A Presentation by: Kedar Gharat Manoj Gupta Pramod Jadhav Ashish Lalpuria Arun Pacheco Nilesh Raut Anand Singh Sachin Dsouza 20 21 24 34 38 49 60 63
Background
FDI Guidelines
FII Guidelines
Case Studies
2
India -- the largest Democracy - one of the fastest growing economies in the World!
3
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
1. It is long-term investment
2. Investment in physical assets 3. Aim is to increase enterprise capacity or productivity or change management control 4. Leads to technology transfer, access to markets and management inputs 5. FDI flows into the primary market
Overview
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
8
27309 22963
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
Up to 51% under Automatic Route for 35 Priority Sectors Allowed selectively up to 40%
Pre 1991
1991
1997
2000
Post 2000
11
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
12
Note:
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 Shipping Manufacturing sector Hotels and tourism
Existing Airports Asset Reconstruction Companies Titanium Minerals Broadcasting (a) Cigars & Cigarettes Courier Print Media (a) Single brand retailing
Agriculture (b) Atomic energy Retail trading (except single brand up to 51%) Lottery, betting and gambling Chit fund, Nidhi company Trading in Transferable Development Rights
13
Recent Developments
14
acknowledged
fact.
From inception policy subject to extensive
through Press Notes, circulars and clarifications Press Note 2,3 and 4 of 2009 issued to downstream investment FM stressed the need for a consolidated Draft consolidated policy
provide clarity
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 lasting
interest
FPI no
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
17
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 Investment by FIIs permitted upto 10% for individual FII and 24% in aggregate
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
18
Payment Where
of royalty upto 1% of domestic sales and 2% of exports permitted (without technology transfer) royalty for brand name/ trademark and technology, then overall limits of 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
19
Foreign Co.
Overseas India
Foreign Co.
Overseas
Direct FI
India
I Co1
I Co1
Indirect FI
I Co2
20
Test
Telecom sector
Infrastructure sector
Overseas India
Foreign Co.
90%
Foreign Co.
Overseas
49%
India
Co1
60%
Co1*
100%
Co2
FI in Co2 is 54% (90*60%)
Co2
FI in Co2 is NIL
21
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%
Overseas India
NRE
51%
51%
Overseas India
Co2 (Owned and Controlled by RIC) Direct FI in Co2 = 39% Indirect FI in Co2 = Nil Total FI in Co2 = 39%
Co2 (Owned and Controlled by NRE) Direct FI in Co2 = 51% Indirect FI in Co2 = 49% Total FI in Co2 = 100%
22
Downstream Investment
Co1
Downstream Investment
Co2
23
NR to R
R to NR services in
Automatic
financial RBI approval
Only for sectors with sectoral caps -Gift not to exceed 5% of paid-up capital
Gift by R to NR
RBI approval
24
Procedural Aspects
25
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
26
27
FDI not
Retail trading (except single brand) Atomic Energy Lottery business Gambling & Betting Chit fund and Nidhi company Trading in Transferable Development Rights
Prohibition extended to foreign technology collaboration including licensing for franchisee, trademark, brand name or management contract for lottery, betting and gambling business
28
FDI allowed in the following (illustrative): Basic and cellular Unified Access Services National/ International Long Distance
FDI in ISPs without gateways now capped at 74% in line with DoT guidelines of 2007 Subject to guidelines issued DOT FDI Limits:
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
30
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 20% 49%
Direct to Home*
Uplinking news/ current affair TV channel** Uplinking non news/ current affair TV channel
* FDI component not to exceed 20% ** May be raised to 49% as per recent press reports
49%
26% 100%
31
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 26% 100%
Newspapers/ periodicals dealing with news and current affairs* Scientific magazines/ specialty journals/ periodicals
* May be raised to 49% as per recent press reports
32
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%.
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
33
INFRASTRUCTURE
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:
35
Good projects
Demand Potential Revenue Potential Stable Policy Environment/Political Commitment Optimal Risk Allocation Framework
Profitability
Costs of production Economic conditions Government policies Political factors
36
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 stock exchange cannot be sold through a private
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
37
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.
limits are applicable: 100 % Debt Route 70 : 30 Route Total Limit US $ 1.55 billion US $ 200 million S $ 1.75 billion
38
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.
39
40
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.
41
Disadvantages of FII
Problems of Inflation
Problems for small investor
42
While strong inflow of funds from foreign institutional investors (FIIs) has been a
reason to , it could turn into a nightmare and if the global investors make a sudden exit can send the bourses
cheer
crashing.
43
BSE Sensex
Rs. in (Crores)
44
45
- 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. 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.
Invite corporate giants from countries like USA, China and south Korea
Maintain a balance between domestic companies and foreign companies so as domestic companies could survive in front of foreign giants.
49
"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
50