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India and foriegn investment (macro economics)
 

India and foriegn investment (macro economics)

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  • FDI can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing.
  • FDI is necessary for sustained economic growth and development of any economy in this era of globalization. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country.
  • In the past decade, FDI has come to play a major role in the internationalization of business.The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than Driven by mergers and acquisitions and internationalization of production in a range of industries, Developing nations looks at FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps.
  • FDI as a strategic component of investment is needed by any country for its sustained economic growth and development. and development of the new one.
  • DescriptionVenture Capital (VC) is an important source of funding seed capital for start-up ventures and technology projects.It is different from traditional sources of financing as unlike traditional source of funding Venture capitalists finance innovation and ideas which have potential for high growth with inherent uncertainties. Venture capital funds (“VCF”) are professional money managers who provide risk capital to businesses.
  • It is a fund established in the form of a trust or a company including a body corporate and registered with SEBI under SEBI(Venture Capital Fund) Regulations 1996 and which has a dedicated pool of capital raised in manner specified in regulations and which invests in VCU in accordance with said regulations. A VCF is also allowed to make investments in VCU subject to provisions in SEBI(Venture Capital Fund) Regulations
  • The formalization of the Indian venture capital community began in 1993 when Indian Venture Capital Association was formed. In 1996, the Securities and Exchange Board of India ("SEBI") introduced the SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”), for regulating and promoting the activities of domestic venture capital funds.Pursuant to K B Chandrasekhar Committee recommendations, in 2000 Securities and Exchange Board of India (SEBI) was made a nodal regulator for VCFs to provide for regulatory and institutional environment to facilitate faster growth of venture capital industry in the country. In 2000 the SEBI announced the SEBI (Foreign Venture Capital Investor) Regulations, 2000 (“FVCI Regulations”) enabling foreign venture capital and private equity investors to register with it and avail of certain benefits provided there under. The step liberated the industry from a number of bureaucratic hassles and paved the path for the entry of a number of foreign funds into India.
  • India provides a skilled labor in terms of technology, research and entrepreneurship and at a competitive cost. This could enable Indian market to flourish if sustainable investment is made in order to enable growth.India’s recent success story in the area of information technology has shown that there is a tremendous potential for growth of knowledge based industries.This potential is not only confined to information technology but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etcA flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. The gap exists because such startups are necessarily based on intangible assets such as human capital and on a technology enabled mission, often with the hope of changing the worldApple, Exodus, Hotmail and Yahoo, to mention a few of the many successful multinational venture-capital funded companies, initially failed to get capital as startups when they approached traditional lenders. However, they were able to obtain finance from independently managed venture capital funds that focus on equity or equity-linked investments in privately held, high-growth companies
  • FVCImay contribute up to 100% of the capital of an Indian Venture Capital Undertaking and may also set up a domestic asset management company to manage the fund. All such investments by FVCI can be made under automatic route in terms of Schedule 6 to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified under the Foreign Exchange Management Act, 1999 (‘FEMA’) [discussed in detail below].A SEBI registered FVCI can also invest in domestic venture capital fund registered under the SEBI (Venture Capital Fund) Regulations, 1996. Such investments would also be subject to RBI regulations and FDI policy. However, in case the entity undertaking venture capital fund activity is a Trust registered under the Indian Trust Act, 1882, FDI would be permitted under the Government route. FVCIs are also allowed to invest in other companies subject to FDI Regulations
  • SEBI and the Reserve Bank of India (“RBI”) have extended certain benefits to funds registered under the FVCI Regulations making it beneficial to register. This is an optional registration that an investor can seek, in order to qualify for certain benefits. FVCIs enjoy a number of regulatory relaxations; some of the significant ones are:Exemption from pricing norms at the time of entry as well as exit;Exemption from “lock-in” period requirements when the investee company goes public; FVCIs are thus effectively allowed to exit investment, immediately on listing of the investee company;Exemption from “Takeover Code” (which mandates making of an open offer by the acquirer, on acquisition of shares beyond prescribed threshold limits) in respect of shares sold by the FVCI to the promoters of the company, after the company goes public

India and foriegn investment (macro economics) India and foriegn investment (macro economics) Presentation Transcript

