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Foreign Direct Investment (FDI)

Foreign Institutional
Investment (FII)

Presented By
Background: India Transformed !!
India -- the largest Democracy - one of the fastest growing economies in the World!
Slow rate of growth
Protected and slow
Weak infrastructure
Strong macro economic fundamentals
Encouraging foreign investment
Outsourcing destination
Growing consumerism
Impetus on infrastructure development

What is FDI & FII

Foreign Direct Investment (FDI):
1. FDI stands for Foreign Direct Investment, a component of a country's national financial
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. SEBIs 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.
Distinction between FDI and FII
1. It is long-term investment
2. Investment in physical assets
3. Aim is to increase enterprise capacity or
productivity or change management
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.
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.


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 Indias 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

Recent Developments

Setting the context
Contribution of FDI in Indias economic development is an acknowledged
From inception policy subject to extensive amendments from time to time
through Press Notes, circulars and clarifications
Press Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI and
downstream investment
FM stressed the need for a consolidated FDI policy in Budget 2010-11
Draft consolidated policy issued in late 2009 for public comments
Consolidated FDI policy issued effective from 1 April, 2010
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
FDI strategic long term relationship and establish a lasting interest
FPI no intention to influence the management of the investee entity
Sector Specific Guidelines
Prohibited sectors
FDI not allowed in the following:
Retail trading (except single brand)
Atomic Energy
Lottery business
Gambling & Betting
Chit fund and Nidhi company
Trading in Transferable Development Rights
Real Estate business or construction of Farm Houses
Sectors not opened for private sector investments

Prohibition extended to foreign technology collaboration including licensing for franchisee,
trademark, brand name or management contract for lottery, betting and gambling business

Sector Specific Guidelines
Private sector banks/ Civil Aviation
No change in existing conditions
FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route
Civil Aviation
No change in existing conditions
FDI in Non-scheduled air transport services/ non-schedule airlines, Chartered and Cargo airlines
permitted under automatic route upto 49% and thereafter upto 74% under Approval Route


What are Foreign
Investors looking for
Good projects
Demand Potential
Revenue Potential
Stable Policy
Optimal Risk Allocation
Rate of interest
Costs of production
Economic conditions
Government policies
Political factors
Factors affecting foreign
Foreign Institutional

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

Proprietary funds, foreign individuals and foreign corporate 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

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.

Disadvantages of FII

Problems of Inflation
Problems for small investor
Adverse impact on Exports
Hot Money

"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