Presented By:

Puneeta Pakhredia 19-MBA-06

Rahul Kapoor 21-MBA-06
Yatin Sharma 39-MBA-06
 Command and Control Economy
Allocation of resources by the Government (budgetary
grants)

Government took active part in setting priorities for the

economy

Self-Reliance was the buzz word

Nationalization of Banks

Limited scope for private participation

 Phases of Indian Economy
1981-1990
Scope of “canalized” imports reduced

Open General Licensing (OGL) expanded: 30% imports freed

up by 1990

East-Asian style export incentives in the second half of the

1980s

More than 30 percent real depreciation of the rupee in the

second half of the 1980s

Tariffs raised to mop up the quota rents

Phases of Indian Economy
1991-2000
Liberalization and Globalization of Indian Economy
Increased emphasis on private sector participation

Limited extent of FDI participation

Gradual improvement in the enabling environment

Highest industrial tariff down from 350 percent in 1991 to

12.5 percent currently.
Phases of Indian Economy
POST 2000
Political Coalitions have started providing stable governments

Government to get out of owning and managing businesses:

Disinvestment Policy

Gradual relaxation in the FDI Policy.

 Progressive
Liberalization
PRE FDI was allowed selectively up to 40% under FERA
1991
This period was dominated by the Congress party
1991 35 high priority industry groups were placed on the Automatic Route
for FDI up to 51%.
Minority Congress government: Initiated economic reforms.
1997 Automatic Route expanded to 111 high priority industry groups up to
100%/ 74%/ 51%/50%
United Front Government: Inclusive of ‘left parties’, was perceived as
traditionally opposed to FDI, but continued with the reforms.
2000 All sectors placed on the Automatic Route for FDI except for some.
BJP coalition government:(coalition of Left and Right wing parties)
was traditionally seen as opposed to FDI, but continued with economic
reforms
 Progressive
Liberalization
POST Many new sectors opened to FDI; viz., insurance (26%),
2000 integrated townships (100%), mass rapid transit systems (100%),
defence industry (26%), tea plantations (100%), print media
(26%).
Sectoral caps in many other sectors relaxed;
BJP coalition government: pursued reforms vigorously and
initiated second generation reforms.
 Present Picture
India: Fourth largest economy in terms of Purchasing Power
Parity
Tenth most industrialized economy
GDP growth rate of 9.1% - Second highest in the world.
Considerable improvement in FDI inflows
FII inflows for the period, July 2007 FII inflow has exceeded
USD 8.5 billion, which is more than the cumulative FII inflow
in the last whole year.
 ROUTES FOR FOREIGN
DIRECT INVESTMENT
Routes available for FDI:

1st route:
Automatic Route - No prior Government approval is required if
the investment to be made falls within the sectoral caps
specified for the listed activities. Only filings have to be made
by the Indian company with the concerned regional office of
the Reserve Bank of India (“RBI”) within 30 days of receipt of
remittance and within 30 days of issuance of shares
 The Entry Process:
Automatic Route
All items/activities for FDI investment up to 100%
fall under the Automatic Route except the
following:

All proposals that require an Industrial License.

All proposals in which the foreign
collaborator has a previous venture/ tie up in
India
All proposals relating to acquisition of existing
shares in an existing Indian Company by a
foreign investor.
All proposals falling outside notified sectoral
 ROUTES FOR FOREIGN DIRECT
INVESTMENT
2nd Route:

FIPB Route –
Investment proposals falling outside the automatic route would
require prior Government approval. Foreign Investment requiring
Government approvals are considered and approved by the Foreign
Investment Promotion Board (“FIPB”). Decision of the FIPB
usually conveyed in 4-6 weeks. Thereafter, filings have to be made
by the Indian company with the RBI
 FIPB Approval
For all activities, which are not covered under the Automatic
Route
Composite approvals involving foreign investment/ foreign
technical collaboration
Published Transparent Guidelines vs. Earlier Case by Case
Approach
Downstream Investment
 ROUTES FOR FOREIGN
DIRECT INVESTMENT
3rd Route:

