Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII)

Presented BySAROJ KUMARMBA 4TH SEM

Background: India Transformed !!*India -- the largest Democracy - one of the fastest growing economies in the World!Slow rate of growthBureaucraticProtected and slowWeak infrastructureYesterdayTodayStrong macro economic fundamentalsEncouraging foreign investmentOutsourcing destination Growing consumerismImpetus on infrastructure development

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What is FDI & FII

Foreign Direct Investment (FDI): FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.Foreign Institutional Investment (FII): FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. SEBIs definition of FIIs 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.

**Distinction between FDI and FII FDI It is long-term investmentInvestment in physical assetsAim is to increase enterprise capacity or productivity or change management control Leads to technology transfer, access to markets and management inputsFDI flows into the primary marketEntry and exit is relatively difficultFDI is eligible for profits of the companyDoes not tend be speculativeDirect impact on employment of labour and wagesAbiding interest in mgt.FIIIt is generally short-term investmentInvestment in financial assets Aim is to increase capital availability

FII results in only capital inflows

FII flows into the secondary marketEntry and exist is relatively easyFII is eligible for capital gainTends to be speculativeNo direct impact on employment of labour and wagesFleeting interest in mgt.

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Overview

Foreign Direct Investment Policy*Foreign Direct Investment (FDI) cross border investment with an objective to establish lasting interestObjective - to encourage FDI to promote industrial & socio-economic development; supplement domestic capital/ technologyForeign investment in India is regulated by Government of Indias FDI policy. The FDI guidelines administered by the Ministry of Commerce and Industry.Department of Industrial Policy & Promotion (DIPP), Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) regulate the FDI PolicyGoI has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a one-window to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agenciesAdministrative and compliance aspects of FDI monitored by RBISince 1991, policy has been liberalized substantially to facilitate foreign investment

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Recent Developments

Setting the context*Contribution of FDI in Indias economic development is an acknowledged fact.From inception policy subject to extensive amendments from time to time through Press Notes, circulars and clarificationsPress Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI and downstream investmentFM stressed the need for a consolidated FDI policy in Budget 2010-11Draft consolidated policy issued in late 2009 for public commentsConsolidated FDI policy issued effective from 1 April, 2010

Consolidated FDI Policy Salient Features*Consolidated document of all foreign investment policies /regulations under FEMA, Press Notes, Press Releases and Clarifications issued by DIPPUnderlying rationale to promote FDI through a policy framework that is transparent, predictable, simple and clear and which reduces regulatory burdenAs an investor friendly measure, a new Circular is proposed to be issued every six monthsPress Notes/Press Releases/Clarifications on FDI in force as of 31 March 2010 will stand rescinded. Savings for actions taken under earlier press notesUse of chapters, headings and definitionsTwo kinds of foreign investment (i) FDI and (ii) Foreign Portfolio Investment (FPI)FDI strategic long term relationship and establish a lasting interestFPI no intention to influence the management of the investee entity

Sector Specific Guidelines Prohibited sectors*FDI not allowed in the following:Retail trading (except single brand)Atomic EnergyLottery businessGambling & BettingChit fund and Nidhi companyTrading in Transferable Development RightsReal Estate business or construction of Farm HousesSectors not opened for private sector investments

Prohibition extended to foreign technology collaboration including licensing for franchisee, trademark, brand name or management contract for lottery, betting and gambling business

Sector Specific Guidelines Private sector banks/ Civil Aviation*No change in existing conditionsFDI permitted under automatic route upto 49% and thereafter upto 74% under Approval RouteBanksCivil AviationNo change in existing conditionsFDI in Non-scheduled air transport services/ non-schedule airlines, Chartered and Cargo airlines permitted under automatic route upto 49% and thereafter upto 74% under Approval Route

*FOREIGN INSTITUTIONAL INVESTORSFOREIGN INSTITUTIONAL INVESTORS

What are Foreign Investors looking for* Good projects Demand Potential Revenue Potential Stable Policy Environment/Political Commitment Optimal Risk Allocation FrameworkRate of interestSpeculationProfitabilityCosts of productionEconomic conditionsGovernment policiesPolitical factorsFactors affecting foreign investment

Foreign Institutional Investors*

FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up share capital of an Indian company

This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing a board resolution/shareholder resolution

FIIs can purchase shares through open offers/private placement/stock exchange

Shares purchased by FII through stock exchange cannot be sold through a private arrangement

Proprietary funds, foreign individuals and foreign corporate can register as a sub- account and invest through the FII. Separate limits of 10% / 5% is available for the sub-accounts

FIIs can raise money through participatory notes or offshore derivative instruments for investment in the underlying Indian securities

FIIs in addition to investment under the FII route can invest under FDI route

Advantages of FII*Enhanced flows of equity capital FIIs have a greater appetite for equity than debt in their asset structure. It improve capital structures.Managing uncertainty and controlling risks. FII inflows help in financial innovation and development of hedging instruments. Improving capital markets. FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to provide more information about their operations, FIIs can help in the process of economic development. Improved corporate governance. FIIs constitute professional bodies, improve corporate governance.

Disadvantages of FII*

Problems of InflationProblems for small investorAdverse impact on ExportsHot Money

*"If there is one place on the face of this Earth where all the dreams of living men have found a home when man began the dream of existence, it is India".Romain Rolland, French philosopher

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