This document summarizes foreign investment opportunities and regulations in India. It outlines three main routes for foreign investment: foreign direct investment (FDI), investment as a foreign institutional investor (FII), and as a foreign venture capital investor (FVCI). FDI can be through the automatic route for smaller investments or the approval route for larger investments. FIIs and FVCs must register and meet qualifications. Infrastructure development, especially power and transportation, is emphasized as a focus area given India's projected growth and need for investment. Overall foreign investment in India is growing significantly across many sectors.

1. “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

2. Foreign Investment in India:
An Overview
Presented by: Julie B. Hunt
Email: jhunt@fulbright.com
Phone: (214) 855-8046

3. 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

4. Recent Growth & Opportunities in the
Indian Market (cont’d)
Facts and Figures
 Foreign Investment Growth
Source: Ministry of Finance, Government of India

5. 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

6. 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

7. 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)

8. 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)

9. Foreign Investment - Options
Foreign Direct Investment (FDI)
 Subscription to new shares
 Transfer of existing interests

10. 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)

11. 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.

12. 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.

13. 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)

14. 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

15. Foreign Investment - Options (cont’d)
Foreign Direct Investment (FDI)
Pricing 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

16. 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

17. 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

18. 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”

19. 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)

20. 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

21. Foreign Investment - Options (cont’d)
Foreign Institutional Investors (FII)
 Qualifying as a Sub-Account
 Also requires a fit and proper person analysis

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. When You Think INTERNATIONAL,
Think Fulbright.
TM