New Policy / Initiatives : FDI & Infrastructure Development

Transcription

1 New Policy / Initiatives : FDI & Infrastructure Development India Investment Seminar Jointly hosted by JBIC & GOI Tokyo, 9 th November,

2 Presentation Scheme The Economic situation FDI Policy Recent Changes Infrastructure Sector Issues in Financing Steps being taken Takeout Financing 2

3 . After the Financial crisis India not impacted as severely as many other countries by the global financial crisis From a five year average high growth of above 8 per cent, the current indication is a growth level of around 6 6.5%. The key question now is the right time and the modulation of the stimulus Growth should be sustained growth, but stimuli rolled back before inflation causes a concern 3

4 Attractions of India Abundant availability of skilled Human Resources Labor at competitive rates About 1/3rd of India s population is young (15 to 35 years). Adequate natural resources and raw materials Large and growing domestic market Established rule of law, independent judiciary, free press, active civil society groups and a vibrant three tiered democracy 4

5 Investing in India Entry Routes Investing in India F D I Automatic Route Prior Permission (FIPB) General Rule No prior permission required Inform Reserve Bank within 30 days of inflow/issue of shares By Exception Prior Government Approval needed. Decision generally within 4-6 weeks 5

6 Investing in India Entry Routes..Contd. Investing in India through the Portfolio Scheme FIIs limited to Registered entities 10% individual holding and up to 24% of listed companies Investing Through Debt the ECB regime Automatic and approval route administered by RBI Foreign Venture Capital Investors 6

7 Entry Options Incorporated Entity Under the Companies Act, 1956; Get National Treatment; Wholly owned subsidiaries also allowed in most activities; Liaison Office Prior permission of the Reserve Bank required; Can collect and transmit information; Cannot undertake business activity except liaison work. Branch Office Prior permission of the Reserve Bank required; Generally allowed from incorporated entities with 3 years operations; Can carry out the prescribed activities; Project Office Prior permission of the Reserve Bank execute specific projects in India; required; To Project office is specific to the project being executed. 7

8 Evolution of FDI Policy Indirect Foreign Investment Ownership & Control Allowed selectively up to 40% 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 Up to 100% Under Automatic Route in all sectors except a small negative list More sectors opened Equity caps raised Procedures simplified Pre

9 Basic philosophy of Indian FDI Policy Most FDI allowed on the automatic route only to inform the Central Bank within 30 days of remittances FDI permitted in almost all activities Policy supported by a legal framework National treatment to investment Investments, profits and dividends fully repatriable Indian FDI policy regime assessed independently to be liberal and progressive No roll back ; pace may be modulated 9

10 FDI Initiatives 2008 FDI in Credit Information Companies: 49% (FDI+FII)[FII should not be more than 24%] FDI in Commodity Exchange : 49% (FDI +FII) [FII limited to 23%] FDI in Industrial Parks :100% FDI in Civil Aviation: (Scheduled Air Transport Service: 49% (NRI 100% and Non Scheduled Air Transport Service: 74% FDI in Petroleum & Natural Gas: 49% FDI in Titanium bearing Minerals & Ores: 100% through FIPB route FDI in Facsimile editions of print media ( 100%) 10

11 Press Notes 2 3 and 4 of 2009 What prompted issuance of Press Notes 2,3 and 4 Confusion and lack of clarity in holding and operating cumholding company status. What is a Holding company /Investing company /Investment company Layered structures and downstream investments complicated calculations Restrictions placed in PN 9 of 1999 somewhat outdated Indirect foreign investment in sectors with caps proving problematic What constitutes foreign investment, how to determine it Concept of ownership and control 11

12 Press Notes 2 3 and 4 of 2009 Contd. What is foreign investment? All forms of non resident inflows. Thus all caps are now composite caps Indian owned and controlled / foreign owned or controlled Owned is having >50 % of the equity interest Controlled is having the power to appoint the majority of directors Indian owned and controlled entities downstream would not be counted as foreign investment Foreign owned or controlled entity s downstream investment to be counted as indirect Inter se agreements to be disclosed and examined 12

