Session Agenda 

Preface 

What is FDI?

What is ODI?

What is ECB? 

Rules & Procedures 

RBI Guidelines on FDI, ODI & ECB 

Automatic Route & Approval Route 

Permitted & Prohibited Activities 

Sectoral Caps 

Preface: World a Global Village…

• The increasing interconnectedness of economies, trade, and travel has created a sense of global interdependence. 
• The movement of goods, services, and people across borders has blurred geographical boundaries.
• The world is more interlinked, akin to a village where goods and services are shared among its residents.
• Many global challenges, such as climate change, pandemics, and economic crises, require collaborative efforts and coordination among nations. 
• "Global Village" emphasizes that these challenges affect everyone and that collective action is necessary to address them.
• Movement of capital as FDI, ODI & ECB is a collaborative effort for inclusive growth of economies…

Why does money move?

• Money flows from producers to workers as wages.
•  It flows back to producers as payment for products. 
• An economy is an endless circular flow of money through the money supply.
• Additions to the money supply are exports, and expenses from the money supply are imports.
• For faster growth, the government permits money supply from overseas as FDI, ODI and ECB.
• When all of these factors are totalled, the result is a nation's gross domestic product (GDP) or the national income.
• The inter-country dependence makes money move across continents.
• The circular flow impacts  GDP. It helps governments and central banks adjust monetary and fiscal policy to improve an economy.

Foreign Direct Investment …

Foreign Direct Investment, or FDI, is an investment made by one country into another. Providing directly controlled assets, FDI impacts the economy, employment opportunities, and competitiveness, contributing to the country’s growth and development.

Increases capital- FDI brings economic stability by increasing capital to a country. This results in financing new businesses, development works, and other important factors for economic growth.

Supports developing countries- FDI is extremely beneficial for countries still developing. It provides the resources and facilities from other countries to overcome economic challenges and improve the standard of life. 

Enhances international trade- FDI enhances international trade by promoting imports and exports of various business products. This increases revenue and the relationship between the host and the source countries.

Expands new-age technologies- For improving the quality of local and old business models, FDI can help bring new technologies to a country. This can result in increased productivity and competitiveness in the host country.

What are the types of FDI?

 Horizontal FDI:-

When a company invests overseas to begin the same kind of business operations as in its nation of origin, this is known as Horizontal FDI. The primary motive for Horizontal FDI is to access new markets and technologies.

Vertical FDI:-

Vertical FDI occurs when a company invests in a foreign country to gain control over the supply chain. In vertical FDI, the individual or a company invests in a foreign company that is either a supplier or a distributor. This results in creating a vertical relationship between the companies.

Conglomerate FDI:-

Conglomerate FDI is an investment by an organization from one nation to another that has no connection to its current core businesses.  The primary goal for Conglomerate FDI is to benefit the companies from the growth potential of new markets and diversify the company’s portfolio.

Various forms of FDI…

FDI can take different forms, such as:

• Greenfield investment: involves establishing new operation facilities in a foreign country. It may include setting up factories, offices, research and development centers & infrastructure.
• Mergers and Acquisitions (M&A): This investment involves acquiring existing companies or equity stakes in foreign enterprises. Access new markets, technologies, brands, and distribution networks to achieve synergies and economies of scale.
• Joint Ventures: Two or more entities from different countries come together to create a new business entity. Joint ventures allow companies to share risks, pool resources, and combine complementary strengths to access foreign markets.

Win-Win for Host Country & Investing  Country

• Foreign direct investment benefits both the host country and the investing company. For the host country, it can stimulate economic growth, job creation, technology transfer, and enhance productivity. It can also bring new capital, expertise, and access to global markets. 
• On the other hand, the investing country gains access to new markets, resources, cost efficiencies, and strategic advantages.
• Governments often strive to attract foreign direct investment by creating favorable investment climates, providing incentives, ensuring legal and regulatory frameworks, and promoting political stability. 
• The impact of FDI can vary depending on the host and home countries' specific circumstances, policies, and economic conditions.

 Importance of FDIs for India

Foreign Direct Investment (FDI) is crucial for India due to several reasons: 

Economic Growth: FDI contributes significantly to India's economic growth by stimulating investment, increasing production capacity, and creating employment opportunities. It helps accelerate

industrial development, improve infrastructure, and foster innovation and technology transfer.

