Portfolio Investment Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets,

, none of which entails active management or control of the securities' issuer by the investor
Some examples of Portfolio investment are:

1. purchase of shares in a foreign company. 2. purchase of bonds issued by a foreign government. 3. acquisition of assets in a foreign country.

Factors affecting international portfolio investment:

tax rates on interest or dividends (investors will normally prefer countries where the tax rates are relatively low) interest rates (money tends to flow to countries with high interest rates) exchange rates (foreign investors may be attracted if the local currency is expended to strengthen)

Regulations in Portfolio Investments in India

FIIs , NRIs, PIOs are allowed to invest in primary & secondary capital markets in India through portfolio investment scheme & can acquire shares & debentures of Indian companies through stock exchanges in India under the Portfolio Investment Scheme ( PIS) .

For total holdings of FIIs/sub accounts , the ceiling is 24% of the paid up capital of the Indian company. For each NRIs & PIOs the ceiling is 10%. Both the ceilings are independent of each other.

 FIIs regulated by SEBI { FII} Regulations, 1995 & Regulation 5(2) of FEMA notification.
FIIs include Asset management companies (10%) , pension funds, mutual funds, investment trusts, institutional portfolio managers or their power of attorney holders, university funds, charitable trusts. FIIs should apply to designated AD for opening a foreign currency account or a Non-Resident Rupee Account.

Generally in all nations, FIIs are required to allocate their investment between equity & debt in the ratio of 70:30 .

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:
i) Business of chit fund, or

ii) Nidhi Company , or iii) Agricultural or plantation activities or iv) Real estate business, or construction of farm houses v) Trading in Transferable Development Rights (TDRs).

"Real Estate Business" mentioned above, does not include development of townships, construction residential/commercial premises, roads or bridges.

BAN LIST
Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme.

INVESTMENTS BY NRIs
NRIs are allowed to invest in shares of listed Indian companies in recognised Stock Exchanges under the PIS. NRIs can invest on repatriation and non-repatriation basis under PIS route upto 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. Shares purchased by NRIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India oroutside India without prior approval of RBI.

Foreign direct Investment

Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise).

The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise.

Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

 OECD recommends that a direct investment enterprise be defined as an incorporated or unincorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise.
In some cases, the ownership of 10 per cent of the ordinary shares or voting power may not lead to the exercise of any significant influence while, on the other hand, a direct investor may own less than 10 per cent but have an effective voice in the management.

Some countries may consider that the existence of elements of a direct investment relationship may be indicated by a combination of factors such as: a) representation on the board of directors; b) participation in policy-making processes; c) material inter-company transactions; d) interchange of managerial personnel; e) provision of technical information; f) provision of long-term loans at lower than existing market rates.

OECD recommends that direct investment flows be defined as:

For subsidiary and associated companies i) the direct investors share of the companys reinvested earnings; ii) plus the direct investors purchases less sales of the companys shares, debt securities (bonds, notes, money market and financial derivative instruments) and loans (including non-cash acquisitions made against equipment, manufacturing rights, etc.); iii) less the companys purchases less sales of the direct investors shares, debt securities (bonds, notes, money market and financial derivative instruments) and loans;

iv) Net balance of trade and other credit outstanding at the end of the
period owing to the direct investor, less the balance outstanding at the beginning of the period, and less the net increase between the opening and closing balances which is due to revaluations and exchange rate movements.

For branches, i) the increase in unremitted profits plus the net increase in funds received
from the direct investor measured as the increase in the net worth of the enterprise to the investor less increases (net of decreases) due to revaluations and exchange rate movements.

FDI forms
Greenfield investment or Merger & Acquisition. Horizontal or Vertical Foreign Direct Investment.

Flow of FDI or Stock of FDI.

Outflows or Inflow of FDI Sometimes inflows of FDI expressed as a percentage of gross fixed capital formation.

Why FDI takes place?

Market Imperfections [ Internalization Theory ] impediments to exports & sale of know-how Strategic Rivalry & interdependence in oligopolistic industries multipoint competition International Product Life Cycle theory -demand led & cost of production

Combining Location specific Advantages & Firms own unique assets [ Eclectic Paradigm] - spillovers

Investing in India Entry Routes

Investing in India

Automatic Route
General rule No prior permission required
Only information to the Reserve Bank of India within 30 days of inflow/ Issue of shares

Prior Permission (FIPB)

By exception Prior Government Approval needed Decision generally Within 4-6 weeks

Changes in FDI policy [ 30th Jan, 2008]

Real Estate Sector Investments by Registered FIIs have been kept out of the purview of 3 yr. lock-in period under press note 2 (2005) applicable for FDI investments. Civil Aviation sector - FDI up to 100% via the automatic route for repair & maintenance firms, flying training institutes, technical training, helicopter services/ sea plane services. Commodity Exchanges FDI upto 26% & FII upto 23% in such exchanges with a 5% cap on single entity.

Credit Information companies [ CIC] 49% FDI cap subject to govt. & RBI approval. [ sub cap of 24% on FII investment within this 49% proposed]

 Petroleum Refining by PSUs FDI cap increased from 26% to 49% with prior permission from FIPB .

100% FDI allowed in the mining & mineral separation of titanium bearing minerals & ores. However the FDI permission will be allowed only if the mineral separation activity by a foreign company is accompanied by investment in local value addition units & transfer of technology.
Provisions of Press note 2( 2005) will not apply to industrial parks

Changes in the FDI Policy [ 2010]

Revised FDI policy would now permit 100 per cent foreign investment in maintenance, repair and overhauling (MRO) facilities for aircraft as also aviation training units

The new FDI policy has also done away with the norms of 26 per cent compulsory equity divestment in fuel and gas trading ventures the Cabinet also decided to exempt foreign investors from certain regulatory norms such as minimum capitalization and the three-year lock-in period.

 100% Foreign investment will henceforth be permitted in mining of titanium bearing minerals and up to 49 per cent in credit information companies. 49 per cent FDI ceiling for commodity exchanges has further been divided. While the investment ceiling for FDI has been pegged at up to 26 per cent that for FIIs has been fixed at 23 per cent, subject to the condition that no single investor would be permitted to hold a stake of more than five per cent