FDI, FII and International Financial Management. CA Final Strategic Financial Management, Paper 2 Chapter 11 CA Tarun Mahajan

Transcription

1 FDI, FII and International Financial Management CA Final Strategic Financial Management, Paper 2 Chapter 11 CA Tarun Mahajan

2 Learning Objectives Foreign Direct Investment Foreign Institutional Investment Global Depository Receipts American Depository Receipts External Commercial Borrowings

3 International Finance International Finance Equity Debt Issue in India Issue Outside India External Commercial Borrowings Foreign Direct Investment Global Depository Receipts Long Term Foreign Institutional Investment American Depository Receipts Short Term

4 Why International Finance? An Indian company can raise fund in India as well as abroad. A question may be that why should a company use overseas fund? Supplement Indian fund Supplement Indian technology Supplement Indian skills

5 Foreign Direct Investment (FDI) FDI is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India. Thus the foreign company not only puts money in India but also provide technology and skills and also allow its brand name to be used.

6 FDI examples IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a foreign company has set up a subsidiary in India. What s amazing about IBM is that, it is now the lartest Indian IT company in India. Foreign companies partnering with Indian companies to set up joint ventures is more typical and Starbucks partnering with Tata Global Beverages Limited is a recent example of FDI through joint venture, but there are several others in the insurance, telecom, food industry etc.

7 FDI Entry Routes FDI entry routes Automatic route Government route

8 Advantages of FDI to host country Improves balance of payment position. Better technology and skills to produce global standard goods and services. Increase in employment opportunities. Increase in Government revenue. Backward linkage gives rise to development of supply industries.

9 Advantages of Joint Venture to Foreign Investor India is one of the biggest consumer market. Size of middle class in India is more than Population of many countries. Established Marketing Network of Indian Partner Contacts of Indian Partner Understanding of Indian Partner of Local market and consumer needs.

10 Foreign Institutional Investment (FII) FII is when foreign investors invest in the shares of a company that is listed in India, or in bonds offered by an Indian company or other eligible investment. Foreign pension funds, mutual funds, banks and insurance companies are examples of FIIs. It is a portfolio Investment.

11 FII sub account and P notes An FII can also invest in India on behalf of a sub-account (means any person outside India on whose behalf investments are proposed to be made in India by a FII) which is registered as a sub-account with SEBI. Also, an FII can issue off-shore derivative instruments (ODIs) to persons who are regulated by an appropriate foreign regulatory authority and after compliance with KYC norms.

12 FII continued A single FII can not invest more than 10% in single company. Normally FII investment in a company can not be more than 24%. The company may allow higher investment but it should not be more than the sector cap. FII money is said to be hot money. It suddenly flows in to and out of the country. Many time FIIs are blamed for market volatility.

13 FII Registration To make investment in India FII has to register with SEBI. It has to submit several documents and pay registration fees around $5000. This registration is valid for five years. Normally it takes seven days to get registration. Sub account registration fees is $1000.

14 FII: Eligible Securities Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; Units of mutual funds; Dated Government Securities; Derivatives traded on a recognized stock exchange; Commercial papers.

15 Global Depository Receipts Indian Company Domestic custodian bank Overseas depository bank Foreign investors Issues rupee denominated shares to Informs the same to Issues depository receipts to Makes payment to the account of Indian company.

16 GDR: exit routes Transfer GDRs are listed hence it can be sold to another investor. Redemption Investor surrenders GDR to overseas depository who instructs domestic custodian to sale underlying shares. Conversion Overseas depository instructs domestic custodian to release shares in favour of investor.

17 GDR: Benefits to Indian Issuer Large volume of funds Attractive price Continue to control No exchange rate fluctuation risk Better image

18 GDR: Benefits to Investors Higher return Portfolio diversification Easy transferability Arbitrage Opportunity No formalities in India No Capital gain tax

19 ADR vs GDR American Depository Receipts ADRs are issued in the USA. ADRs are listed on an American Stock Exchange, e.g., New York Stock Exchange or NASDAQ. Disclosure requirements of SEC are very stringent. ADR market is mainly a retail investors market. It leads to wider participation and better valuation of a company s stock. Global Depository Receipts GDRs are issued in Europe. GDRs are listed on any stock exchanges other than European stock exchanges, e.g., London or Luxemburg stock exchange. Disclosure requirements for GDRs are less stringent GDR market is mainly an institutional market, with lower liquidity.

20 Types of ADR ADRs Unsponsored Sponsored Restricted Unrestricted Level 1 Level 2 Level 3

21 External Commercial Borrowings ECB is a commercial loan obtained by Indian corporate from non resident lenders. Rate of interest on these loans remains lower than domestic loans. Even after considering forward premium it proves to be a cheaper source of finance. Indian corporate can avail ECB but banks, financial institutions, Individuals, Trusts and non profit making organizations are not eligible.

22 ECB continued It can be obtained from: International banks, International capital markets, Multilateral financial institutions Supplier of equipment Foreign collaborators Foreign equity holders There are two ways to procure ECB: Automatic route Approval route

23 ECB continued Under Automatic route: Maximum amount of borrowing for corporate which are not hotel, hospital or software units is US$ 750 millions p.a. For Hotels, hospitals or software units it it US$200 millions p.a. Minimum borrowing period should be 3 years. Borrowing cost should not be more than 6 months Libor basis points for loans of 3-5 years.

24 ECB continued Under Automatic route: For loans of more than 5 years ceiling is 6 months Libor basis points ECB can be used for Import of capital goods, New projects, expansion of existing projects, infrastructure projects etc. ECB can not be used investment in capital market, real estate, working capital or repayment of rupee loan. Indian banks and financial institutions can not give guarantee for such loans.

25 ECB data Funds raised through ECB in April, 2013 were $602 million through automatic route and $523 millions through approval route totalling $1125 millions In automatic route Mylan Laboratories Ltd. Alone raised $200 millions for a period of 6 years and 7 months for import of capital goods. You can see a complete list at

26 Euro Financial Market When borrower of one country borrows money from lender of another country in terms of currency of a third country it is called euro market. The most popular in this category is euro-dollar market. For example Indian company issues dollar denominated bonds in UK.

27 Euro market continues It may be divided into: euro deposit market, euro note market, euro loan market and euro bond market. Instruments in this market are similar to domestic or international financial market. For example: euro bond, euro convertible bonds, euro bonds with equity warrants.

28 Question Time

29 Nov 2012 exam question Write short note on American Depository Receipts. (4 marks)

30 Answer An ADR is an instrument that allows Indian companies to raise funds through equity issues abroad. It is a dollar denominated instrument, traded in stock exchanges outside the country of origin. Though ADRs are dollar denominated (It means that foreign investor make payment in terms of $ while subscribing ADR) but the underlying shares of Indian company are rupee denominated. Normally there is one share behind one ADR but there may be two or more shares behind one ADR or one share behind two or more ADRs.

31 Lesson Summary What is the difference between FDI and FII Difference between GDR and ADR Broad guidelines of External commercial borrowings Concept of Euro financial market

32 Thank you CA.Tarun Mahajan