Foreign Investment

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Foreign Direct Investment

(Foreign Investor Starting a Company in India or Collaborate with Indian Company and do Business)
Ex: Maruti Suzuki. Maruti – PSU of India. Suzuki – Foreign Company. Both collaborate and Run a Company).
  • Foreign Direct Investment means “cross border investment made by a resident of one country in an enterprise in another country, with the objective of establishing a lasting interest in the investee economy.
  • FDI is also described as “investment into the business of a country by a company in another country”.
  • An Indian company may receive Foreign Direct Investment under the two routes as given under
i. Automatic Route
  • (Register in Government of India and do business)
  • FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
ii. Government Route
  • (Register in Government, Government need to approve to start business)
  • FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Department of Economic Affairs, Ministry of Finance.
iii. Merger and Acquisition Route
  • Foreign company buy Indian company
  • Ex: Vodafone (UK) buy idea (Indian). Tata Motors (Indian) buy jaguar (UK) Company
iv. FIPB – Now Abolished
  • FIPB (Foreign Investment Promotion Board) has all Ministry secretory head. The Body give permission of FDI upto 1200 Cr. Above than need permission from Cabinet committee on Economic Affairs.
  • FIPB Abolished, Now All FDI get approval from finance ministry for easy of doing business.
FDI is prohibited under the Government Route as well as the
Automatic Route in the following sectors:
  • Atomic Energy
  • Lottery Business
  • Gambling and Betting
  • Business of Chit Fund
  • Nidhi Company
  • Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
  • Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification
  • Trading in Transferable Development Rights (TDRs).
  • Manufacture of cigarettes, of tobacco or of tobacco substitutes.
Problem
  • Local business Affected
  • Crony Capitalism (Foreign company give donation to Political party, involve in Local politics. After winning election the political party make policy & Schemes favor to The Company).
  • Sometimes Sovereignty affect.
Permission
Allow only Single brand retail (Nike, Adidas), Not allow Multi brand retail (Saravana stores, Big Basket).
  • Single brand retail within 3 years 30% of Domestic Sourcing (Raw material come from India [local sourcing]).
  • For Single brand retail with Critical Technology (Source not available in India. Ex: Apple Company) no need Domestic sourcing. After protest Change it to within 5 years 30% of Domestic Sourcing (Raw material come from India).
  • Restriction on E-Commerce’s website
    • Market Place Model – FDI allowed.
    • Ware House Model – FDI Not allowed. (Construct ware house and sell goods at cheap price affect local traders, company).
(Ware House Model - Restriction on Indian company. Sell upto 25% of goods in one website. Ex: Nike company sell upto 25% shoe in Amazon, another in Flipkart & Other website.
No single website sells more than 25% of Goods of one company.
[Before it, Redmi sell 100% sale in one website].
Foreign Portfolio investment
(Just buy the Shares/ Stocks f Indian Company upto 10% is FPI. More than 10% is consider as FDI)
  • A portfolio investment is a passive investment in securities, which entails no active management or control of the securities by the investor.
  • A portfolio investment is an investment made by an investor who is not particularly interested in involvement in the management of a company.
  • The purpose of the investment is solely financial gain.
  • It is a usually short term investment as opposed to the longer term Foreign Direct Investment partnership.
  • Flight of Capital is a threat of Portfolio Investment.
  • Because of the fear of capital flight, most nations prefer foreign direct investment (FDI) rather than foreign portfolio investment (FPI) because FDI involves long-term investments in factories and enterprises in a country, and can be exceedingly difficult to liquidate at short notice.
Portfolio Investment comprises
  1. Foreign Institutional Investor
  2. Depository Receipts
  3. Offshore Funds
FDI
FPI
Assert MakingInvest only on share
Take part in Management/ Decision MakingLess interference
More Stable
Ex: Hyundai is   100 FDI in India, Construct plant in India and do production, if slow down   the won’t close the company and go. Take action to get profit
Un Stable
Ex: If stock Market is low sell the share or Indian Market   is low (Flight of Capital)
Advantage:   Create infrastructure, Job opportunity, Bringing technology, Production   Increase, Increase Export Market, GDP growth. 
Capital flight (Flight of Capital)
  • It occurs when assets or money rapidly flow out of a country, due to an event of economic consequence.
  • Such events could be an increase in taxes on capital or capital holders or the government of the country defaulting on its debt that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength.
  • This leads to a disappearance of wealth, and is usually accompanied by a sharp drop in the exchange rate of the affected country depreciation in a variable exchange rate regime, or a forced devaluation in a fixed exchange rate regime.
  • ASEAN crisis of 1997 was aggravated by Flight of Capital
Three types of FPI
  1. Foreign Institutional Investment
  2. Depository Receipts
  3. P-Notes
Foreign Institutional Investor – FII
(Foreign institution (Mutual fund, Hedge fund, Merchant Banker, Stock Brokering Company) invest in Indian)
  • The term is used most commonly in India to refer to outside financial 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 market.
Depository Receipt
- Indian Company Sell stock in New York stock Exchange without register New York stock Exchange. (For Foreign Company)
- Ex: TCS need foreign investment, so sell 100 Cr stocks in ABC Company of USA.
- ABC company already listed in New York stock exchange. ABC company release TCS share as Depositary Receipts [Derivative Investment] (Ex: TCS share by ABC Company) in New York Stock exchange. Anyone buy the share.
American Depository Receipt (ADR)
  • ADR is method of trading non-U.S. stocks on U.S. exchanges.
  • Suppose, Indian company wants to raise money from America, by issuing shares in American stock exchange.
  • But then Indian company will have to maintain accounts according to American standards.
  • Hence to prevent this problem, Indian company gives its shares to American bank.
  • American bank gives Indian company certain receipts, called ADR in return of those shares.
  • Now Indian company can trade those ADR receipts in American share market, to raise money.
  • But Indian company will have to pay dividends to investors in Dollars.
Global Depositary Receipt (GDR)
  • Serve as same function like ADR, but on Global scale.
  • Helps third world countries to raise money from the stock exchanges of developed countries.
  • Several international banks such as JPMorgan, Citigroup, Deutsche Bank, Bank of New York issue GDRs.
Indian Depository Receipt (IDR)
  • As ADR (American depository receipt) is from America’s point of view, Similarly, IDR (Indian depository receipt) is from India’s point of view
  • It allows a foreign company to raise money from Indian financial market
  • As part of financial reforms, IDR (Indian depository receipts) are also made two ways fungible

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