A Presentation on FOREIGN INVESTMENT NATURE, TYPES, THEORIES & DEPARTMENT OF EXPENDITURE

Definition of 'Foreign Investment

Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature.

Types of Foreign Investment

Foreign Direct Investment(FDI), Foreign Portfolio Investment (FPI), official flows, and commercial loans.

Cont
Types OF FDI FDI in Limited Liability Partnership FDI in Partnership firm/ Proprietary Concern FDI in Venture Capital Funds FDI in Trusts Types OF FII Normal FIIs 100% Debt FIIs

Prohibition on Investment in India

FDI is prohibited in the following activities/sectors: Retail Trading (except single brand product retailing). Lottery Business including Government/private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Business of chit fund. Real Estate Business or Construction of Farm Houses. Manufacturing of Cigars, cigarillos and cigarettes, of tobacco or of tobacco substitutes. Activities/sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Reporting Compliances of FDI under FEMA

Reporting of Inflow:- An Indian Company receiving investment from outside India for issue of shares / convertible debentures / preference shares under the FDI scheme is required to report the details of the amount of consideration through an AD Category I bank, together with a copy/ies of the FIRC/s (Foreign Inward Remittance Certificate) evidencing the receipt of the remittance along with the KYC report on the non-resident investor from the overseas bank remitting the amount. Reporting of issue of shares:- The Indian company after issue of shares fully, mandatorily & compulsorily convertible debentures/fully, mandatorily & compulsorily convertible preference shares, the Indian company has to file Form FC-GPR, not later than 30 days from the date of issue of shares along with a required Number of documents.

Cont
Reporting Transfer of shares:- Reporting of transfer of shares between residents and non-residents and vice- versa is to be done in Form FC-TRS. Such Form FC-TRS should be submitted to the AD Category I bank, within 60 days from the date of receipt of the amount of consideration by the person in receipt of the consideration. The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor / transferee, resident in India.

THEORIES OF FDI
Production Cycle Theory of Vernon The Theory of Exchange Rates on Imperfect Capital Markets The Internalization Theory The Eclectic of Dunning
O from Ownership advantages L from Location I from Internalization

Production Cycle Theory of Vernon

Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in the manufacturing industry. Vernon believes that there are four stages of production cycle:
innovation, growth, maturity and decline.

According to Vernon, in the first stage the U.S. transnational companies create new innovative products for local consumption and export the surplus in order to serve also the foreign markets. If in the first stage of the production cycle, manufacturers have an advantage by possessing new technologies, as the product develops also the technology becomes known. Manufacturers will standardize the product, but there will be companies that you will copy it.

The Theory of Exchange Rates on Imperfect Capital Markets

This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. Itagaki (1981) and Cushman (1985) analyzed the influence of uncertainty as a factor of FDI. In the only empirical analysis made so far, Cushman shows that real exchange rate increase stimulated FDI made by USD, while a foreign currency appreciation has reduced American FDI. Cushman concludes that the dollar appreciation has led to a reduction in U.S. FDI by 25%.

The Internalization Theory

Hymer is the author of the concept of firm-specific advantages and demonstrates that FDI take place only if the benefits of exploiting firm-specific advantages outweigh the relative costs of the operations abroad. According to Hymer (1976) the MNE appears due to the market imperfections that led to a divergence from perfect competition in the final product market. Hymer has discussed the problem of information costs for foreign firms respected to local firms, different treatment of governments. The result meant the same conclusion: transnational companies face some adjustment costs when the investments are made abroad. Hymer recognized that FDI is a firm-level strategy decision rather than a capital-market financial decision.

The Eclectic of Dunning

The eclectic theory developed by professor Dunning is a mix of three different theories of direct foreign investments (O-L-I):

O from Ownership advantages:- This refer to intangible assets,

which are, at least for a while exclusive possesses of the company and may be transferred within transnational companies at low costs, leading either to higher incomes or reduced costs. But TNCs operations performed in different countries face some additional costs. Thereby to successfully enter a foreign market, a company must have certain characteristics that would triumph over operating costs on a foreign market. These advantages are the property competences or the specific benefits of the company. The firm has a monopoly over its own specific advantages and using them abroad leads to higher marginal profitability or lower marginal cost than other competitors.

