2. 2
Road Map for Presentation
What is FDI & FII
FII Guidelines
Distinction between FDI & FII
Case Studies
FDI Guidelines
Background
3. 3
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
4. ADVANTAGES INDIA HAS TO OFFER
• Stable democratic environment over 60 years of independence
• Large and growing market
• World class scientific, technical and managerial manpower
• Cost-effective and highly skilled labour
• Abundance of natural resources
• Large English speaking population
• Well-established legal system with independent judiciary
• Developed banking system and vibrant capital market
• Well developed accountancy, legal, actuarial and consultancy profession
4
5. 5
What is FDI & FII
Foreign Direct Investment (FDI):
1.FDI stands for Foreign Direct Investment, a component of a country's
national financial accounts.
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 its companies because equity investments are potentially "hot
money" which can leave at the first sign of trouble, whereas FDI is
durable and generally useful whether things go well or badly.
Foreign Institutional Investment (FII):
1. FII denotes all those investors or investment companies that are not
located within the territory of the country in which they are investing.
2.“SEBI’s definition of FIIs presently includes foreign pension funds,
mutual funds, charitable/endowment/university funds etc. as well as
asset management companies and other money managers operating on
their behalf.”
6. 6
Distinction between FDI and FII
FDI
1. It is long-term investment
2. Investment in physical assets
3. Aim is to increase enterprise capacity or
productivity or change management
control
4. Leads to technology transfer, access to
markets and management inputs
5. FDI flows into the primary market
6. Entry and exit is relatively difficult
7. FDI is eligible for profits of the company
8. Does not tend be speculative
9. Direct impact on employment of labour
and wages
10.Abiding interest in mgt.
FII
1. It is generally short-term investment
2. Investment in financial assets
3. Aim is to increase capital availability
4. FII results in only capital inflows
5. FII flows into the secondary market
6. Entry and exist is relatively easy
7. FII is eligible for capital gain
8. Tends to be speculative
9. No direct impact on employment of labour
and wages
10.Fleeting interest in mgt. 6
8. 8
Foreign Direct Investment Policy…
• Foreign Direct Investment (‘FDI’) – cross border investment with an objective to
establish ‘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 FDI
guidelines administered by the Ministry of Commerce and Industry.
• Department of Industrial Policy & Promotion (‘DIPP’), Foreign Investment Promotion
Board (‘FIPB’) and Secretariat of Industrial Assistance (‘SIA’) regulate the FDI Policy
• Administrative and compliance aspects of FDI monitored by RBI
• Since 1991, policy has been liberalized substantially to facilitate foreign investment
10. 10
The Roadmap so far…
Allowed selectively
up to 40%
Up to 51%
under ‘Automatic
Route’ for
35 Priority Sectors
Up to 74/51/50%
in 111 Sectors under
‘Automatic Route’
100% in some sectors
Up to 100% under
‘Automatic Route’ in
all sectors except
a small negative list
Sectoral caps raised;
Conditions relaxed;
Pre 1991 1991 1997 2000 Post 2000
11. 11
…Foreign Direct Investment Policy…
Only for cases other than Automatic Route
and those mentioned in sectoral policy
Applies to cases with existing venture/ tie up
in ‘same filed’
Applies to investment over 24% in SSI
reserved items
Government Route
Allowed for Most sectors
Limits : Sectoral caps/ stipulated sector
specific guidelines
Inward remittances through proper banking
channels
Pricing valuations prescribed
Post facto filing with 30 days of fund receipt
Filings within 30 days of share allotment
Includes Technical Collaboration/ Brand
Name/ Royalty
Automatic Route
FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint
Venture
Foreign Investment Promotion Board (FIPB)No Prior Regulatory Approval but
only Post Facto Filings to RBI, through AD
12. 12
…Foreign Direct Investment Policy
Existing Airports 100%
Asset Reconstruction
Companies 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 single
brand up to 51%)
Lottery, betting and gambling
Chit fund, Nidhi company
Trading in Transferable
Development Rights
Negative List
(Illustrative)
Prior Approval
(Illustrative)
NBFC (minimum capitalization
norms)
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 tourism
Automatic Route
(Illustrative)
Note: (a) Sector specific guidelines
(b) Subject to certain exceptions
FDI limits – Illustrative list
14. 14
Setting the context…
• Contribution of FDI in India’s economic development is an acknowledged
fact.
