Types of Foreign Investment - Foreign Capital and Aid, Economy Traditional, UPSC Video Lecture | Indian Economy for UPSC CSE

[Music]
you
hi students welcome to fusion law school
in this lecture we will be discussing
about various types of foreign
investment this topic will be taught to
you by mr. Caden militia good evening
everyone
so today the topic of the lecture is
types of foreign investment into India
we will be dealing with various kinds
nature and types of foreign investment
and the matter and manner in which they
can be made into area broadly there of
two types and obviously the remainder
balance kind of foreign investments
falls into a residual category so the
broad two categories are equity and yet
under equity we have mainly three sub
categories one is the FDI second one is
the foreign portfolio investment and the
third is foreign venture capital
investment FDI stands for foreign direct
investment the second one as we spoke
just now was dead that is basically
characterized into four broad categories
one is the ECB's which stands for
external commercial borrowings second is
foreign currency convertible bonds FCC
B's then we have if C e B's which is
foreign currency exchangeable bonds and
the fourth is preference shares
preference shares basically means that
you know the shares or the security
Eutaw issued by the company allotted by
the company to foreign investors in
which there is a preferential treatment
in terms of doling and distributing of
dividend as well as liquidation so it
will have reference in terms of return
of capital and then the other category
in the remainder residual category can
comprise off G sex which are government
securities and non convertible
debentures etc they started talking
about FDI first foreign direct
investment is basically referring to a
species wherein the investment made by a
company or an entity based in one
country into a company or entity base
into another so when you talk about
India into India you basically are
talking about for investments made by an
for non
and maybe an NRI maybe a foreign
overseas entity etcetera into an entity
into a structure into a company into a
partnership whatever which is
incorporated within India so these
foreign direct investments differ
substantially from indirect investments
such as portfolio flows where in the
overseas institutions invest in equities
listed on a nation's stock exchange it
basically means that if you have
portfolio investment which has
securities listed on a recognized of
exchange which is overseas then it will
be dubbed as for portfolio investment
entities making direct investment
typically have a significant degree of
influence and control over the company
into which the investment is made now
this statement basically means that
nature and degree of investment will be
a determinant factor of the degree of
influence and control over which the
investor follows over its target
assuming it's less than 50 percent then
it is called minority control if it's
more than 50 percent it's called
majority control and obviously as we
know that under the Companies Act the
major management administration and
governance of a company happens through
ordinary and special resolutions by the
board by the shareholders etc the
certain categories of matters in which
only the shareholders or the members of
the company can actually vote and
exercise control over these are usually
the key significant vital matters like
borrowings into the company which are
not in the ordinary course of business
disposal of substantial assets
restructuring of the company merger an
amalgamation activity something which
actually impacts the valuation of shares
and interests of the members of the
company itself the remaining day-to-day
affairs of the company which are usually
as we call it in the ordinary course of
business are typically carried out by
the discretion of board by virtue of
board meetings by virtue of borer
solutions the resolutions which are
adopted and passed at such meetings okay
now let's take a step back and look into
the evolutionary analysis of FDI over
the past several years now more than
several years now the policy and
procedure of the regulating and the
during the inflow of foreign investments
have progressively liberalized and
simplified as recently as truly is back
the Government of India announced
various Reformatory measures into the
foreign investment regime into India
what they have done is certain
conceptual liberalisation measures plus
happing of the sectoral limits plus
shifting from the approval route to the
government to all these reforms and Dib
realizations have been consistently and
progressively brought into the for
investment regime now therefore as
situation currently stands with very
limited exceptions foreigners can invest
directly in Korea either on their own or
the joint venture in addition investment
ceilings as we call it thresholds the
roofs which are given in certain cases
and gradually being removed of phase
down on liberalized stool arresting the
initiators which are taken by the
Government of India in this regard have
resulted in significant inflows by the
foreign investments in almost all the
areas economy except a select few which
continue to remain reserved and
prohibited for strategic reuse so like
after Prime Minister Narendra Modi has
zoomed helm of affairs
Japan has promised almost 14 billion
dollars of investment into India so that
basically means into the areas in which
FBI is committed demand will actually
induce an inject capital by virtue of
equity debt or other means into various
realms of India infrastructure in other
industries and spaces with Tredici
exceptions like defense like insurance
in which there is for investment which
is permitted but only to a certain
extent and subject to certain conditions
will fulfill at this juncture I think
you know it will be important to
actually see the press mode or the div
be department of industrial promotion
and policy the circulars that come out
that rationalize the FDI policy as such
and lay down sectoral limits the sector
specific norms or the capitalization
norms put in into every specific sector
at hand may be worthwhile you take a
look at that in this particular lecture
let's move on to the highlights of the
