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Foreign Investment in India - An Overview
 

Foreign Investment in India - An Overview

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    Foreign Investment in India - An Overview Foreign Investment in India - An Overview Presentation Transcript

    • “ The Most Extraordinary Country”* Doing Business in India When You Think INTERNATIONAL , Think Fulbright. TM
        • Tuesday, February 20, 2007
        • 7:15 - 9:00 a.m.
        • The Houstonian Hotel
        • 111 North Post Oak Lane
        • Houston, Texas 77024
      *Mark Twain
    • Foreign Investment in India: An Overview Presented by: Julie B. Hunt Email: jhunt@fulbright.com Phone: (214) 855-8046
    • Recent Growth & Opportunities in the Indian Market
      • Facts and Figures
      • Recent GDP Growth
      • 2000-2003 4.6%
      • 2003-2004 8.5%
      • 2004-2005 7.5%
      • 2005-2006 8.4%
      • 2006-2007 (Q1) 8.9%
      Source: Reserve Bank of India
    • Recent Growth & Opportunities in the Indian Market (cont’d)
      • Facts and Figures
      • Foreign Investment Growth
      Source: Ministry of Finance, Government of India
    • Recent Growth & Opportunities in the Indian Market (cont’d)
      • Facts and Figures
      • Population of more than 1 billion
      • Middle class of 300 million
      • Stable democracy with a common law legal system
      • Large English-speaking, highly educated workforce
      • Vibrant capital markets – 23 stock exchanges with 9000 listed companies
      • New Industrial Policy (1991) and continuing liberalization of foreign investment
    • Foreign Investment - Legal Regime
      • Sources of Law and Policy
      • Foreign Exchange Management Act, 1999 (FEMA) and related regulations
      • Press notes issued by the Ministry of Commerce and Industry
      • Securities & Exchange Board of India Act, 1992 and related regulations
      • Companies Act, 1956
      • Sector-specific laws and rules
    • Foreign Investment - Legal Regime
      • Key Regulatory Players
      • Foreign Investment Promotion Board (FIPB)
      • Reserve Bank of India (RBI)
      • Securities & Exchange Board of India (SEBI)
      • Stock Exchanges (Largest: National Stock Exchange (NSE), Bombay Stock Exchange (BSE))
      • Sector-specific regulators (e.g., insurance, telecom, transportation)
    • Foreign Investment - Options
      • Three Main Routes for Foreign Investment
      • Foreign Direct Investment (FDI)
      • Investment as a Foreign Institutional Investor (FII) or a sub-account of an FII
      • Investment as a Foreign Venture Capital Investor (FVCI)
    • Foreign Investment - Options
      • Foreign Direct Investment (FDI)
      • Subscription to new shares
      • Transfer of existing interests
    • Foreign Investment - Options
      • Foreign Direct Investment (FDI)
      • Automatic Route
      •  No approval needed from FIPB or the RBI
      •  Widely available, subject to certain percentage caps and non-compete restrictions
      •  Requires certain after-the-fact filings and declarations with the RBI (within 30 days after payment for investment)
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment – Approval Route
      •  Automatic Route not available (i.e., prior FIPB approval is required) if the investment is:
      •  in an area where foreign investment is prohibited; for example: retail trading (except single brand retail), gambling, atomic energy, defense
      •  above the equity cap applicable to certain sectors; for example: 74% in telecom, mining or banking.
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment – Approval Route
      •  Automatic Route not available if the investment is:
      •  in the same field where the foreign investor has an existing (pre-Jan 15, 2005) collaboration/joint venture in India
      •  a more than 24% equity investment in companies which manufacture for the small-scale sector.
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment – Approval Route
      • Approval Route
        • Any investment not qualifying for the Automatic Route
        • Requires prior approval from the Foreign Investment Promotion Board (FIPB)
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment – Approval Route
      • Approvals take approximately 30 days to obtain, decided on a case-by-case basis
      •  Relevant criteria:
          • the amount of investment
          • jobs creation
          • other benefits to India such as export creation or technology development
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment (FDI)
      • P ricing Restrictions
        • If listed on a stock exchange, price cannot be lower than the average weekly high and low of closing prices during the preceding (a) 6 months, or (b) 2 weeks, whichever average is higher
        • If unlisted, determined by a formula prescribed by the Controller of Capital Issues
    • Foreign Investment - Options (cont’d)
      • Foreign Direct Investment (FDI)
      • Transfers of Existing Shares – requires FIPB approval if:
        • activities are not under the Automatic Route
        • non-resident shareholding would exceed sectoral limits
        • price does not comply with the pricing restrictions
      • Transfers of Existing Shares – requires RBI approval if:
        • company is involved in the financial services sector
