FDI and FII

Vicky Shah Hemen

Parekh

Swati Nimit
Gupta
Ronak
Mehta
FDI…
What is FDI ????????
• Acquiring asset in another Country
• Transfer of financial resources, technology
& other skills
• Intention - Acquire substantial control over
the foreign company
•

Types Of FDI….
Routes for FDI in INDIA
Benefits to host
country….
• Resource-transfer effects
•
• Employment effects
•
• Effects on competition & economic growth
 Benefits to home
country…

 Inward flow of foreign earnings

•
• Employment benefits


• The reverse resource-transfer effect

The Other Side Of The Coin….


Domestic firms may suffer if they are not
competitive

Exploiting workers

Environmental and labor standards.

Company may lose out on its ownership to
an overseas company.
 FDI In
India ….
 Why India….
Largest democracy – political stability & consensus on refo
argest Economy (PPP) - A safe place to do business

Liberal & transparent investment pol

est reservoir of skilled manpower

Second Largest
Long-term sustainable Emerging Market
Competitive advantage
- High growth rate economy

Source - www.dipp.gov.in ; Department of Industrial Policy & Promotion Ministry

10
of Commerce & Industry Government of India
 What They Say….
“India is a developed “We are expanding our presence in
country as far as India to take advantage of the ample
intellectual capital is R&D talent available”
concerned”

JOHN CHAMBERS, CISCO

JACK WELCH, GE
“India is handling the
“India can be a major part of most sophisticated
Dell’s operations and we are projects in the world. I
looking to capitalize on India’s am impressed with the
human capital” quality of work”

MICHAEL DELL, DELL BILL GATES, MICROSOFT

“Who put my snap

here”

VICKY SHAH, ?????

11
Evolution…
 More sectors opened ; Equity caps raised in many other
2000-09
sectors Procedures simplified

Up to 100% under Automatic Route in all sectors

2000
except
a small negative list

Up to 74/51/50% in 112 sectors under the

1997 Automatic Route 100% in some sectors

FDI up to 51% allowed under the

1991 Automatic route in 35 Priority
sectors

Pre 1991 Allowed selectively up

to 40%

FDI Policy
Liberalization
13
FDI Inflows…

Source: UNCTAD, World Investment Report 2008.

www.unctad.org/fdistatistics
Country-wise FDI
Inflows (%)
FDI Outflows…
Major M & A Deals Undertaken Abroad
by India Inc .
Tata
Tata Steel
Steel buys
buys Corus
Corus Plc
Plc
USD 12.1 billion

Hindalco
Hindalco acquired
acquired Novelis
Novelis Inc
Inc. .
USD 6 billion

Essar
Essar Steel
Steel acquired
acquired Algoma
Algoma Steel
Steel
USD 1.58 billion

Suzlon
Suzlon Energy
Energy Ltd
Ltd. . acquires
acquires REpower
REpower
USD 1.6 billion

United
United Spirits
Spirits Ltd
Ltd. . acquired
acquired Whyte
Whyte && Mackay
Mackay
USD 1.1 billion
Sector-wise FDI
Contribution…
Sector
Wise
Policy….
SECTORS % FDI ALLOWED
Shipping and Ports 100% FDI (A)
Construction-development 100% FDI (A)
projects
SEZ 100 % FDI (A)
Hospitals 100 % FDI (A)
Private sector banks 74 % FDI (A)
Stock Exchanges 49% FDI (A)
Airports 100% FDI- Greenfield
Projects
Beyond 74% FIPB APP-
Roads & Highways 100% FDI
Existing Airports
Telecom 74%, beyond 49% under
FIPB route
Prohibited Areas …..
 Steps to Attract FDI ..
•
• “Better Investment Climate”
•
• Create a result-oriented bureaucracy
•
• Market India
•
• Target services
•
• Accelerate privatization efforts
 FDI In
Retail….
 +

=
V/S
 India China

Population (2009) 1.15 billion 1.33 billion

Population growth rate (%) 2009 1.93% 5.28%

Average real GDP growth rate % 2009: 6.5% 7.00%

Foreign direct investment (2008) $27.3 billion $92.4 billion

Population in poverty (2009) 27.5% 4%

Political system Multi party One-party

democracy state

Computer penetration per 1000 18 61

 FDI Inflow Comparison….

rce: UNCTAD, World Investment Report 2008 ; www.unctad.org/wir or www.unctad.org/fdistatistics

Reasons For China’s Growth….

