Fdi and fpi

By: Nidhi More
Mumbai University,
Thane Sub Campus
Course:- BBA-LLB(HONS)

Flow of the Contents
 FDI
 Meaning
 Types
 Other Forms
 Advantages and Disadvantages
 Different routes of FDI
 Sectorial Caps
 FDI policies and reforms over the period of time
 Recent News
 FPI
 Meaning
 Advantages
 Amended regulations in 2019 as per SEBI
 Recent News
 Conclusion

FDI MEANING
A foreign direct investment is an investment made by a
firm or individual in one country into business interests
located in another country.
 Generally, FDI takes place when an investor establishes
foreign business operations or acquires foreign business
assets in a foreign company.
 FDI’s are actively utilized in open markets rather than
closed markets for investors.
 Foreign direct investment frequently involves more than
just a capital investment. It may include provisions of
management or technology as well.

Contd…
The key feature of foreign direct investment is that it
establishes either effective control of or at least
substantial influence over the decision-making of a
foreign business.
Foreign direct investments can be made in a variety of
ways, including
1. the opening of a subsidiary
2. associate company in a foreign country
3. associate company in a foreign country
4. by means of a merger or joint venture with a foreign
company.

TYPES OF FDI
1. Horizontal FDI
 The most common types of FDI is Horizontal FDI,
which primarily revolves around investing funds in a
foreign company belonging to the same industry as
that owned or operated by the FDI investor in the
home country.
 Here, a company invests in another company located
in a different country, wherein both the companies are
producing similar goods.
 For example, a cell phone provider based in the China
opening stores in India.

2.Verticle FDI:
In this case, a business expands into another country by
moving to a different level of the supply chain. Thus
business undertakes different activities overseas but
these activities are related to the main business.
3. Conglomerate FDI:
When investments are made in two completely different
companies of entirely different industries, the
transaction is known as conglomerate FDI.
This type is uncommon as in involves the difficulty of
penetrating a new country and an entirely new market

Some other forms of FDI
FDI can be in the form of :
1.Greenfield Investment:
 In a greenfield investment, parent company opens
a subsidiary in another country.
 Instead of buying an existing facility in that country,
the company begins a new venture by constructing new
facilities in that country.
 Construction projects may include more than just a
production facility.
 They sometimes also entail the completion of offices,
accommodations for the company's staff and
management, as well as distribution centers.

2. Brownfield Investment:
 Brownfield investments, on the other hand,
occur when an entity purchases or leases an
existing facility to begin new production.
 Companies may consider this approach a great
time and money saver since there is no need to go
through the motions of building a brand new
building.

Advantages of FDI to the Host country
1. Increased employment and economic growth
2. Human resource development
3. Development of backward areas
4. Increase in exports
5. Exchange rate stbility
6. Stimulation of economic development
7. Improved capital flow
8. Creation of competitive maket

Disadvantages of FDI to host country
1. Crowing of local industry
2. Effect on national environment
3. Effect on culture
4. Technological dependence on foreign sources

Factors that affect FDI inflows to India
1. Wage rates
2. Labor skills
3. Tax rates
4. Transport and infrastructure
5. Size of economy / potential for growth
6. Political stability
7. Exchange rate
8. Access to free trade areas

Different routes of FDI
1. Automatic route:-
 It is the easiest of the two routes of FDI.
By this route , FDI is allowed without prior approval
of Government or RBI.
Within 30 days of receipt of money from the foreign
investor, the Indian company will report to the
Regional Office of Reserve Bank of India (RBI) under
whose jurisdiction its registered office is located.

Within 30 days from the date of issue of shares a report
in Form FC-GPR together with the following documents
should be filed with the Regional Office of RBI:
a) Certificate from the Company Secretary of the
company accepting investment from persons resident
outside
b) Certificate from Statutory Auditors or Chartered
Accountant indicating the manner of arriving at the
price of the shares issued to the persons resident
outside India

2. Government approval route:
 Under this route, prior approval of the government bodies is
mandatory.
 The proposal of FDI under government route are examined,
analyzed and then approved by the Foreign Investment
Promotion Board(FIPB) and may also be presented before Cabinet
Committee on Economic Affairs or the Cabinet Committee on
Security.
 The offers the single window clearance for the investment
proposals (worth Rs.2000 crore or less) which are not permitted
through the automatic route.
 The CCEA generally considers proposals amounting to INR-2000
crore or more. Lastly, FDI proposals in sectors of high sensitivity
and security concerns are analyzed by the Cabinet Committee on
Security, for approval.

