Finance and Investment

Foreign Direct Investment (FDI)

• FDI refers to long-term investments by a foreign company in the productive capacity of another country.
• In India, FDI occurs when a foreign investor establishes a new business, acquires a stake in an Indian company, or forms a joint venture.
• Unlike FPI, FDI is stable, growth-oriented, and promotes deep involvement in the host country’s economy.

Key Benefits:

• Brings foreign capital without increasing debt.
• Promotes technology transfer and innovation.
• Generates employment directly and indirectly.
• Enhances productivity and competition in domestic markets.
• Boosts infrastructure development, especially in power, telecom, and transport.
• Improves the Balance of Payments (BoP).

Routes of Entry:

• Automatic Route – No government approval needed.
• Government Route – Prior approval needed from the concerned ministry/department.

Prohibited Sectors for FDI

FDI is completely restricted in the following sectors for ethical, security, or economic reasons:

• Lottery business (including online and private lotteries)
• Gambling and betting (including casinos)
• Chit funds
• Nidhi companies
• Real estate business or construction of farmhouses (except township development, REITs, etc.)
• Trading in Transferable Development Rights (TDRs)
• Manufacturing of tobacco or tobacco substitutes
• Atomic energy and railway operations (except some private roles like freight terminals)

FDI Inflows – Source Countries

• Singapore is the largest source of FDI in India due to a favorable Double Taxation Avoidance Agreement (DTAA).
• Mauritius was once dominant but declined after treaty reforms to stop tax evasion.
• Other key sources: USA, Japan, Netherlands, UK, and UAE.

Insurance Amendment & FDI Limit

• Insurance Act, 1938 was amended in 2021.
• FDI limit in Indian insurance companies increased from 49% to 74%.
• Allows foreign ownership and control, but with regulatory safeguards:
  • Indian management on boards
  • 50% of directors to be Indian residents
  • Enhanced scrutiny by IRDAI to protect policyholders

Foreign Institutional Investment (FII)

• FIIs are entities like mutual funds, pension funds, and hedge funds investing in Indian capital markets.
• Investments are mainly in stocks and bonds listed on Indian exchanges.
• FIIs are more speculative and driven by market sentiments, unlike FDI which builds production capacity.

Hot Money (FPI)

• Foreign Portfolio Investment (FPI) is often called “hot money” because it is highly volatile.
• It enters during market upturns and exits quickly during uncertainty (e.g., US Fed rate hikes).
• This can cause capital flight, rupee depreciation, and stock market crashes.

Double Taxation Avoidance Agreement (DTAA)

• DTAA is a tax treaty between two countries to avoid double taxation on the same income.
• Promotes investment and reduces the tax burden.
• India amended treaties with Mauritius, Singapore, and Cyprus to prevent treaty abuse and round-tripping.
• Ensures only genuine investors benefit from tax relief, not shell companies.

National Investment and Infrastructure Fund (NIIF)

• Set up in 2015 as India’s first sovereign wealth fund.
• Aims to fund large infrastructure projects and attract long-term capital.
• Registered as an Alternative Investment Fund (AIF) under SEBI norms.
• Total corpus: ₹40,000 crore (49% by GoI, 51% by global and domestic investors).

Three NIIF Funds:

Strategic Fund:

• Invests in strategic sectors with long-term importance.
• Includes investments in roads, airports, renewable energy, etc.

Master Fund:

• Focuses on core infrastructure.
• Collaborates with reputed partners to create sectoral platforms.

Fund of Funds:

• Invests in third-party infrastructure funds.
• Anchors and supports credible managers in infrastructure and allied sectors.

Disinvestment Policy

• Disinvestment is the process of selling government stakes in public sector enterprises.
• Objectives:
  • Reduce fiscal burden
  • Increase efficiency
  • Encourage private sector participation
  • Raise non-debt revenue
  • Promote “people’s ownership” of PSUs

Two Types:

1. Minority Disinvestment – Govt retains at least 51% and management control.
2. Strategic Disinvestment – Govt sells majority stake + transfers management.

