International Business

International Capital Markets

Prof Bharat Nadkarni

International Business

Obstacles to International Investments 1. Information Barriers 2. Political & Capital control risks

3. Foreign exchange risk

4. Restrictions on foreign investments and control

5. Taxation

International Business

Foreign Direct Investment Definition: FDI occurs when an entity/investor from one country(home country, e.g. USA) obtains or acquires the controlling interest in an entity in another country (host country,e.g. India) and then operates and manages that entity and its assets as part of the multinational business of the investing entity. Foreign Portfolio Investment (FPI) Definition: FPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investment via equity instruments (Stocks) or debt (Bonds) of a foreign enterprise which does not necessarily represent a long-term interest.

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The difference between FDI & FPI

FDI Motive To acquire controlling interest in a foreign entity or set up an entity with controlling interest. FPI To make capital gains from investments. There is no intention to control the entity. FPI investment come from investors, mutual funds, portfolio management companies, and corporate with pure motive of investment gains. FPI is highly volatile. Comes mainly through stock markets. Sole criteria and motive is gains on investments.

Source

FDI investments come from MNCs and corporate so as to derive benefit of new market, cheaper resources (labour), efficiency and skills, strategic asset seeking (oil fields) and time geography (BPOTranscriptions).

Duration More enduring and has longer time stability. Form Purpose Generally comes as subsidiary or joint venture. Made with core thought of business philosophy of diversification, integration, consolidation, expansion and/or core business formation. Calculation of gain is always prime criteria but never the sole criteria.

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FDI in India are approved through two routes: 1. Automatic approval by RBI: The RBI accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving : Foreign equity up to 50% in 3 categories relating to mining activities. Foreign equity up to 51% in 48 specified industries. Foreign equity up to 74% in 9 categories.

The category lists are comprehensive and cover most industries of interest to foreign companies. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

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2. The Foreign Investment Promotion Board (FIPB) Route. FIPB approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to general public. FDI is permitted as under the following forms of investments: 1. Through financial collaborations. 2. Through joint ventures and technical collaborations. 3. Through capital markets via Euro issues. 4. Through private placements or preferential allotments.

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Forbidden Territories: FDI is not permitted in following industrial sectors: 1. 2. 3. 4. 5. Arms and ammunition Atomic energy Railway transport Coal and lignite Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.