should capital flow be stymied

8/9/2019 SHOULD CAPITAL FLOW BE STYMIED

1/20


2/20

What Does Capital Flows Mean?

The movement of money for the purpose of investment, trade

or business production.

Capital flows occur within corporations in the form ofinvestment capital and capital spending on operations and

research & development.

Through trade with other nations and currencies. Individual

investors direct savings and investment capital into securities

like stocks, bonds and mutual funds.


3/20

Capital flows are aggregated government and other organizations for the

purpose of analysis, regulation and legislative efforts.

Different sets of capital flows that are often studied include the following:

Asset-classmovements

measured as capital flows betweencash, stocks, bonds, etc.

Venturecapital

investments in startup businesses

Mutualfund flows

net cash additions or withdrawals frombroad classes of funds


4/20

Since the introduction of the reform process in the early 1990s,

India has witnessed a

significant increase in cross-border capital flows, a trend that

represents a clear break from

the previous two decades. Net capital inflows increased from $7.1billion2 in 1990/91 to

$45.8 billion in 2006/07, and further to $108.0 billion during

2007/08 (Graph 1). India has one

of the highest net capital flows among the emerging market

economies (EMEs) of Asia.


5/20

International capital flow assumes two

important forms, namely

Foreign DirectInvestment.

ForeignPortfolioInvestment


6/20

What is FDI?

Foreign direct investment (FDI) in its classic form is

defined as a company from one country making a

physical investment into building a factory in anothercountry.

Include investments made to acquire lasting interest inenterprises operating outside of the economy of the

investor.


7/20

FDI refers to capital inflows from abroad that invest in the

production capacity of the economy.

preferred over other forms of external finance

returns depend on the performance of the projects.

facilitates international trade and transfer ofknowledge,

skills and technology


8/20

Foreign Direct Investment (FDI) is permitted as under the

following forms of investments-

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.


9/20

WHY FDI ?

1. Gain a foothold in a new geographic market.

2. Increase a firms global competitiveness and

positioning.

3. Fill gaps in a companys product lines in a global

industry.

4. Reduce costs in areas suchas R&D, production,

and distribution.


10/20

FDIs Benefits and challenges

Benefits Additional resources available

for productive investment

Risk sharing with the rest of theworld (equity)

Greater external market discipline onmacroeconomic policy

Greater exploitation of comparativeeconomic advantages

Enhanced access to technology,information, ideas and managementskills

Broader access to export marketsthrough foreign partners

Training and broader exposure ofnational staff

Greater liquidity to meet domesticfinancing needs

challenges Currency appreciation

Reduced scope forindependent macroeconomicpolicy actions

Greater exposure to externalshocks

Demands for protection in localmarkets

Lesser control of foreignowned domestic industry

Disruption of national capitalmarkets, asset inflation

Risk of rising volatility infinancial and exchange markets


11/20

FORBIDDEN TERRITORIES

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.


12/20

Mining of iron, manganese, chrome, gypsum, sulphur,

gold, diamonds, copper, zinc.

Lottery Business

Agricultural or plantation activities

Housing and Real Estate Business (except development

of townships, construction of residen-tial/commercial

premises, roads or bridges to the extent specified in

Notification No. FEMA136/2005-RB dated July 19,

2005).


13/20

ADVANTAGES OFFDI

Increase in Domestic Employment/Drop inunemployment

Investment in Needed Infrastructure.

Positive Influence on the Balance of Payments.

New Technology and Know How Transfer.

Increased Capital Investment.

Targeted Regional and Sectoral Development.


14/20

India: Amuch favoured

destination for FDI Indiahas been rated as the fourth most attractive investment

destination in the world, according to a global surveyconducted by Ernst and Young in June 2008.

India was after China, Central Europe and Western Europe interms of prospects ofalternative business locations. With 30

per cent votes, India emerged ahead of the US and Russia,which received 21 percent, votes each.

As per the global survey of corporate investment planscarried out by KPMG International, released in June 2008, (aglobal network of professional firms providing audit, tax, andadvisory services), India will see the largest overall growth inits share of foreign investment, and it is likely to become the

world leader for investment in manufacturing. Its share ofinternational corporate investment is likely to increase by 8per cent to 18 per cent over the next five years, helping it riseto the fourth, from the seventh position, in the investmentleague table, pushing Germany, France and the UK behind.


15/20

What Does Foreign Institutional

Investor - FIIMean?

An investor or investment fund that is

from or registered in a country outside of

the one in which it is currently investing.

Institutional investors include hedge

funds, insurance companies, pension

funds and mutual funds.


16/20


17/20

Issues and Challenges Facing FIIs

in India

Concentration and Liquidity

Market Capitalization to GDP Ratio

Corporate Governance and DisclosureNorms

Macroeconomic Parameters


18/20

restrictions that FIIs face in

India? FIIs can buy/sell securities on Indian stock exchanges,

but they have to get registered with stock market regulatorSebi.

They can also invest in listed and unlisted securities outsidestock exchanges if the price at which stake is sold has beenapproved by RBI.

No individual FII/sub-account can acquire more than 10% ofthe paid up capital ofan Indian company.

All FIIs and their sub-accounts taken together cannotacquire more than 24% of the paid up capital ofan Indian

Company, unless the Indian Company raises the 24% ceilingto the sectoral cap or statutory ceiling as applicable bypassing a board resolution and a special resolution to thateffect by its general body in terms of RBI press release ofSeptember 20, 2001and FEMA Notification No.45 of thesame date.


19/20

FDI BETTER THAN FII FDI is preferred over FII investments since it is considered to be the

most beneficial form of foreign investment for the economy as awhole.

Direct investment targets a specific enterprise, with the aim ofincreasing its capacity/productivity or changing its management

control.

Direct investment to create or

augment c

apacity ensures t

hat the

capital inflow translates into additional production.

In the case of FII investment that flows into the secondary market,the effect is to increase capital availability in general, rather than

availability of capital to a particular enterprise.

Translating

an FII inflow into

addition

al production depends onproduction decisions by someone other than the foreign investor

some local investorhas to draw upon the additional capital made

available via FII inflows to augment production.


20/20

FDI tends to be much more stable than FIIinflows. Moreover, FDI brings not just capital butalso better management and governancepractices and, often, technology transfer. The

know-how thus transferred along with FDI is oftenmore crucial than the capital per se. No suchbenefit accrues in the case of FII inflows, althoughthe search by FIIs for credible investment optionshas tended to improve accounting and governance

practices

among listed comp

anies.

should capital flow be stymied

Documents