FOREIGN CAPITAL

Rama Mittal
Assistant Professor

Meaning of FDI
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.
It is the movement of capital across national
frontiers in a manner that grants the investor
control over the acquired asset

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Its

definition can be extended to include

investments made to acquire lasting
interest in enterprises operating outside
of the economy of the investor.
The FDI relationship consists of a parent
enterprise and a foreign affiliate which
together form an international business
or a multinational corporation (MNC).
In order to qualify as FDI the investment
must afford the parent enterprise control
over its foreign affiliate.

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A foreign direct investor may be classified in

any sector of the economy and could be any
one of the following;
An individual;
A group of related individuals;
An incorporated or unincorporated entity;
A public company or private company;
A group of related enterprises;
A government body; or
Any combination of the above.

Type of Foreign Direct

Investors

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Classification of FDI
FDI

Inward

Outwar
d
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Inward FDI
Foreign

direct investment, which is inward, is a

typical form of what is termed as 'inward
investment'. Here, investment of foreign
capital occurs in local resources.

The

factors propelling the growth of Inward

FDI comprises tax breaks, relaxation of
existent regulations, loans on low rates of
interest and specific grants. The idea behind
this is that, the long run gains from such a
funding far outweighs the disadvantage of the
income loss incurred in the short run. Flow of
Inward FDI may face restrictions from factors
like restraint on ownership and disparity in the
performance standard
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Outward FDI
Foreign

direct investment, which is outward, is also

referred to as direct investment abroad. In this case
it is the local capital, which is being invested in some
foreign resource.
It may also find use in the import and export dealings
with a foreign country.

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Some other forms of FDI

Horizontal FDI :
FDI in the same industry abroad as
that in which a firm operates at home
Vertical FDI:

When a multinational operates

in some other related fields

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Advantages of FDI
Bringing

infrastructure into the country

Bring advanced technology into the country which can
be used later on in the economy
Generates healthy competition in the recipient country
Creates more industrial units in the country
Creates more employment in the economy

Eg- Hyundai (South Korean company) has established its new car
manufacturing plant at Chennai in India because of low wages rates,
guaranteed power supply, cheap land and providing employment in
India.
Note:- It is estimated that very dollar of FDI increases domestic investment by
80% of the amount of FDI.
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Disadvantages of FDI

Inflation may increase slightly

Breeds bribery and corruption
Domestic firms may suffer if they are
relatively uncompetitive
Small and marginal firms are made to exit
May lead to social and cultural disruption
Too much dependency may arise and cause
problems

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FDI Flow in India

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Sources: Department of Industrial policy and promotion

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SECTORS ATTRACTING HIGHEST

FDI EQUITY INFLOWS

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FDI POLICY IN INDIA

FDI has helped the Indian economy grow, and the

government continues to encourage more investments of
this sort - but with $5.3 billion in FDI in 2004 India gets less
than 10% of the FDI of China.

FDI has allowed India to focus on the areas that may have
needed economic attention, and address the various
problems that continue to challenge the country.
India has continually sought to attract FDI from the worlds
major investors. In 1998 and 1999, the Indian national
government announced a number of reforms designed to
encourage FDI and present a favorable scenario for
investors.

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Policy regarding Foreign

Capital
Industrial

Policy 1991 announced by the Govt. accepted

the fact that foreign investment is essential for
modernization, technology upgradation and industrial
development of India. The main points of policy were:

a. Approval will be given for direct foreign

investment up to 51% foreign equity in high
priority industries.
b. The payment of dividend would be monitored
through the RBI.
c. Automatic permission would be given for
foreign technology agreements in high priority
industries up to a lump sum payment of Rs.
1crore, 55 royalty for domestic sales and 8%
for foreign sales over a period of 10 years.

Foreign Investment
Inflows

After the announcement of Industrial

Policy 1991, there has been an
acceleration in the flow of foreign
capital in India.
During 1991-92 to 2012-13 total
foreign investment flows were $456.9
billion, out of which about $270.2
billion (59.1%) were in the form of FDI
and the remaining (40.9%) were in
the form of portfolio investment.

