FDI and FII

Vicky Shah

Ronak Mehta

Hemen Parekh

Swati Gupta

Nimit

FDI…

What is FDI ????????• Acquiring asset in another Country• Transfer of financial resources,

technology & other skills • Intention - Acquire substantial control

over the foreign company

Types Of FDI….

By Direction

• Outbound • Inbound• Vertical• Horizontal

By Target

• Greenfield

• Mergers and Acquisitions

By moti

ve

•Resource seeking

•Market seeking

•Efficiency seeking

Routes for FDI in INDIARoutes for FDI in India…

Automatic Route

No Government approval is

required if the investment to be made falls within the sectoral caps specified for the listed activities.

FIPB Route

Investment proposals falling

outside the automatic route would require

prior Government approval.

CCFI Route Investment

proposals falling outside the

automatic route and having a

project cost of Rs. 6,000 million or

more would require prior approval of

Cabinet Committee of

Foreign Investment (“CCFI”).

Benefits to host country….

• Resource-transfer effects

• Employment effects

• Effects on competition & economic growth

Benefits to home country…

• Inward flow of foreign earnings

• Employment benefits

• The reverse resource-transfer effect

The Other Side Of The Coin….

• Domestic firms may suffer if they are not competitive

• Exploiting workers • Environmental and labor standards. • Company may lose out on its

ownership to an overseas company.

FDI In India….

10

Largest democracy –

political stability & consensus on

reforms

Liberal & transparent investment

policies

Fourth largest Economy

(PPP) - A safe place to do

business

Largest reservoir of

skilled manpower

Long-term sustainableCompetitive advantage

- High growth rate economy

Source - www.dipp.gov.in ; Department of Industrial Policy & Promotion Ministry of Commerce & Industry Government of India

Second Largest Emerging Market

Why India….

11

What They Say….“India is a developed country as far as intellectual capital is concerned”

“India can be a major part of Dell’s operations and we are looking to capitalize on India’s human capital”

“We are expanding our presence in India to take advantage of the ample R&D talent available”

“India is handling the most sophisticated projects in the world. I am impressed with the quality of work”

JACK WELCH, GEJOHN CHAMBERS, CISCO

MICHAEL DELL, DELL BILL GATES, MICROSOFT

“Who put my snap here”

VICKY SHAH, ?????

Evolution…

13

Pre 1991

1991

1997

2000

2000-09

Allowed selectively up to 40%

Up to 74/51/50% in 112 sectors under theAutomatic Route 100% in some sectors

Up to 100% under Automatic Route in all sectors except a small negative list

More sectors opened ; Equity caps raised in many other sectors Procedures simplified

FDI Policy Liberalization

FDI up to 51% allowed under the Automatic route in 35 Priority sectors

FDI Inflows…

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

30

3.255.54

15.585

24.57527.329

India

India

Source: UNCTAD, World Investment Report 2008. www.unctad.org/fdistatistics

Country-wise FDI Inflows (%)

44

98

6

433

3

20

Mauritius

Singapore

USA

UK

NETHERLANDS

JAPAN

CYPRUS

GERMANY

Others

FDI Outflows…

2003-04 2004-05 2005-06 2006-07 2007-08 (April-December)0

2000

4000

6000

8000

10000

12000

14000

1495 1768

4869

12880

10114

FDI OUTFLOWS (in US $ million)

FDI OUTFLOWS TOTAL

Major M&A Deals Undertaken Abroad by India Inc.

USD 12.1 billion USD 12.1 billion Tata Steel buys Corus PlcTata Steel buys Corus Plc

USD 6 billion USD 6 billion Hindalco acquired Novelis Inc.Hindalco acquired Novelis Inc.