• From inception policy subject to extensive amendments from time to time
through Press Notes, circulars and clarifications
• Press Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI and
downstream 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
15. 15
Consolidated FDI Policy –
Salient Features
• Consolidated document of all foreign investment policies /regulations under
FEMA, Press Notes, Press Releases and Clarifications issued by DIPP
• Underlying rationale to promote FDI through a policy framework that is
transparent, predictable, simple and clear and which reduces regulatory burden
• As an investor friendly measure, a new Circular is proposed to be issued every
six months
• Press Notes/Press Releases/Clarifications on FDI in force as of 31 March 2010 will
stand 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 interest
FPI – no intention to influence the management of the investee entity
16. 16
FDI Policy – Principles
• Capital defined as Equity, Compulsorily Fully Convertible Preference Shares and
Compulsorily 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
17. 17
FDI 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 convertible
instruments) is now required to be decided upfront at the time of issue of
instruments
• Investment by FVCI in DVCF set up as trust would now require specific
Government approval; FVCI can directly invest subject to FDI policy
18. 18
Royalty/ Foreign Technology
Agreement
Brand name/ trade mark royalty
• Payment of royalty upto 1% of
domestic sales and 2% of exports
permitted (without technology
transfer)
• Where royalty for brand name/
trademark and technology, then
overall limits of 5% of domestic
sales and 8% of exports
All payments
covered under
Automatic
route, subject
to limits
Foreign Technology Agreements
• Lumpsum payments not to exceed
USD 2 mn (per technology)
• Royalty upto 5% of domestic sales
and 8% of exports
The Government has liberalized the aforesaid limits by permitting, under the
automatic route, and without any restrictions:
− All payments for royalty
− Lump sum fee for transfer of technology
− Payments for use of trademark/ brand name
Earlier
Now
19. 19
Calculation of Indirect FDI…
Foreign Co.
I Co1
Overseas
India
I Co1
Overseas
India
I Co2
Foreign Co.
Direct FI
Indirect FI
Direct Foreign Investment Indirect Foreign Investment
20. 20
Calculation of Indirect FDI…
Earlier
Different methods of computing Indirect FI prescribed for different sectors. E.g.
- Telecom/ Broadcasting: Proportionate method
- Investing companies in Infrastructure/ Services sector: Management + Ownership
Test
Foreign Co.
Co1
Overseas
India
Telecom sector
Co2
90%
60%
FI in Co2 is 54% (90*60%)
Co1*
Overseas
India
Infrastructure sector
Co2
49%
100%
FI in Co2 is NIL
Foreign Co.
*Management of
Co1 with Indians
21. 21
…Calculation of Indirect FDI*
Now
• Total FI is sum of Direct FI and Indirect FI
• FI to include all types of foreign investments
• For RIC own and control are cumulative conditions; for NRE these are non-cumulative
• The methodology to apply to every stage of investment at Indian company
Direct FI in Co2 = 39%
Indirect FI in Co2 = Nil
Total FI in Co2 = 39%
Non Resident Entity
(‘NRE’)
Co1 (Owned and
Controlled by RIC)
Co2 (Owned and
Controlled by RIC)
Overseas
India
40%
10%
39%
Direct FI in Co2 = 51%
Indirect FI in Co2 = 49%
Total FI in Co2 = 100%
NRE
Co1 (Owned or
Controlled by NRE)
Co2 (Owned and
Controlled by NRE)
Overseas
India
51%
49%
51%
23. 23
Transfer of securities
– basic rules
Type of transfer Window Key conditions
NR to NR or
NRI to NRI
Automatic Subject to prior venture/ tie up condition
R to NR Automatic
- Min. valuation and compliances
- Activities not under approval route
NR to R Automatic Max. valuation and compliances
R to NR in financial
services
RBI
approval
--
Control or ownership
from R to NR pursuant to
M&A
Govt.
approval
Only for sectors with sectoral caps
Gift by R to NR
RBI
approval
-Gift not to exceed 5% of paid-up capital
-Subject to sectoral caps
- Cap of USD 25,000 per calendar year
25. 25
FDI Policy – Procedural Aspects
• Intimation of receipt of share application money – within 30 days
• Purpose of inward remittance clearly stated on FIRC
• Allotment of shares within 180 days of receipt of funds
• Funds against which shares not allotted to be refunded
• Reporting in Form FC GPR within 30 days of allotment
• In case of Approval route, application to FIPB along with supporting documents
• All applications to be placed before FIPB within 15 days
• FIPB empowered to prioritise applications based on sector, export potential etc.
