Group 7 fdi fii

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Road Map for Presentation
What is FDI & FII
FII Guidelines
Distinction between FDI & FII
Case Studies
FDI Guidelines
Background

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Background: India Transformed !!India Transformed !!
India -- the largest Democracy - one of the fastest growing economies in the World!
 Slow rate of growth
 Bureaucratic
 Protected and slow
 Small consumer markets
 Weak infrastructure
…Yesterday
…Today
 Strong macro economic fundamentals
 Encouraging foreign investment
 Outsourcing destination
 Growing consumerism
 Impetus on infrastructure development

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 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
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What is FDI & FII
Foreign Direct Investment (FDI):
1. FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts.
2. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations.
3. It does not include foreign investment into the stock markets.
4. FDI is thought to be more useful to a country than investments in the equity of its
companies because equity investments are potentially "hot money" which can leave at
the first sign of trouble, whereas FDI is durable and generally useful whether things go
well or badly.
Foreign Institutional Investment (FII):
1. FII denotes all those investors or investment companies that are not located within the
territory of the country in which they are investing.
2. “SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies
and other money managers operating on their behalf.”

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Distinction between FDI and FII
FDI
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
6. Entry and exit is relatively difficult
7. FDI is eligible for profits of the company
8. Does not tend be speculative
9. Direct impact on employment of labour
and wages
10.Abiding interest in mgt.
FII
1. It is generally short-term investment
2. Investment in financial assets
3. Aim is to increase capital availability
4. FII results in only capital inflows
5. FII flows into the secondary market
6. Entry and exist is relatively easy
7. FII is eligible for capital gain
8. Tends to be speculative
9. No direct impact on employment of labour
and wages
10.Fleeting interest in mgt. 6

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Foreign Direct Investment Policy…
• 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 India’s 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

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Foreign Direct Investment
Snapshot
5549
15730
24579
27309
22963
0
5000
10000
15000
20000
25000
30000
2005-06 2006-07 2007-08 2008-09 2009-10* * April 2009 – January 2010
184%
56%
Figures in
Million US$
• Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India
• Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI
*as per information in the Press

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India's Hottest FDI Destinations
1. Maharashtra
Maharashtra received the lion's share of the FDI $2.43 billion (Rs 11,154 crore),
which is 35% of the total FDI inflows in to the country,.
2. National Capital Region
NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region
accounted for 20% of the total FDI.
3. West Bengal, Sikkim, Andaman & Nicobar Islands
These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050
crore)
4. Karnataka - $936 million (Rs 4,333 crore)
5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore)
Data: Jan – Jun 2010

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The Roadmap so far…
Allowed selectively
up to 40%
Up to 51%
under ‘Automatic
Route’ for
35 Priority Sectors
Up to 74/51/50%
in 111 Sectors under
‘Automatic Route’
100% in some sectors
Up to 100% under
‘Automatic Route’ in
all sectors except
a small negative list
Sectoral caps raised;
Conditions relaxed;
Pre 1991 1991 1997 2000 Post 2000

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…Foreign Direct Investment Policy…
 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
Government Route
 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
Automatic Route
FDI Guidelines for Investing in Indian Wholly Owned Subsidiary / Joint
Venture
Foreign Investment Promotion Board (FIPB)No Prior Regulatory Approval but
only Post Facto Filings to RBI, through AD
 

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…Foreign Direct Investment Policy
 Existing Airports 100%
 Asset Reconstruction
Companies 49%
 Titanium Minerals 100%
 Broadcasting (a)
 Cigars & Cigarettes 100%
 Courier 100%
 Print Media (a)
26%
 Single brand retailing 51%
 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
Negative List
(Illustrative)
Prior Approval
(Illustrative)
 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
Automatic Route
(Illustrative)
Note: (a) Sector specific guidelines
(b) Subject to certain exceptions
 
FDI limits – Illustrative list

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Setting the context…
• Contribution of FDI in India’s economic development is an acknowledged
fact.
• From inception policy subject to extensive amendments from time to time
through Press Notes, circulars and clarifications
• Press Note 2,3 and 4 of 2009 issued to provide clarity on indirect FDI and
downstream investment
• FM stressed the need for a consolidated FDI policy in Budget 2010-11
• Draft consolidated policy issued in late 2009 for public comments
• Consolidated FDI policy issued effective from 1 April, 2010