Capital Inflows: FDI brings much-needed capital into the Indian economy. It helps bridge the investment gap by supplementing domestic savings and investments. This capital infusion enables the funding of large-scale projects, promotes entrepreneurship, and supports the growth of various sectors.

Technology Transfer: FDI facilitates the transfer of advanced technology, technical know-how, and managerial expertise from foreign companies to Indian firms. This technology transfer contributes to the modernisation and upgradation of industries, enhances productivity, and improves the competitiveness of Indian businesses in both domestic and global markets.

Crucial Role of FDIs in India 

Employment Generation: FDI has a positive impact on job creation. Foreign companies investing in the country create direct and indirect employment opportunities across various sectors. This helps reduce unemployment and poverty, improve living standards, and promote inclusive growth.

Export Promotion: FDI plays a vital role in promoting exports from India. Foreign companies establish manufacturing facilities or outsource operations in India to leverage the country's skilled labour, cost advantages, and access to large consumer markets. This boosts India's exports, increases foreign exchange earnings, and improves the trade balance.

Infrastructure Development: FDI inflows contribute to the development of infrastructure in India. Investments in transportation, telecommunications, power generation, and logistics help in improving infrastructure capabilities. This, in turn, facilitates trade, enhances connectivity, and supports economic development.

Linkages and Networking: FDI allows domestic firms to form partnerships, joint ventures, and supply chain linkages with foreign investors. This collaboration fosters knowledge sharing, enhances managerial skills, and provides access to global markets. It helps domestic companies integrate into global value chains & expand their reach

Government Initiatives to Encourage FDI 

To attract FDI, the Indian government has implemented significant policy measures to improve the ease of doing business:

• Simplified regulations, 
• Liberalized foreign investment norms, 
• Provides incentives and concessions for specific sectors. 
• Creates a conducive environment for foreign investors through Single Window Clearance to maximize the benefits of FDI for India's socio-economic development.

 Disadvantages of FDI   

1. Impediment in domestic investment: FDI can interfere with domestic investments. Countries’ local businesses begin losing interest in financing their household assets.
2. Negative exchange valuations: Foreign direct investments can affect exchange rates to the benefit of one country  and the disadvantage of another.
3. More expensive costs: When investors invest in businesses in foreign  countries, they may charge increased expenses  than domestic exported goods. 
4. Ignores Labour: Frequently, more money is invested into motors and intellectual resources than in earnings for local workers.
5. Financial non-viability: Foreign direct investments may be capital-intensive from the point of view of investors, they can, at times, be economically non-reliable.
6. Modern commercial colonialism: Third-world with a history of colonialism is often troubled that FDI would end in  modern economic colonialism, exposing host countries defenseless to oppression by foreign companies.

 What is Overseas Direct Investment? (ODI)

• ODI is different from FDI as it involves the movement of capital and not the skills, technology and manpower. 
• ODI stands for investments by contributing to the capital or subscription to a foreign entity.
• Overseas investment through purchasing existing shares of a foreign entity, either by market purchase, private placement, or stock exchange.
• ODI occurs when a resident company invests in a non-resident country as part of a strategy to expand its business.

 Examples of ODI

• The acquisition of a foreign company through a share purchase.
• The establishment of a new company by investing capital.
• Purchase of real estate, commercial, residential, industrial.
• The foreign entity has significant control and ownership over the investment.

Facts of ODI 

The primary motivations behind ODIs include : 

• Accessing new markets, 
• Diversifying business activities, 
• Gaining access to natural resources, 
• Acquiring advanced technologies & expertise, and 
• Establishing a global presence. 
• Leveraging foreign resources, markets, and competitive advantages to enhance growth & profitability.

 Monitoring ODIs

Governments typically monitor and regulate ODIs to: 

• Align with national economic and strategic objectives, 
• Promote or restrict Policies and regulations across countries,
• Address national security concerns, 
• Safeguard domestic industries, 
• Manage capital outflows.

 Difference Between FDI and ODI

Foreign Direct Investment (FDI) and Overseas Direct Investment (ODI) are related but distinct concepts: 

Direction of investment: FDI refers to investments made by foreign entities into the domestic economy of another country. ODI relates to investments made by entities from one country into businesses or assets in another.

