inetrnational_investement.ppt

8/14/2019 inetrnational_investement.ppt

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International Investment


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Types of Foreign Investment

Foreign Investment

Portfolio Investment

Investment in

GDRs etcInvestment by FIIs

Foreign Direct Investment

AcquisitionJoint VentureWholly owned

subsidiary


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Types of foreign investment:

FDIrefers to investment in a foreign country where the investorretains control over the investment. It typically takes the form ofstarting a subsidiary, acquiring a stake in an existing firm orstarting a joint venture in the foreign country. Direct investmentand management of the firms concerned normally go together. Itrefers to investments in real assets like factories, sales offices etc.

by foreign firms.

Portfolio investment refers to where the investor uses his capitalin order to get a return on it, but has not much control over theuse of the capital. It refers to cross border transactions in bondsand equities

GDRs / ADRs and FCCBs are instruments issued by Indiancompanies in foreign markets for mobilizing foreign capital byfacilitating portfolio investment by foreigners in Indian securities


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Types of foreign Investment

A depository receipt is a negotiable certificate denominated inUS dollars in case of ADRs, that represents a non US companys

publicly traded local currency (Indian Rupee) shares.

DRs are created when the local currency shares of an Indiancompany are delivered to the depositorys custodian bank,against which the Depository Bank issues DRs in US dollars.


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Significance of Foreign Investment

Foreign capital facilitates essential imports required forcarrying out development programmes, like capitalgoods, raw materials and other inputs and evenconsumer goods which might not be indigenouslyavailable.

When export earnings are insufficient to finance vitalimports, foreign capital could reduce the foreignexchange gap.

Foreign investment may also increase the countrysexports and reduce the import requirements if suchinvestments take place in export oriented and importcompeting industries.


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As long as foreign investment raises productivity, it

would benefit domestic labor in the form ofincreased real wages, consumersin case if foreigninvestment is cost reducing in a particular industry,the consumers might gain through lower product

prices; government if the increase in productionand foreign trade increases the fiscal revenue of thegovernment.

Foreign investment brings about four Es

efficiency, equity, experience and expertise


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Criticism against Foreign Capital

Foreign capital tends to flow to the high profit areas rather than

to the priority sectors. Technology imported might not be adapted to the needs of the

customers.

MNCs could undermine economic autonomy and control andtheir activities might not be in favor of national interests.

Foreign investment could have unfavorable effect on theBalance of Payments of a country if the outflow is higher dueto payment of royalty etc.

Foreign investors at times engage in unfair practices andunethical trade practices.

Foreign investment could result in minimizing / eliminatingcompetition and facilitate creation of monopolistic structure.


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Factors affecting International

Investment

Resources: Availability and therefore exploitation ofresources in the host country.

Markets: FDI largely flows to the countries whichhave large markets with comparatively goodinfrastructure and political stability.

Efficiency: Low cost of production, derived fromcheap labor is the driving force of many FDIs indeveloping countries.

Rate of interest: Difference in the rate of interest actsas a stimuli to attracting foreign investment. Capitalhas a tendency to move from a country with a lowrate of interest to a country where interest rate ishigher.


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Profitability: Private foreign capital is largely influencedby the profit motive. It is attracted to countries where thereturn on investment is higher.

Economic conditions: Economic conditions particularlymarket potential and infrastructural facilities influenceforeign investment.

Government Policies and Political Factors: Policiesencouraging FIIS and FDIs and a stable Governmentlargely encourages the movement of foreign capital into thecountry


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Foreign Investment in IndiaDirect foreign investment in India was adversely affected

by the following factors: Public sector was assigned a dominant position in the

important industries and thus the scope of privateinvestment, both domestic and foreign was limited.

When public sector enterprises needed foreigntechnology or investment, there was a preference forthe foreign government sources.

Government policy towards foreign capital was

selective. Foreign investment was normally permittedin high technology industries in priority areas and inexport oriented industries.


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Foreign equity participation was normally subject to

a ceiling or 40%. Payment of dividends abroad, etc. as well as inward

remittances were subject to stringent laws

Corporate taxation was high and tax laws and

procedures were complex. These factors eitherlimited the scope of or discouraged foreigninvestment in India.


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Foreign Investment in IndiaGovernment Policy:

Pre 1991, India was following a very restrictive policy towardsforeign capital and technology. Foreign collaboration was

permitted only in fields of high priority and in areas where theimport of foreign technology was necessary. The government hadissued list of industries where:

Foreign investment may be permitted Only foreign technical collaboration (but no foreign

investment) may be permitted.

No foreign collaboration (financial or technical) wasconsidered necessary.

The government policy on foreign equity participation wasthus selective. Technical collaborations were to be consideredon the basis of annual royalty payments which were linkedwith the value of total production.


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The Foreign Exchange Regulation Act, 1973 served as atool for implementing the national policy on foreign privateinvestment in India. The FERA empowered the RBI to

regulate or exercise direct control over the activities offoreign companies and foreign nationals in India. .According to FERA, non residents, foreign students residentin India and foreign companies required the permission ofRBI to accept appointment as agents or technicalmanagement advisors in India.

The trading, commercial and industrial activities in India ofpersons resident abroad, foreign citizens in India andforeign companies were regulated by FERA. They had toobtain permission from RBI for carrying on in India anyactivity of a trading, commercial or industrial nature.


