Fdi and Fii | Foreign Direct Investment | Securities (Finance)

FDI and FII

Vicky Shah Hemen Parekh

Swati Gupta
Ronak Mehta

Nimit

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 an overseas lose out on its ownership to 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

Long-term sustainable Competitive advantage - High growth rate economy

Second Largest Emerging Market

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 country as far as intellectual capital is concerned” JACK WELCH, GE “India can be a major part of Dell’s operations and we are looking to capitalize on India’s human capital” MICHAEL DELL, DELL “Who put my snap here” VICKY SHAH, ?????
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“We are expanding our presence in India to take advantage of the ample R&D talent available” JOHN CHAMBERS, CISCO “India is handling the most sophisticated projects in the world. I am impressed with the quality of work” BILL GATES, MICROSOFT

Evolution…

2000-09

More sectors opened ; Equity caps raised in many other sectors Procedures simplified Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors FDI up to 51% allowed under the Automatic route in 35 Priority sectors Allowed selectively up to 40% FDI Policy Liberalization
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2000

1997

1991

Pre 1991

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 Steel buys Corus Plc Tata Steel buys Corus Plc
USD 12.1 billion

Hindalco acquired Novelis Inc. . Hindalco acquired Novelis Inc

USD 6 billion

Essar Steel acquired Algoma Steel Essar Steel acquired Algoma Steel

USD 1.58 billion

Suzlon Energy Ltd. . acquires REpower Suzlon Energy Ltd acquires REpower

USD 1.6 billion

United Spirits Ltd. . acquired Whyte & Mackay United Spirits Ltd acquired Whyte & Mackay

USD 1.1 billion

Sector-wise FDI Contribution…

Sector Wise Policy….

SECTORS Shipping and Ports Construction-development projects SEZ Hospitals Private sector banks Stock Exchanges Airports Roads & Highways Telecom

% FDI ALLOWED 100% FDI (A) 100% FDI (A) 100 % FDI (A) 100 % FDI (A) 74 % FDI (A) 49% FDI (A) 100% FDI- Greenfield Projects Beyond 74% FIPB APP100% FDI Existing Airports 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
Population (2009) Population growth rate (%) 2009 Average real GDP growth rate % 2009: Foreign direct investment (2008) Population in poverty (2009) Political system 1.15 billion 1.93% 6.5% $27.3 billion 27.5% Multi party democracy

China
1.33 billion 5.28% 7.00% $92.4 billion 4% One-party 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 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
70:30 100% Debt

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 US$

Renewal Fee:

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…of the overseas investors who are not FII buy stocks on behalf
P-NOTE:

registered with SEBI but are interested in taking exposure in Indian securities market.

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 Stock Registered Unidentified Introduced by RBI to curb the Money Laundering problems 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

FOREIGN PORTFOLIO INVESTMENTS

Notification-20 under FII…

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 2009 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY GROSS PURCHASE (RS Cr) 35778.3 27986.9 40978.6 49714.6 81265.9 76072.5 77037.5 GROSS SALES (RS Cr) 39220.8 31111.5 46868.6 40716.2 63860.6 71173.7 64433.4 NET INVESTMENT (RS Cr) - 3442 . 5 - 3124 . 6 -5890 8998 . 4 17405 . 3 4898 . 8 12604 . 1 SENSEX GAIN/LOSS % - 4 . 84 % - 5 . 66 % 9 . 19 % 17 . 46 % 28 . 26 % - 0 . 90 % 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

FDI v/s 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 IT INCREASES PRODUCTION, BRINGS IN MORE AND BETTER PRODUCTS AND SERVICES BESIDES INCREASING THE EMPLOYMENT OPPORTUNITIES AND REVENUE FOR THE GOVERNMENT BY WAY OF TAXES. BRINGS IN SHORT TERM CAPITAL IT ONLY WIDENS AND DEEPENS THE STOCK EXCHANGES AND PROVIDES A BETTER PRICE DISCOVERY PROCESS FOR THE SCRIPTS.

FII

Difference between FDI & FII…
• Time frame • Management control • Employment • Stability • Procedures • Identity • Active/Passive

Any Questions???????

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