USD 1.58 billion USD 1.58 billion Essar Steel acquired Algoma Steel Essar Steel acquired Algoma Steel

USD 1.6 billion USD 1.6 billion Suzlon Energy Ltd. acquires REpower Suzlon Energy Ltd. acquires REpower

USD 1.1 billion USD 1.1 billion United Spirits Ltd. acquired Whyte & MackayUnited Spirits Ltd. acquired Whyte & Mackay

Sector-wise FDI Contribution…

23%

10%8%

7%

6%

4%

4%3%

3% 2%ServicesComputerTelecommReal EstateConstructionAutomobilePowerMetallurgicalPetroleumChemicals

Sector Wise Policy….

SECTORS % FDI ALLOWED

Shipping and Ports 100% FDI (A)

Construction-development projects

100% FDI (A)

SEZ 100 % FDI (A)

Hospitals 100 % FDI (A)

Private sector banks 74 % FDI (A)

Stock Exchanges 49% FDI (A)

Airports 100% FDI- Greenfield Projects

Beyond 74% FIPB APP- Existing Airports

Roads & Highways 100% FDI

Telecom 74%, beyond 49% under FIPB route

Prohibited Areas…..

Steps to Attract FDI..

• “Better Investment Climate”

• Create a result-oriented bureaucracy

• Market India

• Target services

• Accelerate privatization efforts

FDI In Retail….

+

=

V/S

India China

Population (2009) 1.15 billion 1.33 billion

Population growth rate (%) 2009 1.93% 5.28%

Average real GDP growth rate % 2009: 6.5% 7.00%

Foreign direct investment (2008)

$27.3 billion

$92.4

billion

Population in poverty (2009) 27.5% 4%

Political system Multi party democracy

One-party state

Computer penetration per 1000 18 61

FDI Inflow Comparison….

Source: UNCTAD, World Investment Report 2008 ; www.unctad.org/wir or www.unctad.org/fdistatistics

Reasons For China’s Growth….

• Authoritarian government • High Savings Rate• A consistent and thoughtful marketing

effort• Creation of zones and infrastructure for

businesses• The business-above-all attitude• A strong manufacturing base• Putting Chinese interests first

FDI In Educatio

n…..

Need…

• $ 4 billion spent annually for higher education.

• To reduce brain drain

• Miserable condition of higher education in India

• Lowest public expenditure on higher education per student- 3%

• 100% FDI in Education

Eg. M/s.A Ltd.(US) invest in M/s.-B (India)…..

On 10.08.2009, M/s.A Ltd. Invests in the following way :

•Cash payment US$15000

•Equity shares US$2000

Journal Entries in the books of M/s.B…..

Merits….• Global exposure

• Foreign Revenues

• High quality human resources

Demerits….• Twining programmes

• Unaccredited and unrecognized

courses• Top Universities interested in collaborating with India’s outstanding institutions

• High fee structure

• Raising Inequality

The Chinese Way….

• Partner with Chinese institutions

• Profit not the sole objective

• Majority Chinese in governing

body

• Chinese President for the

institution

• Basic language- CHINESE

• No raise in fees without Approval

Current News…..

Indirect investment through domestic companies would not be counted as

part of foreign investment

What is the new norm all about..????

• As per the new policy, indirect investment through domestic companies would not be counted as part of foreign investment, while calculating the overall sectoral cap.

• Eg – Foreign co. ‘A’ can form a JV(49:51) ,company ‘C’ with an Indian co. ‘B’. ‘C’ will then qualify as Indian…if ‘C’ invests in another downstream company ‘D’ to any extent below 100% ‘D’ will be treated as having no FDI….since ‘D’ has no FDI, it can operate in any sector including retail, in which FDI is not allowed.

FII

FII means an ENTITY/FUND established or incorporated OUTSIDE INDIA which proposes to make investment in SECURTIES. FII’s are those investors that INDIRECTLY invest into the companies through the STOCK MARKET

Features…• They can invest in:

• Equity

• Debt

• Derivatives

• Mutual Funds

• Dated Government Securities

•SPECULATOR.

•Stability & Growth

•Impact the economy, Financial markets & Companies

Who can be FII….