external of rebuilding FDI scheme
because obviously you know because of
time constrain we cannot delve into each
and every sector let's see the
highlights of the extended VSD
both procedurally and substantively MDI
governs the inflows into India by virtue
of a policy and these policies enacted
by the Ministry of Finance and the
Department of Industrial Policy and
promotion which forms a part of the
Government of India and is subject
obviously more if you want an ongoing
basis depending on the mechanism the
foreign landscape the industrial market
landscape etc now as the situation
stands no government approval or FIV
approval is required in most sectors or
activities except for a very short
negative list as is prescribed the
government moving on the government has
formulated sector specific guidelines
for a VI like in real estate
like in construction like an insurance
etc wherein the investment up to
specified security gap is covered under
the automatic rule its few exceptions if
I give me and in some cases where the
size of transaction exceeds certain
valuation C CCA which is Cabinet
Committee on Economic Affairs considers
the proposal for foreign participation
that do not qualify for the
automatically now decisions on these
foreign investment proposals are
typically taken within 30 to 45 days of
submitting the requisite prescribed
application in a prospect for moving on
free repatriation repatriation basically
means the proceeds of investment taken
back into the country of origin on such
capital investment is permitted provided
the original investment then the foreign
must have mean wasn't reputable basis
this is basically meaning that the
original investment was made in
convertible foreign exchange in addition
free repatriation of profits on capital
investment is permitted subject however
payment of appropriate access and
compliance with other specified
conditions okay so basically the two
kinds of probable returns if you see is
that we can think on as this normal
parlance are much dividends which are
profits when you exit from the target or
your investment you take it back so
either the turn of capital once the
taxes have been paid the capital gains
tax for the dividend distribution tax or
the securities from the - tax as the
case may be
once that is speed and any other
specific condition has been
which is applicable to that particular
sector you can create you investment it
is got a future now use of foreign brand
names and trademarks is permitted for
sale of goods of provision and provision
of services inter alia so yes there
technology transfers the co-branding
arrangements their IP arrangement
specifically relating to lending of
certain brand names which are typically
used in franchising arrangements
something like McDonald's - sitting out
of the US will lend its brand name and
Trademark as we call it with goodwill
for provision of services and products
to India now let's talk about the
capital markets Indian capital markets
are open to foreign institutional
investors which are basically
sophisticated institutionalized
investment agencies or organizations and
Indian company in therefore have
permitted to raise funds from such
international capital market and if I
Isis we're now special investment and
tax incentives have been conferred and
bestowed upon exports in specific
sectors including power software and
food processing see these are sectors in
which government wants to actually as a
policy measure giving beaters gives some
kind of spur to them so that you know
more and more investments flow into
these sectors gives a boost to these
sectors the information technology
typically has been the blue eyed chair
of the Government of India and one
hundred percent investment is permitted
under the automatic rule both an ID and
itës which is information technology
enabled services we have again the
policy of special economic zones in
which special tax incentives other kind
of incentive like reduced price of land
etc is basically given and even
exemptions from income tax per say in
five year period etc is given for
investment in two special economic zones
as a further incentive single window
clearance facilities and investors core
facilities are also available in various
states of India in order to simplify the
approval process in respect of the new
ventures this takes us to foreign
portfolio investments FBI India's the
buying of securities trading another
country which are highly liquid in
nature or which is frequently traded and
therefore allows investors to make quick
money through the frequent buying and
selling in order to harmonize the
various available rules of
or phony investment in India Celie which
is the regulator of capital markets
securities exchange Bureau of India has
introduced a new class of foreign
investors also known as FBI's now
talking about the foreign portfolio
investment this class in particular has
in common merging the existing class or
investors through which portfolio
investments were previously made here
namely the institutional investors the
qualified foreign investors which are
qfi and sub accounts of the FI is now
the existing fi island sub accounts we
continue to buy sell or deal in the
securities of listed securities till the
expiry of the current registration such
fi eyes or sub accounts shall be
required to be the conversion fee on and
for the expiry of the current
registration till that time when the
registration was valid all the existing
fi I is an essay is a team to be FB
i--'s
form for for localized us now the three
categories of FBI is which have been
created on the basis of associated risk
category one which includes the foreign
investors related with the government
such as central bank's combat agencies
sovereign wealth funds etc category two
of FBI which includes a regulated
entities like financial institutions
banks asset management funds investment
managers and other broad-based funds
which may be required and regulated as
mutual funds investment trusts are not
regulated also category three
includes investors which shall not cover
on the category this is basically
residual surviving category which is not
covered under the first two categories
so these are three categories of foreign
portfolio investors and the registration
of which is carried out by the