Sectors of the Indian economy where 100% FDI is
permitted under the automatic route
Agriculture & Animal Husbandry, Construction Development
Air-Transport Services Construction of Hospitals,
Airports (Greenfield + Brownfield), Credit Information Companies,
Asset Reconstruction Companies, Duty Free Shops,
Auto-components, E-commerce Activities,
Automobiles, Electronic Systems,
Biotechnology (Greenfield), Food Processing,
Broadcast Content Services Chemicals Gems & Jewellery,
Coal & Lignite, Healthcare,

IT & BPM, Roads & Highways,
Leather, Manufacturing, Single Brand Retail Trading,
Mining & Exploration of metals &
non-metal ores,
extiles & Garments
Other Financial Services, Thermal Power,
Services under Civil Aviation
Services
Tourism & Hospitality
Petroleum & Natural gas, Renewable Energy,
Pharmaceuticals, Railway Infrastructure
Plantation sector, Ports & Shipping,

Sectors Requring Gov. Approval
 Mining, Defence/cases relating to FDI in small arms
 Broadcasting
 Print media
 Civil Aviation
 Satellites
 Telecom
 Private Security Agencies
 Trading(Single, Multi brand and Food Products)
 Financial services not regulated or regulated by more
than one regulator/ Banking Public and Private (as per
FDI Policy)
 Pharmaceuticals.

Prohibited sectors for FDI in India
 FDI is prohibited in the following sectors
 Lottery Business including Government/private lottery, online
lotteries, etc.
 Gambling and Betting including casinos etc.
 Chit funds
 Trading in Transferable Development Rights (TDRs)
 Real Estate Business or Construction (Real estate business
does not include development of townships, construction of
residential /commercial premises, roads or bridges )
 Manufacturing of cigars, cheroots, cigarillos and cigarettes, of
tobacco or of tobacco substitutes
 Activities/sectors not open to private sector investment e.g.
Atomic Energy and Railway operations (other than permitted
activities)

NEED FOR FDI AND PAST POLICY CHANGES
 FDI is a major source for a non-debt resource for the economic
development of the country. Inflow of FDI to a country not only
brings the required flow of money into domestic industries but
also brings in the inflow of technology, knowledge, skills and
expertise that enhances capacities and competitive capabilities of
domestic businesses.
 Till 1990 all the FDI norms were meant to meet domestic
requirements.
 It was the Balance of Payment (BoP) crisis of 1991 that
triggered for allowing FDI in India.
 Provisions of the Foreign Exchange Regulation Act
(FERA) were diluted to a great extent in this period.
 India was heavily dependent on foreign exchange in the form of
debts in 1970’s & 1980’s.

Contd…
But the 1991 crisis saw allowing a way to foreign exchange
but which was non-debt-creating & long term in nature.
As per the provisions of a FEMA foreign investor which is
a person who is residing outside India and who happens
to be a citizen of a foreign state or a body corporate
registered outside India can undertake investments in
India.
Now FDI can enter most sectors or activities under the
Automatic Approval Route, except for a few sectors
Such restrictions are present because of the sectoral
needs, security and strategic concerns and in the interest
of domestic investment.

Some major reforms in FDI
Post 1991
 Industrial licensing has been abolished.
 ⇒ Many sectors open to foreign participation.
 ⇒ Many sectors were included in the sectors marked
for automatic approval of FDI post 2000.
 ⇒ FERA was changed to Foreign Exchange
Management Act (FEMA) in 1999 to facilitate foreign
exchange management in the capital account.
 ⇒ RBI introduced an automatic approval channel for
100% foreign equity in priority sectors. The automatic
route has been extended to up to 51% foreign equity in
priority sectors.

