Foreign Investment In India

Foreign Investment in India

FDI in India • New Policy since 1991 • Earlier deficits in Current Account met by borrowing from multilateral financial institutions and commercial borrowings • Earlier FDI was linked to imported technology • Now two routes available for FDI • Automatic approval by RBI • Govt. Approval via Foreign Investment Promotion Board (FIPB) • At present over 6000 companies have FDI equity

Eligibility for Investing in India • A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an incorporated entity outside India, (other than an entity in Bangladesh or Pakistan) has the general permission to purchase shares or convertible debentures or preference shares of an Indian company subject to certain terms and conditions • The Indian companies have general permission to issue equity / preference / convertible preference shares and convertible debentures subject to certain conditions. • No person resident outside India other than NRIs/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The RBI may, on an application made to it, permit a person resident outside India to make such investment subject to such terms and conditions as may be considered necessary.

Policy Framework • The Industrial Policy Reform of 1991 • Industrial policy provisions applicable to both domestic and foreign companies • Once applicable permissions obtained, foreign companies are treated at par with an Indian company – national treatment • Under FEMA 2000, approval of RBI required for establishment in India of a branch, liaison office or a project office

RBI Automatic Route • RBI approval in many industries within sectoral caps: 100%, 74%, 51% and 26%. The lists are comprehensive and cover most industries of interest to foreign companies. • The RBI’s approval is automatic (provided certain parameters are met) and only a filing is to be made after allotting shares to foreign equity holder(s). • Foreign technology agreement: not compulsory • Automatic clearance for foreign technology agreements if lump sum payments up to USD 2 million and royalty payments up to 5% of domestic sales and 8% of exports • Payment of royalty up to 1% on domestic sales and 2% on exports on the use of trade marks and brand name of the foreign collaborator without technology transfer

FIPB • Foreign Investment Promotion Board (FIPB) consists of a group of Secretaries (Finance, External Affairs, SSI, Commerce) under the Chairmanship of Secretary, Department of Economic Affairs, Ministry of Finance. Representation of the Ministry under whose jurisdiction a particular investment is proposed, is also invited. FIPB recommends projects to Finance Minister for approval. Investments exceeding Rs.600 crores require the approval of the Cabinet Committee on Foreign Investment (CCFI)

FIPB Route • Proposals attracting compulsory licensing • Items of manufacture reserved for small scale sector (A company which is a small scale industrial unit may issue shares or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital.) • Extension for foreign collaboration agreements • List of activities or items for which FDI is prohibited. • List of Industries in which Automatic Route Not Available

Foreign Investment Implementation Authority (FIIA) • Foreign Investment Implementation Authority (FIIA) has been established to facilitate quick implementation of FDI approvals and assist foreign investors in getting necessary approvals. • Fast Track Committees have been set up in 30 Ministries/ Departments for regular review of FDI mega projects (with proposed investment of Rs. 1 billion and above), and resolution of any difficulties.

List of Industries in which Automatic Route Not Available • 1. Petroleum Sector (except for private sector oil refining)/ Natural Gas/LNG, Pipelines • 2. Investing companies in Infrastructure & Services Sector • 3. Defence and Strategic Industries • 4. Atomic Minerals • 5. Print Media • 6. Broadcasting • 8. Postal services • 9. Courier Services • 10. Establishment and Operation of satellite • 11. Development of Integrated Township • 12. Tea Sector

List of activities or items for which FDI is prohibited. • • • •

Gambling and Betting Lottery Business Business of chit fund or Nidhi Company Housing and Real Estate business except for the development of townships, housing, built-up infrastructure and construction development project • Retail Trading • Atomic Energy • Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea plantations)

Sectoral Caps for FDI Private Sector Banking

74%

Drugs & Pharmaceuticals

100%

Non-Banking Financial Companies

100%

Road and highways, Ports and harbours

100%

Insurance

26%

Hotel & Tourism

100%

Telecommunications Services

74%

Mining

74100%

Petroleum RefiningPrivate Sector

100%

Advertising

100%

Housing and Real Estate

100%

Films

100%

Trading

51-100%

Airports

74%

Coal & Lignite

50-100%

Mass Rapid Transport Systems Pollution Control & Mng.