  • Group: Rakesh Ramchandran, Ravi Iyer and Vivek Chaudhari Batch: X-MBA 23 INDIA And Foreign Investor
  • Brief Background  Planned Economy / License Raj from 1947 – 1990  Planning Commission administers the economy  Balance of payment crises in 1980’s  IMF bail out, Gold transferred to London as bailout  Economic reforms introduced in 1991
  • Foreign Investors Foreign Investors Foreign Direct Investment (FDI) Foreign Institutional Investors (FII) Foreign Venture Capital Investor (FCVI)
  • Foreign Direct Investment Plays an extraordinary and growing role in global business. Provide a source of new technologies, skills and capital Provide a strong impetus to economic development.
  • Definition Is defined as a company from one country making a physical investment into building a factory in another country.
  • How Has FDI Changed in the Past Decade In developing countries, the FDI inflow has been increased from average of < $ 10 bio in 1970s to < $20 bio in 1980s to explode in 1990s from $ 26.7 billion to $179 billion in 1998 & $208 bio in 1999 and to $1604 in year 2011
  • Advantage of FDI  Is necessary for creation of jobs,  Is expansion of existing manufacturing industries.  Play vital role in the healthcare, education, R&D, infrastructure, retailing and in long-term financial projects.
  • Policy makers  Policy makers should design policies where foreign investment can be utilized  as means of enhancing domestic production, savings, and exports;  as medium of technological learning and technology diffusion  and also in providing access to the external market.  Most importantly the policy makers should ensure optimum utilisation of funds and timely implementation of projects.
  • Awakening India  Indian government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investor’s confidence can be maintained for attracting more FDI inflows to India.  India needs a business environment which is conducive to the needs of business.  India require to have efficient and transparent official procedures, rules and regulations, clearance, and opportunities in India.
  • Awakening India  this can be achieved only if India implements its second generation reforms in totality and in right direction.  But if Indian government improves from past mistakes during implementation of 3rd generation economic reforms, then no doubt India will be favourable FDI destination in the world.  This change will show rest of the world, we can achieve what is predicted by Goldman Sachs that from 2007 to 2020, India’s GDP per capita in US$ terms will quadruple and the Indian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and US by 2043.
  • FII & FDI  FDI Allowed through FII  Private Equity, Preferential Allotment, Joint Ventures, Capital Market Operations  FII Allowed - Insurance and Banking  100% FDI Allowed - Infra – Bridges & Tunnels  FDI NOT Allowed – Arms, Railways, Coal, Nuclear, Mining.
  • Foreign Institutional Investors  Pool large amounts and invest in securities, property, etc  Banks, Insurance companies, Retirement or Pension Funds, Hedge Funds, Investment Advisors and Mutual Funds  FII activity has been on a constant rise  Focus on BRIC countries (Brazil, Russia, India and China)
  • FII Figures  In 2010, net foreign inflows was US$30 billion  FY 2000 – 2011 - FDI inflow - US$ 197,935 million Yearly Increase - 43%  January – July 2011, US$3.82 billion - Investment in Shares and Bonds  US$5.84 billion - Investment in Equities and Debt securities  As of July 2011, Total registered FIIs -1730
  • FII in India  Largest pool of Highly Educated People  Lack of Infrastructure – Slow Development  Bureaucratic Hurdles – Red Tape  When Markets slide – FII withdraw – Market affected further
  • Foreign Venture Capital Investor (FVCI)  Investor incorporated established outside India  Invest in venture capital funds (IVCF) or venture capital undertakings (IVCU)  Registered under SEBI FVCI regulation  It’s a categorized under Private Equity
  • Indian venture capital fund (IVCF)  A fund established in the form of a trust or a company  Registered with SEBI under SEBI regulation act for VCF  Had dedicated pool of capital raised in manner specified in regulations and which invests in VCU
  • Indian venture capital undertaking (IVCU)  Has set up in India [India incorporated]  Shares are not listed on a recognized stock exchange in India  Which is not engaged in an activity specified under the negative list specified by the SEBI  A new born private company which is yet to establish itself and is in need of funds and experienced advice and support
  • Why does INDIA Need FCVI  Promote innovation and new enterprises  Potential to grow in IT, bio technology, pharmaceuticals, etc.  Need for Capital Investment  Conventional lenders choose to invest in Low risk business and are also short on reserves
  • Policy  Can contribute up to 100% of the capital of an Indian Venture Capital Undertaking  Can set up a domestic asset management company to manage the fund.  Investments can be made under automatic route as per FEMA regulation act  SEBI registered FVCI can also invest in domestic venture capital fund registered under the SEBI Regulations
  • Regulatory framework  A SEBI registered FCVI having approval from RBI under FEMA regulation can invest in IVCU or in schemes floated by IVCF  Can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a IVCF  The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.
  • Benefits  Exemption from pricing norms at the time of entry as well as exit  Exemption from lock-in period requirements when the investee company goes public. FVCIs are thus effectively allowed to exit investment, immediately on listing of the investee company  Exemption from Takeover Code in respect of shares sold by the FVCI to the promoters of the company, after the company goes public
  • How FCVI operates in India  Foreign investor sets up offshore fund  This offshore fund is registered with SEBI under FVCI regulation  Investor assigns a overseas manager  Register the FCVI as a fund or a company  Appoints an Indian advisor to handle domestic fund or undertaking/company
  • Advantage India for Foreign Investors  Democratic environment  Large growing market  Pool of scientific, technological and managerial manpower  Cost effective and skilled  Large pool of English speaking manpower  Well established banking and vibrant capital market  Well established legal system with independent judiciary
  • Thank You