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Foreign Investment in India

The New Policy:

Foreign investment in most of the industries is now eligible forautomatic approval route. Under the automatic route, the foreigninvestor has to inform RBI within 30 days of bringing the FDIand again within 30 days of issue of shares.

Until Dec 1996, only 36 industries were eligible for automaticapproval of FDI upto 51% of the total equity. The automaticroute has been subsequently expanded significantly and nowthere are different categories of industries on the basis of theceiling of foreign equity participation:

Industries in which FDI does not exceed 26% Industries in which FDI does not exceed 49%

Industries in which FDI does not exceed 51%

Industries in which FDI does not exceed 74%

Industries in which 100% foreign equity is permitted.


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In Feb 2000, Government placed all items under the automaticroute for FDI / NRI/ OCB investment except for a smallnegative list which includes the following:

Items requiring industrial license

Foreign investment being more than 24% in the equitycapital of units manufacturing reserved for small scalesector

Proposals having previous venture / tie-up in India withforeign collaborator

Proposals relating to acquisition of shares in existing Indiancompany by foreign / NRI / OCB(Overseas Corporate

Body) investor.


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Foreign Investment in India Subject to sectoral policies, the automatic route would

be available to all foreign and NRI investors with thefacility to bring in 100 FDI / NRI / OCB investment.All proposals for investment in public sector unitswould qualify for automatic approval.

All other proposals which do not conform to the

guidelines for Automatic Approval are considered bythe FIPB. The FIPB thereafter would recommend the

proposal to the Government.


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For technical collaborations there are two routes:

Automatic approval by RBI is available for any proposal withlumpsum payment not exceeding USD 2 million and royalty

of upto 5% on domestic sales and 8% on exports In all other cases the Project Approval Board considers the

proposals and makes recommendations to the IndustryMinistry.

Other measures which encourage foreign investment include:

Ending the government monopoly in insurance Opening up of the banking sector

Divesting public enterprises

Establishment of a Foreign Investment ImplementationAuthority (FIIA) to ensure that approvals for foreign

investments are processed fast.


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FII Investments:

Indian stock market was opened in 1992-93 and since then therehas been a significant increase in FII investments. According tothe regulations, FIIs may invest in:

Securities in the primary and secondary markets includingshares, debentures and warrants of companies listed on arecognized stock exchange in India and Units of schemes floated

by domestic funds including UTI, whether listed on a recognized

stock exchange or not.

FIIs can invest only up to 24 per cent of the paid up capital of theIndian company whereas for NRIs and PIOs this ceiling is keptup to 10 per cent. However for investment in public sector banks,

including the State Bank of India the limit is 20 per cent of thepaid up capital.


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The ceiling of 24 per cent for FII investment can beraised up to sectoral cap/statutory ceiling, if it isapproved by the board and the general body of thecompany through a special resolution. Similarly theceiling limit for NRIs and PIOs can be raised to 24%from 10% if it is approved by the general body of the

company passing a resolution to that effect.

The ceiling for FIIs is independent of the ceiling of10/24 per cent for NRIs/PIOs.


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Foreign Investments by Indian Companies:

Until 1991, Indian companies made very little investmentsabroad. However, subsequent to the opening of the economy andthe growing competition at home, many Indian companies have

been planning for a major thrust abroad. Foreign investment,both in Greenfield enterprises and mergers and acquisitions, is apart of the globalization strategy of many Indian companies.Direct investments abroad by Indian companies recorded a

strong growth.

RBI had liberalized overseas investment norms for Indiancorporates some time back. Indian corporates are allowed toinvest directly in equity of their joint ventures abroad and or

wholly owned subsidiaries upto a limit of USD 100 millionannually. The norms allow industries, except banking and realestates.


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India is considered to be a strategic player on

global landscape when it comes to investments and

businesses. Standing as the worlds 21stlargestoutward investor, the country is increasingly

encouraging its companies to go out and hunt for

new markets and cost-effective sources.

Indian firms invest overseas majorly through

mergers and acquisition (M&A) transactions.

Indian Governments supportive policy regimen,

coupled with India Incs (comprising governmentand corporate) experimental orientation will

definitely demonstrate an upward trend in outward

foreign direct investment (FDI) in the years to

come


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Similarly, a report by the Europe India Chamber of Commerce

(EICC), a body that promotes bilateral trade between the European

Union and India, has stated that Indian companies have invested

US$ 56 billion across the continent during 2003-2012, of whichEUR 29 billion (US$ 38.47 billion) was invested through M&A

transactions.

The report titled Indian Companies in the European Union:

Reigniting Economic Growthalso mentioned that Indian businesshouses employ 1.34 lakh professionals in Europe, including

40,000 new jobs generated by 511 green-field investments. Tata

Group is the largest employer in Europe, which counts about 80,

000 employees across its 19 companies there. India accounts for a

substantial 47 per cent of the green-field investment and 63 per

cent of the employment creation in the UK, according to the

report.


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Meanwhile, Corporate IndiasM&A activity value touched US$

1.5 billion in July 2013, according to audit and advisory firm

Grant Thornton. The report stated that excluding internalmergers and restructuring deals, the year-to-date M&A deal

values have increased by 36 per cent from the value in 2012.

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