Cont
L from Location:- When the first condition is fulfilled, it must be
more advantageous for the company that owns them to use them itself rather than sell them or rent them to foreign firms. Location advantages of different countries are de key factors to determining who will become host countries for the activities of the transnational corporations.

I from Internalization:- This third characteristic of the eclectic

paradigm OLI offers a framework for assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies. As crossborder market Internalization benefits is higher the more the firm will want to engage in foreign production rather than offering this right under license, franchise.

Foreign Direct Investment in India (FDI)

Sr. No. Sector/Activity/Agriculture FDI Cap /Equity Entry Route

1.

Floriculture, Agriculture cultivation of vegetables & Mushroom under Controlled Condition & service related to agro Sector. Tea Sector Including Tea Plantation Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals. Coal & Lignite mining for captive consumption by power projects, and iron & steel, cement production and other eligible activities permitted under the Coal Mines (Nationalization) Act, 1973.

100%

Automatic

2. 3.

100% 100%

FIPB Automatic

4.

100%

Automatic

5.

Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities.

100%

FIPB

Sr. No.

Sector/Activity/Agriculture

FDI Cap /Equity

Entry Route

6.

Alcohol-Distillation & Brewing

100%

Automatic

7.

Cigars & CigarettesManufacture

Coffee & Rubber processing & warehousing
Defense production

100%

FIPB

8.

100%

Automatic

9.

26%

FIPB

10.

Hazardous chemicals, viz., hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanates and diisocyantes of hydrocarbon.

100%

Automatic

Sr. No.

Sector/Activity/Agriculture

FDI Cap /Equity

Entry Route

11.

Industrial explosives

100%

Automatic

12.
13.

Power including generation

AirportsGreenfield projects

100%
100% 100%

Automatic
Automatic FIPB

Existing projects 14. Air Transport Services including Domestic Scheduled Passenger Airlines; NonScheduled Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services . a. Scheduled Air Transport Services/ 49%- FDI; 100%Domestic Scheduled Passenger Airline for NRIs investment b. Non-Scheduled Air Transport Service/ 74%- FDI 100%- for Non- Scheduled airlines, Chartered airlines, NRIs investment and Cargo airlines c. Helicopter Services/Seaplane services requiring DGCA approval 100% Automatic Automatic

Automatic

Sr. No.

Sector/Activity/Agriculture

FDI Cap /Equity

Entry Route

15.

Other services under Civil Aviation Sector a. Ground Handling Services b. Maintenance and Repair organizations; flying training institutes; and technical training institutions

74%- FDI 100%- for NRIs investment

Automatic

100%

Automatic

16. 17.

Asset Reconstruction Companies Banking - Private sector

49% (only FDI) 74% (FDI+FII) Within this limit, FII investment not to exceed 49% 49% (FDI+FII) FDI 26% FII 23% 100%

FIPB Automatic

18.

Commodity Exchanges

FIPB

19.

Construction Development projects, including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships.

Automatic

Sr. No.

Sector/Activity/Agriculture

FDI Cap /Equity

Entry Route

20.

Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.
Infrastructure companies in securities markets namely, Stock Exchanges, Depositories and Clearing Corporations. Credit Information Companies

100%

FIPB

21.

49% (FDI+FII) FDI 26% FII 23% 49% (FDI+FII) Within this limit, FII investment not to exceed 24%

FIPB

22.

FIPB

23.

Industrial Parks both setting up and in established Industrial Parks.

100%

Automatic

24.

Insurance

26%

FIPB

25.

Retail (Single Brand Retail)

51%

FIPB

26. 27.

Investing companies in infrastructure / services sector (except telecom sector) Non Banking Finance Companies:Merchant banking, Underwriting, Portfolio Management Services, Investment Advisory Services, Financial Consultancy, Stock Broking, Asset Management, Venture Capital, Custodial Services, Factoring, Credit Rating Agencies, Leasing & Finance, Housing Finance, Forex Broking, Credit card Business, Money changing business, Micro credit, Rural credit.

