Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII) A Presentation by: Kedar Gharat 20 Manoj Gupta 21 Pramod Jadhav 24 Ashish Lalpuria 34 Arun Pacheco 38 Nilesh Raut 49 Anand Singh 60 Sachin D’souza 63
Road Map for Presentation Background What is FDI & FII Distinction between FDI & FII FDI Guidelines FII Guidelines Case Studies
Background: India Transformed !! …Yesterday • Slow rate of growth • Bureaucratic • Protected and slow • Small consumer markets • Weak infrastructure …Today • Strong macro economic fundamentals • Encouraging foreign investment • Outsourcing destination • Growing consumerism • Impetus on infrastructure development India -- the largest Democracy - one of the fastest growing economies in the World!
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 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
What is FDI & FII Foreign Direct Investment (FDI): • FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. • Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. • It does not include foreign investment into the stock markets. • 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): • FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. • “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.”
Distinction between FDI and FII • FDI • It is long-term investment • Investment in physical assets • Aim is to increase enterprise capacity or productivity or change management control • Leads to technology transfer, access to markets and management inputs • FDI flows into the primary market • Entry and exit is relatively difficult • FDI is eligible for profits of the company • Does not tend be speculative • Direct impact on employment of labour and wages • Abiding interest in mgt. • FII • It is generally short-term investment • Investment in financial assets • Aim is to increase capital availability • FII results in only capital inflows • FII flows into the secondary market • Entry and exist is relatively easy • FII is eligible for capital gain • Tends to be speculative • No direct impact on employment of labour and wages • Fleeting interest in mgt. 6
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 • GoI has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a one-window to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies • Administrative and compliance aspects of FDI monitored by RBI • Since 1991, policy has been liberalized substantially to facilitate foreign investment
Foreign Direct Investment Snapshot 56% Figures in Million US$ 184% * April 2009 – January 2010 • Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India • Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI *as per information in the Press
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 10
The Roadmap so far… Sectoral caps raised; Conditions relaxed; Up to 100% under ‘Automatic Route’ in all sectors except a small negative list Up to 74/51/50% in 111 Sectors under ‘Automatic Route’ 100% in some sectors Up to 51% under ‘Automatic Route’ for 35 Priority Sectors Allowed selectively up to 40% Post 2000 Pre 1991 1991 1997 2000
…Foreign Direct Investment Policy… FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint Venture Automatic Route Government Route No Prior Regulatory Approval but only Post Facto Filings to RBI, through AD Foreign Investment Promotion Board (FIPB) • Allowed for Most sectors • Limits : Sectoral caps/ stipulated sector specific guidelines • Inward remittances through proper banking channels • Pricing valuationsprescribed • Post facto filing with 30 days of fund receipt • Filings within 30 days of share allotment • Includes Technical Collaboration/ Brand Name/ Royalty • 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
…Foreign Direct Investment Policy FDI limits – Illustrative list Automatic Route (Illustrative) Prior Approval (Illustrative) Negative List (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 • 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 Note: (a) Sector specific guidelines (b) Subject to certain exceptions
Setting the context… • Contribution of FDI in India’s economic development is an acknowledged fact. • From inception policy subject to extensive amendmentsfrom 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
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
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
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
All payments covered under Automatic route, subject to limits Royalty/ Foreign Technology Agreement Earlier Brand name/ trade mark royalty Foreign Technology Agreements • 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 • Lumpsum payments not to exceed USD 2 mn (per technology) • Royalty upto 5% of domestic sales and 8% of exports Now 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
Calculation of Indirect FDI… Direct Foreign Investment Indirect Foreign Investment Foreign Co. Foreign Co. Overseas Overseas Direct FI India India I Co1 I Co1 Indirect FI I Co2
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 Telecom sector Infrastructure sector Foreign Co. Foreign Co. Overseas Overseas 90% 49% India India Co1 Co1* 60% 100% *Management of Co1 with Indians Co2 Co2 FI in Co2 is 54% (90*60%) FI in Co2 is NIL
…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 Non Resident Entity (‘NRE’) NRE Overseas Overseas 51% 40% India India Co1 (Owned or Controlled by NRE) Co1 (Owned and Controlled by RIC) 51% 39% 49% 10% Co2 (Owned and Controlled by NRE) Co2 (Owned and Controlled by RIC) Direct FI in Co2 = 51% Indirect FI in Co2 = 49% Total FI in Co2 = 100% Direct FI in Co2 = 39% Indirect FI in Co2 = Nil Total FI in Co2 = 39%
Downstream Investment… Foreign Co. Co1 could be • An investing company; or • An investing-cum-operating company Co2 is an operating company Overseas India Co1 Downstream Investment Co2
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
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
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:
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
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: * FDI component not to exceed 20% ** May be raised to 49% as per recent press reports
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: * May be raised to 49% as per recent press reports
INSURANCE DRUGS & PHARMACEUTICALS AIRPORTS 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
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
What are Foreign Investors looking for? Factors affecting foreign investment • 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
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
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.