Securities Exchange Board of India
designated as designated depository
participants on the permanent basis
unless which is suspended or cancelled
now let's come to investment by fvc i
the again also had the registration
requirement so while the FEC is to be
called FEC has have to be registered
with the Securities and Exchange Board
of India selling and they may contribute
a 200 percent of the capital of an
Indian venture
and illegal so a VCI investing to VCU's
which are named registered and may
further set up a domestic asset
management company - - the for all such
investments are made or can be made
through the automatic now the
regulations that govern the investment
through a VC is is basically saving when
should having fun the regulations of my
name is six as amended obviously to meet
now such investments will also be
subject to the extend semi regulations
and instead every a scheme including the
sectoral caps including the other sector
specific norms will continue for that
now semi registered ABC eyes are also
allowed to invest under the ABS he has
known as it identities in other
companies as well I think the most
important category now through which
loans and debts are raised Eastern
commercial borrowing now this is an
instrument used by the eligible
borrowers in India to raise loans from
outside India RBI circular the relevant
one defines the ECB's as commercial
loans in the form of bank loans
securitize instruments which have
non-convertible and optionally
convertible partial again whatever in
profession also because anything which
is partially or awfully but not fully
and men literally convertible is
domestic security or EC means from non
as rental endures with a minimum average
maturity of three years so there are
certain eligible for who's eligible to
enter some benchmarks parameters and
criterion here and there to determine
whether any seamy can be legitimately
and legally avail from the financial
institutions of Rademacher
now moving on the process of external
commercial borrowings is the one by the
section 3b of the fem a-- red with
notification 3 which is from our three
which is foreign nations management
borrowing or lending in foreign exchange
regulations of two thousand has emitted
from time to time RBA again so just like
the way it does for master circular on
FDI is always a consolidation of
existing instructions directives and
directions and regulations putting ECB's
also in the master circular on e series
and trade credits it's published issued
annually by the river bank frontier with
the sunset
one year FCC foreign currency
convertible bonds means a bond which is
issued by an Indian company Express no
denominated in foreign currency and the
principal and interest in respect of
which is also they will not want that
these bonds are required to be raised in
quadrants with the scheme nothing the
scheme which governs the issuance
allotment and subscription of FCC B's
which is basically issue of foreign
currency can whatever God cannot be
shares through depository received
mechanisms new 1983 moving on FCC B's
can be subscribed by a non decided in
foreign currency converted into
authorized shares of a issuing company
any manner either in whole fashion for a
part or on the basis of any entity
related warrants attached to these debt
instruments you know they can be plain
vanilla FCC means or they can be
structured or hybrid FCC B's also
depending on the terms and conditions
which are linked to the issuance panels
the rules relating to EC these are also
had to do a series because ECB is
governs then died dead portfolio and
obviously for currency convertible bonds
their very nature are dead they are also
governed by these new regulations they
are also required to add her to the
foreign exchange management transfer or
issue of any foreign
Authority amendment regulations of 2004
so FEMA
RBI you know keep some issuing press
notions or pillars which continue to
govern the issuance of FCC is an easy if
see ease
foreign currency exchangeable box this
means a bond which is Express the
foreign currency the principal and
interest in respect of which is again
payable in foreign currency issued by a
company and subscribe to by a person
who's resonant outside Italy in foreign
currency an exchangeable into an equity
shares another company to be called the
offered company in any manner either
fully or partly or on the basis of any
equity related warrants attached to the
debt instruments now guidelines is
applicable to SEC these and easy these
are also applicable to if sea V's these
are in even structured forms various
species on the same Shona
so Jonah being dead FCC B's ecv FCC V is
there
a species in which the instrument of the
securities structured basis the terms of
the issue now we come to the most common
category under dead
his preference shares pref shares are
generally considered as an investment in
equity however which are not convertible
and optionally convertible or partially
than vertical and for Asia which funds
have been raised after 2007 mean could
be considered as dead so this was the
policy they are non convertible if the
option you can what have been also
partially convertible day unless and
until it's fully and meant literally and
compulsively convertible it will not
qualify in classifies equity since these
instruments would be denominated rupees
the rupee interest rate will be based on
the swap equivalent of LIBOR which is
London interbank offer rate plus the
spread has may be permissible for the
corresponding ECB's now the final
residual category the other investments
for other securities they generally
include investment in government
securities Treasury bills listed in CD
is non convertible debentures shall
estate bonds commercial papers
participatory notes issued when Indian
companies and units of domestic mutual
funds subject to certain restrictions
laid out by the RBI now these type of
instruments can only be made by semi
registered fbi's hen our eyes and di OSP
I was willing people of Indian footage
so thank you for your time so this
presentation talked about the types of
foreign investments into India species
and shown us there thank you I hope you
learn something new from today's lecture
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