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Consolidated FDI Policy –
Salient Features
• 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 intention to influence the management of the investee entity

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FDI Policy – Principles
• 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

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FDI Policy – Principles …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

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Royalty/ Foreign Technology
Agreement
Brand name/ trade mark royalty
• Payment of royalty upto 1% of
domestic sales and 2% of exports
permitted (without technology
transfer)
• Where royalty for brand name/
trademark and technology, then
overall limits of 5% of domestic
sales and 8% of exports
All payments
covered under
Automatic
route, subject
to limits
Foreign Technology Agreements
• Lumpsum payments not to exceed
USD 2 mn (per technology)
• Royalty upto 5% of domestic sales
and 8% of exports
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
Earlier
Now

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Calculation of Indirect FDI…
Foreign Co.
I Co1
Overseas
India
I Co1
Overseas
India
I Co2
Foreign Co.
Direct FI
Indirect FI
Direct Foreign Investment Indirect Foreign Investment

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Calculation of Indirect FDI…
Earlier
Different methods of computing Indirect FI prescribed for different sectors. E.g.
- Telecom/ Broadcasting: Proportionate method
- Investing companies in Infrastructure/ Services sector: Management + Ownership
Test
Foreign Co.
Co1
Overseas
India
Telecom sector
Co2
90%
60%
FI in Co2 is 54% (90*60%)
Co1*
Overseas
India
Infrastructure sector
Co2
49%
100%
FI in Co2 is NIL
Foreign Co.
*Management of
Co1 with Indians

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…Calculation of Indirect FDI*
Now
• 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
Direct FI in Co2 = 39%
Indirect FI in Co2 = Nil
Total FI in Co2 = 39%
Non Resident Entity
(‘NRE’)
Co1 (Owned and
Controlled by RIC)
Co2 (Owned and
Controlled by RIC)
Overseas
India
40%
10%
39%
Direct FI in Co2 = 51%
Indirect FI in Co2 = 49%
Total FI in Co2 = 100%
NRE
Co1 (Owned or
Controlled by NRE)
Co2 (Owned and
Controlled by NRE)
Overseas
India
51%
49%
51%

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Downstream Investment…
Co1
Overseas
India
Co2
Foreign Co.
Downstream
Investment
Co1 could be
-An investing company; or
-An investing-cum-operating
company
Co2 is an operating company

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Transfer of securities
– basic rules
Type of transfer Window Key conditions
NR to NR or
NRI to NRI
Automatic Subject to prior venture/ tie up condition
R to NR Automatic
- Min. valuation and compliances
- Activities not under approval route
NR to R Automatic Max. valuation and compliances
R to NR in financial
services
RBI
approval
--
Control or ownership
from R to NR pursuant to
M&A
Govt.
approval
Only for sectors with sectoral caps
Gift by R to NR
RBI
approval
-Gift not to exceed 5% of paid-up capital
-Subject to sectoral caps
- Cap of USD 25,000 per calendar year

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FDI Policy – Procedural Aspects
• 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
• In case of Approval route, application to FIPB along with supporting documents
• All applications to be placed before FIPB within 15 days
• FIPB empowered to prioritise applications based on sector, export potential etc.
• Violations of regulations attract penal provisions under FEMA

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Sector Specific Guidelines
Prohibited sectors
• FDI not allowed in the following:
− Retail trading (except single brand)
− Atomic Energy
− Lottery business
− Gambling & Betting
− Chit fund and Nidhi company
− Trading in Transferable Development Rights
− Real Estate business or construction of Farm Houses
− Sectors not opened for private sector investments
• Prohibition extended to foreign technology collaboration including licensing for franchisee,
trademark, brand name or management contract for lottery, betting and gambling business

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Telecommunication
• FDI allowed in the following (illustrative):
− Basic and cellular
− Unified Access Services
− National/ International Long Distance
− Global Mobile Personal Communications Services
(GMPCS)
− Other value added telecom services
• FDI in ISPs without gateways now capped at 74% in line
with DoT guidelines of 2007
• Subject to guidelines issued DOT
• FDI Limits:
Automatic Route Approval Route
Upto 49% Upto 74%