100% 100%

FIPB Automatic

28.

Petroleum & Natural Gas sector:a. Refining

49% in case of PSUs. 100% in case of Private companies 100% FIPB (in case of PSUs) Automatic (in case of private companies) Automatic

b. Other than Refining and including market study and formulation; investment/financing; setting up infrastructure for marketing in Petroleum & Natural Gas.

FORBIDDEN TERRITORIES
FDI is not permitted in the following industrial sectors:
Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign direct investments in India are approved through two routes: Automatic approval by RBI:- The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. The FIPB Route Processing of non-automatic approval cases:- FIPB stands for Foreign Investment Promotion Board which approves 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 rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

DEPARTMENT OF EXPENDITURE

DEPARTMENT OF EXPENDITURE
The Department of Expenditure is the nodal Department for overseeing the public financial management system in the Central Government and matters connected with State finances. The principal activities of the Department include pre-sanction appraisal of major schemes/projects (both Plan and non-Plan expenditure), handling the bulk of the Central budgetary resources transferred to States, implementation of the recommendations of the Finance and Central Pay Commissions, overseeing the expenditure management in the Central Ministries/Departments through the interface with the Financial Advisors and the administration of the Financial Rules / Regulations / Orders through monitoring of Audit comments/observations, preparation of Central Government Accounts, managing the financial aspects of personnel management in the Central Government, assisting Central Ministries/Departments in controlling the costs and prices of public services, assisting organizational re-engineering through review of staffing patterns and O&M studies and reviewing systems and procedures to optimize outputs and outcomes of public expenditure. The Department is also coordinating matters concerning the Ministry of Finance including Parliament-related work of the Ministry.

ORGANISATIONAL UNITS
Establishment Division State Finance Division (Plan Finance I) Plan Finance-II Division Procurement Policy Division Staff Inspection Unit Pay Research Unit Office of Chief Adviser Cost Controller General of Accounts National Institute of Financial Management(NIFM) Central Pension Accounting Office(CPAO) Office of Chief Controller of Accounts

 Establishment Division:- The Establishment Division deals with matters like determination of salary structure and service conditions of all Central Government employees, wage policy determination, revision of pay scales, creation of posts, basic principles of fixation of pay, House Rent Allowance, Travelling/Daily Allowance, Dearness Allowance and various other compensatory allowances in respect of Central Government employees. It is also responsible for administrative matters concerning the Department of Expenditure. STATE FINANCE DIVISION:- The State Finance Division has three main branches Plan Finance branch which administers central assistance for State Plans, Finance Commission branch which implements the award of the Finance Commission as accepted by Government of India, and State Debts and Liabilities branch which is concerned with the state debts and liabilities and administers central facilities and initiatives in this regard.

Another branch also exists for maintaining state finance data, analysis of trends of State Finances and for administering the Debt Consolidation and Relief Facility for the States drawn up consequent to recommendations of Twelfth Finance Commission.

 PLAN FINANCE-II DIVISION:- Plan Finance-II Division is primarily concerned with matters relating to the Central Plan. In respect of development schemes and projects, the focus has been on improving the equality of development expenditure through better project formulation, emphasis on outputs, deliverables, impact assessment, projectisation (Mission approach) and convergence. During the period from 1st January to 31st December, 2009, 51 meetings of the Expenditure Finance Committee (EFC) held in the Ministry of Finance considered 93 Plan Investment Proposals and Schemes of various Ministries / Departments costing Rs. 121,227 crore. STAFF INSPECTION UNIT:- The Staff Inspection Unit (SIU) was set up in the year 1964 with the objectives of securing economy in the staffing of Government organizations consistent with administrative efficiency and evolving performance standards and work norms. The Scientific and Technical Organizations are not within the purview of the SIU but the Committee constituted by the Head of the respective Department, with a representative from SIU as a Core Member, conducts study of such organizations.

