• “Investment is the process of putting money in assets for increasing production or financial gains. Yes, investment is all about putting money in assets. And, the investment models speak about how to put the money in assets.
  • For a first hand understanding on investment, consider it as putting money in banks deposits, shares of companies, real estate, gold, business or industry. For a country to grow (and generate employment opportunities to all), it should produce more goods and services, and hence investments in business, agriculture or industry or supporting infrastructure is highly appreciated.
  • If government has sufficient funds to invest in these areas, then it seems well and fine, but a nation like India with a Fiscal Deficit of 5.1% of GDP cannot ask Government to take care of all investment needs. The investment should come from private players too and that’s a win-win situation for all!



  • Funding Gap – Funding Gap is the most important issue that we face on this front. The slowdown in the economy has further aggravated this funding gap in the infrastructure sector.
  • Fiscal Burden – Almost half of the total investment in the infrastructure sector was done by the Government through budget allocations. But the Government funds have competing demands, such as, education, health, employment generation, among others.
  • Asset-Liability Mismatch of Commercial Banks
    • After the budgetary support, next in line for financing infrastructure were funds from the commercial banking sector.
    • However, it is a well-known fact that these are institutions that primarily leverage on short-term liabilities and, as such, their ability to extend long-term loans to the infrastructure sector is limited. This is because, by doing so they get into serious asset-liability mismatches.
  • Investment Obligations of Insurance and Pension Funds
    • From the point of view of asset-liability mismatches, insurance and pension funds are one of the best suited institutions to invest in the infrastructure sector. This is because, in contrast to the commercial banking sector, these institutions leverage on long-term liabilities.
    • However, they are constrained by their obligation to invest a substantial portion of their funds in Government securities. Of course, in a way, this facilitates the financing of gross fiscal deficit of the Central Government and hence enables the Central Government to make more investments.
    • However, this limits the direct investment of these institutions in the infrastructure sector
  • Need for an Efficient and Vibrant Corporate Bond Market – An active corporate bond market can facilitate long-term funding for the infrastructure sector. However, despite the various initiatives taken by the Reserve Bank, Securities & Exchange Board of India and Government of India, the corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.
  • Developing Municipal Bond Market for Financing Urban Infrastructure
    • For large scale financing urban infrastructure which is assuming critical importance in the context of rapid urbanization, conventional fiscal transfers to the urban local bodies or municipals from governments are no longer considered sufficient.
    • As a result, there have been some earnest experimentations by these bodies to tap unconventional methods of financing such as public private partnerships (PPPs), utilizing urban assets more productively, accessing carbon credits, etc. but then these do not address the financing needs. One possible way of addressing the problem is developing a municipal bond market.
  • Insufficiency of User Charges
    • It is a well-known fact that a large part of the infrastructure sector in India (especially irrigation, water supply, urban sanitation, and state road transport) is not amenable to commercialization for various reasons, such as, regulatory, political and legal constraints in the real sector.
    • Due to this, Government is not in a position to levy sufficient user charges on these services. The insufficiency of user charges on infrastructure projects negatively affect the servicing of the infrastructure loans. Generally, such loans are taken on a non-recourse basis and are highly dependent on cash flows.
    • Hence, levy and collection of appropriate user charges becomes essential for financial viability of the projects.
  • Legal and Procedural Issues – Infrastructure development involves long gestation periods, and also many legal and procedural issues. The problems related to infrastructure development range from those relating to land acquisition for the infrastructure project to environmental clearances for the project. Many a times there are legal issues involved in it and these increase procedural delays.