Contd…
 ⇒ Abolition of high local content requirements,
dividend balancing requirements, and export obligation
conditions except for 22 consumer goods. (The
conditions on 22 consumer goods were subsequently
withdrawn in 2000).
 ⇒ Major institutions set up to promote and facilitate
FDI inflows, such as Foreign Investment Promotion
Board (FIPB), Foreign Investment Implementation
Authority (FIIA), and Secretariat of Industrial Assistance
(SIA).
 ⇒ Privatisation of public sector.
 ⇒ Aggressive signing of bilateral investment and double
tax avoidance agreements to benefit and assure foreign
investors.

Contd...
 => The law on trademarks and Geographical
Indications of Goods passed in 1999 to protect
intellectual property rights.
 ⇒ Fiscal incentives such as tax subsidies and
concessions offered by both central and state
governments to foreign investment.
 ⇒ Reforms at the state government level and
institutions established to help implement FDI
projects.

Major Reforms Since 2012
 ⇒ Allowing 100% FDI ownership in single brand retail
trading and upto 51% FDI in multi brand retail.
 ⇒ Allowing foreign airlines upto 49% FDI.
 ⇒ Increasing FDI equity from 49% to 74% in certain
broadcasting sectors.
 ⇒ Allow up to 49% FDI in power exchanges.
 ⇒ Increasing FDI limit from 26% to 49% in the
insurance sector.
 ⇒ Allowing 49% FDI in several sectors such as
petroleum and natural gas, commodity and stock
exchanges, power exchanges, asset reconstruction,
single brand retail and telecommunications.

Contd…
 => Foreign investment up to 49% in these industries
may be made under the automatic route which does not
require approval from the RBI or the Indian
government
 ⇒ Sectors such as asset reconstruction and
telecommunications are eligible for 100% FDI upon
approval by the FIPB.
 ⇒ The defence sector will also be eligible for greater FDI
under the recent changes. For present it is 26%. But 100
equity is also allowed if the project are likely to result in
access to modern and state of the art technology.
 => FDI in the insurance sector capped at 49 per cent
under the automatic route.

FDI reforms in 2018
 ⇒ 100% FDI under automatic route for Single Brand
Retail Trading.
 => 100% FDI under automatic route in Construction
Development.
 => Foreign airlines allowed to invest up to 49% under
approval route in Air India.

FDI Policy reforms in the year 2019
1. Single Brand Retail Trading
(i) diluting the stringent condition of local sourcing
for SBRT and
(ii) granting entities undertaking SBRT, permission to
conduct retail trading through e-commerce, prior to
establishment of brick and mortar stores.
2. Manufacturing
100% FDI is permitted in contract
manufacturing under the automatic route.
Further, a manufacturer is permitted to sell its
products manufactured in India through wholesale
and/ or retail, including through e-commerce,
without Government approval.

3.Coal mining
 permits 100% FDI under the automatic route for sale
of coal, for coal mining activities including associated
processing infrastructure subject to provisions of Coal
Mines (Special Provisions) Act, 2015 and the Mines
and Minerals (Development And Regulation) Act,
1957.
 “Associated Processing Infrastructure” includes coal
washery, crushing, coal handling, and separation
(magnetic and non-magnetic).

FDI Policy in the year 2020
In March 2020, Government permitted non-resident
Indians (NRIs) to acquire up to 100% stake in Air India
The DPIIT, issued a Press Note (No. 3) on April 17,
2020 (‘PN3’) which alters Para 3.1.1 of the Consolidated
FDI Policy, 2017.
 According to the new FDI policy:
 An entity of a country, which shares a land border with
India or where the beneficial owner of an investment
into India is situated in or is a citizen of any such
country, can invest only under the Government
route.

 A transfer of ownership in an FDI deal that benefits
any country that shares a border with India will also
need government approval.
 Investors from countries not covered by the new policy
only have to inform the RBI after transaction rather
than asking for prior permission from the relevant
government department.
 In May 2020, Government increased FDI in defence
manufacturing under the automatic route from 49% to
74%.
 In August 2020, the Indian government amended Foreign
Direct Investment Policy, 2017 on commercial coal mining
policy making it approved only under the Government
route. In 2019, the Central Government, amended FDI
Policy 2017, to permit 100% FDI under automatic route in
coal mining activities.