• Pension Funds• Mutual Funds• Insurance or Re-Insurance companies• Foundations or Charitable Trust• Asset Management Companies• Portfolio Managers• Charitable Trustees•Endowment Funds• Banks

Eligibility….• Registered with SEBI under Regulation 6 (FII), 1995 :

• Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity

• Regulated by an appropriate foreign regulatory authority in the same category where registration is sought from SEBI.

• Is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

• Legally permitted to invest in securities outside the country

• “Fit and proper" person.

Entry Options..

• Fulfill the above criteria & enter as a FII

• As a Sub-Account of the FII

• Investing in the BROAD BASED FUND

• Through FII for the unregistered investors

• As an Investor in the funds of a FII in the foreign country

Direct Entry as an FII….

•Register with SEBI • 70:30• 100% Debt

•Register your sub-accounts•Inform RBI•Open a Special Non-Resident Rupee Account with a Designated Bank•Appoint a Local Custodian (approved by SEBI)•Open an Trading Account with a Stock Broker•Open a Demat Account with the bank/broker•START TRADE

Registration Procedure….

Documents…

•Form A• Certified copy of clauses of MOA & AOA• Audited Financial Statement & Annual Report for last year

Registration Fee: US$ 10,000

Validity : 3 yrs

Renewal Fee: US$ 10,000

Entry through Sub-Accounts….Includes those foreign corporates, institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.

Application:• FII to apply on behalf of the sub-account holder• Form AA• Registration Fee : US$ 2,000• Validity : Co-terminus with FII it is registered under• Renewal Fee : US$ 2,000

Broad Based Fund…Fund Established By Proprietary, Foreign Corporate or Foreign Individuals outside India

Which has (any one)

•at least twenty investors with no single individual investor holding more than 10% shares or units of the fund

•Institutional Investor/ Investors (not necessary to have 20 investors)

•institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund

Entry Of Unregistered Investors…FII buy stocks on behalf of the overseas investors who are not registered with SEBI but are interested in taking exposure in Indian securities market.

P-NOTE:

• This was introduced & followed strictly in 2007 but now has been relaxed.

• FII to issue a Participatory Note (P-Note) to the unregistered investor on the investment amount he provides

• Introduced by RBI to curb the Money Laundering problems

UnidentifiedInvestor

Registered FII

Order ExecuteStock

Brokingfirm

ConfirmP-Note

Limits Of Investment….• 10% of issued capital – Single FII

• On behalf of each sub-account shall not exceed 10% of total issued capital.

• Sub-account registered under Foreign Companies, the limit is fixed at 5% of total issued capital.

• These limits are within overall limit of 24% / 49 % / 74% or the sectoral caps, as prescribed by Government or RBI.

•INV IN GOVT DEBT-• Under 100% Debt Route : US$ 2.0 bn• Under 70:30 Route : US$ 0.6 bn

• INV IN CORPORATE DEBT-• Under 100% Debt Route : US$ 1.0 bn• Under 70:30 Route : US$ 0.5 bn

Regulators…

SEBI-Rules

• Registering FII

• Approving Custodian

• Clearing under 6A/7A

• Transfer to 7000 series

Notification-20 under FII…FOREIGN PORTFOLIO INVESTMENTS

PIS limit – Single FII – 10 per cent , Aggregate limit 24 per cent raised to sectoral cap

Exchange Trade Derivatives Contracts allowed

Can buy dated Government Securities/treasury bills

Can buy listed non-convertible debentures/bonds issued by Indian companies

Units of domestic mutual funds directly or through stock broker

Subject to certain limits and conditions, FII can subscribe to the Perpetual Debt Instruments issued by banks in India

MONITORING OF FII BY RBI :

The Reserve Bank of India monitors the ceilings on FII investments in Indian companies on a daily basis. They even publish data regarding the amount of FII inflow & Outflow.

