Meaning of FDI, FDI Forms, FDI policy, FDI hottest area, Meaning of FII, Difference between FDI & FII, Advantages & disadvantages of FDI & FII,

1. Foreign Direct Investment (FDI)Foreign Direct Investment (FDI)
&&
Foreign Institutional Investment (FII)Foreign Institutional Investment (FII)
A Presentation by:
Simran vij
Rinshi singh
Sonalika sharma
Shivani dixit
Utkarsh magan

2. 2
Road Map for Presentation
What is FDI & FII
FII Guidelines
Distinction between FDI & FII
Case Studies
FDI Guidelines
Background

3. 3
Background: India Transformed !!India Transformed !!
India -- the largest Democracy - one of the fastest growing economies in the World!
 Slow rate of growth
 Bureaucratic
 Protected and slow
 Small consumer markets
 Weak infrastructure
…Yesterday
…Today
 Strong macro economic fundamentals
 Encouraging foreign investment
 Outsourcing destination
 Growing consumerism
 Impetus on infrastructure development

4. ADVANTAGES INDIA HAS TO OFFER
• Stable democratic environment over 60
years of independence
• Large and growing market
• World class scientific, technical and
managerial manpower
• Cost-effective and skilled labour
• Abundance of natural resources
• Large English speaking population
• Well-established legal system with
independent judiciary
• Developed banking system and vibrant
capital market
• Well developed accountancy, legal,
actuarial and consultancy profession
4

5. 5
What is FDI & FII
Foreign Direct Investment (FDI):
1. FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts.
2. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations.
3. It does not include foreign investment into the stock markets.
4. 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):
1. FII denotes all those investors or investment companies that are not located within the
territory of the country in which they are investing.
2. “SEBI’s 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.”

6. 6
Distinction between FDI and FII
FDI
1. It is long-term investment
2. Investment in physical assets
3. Aim is to increase enterprise capacity or
productivity or change management
control
4. Leads to technology transfer, access to
markets and management inputs
5. FDI flows into the primary market
6. Entry and exit is relatively difficult
7. FDI is eligible for profits of the company
8. Does not tend be speculative
9. Direct impact on employment of labour
and wages
10.Abiding interest in mgt.
FII
1. It is generally short-term investment
2. Investment in financial assets
3. Aim is to increase capital availability
4. FII results in only capital inflows
5. FII flows into the secondary market
6. Entry and exist is relatively easy
7. FII is eligible for capital gain
8. Tends to be speculative
9. No direct impact on employment of labour
and wages
10.Fleeting interest in mgt. 6

7. Forms of FDI
 FDI forms
Purchase of assets: why? why not?
− Quick entry, local market know-how, local financing may be possible,
eliminate competitor, buying problems
New investment: why? why not?
− No local entity is available for sale, local financial incentives, no inherited
problems, long lead time to generation of sales
International joint-venture
− Shared ownership with local and/or other non-local partner
− Shared risk

8. Alternative Modes of Market Entry
 FDI
 FDI - 100% ownership
 FDI < 100% ownership, International Joint Venture
 Strategic Alliances (non-equity)
 Franchising
 Licensing

Exports: Direct vs Indirect

9. Decision Framework for FDI
Export
FDI
FDI
FDI
License
Yes
Import
Barriers?No
No
Yes
No
Are transportation costs
high?
Is know-how easy to
license?
Tight control over foreign
ops required?
Is know-how valuable and is
protection possible?
No
Ye
s
Ye
s
No
Ye
s

10. 10
Overview

11. 11
Foreign Direct Investment Policy…
• Foreign Direct Investment (‘FDI’) – cross border investment with an objective to
establish ‘lasting interest’
• Objective - to encourage FDI to promote industrial & socio-economic development;
supplement domestic capital/ technology
• Foreign investment in India is regulated by Government of India’s 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 Policy
• GoI 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 agencies
• Administrative and compliance aspects of FDI monitored by RBI
• Since 1991, policy has been liberalized substantially to facilitate foreign investment

12. 12
Foreign Direct Investment
Snapshot
5549
15730
24579
27309
22963
0
5000
10000
15000
20000
25000
30000
2005-06 2006-07 2007-08 2008-09 2009-10* * April 2009 – January 2010
184%
56%
Figures in
Million US$
• Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India
• Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI
*as per information in the Press