13 Press Notes 2 3 and 4 of 2009 Contd. Guiding Principle for downstream investment is : only as much can be done indirectly as can be done directly Operating and operating cum investing company can make downstream without any further approval subject to the above guiding principle. Investing company can be set up only with FIPB approval for up to 100% investment. The Objective: Rationalisation & Simplification Establishing the Concept of control FDI policy /caps in respect of prohibited /restricted sectors continues 13

14 Where does Indirect Foreign Investment matter? Sectoral Cap/Route* Defence Production 26% FIPB Civil Aviation 49 74% FIPB Stock Exchanges 49% FIPB CICs 49% FIPB ARCs 49% FIPB Broadcasting 20 49% FIPB Print Media 26% 100% FIPB Telecom 49 74% FIPB Retail 51% FIPB Satellites 74% FIPB Insurance 26% Automatic Banking 74% Automatic * Sectoral and other conditions apply 14

15 Issues in Infrastructure Financing Economic IRR v/s Financial IRR: Government support necessary to support projects with higher social returns. Investor base and availability of risk capital. Reducing cost of funds: Credit enhancement through guarantees Tax exemptions Financial repression Secondary market development Repayment mechanism: Dedicated revenue streams Budgetary support 15

16 Steps being taken Corporate Bond Markets Asset Liability Mismatches of Banks Exposure Norms NBFCs Take out Financing Financing by the Insurance sector ECB Norms 16

17 Take Out Financing through IIFCL Key Issue : enabling longer tenor financing by banks Take out financing from IIFCL in the medium term (after 5 years) to provide an exit route to banks. Banks take initial gestation period risk and then offload their performing loans (where construction and debt servicing is satisfactory) to IIFCL. The portfolio of loans taken out would have both low operating and credit quality risk. IIFCL in turn, after warehousing these loans for a certain period, can securitize the loans taken out and sell them to entities like insurance companies. Alternatively, IIFCL can borrow long term resources from the insurance sector and hold the portfolio taken out from banks. 17

18 Takeout of a Single Loan by IIFCL Transfer of Loan Accounts Primary Lender IIFCL Fees/Commitment Charges 7 to 10 years After 10 Years Tenor of Loan 18

19 Transferring IIFCL s Takeout Debt Pool to Insurance Investors. Liabilities Banks Bonds Insurance Co. Multilaterals Assets Takeout Loan 1 Loan 2 Loan 3 Loan 4 Refinance Loan 1 Loan 2 Direct Loan 1 Loan 2 SPV Loan 1 Loan 2 Loan 3 Loans which meet minimum investment grade rating are pooled in an SPV 19

20 Transferring IIFCL s Takeout Debt Pool to Insurance Investors. 20% cash collateral/guarantee from IIFCL SPV Principal & Interest 80% Senior Secured Debt (Subscribed to by Insurance Cos) Loan 1 Loan 2 Loan 3 Principal & Interest 20% Junior Mezzanine Debt (Subscribed to by IIFCL) Junior Mez Debt Absorbs Portfolio Losses of upto 20% 20 Once Principal & Interest payments have been made to Senior Debt then Junior Debt is serviced

21 Benefits of Take Out Financing 21 Addresses the banks asset liability duration mismatch (ALM) risk as well as their borrower exposure limits. Frees up capacity on bank balance sheets to finance new projects and / or repay their liabilities. Circumvents the current risk management constraints of IIFCL by reducing its exposure to relatively high construction and initial operations period risks of infrastructure projects. IIFCL would primarily be taking the risk of refinancing the loan. Government would not assume all the credit risks for PPP infrastructure projects. Uses long tenor funds available with the Insurance sector. Addresses Insurance Regulator concerns about credit quality.

22 Non Bank Finance Companies engaged in Infrastructure Financing After the latest Second Quarter Monetary Policy review ( 27 th October 2009): NBFCs are categorised as asset finance companies, loan companies and investment companies In view of the critical role played by NBFCs in providing credit to the infrastructure sector a special category to be created To be called Infrastructure NBFCs, defined as entities which hold minimum of 75 per cent of their total assets for financing infrastructure projects. To link the risk weights of banks exposure to such NBFCs to the credit rating assigned to the NBFC 22

23 Thank You 23