Foreign Direct Investment (FDI)Presented by –Pritish Govindpurkar &Dinoop Nair
2Road Map for PresentationBackgroundFDI GuidelinesObjectives of ResearchWhat is FDIMethodologyRecommendations
Objective of Research-• To study the FDI.• To find out the contribution of FDI in Indianeconomy.• To find out the Impact of increase in FDI.• To study in detail effect of FDI in agriculture.3
Methodology• We use Primary as well as secondary data.4
5Background: India Transformed !!India -- the largest Democracy - one of the fastest growing economies in the World! Slow rate of growth Bureaucratic Protected and slow Small consumer markets Weak infrastructure…Yesterday…Today Strong macro economic fundamentals Encouraging foreign investment Outsourcing destination Growing consumerism Impetus on infrastructure development
ADVANTAGES INDIA HAS TO OFFER• Stable democratic environment over 60years of independence• Large and growing market• World class scientific, technical andmanagerial manpower• Cost-effective and skilled labour• Abundance of natural resources• Large English speaking population• Well-established legal system withindependent judiciary• Developed banking system and vibrantcapital market• Well developedaccountancy, legal, actuarial andconsultancy profession6
7What is FDIForeign Direct Investment (FDI):1. FDI stands for Foreign Direct Investment, a component of a countrys national financialaccounts.2. Foreign direct investment is investment of foreign assets into domestic structures,equipment, and organizations.3. It does not include foreign investment into the stock markets.4. FDI is thought to be more useful to a country than investments in the equity of itscompanies because equity investments are potentially "hot money" which can leave atthe first sign of trouble, whereas FDI is durable and generally useful whether things gowell or badly.
9Foreign Direct Investment Policy…• Foreign Direct Investment (‘FDI’) – cross border investment with an objective toestablish ‘lasting interest’• Objective - to encourage FDI to promote industrial & socio-economic development;supplement domestic capital/ technology• Foreign investment in India is regulated by Government of India’s FDI policy. The FDIguidelines administered by the Ministry of Commerce and Industry.• Department of Industrial Policy & Promotion (‘DIPP’), Foreign Investment PromotionBoard (‘FIPB’) and Secretariat of Industrial Assistance (‘SIA’) regulate the FDI Policy• GoI has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quicktranslation of Foreign Direct Investment (FDI) approvals into implementation, to providea one-window to foreign investors by helping them obtain necessary approvals, sort outoperational problems and meet with various Government agencies• Administrative and compliance aspects of FDI monitored by RBI• Since 1991, policy has been liberalized substantially to facilitate foreign investment
10Foreign Direct InvestmentSnapshot5549157302457927309229630500010000150002000025000300002005-06 2006-07 2007-08 2008-09 2009-10* * April 2009 – January 2010Figures inMillion US$• Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India• Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI*as per information in the Press
11Indias Hottest FDI Destinations1. MaharashtraMaharashtra received the lions share of the FDI $2.43 billion (Rs 11,154 crore),which is 35% of the total FDI inflows in to the country,.2. National Capital RegionNCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The regionaccounted for 20% of the total FDI.3. West Bengal, Sikkim, Andaman & Nicobar IslandsThese states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050crore)4. Karnataka - $936 million (Rs 4,333 crore)5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore)Dated-June2012
12The Roadmap so far…Allowed selectivelyup to 40%Up to 51%under ‘AutomaticRoute’ for35 Priority SectorsUp to 74/51/50%in 111 Sectors under‘Automatic Route’100% in some sectorsUp to 100% under‘Automatic Route’ inall sectors excepta small negative listSectoral caps raised;Conditions relaxed;Pre 1991 1991 1997 2000 Post 2000
13…Foreign Direct Investment Policy… Only for cases other than Automatic Routeand those mentioned in sectoral policy Applies to cases with existing venture/ tie upin ‘same filed’ Applies to investment over 24% in SSIreserved itemsGovernment Route Allowed for Most sectors Limits : Sectoral caps/ stipulated sectorspecific guidelines Inward remittances through proper bankingchannels Pricing valuations prescribed Post facto filing with 30 days of fund receipt Filings within 30 days of share allotment Includes Technical Collaboration/ BrandName/ RoyaltyAutomatic RouteFDI Guidelines for Investing in Indian Wholly Owned Subsidiary / JointVentureForeign Investment Promotion Board (FIPB)No Prior Regulatory Approval but only PostFacto Filings to RBI, through AD
14…Foreign Direct Investment Policy Existing Airports 100% Asset ReconstructionCompanies 49% Titanium Minerals 100% Broadcasting (a) Cigars & Cigarettes 100% Courier 100% Print Media (a) 26% Single brand retailing 51% Agriculture (b) Atomic energy Retail trading (except singlebrand up to 51%) Lottery, betting and gambling Chit fund, Nidhi company Trading in TransferableDevelopment RightsNegative List(Illustrative)Prior Approval(Illustrative) NBFC (minimum capitalizationnorms) IT / ITes Financial services(a) Telecom Sector (74% cap)(a) Insurance (26 % cap)(a) Real Estate(a) Special Economic Zones Infrastructure Shipping Manufacturing sector Hotels and tourismAutomatic Route(Illustrative)Note: (a) Sector specific guidelines(b) Subject to certain exceptions FDI limits – Illustrative list
16Setting the context…• Contribution of FDI in India’s economic development is an acknowledgedfact.• From inception policy subject to extensive amendments from time to timethrough Press Notes, circulars and clarifications• Press Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI anddownstream investment• FM stressed the need for a consolidated FDI policy in Budget 2010-11• Draft consolidated policy issued in late 2009 for public comments• Consolidated FDI policy issued effective from 1 April, 2010