        • price does not comply with the pricing restrictions
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • What is an FII?
        • An institution established outside India, which invests in securities traded on the primary and secondary markets in India
        • Examples: pension funds, mutual funds, investment trusts, university endowment funds
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange
      • Makes investments on behalf of foreign investors, referred to as “sub-accounts”
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • Qualifying as an FII
        • Requires a certificate from the Securities and exchange Board of India (SEBI)
        • Strict qualification standards including professional experience requirements and reputational considerations (“Fit and proper person” determination)
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • SEBI “Fit and proper person” criteria include:
        • financial integrity
        • absence of convictions or civil liabilities
        • competence
        • good reputation and character
        • efficiency and honesty
        • no violation of securities regulations in home jurisdiction
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • Qualifying as a Sub-Account
        • Also requires a fit and proper person analysis
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • FIIs may invest in:
        • securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies)
        • units issued by domestic mutual funds
        • dated Government securities
        • derivatives traded on a recognized stock exchange
        • commercial paper
        • debt instruments – provided a 70/30 equity/debt ratio is maintained
    • Foreign Investment - Options (cont’d)
      • Foreign Institutional Investors (FII)
      • Limits on the type and amount of investments apply to FIIs
        • no more than 10% of the equity in any one company
        • no more than 10% in the equity in any one company on behalf of a fund sub-account
        • no more than 5% in the equity in any one company on behalf of a corporate/individual sub-account
        • no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs
    • Foreign Investment - Options (cont’d)
      • Foreign Venture Capital Investors (FVCI)
      • What is an FVCI?
        • An investor established outside of India, who proposes to make venture capital investments in India
    • Foreign Investment - Options (cont’d)
      • Foreign Venture Capital Investors (FVCI)
      • Qualifying as an FVCI
        • Requires registration with SEBI; a copy of the application is forwarded to the RBI for approval as well
        • Involves a “fit and proper person” determination as for FIIs
    • Foreign Investment - Options (cont’d)
      • Foreign Venture Capital Investors (FVCI)
      • Benefits of registering as an FVCI
        • one-time approval of the RBI for investments in Indian companies
        • ability to purchase or sell securities at a price that is mutually acceptable to buyer and seller
        • shares held by FVCI in an unlisted company are not subject to the one-year lock-in generally applicable to the shares of a company undergoing an IPO
    • Foreign Investment - Options (cont’d)
      • Foreign Venture Capital Investor (FVCI)
      • Investment Requirements and Restrictions
        • At least 66.67% of its funds must be invested in unlisted equity shares (or equity-linked instruments of unlisted entities)
        • Up to 33.33% of its funds may be invested in an IPO subscription for a venture capital undertaking, or through a preferential allotment of equity shares of a listed company
    • Foreign Investment - Options (cont’d)
      • Foreign Venture Capital Investor (FVCI)
      • Investment Requirements and Restrictions
        • Subject to certain sectoral percentage caps, limitations on foreign investment
        • No more than 25% of its funds may be invested in any one venture capital undertaking
    • Project Finance - Infrastructure
      • “Infrastructure Deficit” requiring estimated investments of US $300 billion by 2012
      • FDI of up to 100% is now permitted in most infrastructure sectors
      • Shortage of domestic funding
      • Particular emphasis on power sector, airports, roads
    • Recent Deals
      • Mumbai and Delhi airports – Public/Private Partnership (PPP) with 26% government participation
      • Vodafone – $11.1 billion purchase of a 67% stake in Hutchison Essar (fourth largest mobile phone company in India)
      • Airbus – announced $1 billion investment in an engineering facility and pilot training school
      • Cisco – investing $1.1 billion in various initiatives (manufacturing facility, VC investments, broadband and digital media), and planning to move 20% of top executives to India
    • Future Prospects
      • Projections for future growth
      • Continued annual GDP growth of 8%
      • GDP of US $11 trillion by 2011, US $27 trillion by 2050 (making India the third-largest economy in the world)
      • Trend of increasing liberalization of foreign investment
    • In Summary
      • Three main regulatory categories of foreign investment: FDI, FII, FVCI
      • Certain sector caps and pricing restrictions may apply
      • Infrastructure development is a particular focus for the Government
      • Regulations continue to evolve
    • When You Think INTERNATIONAL, Think Fulbright. TM