FOREIGN DIRECT INVESTMENT (FDI)

INTRODUCTION

FDI is one of the most important sources of foreign investment in developing countries like India . It is seen as a means to supplement domestic investment for achieving a higher level of growth and development .

MEANING 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. Foreign direct investment 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

Classification of FDI inflow from investors point of view Market seeking : The investors are attached by

the size of the local market , which depends on the income of the country and its growth rate.

Lower cost : Investors are most cost-conscious . They are influenced by infrastructure facilities and labour costs.

Location and other factors : Technology status of a country , brand name , goodwill enjoyed by the local firms , favorable location , openness of the economy , policies of the government and intellectual property protection granted by the government are some of the factors that attract investors to undertake investments .

WHAT F.D.I REQUIRS ?

Important factors which foreign investors take into consideration when entering a country are:

Reliable access to economic information. The level of corruption. Stability of political and business

environment . Ability to meet and comply with

internationality acceptable standards and norms .

Character of local market (size , growth , potential) or the distance and the access to neighboring markets.

The existence of good and quality infrastructure.

F.D.I Permitted in the following forms of investments.Through financial collaborations.Through joint ventures and technical

collaboration.Through capital markets via euro

issues.Through private placements or

preferential allotment.

FDI is not permitted in the following industrial sectorsAreas and ammunition .Atomic energy .Railway transport.Coal and Lignite.Mining of iron , manganese , chrome ,

gypsum , gold , diamonds , copper , and zinc .

APPROVAL OF FDIs

FDI in India are approved through two routes:

Automatic Approval by RBI. The FIPB Route

AUTOMATIC APPROVAL OF RBI The RBI accords approval within two

weeks to all proposals involving: Foreign equity up to 50% in 3 categories

relating to mining activities(list 2); Foreign equity up to 51% in 48 specified

industries(list 3) ; Foreign equity up to 74% in 9

categories(list 4); and Where list 4 includes items also listed in

list 3, 74% participation shall be allowed.

The FIPB Route

The FIPB was constituted to promote foreign direct investment in India. FIPB stands for Foreign Investment Promotion Board which approve all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals and rejection are few.

Factors that Attracts FDIs in India

I. India has a well developed network and financial institutions and an organized capital market open to foreign institutional investors that attracts them to undertake investments.

II. Indian skills and competence is used as a base for carrying out production activities and export to neighbor countries.

III. For the last few years there has been political stability in the country.

IV. India enjoy good reputation among other countries as a honoring of its commitments about repayment obligations , remittance of dividends etc

V. India has vast potential of unskilled labor available at cheap rates as compared to other countries, and vast natural resources that attract foreign investors.

Factors that Discourage FDIs

High rates of taxation Lack of infrastructure facilities Favoritisms in the selection of investment Complicated legal framework of rules, regulations, procedures for foreign direct investment into India. Lack of transparency.

FDI investments allowed in the following 19 NBFC activities shall be as per levels indicated below:

Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring

Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit

FDI investments allowed in the following 19 NBFC activities shall be as per levels indicated below: (Continued)

100% FDI Allowed in Following sectors. Hotel & Tourism Power Sector Drugs and Pharmaceuticals Roads, Highways, Ports and Harbors Pollution Control and Management Call centers Business Process Outsourcing Manufacturing Industries Designated

as small scale Industries.

51% FDI allowed in following sectors .Trading .

49% FDI allowed in following sectors .

• Private sector Banking .• Telecommunication .

FDI Inflows in 2005-06 (In US $ mn)

FDI Inflows in India vis-à-vis Developing Countries

FDI inflows into India from Japan

Total Foreign Investment Inflows in US$ Million

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):

Amount Rupees in crores (US$ in million) Ranks Country 2010-11

(April-March)2011-12 (for April 2011)

1 MAURITIUS 31,855(6,987)

4,332(976)

2 SINGAPORE 7,730(1,705)

5,214(1,175)

3 U.S.A. 5,353(1,170)

80(356)

4 U.K. 3,434(755)

19(4)

5 NETHERLANDS 5,501(1,213)

172(39)

6 CYPRUS 4,171(913)

754(170)

7 JAPAN 7,063(1,502)

1,043(235)

8 GERMANY 908(200)

231(52)

9 U.A.E. 1,569(341)

91(21)

9 FRANCE 3,349(734)

977(220)

Total 88,520(19,427)

13,846(3,121)

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:

Amount Rupees in crores (US$ in million) Ranks

Sector 2010-11(April-March)

2011-12 (for April2011)

1 SERVICES SECTOR(financial & non-financial)

15,776(3,353)

2,922(658)

2 COMPUTER SOFTWARE & HARDWARE 3,571(784)

425(95)

3 TELECOMMUNICATIONS(radio paging, cellular mobile, basic telephone services)

7,546(1,665)

205(46)

4 HOUSING & REAL ESTATE 5,149(1,127)

167(38)

5 CONSTRUCTION ACTIVITIES(including roads & highways)

5,077 (1,125) 1,381(311)

6 POWER 5,709(1,252)

1,136(256)

7 AUTOMOBILE INDUSTRY 6,008 (1,331) 1,182(266)

8 METALLURGICAL INDUSTRIES 5,055(1,105)

229(52)

9 PETROLEUM & NATURAL GAS 2,621(574)

28(6)

10 CEHMICALS(other than fertilizers)

1,810(398)

152(34)

FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2009-10:

Financial Year 2011( Jan-Dec )

Amount of FDI inflows*

(In Rs. Crore) In US$ mn)

1 January 2011 4,725 1,042

2 February 2011 5,785 1,274

3 March 2011 4,833 1,074

4 April 2011 13,846 3,121

2011 (Up to April 2011) # 29,189 6,511

2010 (Up toApril2010) 32,535 7,147

%age growth over last year (-)10% ( -)09%

FDI EQUITY INFLOWS (WITH COMPANY-WISE DETAILS) AVAILABLE 2000-2009:

1 Cumulative amount of FDI inflows(from August 1991 to April 2011)

Rs. 5,94,569crore

US$ 1,32,837million

2 Amount of FDI inflows during 2010-11(from April 2011)*

Rs. 13,846crore

US$ 3,121million

News Relating to FDI India FDI Inflow Dips 25% In 11 Months Of 2010-2011-

April 25 ,2011 India Allows 100% FDI in Several Key Sectors –April

7 ,2011 India Releases Third Consolidated FDI Policy – April

5,2011 TRAI raises FDI limit for DTH, FM radio – June 30 ,2011 Real Estate FDI Worries may continue this Year -October

12, 2011 FDI in Multi Brand Retail will Increase Investment

Opportunities in Organised Retail Sector -September 26, 2011

Changes in FDI Norms can Dampen Foreign Investments- Experts

Govt Rules out Change in FDI Norms for Banks

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