Fdi Final (yatin)

Presented By: Puneeta Pakhredia Rahul Kapoor Yatin Sharma

19-MBA-06 21-MBA-06 39-MBA-06

Command and Control Economy Allocation of resources by the Government (budgetary grants) Government took active part in setting priorities for the economy Self-Reliance was the buzz word Nationalization of Banks Limited scope for private participation

Phases of Indian Economy 1981-1990 Scope of “canalized” imports reduced Open General Licensing (OGL) expanded: 30% imports freed up by 1990 East-Asian style export incentives in the second half of the 1980s More than 30 percent real depreciation of the rupee in the second half of the 1980s Tariffs raised to mop up the quota rents

Phases of Indian Economy 1991-2000 Liberalization and Globalization of Indian Economy Increased emphasis on private sector participation Limited extent of FDI participation Gradual improvement in the enabling environment Highest industrial tariff down from 350 percent in 1991 to 12.5 percent currently.

Phases of Indian Economy POST 2000 Political Coalitions have started providing stable governments Government to get out of owning and managing businesses: Disinvestment Policy Gradual relaxation in the FDI Policy.

Progressive Liberalization PRE 1991

FDI was allowed selectively up to 40% under FERA This period was dominated by the Congress party

1991

35 high priority industry groups were placed on the Automatic Route for FDI up to 51%. Minority Congress government: Initiated economic reforms.

1997

Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/ 51%/50% United Front Government: Inclusive of ‘left parties’, was perceived as traditionally opposed to FDI, but continued with the reforms.

2000

All sectors placed on the Automatic Route for FDI except for some. BJP coalition government:(coalition of Left and Right wing parties) was traditionally seen as opposed to FDI, but continued with economic reforms

Progressive Liberalization POST 2000

Many new sectors opened to FDI; viz., insurance (26%), integrated townships (100%), mass rapid transit systems (100%), defence industry (26%), tea plantations (100%), print media (26%). Sectoral caps in many other sectors relaxed; BJP coalition government: pursued reforms vigorously and initiated second generation reforms.

Present Picture India: Fourth largest economy in terms of Purchasing Power Parity Tenth most industrialized economy GDP growth rate of 9.1% - Second highest in the world. Considerable improvement in FDI inflows FII inflows for the period, July 2007 FII inflow has exceeded USD 8.5 billion, which is more than the cumulative FII inflow in the last whole year.

ROUTES FOR FOREIGN DIRECT INVESTMENT Routes available for FDI:

1st route: Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of shares

The Entry Process: Automatic Route All items/activities for FDI investment up to 100% fall under the Automatic Route except the following: All proposals that require an Industrial License. All proposals in which the foreign collaborator has a previous venture/ tie up in India All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor. All proposals falling outside notified sectoral

ROUTES FOR FOREIGN DIRECT INVESTMENT 2nd Route: FIPB Route – Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (“FIPB”). Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI

FIPB Approval For all activities, which are not covered under the Automatic

Route Composite approvals involving foreign investment/ foreign technical collaboration Published Transparent Guidelines vs. Earlier Case by Case Approach Downstream Investment

ROUTES FOR FOREIGN DIRECT INVESTMENT 3rd Route: 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”). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI - Investment proposals falling within the automatic route and having a project cost of Rs. 6,000 million or more do not require to be approved by CCFI

TYPES OF FOREIGN INVESTMENT FOREIGN DIRECT INVESTMENT FDI refers to investment in a foreign country where the investors retains control over the investment. It typically takes the form of starting a subsidiary, acquiring a stake in an existing firm or starting a joint venture in the foreign country. FDI is now recognized as an important driver of growth in the country. Government is , therefore, making all efforts to attract and facilitate FDI from NRIs including Overseas Corporate Bodies (OCBs), to complement and supplement domestic investment PORTFOLIO INVESTMENT If the investor has only a sort of a property interest in investing the capital in buying equities ,bonds or other securities abroad, it refers to as portfolio investments. That is, in case of PI, the investor uses his capital in order to get a return but has not got much control over the use of capital. Therefore , PI is considered to be an indirect form of investment.

According to WTO, “Foreign Direct Investments (FDI) occurs when an investor based in one country (home country) acquires an asset in another country (host country) with the intent to manage that asset. The management dimension is what distinguishes FDI from Portfolio Investment in foreign stocks, bonds and other financial instruments because the PI has no intent about managing the asset”

TYPES OF FDI 3 types of FDI: Wholly Owned Subsidiary Joint Venture Acquisition

WHOLLY OWNED SUBSIDIARY A Wholly Owned Subsidiary, is an entity that is controlled completely by another entity. The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that an individual cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees. The most common example of a wholly owned subsidiary in India is LG that was set up in 1997 as LGEIL (LG Electronics India Ltd.)

Illustrative List of Sectors for FDI upto 100% in form of wholly owned subsidiaries Most manufacturing activities Non-banking financial services Drugs and pharmaceuticals Food processing Electronic hardware Software development Film industry Advertising Hospitals

Management consultancy Computer related Services Research and Development Services Construction and related Engineering Services Health related & Social Services Travel related services Pollution control and management

JOINT VENTURES A large number of recent foreign investments in most countries is associated with joint venturing with local entrepreneurs. Joint Venture is coming together of two or more corporations to form a new corporation. The classic example in case of India context is the JV between Govt. of India and the Suzuki Motor Corporation of Japan which resulted in the Maruti Udyog Ltd. (MUL) in 1981-82.