17Consolidated FDI Policy –Salient Features• Consolidated document of all foreign investment policies /regulations underFEMA, Press Notes, Press Releases and Clarifications issued by DIPP• Underlying rationale to promote FDI through a policy framework that istransparent, predictable, simple and clear and which reduces regulatory burden• As an investor friendly measure, a new Circular is proposed to be issued everysix months• Press Notes/Press Releases/Clarifications on FDI in force as of 31 March 2010 willstand rescinded. Savings for actions taken under earlier press notes• Use of chapters, headings and definitions• Two kinds of foreign investment – (i) FDI and (ii) Foreign Portfolio Investment(FPI)FDI – strategic long term relationship and establish a lasting interestFPI – no intention to influence the management of the investee entity
18FDI Policy – Principles• Capital defined as Equity, Compulsorily Fully Convertible Preference Shares andCompulsorily Fully Convertible Debentures• Warrants, partly paid up shares other hybrid instruments not permitted for FDI• Investment in other instruments such as:− Non Convertible Preference Shares/ Debenture (‘NCP’)− Optionally Convertible Preference Shares/ Debentures (‘OCP’)− Partially Convertible Preference Shares/ Debentures (‘PCP’)treated as External Commercial Borrowings (‘ECB’) - subject to ECB guidelines• Existing NCP/ OCP/ PCP on cut off date outside sectoral cap till current maturity
19FDI Policy – Principles …contd.• FDI permitted in:− Indian companies including micro & small enterprise− Partnership firm/ proprietorship concern – only by NRI/PIOs− Trust only in the form of VCFs• Not permitted in LLPs or any other entities – under consideration• Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate• Pricing of capital instruments (including conversion price for convertibleinstruments) is now required to be decided upfront at the time of issue ofinstruments• Investment by FVCI in DVCF set up as trust would now require specificGovernment approval; FVCI can directly invest subject to FDI policy
What are Foreign Investorslooking for?• Good projects• Demand Potential• Revenue Potential• Stable PolicyEnvironment/PoliticalCommitment• Optimal Risk AllocationFramework•Rate of interest•Speculation•Profitability•Costs of production•Economic conditions•Government policies•Political factorsFactors affecting foreigninvestment20
21Case Studies and Recommendations
UBS Fraud case• - The funds held in the accounts of the two companies (ADAG Group )openedin UBS with the approval of RBI were transferred to another account withoutRBI’s approval, by obtaining overdrafts against cash collateral security providedthrough the funds.• - Thereafter, substantial amounts were transferred to certain accountsbelonging to 8-10 diamond dealers based in India and Belgium..• - The funds were then passed on from the accounts of the diamond merchantsto two funds that in turn invested them in the Indian stock market through FIIs.• - Swiss bank UBS has been fined £8 million by UKs Financial ServicesAuthority (FSA)• - ED is probing the matter because the transactions may amount to violation ofIndian foreign exchange and anti-money laundering laws.
The Prudential Assurance Company vs. DIT (Bombay High Court)• - The Court has held that earnings of FIIs registered in India are in the nature ofbusiness income.• - Such income is not taxable in India if the FII does not have a permanentestablishment in India.• - The judgement benefits FIIs investing in India from countries such as UK, USA.• - Those from Mauritius that already enjoy capital gains tax exemption under a taxtreaty India has with the island nation.• - This is not likely to settle the debate over taxation of capital gains made by FIIsin India• - Only a Supreme Court decision can provide a binding certainty on the issue. Th
Will the Vodafone case hit FDI?• Case : Show cause notice to Vodafone was issued by Indian Revenue Authoritiesarguing that they had failed to discharge withholding tax obligation with respect to tax ongains made by Hutch on sale of shares to Vodafone• The Bombay High court said Vodafone Group Plc is liable for an estimated $2.6 billionin taxes for its 2007 acquisition of one of Indias largest mobile phone companies.• Decision as well as the tax department’s approach creates tremendous uncertainty onwhat aspects of an offshore transaction may fall within the Indian tax net.• Tax practitioners see inherent bottlenecks while computing tax liability on such deals.• The Vodafone judgement will definitely impact foreign investments into India.• This is bound to affect FDI/M&A/PE deals as companies would ascribe a higher taxweightage risk while entering India. Offshore deals may also start drying up.• But due to growing image and future prospectus of country, we are developing as aprominent nation and FDI would get much strong over the years despite any such issues.
Recommendations for IndiaDo away with too many caps in the overall regulatory regime.Increase FDI limit for Insurance Sector to 49% from current 26%.Increase FDI limit for Retail Sector.Easy access to Foreign Investor by simplifying the approval procedure and industrial licenseLiberalize the locking period for FDIAllow FDI in investment companies"Better Investment Climate" Need of the Hour.Liberalise the economic policies further so as to overcome the fiscal deficits faced by IndianeconomyInvite corporate giants from countries like USA, China and south KoreaMaintain a balance between domestic companies and foreign companies so as domesticcompanies could survive in front of foreign giants.25
26"If there is one place on theface of this Earth where allthe dreams of living men havefound a home when manbegan the dream of existence,it is India".Romain Rolland,French philosopher