  • Public-Private Partnership Projects in Infrastructure
    • As Government faces a tight budget constraint in the context of a rule based fiscal policy framework, it was important to encourage the private sector to invest more in the infrastructure sector. Resultantly, the Government started encouraging Public-Private Partnership (PPP) projects in the infrastructure sector.
    • PPP mechanism provides built in credit enhancement for improving project viability by way of buyback guarantee, escrow arrangement, substitution rights for the lenders, etc. Government has taken several initiatives, especially to standardize the documents and process for structuring and award of PPP projects.
    • This has improved transparency in relation to the issues involved in setting up PPP projects.
  • Viability Gap Funding
    • Viability gap funding was introduced in 2006, which provides Central Government grants up to 20 per cent of the total capital cost to PPP projects undertaken by any central ministry, state government, statutory entity, or local body.
    • The scheme aimed at providing upfront capital grant to PPP projects to enable financing of commercially unviable projects. The level of grant is the net present value of the gap between the project cost and estimated revenue generation over the concession period based on a user fee that was to be levied in a pre-determined manner
  • Foreign Direct Investment and Infrastructure Development
    • To facilitate infrastructure financing 100 per cent FDI is allowed under the automatic route in some of the sectors such as mining, power, civil aviation sector, construction and development projects, industrial parks, petroleum and natural gas sector, telecommunications and special economic zones.
    • Further, FDI is also allowed through the Government approval route in some sectors such as civil aviation sector, Petroleum and Natural Gas sector – refining PSU companies; Telecommunications etc.
  • Setting up of India Infrastructure Finance Company Limited (IIFCL)
    • Another major development was the setting up of IIFCL by the Central Government for providing long-term loans to the infrastructure projects.
    • IIFCL is involved both in direct lending to project companies and refinancing of banks and other financial institutions. IIFCL can provide funds to the infrastructure project up to 20 per cent of the total project cost as long-term debt
  • Setting up of Infrastructure Debt Funds –
    • Reserve Bank of India and the Securities and Exchange Board of India (SEBI) notified detailed guidelines for setting up of IDFs which can either be a mutual fund (trusts) (IDF-MF) or an NBFC (companies) (IDF-NBFC).
    • The Scheduled commercial banks are allowed to act as sponsors to IDF-MFs and IDF-NBFCs with prior approval from RBI subject to certain terms and conditions.
  • Tapping the retail investor base through Infrastructure Bonds–
    • To provide further impetus to infrastructure financing, Government of India has permitted IFCI, IDFC, LIC and infrastructure finance firms to issue long-term infrastructure bonds providing for tax benefit.
  • Use of Foreign Exchange Reserves for Infrastructure Development
    • Although use of reserves for such purposes does not meet the criterion of reserve management objectives, a special and limited window has been created. Accordingly, IIFC (UK) Ltd. was incorporated in London and was set up in April 2008. Under this scheme, RBI invests, in tranches, up to an aggregate amount of USD 5 billion in fully government guaranteed foreign currency denominated bonds issued by this overseas Special Purpose Vehicles (SPV) of the IIFCL.
    • The funds, thus raised, are to be utilized by the company for on-lending to the Indian companies implementing infrastructure projects in India and/or to co-finance the ECBs of such projects for capital expenditure outside India without creating any monetary impact.
  • Introduction of Credit Default Swaps –
    • Further, the introduction of Credit Default Swaps (CDS) would help banks to manage exposures while increasing credit penetration, and lending to infrastructure and large firms without being constrained by the extant regulatory prescriptions in respect of single borrower gross exposure limits.
  • Liberalization & Rationalization of ECB policies –
    • The ECB limit for infrastructure has been raised to promote investment in this sector.
  • Establishing National Investment and Infrastructure Fund (NIIF)
    • It is India’s first sovereign wealth fund that seeks to create long-term value for domestic and international investors seeking investment in energy, transportation, housing, water, waste management etc. in greenfield, brownfield and stalled projects.
    • It has been set up as fund of funds and is registered with Securities and Exchange Board of India (SEBI). The corpus of the fund is proposed to be around Rs. 40, 000 crore, with the government investing 49% and the rest to be raised from third-party investors such as sovereign wealth funds, insurance and pension funds



  • Public-private partnerships involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centers.
  • Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place.

