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Group: Rakesh Ramchandran, Ravi Iyer and Vivek ChaudhariBatch: X-MBA 23

INDIA And Foreign Investor

Brief Background

Planned Economy / License Raj from 1947 1990

Planning Commission administers the economy

Balance of payment crises in 1980s

IMF bail out, Gold transferred to London as bailout

Economic reforms introduced in 1991

Foreign Investors

Foreign Direct Investment

Plays an extraordinary and growing role in global business.

Provide a source of new technologies, skills and capital

Provide a strong impetus to economic development.

FDI can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing.

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Definition

Is defined as a company from one country making a physical investment into building a factory in another country.

FDI is necessary for sustained economic growth and development of any economy in this era of globalization. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firms home country.

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How Has FDI Changed in the Past Decade

In developing countries, the FDI inflow has been increased from average of < $ 10 bio in 1970s to < $20 bio in 1980s to explode in 1990s from $ 26.7 billion to $179 billion in 1998 & $208 bio in 1999 and to $1604 in year 2011

In the past decade, FDI has come to play a major role in the internationalization of business.

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than Driven by mergers and acquisitions and internationalization of production in a range of industries, Developing nations looks at FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps.

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Advantage of FDI

Is necessary for creation of jobs, Is expansion of existing manufacturing industries.Play vital role in the healthcare, education, R&D, infrastructure, retailing and in long-term financial projects.

FDI as a strategic component of investment is needed by any country for its sustained economic growth and development. and development of the new one.

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Policy makers

Policy makers should design policies where foreign investment can be utilized

as means of enhancing domestic production, savings, and exports;

as medium of technological learning and technology diffusion

and also in providing access to the external market.

Most importantly the policy makers should ensure optimum utilisation of funds and timely implementation of projects.

Awakening India

Indian government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy, red - tapism, and the rampant corruption, so that investors confidence can be maintained for attracting more FDI inflows to India.

India needs a business environment which is conducive to the needs of business.

India require to have efficient and transparent official procedures, rules and regulations, clearance, and opportunities in India.

Awakening India

this can be achieved only if India implements its second generation reforms in totality and in right direction. But if Indian government improves from past mistakes during implementation of 3rd generation economic reforms, then no doubt India will be favourable FDI destination in the world.This change will show rest of the world, we can achieve what is predicted by Goldman Sachs that from 2007 to 2020, Indias GDP per capita in US$ terms will quadruple and the Indian economy will overtake France and Italy by 2020, Germany, UK and Russia by 2025,Japan by 2035 and US by 2043.

FII & FDI

FDI Allowed through FII

Private Equity, Preferential Allotment, Joint Ventures, Capital Market Operations

FII Allowed - Insurance and Banking

100% FDI Allowed - Infra Bridges & Tunnels

FDI NOT Allowed Arms, Railways, Coal, Nuclear, Mining.

Foreign Institutional Investors

Pool large amounts and invest in securities, property, etc

Banks, Insurance companies, Retirement or Pension Funds, Hedge Funds, Investment Advisors and Mutual Funds

FII activity has been on a constant rise

Focus on BRIC countries (Brazil, Russia, India and China)

FII Figures

In 2010, net foreign inflows was US$30 billion

FY 2000 2011 - FDI inflow - US$ 197,935 million Yearly Increase - 43%

January July 2011, US$3.82 billion - Investment in Shares and Bonds

US$5.84 billion - Investment in Equities and Debt securities

As of July 2011, Total registered FIIs -1730

FII in India

Largest pool of Highly Educated People

Lack of Infrastructure Slow Development

Bureaucratic Hurdles Red Tape

When Markets slide FII withdraw Market affected further

Foreign Venture Capital Investor (FVCI)

Investor incorporated established outside India

Invest in venture capital funds (IVCF) or venture capital undertakings (IVCU)

Registered under SEBI FVCI regulation

Its a categorized under Private Equity

DescriptionVenture Capital (VC) is an important source of funding seed capital for start-up ventures and technology projects.It is different from traditional sources of financing as unlike traditional source of funding Venture capitalists finance innovation and ideas which have potential for high growth with inherent uncertainties. Venture capital funds (VCF) are professional money managers who provide risk capital to businesses.