• Violations of regulations attract penal provisions under FEMA
27. 27
Sector Specific Guidelines
Prohibited sectors
• FDI not allowed in the following:
− Retail trading (except single brand)
− Atomic Energy
− Lottery business
− Gambling & Betting
− Chit fund and Nidhi company
− Trading in Transferable Development Rights
− Real Estate business or construction of Farm Houses
− Sectors not opened for private sector investments
• Prohibition extended to foreign technology collaboration including licensing for franchisee,
trademark, brand name or management contract for lottery, betting and gambling business
28. 28
Sector Specific Guidelines
Telecommunication
• FDI allowed in the following (illustrative):
− Basic and cellular
− Unified Access Services
− National/ International Long Distance
− Global Mobile Personal Communications Services
(GMPCS)
− Other value added telecom services
• FDI in ISPs without gateways now capped at 74% in line
with DoT guidelines of 2007
• Subject to guidelines issued DOT
• FDI Limits:
Automatic Route Approval Route
Upto 49% Upto 74%
29. 29
Sector Specific Guidelines
Private sector banks/ Civil Aviation
• No change in existing conditions
• FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route
Banks
Civil Aviation
• No change in existing conditions
• FDI in Non-scheduled air transport services/ non-schedule airlines, Chartered and Cargo airlines
permitted under automatic route upto 49% and thereafter upto 74% under Approval Route
30. 30
Sector Specific Guidelines
Broadcasting
• In the Broadcasting sector, all FDI are under the Approval
route
• For reckoning the FDI limits, FII investment also to be
considered
• Subject to guidelines issued by I&B ministry
• FDI permitted in broadcasting sector:
Activity Limit
Radio 20%
Cable Networks 49%
Direct to Home* 49%
Uplinking news/ current affair TV channel** 26%
Uplinking non news/ current affair TV channel 100%
* FDI component not to exceed 20%
** May be raised to 49% as per recent press reports
31. 31
Sector Specific Guidelines
Print Media
• FDI is permitted under Approval route based on
nature of publication
• Investment subject to sectoral policy issued by
Ministry of Information and Broadcasting
• FDI limits on publications:
Activity Limit
Newspapers/ periodicals dealing with news
and current affairs*
26%
Scientific magazines/ specialty journals/
periodicals
100%
* May be raised to 49% as per recent press reports
32. 32
INSURANCE
• FDI upto 26% allowed on the automatic route
• However, license from the IRDA has to be obtained & There is a proposal to increase this
limit to 49%.
• FDI upto 100% is permitted under the automatic route for manufacture of drugs and
pharmaceuticals (The following is the current position)
• i. FDI upto 74% in the case of bulk drugs, their intermediates Pharmaceuticals and
formulations (except those produced by the use of recombinant DNA technology) would be
covered under automatic route.
• ii. FDI above 74% for manufacture of bulk drugs will be considered on case to case basis.
• Foreign Investment up to 100% is allowed in green field projects under automatic route
• Foreign Direct Investment is allowed in existing projects
• - up to 74% under automatic route
• - beyond 74% and up to 100% subject to Government approval
DRUGS & PHARMACEUTICALS
AIRPORTS
33. INFRASTRUCTURE
100% FDI is permitted for the following activities:
Electricity Generation (except Atomic energy)
Electricity Transmission
Electricity Distribution
Mass Rapid Transport System
Roads & Highways
Toll Roads
Vehicular Bridges
Ports & Harbors
Hotel & Tourism
FDI in Investing companies in infrastructure/service sector (except telecom sector) will not
be counted towards sectoral cap provided:
- Such investment is up to 49% &
- The management of the company is in Indian hands.
FDI in such companies will be through the FIPB route
33
36. What are Foreign Investors
looking for?
• Good projects
• Demand Potential
• Revenue Potential
• Stable Policy
Environment/Political
Commitment
• Optimal Risk Allocation
Framework
•Rate of interest
•Speculation
•Profitability
•Costs of production
•Economic conditions
•Government policies
•Political factors
Factors affecting foreign
investment
36
37. Foreign Institutional Investors
• FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up share
capital of an Indian company
• This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian
company by passing a board resolution/shareholder resolution
• FIIs can purchase shares through open offers/private placement/stock exchange
• Shares purchased by FII through stock exchange cannot be sold through a private
arrangement
• Proprietary funds, foreign individuals and foreign corporates can register as a sub- account
and invest through the FII. Separate limits of 10% / 5% is available for the sub-accounts
• FIIs can raise money through participatory notes or offshore derivative instruments for
investment in the underlying Indian securities
• FIIs in addition to investment under the FII route can invest under FDI route
37
38. Investment limits on Equity &
Debt investments by FII
FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an
Indian company.
Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an
India company.
For the sub-account registered under Foreign Companies/Individual category, the investment
limit is fixed at 5% of issued capital.
These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by
Government of India / Reserve Bank of India.
investment limits on debt investments by FII
For FII investments in Government debt, currently following
limits are applicable:
• 100 % Debt Route US $ 1.55 billion
• 70 : 30 Route US $ 200 million
• Total Limit S $ 1.75 billion
For corporate debt the investment limit is fixed at US $ 500 million.
38
39. PARTICIPATORY NOTES
What is P-Note:
PNs are instruments issued by registered FIIs to overseas investors, who wish to invest in the
Indian stock markets without registering themselves with SEBI.