Purpose and objective: FDI establishes a long-term presence to gain access to new markets, technologies & expertise. The primary goal is often to expand business operations and generate profits in the host country. ODI involves a domestic entity seeking investment opportunities to expand business in foreign markets.

Control and ownership: In FDI, the investor typically acquires a substantial ownership stake in a foreign company. This control allows for influencing the strategic decisions and operations of the invested entity. In ODI, the investor holds ownership in the foreign entity without the same control or influence as in FDI.

Economic & Regulatory Framework

• Economic impact: FDI is beneficial for the host country as it brings in foreign capital, creates employment opportunities, facilitates technology transfer, and boosts economic growth. 
• It is a development driver and an indicator of confidence in the host country's business environment. ODI primarily benefits the investing entity by providing access to new markets, resources, or strategic advantages. The impact on the host country's economy may vary depending on the specific nature and scale of the ODI.
• Regulatory framework: Governments typically have specific policies and regulations to monitor and manage FDI and ODI activities. The regulatory framework for FDI focuses on attracting and regulating foreign investments to ensure they align with national interests, economic development goals, and national security concerns. 
• ODI regulations address capital outflows, currency exchange, taxation, and reporting requirements for domestic entities investing abroad.

 External Commercial Borrowings

• External Commercial Borrowings (ECBs) are a form of financing in which entities in one country borrow funds from non-resident lenders.
• ECB is in the form of loans, debt securities, & instruments denominated in a foreign currency. 
• ECBs are an important source of capital for businesses and governments seeking to raise funds from international markets.

 ECB: Counterparties & Currencies

Borrowers: ECBs are availed by corporations, financial institutions, infrastructure projects, and government entities in the borrowing country.

Non-Resident Lenders: The lenders in ECB transactions are typically non-resident entities, including banks, institutional investors, multilateral financial institutions, export credit agencies, or foreign governments.

Currency: ECBs are denominated in a foreign currency, such as the US dollar, euro, yen, or other globally recognised currency. 

Borrowing in a foreign currency allows the borrower to access funds from international markets and take advantage of favorable interest rate differentials.

RBI Directives on ECB 

Purpose: ECBs can be used for various purposes, including funding capital expenditures, infrastructure projects, and working capital requirements. 

It can also be utilized for foreign acquisitions, technology imports, refinancing existing debt, or other permissible end-uses specified by the regulatory authorities in the borrowing country.

Regulations and Approval: Governments and central banks regulate ECBs to ensure their proper utilization and to manage risks associated with external borrowings. 

Each country has rules and guidelines governing ECBs, including restrictions on borrowing amounts, eligible borrowers, sectoral limits, maturity periods, interest rates, and reporting requirements. 

Borrowers are typically required to seek approval or comply with certain regulatory procedures before raising ECBs.

Regulatory Guidelines on ECBs

Repayment and Interest: ECBs are subject to repayment schedules, including the principal amount and interest payments, as agreed upon between the borrower and the lender. Interest rates on ECBs are generally market-based and reflect prevailing interest rates in international financial markets, which can be fixed or floating.

Risks and Considerations: ECBs expose borrowers to certain risks, including exchange rate risk (fluctuations in the currency exchange rates), interest rate risk (changes in global interest rates affecting debt servicing costs), and liquidity risk (availability of funds for repayment). 

Borrowers should carefully assess these risks and implement appropriate risk management strategies.

ECBs provide an avenue for accessing foreign capital, diversifying funding sources, and taking advantage of favorable borrowing conditions in international markets. 

It's important for borrowers to carefully evaluate their borrowing needs, assess the associated risks, and comply with the regulatory requirements set by their respective countries.

How are External Commercial Borrowings (ECB) different from International Trade Finance?

External Commercial Borrowings (ECBs) and International Trade Finance are distinct financing mechanisms in international business transactions.

Purpose and Nature: ECBs are funds borrowed from non-resident lenders for capital expenditures, infrastructure projects, or refinancing existing debt. ECBs are long-term financing arrangements and involve borrowing in a foreign currency. 

On the other hand, International Trade Finance focuses on facilitating trade transactions, including importing and exporting goods and services. It provides short-term financing to support the working capital needs of businesses engaged in cross-border trade.

Parties Involved: ECBs involve borrowing entities, such as corporations, financial institutions, government entities, and non-resident lenders. The lenders can be banks, institutional investors, multilateral financial institutions, or export credit agencies. 

