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Foreign Investment In India

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Information about Foreign Investment In India
Business & Mgmt

Published on March 3, 2009

Author: pankajprabhakar4u

Source: slideshare.net

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PRESENTATION ON Foreign Investment In India Prepared By: Pankaj Prabhakar

Prepared By:

Pankaj Prabhakar

Foreign Investment in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner.

Liberalization of economy Huge consumer base Drive for Fast Growth Technological and Innovation Expansion in Market Share Incentive by Government Overcome Competition Domestic Demand Constraints Means of Communication Factor Attracting Foreign Investors

Liberalization of economy

Huge consumer base

Drive for Fast Growth

Technological and Innovation

Expansion in Market Share

Incentive by Government

Overcome Competition

Domestic Demand Constraints

Means of Communication

SPECIAL CLASS OF FOREIGN INVESTORS

VENTURE CAPITAL FUNDS SEBI registered foreign venture capital investor can invest in an Indian venture capital undertaking (“IVCU”) or venture capital fund (“VCF”) It can purchase equity/equity linked instruments/debt instruments, debentures of an IVCU or VCF through initial public offer or private placement or in units of schemes/funds set up by VCF The purchase/sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller/issuer

SEBI registered foreign venture capital investor can invest in an Indian venture capital undertaking (“IVCU”) or venture capital fund (“VCF”)

It can purchase equity/equity linked instruments/debt instruments, debentures of an IVCU or VCF through initial public offer or private placement or in units of schemes/funds set up by VCF

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

FOREIGN INSTITUTIONAL INVESTOR Foreign Institutional Investors (“FIIs”) can individually purchase up to 10% and collectively up to 24% of the paid-up share capital of an Indian company This limit of 24% can be increased to 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

Foreign Institutional Investors (“FIIs”) can individually purchase up to 10% and collectively up to 24% of the paid-up share capital of an Indian company

This limit of 24% can be increased to 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

FOREIGN INSTITUTIONAL INVESTOR Proprietary funds, foreign individuals and foreign corporate 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

Proprietary funds, foreign individuals and foreign corporate 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

NON RESIDENT INDIANS General policy and facility for FDI available to NRIs Following additional concessions specifically applicable to NRIs: NRI Investment in Construction Development Projects inclusive of housing sector up to 100% wherein conditions prescribed under Press Note 2 of 2005 are not applicable NRI investment in domestic airlines sector up to 100%. Further NRIs are permitted to invest on repatriate basis in partnership firms and proprietary concerns on prior approval of the Reserve Bank of India (Master Circular on Foreign Investment in India 01 July, 2006)

General policy and facility for FDI available to NRIs

Following additional concessions specifically applicable to NRIs:

NRI Investment in Construction Development Projects inclusive of housing sector up to 100% wherein conditions prescribed under Press Note 2 of 2005 are not applicable

NRI investment in domestic airlines sector up to 100%.

Further NRIs are permitted to invest on repatriate basis in partnership firms and proprietary concerns on prior approval of the Reserve Bank of India (Master Circular on Foreign Investment in India 01 July, 2006)

VALUATION, PRICING & TRANSFER OF SHARES

VALUATION & PRICING OF SHARES Subscription of shares of a Indian company by a non- resident investor shall be at a price not less than: Price worked out in accordance with SEBI guidelines, where the issuing company is listed; Fair valuation of shares done by a Chartered Accountant as per the guidelines issued by the erstwhile Controller of Capital Issues, where the issuing company is unlisted The above pricing guidelines will also apply to transfer of shares of an Indian company from a resident to a non resident

Subscription of shares of a Indian company by a non- resident investor shall be at a price not less than:

Price worked out in accordance with SEBI guidelines, where the issuing company is listed;

Fair valuation of shares done by a Chartered Accountant as per the guidelines issued by the erstwhile Controller of Capital Issues, where the issuing company is unlisted

The above pricing guidelines will also apply to transfer of shares of an Indian company from a resident to a non resident

TRANSFER OF SHARES Pricing guidelines do not apply in case of (a) a rights issue, (b) shares issued under the Employee Stock Option Scheme, (c) bonus shares, (d) shares issued pursuant to a scheme of amalgamation or de-merger and (e) shares acquired by foreign venture capital funds Transfer of shares from non-resident to non-resident is not subject to pricing guidelines Transfer of shares under a private arrangement by a non resident to a resident can be made at the ruling market price +/- 5% (in case of listed companies) or at a price which is the higher of the price arrived at by two valuers, one of them being the auditor of the Indian company (in case of unlisted companies)

Pricing guidelines do not apply in case of (a) a rights issue, (b) shares issued under the Employee Stock Option Scheme, (c) bonus shares, (d) shares issued pursuant to a scheme of amalgamation or de-merger and (e) shares acquired by foreign venture capital funds

Transfer of shares from non-resident to non-resident is not subject to pricing guidelines

Transfer of shares under a private arrangement by a non resident to a resident can be made at the ruling market price +/- 5% (in case of listed companies) or at a price which is the higher of the price arrived at by two valuers, one of them being the auditor of the Indian company (in case of unlisted companies)