CCFI Route:
Investment proposals falling outside the automatic route and
having a project cost of Rs. 6,000 million or more would
require prior approval of Cabinet Committee of Foreign
Investment (“CCFI”). Decision of CCFI usually conveyed
in 8-10 weeks. Thereafter, filings have to be made by the
Indian company with the RBI
- Investment proposals falling within the automatic route
and having a project cost of Rs. 6,000 million or more do
not require to be approved by CCFI
 TYPES OF FOREIGN
INVESTMENT
FOREIGN DIRECT INVESTMENT

FDI refers to investment in a foreign country where the investors retains

control over the investment. It typically takes the form of starting a
subsidiary, acquiring a stake in an existing firm or starting a joint venture in
the foreign country. FDI is now recognized as an important driver of growth
in the country. Government is , therefore, making all efforts to attract and
facilitate FDI from NRIs including Overseas Corporate Bodies (OCBs), to
complement and supplement domestic investment

PORTFOLIO INVESTMENT

If the investor has only a sort of a property interest in investing the capital in
buying equities ,bonds or other securities abroad, it refers to as portfolio
investments. That is, in case of PI, the investor uses his capital in order to
get a return but has not got much control over the use of capital. Therefore ,
PI is considered to be an indirect form of investment.
According to WTO,
“Foreign Direct Investments (FDI) occurs when an investor
based in one country (home country) acquires an asset in
another country (host country) with the intent to manage that
asset. The management dimension is what distinguishes FDI
from Portfolio Investment in foreign stocks, bonds and other
financial instruments because the PI has no intent about
managing the asset”
 TYPES OF FDI
3 types of FDI:

Wholly Owned Subsidiary

Joint Venture
Acquisition
 WHOLLY OWNED
SUBSIDIARY
A Wholly Owned Subsidiary, is an entity that is controlled
completely by another entity. The controlled entity is called a
company,
corporation, or limited liability company, and the controlling
entity is called its parent (or the parent company).
The reason for this distinction is that an individual cannot be a
subsidiary of any organization; only an entity representing a
legal fiction as a separate entity can be a subsidiary. While
individuals have the capacity to act on their own initiative,
a business entity can only act through its directors,
officers and employees. The most common example of a wholly
owned subsidiary in India is LG that was set up in 1997 as LGEIL
(LG Electronics India Ltd.)
Illustrative List of Sectors for FDI
upto 100% in form of
wholly owned subsidiaries

Most manufacturing activities Management consultancy

Non-banking financial services
Drugs and pharmaceuticals
Food processing
Electronic hardware
Software development
Film industry
Advertising
Hospitals
Computer related Services
Research and Development
Services
Construction and related
Engineering Services
Health related & Social Services
Travel related services
Pollution control and
management
 JOINT VENTURES
A large number of recent foreign investments in most
countries is associated with joint venturing with local
entrepreneurs. Joint Venture is coming together of two or
more corporations to form a new corporation. The classic
example in case of India context is the JV between Govt.
of India and the Suzuki Motor Corporation of Japan which
resulted in the Maruti Udyog Ltd. (MUL) in 1981-82.
 The Entry Strategy: Joint
Venture Company
Advantages
 Limited liability