A) Types of Investment Models

  1. Public Investment Model:In this model Government requires revenue for investment that mainly comes through taxes.
    • As the world is facing the prospect of an extended period of weak economic growth, by enhancing public-sector investment large pools of savings can be channelized into productivity.
    • Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns.
    • Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns.
  2. Private Investment Model:For a country to grow and increase its production investment is required. Presently tax revenue of India is not adequate to meet this demand so government requires private investment.
    • Private investment can be source from domestic or international market.
    • From abroad private investment comes in the form of FDI or FPI.
    • Private investment can generate more efficiency by creating more competition, realization of economies of scale and greater flexibility than is available to the public sector.
  3. Public-Private Partnership Model: PPP is an arrangement between government and private sector for the provision of public assets and/or public services. Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
    • In this type of partnership, investments are undertaken by the private sector entity, for a specified period of time.
    • These partnerships work well when private sector technology and innovation combine with public sector incentives to complete work on time and within budget.
    • As PPP involves full retention of responsibility by the government for providing the services, it doesn’t amount to privatization.
    • There is a well defined allocation of risk between the private sector and the public entity.
    • Private entity is chosen on the basis of open competitive bidding and receives performance linked payments.
    • PPP route can be alternative in developing countries where governments face various constraints on borrowing money for important projects.
    • It can also give required expertise in planning or executing large projects.
  4. Private Finance Initiative (PFI) Model
    • In the private finance initiative model, the private sector remains responsible for the design, construction and operation of an infrastructure facility. In some cases, the public sector may relinquish the right of ownership of assets to the private sector.
    • In this model, the public sector purchases infrastructure services from the private sector through a long-term agreement. PFI projects, therefore, bear direct financial obligations to the government in any event.
    • In addition, explicit and implicit contingent liabilities may also arise due to loan guarantees provided to the lenders and default of a public or private entity on non-guaranteed loans. A PFI project can be structured on minimum payment by the government over a fixed contract tenure, or minimum contract tenure for a fixed annual payment, or a combination of both payment and tenure.
    • In the PFI model, asset ownership at the end of the contract period is generally transferred to the public sector. Setting up of a Special Purpose Vehicle (SPV) may not be always necessary. A PFI contract may be awarded to an existing company. For the purpose of financing, the lenders may, however, require the establishment of an SPV. The PFI model also has many variants.
    • In a PFI project, as the same entity builds and operates the services, and is paid for the successful supply of services at a pre-defined standard, the SPV / private company has no incentive to reduce the quality or quantity of services. This form of contractual agreement reduces the risks of cost overruns during the design and construction phases or of choosing an inefficient technology, since the operator’s future earnings depend on controlling the costs.
    • The public sector’s main advantages lie in the relief from bearing the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation.


  • Private sector may bear a significant share of the risks.
  • High level of private investment.
  • Potential for efficiency gains and innovation is high.
  • Attractive to private investors in an untested or developing PPP market.
  • Most suitable for social sector infrastructure projects (schools, dormitories, hospitals, community facilities, etc.).


  • Complex to implement and manage the contractual regimes.
  • Government has direct financial liability.
  • Negotiation between parties may require long time.
  • Regulatory efficiency is very important.
  • Contingent liabilities on the government in the medium and long term.



B) Problems with PPP Projects

  • PPP projects have been stuck in issues such as disputes in existing contracts, non-availability of capital and regulatory hurdles related to the acquisition of land.
  • Indian government has a poor record in regulating PPPs in practice.
  • Metro projects become sites of crony capitalism and a means for accumulating land by private companies.
  • Across the world PPPs are facing problems, performance of PPPs has been very mixed according to study conducted by various research bodies.
  • It is also argued that PPP is mere a ‘’language game” by governments who find it difficult to push privatization, or when politically it is difficult to contracting out.
  • Loans for infrastructure projects are believed to comprise a large share of the non-performing asset portfolio of public sector banks in India.
  • In many sectors, PPP projects have turned into conduits of crony capitalism.
  • Many PPP projects in infrastructure sector are run by “politically connected firms” which have used political connections to win contracts.
  • PPP firms use every opportunity for renegotiating contracts by citing reasons like lower revenue or rise in costs which becomes a norm in India.
  • Frequent renegotiations also resulted into drain of larger share of public resources.
  • These firms create a moral hazard by their opportunistic behaviour.







  • Highway sector in India is responsible for job creation for millions of people and has a multiplier effect on the economy. Hence government took immediate measures to boost the sector by adopting EPC Model and the acronym stands for Engineering, Procurement and Construction.
  • Engineering procurement and construction is the new system of private sector participation aimed at overcoming the shortcomings of PPP model. Under EPC model the contractor is legally responsible to complete the project under some fixed predetermined timeline and may also involve scope for penalty in case of time overrun. But the entire cost is borne by the government.
  • In EPC all the clearances, land acquisition and regulatory norms have to be completed by the government itself and the private players do not have to get itself involved in these time taking procedures.
  • Specifically, in EPC model, 90% land is to be acquired and fund is transferred to the player before the starting of the project. Another set of distinctions are that it is to be completed in a predefined time frame, the risk of the project lies more on the contractors (turnkey project) and unlike PPP, the profit margin is fixed in this case.
  • In PPP mode of project, operator was liable to build, operate and transfer the project to the government after completion while profit is to be acquired by either annuity paid or by levying toll.

