Foreign Direct Investment (FDI)

&
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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Road Map for Presentation

Background

What is FDI & FII

Distinction between FDI & FII

FDI Guidelines

FII Guidelines

Case Studies
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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!
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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
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What is FDI & FII

Foreign Direct Investment (FDI):
1. FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts.
2. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations.
3. It does not include foreign investment into the stock markets.
4. 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):
1. FII denotes all those investors or investment companies that are not located within the
territory of the country in which they are investing.
2. SEBIs 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.
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Distinction between FDI and FII

FDI

FII

1. It is long-term investment

1. It is generally short-term investment

2. Investment in physical assets

2. Investment in financial assets

3. Aim is to increase enterprise capacity or

productivity or change management
control

3. Aim is to increase capital availability

4. Leads to technology transfer, access to

markets and management inputs

4. FII results in only capital inflows

5. FDI flows into the primary market

5. FII flows into the secondary market

6. Entry and exit is relatively difficult

6. Entry and exist is relatively easy

7. FDI is eligible for profits of the company

7. FII is eligible for capital gain

8. Does not tend be speculative

8. Tends to be speculative

9. Direct impact on employment of labour

and wages

9. No direct impact on employment of labour

and wages

10.Abiding interest in mgt.

10.Fleeting interest in mgt.

Overview

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 Indias 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
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Foreign Direct Investment

Snapshot

Million US$

18

Figures in

4%

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* April 2009 January 2010

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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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

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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%
Pre 1991

1991

1997

2000

Post 2000
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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

Allowed for Most sectors

Limits : Sectoral caps/ stipulated sector

specific guidelines

Inward remittances through proper banking

channels

Pricing valuations prescribed

Post facto filing with 30 days of fund receipt

Filings within 30 days of share allotment

Includes Technical Collaboration/ Brand

Name/ Royalty

Foreign Investment Promotion Board (FIPB)

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

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Foreign Direct Investment Policy

FDI limits Illustrative list
Automatic Route
(Illustrative)

Note:

Prior Approval
(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

Existing Airports
Asset Reconstruction
Companies
Titanium Minerals

Negative List
(Illustrative)
100%
49%

Courier

Agriculture (b)

Lottery, betting and gambling

100%

Broadcasting (a)
Cigars & Cigarettes

100%
100%

Print Media (a)

26%

Single brand retailing

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

(a) Sector specific guidelines

(b) Subject to certain exceptions
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Recent Developments

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Setting the context

Contribution of FDI in Indias economic development is an

acknowledged

fact.

From inception policy subject to

extensive amendments from 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

Draft consolidated policy

Consolidated FDI policy issued

FDI policy in Budget 2010-11

issued in late 2009 for public comments

effective from 1 April, 2010
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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
FPI no

lasting interest

intention to influence the management of the investee entity

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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

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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

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

Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate

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Royalty/ Foreign Technology

Agreement
Earlier
Brand name/ trade mark royalty

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

Foreign Technology Agreements

All payments
covered under
Automatic
route, subject
to limits

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
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Calculation of Indirect FDI

Direct Foreign Investment

Indirect Foreign Investment

Foreign Co.

Foreign Co.
Overseas

Overseas

Direct FI

India

I Co1

India

I Co1

Indirect FI
I Co2
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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
Foreign Co.
90%

Co1
60%

Infrastructure sector
Overseas
India

Foreign Co.
49%

Co1*
100%

Co2

Co2

FI in Co2 is 54% (90*60%)

FI in Co2 is NIL

Overseas
India

*Management of
Co1 with Indians

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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)
40%
39%

Co1 (Owned and

Controlled by RIC)
10%

Co2 (Owned and

Controlled by RIC)
Direct FI in Co2 = 39%
Indirect FI in Co2 = Nil
Total FI in Co2 = 39%

NRE

Overseas

Overseas

51%

India

51%

India

Co1 (Owned or
Controlled by NRE)
49%

Co2 (Owned and

Controlled by NRE)
Direct FI in Co2 = 51%
Indirect FI in Co2 = 49%
Total FI in Co2 = 100%
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Downstream Investment

Foreign Co.
Co1 could be
Overseas
India

- An investing company; or
- An investing-cum-operating
company

Co1

Downstream
Investment

Co2 is an operating company

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

-Subject to sectoral caps

- Cap of USD 25,000 per calendar year

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Procedural Aspects

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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

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Sector Specific Guidelines

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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

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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:
Automatic Route

Approval Route

Upto 49%

Upto 74%
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Sector Specific Guidelines

Private sector banks/ Civil Aviation
Banks

No change in existing conditions

FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route

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

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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:
Activity

Limit

Radio

20%

Cable Networks

49%

Direct to Home*

49%

Uplinking news/ current affair TV channel**

26%

Uplinking non news/ current affair TV channel

100%

* FDI component not to exceed 20%

** May be raised to 49% as per recent press reports
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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:

Activity

Limit

Newspapers/ periodicals dealing with news

and current affairs*

26%

Scientific magazines/ specialty journals/

periodicals

100%

* May be raised to 49% as per recent press reports

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INSURANCE

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%.

DRUGS & PHARMACEUTICALS

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

Foreign Direct Investment is allowed in existing projects

- up to 74% under automatic route

- beyond 74% and up to 100% subject to Government approval

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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
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FOREIGN INSTITUTIONAL INVESTORS

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What are Foreign Investors

looking for?

Factors affecting foreign

investment

Good projects

Rate of interest

Demand Potential

Speculation

Revenue Potential

Profitability

Stable Policy
Environment/Political
Commitment

Costs of production

Optimal Risk Allocation

Framework

Economic conditions
Government policies
Political factors
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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

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

stock exchange cannot be sold through a private

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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

70 : 30 Route

US $ 200 million

Total Limit

S $ 1.75 billion

US $ 1.55 billion

For corporate debt the investment limit is fixed at US $ 500 million.

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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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Importance of FII Inflow - FMs 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.

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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.

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Disadvantages of FII

Problems of Inflation
Problems for small investor
Adverse impact on Exports
Hot Money

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FII Investments & Market Reaction

While strong inflow of funds from

foreign institutional investors (FIIs)

cheer

has been a reason to

, it
could turn into a nightmare and if the
global investors make a sudden exit
can send the bourses

crashing.

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FII Inflows Vs Sensex

FII Investment from 2005 - 2010

FII Investment Vs Sensex

BSE Sensex

FII average holding in BSE 500

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Case Studies and Recommendations

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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
RBIs 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 departments 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
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"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

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