A. Caution List When trigger limit which is 2% below the applicable limit, RBI issues notice to all concerned.

B. Ban List Once the limit of FII reaches the overall limit, Reserve Bank puts the company under the ban list

FII Allowed upto 24% under PIS

FII Allowed upto 30% under PIS….

FII Allowed upto 40% under PIS….

FII Allowed upto 49% under PIS….

FII Allowed upto given Limits….

74%

35%74%

35% 33%

35%100%

History Of Sensex and FIIs….

25/07/1

990

15/01/1

992

29/2/1

992

30/03/1

992

8/10/1

999

14/02/2

000

21/09/2

001

20/06/2

005

8/9/2

005

28/11/2

005

6/2/2

006

21/03/2

006

20/04/2

006

30/10/2

006

5/12/2

006

6/7/2

007

19/9/2

007

26/09/2

007

9/10/2

007

19/10/2

207

29/10/2

007

8/1/2

008

13/06/2

008

25/6/2

008

2/7/2

008

6/9/2

008

10/9/2

008

18/05/2

0090

5000

10000

15000

20000

25000

10002000

30004000

5000

6151

2595

70008000

900010000

1100012000

1300014000

1500016000

1700018000

1900020000

21000

1500014000

1200011000

10000

14218

FII v/s Sensex Correlation….MONTH

2009GROSS PURCHASE

(RS Cr)GROSS SALES

(RS Cr)NET INVESTMENT

(RS Cr)

SENSEX GAIN/LOSS %

JANUARY 35778.3 39220.8 -3442.5 -4.84%

FEBRUARY 27986.9 31111.5 -3124.6 -5.66%

MARCH 40978.6 46868.6 -5890 9.19%

APRIL 49714.6 40716.2 8998.4 17.46%

MAY 81265.9 63860.6 17405.3 28.26%

JUNE 76072.5 71173.7 4898.8 -0.90%

JULY 77037.5 64433.4 12604.1 8.12%

Determinants ….

• MARKET SIZE

• LIBERALIZED TRADE POLICIES

• INCENTIVES AND GOOD OPERATING CONDTIONS

• POLITICAL SCENARIO

• DISINVESTMENT POLICIES

Advantages…..• FINANCE

• ECONOMIC GROWTH

• BALANCE OF PAYMENTS

• DEVELOPS RELATIONSHIPS

Disadvantages….• ANYTIME WITHDRAWAL

• OUTFLOW OF MONEY

• SHORT TERM OPPORTUNITES

• EASY ROUTE WITHOUT IDENTITY

• INDIAN MARKET MORE SENSITIVE

FDI v/s FII….FDI FII

FDI IS WHEN A FOREIGN COMPANY BRINGS CAPITAL INTO A COUNTRY TO SET UP A PRODUCTION OR OTHER FACILITY

FII IS WHEN A FOREIGN COMPANY BUYS EQUITY IN THE COMPANY THROUGH STOCK MARKETS

FDI INVOLVES IN DIRECT PRODUCTION ACTIVITY AND ALSO OF MEDIUM TO LONG TERM NATURE

DOES NOT INVOLVE DIRECT ACTIVITY AS IS FOR SHORT TERM

ENABLES DEGREE OF CONTROL IN THE COMPANY

DOES NOT INVOLVE ANY DEGREE OF CONTROL IN THE COMPANY

BRINGS IN LONG TERM CAPITAL BRINGS IN SHORT TERM CAPITAL

IT INCREASES PRODUCTION, BRINGS IN MORE AND BETTER PRODUCTS AND SERVICES BESIDES INCREASING THE EMPLOYMENT OPPORTUNITIES AND REVENUE FOR THE GOVERNMENT BY WAY OF TAXES.

IT ONLY WIDENS AND DEEPENS THE STOCK EXCHANGES AND PROVIDES A BETTER PRICE DISCOVERY PROCESS FOR THE SCRIPTS.

• Time frame• Management control• Employment• Stability• Procedures• Identity• Active/Passive

Difference between FDI & FII…

Any Questions???????