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Friday, July 8, 2011

The Explainer: Foreign Direct Investment

Starting today, every Friday, I will blog on 'explaining' crucial issues, including issues of economic and political nature. This feature will be titled 'The Explainer'. Most of these Explainers will be in the form of Question & Answer (Q&A), with minimal jargon.

I will start this series with 'Foreign Direct Investment', or FDI, as it is more popularly known. 

The language and interpretation are mine; the data have been taken from here.

What is FDI?
FDI refers to the capital invested by a foreign company in an existing or new domestic company. This way, by directly acquiring a 'stake' (by contributing to capital) in the domestic business, the foreign company becomes a shareholder.

(Please note that FDI does not relate to the funds invested by a foreign company in the share market; such investment is called Foreign Institutional Investment (FII).)

For example, if Prudential, a British company, invests in ICICI Prudential Life Insurance, by way of capital, such investment is termed FDI. 

In what way can a company bring in FDI?
 

FDI can be brought in through direct injection of funds into the capital of the company, subject to government rules.

What are the advantages of FDI?
A foreign partner (the one who brings in FDI) may come with better technology, technology transfer, expertise in executing large and complex projects (like airports), global reputation, financial leverage, access to markets elsewhere, etc.

How much FDI did India receive between April 2000 and March 2011? 
Between April 2000 and March 2011, India received a cumulative FDI of U.S.$194.81 billion.

How much FDI did India receive in the last financial year (2010-11)?
In 2010-11, India received U.S.$19.42 billion in FDI. This figure is 25 per cent less than the FDI inflow of U.S.$25.83 billion received in 2009-10.

Which sectors attracted the highest FDI in 2010-11?
The top three sectors (in order of highest) are: Services (21% of all FDI), Computer Hardware & Software (8%), and Telecom (8%).

Which were the top investing countries in India in 2010-11?
Mauritius (42% of all FDI came via this island country), Singapore (9%), and the U.S. (7%).

How is it that the tiny island nation of Mauritius is the biggest foreign investor in India?
India has a Double Taxation Avoidance Agreement (DTAA) with Mauritius. Without getting into complex tax jargon, if a company based in Mauritius is paying tax there, it will not be asked to pay tax in India. Since the tax rates are either nil or extremely low in Mauritius, companies prefer to route their investments into India through Mauritius.

    Let me bring to you a snapshot of FDI limits in some major sectors as laid down by the Government of India.

    Sector
    % of FDI Cap / Equity
    Agriculture & related fields like Aquaculture
    100
    Mining
    100
    Defence
    26
    Airports (Greenfield & Existing)
    100
    Banking – Private Sector
    49 through automatic route 
    74 via Govt. approval
    Banking – Public Sector
    20 (both FDI & FII)
    In Broadcasting
        - Terrestrial FM
        - Cable Network
        - Direct-to-Home

    20
    49 (incl FDI, FII, & NRI)
    49 (incl FDI, FII, & NRI)
    Commodity Exchange
    49 (includes 23% for FII)
    Insurance
    26
    Petroleum & Gas Sector (exploring & refining)
       - by private sector companies
       - by public sector companies

    100
    49

    In Print Media
      - Current Affairs & News
      - Scientific & Technical journals
      - Facsimile edition of foreign newspapers

    26
    100
    100

    Telecom

    49 through automatic route
    74 via Govt. approval
    Internet Service Providers
    49 through automatic route
    74 via Govt. approval
    Trading
      - Wholesale Cash & Carry
      - Single Brand Retail

    100
      51

    An example: In telecom, the FDI limit is 74%. What it means is that in a telecom company like Uninor (a joint venture between Unitech, an Indian company, and Telenor, a company based in Norway), the maximum that Telenor can contribute to the capital base of the company is 74%. The rest of the capital (also called equity) should be held by an Indian company or a clutch of Indian investors.

    Jargon decoded:
    • Greenfield: Any project that is not constrained by prior or existing project. In short, a brand new project. For example, the building of the Hyderabad International Airport is a greenfield project. The developers were not constrained by existing infrastructure. Now contrast this with the Indira Gandhi International Airport in New Delhi. It was built in and around the existing old airport, and the developers were constrained by the existing infrastructure in developing it.

    • Automatic Route: Any FDI under the automatic route does not require prior approval either by the Government of India or the Reserve Bank of India (RBI).

    • Government ApprovalAny FDI that is NOT under the automatic route requires prior approval by the Government of India. 

    I have tried to keep it simple. This is meant for a reader who is not comfortable with economic jargon. I have deliberately skipped putting in some real tough terms, like capital gains tax, while explaining DTAA with Mauritius. 


    Do you like this new feature - The Explainer? Please select your reaction to this new feature and to this post by selecting the relevant check boxes below.  

    23 comments:

    rahul said...

    just i can say thank you for making the economics to easy to understand...

    Goutham said...

    thank u sir....you could make it a little bit tougher if it is adding more knowledge.

    Blogger said...

    Manmeet - really liked it. Very well thought of and covers all important things a person should know about FDI ...

    Eagerly waiting for the next post

    namrata said...

    This is a big help.. with little knowledge on the economic or commerce front, this article comes as a breather....

    Nature Lover said...

    Another great work from you. Thanks a lot Sir!

    abhiram_nayan said...

    Simply superb!! This just can't get any better. You are the best!! :)

    Nikhil said...

    This is an interesting series. Because you had brought the topic of Uninor, do you think Dr. Subramaniam Swamy's (President of Janata Party) claim that ISI has vested interest in Telenor is true?

    Yamini Kancharana said...

    This is tooo good sir..very helpful post for a person like me who wants to learn economics...
    You are the best! :)

    piyush483 said...

    This is tooo good sir.. This just can't get any better. You are the best!! Eagerly waiting for the next post.........

    Anonymous said...

    good one..

    subhash said...

    simply superb sir,now i'm able to understand

    ruchi said...

    good job...it is interesting to read n understand in this type of format...!

    Gayathri said...

    Thanks a lot sir.. very simple terminology...and gripping explination

    veracious vibes said...

    thank you,sir....!!!!

    Anonymous said...

    awesomely articulated with utmost simplicity.....

    Anonymous said...

    Marvelous i like the spirit of yours,sir representing economics in lay man language. A real hearty thanks to you 4 making economics at ease .THANK YOU

    Anonymous said...

    thank you.........represents the economics in such an articulated and in a simple way......THANK YOU sir

    Rohith castelino said...

    Fantastic, The Article on FDI is simply the best, this actually helps the beginners to understand Economics or other Fundas very easily, And its very tiresome to search in google or wikipedia wherein one gets lot of unwanted materials first even if you want search for a very simple topic,
    FDI has been explained in a simple manner here, I have few requests,
    1)it would have been useful if you could come out with the second part wherein you can extend the topic a bit further.
    2)And also enlighten us with other Eco fundas as well, your way of writing makes me understand the most difficult topics.
    Thank you very much for this useful post!
    simply superb!!

    Anonymous said...

    Wow!dat was lyk super clear n easy to understand!!thanks a ton sir!!

    Anonymous said...

    great sir got the hang of fdi's.
    keep up the good work sir so tat it is easy for we ppl to undrstand
    all this economic terms

    Suryaprakashreddy Saidupally said...

    very informative

    Profit said...

    I will definitely bookmark this blog for future reference and further viewing. Thanks a bunch for sharing this with us! certainly informative and contains useful content

    Susanta said...

    Sir,
    please help with various GD topics asked in top B-school..... Like introduce a topic and explain yourself about the topic n tell some links to study about that topic.... And it should be published daily.....