100%

Power Air transport Services (no foreign airlines)

100%

100% -NRIs, Special Economic Zones 49% others

100% 100%

Illustrative List of Sectors Under Automatic Route for FDI Up to 100% • Most manufacturing activities • Non-banking financial services • Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant DNA technology • Food processing • Electronic hardware • Software development • Film industry • Advertising

Illustrative List of Sectors Under Automatic Route for FDI Up to 100% • • • • • • • •

Hospitals Private oil refineries Pollution control and management Exploration and mining of minerals other than diamonds and precious stones Management consultancy Venture capital funds/companies Setting up/development of industrial park/model town/SEZ Petroleum Products Pipeline

Illustrative List of Infrastructure Sectors with FDI up to 100% under Automatic Route. • Electricity Generation (except Atomic energy) • Electricity Transmission • Electricity Distribution • Mass Rapid Transport System • Roads & Highways • Toll Roads • Vehicular Bridges • Ports & Harbours • Hotel & Tourism • Townships, Housing, Built-up Infrastructure and Construction Development Project

Illustrative List of Services Sector with FDI Upto 100% under Automatic Route • Advertising and Films • Computer related Services • Research and Development Services • Construction and related Engineering Services • Pollution Control and Management Services • Urban Planning and Landscape Services • Architectural Services • Health related & Social Services • Travel related services • Road Transport Services • Maritime Transport Services • Internal Waterways Transport Services

Trading • Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/ trading house / super trading house/ star trading house. However, under the FIPB route: • 100% FDI is permitted in case of trading companies for the following activities: - exports; - bulk imports with export/ ex-bonded warehouse sales; - cash and carry wholesale trading; - other import of goods or services provided at least 75% is for procurement and sale of the same group and not for third party use or onward transfer/ distribution/sales.

Latest Developments • Nov. 2005: FDI (thru FIPB approval) allowed in Asset Reconstruction Companies (ARCs) up to 49%. However, FII investment not allowed. FIIs can invest in Security Receipts (SRs) issued by ARCs up to 49% of each tranche of SRs, with investment of a single FII in each tranche of scheme of SRs not exceeding 10% of the issue. • Aug. 2005: FDI permitted up to 100 % under the automatic route, in townships, housing, built-up infrastructure and construction development projects, subject to guidelines • July 2005: FDI up to 100% permitted under the automatic route in petroleum product marketing, oil exploration in both small and medium sized fields and petroleum product lines. In air transport services (domestic airlines) sector – FDI up to 100% under the automatic route by NRIs and up to 49% by others. However, no direct or indirect equity participation by foreign airlines would be allowed.

Conversion of ECB / Lump sum Fee/Royalty into Equity • General permission has been granted for conversion of External Commercial Borrowings into equity, subject to certain conditions. • General permission is also available for issue of shares against lump-sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines of Reserve Bank / SEBI and compliance with applicable tax laws.

Taxation • Withholding tax rates for payment to non-residents are determined by the Finance Act passed by Parliament for each year. The current rates are: • (i) Interest: 20% • (ii) Dividends paid by domestic companies: Nil • (iii) Royalties: 20% • (iv) Technical Services: 10% • (v) Any Other Services - Individuals: 30% of the Income, Companies: 40% of the net income • The above rates are general and in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Private Equity Industry • Probably more than USD 1.5 billion has been invested by the PE industry in India. Examples: Warburg Pincus in Bharti and Moser Baer, Chrys Capital Investment in Spectramind and YES Bank, ICICI Ventures in PVR Cinema, General Atlantic Partners in Patni Computers, New Bridge & Temasek in Matrix and Oakhill Investments in GECIS. • Private equity funds invest usually for a long term (3 to 7 years) and investing firms add value by participating in corporate governance and strategy of the investee company. These investments are late stage, i.e. once the enterprise has a proven business model, customers, revenue, etc., as compared to a venture capital fund which are early stage investment in new business start-ups, new technology, etc. • The PE industry has developed over the last 25 years or so

Double Taxation Avoidance Agreements Dividends (%)

Interest (%)

Royalties (%)

Bangladesh

15

15

15

China

10

10

10

Germany

10

10

10

Japan

15

15

20

Korea

20

15

15

Mauritius

15

20

15

Netherlands

10

10

10

Singapore

15

15

25

UK

15

15

15

USA

20

15

15

Non-treaty countries

0

20

20

International Portfolio Investment • Portfolio investment represents purchases and sales of foreign financial assets such as stocks and bonds that do not involve a transfer of management control. • International portfolio investments have become popular in recent years due to the desire of investors to diversify risk globally. Global investors may feel that they may also benefit from higher expected returns from some foreign markets. • Such investments can be in the form of bonds (convertible and non-convertible) as well as equity (say in the form of ADRs/ GDRs). Investments may be made directly or through institutional investments (say FIIs).

