INTERNATIONAL CAPITAL MARKETS

- PROF. VINIT UPADHYAY

Road Map for Presentation
Background

What is FDI & FII

Distinction between FDI & FII

Case Studies

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Background: India Transformed !!
…Yesterday
 Slow rate of growth
 Bureaucratic
 Protected and slow
 Small consumer markets
 Weak infrastructure
…Today
 Strong macro economic fundamentals
 Encouraging foreign investment
 Outsourcing destination
 Growing consumerism
 Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the World!
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technical and managerial manpower • Cost-effective and skilled labour • Abundance of natural resources • Large English speaking population • Developed banking system and vibrant capital market • Well developed accountancy. legal.ADVANTAGES INDIA HAS TO OFFER • Stable democratic environment over 60 years of independence • Large and growing market • World class scientific. actuarial and consultancy profession 4 .

OBSTACLES TO INTERNATIONAL INVESTMENTS: • INFORMATION BARRIERS • POLITICAL & CAPITAL CONTROL RISKS • FOREIGN EXCHANGE RISK • RESTRICTION ON FOREIGN INVESTMENT & CONTROL • TAXATION. 5 .

mutual funds. 4. 6. equipment. 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. Foreign direct investment is investment of foreign assets into domestic structures. as well as asset management companies and other money managers operating on their behalf. and organizations. 2. FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. 3. Foreign Institutional Investment (FII): 5. whereas FDI is durable and generally useful whether things go well or badly. “SEBI’s definition of FIIs presently includes foreign pension funds.” 6 . It does not include foreign investment into the stock markets. a component of a country's national financial accounts. charitable/endowment/university funds etc. FDI stands for Foreign Direct Investment.What is FDI & FII Foreign Direct Investment (FDI): 1.

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

 FDI investment is more enduring & Longer time stability.  Debt instruments like Euro Credit (FCL).Distinction between FDI and FII FDI FII  Motive is to acquire controlling interest in a Foreign entity or set up entity. No controlling interest in entity.  Comes as Venture. GDR)  Motive is to make capital gains from investment.  It comes from individual investors.  It is highly volatile  Comes mainly through Stock markets. FCCBs  Equity instruments like Euro Equity. portfolio management Co’s & Corporate with investment motive. Subsidiary or Joint  It is made with business philosophy of diversification.  Debt Instruments like Investment in listed Bonds & other listed debt instruments  Equity instruments in stock markets 8 . integration. consolida-tion & expansion. Eurobonds.  It comes from big MNC’S & Corporate.  Sole criteria is to gains on investments. mutual funds. Foreign Equity ( ADR.

Overview 9 .

DISADVANTAGES TO FOREGIN INVESTORS: • Has to establish local contacts for suppliers & distribution. • New rules & regulations on matters of trading. Mfg. • FDI occurs in some countries & in some industries. to exchange rate exposures & different tax requirements. & other apply. 10 . • Investor needs to properly manage exposure of Mother Co. employment. • Difficult to Co-ordinate & communicate across geographical & cultural differences. • FDI is hardly predictable subject.

policy has been liberalized substantially to facilitate foreign investment 11 . The FDI guidelines administered by the Ministry of Commerce and Industry. sort out operational problems and meet with various Government agencies • • Administrative and compliance aspects of FDI monitored by RBI Since 1991. supplement domestic capital/ technology • Foreign investment in India is regulated by Government of India’s FDI policy.Foreign Direct Investment Policy… • Foreign Direct Investment (‘FDI’) – cross border investment with an objective to establish ‘lasting interest’ • Objective . 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. • Department of Industrial Policy & Promotion (‘DIPP’).to encourage FDI to promote industrial & socio-economic development. to provide a one-window to foreign investors by helping them obtain necessary approvals.

Conditions relaxed.The Roadmap so far… Sectoral caps raised. Up to 100% under ‘Automatic Route’ in all sectors except a small negative list Up to 74/51/50% in 111 Sectors under ‘Automatic Route’ 100% in some sectors Up to 51% under ‘Automatic Route’ for 35 Priority Sectors Allowed selectively up to 40% Pre 1991 1991 1997 2000 Post 2000 12 .

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 13 .Foreign Direct Investment Snapshot % 56 18 Million US$ 4% Figures in * April 2009 – January 2010 • • Mauritius.

FOREIGN INSTITUTIONAL INVESTORS 14 .

What are Foreign Investors looking for? Factors affecting foreign investment • Good projects • Rate of interest • Demand Potential • Speculation • Revenue Potential • Profitability • Stable Policy Environment/Political Commitment • Costs of production • Optimal Risk Allocation Framework • Political factors • Economic conditions • Government policies 15 .

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. 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 16 . foreign individuals and foreign corporates can register as a sub.account and invest through the FII.

