RBI within 30 days of </li></ul><ul><li>inflow/issue of shares </li></ul><ul><li>Pricing: FEMA Regulations </li></ul><ul><ul><li>Unlisted – CCI </li></ul></ul><ul><ul><li>Listed – SEBI </li></ul></ul><ul><li>Cap of Rs. 600 Crore </li></ul><ul><ul><li>( approx SGD 222 million) </li></ul></ul><ul><li>Approval of Foreign Investment Promotion Board (FIPB) needed. </li></ul><ul><li>Decision generally within 4-6 weeks </li></ul>
    11. 11. FCF - AUTOMATIC ROUTE <ul><li>All items/activities for FDI investment up to 100% fall under the Automatic Route except the following: </li></ul><ul><ul><li>All proposals that require an Industrial License . </li></ul></ul><ul><ul><li>All proposals in which the foreign collaborator has a previous venture/ tie up in India. </li></ul></ul><ul><ul><li>All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor. </li></ul></ul><ul><ul><li>All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted. </li></ul></ul><ul><li>Filing to be done by the Indian company </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    12. 12. FCF – FIPB ROUTE <ul><li>For all activities, which are not covered under the Automatic Route </li></ul><ul><li>Composite approvals involving foreign investment/ foreign technical collaboration </li></ul><ul><li>Published Transparent Guidelines vs. Earlier Case by Case Approach </li></ul><ul><li>Downstream Investment </li></ul><ul><li>Other Routes: </li></ul><ul><li>CCFI Route: </li></ul><ul><ul><li>Investment above the cost of Rs. 600 Crores </li></ul></ul><ul><ul><li>Prior Permission required from CCFI </li></ul></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    13. 13. FDI – FOREIGN DIRECT INVESTMENT <ul><li>What is a FDI? </li></ul><ul><li>FDI – a major non debt capital fund </li></ul><ul><li>Increase in FDI around 7 times since ’03 </li></ul><ul><li>2 types of FDI </li></ul><ul><ul><li>Mergers & Acquisition </li></ul></ul><ul><ul><li>Greenfield Investment </li></ul></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    14. 14. FDI - LIMITS <ul><li>Banking - 74% </li></ul><ul><li>Non-banking financial companies - 100% </li></ul><ul><li>Insurance - 26% </li></ul><ul><li>Telecommunications - 74% </li></ul><ul><li>Private petrol refining - 100% </li></ul><ul><li>Construction development - 100% </li></ul><ul><li>Coal & lignite - 74% </li></ul><ul><li>Trading - 51% </li></ul><ul><li>Electricity - 100% </li></ul><ul><li>Pharmaceuticals – 100% </li></ul><ul><li>Tourism - 100% </li></ul><ul><li>Mining - 74% </li></ul><ul><li>Advertising - 100% </li></ul><ul><li>Airports - 74% </li></ul><ul><li>Films - 100% </li></ul><ul><li>Domestic airlines - 49% </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India <ul><li>Exceptions: </li></ul><ul><li>Arms & Ammunition </li></ul><ul><li>Atomic Energy </li></ul><ul><li>Railway Transport </li></ul><ul><li>Gambling & Betting </li></ul><ul><li>Agriculture & Plantation (Certain) </li></ul>
    15. 15. FDI CONFIDENCE INDEX <ul><li>2002: India ranked 15 th </li></ul><ul><li>2003: India ranked 6 th (China, US, Mexico, Poland, Germany) </li></ul><ul><li>2004: China, US, India </li></ul><ul><li>2005 to 2009: China, India, US </li></ul><ul><li>2009: China, India, US, UK, Hong Kong, Brazil </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India Source: AT Kearney
    16. 16. FPI & ECB 01 Jun 09 Group 6 - Business Environment : FCF in India
    17. 17. FPI – FOREIGN PORTFOLIO INVESTMENT <ul><li>Investment by FIIs </li></ul><ul><li>GDRs / ADRs / FCCBs </li></ul><ul><li>Preference Shares </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    18. 18. FDI & FPI INFLOWS 01 Jun 09 Group 6 - Business Environment : FCF in India
    19. 19. ECB – EXTERNAL COMMERCIAL BORROWINGS <ul><li>Loans / Bonds issued outside India </li></ul><ul><li>Cap on Bond Ownership by FIIs - $2 million </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    20. 20. ECB – EXTERNAL COMMERCIAL BORROWINGS 01 Jun 09 Group 6 - Business Environment : FCF in India
    21. 21. 01 Jun 09 Group 6 - Business Environment : FCF in India MATRIX OF WELFARE OUTCOME FROM INVESTMENT INCENTIVE Group 6: Foreign Capital Flows Healthy competition Winners’ Curse Investment Poaching Beggar-thy-neighbour National Welfare Sub-national welfare Waste Gain Waste Gain
    22. 22. 01 Jun 09 Group 6 - Business Environment : FCF in India MANAGEMENT OF CAPITAL FLOWS <ul><li>Capital flows & exchange rate management </li></ul><ul><li>Capital flows & monetary management </li></ul><ul><ul><li>Capital flows & liquidity management </li></ul></ul><ul><ul><li>Cost of Sterilization </li></ul></ul><ul><li>Capital Account liberalization </li></ul>
    23. 23. CAPITAL ACCOUNT - CONTROLS <ul><li>Individuals limited to taking $50,000 per year </li></ul><ul><li>Firms – Capital equal to their net worth </li></ul><ul><li>ECBs – </li></ul><ul><ul><li>< $20 million – Maturity at least 3 yrs </li></ul></ul><ul><ul><li>> $20 million – Maturity at least 5 yrs </li></ul></ul><ul><li>Only FIIs are allowed to invest in India </li></ul><ul><li>FII in Govt bonds – max $2 billion </li></ul><ul><li>FIIs in corporate bonds – max $1.5 billion </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India
    24. 24. CONCLUSION <ul><li>Financial development can be best considered as a facilitator of economic growth </li></ul>01 Jun 09 Group 6 - Business Environment : FCF in India Thank You!

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