FDI inflows to India since 2000 upto 2019
FINANCIAL YEARS 2000-01 TO
2018-19
Amount of FDI Inflows
In Rs Crores
Amount of FDI Inflows
In US$ Million
2000-01 10,733 2,463
2001-02 18,654 4,065
2002-03 12,871 2,705
2003-04 10,064 2,188
2004-05 14,653 3,219
2005-06 24,584 5,540
2006-07 56,390 12,492
2007-08 98,642 24,575
2008-09 142,829 31,396
2009-10 123,120 25,834
2010-11 97,320 21,383
2011-12 165,146 165,146
2012-13 121,907 22,423
2013-14 147,518 24,299
2014-15 181,682 29,737
2015-16 262,322 40,001
2016-17 291,696 43,478
2017-18 288,889 288,889
2018-19 309,867 44,366

FDI equity inflows[month wise] in the
financial year 2019-2020
FY 2019-2020
Months
Amt. of FDI equity inflows
[in Rs.Crore
Amount of FDI Equity
inflows
(In US$ mn)
April 36,463 5,252
May 26,481 3,795
June 50,567 7,282
July 30,774 4,472
August 18,164 2,553
September 19,551 2,741
October 22,808 3,211
November 20,036 2,804
December 33,166 4,659
January 39,719 5,570
February 24,025 3,361
March 31,804 4,278
Total 353,558 49,977

FDI inflows during 1st quarter of FY 2020-2021
Financial Year 2020-21
( April - June)
inflows
(In Rs. Crore)
inflows
(In US$ mn) (In US$ mn)
April, 2020 21,133 2,772
May, 2020 16,951 2,240
June, 2020 16,951 1,550
2020-21 (form April, 2020
to June, 2020)
49,820 6,562
2019-20 (form April, 2019
to June, 2019) #
113,511 16,330
%age growth over last year (-) 56% (-) 60%

Recent news about FDI inflows in India

Highlights of this news
 India, in April-August 2020, received the highest ever
total Foreign Direct Investment (FDI) for the first five
months of a financial year, the commerce and industry
ministry said.
 The total FDI inflow into India in the first five months
was $35.73 billion, 13% higher than that in the same
period last fiscal.
 These trends are an endorsement of India’s status as a
preferred investment destination amongst global
investors, the government said: “Measures taken by the
government on the fronts of FDI policy reforms,
investment facilitation and ease of doing business have
resulted in increased FDI inflows into the country”.

 Total FDI into India in the first quarter of 2020-21
plunged by 60% from the year-ago period to $6.5
billion, data released by the department for
promotion of industry and internal trade (DPIIT).
 As per the statement, the government’s intent is to
make the FDI policy more investor friendly and
remove the policy bottlenecks that have been
hindering the investment inflows into the country.

FPI
Meaning
• foreign portfolio investments consist of securities and
other foreign financial assets that are passively held by the
foreign investor
• This does not provide the foreign investor with direct
ownership of the financial assets and can be relatively
liquid depending on the volatility of the market that the
investment takes place in.
• Foreign portfolio investments can be made by individuals,
companies, or even governments in international
countries.
• This type of investment is a way for investors to diversify
their portfolio with an international advantage.
• Foreign Portfolio Investment is part of a country’s capital
account and is shown on its balance of payments (BOP).

Advantages of FPI to Investors
 Portfolio Diversification :- FPI gives investors a fairly
simple way to diversify their portfolio internationally.
 International Credit:- FPI gives investors a larger
credit base because they are able to access credit in
the foreign countries that they have large amounts of
investment in.
 Benefit from foreign exchange:- If an investor has an
FPI in a foreign country with a stronger currency than
their own country the difference in exchange rates
between the two countries can benefit the investor

Contd…
 Access to bigger market:- Often markets may be larger
and less competitive outside of ones home country.
Investors can take advantage of the less competitive
markets internationally by using these Foreign portfolio
investments.
 Liquidity:- Where foreign portfolio investments are very
liquid, they can be bought and sold quickly and easily.
Higher liquidity means greater buying power for investors,
as it gives them access to a ready stream of cash. That
means that investors holding foreign portfolio
investments are better-positioned to act quickly when
good purchase opportunities arise.