A) How is EPC different and better than PPP?

  • Here the government bears the entire financial burden and funds the project. Capital is either raised by issuing bonds like NHAI bonds or by taking steps to secure road toll receivables post construction. Note that the fund here is not raised through banks, there by saving banks from the risk of NPAs. Secondly, it relieves funds for the off take by other players in economy.
  • Government now takes care of clearances, acquiring land and estimating the traffic a very huge exercise that had to be done by private parties earlier. This reduces the risk for private player, thereby encouraging them to take up more projects.
  • With decreased risk on private builders and increased incentives for early completion, it creates comfortable base to lure investors to carry on the EPC work i.e. the contractor now designs the installation, procures the necessary materials and builds the project, either directly or by subcontracting part of the work.
  • Timeline required to construct reduces remarkably and there may even the clause of penalizing the private player for overshooting the timeline.
  • Here the government takes responsibility of raising capital, procuring clearances before the onset of the project.
  • EPC model is better than PPP model as the company gets the whole responsibility to complete the project and it is also easy for the government to hold the company accountable for the project. In PPP model various companies are involved in a single project. This creates the opportunity to start blame game if anything goes wrong after completion.

B) Some issues with EPC model

Under this system the entire project is funded by the government rather than shared by the private player as well. Sometimes it becomes problematic as under:

  • Financial burden on the government: In contrast to PPP where the private player shares the cost of project, thereby enabling the government to save its resources for other socioeconomic projects, in EPC the entire cost is borne by the government. Therefore, this model can’t be used always, especially when the government is facing budget deficits.
  • Lack of incentive to private players to reduce cost of project: It is because, here the nature of project is outsourcing by the government to private entity, which does not have incentive to reduce cost, as it doesn’t share the risks involved.
  • In EPC the private entity is entitled to get pre-decided fixed amount akin to service charge, while the government takes all the risk. Therefore, this model is used only when the private players lack adequate financial resources, or investment sentiments are bleak, where the government has to intervene.
  • This model was used recently when projects under PPP were stuck at different stages of completion and new investment was not coming. For example, due to reduced private sector participation, Govt. has increasingly resorted to EPC in 2013-14 and 2014-15.
  • But in view of the high fiscal deficit this model is unsustainable. As a result, efforts are being made to adopt a hybrid model, which borrows the advantages of both the PPP Model and EPC Model, called Hybrid Annuity Model (HAM), which is discussed later in this document.



  • A Swiss challenge is a form of public procurement which requires a public authority which has received an unsolicited bid for a public project, to publish the bid and invite third parties to match or exceed it.
  • Some Swiss challenges also allow the entity which submitted the unsolicited bid itself then to match or better the best bid which comes out of the Swiss challenge process. The technique was used for the development of Mega Film City Venture by the Jaipur Development Authority (JDA).
  • In 2017 Indian Railways also adopted Swiss challenge for inviting tenders for renovation of its 23 railway station.



A) Advantages

  • Competition: It allows the project to be put for competitive bidding and counter-bidding so to realize the optimum cost.
  • Transparency: Since the bidding and counter-bidding are open to challenge in this model, it promotes transparency and thereby helps in fixing the accountability.
  • Creativity: Since this model allows the prospective bidders to analyses the design submitted by their competitors and come out with better design, it promotes creative designing and project execution.

B) Problems with this Model

  • Concerns are raised that unsolicited proposals (or the Swiss Challenge) may be actively discouraged as they bring information asymmetries in the procurement process and result in lack of transparency and in the fair and equal treatment of potential bidders. It is because the opponent bidder may unnecessarily submit the counter proposal merely to create confusion.
  • Governments need to have a strong legal and regulatory framework to award projects under the Swiss Challenge method. It can potentially foster crony capitalism, and allow companies space to employ dubious means to bag projects. Given that governments sometimes lack an understanding of risks involved in a project, direct negotiations with private players can be fraught with downsides.
  • In general, competitive bidding is the best method to get the most value on public-private partnership projects. The government might also end up granting significant concessions in the nature of viability gap funding, commercial exploitation of real estate, etc., without necessarily deriving durable and long-term social or economic benefits.



