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FOREIGN INVESTMENT

IN INDIA :

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An Overview

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Foreign Institutional Investor (FII)

What is FII

Why we need FII Process of the Inflow of FII

Benefits

Types

Advantages and disadvantages

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What is an FII??

An institution established outside India, which invests insecurities traded on the markets in India e.g.

Pension Funds Mutual Funds Investment Trust Insurance companies Endowment Funds University Funds

Foundations or Charitable Trusts Asset Management Companies Power of Attorney Holders Bank

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Modes of FII1) By Direction

* Inward

*Outward

2) By Target

* Mergers and Acquisitions* Horizontal FII

* Vertical FII

(a) Backward Vertical FII

(b) Forward Vertical FII3 )By Motive

* Resource-Seeking

* Market-Seeking

* Efficiency-Seeking

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Factors Affecting FII

Financial incentives (Funds from local Government)

Fiscal incentives (Exemption from import duties)

Indirect incentives (Provides land and Political stability

Market potential & accessibility

Large economy

Market size

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Why India? Liberal, largest democracy, Political Stability Second largest emerging market (US$ 2.4 trillion) Skilled and competitive labors force

highest rates of return on investment one hundred of the Fortune 500 have R & D facilities in

India Second largest group of software developers after the

U.S. lists 6,500 companies on the Bombay Stock Exchange

(only the NYSE has more)

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Why India (cont.)

World's fourth largest economy & second largestpharmaceutical industry

growth over the past few years averaging 8% has a middle class estimated at 300 million out of a total

population of 1 billion Destination for business process outsourcing, Knowledge

processing etc. Second largest English-speaking, scientific, technical and

executive manpower Low costs & Tax exemptions in SEZ Tax incentives for IT , business process outsourcing and

KPO companies

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Government policies

Automatic Route

Prior Permission (FIPB)

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Investing in India Entry Routes

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Investing in India

Automatic Route Prior Permission(FIPB)

General ruleNo prior permission

requiredOnly information to theReserve Bank of Indiawithin 30 days of inflow/Issue of shares

By exceptionPrior Government

Approval needed

Decision generallyWithin 4-6 weeks

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What are the types of FIIs

Foundation/Charitable

Trusts

AssetManagementCompanies

Banks

InsuranceCompanies

HedgeFunds

InvestmentBanking

UnitInvestmen

t Trusts

InvestmentTrusts

MutualFunds

PensionFunds

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FII Investment Sectors

Prohibited activities

Atomic energy

Arms and ammunition Lottery business

Betting and Gambling

Aircraft and warships

Coal lignite

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Fully permitted Activities Cigar and cigarettes of

tobacco

Coal, Roads & Highways Diamond, Gold, Silver ,

Minerals Atomic minerals Electricity

Hotel, hospitals

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Retail I.T

Oil & Energy

Power sector

Pharmaceuticals & Chemicals

Real state Mining Mobile Sector Automobile

Telecommunication

FII inflows In real estate US$ 5 Billion FII inflows Retail US$ 20 Billion by 2010

FII inflows in Mining US$ 2,5 Billion per N.M. FII inflows in Telecommunication US$ 24 Billion

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Major Investments

Companies Sector Investment

Wal mart,Marks Retail US$ 10 Billion

Intel Corp. I.T US$ 40 Billion

British & cairn Oil & Energy US$ 2 Billion

Essar power Power sector US$ 2 Billion

Toyota Automobile US$ 10.51 Billion

Panasonic Telecommunication US$ 200 million

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Allocation of government debt &

corporate debt investment limits to

FIIs Increased investment limit for FIIs in government andcorporate debt

Raising the cap to US $ 10 billion from 5

Current limit of Fll investment in corporate bondsincreased by US $ 5 billion, raising the cap to US $ 20billion

Government debt long term: No single entity shall beallocated more than 2000 crore of the investment limit

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Policy Developments

Maintenance of Collateral by FIIs for Transactions in

the Cash Segment :domestic government securities andforeign sovereign securities with AAA rating as collateral.

Reporting of Lending of Securities bought in the

Indian Market :FIIs reporting of the lending of securitiesbought in the Indian market will be done on a weeklybasis.