13. 13
India's Hottest FDI 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

14. 14
The Roadmap so far…
Allowed selectively
up to 40%
Up to 51%
under ‘Automatic
Route’ for
35 Priority Sectors
Up to 74/51/50%
in 111 Sectors under
‘Automatic Route’
100% in some sectors
Up to 100% under
‘Automatic Route’ in
all sectors except
a small negative list
Sectoral caps raised;
Conditions relaxed;
Pre 1991 1991 1997 2000 Post 2000

15. 15
…Foreign Direct Investment Policy…
 Only for cases other than Automatic Route
and those mentioned in sectoral policy
 Applies to cases with existing venture/ tie up
in ‘same filed’
 Applies to investment over 24% in SSI
reserved items
Government Route
 Allowed for Most sectors
 Limits : Sectoral caps/ stipulated sector
specific guidelines
 Inward remittances through proper banking
channels
 Pricing valuations prescribed
 Post facto filing with 30 days of fund receipt
 Filings within 30 days of share allotment
 Includes Technical Collaboration/ Brand
Name/ Royalty
Automatic Route
FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint
Venture
Foreign Investment Promotion Board (FIPB)No Prior Regulatory Approval but
only Post Facto Filings to RBI, through AD
 

16. 16
…Foreign Direct Investment Policy
 Existing Airports 100%
 Asset Reconstruction
Companies 49%
 Titanium Minerals 100%
 Broadcasting (a)
 Cigars & Cigarettes 100%
 Courier 100%
 Print Media (a)
26%
 Single brand retailing 51%
 Agriculture (b)
 Atomic energy
 Retail trading (except single
brand up to 51%)
 Lottery, betting and gambling
 Chit fund, Nidhi company
 Trading in Transferable
Development Rights
Negative List
(Illustrative)
Prior Approval
(Illustrative)
 NBFC (minimum capitalization
norms)
 IT / ITes
 Financial services(a)
 Telecom Sector (74% cap)(a)
 Insurance (26 % cap)(a)
 Real Estate(a)
 Special Economic Zones
 Infrastructure
 Shipping
 Manufacturing sector
 Hotels and tourism
Automatic Route
(Illustrative)
Note: (a) Sector specific guidelines
(b) Subject to certain exceptions
 
FDI limits – Illustrative list

17. 17
Recent Developments

18. 18
Consolidated FDI Policy –
Salient Features
• Consolidated document of all foreign investment policies /regulations under
FEMA, Press Notes, Press Releases and Clarifications issued by DIPP
• Underlying rationale to promote FDI through a policy framework that is
transparent, predictable, simple and clear and which reduces regulatory burden
• As an investor friendly measure, a new Circular is proposed to be issued every
six months
• Press Notes/Press Releases/Clarifications on FDI in force as of 31 March 2010 will
stand rescinded. Savings for actions taken under earlier press notes
• Use of chapters, headings and definitions
• Two kinds of foreign investment – (i) FDI and (ii) Foreign Portfolio Investment
(FPI)
FDI – strategic long term relationship and establish a lasting interest
FPI – no intention to influence the management of the investee entity

19. 19
FDI Policy – Principles
• Capital defined as Equity, Compulsorily Fully Convertible Preference Shares and
Compulsorily Fully Convertible Debentures
• Warrants, partly paid up shares other hybrid instruments not permitted for FDI
• Investment in other instruments such as:
− Non Convertible Preference Shares/ Debenture (‘NCP’)
− Optionally Convertible Preference Shares/ Debentures (‘OCP’)
− Partially Convertible Preference Shares/ Debentures (‘PCP’)
treated as External Commercial Borrowings (‘ECB’) - subject to ECB guidelines
• Existing NCP/ OCP/ PCP on cut off date outside sectoral cap till current maturity

20. 20
FDI Policy – Principles …contd.
• FDI permitted in:
− Indian companies including micro & small enterprise
− Partnership firm/ proprietorship concern – only by NRI/PIOs
− Trust only in the form of VCFs
• Not permitted in LLPs or any other entities – under consideration
• Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate
• Pricing of capital instruments (including conversion price for convertible
instruments) is now required to be decided upfront at the time of issue of
instruments
• Investment by FVCI in DVCF set up as trust would now require specific
Government approval; FVCI can directly invest subject to FDI policy

21. 21
Calculation of Indirect FDI…
Foreign Co.
I Co1
Overseas
India
I Co1
Overseas
India
I Co2
Foreign Co.
Direct FI
Indirect FI
Direct Foreign Investment Indirect Foreign Investment