Advantages of FPI to Host Country
Provides a developing country non-debt creating source
of foreign investment.
 Supplement domestic saving by providing foreign
exchange to developing countries.
FPI provide a buffer for financing the Balance of
Payment deficits thereby helping to preserve the foreign
currency reserves

Who regulates FPI in India?
 In India, foreign portfolio investment is regulated by the
Securities and Exchange Board of India (SEBI).
Earlier, FPI was divided into three categories, on the basis of
their risk profile.
Category I or low-risk: This kind of FPI includes
government/government-related establishments like central
banks and international agencies among others.
Category II or moderate-risk: This includes mutual funds,
insurance firms, banks, and pension funds among others.

Contd…
Category III or high-risk: This type of foreign portfolio
investment includes all other FPIs that don’t fall into the first
two categories. They could include charitable organisations
such as trusts or societies, endowments or trusts among
others.
 However, as per a new notification in the second half of
2019, SEBI has sought to reclassify the categories and simplify
norms.
 FPIs would come under two categories.
 All those entities or funds that were earlier registered as
Category III are now Category II.
 the Category I is a mix of the earlier Category I and II

Regulations as per latest amendments in 2019 by
SEBI
 Rules regarding Application for grant of certificate as a
foreign portfolio investor.
 No person shall buy, sell or otherwise deal in securities
as a foreign portfolio investor unless it has obtained a
certificate granted by a designate depository participant
on behalf of the Board
 An application for the grant of certificate as a foreign
portfolio investor shall be made to a designated
depository participant in the Form specified by the
Government or the Board from time to time and shall be
supported by the fee as specified by the respective
authorities.

Eligibility criteria of foreign portfolio investor.
 A designated depository participant shall consider application for
grant of certificate of registration as a foreign portfolio investor if the
applicant satisfies the following conditions :-
a) the applicant is not a resident Indian
b) the applicant is not a non-resident Indian or an overseas citizen of
India;
c) non-resident Indians or overseas citizens of India or resident Indian
individuals can be constituents of the applicant provided they meet
conditions specified by the Board from time to time;
d) the applicant is a resident of the country whose securities market
regulator is a signatory to the International Organization of
Securities Commission’s Multilateral Memorandum of
Understanding (Appendix A Signatories) or a signatory to the
bilateral Memorandum of Understanding with the Board:

Categories of Foreign Portfolio Investors
 An applicant seeking registration as a foreign portfolio investor
may apply in one of the categories mentioned hereunder or any
other category as may be specified by the Board from time to
time
 (a)Category I:-
 (i) Government and Government related investors such as
central banks, sovereign wealth funds, international or
multilateral organizations or agencies including entities
controlled or at least 75% directly or indirectly owned by such
Government and Government related investor
 (ii)Pension funds and university funds;
 (iii)Appropriately regulated entities such as insurance or
reinsurance entities, banks, asset management companies,
investment managers, investment advisors, portfolio managers,
broker dealers and swap dealers;


(b) Category II:-
 Includes foreign portfolio investors such as-
 1. appropriately regulated funds not eligible as
Category 1 foreign portfolio investor
 2. endowments and foundations
 3. Charitable organisation
 4. corporate bodies
 5. family offices
 6. Individuals
 7. appropriately regulated entities investing on behalf of their
client, as per conditions specified by the Board from time to time
 8. Unregulated funds in the form of limited partnership and
trusts

(1) The Board or the designated depository participant may
require the applicant to furnish such further information
as may be considered necessary for the grant of the
certificate of registration as a foreign portfolio investor.
(2) The applicant or his authorised representative shall, if so
required by the Board or the designated depository
participant, appear before them for personal
representation in connection with the grant of a
certificate.
Furnishing of information, and personal
representation

Certificate of registration
 1. The designated depository participant shall on behalf of the
Board grant the certificate of registration, bearing registration
number generated by National Securities Depositories Limited,
if it is satisfied that the applicant is eligible and fulfils the
requirements as specified in these regulations.
 2. The designated depository participant shall endeavour to
dispose of the application for grant of certificate of registration
as soon as possible but not later than 30 days after receipt of
application, or after the information called for under regulation
6 has been furnished; whichever is later.
 3. Upon grant of certificate of registration to the applicant, the
designated depository participant shall remit the fees, as
specified in Part A of the Second Schedule, received from the
applicant to the Board.