Issue of shares by Indian companies under ADR/GDR • An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). • An Indian Company, which is not eligible to raise funds from the Indian Capital Market will not be eligible to issue ADRs/GDRs/ FCCBs • The guidelines allow an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing ADRS and/or GDRS. The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time

Issue of shares by Indian companies under ADR/GDR • These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ investment of these funds in Real Estate and the Stock Market. • There is no monetary limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy and the foreign shareholding after issue should be in compliance with the FDI policy. • The ADR/GDR/FCCB proceeds may be utilised in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public in view of their strategic importance.

Issue of shares by Indian companies under ADR/GDR

• The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep the shares in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad. • A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase the shares from the market for conversion into ADRs/GDR. Re-issuance of ADRs/GDR would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

Pricing of ADR/GDR/FCCBs • The pricing of GDRs and FCCBs should be made at a price not less than the higher of the following two averages: • (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; • (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. (The “relevant date” means the date thirty days prior to the date on which the meeting of the general body of shareholders is held in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.) • Unlisted companies, while raising ADRs/GDRs/FCCBs would require prior or simultaneous listing in the domestic market

Issue of shares by Indian companies under ADR/GDR • An Indian company can also sponsor an issue of ADR/GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the ADR/GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion.

Portfolio Investment Scheme • Foreign Institutional Investors registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD, who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account. • NRIs should apply to the concerned designated branch of the AD authorised by RBI to administer the Portfolio Investment Scheme (PIS) for permission to open a NRE/NRO account under the Scheme.

Foreign Institutional Investors • In the case of FIIs, the total holding of each FII/SEBI approved sub account shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by an Indian company and the total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. • This limit of 24% can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body.

Foreign Institutional Investors • FIIs are not permitted to invest in Print Media Sector through FDI or PIS routes. Such investment by FII requires prior approval of Government of India, Foreign Investment Promotion Board and Ministry of Information & Broadcasting. FIIs should also take delivery of the shares purchased and give delivery of shares sold. • The FIIs are also permitted to trade in all exchange traded derivative contracts subject to position limits as prescribed by SEBI and advised by RBI to the custodian banks.

Foreign Institutional Investors • Registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer / private placement. This is subject to applicable ceiling. A FII may invest in a particular issue of an Indian company either under FDI Scheme or PIS. • The FII shall restrict allocation of its total investment between equities and debt including dated Government Securities and Treasury Bills in the Indian Capital Market in the ratio of 70:30, with a cap of USD 200 million in Government securities. The FII can also form a 100% Debt Fund and get registered with SEBI for investment in debt investments. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard. FII Cap in debt is at present at USD 2.25 billion in the domestic market, including a limit of USD 500 million in corporate debt.

Foreign Institutional Investors • Guidelines originally issued in Sept.1992 • Consists of pension funds, mutual funds, investment trusts, AMCs, endowments, etc. • Good track record, competence, financial soundness, registration from regulatory authority in home country • Registration (5 yrs.) by nodal agency - SEBI, also RBI. • Allowed to invest in all the securities traded on the primary and secondary markets • Foreign Institutional Investors can buy dated Government securities/ treasury bills, non-convertible debentures /bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognised stock exchange in India.

