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INTERNATIONAL CAPITAL MARKETS

- PROF. VINIT UPADHYAY

Road Map for Presentation


Background

What is FDI & FII

Distinction between FDI & FII

Case Studies

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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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 skilled labour

Abundance of natural resources

Large English speaking population

Developed banking system and vibrant


capital market

Well developed accountancy, legal,


actuarial and consultancy profession

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

What is FDI & FII


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


FDI

FII

1. It is long-term investment

1. It is generally short-term investment

2. Investment in physical assets

2. Investment in financial assets

3. Aim is to increase enterprise capacity or


productivity or change management
control

3. Aim is to increase capital availability

4. Leads to technology transfer, access to


markets and management inputs

4. FII results in only capital inflows

5. FDI flows into the primary market

5. FII flows into the secondary market

6. Entry and exit is relatively difficult

6. Entry and exist is relatively easy

7. FDI is eligible for profits of the company

7. FII is eligible for capital gain

8. Does not tend be speculative

8. Tends to be speculative

9. Direct impact on employment of labour


and wages

9. No direct impact on employment of labour


and wages

10.Abiding interest in mgt.

10.Fleeting interest in mgt.


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Distinction between FDI and FII


FDI

FII

Motive is to acquire controlling


interest in a Foreign entity or set up
entity.
It comes from big MNCS & Corporate.
FDI investment is more enduring &
Longer time stability.
Comes as
Venture.

Subsidiary

or

Joint

It is made with business philosophy


of
diversification,
integration,
consolida-tion & expansion.

Debt instruments like Euro Credit


(FCL), Eurobonds, FCCBs

Equity instruments like Euro Equity,


Foreign Equity ( ADR, GDR)

Motive is to make capital gains from


investment. No controlling interest in entity.
It comes from individual investors, mutual
funds, portfolio management Cos &
Corporate with investment motive.
It is highly volatile
Comes mainly through Stock markets.
Sole criteria is to gains on investments.
Debt Instruments like Investment in listed
Bonds & other listed debt instruments
Equity instruments in stock markets

Overview

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

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Foreign Direct Investment Policy

Foreign Direct Investment (FDI) cross border investment with an objective to


establish lasting interest

Objective - to encourage FDI to promote industrial & socio-economic development;


supplement domestic capital/ technology

Foreign investment in India is regulated by Government of Indias FDI policy. The FDI
guidelines administered by the Ministry of Commerce and Industry.

Department of Industrial Policy & Promotion (DIPP), 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, to provide
a one-window to foreign investors by helping them obtain necessary approvals, sort out
operational problems and meet with various Government agencies

Administrative and compliance aspects of FDI monitored by RBI


Since 1991, policy has been liberalized substantially to facilitate foreign investment

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The Roadmap so far

Sectoral caps raised;


Conditions relaxed;
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
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Foreign Direct Investment


Snapshot

%
56

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Million US$

4%

Figures in

* April 2009 January 2010

Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India
Foreign investment (FI) from Mauritius constituting 43%* of Indias total FI
*as per information in the Press
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FOREIGN INSTITUTIONAL INVESTORS

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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

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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, 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
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Advantages of FII

Enhanced flows of equity capital

FIIs have a greater appetite for equity than debt in their asset structure. It improve capital
structures.

Managing uncertainty and controlling risks.

FII inflows help in financial innovation and development of hedging instruments.

Improving capital markets.

FIIs as professional bodies of asset managers and financial analysts enhance competition
and efficiency of financial markets.

Equity market development aids economic development.

By increasing the availability of riskier long term capital for projects, and increasing firms
incentives to provide more information about their operations, FIIs can help in the process of
economic development.

Improved corporate governance.

FIIs constitute professional bodies, improve corporate governance.

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Disadvantages of FII

Problems of Inflation
Problems for small investor
Adverse impact on Exports
Hot Money

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FII Investments & Market Reaction

While strong inflow of funds from


foreign institutional investors (FIIs)

cheer

has been a reason to


, it
could turn into a nightmare and if the
global investors make a sudden exit
can send the bourses

crashing.

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FII Inflows Vs Sensex


BSE Sensex

FII Investment from 2005 - 2010

Rs. 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

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Case Studies and Recommendations

2121

The Prudential Assurance Company vs. DIT (Bombay High Court)


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

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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 $2.6 billion in
taxes for its 2007 acquisition of one of India's largest mobile phone companies.
Decision as well as the tax departments 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.
The Vodafone judgement will definitely impact foreign investments into India.
This is bound to affect FDI/M&A/PE deals as companies would ascribe a higher tax
weightage risk while entering India. Offshore deals may also start drying up.
But due to growing image and future prospectus of country, we are developing as a
prominent nation and FDI would get much strong over the years despite any such issues.

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

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International Money Market

Eurocurrency is a time deposit in an international bank


located in a country different than the country that issued
the currency.
For example, Eurodollars are U.S. dollar-denominated time
deposits in banks located abroad.
Euroyen are yen-denominated time deposits in banks located
outside of Japan.
The foreign bank doesnt have to be located in Europe.

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Eurocurrency Market

Most Eurocurrency transactions are interbank transactions in the amount of


$1,000,000 and up.

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

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Eurocredits

Eurocredits are short- to medium-term loans of Eurocurrency.


The loans are denominated in currencies other than the home currency of
the Eurobank.
Often the loans are too large for one bank to underwrite; a number of
banks form a syndicate to share the risk of the loan.
Eurocredits feature an adjustable rate. On Eurocredits originating in
London the base rate is LIBOR.
Maturity can vary from 3 to 10 years.
Drawdown Period over which borrower may take the loan & repayment
period vary in accordance to the need of the borrower.
Managers charge fees up to 0.25% to 1% of loan value.
Number of banks in the form of Syndicate participate in this loans.

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EuroBond:

1. 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.
2. As same as domestic bonds & free from official regulation.
3. It can be denominated in any of the several different currencies.

SWAPS:
1.
2.
3.
4.
5.

Major catalyst for the growth in EuroBond market.


2 Counterparties agree to exchange streams of payments over time.
70% of EuroBond issue are SWAP Driven.
Today majority of the issues are DOLLAR ($) denominated.
Retire mainly through repurchase by the issuer at prdecided price.

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ADVANTGES TO BORROWERS
(ISSUING Cos.):
1. LARGE AMOUNTS
2. FREEDOM & FLEXIBILITY
3. LOWER INTEREST COST
4. LONGER MATURITIES (15 TO 30YEARS)

ADVANTGES TO INVESTORS :
1. TAX FREE INCOME
2. LOW RISK INVESTMENT
3. CONVERTIBLE TO EQUITY
4. LIQUID INVESTMENT

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Euro Commercial Paper


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

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

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