Contd…
 4. If an applicant seeking registration as a foreign portfolio
investor has any grievance with respect to its application or if
the designated depository participant has any question in
respect of interpretation of any provision of this regulation, it
may approach the Board for appropriate instructions.
 5. The foreign portfolio investor needs to have a valid
registration as long as it is holding securities or derivatives in
India
 Proviso says that, a foreign portfolio investor whose
registration is not valid and who is holding securities or
derivatives in India shall be allowed to sell such securities or
wind up their open position in derivatives within one year
from the date of publication of these regulations.

Application to conform to the requirements
 1. An application for grant of certificate of registration which is
not complete in all respects or is false or misleading in any
material particular or does not satisfy the requirements specified
in these regulations shall be deemed to be deficient and liable to
be rejected by the designated depository participant,
 Proviso says that, before rejecting any such application, the
applicant shall be given a reasonable opportunity of being heard
and to remove the deficiency, within the time as specified by the
designated depository participant.
 2. The decision to reject the application shall be communicated by
the designated depository participant to the applicant in writing
indicating the grounds for rejection of the application.

Contd…
 3. The applicant, who is aggrieved by the decision of the
designated depository participant may, within a period of
30 days from the date of receipt of communication,apply to the
Board for reconsideration of the decision of the designated
depository participant:
Proviso says that such application for reconsideration shall not be
considered by the Board where the rejection was on account of
technical reasons such as non-submission of complete
information, documents, including non-payment of specified
fees.
 4. The Board shall, as soon as possible, after considering the
submissions made in the application seeking reconsideration
made under sub-regulation (3) and after giving a reasonable
opportunity of being heard, communicate its decision in writing
to the applicant.

General obligations and responsibilities of foreign
portfolio investors
 The foreign portfolio investor shall –
 (a) comply with the provisions of these regulations, as far as they
may apply, circulars issued thereunder and any other terms and
conditions specified by the Board from time to time;
 (b) forthwith inform the Board and designated depository
participant in writing, if any information or particulars previously
submitted to the Board or designated depository participant are
found to be false or misleading, in any material respect;
 (c) forthwith inform the Board and designated depository
participant in writing, if there is any material change in the
information including any direct or indirect change in its
structure or ownership or control, previously furnished by him to
the Board or designated depository participant;

Contd…
 (d) as and when required by the Board or any other Government
agency in India, submit any information, record or documents in
relation to its activities
 (e) obtain a Permanent Account Number from the Income Tax
Department
 (f) in relation to its activities as foreign portfolio investor, at all
times, subject itself to the extant Indian laws, rules, regulations,
guidelines and circulars issued from time to time
 (g) provide any additional information or documents including
beneficiary ownership details of their clients as may be required
by the designated depository participant or the Board or any
other enforcement agency
 2. In case of jointly held depository accounts, each of the joint
holders shall meet the requirements specified for foreign
portfolio investor and each shall be deemed to be holding a
depository account as a foreign portfolio investor.

Highlights of the News
As soon as India came out of the nationwide lockdown,
foreign portfolio investors returned to the country’s
markets with massive equity investments.
India received an FPI equity investment of Rs 21,876
crore in just the first 10 days of June, according to the
National Securities Depository Limited (NSDL).
The investment received in the first 10 days of the
month is much more than the monthly investments
received in the last six months.

Conclusion
FDI and FPI are both important sources of funding
for most economies.
 Foreign capital can be used to develop
infrastructure, set up manufacturing facilities and
service hubs, and invest in other productive assets
such as machinery and equipment, which
contributes to economic growth and stimulates
employment.
However, FDI is obviously the route preferred by
most nations for attracting foreign investment, since
it is much more stable than FPI and signals long-
lasting commitment.

Contd…
But for an economy that is just opening up, meaningful
amounts of FDI may only result once overseas investors have
confidence in its long-term prospects and the ability of the
local government.
Though FPI is desirable as a source of investment capital, it
tends to have a much higher degree of volatility than FDI.
In fact, FPI is often referred to as “hot money” because of its
tendency to flee at the first signs of trouble in an economy.
 Hence, Both FdI and FPI may be fruitful or it may proved to
be cost to the economy.
The Government shall endeavor to reform the policies time
to time as per the existing economic conditions so that
country gets the advantages of foreign capital as well as at the
same time it does not affect adversely and to ensure free flow
of capital, free trade .

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