FIIs in India
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This document summarizes foreign investment opportunities and regulations in India. It outlines three main routes for foreign investment: foreign direct investment (FDI), investment as a foreign institutional investor (FII), and as a foreign venture capital investor (FVCI). FDI can be through the automatic route for smaller investments or the approval route for larger investments. FIIs and FVCs must register and meet qualifications. Infrastructure development, especially power and transportation, is emphasized as a focus area given India's projected growth and need for investment. Overall foreign investment in India is growing significantly across many sectors.
FIIs in India
- 1. “The Most Extraordinary Country”* Doing Business in India When You Think INTERNATIONAL, Think Fulbright.TM Tuesday, February 20, 2007 7:15 - 9:00 a.m. The Houstonian Hotel 111 North Post Oak Lane Houston, Texas 77024 *Mark Twain
- 2. Foreign Investment in India: An Overview Presented by: Julie B. Hunt Email: jhunt@fulbright.com Phone: (214) 855-8046
- 3. Recent Growth & Opportunities in the Indian Market Facts and Figures Recent GDP Growth 2000-2003 4.6% 2003-2004 8.5% 2004-2005 7.5% 2005-2006 8.4% 2006-2007 (Q1) 8.9% Source: Reserve Bank of India
- 4. Recent Growth & Opportunities in the Indian Market (cont’d) Facts and Figures Foreign Investment Growth Source: Ministry of Finance, Government of India
- 5. Recent Growth & Opportunities in the Indian Market (cont’d) Facts and Figures Population of more than 1 billion Middle class of 300 million Stable democracy with a common law legal system Large English-speaking, highly educated workforce Vibrant capital markets – 23 stock exchanges with 9000 listed companies New Industrial Policy (1991) and continuing liberalization of foreign investment
- 6. Foreign Investment - Legal Regime Sources of Law and Policy Foreign Exchange Management Act, 1999 (FEMA) and related regulations Press notes issued by the Ministry of Commerce and Industry Securities & Exchange Board of India Act, 1992 and related regulations Companies Act, 1956 Sector-specific laws and rules
- 7. Foreign Investment - Legal Regime Key Regulatory Players Foreign Investment Promotion Board (FIPB) Reserve Bank of India (RBI) Securities & Exchange Board of India (SEBI) Stock Exchanges (Largest: National Stock Exchange (NSE), Bombay Stock Exchange (BSE)) Sector-specific regulators (e.g., insurance, telecom, transportation)
- 8. Foreign Investment - Options Three Main Routes for Foreign Investment Foreign Direct Investment (FDI) Investment as a Foreign Institutional Investor (FII) or a sub-account of an FII Investment as a Foreign Venture Capital Investor (FVCI)
- 9. Foreign Investment - Options Foreign Direct Investment (FDI) Subscription to new shares Transfer of existing interests
- 10. Foreign Investment - Options Foreign Direct Investment (FDI) Automatic Route No approval needed from FIPB or the RBI Widely available, subject to certain percentage caps and non-compete restrictions Requires certain after-the-fact filings and declarations with the RBI (within 30 days after payment for investment)
- 11. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route Automatic Route not available (i.e., prior FIPB approval is required) if the investment is: in an area where foreign investment is prohibited; for example: retail trading (except single brand retail), gambling, atomic energy, defense above the equity cap applicable to certain sectors; for example: 74% in telecom, mining or banking.
- 12. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route Automatic Route not available if the investment is: in the same field where the foreign investor has an existing (pre-Jan 15, 2005) collaboration/joint venture in India a more than 24% equity investment in companies which manufacture for the small-scale sector.