Why is P-Note:
More than 30% of foreign institutional money coming into India is from hedge funds. Hedge
funds, which thrive on arbitrage opportunities, rarely hold a stock for a long time.
P-Notes are issued to the real investors on the basis of stocks purchased by the FII.
To monitoring investments through P Notes, Sebi decided that FIIs must report P-Notes details.
Reporting by FIIs
P-Notes issued - 7th day of the following month.
The FII merely investing for themselves through P-Notes – Quarterly basis
FIIs who do not issue PNs but have trades – File 'Nil' undertaking on a quarterly basis.
39
40. Importance of FII Inflow - FM’s View October 26, 2010
• No controls on FII inflows
• RBI may check rupee appreciation
• The upward movement of the rupee against the dollar was sharp in recent weeks as the
Indian currency has climbed about 5.6% since the beginning of September due to sustained
capital inflows.
The FM believes that with FII inflows and forex reserves, the current account deficit should
be contained at around 3% of the gross domestic product (GDP) (this fiscal).
The current account deficit is the gap between the amount the country pays to the external
world against what it receives from abroad, barring capital movement. It was around 3.6% of
GDP in the first quarter of 2010-11.
40
41. Advantages of FII
• Enhanced flows of equity capital
• FIIs have a greater appetite for equity than debt in their asset structure. It improve capital
structures.
• Managing uncertainty and controlling risks.
• FII inflows help in financial innovation and development of hedging instruments.
• Improving capital markets.
• FIIs as professional bodies of asset managers and financial analysts enhance competition
and efficiency of financial markets.
• Equity market development aids economic development.
• By increasing the availability of riskier long term capital for projects, and increasing firms’
incentives to provide more information about their operations, FIIs can help in the process of
economic development.
• Improved corporate governance.
• FIIs constitute professional bodies, improve corporate governance.
41
42. Disadvantages of FII
• Problems of Inflation
• Problems for small investor
• Adverse impact on Exports
• Hot Money
42
43. FII Investments & Market Reaction
While strong inflow of funds from foreign
institutional investors (FIIs) has been a
reason to cheer, it could turn into a
nightmare and if the global investors make
a sudden exit can send the bourses
crashing.
43
44. FII Inflows Vs Sensex
FII Investment from 2005 - 2010 BSE Sensex
FII Investment Vs Sensex FII average holding in BSE 500
44
45. GDR
A negotiable certificate held in the bank of one country representing a specific
number of shares of a stock traded on an exchange of another country. They are
traded and settled independently of the underlying share, and such are commonly
used to invest in companies in developing or emerging markets - especially Russia.
They trade on the International Order Book (IOB) of the LSE.
46. FCCB
A type of convertible bond issued in a currency different than the issuer's
domestic currency. In other words, the money being raised by the issuing
company is in the form of a foreign currency. A convertible bond is a mix
between a debt and equity instrument. It acts like a bond by making
regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
These types of bonds are attractive to both investors and issuers. The
investors receive the safety of guaranteed payments on the bond and are
also able to take advantage of any large price appreciation in the
company's stock. Issuers take advantage of this appreciation by means
warrants attached to the bonds, which are activated when the price of the
stock reaches a certain point.
47. Recommendations for India
There are several caps within FDIs; a 26%, 20%, 49%, 51% and 74% and a 20% for e.g. is only in one case
and perhaps that could be done away because there are just too many caps in the overall regulatory
regime.
Foreign investors should be allowed to establish the company which facilitates them 100% ownership.
They should not be restricted for joint venture with Indian companies to enter into Indian market.
FII & FDI locking period to be liberalized.
Allow FDI in investment companies
"Better Investment Climate" Need of the Hour.
Increase FDI limit for Insurance Sector to 49% from current 26%.
Increase FDI limit for Retail Sector.
Government bodies should take less time for the foreign investment approval.
Government should maintain a balance between domestic companies and foreign companies so as
domestic companies could survive in front of foreign giants.
The procedure for approval and industrial license should be made simple so that foreign investors can
easily access in India.
Government should liberalise the economic policies further so as to overcome the fiscal deficits faced by
Indian economy from a last decade.
Government should invite corporate giants from countries like USA, China and south Korea which can
enhance foreign capital inflows into India.
48
48. 49
India is Relatively Stable and Growing …!
"If there is one place on the
face of this Earth where all
the dreams of living men have
found a home when man
began the dream of
existence, it is India".
Romain Rolland,
French philosopher
49. 50
India's Hottest FDI Destinations
1. Maharashtra
Maharashtra received the lion's 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 Region
NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region
accounted for 20% of the total FDI.
3. West Bengal, Sikkim, Andaman & Nicobar Islands
These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050
crore)
4. Karnataka - $936 million (Rs 4,333 crore)
5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore)
Data: Jan – Jun 2010