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Private sector banks/ Civil Aviation
• No change in existing conditions
• FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route
Banks
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

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Broadcasting
• 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
Radio 20%
Cable Networks 49%
Direct to Home* 49%
Uplinking news/ current affair TV channel** 26%
Uplinking non news/ current affair TV channel 100%
* FDI component not to exceed 20%
** May be raised to 49% as per recent press reports

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Print Media
• 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
Newspapers/ periodicals dealing with news
and current affairs*
26%
Scientific magazines/ specialty journals/
periodicals
100%
* May be raised to 49% as per recent press reports

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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%.
• 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 on case to case basis.
• 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
DRUGS & PHARMACEUTICALS
AIRPORTS

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
34

FOREIGN INSTITUTIONAL INVESTORS
35

What are Foreign Investors
looking for?
• Good projects
• Demand Potential
• Revenue Potential
• Stable Policy
Environment/Political
Commitment
• Optimal Risk Allocation
Framework
•Rate of interest
•Speculation
•Profitability
•Costs of production
•Economic conditions
•Government policies
•Political factors
Factors affecting foreign
investment
36

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
• 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

Investment limits on Equity &
Debt investments by FII
FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an
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.
investment limits on debt investments by FII
For FII investments in Government debt, currently following
limits are applicable:
• 100 % Debt Route US $ 1.55 billion
• 70 : 30 Route US $ 200 million
• Total Limit S $ 1.75 billion
For corporate debt the investment limit is fixed at US $ 500 million.
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

Importance of FII Inflow - FM’s View October 26, 2010
• No controls on FII inflows
• RBI may check rupee appreciation
• The upward movement of the rupee against the dollar was sharp in recent weeks as the
Indian currency has climbed about 5.6% since the beginning of September due to sustained
capital inflows.
The FM believes that with FII inflows and forex reserves, the current account deficit should
be contained at around 3% of the gross domestic product (GDP) (this fiscal).
The current account deficit is the gap between the amount the country pays to the external
world against what it receives from abroad, barring capital movement. It was around 3.6% of
GDP in the first quarter of 2010-11.
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.
• FIIs constitute professional bodies, improve corporate governance.
41

Disadvantages of FII
• Problems of Inflation
• Problems for small investor
• Adverse impact on Exports
• Hot Money
42

FII Investments & Market Reaction
While strong inflow of funds from foreign
institutional investors (FIIs) has been a
reason to cheer, it could turn into a
nightmare and if the global investors make
a sudden exit can send the bourses
crashing.
43

FII Inflows Vs Sensex
FII Investment from 2005 - 2010 BSE Sensex
FII Investment Vs Sensex FII average holding in BSE 500
44

45
Case Studies and Recommendations

UBS Fraud case
• - The funds held in the accounts of the two companies (ADAG Group )opened
in UBS with the approval of RBI were transferred to another account without
RBI’s approval, by obtaining overdrafts against cash collateral security
provided through the funds.
• - Thereafter, substantial amounts were transferred to certain accounts
belonging to 8-10 diamond dealers based in India and Belgium..
• - The funds were then passed on from the accounts of the diamond merchants
to two funds that in turn invested them in the Indian stock market through FIIs.
• - Swiss bank UBS has been fined £8 million by UK's Financial Services
Authority (FSA)
• - ED is probing the matter because the transactions may amount to violation
of Indian foreign exchange and anti-money laundering laws.

The Prudential Assurance Company vs. DIT (Bombay High Court)
• - The Court has held that earnings of FIIs registered in India are in the nature of
business income.
• - Such income is not taxable in India if the FII does not have a permanent
establishment in India.
• - 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

Will the Vodafone case hit FDI?
• 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 department’s 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.

Recommendations for India
Do away with too many caps in the overall regulatory regime.
Increase FDI limit for Insurance Sector to 49% from current 26%.
Increase FDI limit for Retail Sector.
Allow FII 100% ownership
Easy access to Foreign Investor by simplifying the approval procedure and industrial license
Liberalize the locking period for FII & FDI
Allow FDI in investment companies
"Better Investment Climate" Need of the Hour.
Liberalise the economic policies further so as to overcome the fiscal deficits faced by Indian
economy
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

50
"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

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