  • The new hybrid model is a mix of the EPC (engineering, procurement and construction) and the BOT models. In the annuity mode, the concessionaire gets a fixed and more importantly assured payment from the government.



A) Salient Features

  • Assured return: This assured return frees the concessionaire’s dependency on the toll collected on the highway. The government shoulders the responsibility of revenue collection.
  • Further, the government will pay 40 per cent of the project cost to the concessionaire during the construction phase in five equal installments of 8 per cent each.
  • Land: The government will provide 90 per cent of land and the related environment and forest clearance (earlier 80 per cent).
  • Operation and Maintenance: The balance of 60 per cent needs to come from the concessionaire. Operation and maintenance of the toll road also rests with the concessionaire.

B) Advantages of this Model

  • According to industry experts, hybrid model is viable and companies see value in bidding for such projects.
  • In the hybrid annuity model, one need not bring 100 per cent of finance upfront and since 40 per cent is available during the construction period, only 60 per cent is required to be arranged for the long term.
  • Moreover, there is no risk of tolling as well as traffic uncertainty.
  • The National Highways Authority of India (NHAI) will collect toll and refund the amount in installments over a period of 15-20 years, cutting down on upfront investment required to be made by the government.
  • Developers will start participating in this type of projects, otherwise, the enterprise and lenders have practically no appetite for BOT projects and it should also give impetus to active private sector participation.
  • Further, 40 per cent grant in form of capital support would substantially reduce the debt portion and interest thereof. The lenders will have a great comfort in financing the project.
  • Land Acquisition and Environmental clearances: are major sources of delay and stalling of many projects. In HAM model, the obligation to acquire land and environmental clearances lies with the government.
  • Projects speeded up: Losses due to time overruns are prevented. As government is itself a stakeholder, it now acts as a real ‘partner’.
  • Sensible risk and reward sharing
  • Investment burden shared: Since corporate bank balance sheets are weak, private players cannot bear full capital investment burden. (HAM has 40% investment from govt.)
  • Higher revenue certainty and reduced risk of developer: In the BOT model, private partner bears the construction and maintenance risks. As Government is going to collect Highway toll tax in HAM, government also bears the risk.
  • Monitoring mechanism: as government will invest money in five equal installments based on the targeted completion of the road project.

C) Challenges in this Model

  • HAM is still a new model. So government should test it, improve it and refine it, before it goes big. (There are 28 projects approved under HAM, worth more than 36,000 cr.)
  • Participation has to be increased more to start the positive feedback loop, where old contractors return. Then more participation and competition will increase the confidence.
  • Notwithstanding these issues this model presents a healthy mix of the existing models, taking their positives. Currently, this seems to be the solution for fast track execution of projects amidst the pessimistic business sentiments.



  • Making the Infrastructure Project Commercially Viable –
    • This is the first and foremost thing we should do for financing infrastructure in a sustainable manner. As mentioned earlier infrastructure projects involve huge financing requirements, most of which are met by banks and other financial institutions directly and indirectly.
    • Thus, it is very important to make the project commercially viable to ensure regular servicing of the loan. This will lead to sustainable development of infrastructure without jeopardizing the soundness of the financial sector.
    • Project appraisal and follow-up capabilities of many banks, particularly public sector banks, also need focused attention and upgradation so that project viability can be properly evaluated and risk mitigants provided where needed.
  • Greater Participation of State Governments –
    • In a federal country like India, participation and support of the State governments is essential for developing high quality infrastructure.
    • The State governments’ support in maintenance of law and order, land acquisition, rehabilitation and settlement of displaced persons, shifting of utilities, and obtaining environmental clearances are necessary for the projects undertaken by the Central Government or the private sector.
    • It is satisfying to know that many State governments have also initiated several PPP projects for improving infrastructure.
  • Improving efficiency of the Corporate Bond Market –
    • Vibrant corporate bond market will reduce the dependence on the banking sector for funds. Further, coordinated regulatory initiatives could be considered in the areas involving standardization of stamp duties on corporate bonds across the states, encouraging public issuance and bringing in institutional investors in a big way.
    • It is also important to broad base the investor base by bringing in new classes of institutional investors (like insurance companies, pension funds, provident funds, etc.) apart from banks into this market.
  • Credit Enhancement –
    • One of the major obstacles in attracting foreign debt capital for infrastructure is the sovereign credit rating ceiling. Domestic investors are also inhibited due to high level of credit risk perception, particularly in the absence of sound bankruptcy framework. A credit enhancement mechanism can possibly bridge the rating cap between the investment norms, risk perceptions and actual ratings
  • Simplification of Procedures – Enabling Single Window Clearance –
    • It is well recognized that while funding is the major problem for infrastructure financing, there are other issues which aggravate the problems of raising funds.
    • These include legal disputes regarding land acquisition, delay in getting other clearances (leading to time and cost overruns) and linkages (e.g. coal, power, water, etc.) among others.
    • It is felt that in respect of megaprojects, beyond certain cut-off point, single window clearance approach could cut down the implementation period.



