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“The Most Extraordinary Country”* Doing Business in India *Mark Twain Tuesday, February 20, 2007 7:15 - 9:00 a.m. The Houstonian Hotel 111 North Post Oak Lane Houston, Texas 77024 When You Think INTERNATIONAL , Think Fulbright. TM Foreign Investment in India: An Overview

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“The Most Extraordinary Country”*

Doing Business in India

*Mark Twain

  • Tuesday, February 20, 2007

  • 7:15 - 9:00 a.m.

  • The Houstonian Hotel

  • 111 North Post Oak Lane

  • Houston, Texas 77024

When You Think INTERNATIONAL,Think Fulbright.TM


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Foreign Investment in India: An Overview

Presented by: Julie B. Hunt

Email: [email protected]

Phone: (214) 855-8046


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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


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Recent Growth & Opportunities in the Indian Market (cont’d)

Facts and Figures

  • Foreign Investment Growth

Source: Ministry of Finance, Government of India


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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


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Foreign Investment - Legal Regime (cont’d)

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


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Foreign Investment - Legal Regime (cont’d)

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)


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Foreign Investment - Options (cont’d)

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)


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Foreign Investment - Options (cont’d)

Foreign Direct Investment (FDI)

  • Subscription to new shares

  • Transfer of existing interests


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Foreign Investment - Options (cont’d)

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)


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Foreign Investment - Options (cont’d) (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.


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Foreign Investment - Options (cont’d) (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.


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Foreign Investment - Options (cont’d) (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)


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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”


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Foreign Investment - Options (cont’d) (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)


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (cont’d)

Foreign Institutional Investors (FII)

  • Qualifying as a Sub-Account

    • Also requires a fit and proper person analysis


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Foreign Investment - Options (cont’d) (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


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Project Finance - Infrastructure (cont’d)

  • “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


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Recent Deals (cont’d)

  • 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


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Future Prospects (cont’d)

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


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In Summary (cont’d)

  • 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


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When You Think (cont’d)INTERNATIONAL,Think Fulbright.TM


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