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.
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.
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.
Disadvantages of FII • Problems of Inflation • Problems for small investor • Adverse impact on Exports • Hot Money
FII Investments & Market Reaction • While strong inflow of funds from foreign institutional investors (FIIs) has been a reason tocheer, it could turn into a nightmare and if the global investors make a sudden exit can send the bourses crashing.
FII Inflows Vs Sensex BSE Sensex FII Investment from 2005 - 2010 FII Investment Vs Sensex FII average holding in BSE 500
UBS Fraud case - The funds held in the accounts of the two companies (ADAG Group )opened in UBS with the approval of RBI were transferred to another account without RBI’s approval, by obtaining overdrafts against cash collateral security provided through the funds. - Thereafter, substantial amounts were transferred to certain accounts belonging to 8-10 diamond dealers based in India and Belgium.. - The funds were then passed on from the accounts of the diamond merchants to two funds that in turn invested them in the Indian stock market through FIIs. - Swiss bank UBS has been fined £8 million by UK's Financial Services Authority (FSA) - ED is probing the matter because the transactions may amount to violation of Indian foreign exchange and anti-money laundering laws.
The Prudential Assurance Company vs. DIT (Bombay High Court) - The Court has held that earnings of FIIs registered in India are in the nature of business income. - Such income is not taxable in India if the FII does not have a permanent establishment in India. - The judgement benefits FIIs investing in India from countries such as UK, USA. - Those from Mauritius that already enjoy capital gains tax exemption under a tax treaty India has with the island nation. - This is not likely to settle the debate over taxation of capital gains made by FIIs in India - Only a Supreme Court decision can provide a binding certainty on the issue. Th
Will the Vodafone case hit FDI? Case : Show cause notice to Vodafone was issued by Indian Revenue Authorities arguing that they had failed to discharge withholding tax obligation with respect to tax on gains made by Hutch on sale of shares to Vodafone The Bombay High court said Vodafone Group Plc is liable for an estimated $2.6 billion in taxes for its 2007 acquisition of one of India's largest mobile phone companies. Decision as well as the tax department’s approach creates tremendous uncertainty on what aspects of an offshore transaction may fall within the Indian tax net. Tax practitioners see inherent bottlenecks while computing tax liability on such deals. The Vodafone judgement will definitely impact foreign investments into India. This is bound to affect FDI/M&A/PE deals as companies would ascribe a higher tax weightage risk while entering India. Offshore deals may also start drying up. But due to growing image and future prospectus of country, we are developing as a prominent nation and FDI would get much strong over the years despite any such issues.
Recommendations for India • Do away with too many caps in the overall regulatory regime. • Increase FDI limit for Insurance Sector to 49% from current 26%. • Increase FDI limit for Retail Sector. • Allow FII 100% ownership • Easy access to Foreign Investor by simplifying the approval procedure and industrial license • Liberalize the locking period for FII & FDI • Allow FDI in investment companies • "Better Investment Climate" Need of the Hour. • Liberalise the economic policies further so as to overcome the fiscal deficits faced by Indian economy • Invite corporate giants from countries like USA, China and south Korea • Maintain a balance between domestic companies and foreign companies so as domestic companies could survive in front of foreign giants. 49
"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