• Authoritarian government
• High Savings Rate
• A consistent and thoughtful marketing
effort
• Creation of zones and infrastructure for
businesses
• The business-above-all attitude
• A strong manufacturing base
 FDI In
Education
…..
 Need…
•
• $ 4 billion spent annually for higher education.
•
• To reduce brain drain
•
• Miserable condition of higher education in
India
•
• Lowest public expenditure on higher education
per student- 3%
•
Eg . M / s . A Ltd .( US ) invest in
M / s .- B ( India )…..

On 10.08.2009, M/s.A Ltd. Invests in the

following way :

Cash payment US$15000


Equity shares US$2000
Journal Entries in the
books of M / s . B …..
Merits….
Global exposure

Foreign Revenues

High quality human resources






Demerits….
Twining programmes

Unaccredited and unrecognized courses

Top Universities interested in collaborating
with India’s outstanding institutions
High fee structure

Raising Inequality

 The Chinese
Way ….
Partner with Chinese institutions

Profit not the sole objective

Majority Chinese in governing body

Chinese President for the institution

Basic language- CHINESE

No raise in fees without Approval

 Current
News…..

Indirect investment through domestic

companies would not be counted as part of
foreign investment
 What is the new norm all
about..????
•
• As per the new policy, indirect investment through
domestic companies would not be counted as part of
foreign investment, while calculating the overall
sectoral cap.
•
• Eg – Foreign co. ‘A’ can form a JV(49:51) ,company ‘C’
with an Indian co. ‘B’. ‘C’ will then qualify as Indian…
if ‘C’ invests in another downstream company ‘D’ to
any extent below 100% ‘D’ will be treated as having
no FDI….since ‘D’ has no FDI, it can operate in any
sector including retail, in which FDI is not allowed.
 FII

FII means an ENTITY/FUND established or

incorporated OUTSIDE INDIA which proposes to
make investment in SECURTIES. FII’s are those
investors that INDIRECTLY invest into the
companies through the STOCK MARKET
Features…
 They can invest in:

Equity

Debt

Derivatives

Mutual Funds

Dated Government Securities
SPECULATOR.

Stability & Growth

Impact the economy, Financial markets &
Companies
Who can be FII….
Pension Funds
Mutual Funds
Insurance or Re-Insurance companies
Foundations or Charitable Trust
Asset Management Companies
Portfolio Managers
Charitable Trustees
Endowment Funds
Banks
Eligibility….
Registered with SEBI under Regulation 6 (FII),
1995 :

 Applicant should have track record, professional

competence, financial soundness, experience, general
reputation of fairness and integrity

Regulated by an appropriate foreign regulatory authority in
the same category where registration is sought from SEBI.

 Is required to have the permission under the provisions of
the Foreign Exchange Management Act, 1999 from the
Reserve Bank of India.

Entry Options..

Fulfill the above criteria & enter as a FII


As a Sub-Account of the FII

Investing in the BROAD BASED FUND

Through FII for the unregistered investors

As an Investor in the funds of a FII in the
foreign country
Direct Entry as an FII….
Register with SEBI
70:30
100% Debt
Register your sub-accounts
Inform RBI
Open a Special Non-Resident Rupee Account
with a Designated Bank
Appoint a Local Custodian (approved by SEBI)
Open an Trading Account with a Stock Broker
Open a Demat Account with the bank/broker
START TRADE
Registration Procedure….
Documents…
Form A
Certified copy of clauses of
MOA & AOA
Audited Financial Statement &
Annual Report for last year

Registration Fee: US$
10,000

Validity : 3 yrs

Renewal Fee: US$

Entry through Sub-Accounts….
Includes those foreign corporates, institutions,
funds or portfolios established or incorporated
outside India on whose behalf investments are
proposed to be made in India by a FII.

Application:
FII to apply on behalf of the sub-account
holder
Form AA
Registration Fee : US$ 2,000
Validity : Co-terminus with FII it is
Broad Based Fund…
Fund Established By Proprietary, Foreign
Corporate or Foreign Individuals outside India

Which has (any one)

at least twenty investors with no single

individual investor holding more than 10% shares
or units of the fund

Institutional Investor/ Investors (not necessary
to have 20 investors)

institutional investor holding more than 10% of
Entry Of Unregistered
Investors …
FII buy stocks on behalf of the overseas investors who are not
registered with SEBI but are interested in taking exposure in Indian
securities market.

P-NOTE:

This was introduced & followed strictly in 2007 but now has been
relaxed.

FII to issue a Participatory Note (P-Note) to the unregistered investor

on the investment amount he provides
 Order Execute
Registered Stock
Introduced by RBI to curb the Money Laundering problems
Unidentified Broking
Investor FII
firm
P-Note Confirm
Limits Of Investment….

10% of issued capital – Single FII

On behalf of each sub-account shall not exceed 10% of total
issued capital.

