Foreign Investment in India - An Overview

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Foreign Investment in India - An Overview

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

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