Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII)
Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII)
Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII)
&
Foreign Institutional Investment (FII)
A Presentation by:
Kedar Gharat
Manoj Gupta
Pramod Jadhav
Ashish Lalpuria
Arun Pacheco
Nilesh Raut
Anand Singh
Sachin Dsouza
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FDI Guidelines
FII Guidelines
Case Studies
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India -- the largest Democracy - one of the fastest growing economies in the World!
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FII
1. It is long-term investment
8. Tends to be speculative
Overview
Foreign investment in India is regulated by Government of Indias FDI policy. The FDI
guidelines administered by the Ministry of Commerce and Industry.
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
Million US$
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Figures in
4%
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Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India
Foreign investment (FI) from Mauritius constituting 43%* of Indias total FI
*as per information in the Press
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Up to 51%
under Automatic
Route for
35 Priority Sectors
Allowed selectively
up to 40%
Pre 1991
1991
1997
2000
Post 2000
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Government Route
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Note:
Prior Approval
(Illustrative)
IT / ITes
Financial services
(a)
Existing Airports
Asset Reconstruction
Companies
Titanium Minerals
Negative List
(Illustrative)
100%
49%
Courier
Agriculture (b)
100%
Broadcasting (a)
Cigars & Cigarettes
100%
100%
26%
51%
Atomic energy
Retail trading (except single
brand up to 51%)
Chit fund, Nidhi company
Trading in Transferable
Development Rights
Shipping
Manufacturing sector
Hotels and tourism
Recent Developments
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acknowledged
fact.
provide clarity
downstream investment
lasting interest
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
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contd.
Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate
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Payment
of royalty upto 1% of
domestic sales and 2% of exports
permitted (without technology
transfer)
Where
Lumpsum
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
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Foreign Co.
Foreign Co.
Overseas
Overseas
Direct FI
India
I Co1
India
I Co1
Indirect FI
I Co2
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Test
Telecom sector
Foreign Co.
90%
Co1
60%
Infrastructure sector
Overseas
India
Foreign Co.
49%
Co1*
100%
Co2
Co2
FI in Co2 is NIL
Overseas
India
*Management of
Co1 with Indians
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NRE
Overseas
Overseas
51%
India
51%
India
Co1 (Owned or
Controlled by NRE)
49%
Downstream Investment
Foreign Co.
Co1 could be
Overseas
India
- An investing company; or
- An investing-cum-operating
company
Co1
Downstream
Investment
Co2
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Transfer of securities
basic rules
Type of transfer
NR to NR or
Window
Automatic
NRI to NRI
R to NR
Automatic
NR to R
Automatic
R to NR
services
in
financial RBI
approval
Control or ownership
Govt.
from R to NR pursuant to
approval
M&A
Key conditions
Subject to prior venture/ tie up condition
- Min. valuation and compliances
- Activities not under approval route
Max. valuation and compliances
-Only for sectors with sectoral caps
-Gift not to exceed 5% of paid-up capital
Gift by R to NR
RBI
approval
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Procedural Aspects
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FDI not
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FDI Limits:
Automatic Route
Approval Route
Upto 49%
Upto 74%
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Civil Aviation
30
Limit
Radio
20%
Cable Networks
49%
Direct to Home*
49%
26%
100%
Limit
26%
100%
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INSURANCE
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.
AIRPORTS
Foreign Investment up to 100% is allowed in green field projects under automatic route
INFRASTRUCTURE
100% FDI is permitted for
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Good projects
Rate of interest
Demand Potential
Speculation
Revenue Potential
Profitability
Stable Policy
Environment/Political
Commitment
Costs of production
Economic conditions
Government policies
Political factors
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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
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
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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.
70 : 30 Route
US $ 200 million
Total Limit
S $ 1.75 billion
US $ 1.55 billion
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.
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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.
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Advantages of FII
FIIs have a greater appetite for equity than debt in their asset structure. It improve capital
structures.
FIIs as professional bodies of asset managers and financial analysts enhance competition
and efficiency of financial markets.
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.
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Disadvantages of FII
Problems of Inflation
Problems for small investor
Adverse impact on Exports
Hot Money
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cheer
crashing.
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BSE Sensex
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- 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
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.
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.
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