Foreign

Investment
By:
Jatin Mittal
NRO0327240

What is Foreign
Investment?
It is the flow of
capital from one
nation to another in
exchange for
significant
ownership stakes in
domestic
companies or other
domestic assets.

Types of Foreign Investment:

I. Foreign Direct Investment (FDI)
II. Foreign Portfolio Investment (FPI)

 Foreign Direct
Investment
FDI is direct investment
into production or business in a country
by an individual or company of another

country
either by buying a company in the
target country or;
by expanding operations of an existing
business into that country.

 Foreign Portfolio Investment

FPI is the entry of funds into a country
Where foreigners make purchases in

the countrys stock and bond markets,

Sometimes for speculation

Types of FDI
Horizontal FDI: It arises when a firm

duplicates its home country based activities at

the same value chain stage in a host country
through FDI.
Platform FDI: FDI from a source country to a
destination country for the purpose of
exporting to a third country.
Vertical FDI: It takes place when a firm
through FDI moves upstream or downstream
in different value chains.

Advantages of FDI
Infrastructure and technology
Employment
Consumer benefits
Profits generated by FDI contribute to

corporate tax revenues in the host

country.
Raise living standard of people
Makes BoP favorable

Disadvantages of FDI
Displacement of small unorganized

shopkeepers
Threat of monopoly
More investment in intellectual property
than in wages of local people

Benefits of FPI
Increase liquidity of domestic capital

markets
Help in funding foreign exchange
reserves of the country
Provides non-debt creating source of
foreign investment

Disadvantages of FPI
Very volatile in nature
From investor point of view, it may lead

to losses, if share prices fall drastically

Difference b/w Portfolio investment

& investment portfolio
Portfolio

Investment
It is purchases
made into a
country where
foreigners make
purchases in the
countrys stock &
bond markets,
sometimes for
speculation.

Investment

Portfolio
It means collection
of investments held
by an investment
company or even an
individual.

How FPI flow can help an economy?

Foreign
Portfolio
Investme
nt

Share prices
up
Liquidity up

More
supply,
Liquidity,
Demand

Cost of issuing
down

More Equity
Issued

Regulations regarding FPI by Foreign

Institutional Investors
Only SEBI registered FIIs can invest in

India under Foreign Portfolio Investment

Scheme.
All FIIs taken together cannot acquire
more than 24% of the paid-up capital of
an Indian company.
Investment by individual FIIs cannot
exceed 10% of paid-up capital.

The Entry Process for FDI

Investing in India

Automatic Route
General rule
Inform RBI within 30 days of
inflow
Cap of Rs. 600 Crore

Prior Permission
By exception
Approval of Foreign
Investment Promotion
Board needed.
Decision generally
within 4-6 weeks

Procedure for receiving

FDI
Automatic Route: FDI is allowed without

prior approval of Government or RBI, in all

activities or sectors as specified in the FDI
policy, issued by GOI from time to time.
Government Route: FDI in activities not
covered under automatic route requires
prior approval of Govt. which are
considered by the FIPB and Ministry of
Finance.

Sectors banning FDI in

India
Atomic Energy
Lottery Business
Gambling & Betting
Business of Chit Fund
Nidhi Company
Agricultural & Plantation Activities
Manufacturing of cigars, cigarettes etc.

Indian Economy prior to 1991

Inward looking Economy
Import and Export restrictions
Restrictions on Foreign Investments
Import substitution policy was adopted
In 1991, foreign exchange reserves

were swiped off to a very low level.

Reforms related to FI in 1991

FDI was liberalized
100% foreign ownership was allowed in

almost all the industries

Automatic approval up to specified
levels of Foreign Equity. [100%, 74%,
51%]

Aftermath of Reforms
Foreign exchange reserves started

piling up
India became the market for the
various foreign countries
National income started rising

FDI in Retail
Retailing is one of the pillars of Indias

economy & accounts for 14 to 15% of

its GDP
Until 2011, Indian Govt. denied FDI in
multi-brand retail
In Jan 2012, India approved reforms for
single brand stores

Controversy over allowing

Foreigners Retailers
Work will be done by Indians, profit will

go to foreigners
Walmart will lower the prices and could
create a monopoly
Walmart could enter India as trader and
then take over politically

INDIAS Global Position

FDI Inflows:
Global Rank:
32nd

in 2001
9th in 2009
Rank among developing countries:
13th

in 2005
4th in 2009
Indias share of world FDI inflows:
0.78%

in 2005
3.11% in 2009
- UNCTAD Data

Why Companies go
Global?
When Domestic market becomes

saturated
Companies depending on mines always
look for these resources overseas to
ensure long term security
For taking benefit of cheap labour
policies & Govt. incentives

Why Companies go Global?

(Continued)

Consolidation of business to achieve

economy of scale
Demand of the product in abroad

Steps taken by MODI

Govt.
With foreign investment almost drying up
in Indias oil & gas sector, Petroleum minister
Dharmendra Pradhan promised an
overhaul to make policies predictable,
transparent and fair to investors.
Pradhan also said in a session in Moscow that
Narendra Modi Government intends to bring
in policies which would ease the way for large
foreign investments in the oil & gas sector.

Trends In FDI
60
50

US $
Millions

40
30
20
10
0

Approv
ed FDI
Actual
FDI

Trends In FPI

Foreign Investment: Boon or Bane

As we know, during 1990s it was only Foreign
Investment that led to the rehabilitation of
Indian Economy. Hence, considering this, it
proved itself to be beneficial for the Economy.
But, if FI is allowed without any rules,
regulations and restrictions, a threat arises of
the political takeover by the foreign investors
like East India Company.

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