 Market Penetration

 Local Partner’s Expertise and Experience

Vital Considerations
 Choice of Joint Venture Partner

 Clearly defined agreement

 Terms of the Shareholders’ Agreement

 Share Transfer Restriction

 Non-disclosure of confidential information post termination

 JOINT VENTURES
4 types of JV :-

 JV BY ADOPTION
 JV BY REBIRTH
 JV BY PROCREATION
 JV THROUGH FAMILY TIES
 ACQUISITIONS
An acquisition, also known as a takeover, is the buying of one company (the
‘target’) by another. An acquisition may be friendly or hostile. In the former
case, the companies cooperate in negotiations; in the latter case, the
takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Acquisition usually refers to a purchase of a smaller
firm by a larger one. Sometimes, however a smaller firm will acquire
management control of a larger or longer established company and keep its
name for the combined entity. This is known as a reverse takeover.
Types of ACQUISITIONS
The buyer buys the shares, and
therefore control, of the target
company being purchased.
Ownership control of the
company in turn conveys
effective control over the assets of
the company, but since the
company is acquired intact as a
going business, this form of
transaction carries with it all of
the liabilities accrued by that
business over its past and all of
the risks that company faces in its
commercial environment.
The buyer buys the assets of the
target company. The cash the
target receives from the sell-off is
paid back to its shareholders by
dividend or through liquidation.
This type of transaction leaves the
target company as an empty shell,
if the buyer buys out the entire
assets. A buyer often structures
the transaction as an asset
purchase to “hand-pick" the assets
that it wants and leave out the
assets and liabilities that it does
not.
 TOP 10 ACQUISITIONS BY
INDIAN COs
Acquirer Target Co Country Value Industry
$ml
Tata Steel Corus Group UK 12000 Steel
plc
Hindalco Novelis Canada 5982 Steel
Videocon Daewoo Korea 729 Electronics
Electronics
Dr. Reddy’s Betapharm German 597 Pharmaceutical
Lab y
Suzlon Hansen Group Belgium 565 Energy
Energy Kenya
HPCL Petroleum Kenya 500 Oil & Gas
Refinery Ltd.
Ranbaxy Terapia SA Romania 324 Pharmaceutical
Labs
Tata Steel Natsteel Singapor 293 Steel
Videocon Thomson e
France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
GRAPHICAL REPRESENTATION
FDI INFLOWS YEAR WISE
Year (April-March) FDI inflows (US$ Billion)
1991-1992 (Aug-March) 0.16
1992-1993 0.39
1993-1994 0.65
1994-1995 1.37
1995-1996 2.14
1996-1997 2.77
1997-1998 3.68
1998-1999 3.08
1999-2000 2.43
2000-2001 2.91
2001-2002 4.22
2002-2003 3.13
2003-2004 2.63
2004-2005 3.75
2005-2006 7.26
2006-2007 15.07 (approx)
2007-2008 25.00 (estimated)
 PORTFOLIO INVESTMENT
2 TYPES OF PI :-

 Investment by FIIs
 Investment in GDRs & FCCBs
 FII
 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
 FII
 Proprietary funds, foreign individuals and foreign corporates can register
as a sub- account and invest through the FII. 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
 What are Foreign Investors
looking for?

Good projects
Demand Potential
Revenue Potential
Stable Policy Environment/Political Commitment
Optimal Risk Allocation Framework
 Daily Trends in FII
Investments
Net
Gross Gross Net Investment
Reporting
Debt/Equity Purchases(Rs Sales(Rs Investment US($) million
Date
Crores) Crores) (Rs Crores) at month
exchange rate
12-SEP-2007
Equity 2370.80 1925.10 445.60 109.20

Debt 446.10 48.10 398.00 97.50

The above report is compiled on the basis of reports submitted to

SEBI by custodians on 12-SEP-2007 and constitutes trades
conducted by FIIs on and upto the previous trading day.
FII inflows this year
 ADR
An American Depositary Receipt (or ADR) represents ownership in the
shares of a foreign company trading on US financial markets. The
stock of many non-US companies trades on US exchanges through
the use of ADRs. ADRs enable US investors to buy shares in foreign
companies without undertaking cross-border transactions. ADRs
carry prices in US dollars, pay dividends in US dollars, and can be
traded like the shares of US-based companies.
 
Each ADR is issued by a US depositary bank and can represent a
fraction of a share, a single share, or multiple shares of foreign
stock. An owner of an ADR has the right to obtain the foreign stock
it represents, but US investors usually find it more convenient
simply to own the ADR. The price of an ADR is often close to the
price of the foreign stock in its home market, adjusted for the ratio
of ADRs to foreign company shares.
 GDR
A negotiable certificate held in the bank of one country representing
a specific number of shares of a stock traded on an exchange of
another country. They are traded and settled independently of the
underlying share, and such are commonly used to invest in
companies in developing or emerging markets - especially Russia.
 
They trade on the International Order Book (IOB) of the LSE.
 
 fccb
A type of convertible bond issued in a currency different than
the issuer's domestic currency. In other words, the money
being raised by the issuing company is in the form of a
foreign currency. A convertible bond is a mix between a debt
and equity instrument. It acts like a bond by making regular
coupon and principal payments, but these bonds also give
the bondholder the option to convert the bond into stock.