Major Disinvestment Cases

1. Air India – Strategic sale with debt and management transfer.
2. BPCL – Proposed 53.29% strategic disinvestment.
3. Shipping Corporation of India (SCI) – 63.75% sale.
4. THDCIL & NEEPCO – Transferred to NTPC as strategic buyer.
5. CONCOR – Partial disinvestment planned (30.8%).

National Investment Fund (NIF)

• Created in 2005 to receive disinvestment proceeds.
• Funds used for:
  • Capital investment in social sector schemes
  • Recapitalization of public sector banks
  • Infrastructure development

Disinvestment under Atmanirbhar Bharat

• Emphasis on reducing government presence in non-strategic sectors.
• Government to retain presence only in strategic sectors (e.g., defence, atomic energy).
• Rest to be opened for private competition.
• Aims to optimize public resources and improve PSU efficiency.

Issues in Disinvestment

• Under-pricing concerns: Some assets sold below value.
• Focused more on revenue generation, less on reforms.
• Govt control often retained, limiting private freedom.
• Loss-making PSUs unattractive to buyers.
• Risk of private monopolies.
• Potential for job loss due to private sector’s cost-cutting.

Seed Capital

• Initial funding to start a new venture.
• Used to develop prototypes, conduct market research, or build a team.
• Often comes from founders, friends/family, or angel investors.

Venture Capital & Angel Funds

• Venture Capital: Institutional investment in high-growth startups.
• Angel Funds: Early-stage funding from individual investors who also mentor startups.
• Crucial for India’s startup ecosystem.
• Registered under SEBI’s Alternative Investment Funds (AIF) regulations.

Angel Tax

• Applies when startups receive investment above fair market value.
• The excess is taxed as income under Section 56(2)(viib) of the IT Act.
• Aimed at curbing money laundering, but burdens genuine startups.

Chit Fund Companies

• Traditional saving mechanism regulated under the Chit Funds Act, 1982.
• Registered by state governments; central regulation via Ministry of Finance.
• Violations can be investigated by SFIO under Companies Act, 2013.

Death Valley Curve (Venture Capital)

• Describes the critical early phase of a startup after seed funding but before revenue.
• Most vulnerable time: High costs, no income, uncertain future.
• Survival depends on strategic funding and cost management.

Zombie Companies

• Firms that generate enough revenue to pay interest on loans, but not the principal.
• They continue operations despite being insolvent.
• Survive due to bank leniency or government bailouts, but don’t invest or grow.
• Common in banking NPAs and crisis-hit sectors.

Shell Companies

• Entities that exist only on paper and do not conduct real business.
• Often used for money laundering, tax evasion, or hiding black money.
• Traits in India:
  • No operational income
  • High share premiums
  • Low fixed assets
  • Large cash in hand
  • Controlled by private companies

Public Financial Management System (PFMS)

• PFMS is a web-based application developed by the Controller General of Accounts (CGA) under the Ministry of Finance.
• Designed to track and manage the fund flow under Central Sector and Centrally Sponsored Schemes.
• Plays a key role in Direct Benefit Transfers (DBT).

Key Features:

• Real-time monitoring of fund disbursement.
• Tracks fund usage across implementing agencies.
• Ensures “Just-in-Time” releases and prevents idle parking of funds.
• Integrated with Core Banking System for direct payments to beneficiaries.
• Used extensively in schemes like MGNREGA, NSAP, and PMAY.

Green Bonds

• A debt instrument where the proceeds are used exclusively for environmentally sustainable projects.
• Issued by governments, banks, or corporations to fund renewable energy, clean transport, afforestation, etc.

Global Perspective:

• World Bank is a leading issuer of green bonds.
• Over $1 trillion cumulative issuance globally since 2015.

Benefits:

• Promotes sustainable infrastructure.
• Can offer tax incentives.
• Helps India meet its climate change commitments under the Paris Agreement.

Public-Private Partnerships (PPP)

• PPP is a collaboration between the public and private sector to fund and operate infrastructure projects.
• Combines private sector efficiency and innovation with public sector resources and scale.

