This document discusses foreign direct investment (FDI) in India. It defines FDI and other related terms like foreign institutional investors, depository receipts, and foreign currency convertible bonds. It outlines different forms of FDI like joint ventures, acquisitions, and wholly owned subsidiaries. The document also discusses factors that influence FDI, reasons for companies to invest abroad, and costs and benefits of FDI to both home and host countries. It provides examples of sectors where FDI is prohibited in India and explains the process for an Indian company to receive FDI.

1. FOREIGN DIRECT
INVESTMENT- FDI
V.Madhusudhan Goud
Assistant Professor
Department of Management Studies
GPCET, Kurnool

2. FDI
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V.Madhsudhan Goud, Assistant
Professor, GPCET
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Types of
Foreign
Investment
FDI Portfolio
Investment
Joint
Venture
Acquisition
Wholly Owned
Subsidary
FIIS
GDRS FDRS FCCBS

3.  ‘FDI’ means investment by non-resident entity/person
resident outside India in the capital of an Indian
company under Schedule 1 of Foreign Exchange
Management (Transfer or Issue of Security by a Person
Resident Outside India) Regulations, 2000
 ‘Foreign Institutional Investor’(FII) means an entity
established or incorporated outside India which
proposes to make investment in India and which is
registered as a FII in accordance with the Securities
and Exchange Board of India (SEBI) (Foreign
Institutional Investor) Regulations 1995.
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GPCET
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4.  ‘Depository Receipt’ (DR) means a negotiable security issued
outside India by a Depository bank, on behalf of an Indian
company, which represent the local Rupee denominated equity
shares of the company held as deposit by a Custodian bank in
India. DRs are traded on Stock Exchanges in the US, Singapore,
Luxembourg, etc. DRs listed and traded in the US markets are
known as American Depository Receipts (ADRs) and those listed
and traded anywhere/elsewhere are known as Global Depository
Receipts (GDRs).
 ‘Foreign Currency Convertible Bond’ (FCCB) means a bond
issued by an Indian company expressed in foreign currency, the
principal and interest of which is payable in foreign currency.
FCCBs are issued in accordance with the Foreign Currency
Convertible Bonds and ordinary shares (through depository
receipt mechanism) Scheme, 1993 and subscribed by a non-resident
entity in foreign currency and convertible into ordinary
shares of the issuing company in any manner, either in whole, or
in part.
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GPCET
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5. FORMS OF FDI
 Purchase of existing assets in a
foreign country
 New Investment in property, plant,
equipment
 Participation in a joint venture with a
local partner
Transfer of many types of assets like
HR, systems, technological know-how
in exchange for equity in foreign
companies.
 Exports of goods for equity.
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V.Madhsudhan Goud, Assistant Professor,
GPCET
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6. FACTORS INFLUENCING FDI
 Supply Factors
1. Production Costs
2. Logistics…………………………Eg: Coca-cola.
3. Resource Availability
4. Access to technology
 Demand Factors
1. Customer Access
2. Marketing Advantages
3. Exploitation of competitive advantages-Trade marks,
brand names
4. Customer mobility
 Political Factors
1. Avoidance of trade barriers
2. Economic development incentives
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GPCET
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7. REASONS FOR FDI
 To increase sales & profits
 To enter fast growing markets
 To reduce costs
 To consolidate trade blocs
 To protect domestic markets
 To protect foreign markets
 To acquire technological and managerial
Know-how
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GPCET
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8. COSTS & BENEFITS OF FDI
 Benefits to Home Country
1. Inflow of foreign currencies in the form of
dividend, interests etc
2. Increases export of machinery, equipment,
technology etc from home country to the host
country, in turn increases industrial activity of
home country
3. Firm and home country firms can learn skills
from its exposure to the host country and
transfer skills.
 Costs to Home Country
1. Home country’s industry and employment
position are at stake when firm enters foreign
markets due to low cost labour.
2. Current account position of the home country
suffers as FDI is a substitute for direct exports.
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GPCET
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9. BENEFITS TO HOST COUNTRY
 Benefits to Host Country
1. Resource Transfer Effects
2. Employment Effects
3. Balance of payments effects
 Costs to Host Country
1. Intensifying Competition
2. Negative Effects on the Balance of Payments
a. Foreign companies repatriate the dividends to
their home countries that affect the current
account.
b. Adverse the position of balance of payments
c. National Sovereignty and Autonomy
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GPCET
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10.  1. What are the forms in which business can be
conducted by a foreign company in India?
 Ans. A foreign company planning to set up business
operations in India may: Incorporate a company under
the Companies Act, 1956, as a Joint Venture or a
Wholly Owned Subsidiary. Set up a Liaison Office /
Representative Office or a Project Office or a Branch
Office of the foreign company which can undertake
activities permitted under the Foreign Exchange
Management (Establishment in India of Branch Office
or Other Place of Business) Regulations, 2000.
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GPCET
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11.  What is the procedure for receiving Foreign Direct
Investment in an Indian company?
 Ans. An Indian company may receive Foreign Direct
Investment under the two routes as given under:
 i. Automatic Route
 FDI is allowed under the automatic route without prior
approval either of the Government or the Reserve Bank of
India in all activities/sectors as specified in the consolidated
FDI Policy, issued by the Government of India from time to
time.
 ii. Government Route
 FDI in activities not covered under the automatic route
requires prior approval of the Government which are
considered by the Foreign Investment Promotion Board
(FIPB), Department of Economic Affairs, Ministry of Finance.
Application can be made in Form FC-IL, which can be
downloaded from http://www.dipp.gov.in. Plain paper
applications carrying all relevant details are also accepted. No
fee is payable.
 The Indian company having received FDI either under the
Automatic route or the Government route is required to
comply with provisions of the FDI policy including reporting
the FDI to the Reserve Bank as stated in Q 4.
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GPCET
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12.  Which are the sectors where FDI is not allowed in India, both under the
Automatic Route as well as under the Government Route?
 Ans. FDI is prohibited under the Government Route as well as the Automatic
Route in the following sectors:
 i) Atomic Energy
 ii) Lottery Business
 iii) Gambling and Betting
 iv) Business of Chit Fund
 v) Nidhi Company
 vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds,
Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms,
etc. under controlled conditions and services related to agro and allied
sectors) and Plantations activities (other than Tea Plantations)
(c.f. Notification No. FEMA 94/2003-RB dated June 18, 2003).
 vii) Housing and Real Estate business (except development of townships,
construction of residential/commercial premises, roads or bridges to the
extent specified inNotification No. FEMA 136/2005-RB dated July 19, 2005).
 viii) Trading in Transferable Development Rights (TDRs).
 ix) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes.
 (Please also see the website of Department of Industrial Policy and
Promotion (DIPP), Ministry of Commerce & Industry, Government of India
at www.dipp.gov.in for details regarding sectors and investment limits therein
allowed, under FDI)
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GPCET
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13.  Can Indian companies issue Foreign Currency
Convertible Bonds (FCCBs)?
 Ans. FCCBs can be issued by Indian companies in
the overseas market in accordance with the
Scheme for Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993.
 The FCCB being a debt security, the issue needs to
conform to the External Commercial Borrowing
guidelines, issued by RBI vide Notification No.
FEMA 3/2000-RB dated May 3, 2000, as amended
from time to time.
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V.Madhsudhan Goud, Assistant Professor,
GPCET
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14. 11/11/2014
Thank you
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V.Madhsudhan Goud, Assistant Professor,
GPCET