fdi and fii
TRANSCRIPT
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???????