FII participation in Interest Rate Futures

FII Investment in Corporate Bonds Infra Long-term

Category

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Policy measures to attract FII

Automatic approval: Automatic approval up to aspecified limit is allowed in 34 specified high priority,capital intensive and high technology industries

The Foreign Investment Promotion Board (FIPB): FIBPhas been set up to process applications in cases notcovered by automatic approval.

Foreign Investment Implementation Authority (FIIA):

to ensure the approvals for Foreign Investment (including

NRI investment) are quickly translated into actualinvestment inflows and that proposals fructify into projects

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Foreign Institutional Investors

FIIs can individually purchase upto 10% and collectively upto 24% of the paid-upshare capital of an Indian company

This limit of 24% can be increased to sectoral cap/ statutory limit applicable to theIndian company by passing a board resolution/shareholder resolution

FIIs can purchase shares through open offers/private placement/stock exchange

Shares purchased by FII through stock exchange cannot be sold through a privatearrangement

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 thesub-accounts

FIIs can raise money through participatory notes or offshore derivative instrumentsfor investment in the underlying Indian securities

FIIs in addition to investment under the FII route can invest under FDI route

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portfolio investment scheme (PIS)

The limit is 20 per cent of the paid up capital in the

case of public sector banks, including the State Bank

of India.

The ceiling of 10 per cent for NRIs/PIOs can be

raised to 24 per cent subject to the approval

The Reserve Bank has fixed cut-off points that are

two percentage points lower than the actual ceilings.

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ROAD BLOCKS IN FII INVESTMENT

LACK OF POLITICAL STABILITY

LACK OF ECONOMIC STABILITY

TAX ISSUES POOR INFRASTRUCTURE

ABSENCE OF INCENTIVES

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Our Portfolio

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Pharma

The estimated value of business of the PharmaceuticalsIndustry in 2008 was Rs 80,300 crore which reached toRs 1,04,209 crore in March 2010

Indian pharmaceutical industry is poised to grow at therate of 18 per cent by the year 2016-17

The projected rate of growth of the industry in domesticmarket has been envisaged as 21 per cent and theprojected growth rate in the international market has been

envisaged as 16 per cent

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Pharma

30 million to be invested in pharma sector

18 % growth in the sector

Companies Sun Pharma(18-20%), Ajanta Pharma(mid

cap)(19.7% CAGR) , Dr.Reddys lab. ,Aurobindo pharma

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CEMENT SECTOR

30 million to be invested

Cement industry to grow by 10 % CAGR.

Companies Ambuja cement(9 %), Growth estimate 8-23

% ACC Volume growth(5%), Earnings growth 6 -24 %

Grasim Industries 11% volume growth , 4- 20 %

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Banking Sector

35 million to be invested

Expected growth of banking sector 14 -15 %

1/6th of total FII investments in Banks

ING Vysya (20% CAGR), HDFC Bank, and KotakMahindra Bank(14.5%)

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FII Investment Limit

Public Sector banks in which 20% limit has been reachedand no further investments are permitted.

1.Bank of Baroda

2.Oriental Bank of Commerce

3.Punjab National Bank

4.State Bank of India

5.Union Bank of India

Public Sector banks in which 18% caution limit has beenreached and further

purchases are allowed only with prior permission of RBI.

1.Canara Bank*

2.Indian Overseas Bank*

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Agencies Regulating FII in India

RBI: the apex bank

FIPB: reviews all foreign investment proposals

SEBI: which regulates India's capital markets

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Monthly FII Net Investment` crores

Month Equity Debt Total

January-12 10357.70 15971.20 26328.90

February-12 25212.10 10015.80 35227.90

March-12 8381.10 -6588.60 1792.50

April-12 -1109.10 -3787.50 -4896.60

May-12 -347.10 3569.10 3222.00

June-12 -501.30 1681.80 1180.50

July-12 10272.70 3391.70 13664.40

August-12 10803.90 265.20 11069.10

September-12 19261.50 622.50 19884.00

October-12 11364.00 7851.70 19215.90

Total - 2012* 93695.50 32992.90 126688.60

* The data presented above is compiled on the basis of reports submitted to SEBI by custodians and constitutes trades conducted by FIIs on and upto the previoustrading day(s).

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