The Entry Strategy: Joint Venture Company Advantages  Limited liability  Market Penetration  Local Partner’s Expertise and Experience

Vital Considerations  Choice of Joint Venture Partner  Clearly defined agreement  Terms of the Shareholders’ Agreement  Share Transfer Restriction  Non-disclosure of confidential information post termination

JOINT VENTURES 4 types of JV : JV BY ADOPTION  JV BY REBIRTH  JV BY PROCREATION  JV THROUGH FAMILY TIES

ACQUISITIONS An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

Types of ACQUISITIONS The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to “hand-pick" the assets that it wants and leave out the assets and liabilities that it does not.

TOP 10 ACQUISITIONS BY INDIAN COs

Acquirer

Target Co

Tata Steel

Corus Group plc Novelis

Hindalco

Country Value $ml UK 12000

Industry

Canada

5982

Steel

Steel

Videocon

Daewoo Electronics

Korea

729

Electronics

Dr. Reddy’s Lab

Betapharm

German y

597

Pharmaceutical

Suzlon Energy HPCL Ranbaxy Labs Tata Steel

Hansen Group Belgium 565 Kenya Kenya 500 Petroleum Refinery Ltd. Terapia SA Romania 324 Natsteel

Videocon

Thomson

Singapor 293 e France 290

VSNL

Teleglobe

Canada

239

Energy Oil & Gas Pharmaceutical Steel Telecom

Electronics

GRAPHICAL REPRESENTATION

FDI INFLOWS YEAR WISE Year (April-March)

FDI inflows (US$ Billion)

1991-1992 (Aug-March) 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006

0.16 0.39 0.65 1.37 2.14 2.77 3.68 3.08 2.43 2.91 4.22 3.13 2.63 3.75 7.26

2006-2007

15.07 (approx)

2007-2008

25.00 (estimated)

PORTFOLIO INVESTMENT 2 TYPES OF PI : 

Investment by FIIs Investment in GDRs & FCCBs

FII 

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 stock exchange cannot be sold through a private arrangement

FII 

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

What are Foreign Investors looking for? Good projects Demand Potential Revenue Potential Stable Policy Environment/Political Commitment Optimal Risk Allocation Framework

Daily Trends in FII Investments Reporting Date

12-SEP-2007

Debt/Equity

Equity Debt

Gross Purchases(Rs Crores)

Gross Sales(Rs Crores)

Net Investment (Rs Crores)

Net Investment US($) million at month exchange rate

2370.80

1925.10

445.60

109.20

446.10

48.10

398.00

97.50

The above report is compiled on the basis of reports submitted to SEBI by custodians on 12-SEP-2007 and constitutes trades conducted by FIIs on and upto the previous trading day.

FII inflows this year

ADR An American Depositary Receipt (or ADR) represents ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.   Each ADR is issued by a US depositary bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.

GDR A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. They are traded and settled independently of the underlying share, and such are commonly used to invest in companies in developing or emerging markets - especially Russia.   They trade on the International Order Book (IOB) of the LSE.  

fccb A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. Issuers take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.

Factors affecting foreign investment Rate of interest Speculation Profitability Costs of production Economic conditions Government policies Political factors

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 highly 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

Difference b/w FDI and Portfolio investment FDI Investment in physical assets Tends to be long term Difficult to withdraw Does not tend be speculative Expectation of technology transfer Direct impact on employment of labour and wages Abiding interest in mgt.

Portfolio Investment Investment in financial assets Tends to be short term Easy to withdraw Tends to be speculative No Expectation of technology transfer No direct impact on employment of labour and wages Fleeting interest in mgt.

FDI SECTORAL GUIDELINES

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

DOMESTIC AIRLINES FDI

upto

49%

permitted

under

automatic

route

However, foreign airlines are not allowed to have any direct or indirect equity participation 100% investment by NRIs/OCB’s

TELECOM FDI in basic and cellular, unified access services, national/ international long distance, V-Sat, public mobile radio trunk services (PMRTS), global mobile personal communications services (GMPCS), other value added telecom services and ISP with gateways - Automatic upto 49% - FIPB beyond 49% but upto 74% (this limit is inclusive of FII, NRI, FCCB’s, ADR,GDR, Convertible preference shares and proportionate foreign equity in Indian promoters/Investing companies) subject to guidelines notified in the PN 5 (2005 Series). ISP with gateways, radio paging, end-to-end bandwidth - Automatic up to 49% - FIPB beyond 49% up to 74% (Subject to licensing and security requirements notified by the Department of Telecommunications)

TELECOM ISP without gateway, infrastructure provider providing dark fibre, electronic mail and voice mail - Automatic upto 49% - FIPB beyond 49% but upto 100% (Subject to the condition that such company shall divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. They are also subject to licensing and security requirements, where required) Manufacture of telecom equipments - Automatic upto 100% (Subject to sectoral requirements).

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 by the Government on case to case basis for manufacture of bulk drugs from basic stages and their intermediates and bulk drugs produced by the use of recombinant DNA technology as well as the specific cell/tissue targeted formulations provided it involves manufacturing from basic stage.]

INSURANCE FDI upto 26% allowed on the automatic route However, license from the Insurance Regulatory Development Authority (IRDA) has to be obtained

&

There is a proposal to increase this limit to 49%(Not found any data to substantiate this statement)

PRIVATE SECTOR BANKING Foreign Investment upto 74% is permitted from all sources (FDI +FII) under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

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

Any

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