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 Approval: Any 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.  

Investment Philosophies from the Dead

Everybody who invests money is guided by a certain investment philosophy. Most people are guided by the simple animal instinct - minimum risk, maximum output; in other words, the highest rate of return with the least risk attached to the investment.

I found a very interesting list of investment philosophies at the Financial Philosopher. In fact, what's more interesting is that these philosophies are not, in the true sense, investment ideas; rather they are ideas on human behavior from great men who have long been rolling in the grave.

So here is the list:

• ...those who wish to know in what direction they are going would do well to give their attention not to the politicians but to the philosophers, for what they propound today will be the faith of tomorrow. ~ I.M. Bochenski (1902-1995)

• Even if someone knew the entire physical history of the world, and every mental event were identical with a physical, it would not follow that he could predict or explain a single mental event (so described, of course). ~ Donald Davidson (1917-2003)

• We do not, in fact step out of the movement of things, ask 'What am I to do' and, having obtained an answer, step in again.  All our actions, all our questionings and answerings, are part of the movement of things, and if we can work on things, things can work on us... ~ John Anderson (1893-1962)

• All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we make troublesome changes without amendment, and frequently for the worse. ~ Benjamin Franklin (1706-1790)

• A crust eaten in peace is better than a banquet partaken in anxiety. ~ Aesop (620-560 BC)

• And as imagination bodies forth the forms of things unknown, the poet's pen turns them to shapes, and gives to airy nothing a local habitation and a name. ~ Shakespeare (1564-1616)

• A hidden connection is stronger than an obvious one. ~ Heraclitus (c.536-470 BC)

• It is the mark of an educated mind to rest satisfied with the degree of precision which the nature of the subject admits and not to seek exactness where only an approximation is possible. ~ Aristotle (384-322 BC)

• When the mind is in a state of uncertainty the smallest impulse directs it to either side. ~ Terence (195/185 - 159 BC)

• Reasoning draws a conclusion and makes us grant the conclusion, but does not make the conclusion certain, nor does it remove doubt. ~ Roger Bacon (c.1214-1292)

• It's quite true what philosophy says, that life must be understood backwards. But one then forgets the other principle, that it must be lived forwards. A principle which, the more one thinks it through, precisely leads to the conclusion that life in time can never be properly understood, just because no moment can acquire the complete stillness needed to orient oneself backward.~ Soren Kierkegaard (1813-1855)

• The crowd is untruth. ~ Soren Kierkegaard (1813-1855)

• Stubborn and ardent clinging to one's opinion is the best proof of stupidity. ~ Michel de Montaigne (1533-1592)

• If you do not change direction, you may end up where you are heading. ~ Lau Tzu (fl. circa 600BC)

It is true that each of the above general ideas can be regarded as some sort of investment idea. Let me repeat just one: 'The crowd is untruth'.

So true yet most investors follow the crowd. But then when have we ever learnt from the (lack of) wisdom of the crowd.


Source: The Financial Philospher
http://www.thefinancialphilosopher.com/2011/07/guidance-from-dead-philosophers.html

(Do not forget to select your reaction to the post; see below.)

Emerging Markets: On the Edge?

The term 'Emerging Market' was coined by Antoine van Agtmael. Uncomfortable with the deeply condescending attitude of the West toward the so-called Third World, he came up with the idea in the 1980s that economic growth in the next few decades will largely be driven by 'Emerging Markets', like China and India. How prophetic his words have proved!

The Economist has come up with a terrific interactive graphic on the state of the Emerging Markets. However, the focus is less on how strong their economies are and more on whether they run the risk of overheating, i.e. slowing down of economic growth and its accompanying negative aftereffects.

Here's The Economist on how to use and understand the interactive feature.

This chart, based on an analysis by The Economist, ranks 27 economies according to their risk of boiling over. We take each economy’s temperature using six different indicators: the inflation rate, the unemployment rate relative to its ten-year average, GDP growth relative to trend, excess credit (the growth in bank lending minus the growth in nominal GDP), real interest rates, and the forecast change in the current-account balance in 2011.

Countries are first graded according to the risk of overheating suggested by each indicator (2=high risk, 1=moderate, 0=low). For example, if the growth in excess credit is more than 5% it scores 2 points, 0-5% 1 point, and below 0% nil. The scores from each indicator are then summed and turned into an overall index; 100 means that an economy is red-hot on all six measures.

There are seven hot spots where a majority of the indicators are flashing red: Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam. In particular, the growth in credit is sizzling in all seven. Argentina is the only economy where all six indicators are on red, but Brazil and India are not far behind. China, often the focus of overheating concerns, is well down the rankings in the middle of the amber zone, partly thanks to more aggressive monetary tightening. Russia, Mexico and South Africa are in the green zone, suggesting little risk of overheating.

Click on the tabs at the top of the chart to see rankings on each of the six indicators.

If you wish to read more on this, click here.

(Please select your reaction to this post; see below.)

Infographic: Investment Fads & Themes

Almost all people who make money invest in some kind of security. For the aggressive risk-taker, there are equities and junk bonds; for the risk-averse conservative investor, there is gold or bank deposits. 

On the Business Insider Web site, I found this cool infographic on investment fads from Joshua Brown, an investment advisor. 

Please note that the mentioned investment themes and fads relate more to the Western markets, and less to Indian investors. Nevertheless, the infographic sheds light on the investment ideas that have caught the imagination of millions of investors and how they have moved and changed over the last few decades.

Please post your reaction to this post; it gives me an idea of what is popular and what is not!

Weekend Music Videos: Sound of Silence & ...

As you know, I post music videos on every Weekend. Music is a personal choice, and as such, these videos reflect my personal taste. 

Two Videos: Changing Education Paradigm & Where Good Ideas Come From

Friends, let me share two insightful animation videos.

The first one is adapted from a talk given at the RSA by Sir Ken Robinson, world-renowned education and creativity expert and recipient of the RSA's Benjamin Franklin award.

Trust me, I have not seen a better perspective on education. So, here's the video on Changing Education Paradigm.

Here's another brilliant video; this one is on 'Where Good Ideas Come From' by Steven Johnson.

Infographic: How the World's Biggest Financial Frauds Happen

The world over frauds are an integral part of economic and financial activity. Trillions of dollars have been lost to market manipulation, insider trading, marshaled accounts, and above all, human greed.

In the 1987 American film, Wall Street, Gordon Gekko, a Machiavellian businessman, mouths that, "Greed, for lack of a better word, is good".  Today, Gekko's credo seems to have become a byword for corporate greed and excess.

Recently I found this terrific infographic on the Credit Blog. In terms of length and size, it is the single biggest infographic I have ever seen; it is also one of the best.

It is titled 'Too Big to Fail' - a favourite slogan of the U.S. government officials and Wall Street executives, designed to extract a trillion dollar bailout for beleaguered and bankrupt large American business entities. 

It details the backgrounders to some of the most serious financial frauds and crises that Corporate America has witnessed (like the 2008 Financial Crisis and the 2000 Dotcom Bust); why and how they happened, the names of prominent players, and how these crises have almost brought down the U.S. economy. 

If you wish to learn more, click here for the complete infographic. Open the infographic in a new tab / window; double click on the infographic for a larger picture.