“The Most Extraordinary Country”*

Doing Business in India

When You Think INTERNATIONAL,

Think Fulbright.TM

Tuesday, February 20, 20077:15 - 9:00 a.m.The Houstonian Hotel111 North Post Oak LaneHouston, Texas 77024

*Mark Twain

Foreign Investment in India: An Overview

Presented by: Julie B. HuntEmail: jhunt@fulbright.com

Phone: (214) 855-8046

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

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

Facts and Figures

Foreign Investment Growth

Source: Ministry of Finance, Government of India

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

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

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)

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)

Foreign Investment - Options

Foreign Direct Investment (FDI) Subscription to new shares Transfer of existing interests

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)

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.

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.

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)

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

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

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

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

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”

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)

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

Foreign Investment - Options (cont’d)

Foreign Institutional Investors (FII) Qualifying as a Sub-Account

Also requires a fit and proper person analysis

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

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

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

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

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

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

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

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

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

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

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

When You Think INTERNATIONAL,Think Fulbright.TM