- 13. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route Approval Route Any investment not qualifying for the Automatic Route Requires prior approval from the Foreign Investment Promotion Board (FIPB)
- 14. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route Approvals take approximately 30 days to obtain, decided on a case-by-case basis Relevant criteria: the amount of investment jobs creation other benefits to India such as export creation or technology development
- 15. Foreign Investment - Options (cont’d) Foreign Direct Investment (FDI) Pricing Restrictions If listed on a stock exchange, price cannot be lower than the average weekly high and low of closing prices during the preceding (a) 6 months, or (b) 2 weeks, whichever average is higher If unlisted, determined by a formula prescribed by the Controller of Capital Issues
- 16. Foreign Investment - Options (cont’d) Foreign Direct Investment (FDI) Transfers of Existing Shares – requires FIPB approval if: activities are not under the Automatic Route non-resident shareholding would exceed sectoral limits price does not comply with the pricing restrictions Transfers of Existing Shares – requires RBI approval if: company is involved in the financial services sector price does not comply with the pricing restrictions
- 17. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) What is an FII? An institution established outside India, which invests in securities traded on the primary and secondary markets in India Examples: pension funds, mutual funds, investment trusts, university endowment funds
- 18. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange Makes investments on behalf of foreign investors, referred to as “sub-accounts”
- 19. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) Qualifying as an FII Requires a certificate from the Securities and exchange Board of India (SEBI) Strict qualification standards including professional experience requirements and reputational considerations (“Fit and proper person” determination)
- 20. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) SEBI “Fit and proper person” criteria include: financial integrity absence of convictions or civil liabilities competence good reputation and character efficiency and honesty no violation of securities regulations in home jurisdiction
- 21. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) Qualifying as a Sub-Account Also requires a fit and proper person analysis
- 22. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) FIIs may invest in: securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies) units issued by domestic mutual funds dated Government securities derivatives traded on a recognized stock exchange commercial paper debt instruments – provided a 70/30 equity/debt ratio is maintained
- 23. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) Limits on the type and amount of investments apply to FIIs no more than 10% of the equity in any one company no more than 10% in the equity in any one company on behalf of a fund sub-account no more than 5% in the equity in any one company on behalf of a corporate/individual sub-account no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs
- 24. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) What is an FVCI? An investor established outside of India, who proposes to make venture capital investments in India
- 25. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) Qualifying as an FVCI Requires registration with SEBI; a copy of the application is forwarded to the RBI for approval as well Involves a “fit and proper person” determination as for FIIs
- 26. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) Benefits of registering as an FVCI one-time approval of the RBI for investments in Indian companies ability to purchase or sell securities at a price that is mutually acceptable to buyer and seller shares held by FVCI in an unlisted company are not subject to the one-year lock-in generally applicable to the shares of a company undergoing an IPO
- 27. Foreign Investment - Options (cont’d) Foreign Venture Capital Investor (FVCI) Investment Requirements and Restrictions At least 66.67% of its funds must be invested in unlisted equity shares (or equity-linked instruments of unlisted entities) Up to 33.33% of its funds may be invested in an IPO subscription for a venture capital undertaking, or through a preferential allotment of equity shares of a listed company
- 28. Foreign Investment - Options (cont’d) Foreign Venture Capital Investor (FVCI) Investment Requirements and Restrictions Subject to certain sectoral percentage caps, limitations on foreign investment No more than 25% of its funds may be invested in any one venture capital undertaking
- 29. Project Finance - Infrastructure “Infrastructure Deficit” requiring estimated investments of US $300 billion by 2012 FDI of up to 100% is now permitted in most infrastructure sectors Shortage of domestic funding Particular emphasis on power sector, airports, roads
- 30. Recent Deals Mumbai and Delhi airports – Public/Private Partnership (PPP) with 26% government participation Vodafone – $11.1 billion purchase of a 67% stake in Hutchison Essar (fourth largest mobile phone company in India) Airbus – announced $1 billion investment in an engineering facility and pilot training school Cisco – investing $1.1 billion in various initiatives (manufacturing facility, VC investments, broadband and digital media), and planning to move 20% of top executives to India
- 31. Future Prospects Projections for future growth Continued annual GDP growth of 8% GDP of US $11 trillion by 2011, US $27 trillion by 2050 (making India the third-largest economy in the world) Trend of increasing liberalization of foreign investment
- 32. In Summary Three main regulatory categories of foreign investment: FDI, FII, FVCI Certain sector caps and pricing restrictions may apply Infrastructure development is a particular focus for the Government Regulations continue to evolve
- 33. When You Think INTERNATIONAL, Think Fulbright. TM