Assignment

Of International Financial Management

Submitted By:
Akhilesh Kumar Sec- A/ DM1113110

Submitted To:
Dr. B.P. Joshi (AIMT)

Meaning of FDI (Foreign Direct Investment): FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. Factors FDI inflows to India witnessed significant moderation in 2010-11 while other EMEs in Asia and Latin America received large inflows. This had raised concerns in the wake of widening current account deficit in India beyond the perceived sustainable level of 3.0 per cent of GDP during April-December 2010. This also assumes significance as FDI is generally known to be the most stable component of capital flows needed to finance the current account deficit. Moreover, it adds to investible resources, provides access to advanced technologies, assists in gaining production know-how and promotes exports.

With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalisation of the economy since the early 1990s as well as gradual opening up of the

capital account. As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year. Equity FDI Inflows to India in last five years: (Sector wise) Sectors Manufactures Services Const. Real Estate Others Total
(All figures in Percent %)

2006-07 2007-08 2008-09 2009-10 17.6 56.9 15.5 9.9 100.0 19.2 41.2 22.4 17.2 100.0 21.0 45.1 18.6 15.2 100.0 22.9 32.8 26.6 17.7 100.0

2010-11 32.1 30.1 17.6 20.1 100.0

Equity Inflows (US$ billion) Manufactures Services Const.Real estate Others Total Equity FDI 1.6 5.3 1.4 0.9 9.3 3.7 8.0 4.3 3.3 19.4 4.8 10.2 4.2 3.4 22.7 5.1 7.4 6.0 4.0 22.5 4.8 4.5 2.6 3.0 14.9

From a sectoral perspective, FDI in India mainly flowed into services sector (with an average share of 41 per cent in the past five years) followed by manufacturing (around 23 per cent) and mainly routed through Mauritius (with an average share of 43 per cent in the past five years) followed by Singapore (around 11 per cent). However, the share of services declined over the years from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing, and others largely comprising electricity and other power generation increased over the same period (Table 2).Sectoral information on the recent trends in FDI flows to India show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as construction, real estate and mining and services such as business and financial services. Manufacturing, which has been the largest recipient of FDI in India, has also witnessed some moderation

Sector Specific Limits of Foreign Investment in India Sector A. Agriculture FDI Cap/Equity 100% Entry Route Automatic Other Conditions

Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aquaculture, Cultivation of vegetables & mushrooms and services related to agro and allied sectors.

2. Tea sector, including plantation 100% Automatic

(FDI is not allowed in any other agricultural sector /activity)

B. Industry 1. Mining covering exploration and 100%

mining of diamonds & precious stones; gold, silver and minerals.

Automatic

2. Coal and lignite mining for

captive consumption by power projects, and iron & steel, cement production.

100%

Automatic

3. Mining and mineral separation

of titanium bearing minerals

100%

Automatic

Sectors where FDI is Banned

1. Retail Trading (except single brand product retailing); 2. Atomic Energy; 3. Lottery Business including Government / private lottery, online lotteries etc; 4. Gambling and Betting including casinos etc.; 5. Business of chit fund; 6. Nidhi Company;

FII Investment Details (Financial Year)

Financial Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (till Aug31, 2011) Equity 5,267.0 -717.2 9,669.5 10,206.7 8,072.2 2,527.2 39,959.7 44,122.7 48,800.5 25,235.7 53,403.8 -47,706.2 110,220.6 110,120.8 2,367.6 Debt 691.1 -867.0 452.6 -273.3 690.4 162.1 5,805.0 1,758.6 -7,333.8 5,604.7 12,775.3 1,895.2 32,437.7 36,317.3 8,186.2 Total 13.4 5,126.5 4,796.3 6,942.0 8,574.5 5,957.2 -1,584.0 10,122.1 9,933.4 8,762.6 2,689.3 45,764.7 45,881.3 41,466.7 30,840.4 66,179.1 -45,811.0 142,658.3 146,438.1 10,553.8

All values in INR Crores. * The data presented above is compiled on the basis of reports submitted to SEBI by custodians and constitutes trades conducted by FIIs on and upto the previous trading day(s).