 PAY RESEARCH UNIT:- PRU was established in 1968 and is mainly responsible for collection, compilation and analysis of data of actual expenditure incurred on pay and various types of allowances as well as data pertaining to strength of the Central Government civilian employees and employees of the UT administration. An annual brochure giving statistical information regarding expenditure incurred by different Ministries/ Departments on pay and various allowances, staff strength details. The 30th issue of the brochure for the year 2007-08 was issued in September 2009. OFFICE OF CHIEF ADVISOR COST:- Advice to Ministries and Government Undertakings on Cost Accounts matters and attend to Cost Investigation work on their behalf. It is a professional body staffed by Cost Accountants and Chartered Accountants.
CORE COMPETENCE A repository of expertise in Cost and Management accounting matters in the Central Government. Prime professional agency in dealing with matters relating to Costing and Pricing, studies on cost reduction, cost efficiency. To render professional assistance to different Ministries and Government agencies. Cost Benefit analysis of non-profit schemes. To serve as an independent agency of the Central Government.DFFIUFI

CONTROLLER GENERAL OF ACCOUNTS (CGA)

The Controller General of Accounts is the apex Accounting Authority of the Central Government and exercises the powers of the President under Article 150 of the constitution for prescribing the forms of Accounts of the Union and State Governments on the advice of the Comptroller & Auditor General of India. The Controller General of Accounts is responsible,
for the preparation and consolidation of the non government Monthly Accounts. presentation to Parliament to the Annual Appropriation Accounts presentation to Parliament of the Annual Appropriation Accounts (Civil) and Finance Accounts of the Union government ensuring a sound and effective internal audit and pre-check system in the Civil Ministries enabling prompt and accurate accounting ensuring effective and close monitoring of Receipts of the Government of India especially those relating to Income Tax, Customs and Central Excise enabling the effective utilisation of accounts as a tool of management by constant upgradation of the quality of accounts, leading to improved financial control within Government. The organisation of the Controller General of accounts is also responsible for government disbursements and banking arrangements of various Ministries/ Departments of the Government of India. The Controller General of Accounts also brings out every year, a booklet entitled "Accounts at a Glance", bringing out broad and significant features of Government Receipts and Expenditure.

 CENTRAL PENSION ACCOUNTING OFFICE:- The Central Pension Accounting Office (CPAO) was setup as an administrative unit of the Ministry of Finance, Department of Expenditure under the Controller General of Accounts. This office started functioning with effect from 1st January, 1990. CPAO is administering the 'Scheme for payment of Pension to Central Government Civil Pensioners by Authorized Banks (both Public Sector and some Private Sector Banks)'. Its function inter-alia includes:
Issue of Special Seal Authorizations (SSAs) for pension payment to Authorized Banks. Preparation of budget for the Pension Grant and accounting thereof. Reconciliation with and performance review of banks with respect to Pension Payments and disbursements.

OFFICE OF CHIEF CONTROLLER OF ACCOUNTS:- The Ministry of Finance comprises five Departments viz., Department of Economic Affairs, Department of Expenditure, Department of Revenue, Department of Disinvestment and Department of Financial Services. The Chief Controller Of Accounts, Ministry Of Finance, is handling the payment and accounting functions for nine of the thirteen Grants/Appropriations pertaining to the Ministry of Finance. These nine grants account for about 83% of the expenditure of Government of India; the bulk of the expenditure pertains to the redemption of debt.

Cont.
FUNCTIONS OF THE CHIEF CONTROLLER OF ACCOUNTS:The Secretary of each Department is the Chief Accounting Authority and is assisted by the Financial Adviser and the Chief Controller of Accounts. The Chief Controller of Accounts (CCA) is in overall charge of the accounting organization of the Ministry, supported by three Controllers of Accounts, two Deputy Controllers of Accounts, 36 Senior Accounts Officers/Pay and Accounts and approximately 300 other staff members at various levels. CCA has been assigned the function of supervision of payments and accounting for the five Departments mentioned above.