In International Trade Finance, the parties involved are the buyer (importer) and the seller (exporter) engaged in the trade transaction. Trade finance solutions include banks, financial institutions, & specialized trade finance providers.

Financing Structure: ECBs involve a borrowing entity raising funds through loans, debt securities, and instruments denominated in a foreign currency. The borrowing entity assumes liability for repayment. 

In International Trade Finance, the financing mechanisms differ. The trade finance instruments such as letters of credit, documentary collections, trade loans, or factoring are commonly used. These instruments provide specific forms of credit or guarantee to facilitate the transaction, ensure payment security, and  provide working capital support.

 ECB & Trade Finance: Both Are Valuable 

Time Horizon: ECBs are long-term financing arrangements, with repayment periods extending over several years. The purpose is to support capital-intensive projects or long-term financial requirements. 

International Trade Finance predominantly serves short-term financing needs associated with specific trade transactions. The financing is typically structured to align with the trade cycle, providing working capital support during the shipment and payment period.

Risk Factors: ECBs expose borrowers to various risks, including exchange rate risk, interest rate risk, and liquidity risk. Borrowers need to manage these risks to ensure timely repayment carefully. 

International Trade Finance focuses on mitigating risks associated with trade transactions. Instruments like letters of credit or documentary collections offer payment security to the exporter by transferring non-payment risk to the importer or the issuing bank.

Regulatory Considerations: ECBs are subject to specific regulations and guidelines imposed by governments and central banks to manage external borrowings, ensure their proper utilization, and manage associated risks. 

International Trade Finance may also be subject to regulatory requirements. Still, they aim to facilitate smooth trade transactions and ensure compliance with trade regulations, such as customs and documentation requirements.

In summary, ECBs are broader financing arrangements used for long-term purposes. International Trade Finance specifically focuses on facilitating trade transactions to address short-term financing needs associated with international trade.

India Stands Tall in FDI Mobilization 

• Economic liberalization started in India in the wake of the 1991 crisis.
• Since 1991, FDI has steadily increased in the country. 
• Out of every $ 100 FDI worldwide, $ 20 comes to India. 
• In the last 21 years (April 2000 - March 2021) India received $763.5 billion as FDI funds India.
• Today India is a part of the top 100-club on Ease of Doing Business (EoDB) and ranks number 1 in the greenfield FDI ranking. 
• India now received $ 100 billion last year in FDI, the figure is $ 122 billion this year & growing…

 Automatic & Government Routes to FDI

Automatic route: 

The non-resident or Indian company does not require a prior nod from the RBI or the government of India for FDI. 

Govt route: 

• The government's approval is mandatory. 
• The company must apply through Foreign Investment Facilitation Portal, which facilitates single-window clearance. 
• The application is processed in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. 
• Proposals involving FDI exceeding USD$ 775 million ( Rs.5000 cr) shall be placed before the Cabinet Committee of Economic Affairs. 
• Once the proposal is complete in all respects, the same gets approved within 8-10 weeks. 

 Sectoral Caps: Sectors Under Automatic Route

• Infrastructure Company: upto 49% 
• Insurance: upto 49% 
• Medical Devices: upto 100% 
• Pension Funds: upto 49% 
• Petroleum Refining (By PSUs): upto 49% 
• Power Exchanges: up to 49%

 Sectoral Caps : Under Govt Route 

• Banking & Public Sector: 20% 
• Broadcasting Content Services: 49% 
• Core Investment Company: 100% 
• Food Products Retail Trading: 100% 
• Mining & Minerals & Ores: 100% 
• Multi-Brand Retail Trading: 51% 
• Print Media (publications of scientific and technical magazines/ journals/ and facsimile editions of foreign newspapers): 100% 
• Print Media (publishing of newspapers and Indian editions of foreign magazines dealing with news & current affairs): 26% 
• Satellite (Establishment and operations): 100% 

 Prohibited Activities 

• Atomic Energy Generation Gambling or Betting businesses Lotteries (online, private, government)
•  Investment in Chit Funds Nidhi Company 
• Agricultural & Plantation Activities (Exceptions: Horticulture, Fisheries, Tea Plantation, Pisciculture, Animal Husbandry) 
• Housing and Real Estate (except townships, commercial projects) 
• Trading in Cigars, Cigarettes, Tobacco Industry