17 . • Improved corporate governance. • FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. • Managing uncertainty and controlling risks. • FIIs constitute professional bodies. • Improving capital markets. • By increasing the availability of riskier long term capital for projects. FIIs can help in the process of economic development. • FII inflows help in financial innovation and development of hedging instruments. It improve capital structures. improve corporate governance.Advantages of FII • Enhanced flows of equity capital • FIIs have a greater appetite for equity than debt in their asset structure. • Equity market development aids economic development. and increasing firms’ incentives to provide more information about their operations.

Disadvantages of FII • Problems of Inflation • Problems for small investor • Adverse impact on Exports • Hot Money 18 .

it could turn into a nightmare and if the global investors make a sudden exit can send the bourses crashing. 19 .FII Investments & Market Reaction While strong inflow of funds from foreign institutional investors (FIIs) cheer has been a reason to .

2010 Rs.FII Inflows Vs Sensex BSE Sensex FII Investment from 2005 . in (Crores) 120000 100000 80000 60000 40000 Rs. in (Crores) 20000 0 -20000 2005 2006 2007 2008 2009 2010 -40000 -60000 -80000 FII Investment Vs Sensex FII average holding in BSE 500 20 .

Case Studies and Recommendations 2121 .

This is not likely to settle the debate over taxation of capital gains made by FIIs in India •.Those from Mauritius that already enjoy capital gains tax exemption under a tax treaty India has with the island nation. •.The Prudential Assurance Company vs. •. •.The Court has held that earnings of FIIs registered in India are in the nature of business income.Only a Supreme Court decision can provide a binding certainty on the issue. DIT (Bombay High Court) • . Th 22 .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.

6 billion in taxes for its 2007 acquisition of one of India's largest mobile phone companies. Offshore deals may also start drying up. •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. we are developing as a prominent nation and FDI would get much strong over the years despite any such issues. 23 . •But due to growing image and future prospectus of country. •This is bound to affect FDI/M&A/PE deals as companies would ascribe a higher tax weightage risk while entering India.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. •The Vodafone judgement will definitely impact foreign investments into India.

China and south Korea  Maintain a balance between domestic companies and foreign 24 companies so as domestic companies could survive in front of 24 .  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.  Increase FDI limit for Retail Sector.  Liberalise the economic policies further so as to overcome the fiscal deficits faced by Indian economy  Invite corporate giants from countries like USA.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%.

 For example.  Euroyen are yen-denominated time deposits in banks located outside of Japan. dollar-denominated time deposits in banks located abroad.S. Eurodollars are U. The foreign bank doesn’t have to be located in Europe. 25 .International Money Market  Eurocurrency is a time deposit in an international bank located in a country different than the country that issued the currency.

000 and up.000.  Common reference rates include  LIBOR the London Interbank Offered Rate  PIBOR the Paris Interbank Offered Rate  SIBOR the Singapore Interbank Offered Rate  A new reference rate for the new euro currency 26 .Eurocurrency Market  Most Eurocurrency transactions are interbank transactions in the amount of $1.

Often the loans are too large for one bank to underwrite. Number of banks in the form of Syndicate participate in this loans.25% to 1% of loan value.Eurocredits • • • • • • • • Eurocredits are short. Eurocredits feature an adjustable rate. Maturity can vary from 3 to 10 years. The loans are denominated in currencies other than the home currency of the Eurobank. 27 . a number of banks form a syndicate to share the risk of the loan.to medium-term loans of Eurocurrency. On Eurocredits originating in London the base rate is LIBOR. Managers charge fees up to 0. Drawdown – Period over which borrower may take the loan & repayment period vary in accordance to the need of the borrower.

A bond underwritten by the International syndicate of banks & marketed internationally in countries other than the country of the currency in which it is denominated. As same as domestic bonds & free from official regulation. 2. 70% of EuroBond issue are SWAP Driven. SWAPS: 1. 4. It can be denominated in any of the several different currencies. 3. Today majority of the issues are DOLLAR ($) denominated. 5. 2. 28 . 2 Counterparties agree to exchange streams of payments over time. 3. Retire mainly through repurchase by the issuer at prdecided price.EuroBond: 1. Major catalyst for the growth in EuroBond market.

LIQUID INVESTMENT 29 .): 1. LONGER MATURITIES (15 TO 30YEARS) ADVANTGES TO INVESTORS : 1. LOWER INTEREST COST 4.ADVANTGES TO BORROWERS (ISSUING Cos. FREEDOM & FLEXIBILITY 3. LARGE AMOUNTS 2. LOW RISK INVESTMENT 3. TAX FREE INCOME 2. CONVERTIBLE TO EQUITY 4.

while typically U. • Placed directly with the public through a dealer.Euro Commercial Paper (ECP): • Unsecured short-term promissory notes issued by corporations and banks. • Eurocommercial paper.S. commercial paper—as a result yields are higher.S. is often of lower quality than U. • Maturities typically range from one month to six months. dollar denominated. 30 .

French philosopher 31 . it is India". Romain Rolland."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.