  • In 2005, the Government of India constituted a ‘National Investment Fund’ (NIF) into which the realization from sale of shareholding of the Government in Central Public Sector Enterprises (CPSEs) would be channelized. In other words, realizations from disinvestments were to be maintained in NIF (which was kept outside of the Consolidated Fund of India).

A) Salient features:

  • 75% of the annual income of the Fund was to be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund was used to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/ diversification
  • The Fund was professionally managed by three public sector mutual funds – SBI, LIC and UTI mutual funds to provide sustainable returns to the Government, without depleting the corpus.
  • In 2009 the government had decided to put a ‘pause’ on putting disinvestment money in NIF.

B) Restructuring:

Following changes have been incorporated recently in NIF:

  • The disinvestment proceeds with effect from the fiscal year 2013-14 will be credited to the public account under the head National Investment Fund (NIF), and they would remain there until withdrawn/invested for the approved purposes.
  • The fund will be used to subscribe to shares issued by the Central Public Sector Enterprise (CPSEs), including public sector banks and public sector insurance companies, and for preferential allotment of shares of the CPSE to promoters so that government holding does not go down below 51 per cent, in all the cases where the CPSE is going to raise fresh equity
  • The fund managers presently managing the NIF will stand discharged of their responsibility and NIF will be operated through an empowered group of ministers (eGoM) headed by the finance minister and it will work on the advice of an interministerial group (IMG) working under the chairmanship of disinvestment secretary.



A) Why the Need for Foreign investment?

  • In most developing countries like ours, domestic capital is inadequate to meet the purpose of economic growth.
  • The inflow of foreign capital helps in removing the balance of payment over time.
  • By taxing the profits of foreign enterprise, the developing countries mobilize funds for development projects.
  • Foreign capital contributes to the generation of employment.
  • Foreign investment fills the gaps in management, entrepreneurship, technology and skill.

B) Forms of Foreign Investment

  • It includes foreign direct investment (FDI) and foreign portfolio investment (FPI)
  • Foreign direct investment is the investment in physical assets by foreign individuals, companies or financial institutions.
  • Foreign portfolio investment in the investment made in financial assets. It includes investments made by foreign institutional investors.

C) Foreign Direct Investment

  • Investment in the businesses by foreign citizens usually involving majority stock ownership of the enterprise
  • Joint ventures between the foreign and domestic companies

D) Forms of FDI

  • Greenfield Investment: It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries.
  • Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place.

E) Why FDI preferred?

  • It is of non-debt creating nature.
  • It is also less prone to quick reversals. South-east Asian crisis emanated due to the reversals of short-term capital inflows.

F) Forbidden Territories

  • FDI is not permitted in the following industrial sectors:
  • Arms and ammunition
  • Atomic Energy
  • Railway Transport
  • Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Gambling & BettingLottery
  • Chit Funds
  • Nidhi Companies

G) Foreign Institutional Investors

  • Foreign Institutional Investors (FII s) means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for FIIs.
  • FII inflows are called ‘hot money’ because they can be taken out any time.
  • According to recently changed guidelines, the investment of up to 10% of the project cost is categorized as FPI and above that limit comes under the category of FDI.


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