These types of bonds are attractive to both investors and

issuers. The investors receive the safety of guaranteed
payments on the bond and are also able to take advantage
of any large price appreciation in the company's stock.
Issuers take advantage of this appreciation by means
warrants attached to the bonds, which are activated when
the price of the stock reaches a certain point.
 Factors affecting foreign
investment
Rate of interest
Speculation
Profitability
Costs of production
Economic conditions
Government policies
Political factors
 ADVANTAGES INDIA HAS TO
OFFER
 Stable democratic environment over 60 years of independence
 Large and growing market
 World class scientific, technical and managerial manpower
 Cost-effective and highly skilled labour
 Abundance of natural resources
 Large English speaking population
 Well-established legal system with independent judiciary
 Developed banking system and vibrant capital market
 Well developed accountancy, legal, actuarial and consultancy profession
 Difference b/w
FDI and Portfolio investment
FDI Portfolio Investment
Investment in physical Investment in financial
assets assets
Tends to be long term Tends to be short term
Difficult to withdraw Easy to withdraw
Does not tend be Tends to be speculative
speculative No Expectation of
Expectation of technology technology transfer
transfer No direct impact on
Direct impact on employment of labour and
employment of labour wages
and wages Fleeting interest in mgt.
Abiding interest in mgt.
 FDI
SECTORAL GUIDELINES
 AIRPORTS
Foreign Investment up to 100% is allowed in green field
projects under automatic route

Foreign Direct Investment is allowed in existing projects

- up to 74% under automatic route
- beyond 74% and up to 100% subject to Government
approval
DOMESTIC AIRLINES
FDI upto 49% permitted under automatic route

However, foreign airlines are not allowed to have any direct

or indirect equity participation

100% investment by NRIs/OCB’s

 TELECOM
FDI in basic and cellular, unified access services, national/ international
long distance, V-Sat, public mobile radio trunk services (PMRTS), global
mobile personal communications services (GMPCS), other value added
telecom services and ISP with gateways
- Automatic upto 49%
- FIPB beyond 49% but upto 74% (this limit is inclusive of FII, NRI,
FCCB’s, ADR,GDR, Convertible preference shares and proportionate
foreign equity in Indian promoters/Investing companies) subject to
guidelines notified in the PN 5 (2005 Series).

ISP with gateways, radio paging, end-to-end bandwidth

- Automatic up to 49%
- FIPB beyond 49% up to 74% (Subject to licensing and security
requirements notified by the Department of Telecommunications)
 TELECOM
ISP without gateway, infrastructure provider providing dark fibre, electronic
mail and voice mail
- Automatic upto 49%
- FIPB beyond 49% but upto 100% (Subject to the condition that such
company shall divest 26% of their equity in favor of Indian public in 5
years, if these companies are listed in other parts of the world. They are also
subject to licensing and security requirements, where required)

Manufacture of telecom equipments - Automatic upto 100%

(Subject to sectoral requirements).
DRUGS & PHARMACEUTICALS
FDI upto 100% is permitted under the automatic route for manufacture of
drugs and pharmaceuticals (The following is the current position)

i. FDI upto 74% in the case of bulk drugs, their intermediates

Pharmaceuticals and formulations (except those produced by the use of
recombinant DNA technology) would be covered under automatic route.

ii. FDI above 74% for manufacture of bulk drugs will be considered by
the Government on case to case basis for manufacture of bulk drugs from
basic stages and their intermediates and bulk drugs produced by the use of
recombinant DNA technology as well as the specific cell/tissue targeted
formulations provided it involves manufacturing from basic stage.]
 INSURANCE
FDI upto 26% allowed on the automatic route

However, license from the Insurance Regulatory &

Development Authority (IRDA) has to be obtained

There is a proposal to increase this limit to 49%(Not found

any data to substantiate this statement)
 PRIVATE SECTOR BANKING

Foreign Investment upto 74% is permitted from all sources (FDI +FII) under
the automatic route subject to guidelines for setting up of
branches/subsidiaries of foreign banks issued by RBI from time to time.
 INFRASTRUCTURE
100% FDI is permitted for the following activities:
Electricity Generation (except Atomic energy)
Electricity Transmission
Electricity Distribution
Mass Rapid Transport System
Roads & Highways
Toll Roads
Vehicular Bridges
Ports & Harbors
Hotel & Tourism

FDI in Investing companies in infrastructure/service sector (except

telecom sector) will not be counted towards sectoral cap
provided:
- Such investment is up to 49% &
- The management of the company is in Indian hands.
FDI in such companies will be through the FIPB route
 Any
u es t i o n s ? ?
Q