Region wise Breakup of

FDI

(From
Region

April 2000 toShare

March
% 2013)

Maharashtra (Mumbai)

33%

Delhi-NCR

19%

Tamil Nadu and

Pondicherry
(Chennai)

6%

Karnataka
(Bengaluru)

6%

Gujarat
(Ahmadabad)

4%

Andhra Pradesh
(Hyderabad)

4%

Others

28.6
Source: Department of Industrial policy and promotion, March 2013.

destinations comprising of
Mumbai, Delhi, Chennai,
Bengaluru, Ahmedabad and
Hyderabad had a total 71.4% FDI
inflow.
In other words, there was heavy
concentration of FDI inflows in
these 6 regions.

Foreign Direct Investment

Incentives
Low

corporate tax and income tax rates

Tax holidays
Other types of tax concessions
Preferential tariffs
Special economic zones
Investment financial subsidies
Soft loan or loan guarantees
Free land or land subsidies
Relocation & expatriation subsidies
Job training & employment subsidies
Infrastructure subsidies
R&D support.
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Main Sectors with FDI

Equity/Route Limit
FDI equity limitautomatic Route

Insurance 49%
Domestic airlines 49% (74%)
Telecom services- Foreign equity
74%
Private sector banks- 74%
Mining of coal and lignite for captive
consumption- 100%
Coffee and rubber processing-100%
Civil Aviation-100%
Manufacture of Telecom Equipment100%
Non Banking Finance Companies100%

FDI requiring prior

approval

Defense production 26%

FM Broadcasting - foreign equity
20%
News and current affairs- 26%
Broadcasting- cable, DTH, uplinking foreign equity 49%
Trading- wholesale cash and carry,
export trading, etc., 100%
Tea plantation 100%
Development of airports- 100%
Courier Services-100%
Cigars & cigarettes manufacture100%
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Foreign portfolio investment (FPI)

It is the passive holding of securities
such as foreign stocks, bonds, or other
financial assets ,none of which entails
active management or control of the
securities issues by the investor.
It is also called Foreign Institutional
Investment (FIIs).
It represent movement of financial
resources and do not have much effect
on productive capacity and employment.

Starting up
In

1992, India opened up its

economy and allowed foreign
portfolio investment in its
domestic stock market

Since

then ,FPI has emerged as a

major source of private capital
inflow in this country
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Factors affecting Institutional

Investment
Tax

rates on interest or dividends

Interest

rates

Exchange

rates

Note: FII is the part of capital account of BOP

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How FPI flow can help an

economy?

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Regulations regarding
Investment
by FIIs
RBI

has granted permission to SEBI

registered (FIIs) invest in India
under Portfolio investment scheme.

All

FIIs and their sub-accounts

taken together cannot acquire
more than24% of the paid up
capital of an Indian economy
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Regulations regarding
Portfolio Investments by
NRIs/PIOs
NRIs/PIOs can purchase/ sell shares /
convertible debentures of Indian
companies on stock exchanges.
An

NRI or PIO can purchase shares

upto5% of the paid up capital of Indian
company.

All

NRIs/PIOs taken together cannot

purchase more than 10% of the paid up
value of the company.
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Difference Between FDI & FII

Basis

FDI

FII

Stands for

Foreign Direct Investment

Foreign Institutional Investment

Sell off:

It is more difficult to sell off or pull out.

It is fairly easy to sell securities and pull out

because they are liquid.

Comes from

Tends to be undertaken by Multinational Comes from more diverse sources e.g.a small
organisations
company's pension fund or through mutual funds
held by individuals; investment via equity
instruments (stocks) or debt (bonds) of a foreign
enterprise.

What is invested

Involves the transfer of non-financial

assets e.g.technology and intellectual
capital, in addition to financial assets.

Only investment of financial assets.

Volatility

Having smaller in net inflows

Having larger net inflows

Management

Projects are efficiently managed

Projects are less efficiently managed

Involvement - direct or
indirect:

Involved in management and ownership No active involvement in management.

control; long-term interest
Investment instruments that are more easily
traded, less permanent and do not represent a
controlling stake in an enterprise.
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