22. 22
Calculation of Indirect FDI…
Earlier
Different methods of computing Indirect FI prescribed for different sectors. E.g.
- Telecom/ Broadcasting: Proportionate method
- Investing companies in Infrastructure/ Services sector: Management + Ownership
Test
Foreign Co.
Co1
Overseas
India
Telecom sector
Co2
90%
60%
FI in Co2 is 54% (90*60%)
Co1*
Overseas
India
Infrastructure sector
Co2
49%
100%
FI in Co2 is NIL
Foreign Co.
*Management of
Co1 with Indians

23. 23
…Calculation of Indirect FDI*
Now
• Total FI is sum of Direct FI and Indirect FI
• FI to include all types of foreign investments
• For RIC own and control are cumulative conditions; for NRE these are non-cumulative
• The methodology to apply to every stage of investment at Indian company
Direct FI in Co2 = 39%
Indirect FI in Co2 = Nil
Total FI in Co2 = 39%
Non Resident Entity
(‘NRE’)
Co1 (Owned and
Controlled by RIC)
Co2 (Owned and
Controlled by RIC)
Overseas
India
40%
10%
39%
Direct FI in Co2 = 51%
Indirect FI in Co2 = 49%
Total FI in Co2 = 100%
NRE
Co1 (Owned or
Controlled by NRE)
Co2 (Owned and
Controlled by NRE)
Overseas
India
51%
49%
51%

24. 24
Downstream Investment…
Co1
Overseas
India
Co2
Foreign Co.
Downstream
Investment
Co1 could be
-An investing company; or
-An investing-cum-operating
company
Co2 is an operating company

25. 25
Procedural Aspects

26. 26
FDI Policy – Procedural Aspects
• Intimation of receipt of share application money – within 30 days
• Purpose of inward remittance clearly stated on FIRC
• Allotment of shares within 180 days of receipt of funds
• Funds against which shares not allotted to be refunded
• Reporting in Form FC GPR within 30 days of allotment
• In case of Approval route, application to FIPB along with supporting documents
• All applications to be placed before FIPB within 15 days
• FIPB empowered to prioritise applications based on sector, export potential etc.
• Violations of regulations attract penal provisions under FEMA

27. FOREIGN INSTITUTIONAL INVESTORS
27

28. What are Foreign Investors
looking for?
• Good projects
• Demand Potential
• Revenue Potential
• Stable Policy
Environment/Political
Commitment
• Optimal Risk Allocation
Framework
•Rate of interest
•Speculation
•Profitability
•Costs of production
•Economic conditions
•Government policies
•Political factors
Factors affecting foreign
investment
28

29. 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 corporates 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
29

30. Investment limits on Equity &
Debt investments by FII
FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an
Indian company.
Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an
India company.
For the sub-account registered under Foreign Companies/Individual category, the investment
limit is fixed at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by
Government of India / Reserve Bank of India.
investment limits on debt investments by FII
For FII investments in Government debt, currently following
limits are applicable:
• 100 % Debt Route US $ 1.55 billion
• 70 : 30 Route US $ 200 million
• Total Limit S $ 1.75 billion
For corporate debt the investment limit is fixed at US $ 500 million.
30

31. PARTICIPATORY NOTES
What is P-Note:
PNs are instruments issued by registered FIIs to overseas investors, who wish to invest in the
Indian stock markets without registering themselves with SEBI.
Why is P-Note:
More than 30% of foreign institutional money coming into India is from hedge funds. Hedge
funds, which thrive on arbitrage opportunities, rarely hold a stock for a long time.
P-Notes are issued to the real investors on the basis of stocks purchased by the FII.
To monitoring investments through P Notes, Sebi decided that FIIs must report P-Notes details.
Reporting by FIIs
P-Notes issued - 7th day of the following month.
The FII merely investing for themselves through P-Notes – Quarterly basis
FIIs who do not issue PNs but have trades – File 'Nil' undertaking on a quarterly basis.
31

32. Importance of FII Inflow - FM’s View October 26, 2010
• No controls on FII inflows
• RBI may check rupee appreciation
• The upward movement of the rupee against the dollar was sharp in recent weeks as the
Indian currency has climbed about 5.6% since the beginning of September due to sustained
capital inflows.
The FM believes that with FII inflows and forex reserves, the current account deficit should
be contained at around 3% of the gross domestic product (GDP) (this fiscal).
The current account deficit is the gap between the amount the country pays to the external
world against what it receives from abroad, barring capital movement. It was around 3.6% of
GDP in the first quarter of 2010-11.
32

33. 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.
33

34. Disadvantages of FII
• Problems of Inflation
• Problems for small investor
• Adverse impact on Exports
• Hot Money
34

35. 35
"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