foreign investment in india an overview 3466

8/8/2019 Foreign Investment in India an Overview 3466

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The Most

Extraordinary Country*

Doing Business in India

When You ThinkINTERNATIONAL,

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


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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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Indian Market(contd)

Facts and Figures

Foreign Investment Growth

Source:Ministry of Finance, Government of India


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Indian Market (contd)

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 continuingliberalization of foreign investment


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Foreign Investment - LegalRegime

Sources of Law and Policy

Foreign Exchange Management Act, 1999 (FEMA)

and related regulations

Press notes issued by the Ministry of Commerce andIndustry

Securities & Exchange Board of India Act, 1992 and

related regulations

Companies Act, 1956

Sector-specific laws and rules


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Foreign Investment - LegalRegime

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

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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Subscription to new shares

Transfer of existing interests


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Automatic Route

No approval needed from FIPB or the RBI

Widely available, subject to certain percentagecaps 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 (contd)

Foreign Direct Investment ApprovalRoute AutomaticRoute 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 Direct Investment ApprovalRoute

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 Direct Investment ApprovalRoute

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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Pricing Restrictions

If listed on a stock exchange, price cannot be lower than

the average weekly high and low of closing pricesduring 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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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 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 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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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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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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FIIs may invest in:

securities in the primary and secondary markets

(shares, debentures, warrants of listed and unlistedcompanies)

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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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 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 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 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 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

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

Mumbai and Delhi airports Public/PrivatePartnership (PPP) with 26% governmentparticipation

Vodafone $11.1 billion purchase of a 67% stake in

Hutchison Essar (fourth largest mobile phonecompany in India)

Airbus announced $1 billion investment in anengineering facility and pilot training school

Cisco investing $1.1 billion in various initiatives(manufacturing facility, VC investments, broadbandand digital media), and planning to move 20% of topexecutives to India


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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 theworld)

Trend of increasing liberalization of foreign

investment


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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


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When You ThinkINTERNATIONAL,

Think Fulbright.TM

foreign investment in india an overview 3466

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