ENTRY STRATEGIES

ENTRY STRATEGIES FOR FOREIGN INVESTOR Foreign Company has the following options to set up business operations in India : By incorporating a company under the Companies Act, 1956 A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner As an unincorporated entity Liaison Office Project Office Branch Office

Foreign Company has the following options to set up business operations in India :

By incorporating a company under the Companies Act, 1956

A wholly owned subsidiary

Joint venture company - existing company or new company with domestic partner

As an unincorporated entity

Liaison Office

Project Office

Branch Office

LIAISON OFFICE Liaison office not permitted to undertake any commercial/trading/industrial activity The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers and acting as a communication channel between the parent company and Indian Companies. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India Approval for establishing a liaison office in India is granted by RBI

Liaison office not permitted to undertake any commercial/trading/industrial activity

The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers and acting as a communication channel between the parent company and Indian Companies.

It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India

Approval for establishing a liaison office in India is granted by RBI

PROJECT OFFICE General permission to foreign entities to establish Project / Site Offices (temporary in nature) Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project General permission also for remitting surplus funds after completion of project on production of the following documents: Certified copy of the final audited project accounts; A Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus; Income tax assessment order or other documentary evidence showing payment of income-tax and other applicable taxes

General permission to foreign entities to establish Project / Site Offices (temporary in nature)

Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project

General permission also for remitting surplus funds after completion of project on production of the following documents:

Certified copy of the final audited project accounts;

A Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus;

Income tax assessment order or other documentary evidence showing payment of income-tax and other applicable taxes

BRANCH OFFICE Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes Branch Offices are established with the approval of RBI Permitted to remit outside India profit of the branch No approval required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes

Branch Offices are established with the approval of RBI

Permitted to remit outside India profit of the branch

No approval required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities

SPECIAL INVESTMENT AVENUES

ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS 100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports Such units are eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc. Income tax exemption on exports for a block of 10 years of its operation under Section 10A and eligible up to Assessment Year 2009-10 (till 31.03. 2009) Such units are permitted to supply up to 50% of production in the domestic market in value terms subject to net foreign exchange earnings

100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports

Such units are eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc.

Income tax exemption on exports for a block of 10 years of its operation under Section 10A and eligible up to Assessment Year 2009-10 (till 31.03. 2009)

Such units are permitted to supply up to 50% of production in the domestic market in value terms subject to net foreign exchange earnings

EXPORT ORIENTED UNITS 100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (“EOUs”) even if it is manufacturing an item reserved for the small scale sector Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme - This shall not apply in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc. Goods and services exported from units in DTA and units in EOU, remission of service tax levied shall be allowed. EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till 31.03. 2009 EOUs, other than gems and jewellery, are permitted to supply up to 50% of FOB value of exports in the domestic market, subject to fulfillment of positive NFE on payment of concessional duties.

100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (“EOUs”) even if it is manufacturing an item reserved for the small scale sector

Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme - This shall not apply in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc.

Goods and services exported from units in DTA and units in EOU, remission of service tax levied shall be allowed.

EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till 31.03. 2009

EOUs, other than gems and jewellery, are permitted to supply up to 50% of FOB value of exports in the domestic market, subject to fulfillment of positive NFE on payment of concessional duties.

SPECIAL ECONOMIC ZONE Special Economic Zone (“SEZ”) is deemed to be foreign territory for the purposes of trade operations and duties and tariffs No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from industrial licensing SEZ unit can be set up in the designated SEZ areas which is supported with all services and utilities Unlike a EOU unit, an SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and rendering of services

Special Economic Zone (“SEZ”) is deemed to be foreign territory for the purposes of trade operations and duties and tariffs

No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from industrial licensing

SEZ unit can be set up in the designated SEZ areas which is supported with all services and utilities

Unlike a EOU unit, an SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and rendering of services

No minimum investment criteria is applicable for establishment of units under the SEZ scheme SEZ units have to be foreign exchange positive On exports, SEZ units entitled to 100% income tax exemption for first five years, 50% income tax exemption for the next five years and 50% income tax exemption for the next five years subject to creation of reserves For the Domestic Tariff Area (‘DTA’) units, goods and services going into SEZ area are treated as exports and goods coming from the SEZ area into the DTA are treated as imports SPECIAL ECONOMIC ZONE

No minimum investment criteria is applicable for establishment of units under the SEZ scheme

SEZ units have to be foreign exchange positive

On exports, SEZ units entitled to 100% income tax exemption for first five years, 50% income tax exemption for the next five years and 50% income tax exemption for the next five years subject to creation of reserves

For the Domestic Tariff Area (‘DTA’) units, goods and services going into SEZ area are treated as exports and goods coming from the SEZ area into the DTA are treated as imports

SPECIAL ECONOMIC ZONE No excise duty or customs duty or service tax is applicable for supply of goods from outside India/ within India to a SEZ unit State Governments are passing legislations for relaxing the applicability of labor laws, providing exemption/ reduction in the stamp duty, etc. for SEZ units Exemption from capital gains tax on transfer of assets in cases of shifting of industrial undertaking from urban area to any SEZ under Section 54GA of Income Tax Act, 1961.