Sub-account registered under Foreign Companies, the limit is
fixed at 5% of total issued capital.

These limits are within overall limit of 24% / 49 % / 74% or the
sectoral caps, as prescribed by Government or RBI.

INV IN GOVT DEBT-
Under 100% Debt Route : US$ 2.0 bn
Under 70:30 Route : US$ 0.6 bn

Regulators…
SEBI-Rules

Registering FII

Approving Custodian

Clearing under 6A/7A

Transfer to 7000 series
 Notification-20 under
FII…
FOREIGN PORTFOLIO INVESTMENTS

PIS limit – Single FII – 10 per cent , Aggregate limit 24 per cent
raised to sectoral cap

Exchange Trade Derivatives Contracts allowed

Can buy dated Government Securities/treasury bills

Can buy listed non-convertible debentures/bonds issued by Indian

companies

Units of domestic mutual funds directly or through stock broker

Subject to certain limits and conditions, FII can subscribe to the

Perpetual Debt Instruments issued by banks in India
MONITORING OF FII BY RBI :
The Reserve Bank of India monitors the ceilings on
FII investments in Indian companies on a daily
basis. They even publish data regarding the amount
of FII inflow & Outflow.

A . Caution List
When trigger limit which is 2% below the
applicable limit, RBI issues notice to all
concerned.

B . Ban List
Once the limit of FII reaches the overall
FII Allowed upto 24% under
PIS
FII Allowed upto 30% under
PIS….
FII Allowed upto 40% under
PIS….
FII Allowed upto 49% under
PIS….
 FII Allowed upto given
Limits…. 35%
74%
74%

35% 33%

35%
100%
History Of Sensex and FIIs….
FII v/s Sensex Correlation….
MONTH GROSS GROSS SALES NET SENSEX
2009 PURCHASE (RS Cr) INVESTMENT GAIN/LOSS %
(RS Cr) (RS Cr)
JANUARY 35778.3 39220.8 - 3442 . 5 - 4 . 84 %

FEBRUARY 27986.9 31111.5 - 3124 . 6 - 5 . 66 %

MARCH 40978.6 46868.6 -5890 9 . 19 %

APRIL 49714.6 40716.2 8998 . 4 17 . 46 %

MAY 81265.9 63860.6 17405 . 3 28 . 26 %

JUNE 76072.5 71173.7 4898 . 8 - 0 . 90 %

JULY 77037.5 64433.4 12604 . 1 8 . 12 %

Determinants ….
• MARKET SIZE
•
• LIBERALIZED TRADE POLICIES
•
• INCENTIVES AND GOOD OPERATING
CONDTIONS
•
• POLITICAL SCENARIO
•
• DISINVESTMENT POLICIES
 Advantages…..
• FINANCE
•
• ECONOMIC GROWTH
•
• BALANCE OF PAYMENTS
•
• DEVELOPS RELATIONSHIPS
Disadvantages….
• ANYTIME WITHDRAWAL
•
• OUTFLOW OF MONEY
•
• SHORT TERM OPPORTUNITES
•
• EASY ROUTE WITHOUT IDENTITY
•
• INDIAN MARKET MORE SENSITIVE
•
 FDI v/s FII….
FDI FII
FDI IS WHEN A FOREIGN COMPANY FII IS WHEN A FOREIGN COMPANY
BRINGS CAPITAL INTO A COUNTRY TO BUYS EQUITY IN THE COMPANY
SET UP A PRODUCTION OR OTHER THROUGH STOCK MARKETS
FACILITY
FDI INVOLVES IN DIRECT PRODUCTIONDOES NOT INVOLVE DIRECT ACTIVITY
ACTIVITY AND ALSO OF MEDIUM TO AS IS FOR SHORT TERM
LONG TERM NATURE

ENABLES DEGREE OF CONTROL IN THE DOES NOT INVOLVE ANY DEGREE OF

COMPANY CONTROL IN THE COMPANY

BRINGS IN LONG TERM CAPITAL BRINGS IN SHORT TERM CAPITAL

IT INCREASES PRODUCTION, BRINGS IT ONLY WIDENS AND DEEPENS THE

IN MORE AND BETTER PRODUCTS AND STOCK EXCHANGES AND PROVIDES A
SERVICES BESIDES INCREASING THE BETTER PRICE DISCOVERY PROCESS
EMPLOYMENT OPPORTUNITIES AND FOR THE SCRIPTS.
REVENUE FOR THE GOVERNMENT BY
WAY OF TAXES.
Difference between FDI &
FII…
• Time frame
• Management control
• Employment
• Stability
• Procedures
• Identity
• Active/Passive
Any Questions???????