Definition of Direct Investment Course on Balance of Payments and International Investment Position Manual (BPM6) IMF-PFTAC Nadi November 22-December 1, 2010 BP09

Introduction  Recall Direct investment is  related to control or a significant degree of influence, and tends to be associated with a lasting relationship Direct investor may supply  Funds, knowhow, technology, management, and marketing Enterprises in a direct investment relationship  are more likely to trade with and finance each other 10/12/20152

Definition of direct investment  Direct investment relationship, (DIE and DI)  Control and significance influence  Immediate and indirect relationships  Transmission of control and influence  Subsidiaries, associates, fellow enterprises  Control, influence & voting power 10/12/20153

Direct investment relationship A direct investment relationship  an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise that is resident in another economy A direct investor  is an entity or group of related entities able to  exercise control or a significant degree of influence  over another entity that is resident of a different economy 10/12/20154

Direct investment relationship Cont. A direct investment enterprise is an entity subject to control or a significant degree of influence by a direct investor In some cases, a single entity may be, at the same time, a direct investor, a direct investment enterprise, and a fellow enterprise in its relationships to other enterprises 10/12/20155

Control and significance influence  Control or influence may be achieved directly by owning equity that gives voting power in the enterprise, or  Indirectly through having voting power in another enterprise that has voting power in the enterprise  Accordingly, two ways of having control or influence are identified 10/12/20156

Immediate and indirect relationships  Immediate direct investment relationships direct investor directly owns equity that entitles it to 10 per cent or more of the voting power in the direct investment enterprise  Control is determined to exist if the direct investor owns more than 50 per cent of the voting power in the direct investment enterprise  A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise 10/12/20157

Immediate and indirect relationships Cont.  Indirect direct investment relationships Indirect direct investment relationships  through owning of voting power in one direct investment enterprise that owns voting power in another enterprise or enterprises  i.e., an entity is able to exercise indirect control or influence through a chain of direct investment relationships 10/12/20158

Transmission of control and influence  Principles for indirect transmission of control and influence through a chain of ownership Control can be passed down a chain of ownership as long as control exists at each stage Influence can be generated at any point down a chain of control Influence can only be passed through a chain of control but not beyond 10/12/20159

Subsidiaries, associates, fellow enterprises A subsidiary is a direct investment enterprise over which the direct investor is able to exercise control An associate is a direct investment enterprise over which the direct investor is able to exercise a significant degree of influence, but not control Fellow enterprises are those which are both under the control or influence of the same direct investor 10/12/201510

10/12/2015JAI Tunis/L4:11

Control, influence & voting power  Control or influence - voting power  Voting power is not recognized if temporary obtained through repurchase agreements (because no change in the economic ownership) through the holding of warrants (holder does not possess voting power until the warrants are exercised)  Voting power may be direct or indirect 10/12/201512

Relationships - not constituting DI  Representation on the board of directors  A common board of directors  Participation in policy-making processes  Material inter-company transactions  Interchange of managerial personnel  Provision of technical information  Provision of long-term loans at lower than existing market rates 10/12/201513

Who might be a direct investor?  an individual or household  an enterprise, incorporated or unincorporated, public or private  an investment fund, a government or international organization  a nonprofit institution in an enterprise that operates for profit. However, the relationship between two nonprofit institutions is excluded from direct investment  an estate, trustee in bankruptcy, or other trust, or any combination of two or more of the above 10/12/201514

Changes to BPM5  The Framework for Direct Investment Relationships (FDIR) adopted  Ownership of ordinary shares replaced by ownership of equity that gives rise to voting power  The relationships due to indirect voting power and fellow enterprises is elaborated  Insurance technical reserves are potentially included in direct investment 10/12/201515