No excise duty or customs duty or service tax is applicable for supply of goods from outside India/ within India to a SEZ unit

State Governments are passing legislations for relaxing the applicability of labor laws, providing exemption/ reduction in the stamp duty, etc. for SEZ units

Exemption from capital gains tax on transfer of assets in cases of shifting of industrial undertaking from urban area to any SEZ under Section 54GA of Income Tax Act, 1961.

 

 

 

 

FDI is an investment made abroad either by establishing a new production facility or by acquiring a minimum share of an already existing company FDI is characterized by : “ the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise”.

FDI is an investment made abroad either by establishing a new production facility or by acquiring a minimum share of an already existing company

FDI is characterized by :

“ the existence of a long-term relationship between the direct investor and the

enterprise and a significant degree of influence by the direct investor on the

management of the enterprise”.

FDI may come in India through Automatic or Approval route. Foreign Institutional Investors registered with SEBI and NRIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme. Eligibility for Investment: Any person or entity incorporated outside India can invest in India subject to the FDI policy and required approvals No citizen of Pakistan or entity of Pakistan can invest in India Bangladeshi can invest after prior approval from FIPB

FDI may come in India through Automatic or Approval route.

Foreign Institutional Investors registered with SEBI and NRIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme.

Eligibility for Investment:

Any person or entity incorporated outside India can invest in India subject to the FDI policy and required approvals

No citizen of Pakistan or entity of Pakistan can invest in India

Bangladeshi can invest after prior approval from FIPB

Foreign direct investment (“FDI”) is prohibited in the following cases: Gambling and Betting Lottery Business Retail Trading (except single brand retail trading-not provided in Master Circular) Atomic Energy Housing and Real Estates Agriculture (with certain exceptions) and Plantations (Other than Tea plantations)

Foreign direct investment (“FDI”) is prohibited in the following cases:

Gambling and Betting

Lottery Business

Retail Trading (except single brand retail trading-not provided in Master Circular)

Atomic Energy

Housing and Real Estates

Agriculture (with certain exceptions) and Plantations (Other than Tea plantations)

 

 

Automatic Route: The maximum amount of ECB which can be raised by a corporate is USD 500 million or equivalent during a financial year. ECB up to USD 20 million or equivalent in a financial year with minimum average maturity of three years . ECB above USD 20 million and up to USD 500 million or equivalent with a minimum average maturity of five years. ECB up to USD 20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option. Approval Route: Additional USD 250 million with average maturity of more than 10 years

Automatic Route:

The maximum amount of ECB which can be raised by a corporate is USD 500 million or equivalent during a financial year.

ECB up to USD 20 million or equivalent in a financial year with minimum average maturity of three years .

ECB above USD 20 million and up to USD 500 million or equivalent with a minimum average maturity of five years.

ECB up to USD 20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.

Approval Route:

Additional USD 250 million with average maturity of more than 10 years

Basically commercial loans availed from non-resident lenders with minimum average maturity of 3 years. ECB may be through Automatic route, requiring no approval OR through approval of RBI. There is criteria of eligible buyers and recognized lenders for ECB There are end-use restrictions in ECB

Basically commercial loans availed from non-resident lenders with minimum average maturity of 3 years.

ECB may be through Automatic route, requiring no approval OR through approval of RBI.

There is criteria of eligible buyers and recognized lenders for ECB

There are end-use restrictions in ECB

Investor ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repatriable No owners risk as in case of Equity Investment Borrower No dilution in ownership Considerably large funds can be raised as per requirements of borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to Investors

Investor

ECB is for specific period, which can be as short as three years

Fixed Return, usually the rates of interest are fixed

The interest and the borrowed amount are repatriable

No owners risk as in case of Equity Investment

Borrower

No dilution in ownership

Considerably large funds can be raised as per requirements of borrower

Usually only a fixed rate of interest is to be paid

Easy Availability of funds because ECB is more appealing to Investors

ADVANTAGES INDIA Stable democratic environment over 55 years of independence Large and growing market World class scientific, technical and managerial manpower Cost-effective and highly skilled labor Abundance of natural resources Large English speaking population

Stable democratic environment over 55 years of independence

Large and growing market

World class scientific, technical and managerial manpower

Cost-effective and highly skilled labor

Abundance of natural resources

Large English speaking population

ADVANTAGES INDIA Well-established legal system with independent judiciary Developed banking system and vibrant capital market Well developed accountancy, legal, actuarial and consultancy profession Surveys by leading organizations rate India among the top three investment hot spots and one of the fastest growing economies in the world

Well-established legal system with independent judiciary

Developed banking system and vibrant capital market

Well developed accountancy, legal, actuarial and consultancy profession

Surveys by leading organizations rate India among the top three investment hot spots and one of the fastest growing economies in the world

CONCLUSION Investors have posed faith in Indian economy, and surely the golden bird will continue to soar high!

Investors have posed faith in Indian

economy, and surely the golden

bird will continue to soar high!

Thanking You For Your Attention….

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