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Indian venture capital fund (IVCF)

A fund established in the form of a trust or a company

Registered with SEBI under SEBI regulation act for VCF

Had dedicated pool of capital raised in manner specified in regulations and which invests in VCU

It is a fund established in the form of a trust or a company including a body corporate and registered with SEBI under SEBI(Venture Capital Fund) Regulations 1996 and which has a dedicated pool of capital raised in manner specified in regulations and which invests in VCU in accordance with said regulations. A VCF is also allowed to make investments in VCU subject to provisions in SEBI(Venture Capital Fund) Regulations

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Indian venture capital undertaking (IVCU)

Has set up in India [India incorporated]

Shares are not listed on a recognized stock exchange in India

Which is not engaged in an activity specified under the negative list specified by the SEBI

A new born private company which is yet to establish itself and is in need of funds and experienced advice and support

Chronological Events

India Venture Capital Association was formed in 1996

In 1996 SEBI introduced Venture Capital Fund (VCF) regulation

In 2000 the SEBI announced the SEBI Regulations, 2000 (FVCI Regulations) enabling foreign venture capital and private equity investors

The formalization of the Indian venture capital community began in 1993 when Indian Venture Capital Association was formed. In 1996, the Securities and Exchange Board of India ("SEBI") introduced the SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations), for regulating and promoting the activities of domestic venture capital funds.Pursuant to K B Chandrasekhar Committee recommendations, in 2000 Securities and Exchange Board of India (SEBI) was made a nodal regulator for VCFs to provide for regulatory and institutional environment to facilitate faster growth of venture capital industry in the country. In 2000 the SEBI announced the SEBI (Foreign Venture Capital Investor) Regulations, 2000 (FVCI Regulations) enabling foreign venture capital and private equity investors to register with it and avail of certain benefits provided there under. The step liberated the industry from a number of bureaucratic hassles and paved the path for the entry of a number of foreign funds into India.

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Why does INDIA Need FCVI

Promote innovation and new enterprises

Potential to grow in IT, bio technology, pharmaceuticals, etc.

Need for Capital Investment

Conventional lenders choose to invest in Low risk business and are also short on reserves

India provides a skilled labor in terms of technology, research and entrepreneurship and at a competitive cost. This could enable Indian market to flourish if sustainable investment is made in order to enable growth.

Indias recent success story in the area of information technology has shown that there is a tremendous potential for growth of knowledge based industries.This potential is not only confined to information technology but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc

A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. The gap exists because such startups are necessarily based on intangible assets such as human capital and on a technology enabled mission, often with the hope of changing the world

Apple, Exodus, Hotmail and Yahoo, to mention a few of the many successful multinational venture-capital funded companies, initially failed to get capital as startups when they approached traditional lenders. However, they were able to obtain finance from independently managed venture capital funds that focus on equity or equity-linked investments in privately held, high-growth companies

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Policy

Can contribute up to 100% of the capital of an Indian Venture Capital Undertaking

Can set up a domestic asset management company to manage the fund.

Investments can be made under automatic route as per FEMA regulation act

SEBI registered FVCI can also invest in domestic venture capital fund registered under the SEBI Regulations

FVCI may contribute up to 100% of the capital of an Indian Venture Capital Undertaking and may also set up a domestic asset management company to manage the fund. All such investments by FVCI can be made under automatic route in terms of Schedule 6 to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified under the Foreign Exchange Management Act, 1999 (FEMA) [discussed in detail below].

A SEBI registered FVCI can also invest in domestic venture capital fund registered under the SEBI (Venture Capital Fund) Regulations, 1996. Such investments would also be subject to RBI regulations and FDI policy. However, in case the entity undertaking venture capital fund activity is a Trust registered under the Indian Trust Act, 1882, FDI would be permitted under the Government route. FVCIs are also allowed to invest in other companies subject to FDI Regulations

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Regulatory framework

A SEBI registered FCVI having approval from RBI under FEMA regulation can invest in IVCU or in schemes floated by IVCF

Can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a IVCF

The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.

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Benefits

Exemption from pricing norms at the time of entry as well as exit

Exemption from lock-in period requirements when the investee company goes public. FVCIs are thus effectively allowed to exit investment, immediately on listing of the investee company

Exemption from Takeover Code in respect of shares sold by the FVCI to the promoters of the company, after the company goes public

SEBI and the Reserve Bank of India (RBI) have extended certain benefits to funds registered under the FVCI Regulations making it beneficial to register. This is an optional registration that an investor can seek, in order to qualify for certain benefits.

FVCIs enjoy a number of regulatory relaxations; some of the significant ones are:Exemption from pricing norms at the time of entry as well as exit;Exemption from lock-in period requirements when the investee company goes public; FVCIs are thus effectively allowed to exit investment, immediately on listing of the investee company;Exemption from Takeover Code (which mandates making of an open offer by the acquirer, on acquisition of shares beyond prescribed threshold limits) in respect of shares sold by the FVCI to the promoters of the company, after the company goes public

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How FCVI operates in India

Foreign investor sets up offshore fund

This offshore fund is registered with SEBI under FVCI regulation

Investor assigns a overseas manager

Register the FCVI as a fund or a company

Appoints an Indian advisor to handle domestic fund or undertaking/company

Advantage India for Foreign Investors

Democratic environmentLarge growing marketPool of scientific, technological and managerial manpowerCost effective and skilledLarge pool of English speaking manpowerWell established banking and vibrant capital marketWell established legal system with independent judiciary

Thank You