Foreign Institutional Investors • No max./min. restriction, no lock-in period • Role of designated branch, custodian • Allowed to repatriate at market rates the capital gains, dividends, interest income • ADs can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments • Overall FII limit does not include portfolio investments by NRIs, NRI-OCBs, FDI, GDRs/ADRs, single-regional funds, etc. • Generally, investment limit for FIIs hiked to the limit applicable for FDI/ statutory ceiling in that particular sector. • Till the end of 2005, over 800 FIIs registered, not all active

Foreign Institutional Investors • FII net inflows: $10.7 billion in 2005, $9.2 billion in 2004 and $ 6.6 billion in 2003. Total net inflow since 1993: $42 billion in a total market cap of $ 550 billion. • Investments through three routes: registered FII, registered as a sub-account of a sponsoring FII, and indirectly through access products or Participatory Notes (PNs). • Estimated 90% investment through sub-accounts, as this avoids procedural problems: establishing broker and custodian relationships, filing of tax certificates, etc. PNs account for about 25% of total FII investment, including sub-accounts. • PNs are derivative products wherein the holder gets all the economic benefits of a direct exposure to Indian equities with a corresponding exposure that the FII/sub-account would take on the underlying equities in the Indian market. Since February 2004, PNs can be issued only to regulated entities.

Investments by NRIs • In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI on repatriation and non-repatriation basis under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. • The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. • The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect.

Investments by NRIs • Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis. Under PIS, NRIs are not permitted to invest in Print Media Sector. • With effect from November 29, 2001, Overseas Corporate Bodies (OCBs) are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme, may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.

FDI Flows by Regions and Selected Countries $ billions

FDI Inflows

FDI Outflows

2003

2004

2003

2004

Developed Countries

442.2

380.0

577.3

637.4

- European Union

338.7

216.4

372.4

279.8

- USA

56.8

95.9

119.4

229.3

- Japan

6.3

7.8

28.8

31.0

166.3

233.2

29.0

83.2

53.5

60.6

1.0

2.3

Developing Countries - China

Net Capital Inflows to Developing Countries $ billions

2002

2003

2004

Net equity flows

159.8

176.6

192.3

- Net FDI Inflows

154.0

151.8

165.5

- Net portfolio equity inflows

5.8

24.8

26.8

Net debt flows

8.9

62.2

84.1

Net Inward FDI $ billions Brazil China Chile Czech Republic India Mexico Malaysia Poland Russian Fed.

2002 16.6 49.3 1.9 8.5 3.7 14.8 3.2 4.1 3.5

2003 10.1 53.5 3.0 2.5 4.3 10.8 2.5 4.1 8.0

2004 15.3 56.0 5.6 3.8 5.3 14.1 2.8 4.7 7.8

Net Inward Portfolio Equity $ billions All developing countries Brazil China Czech Republic India Mexico Russian Fed. South Africa

2002 5.8

2003 24.8

2004 26.8

2.0 4.0 -0.3 1.1 -0.1 2.6 -0.4

3.0 11.8 1.1 8.2 -0.1 0.4 0.7

0.9 13.6 0.8 7.5 -2.3 1.0 3.5

Foreign Investment USD million

2004-05

2003-04

2002-03

Foreign Investment (a+b)

11,944

14,776

4,161

a)Foreign Direct Inv. (i+ii)

3,037

3,420

3,217

i. In India

5,526

4,674

5,036

Equity

3,353

2,387

2,766

Reinvested Earnings

1,816

1,800

1,832

357

487

438

ii. Abroad

(2,489)

(1,254)

(1,819)

Equity

(1,408)

(282)

(611)

Reinvested Earnings

(700)

(892)

(1,104)

Other Capital

(381)

(80)

(104)

b) Portfolio Investment

8,907

11,356

944

In India

8,907

11,378

979

Abroad

-

(22)

(35)

Other Capital

FDI to India: Country-wise $ millions

2004-05

2003-04

2002-03

Total FDI*

2320

1462

1658

Mauritius

820

381

534

USA

469

297

268

UK

84

157

224

Germany

143

69

103

Netherlands

196

197

94

Spain

122

67

66

France

44

34

53

Singapore

64

15

39

Switzerland

64

5

35

South Korea

14

22

15

300

218

227

Others

*Data does not include FDI flows by way of acquisition of shares by non-

FDI to India: Industry-wise Flows $ millions

2004-05

2003-04

2002-03

Fisheries

10

2

9

Mining

11

18

9

Manufacturing

924

426

480

Food & Dairy Products

183

64

39

14

90

48

209

172

237

Trade, Hotels & Restaurants

22

67

39

Transport

70

20

12

Financing, Insurance, Real Estate & Business Services

363

206

223

Computer Services

372

166

297

Educational Services

2

0

1

Research & Scientific Services

5

1

0

25

15

28

110

215

236

Electricity Construction

Health & Medical Services Others