Types of PPP Models:

• BOT (Build-Operate-Transfer)
• BOOT (Build-Own-Operate-Transfer)
• HAM (Hybrid Annuity Model) – used in road construction

Regulatory Body:

• All PPP projects by the central government require approval from the Public Private Partnership Appraisal Committee (PPPAC) under the Department of Economic Affairs.

Mezzanine Financing

• A hybrid of debt and equity financing.
• Used when the borrower cannot secure traditional loans.
• Lenders have the right to convert debt into equity in case of default.
• Common in growth-stage companies or acquisitions.

Peer-to-Peer (P2P) Lending

• P2P is an online lending model that connects individual lenders and borrowers directly.
• Does not involve traditional banks or NBFCs.

Regulation:

• Platforms must register as NBFC-P2P with RBI.
• Interest rates may be set by platforms or mutually between parties.
• Offers higher returns to lenders and lower interest rates for borrowers compared to informal credit sources.

Invest India

• Official investment promotion agency of India under DPIIT.
• Formed in 2009 as a not-for-profit company under Section 25 of the Companies Act.
• Provides end-to-end investor facilitation:
  • Policy advisory
  • Business approvals
  • After-care services
  • Connects investors with state agencies

India Investment Grid (IIG)

• An online portal managed by Invest India.
• Showcases real-time investment opportunities across sectors and states.
• Helps global investors identify and explore viable projects.

Insolvency and Bankruptcy Code (IBC), 2016

• A comprehensive law to resolve insolvency and bankruptcy in a time-bound manner.
• Replaced multiple outdated laws like SARFAESI, SICA, and the Companies Act provisions.

Time Limits:

• Corporate resolution: 180 days (extendable to 270)
• For MSMEs and startups: 90 days (extendable to 135)

Key Institutions:

• Insolvency Professionals (IPs)
• Insolvency Professional Agencies (IPAs)
• Information Utilities (IUs) – maintain borrower-lender data
• National Company Law Tribunal (NCLT) – for companies
• Debt Recovery Tribunal (DRT) – for individuals and partnerships
• Insolvency and Bankruptcy Board of India (IBBI) – regulator

NeSL – National E-Governance Services Ltd.

• India’s first Information Utility under the IBC framework.
• Facilitates quick insolvency resolution by maintaining accurate financial information.
• Sponsored by major banks and financial institutions.
• Provides creditors with authenticated records to establish default or claims.

Crowd Funding

• Raising small funds from a large number of people through online platforms for creative, social, or business ventures.
• Includes donation-based, reward-based, and equity-based models.
• Falls under the purview of SEBI for regulation.
• Enables startup financing and social cause funding with transparency and reach.

Securities and Exchange Board of India (SEBI)

• India’s capital market regulator.
• Established in 1988; given statutory powers in 1992 via SEBI Act.
• Ensures investor protection, market transparency, and orderly development of securities market.

Key Functions:

• Regulates stock exchanges and mutual funds.
• Approves IPOs, mergers, and takeovers.
• Investigates insider trading and frauds.

Investor Education and Protection Fund (IEPF)

• Established under Section 125 of Companies Act, 2013.
• Unclaimed dividends, deposits, debentures, etc., held for 7 years are transferred to IEPF.
• Fund used for:
  • Refunding eligible investors
  • Conducting investor awareness programs

Insider Trading

• Involves trading of securities by someone who has unpublished price-sensitive information (UPSI).
• Examples of UPSI: financial results, mergers, capital restructuring.
• Regulated under SEBI (Prohibition of Insider Trading) Regulations, 2015.
• Penalized with fines and imprisonment.

Serious Fraud Investigation Office (SFIO)

• A multidisciplinary agency under the Ministry of Corporate Affairs.
• Investigates complex corporate frauds involving financial, legal, and IT dimensions.
• Includes experts from law, accountancy, taxation, and cybercrime.
• Investigated major cases like Satyam scam, IL&FS fraud.

Masala Bonds

• Rupee-denominated bonds issued by Indian companies in overseas markets.
• Investors bear the exchange rate risk, not the Indian issuer.
• First Masala bond was issued by IFC in 2014.
• Helps Indian entities:
  • Raise funds abroad without FX risk
  • Promote internationalization of the Rupee
  • Fund infrastructure and development projects

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Subject: Economics

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