“The Most Extraordinary Country”* Doing Business in India

1. “The Most Extraordinary Country”* Doing Business in India *Mark Twain • Tuesday, February 20, 2007 • 7:15 - 9:00 a.m. • The Houstonian Hotel • 111 North Post Oak Lane • Houston, Texas 77024 When You Think INTERNATIONAL,Think Fulbright.TM

2. Foreign Investment in India: An Overview Presented by: Julie B. Hunt Email: jhunt@fulbright.com Phone: (214) 855-8046

3. Recent Growth & Opportunities in the Indian Market Facts and Figures • Recent GDP Growth 2000-2003 4.6% 2003-2004 8.5% 2004-2005 7.5% 2005-2006 8.4% 2006-2007 (Q1) 8.9% Source: Reserve Bank of India

4. Recent Growth & Opportunities in the Indian Market (cont’d) Facts and Figures • Foreign Investment Growth Source: Ministry of Finance, Government of India

5. Recent Growth & Opportunities in the Indian Market (cont’d) Facts and Figures • Population of more than 1 billion • Middle class of 300 million • Stable democracy with a common law legal system • Large English-speaking, highly educated workforce • Vibrant capital markets – 23 stock exchanges with 9000 listed companies • New Industrial Policy (1991) and continuing liberalization of foreign investment

6. Foreign Investment - Legal Regime Sources of Law and Policy • Foreign Exchange Management Act, 1999 (FEMA) and related regulations • Press notes issued by the Ministry of Commerce and Industry • Securities & Exchange Board of India Act, 1992 and related regulations • Companies Act, 1956 • Sector-specific laws and rules

7. Foreign Investment - Legal Regime Key Regulatory Players • Foreign Investment Promotion Board (FIPB) • Reserve Bank of India (RBI) • Securities & Exchange Board of India (SEBI) • Stock Exchanges (Largest: National Stock Exchange (NSE), Bombay Stock Exchange (BSE)) • Sector-specific regulators (e.g., insurance, telecom, transportation)

8. Foreign Investment - Options Three Main Routes for Foreign Investment • Foreign Direct Investment (FDI) • Investment as a Foreign Institutional Investor (FII) or a sub-account of an FII • Investment as a Foreign Venture Capital Investor (FVCI)

9. Foreign Investment - Options Foreign Direct Investment (FDI) • Subscription to new shares • Transfer of existing interests

10. Foreign Investment - Options Foreign Direct Investment (FDI) • Automatic Route  No approval needed from FIPB or the RBI  Widely available, subject to certain percentage caps and non-compete restrictions  Requires certain after-the-fact filings and declarations with the RBI (within 30 days after payment for investment)

11. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route  Automatic Route not available (i.e., prior FIPB approval is required) if the investment is:  in an area where foreign investment is prohibited; for example: retail trading (except single brand retail), gambling, atomic energy, defense  above the equity cap applicable to certain sectors; for example: 74% in telecom, mining or banking.

12. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route  Automatic Route not available if the investment is:  in the same field where the foreign investor has an existing (pre-Jan 15, 2005) collaboration/joint venture in India  a more than 24% equity investment in companies which manufacture for the small-scale sector.

13. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route • Approval Route • Any investment not qualifying for the Automatic Route • Requires prior approval from the Foreign Investment Promotion Board (FIPB)

14. Foreign Investment - Options (cont’d) Foreign Direct Investment – Approval Route • Approvals take approximately 30 days to obtain, decided on a case-by-case basis  Relevant criteria: • the amount of investment • jobs creation • other benefits to India such as export creation or technology development

15. Foreign Investment - Options (cont’d) Foreign Direct Investment (FDI) • Pricing Restrictions • If listed on a stock exchange, price cannot be lower than the average weekly high and low of closing prices during the preceding (a) 6 months, or (b) 2 weeks, whichever average is higher • If unlisted, determined by a formula prescribed by the Controller of Capital Issues

16. Foreign Investment - Options (cont’d) Foreign Direct Investment (FDI) • Transfers of Existing Shares – requires FIPB approval if: • activities are not under the Automatic Route • non-resident shareholding would exceed sectoral limits • price does not comply with the pricing restrictions • Transfers of Existing Shares – requires RBI approval if: • company is involved in the financial services sector • price does not comply with the pricing restrictions

17. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • What is an FII? • An institution established outside India, which invests in securities traded on the primary and secondary markets in India • Examples: pension funds, mutual funds, investment trusts, university endowment funds

18. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange • Makes investments on behalf of foreign investors, referred to as “sub-accounts”

19. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Qualifying as an FII • Requires a certificate from the Securities and exchange Board of India (SEBI) • Strict qualification standards including professional experience requirements and reputational considerations (“Fit and proper person” determination)

20. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • SEBI “Fit and proper person” criteria include: • financial integrity • absence of convictions or civil liabilities • competence • good reputation and character • efficiency and honesty • no violation of securities regulations in home jurisdiction

21. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Qualifying as a Sub-Account • Also requires a fit and proper person analysis

22. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • FIIs may invest in: • securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies) • units issued by domestic mutual funds • dated Government securities • derivatives traded on a recognized stock exchange • commercial paper • debt instruments – provided a 70/30 equity/debt ratio is maintained

23. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Limits on the type and amount of investments apply to FIIs • no more than 10% of the equity in any one company • no more than 10% in the equity in any one company on behalf of a fund sub-account • no more than 5% in the equity in any one company on behalf of a corporate/individual sub-account • no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs

24. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) • What is an FVCI? • An investor established outside of India, who proposes to make venture capital investments in India

25. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) • Qualifying as an FVCI • Requires registration with SEBI; a copy of the application is forwarded to the RBI for approval as well • Involves a “fit and proper person” determination as for FIIs

26. Foreign Investment - Options (cont’d) Foreign Venture Capital Investors (FVCI) • Benefits of registering as an FVCI • one-time approval of the RBI for investments in Indian companies • ability to purchase or sell securities at a price that is mutually acceptable to buyer and seller • shares held by FVCI in an unlisted company are not subject to the one-year lock-in generally applicable to the shares of a company undergoing an IPO

27. Foreign Investment - Options (cont’d) Foreign Venture Capital Investor (FVCI) • Investment Requirements and Restrictions • At least 66.67% of its funds must be invested in unlisted equity shares (or equity-linked instruments of unlisted entities) • Up to 33.33% of its funds may be invested in an IPO subscription for a venture capital undertaking, or through a preferential allotment of equity shares of a listed company

28. Foreign Investment - Options (cont’d) Foreign Venture Capital Investor (FVCI) • Investment Requirements and Restrictions • Subject to certain sectoral percentage caps, limitations on foreign investment • No more than 25% of its funds may be invested in any one venture capital undertaking

29. Project Finance - Infrastructure • “Infrastructure Deficit” requiring estimated investments of US $300 billion by 2012 • FDI of up to 100% is now permitted in most infrastructure sectors • Shortage of domestic funding • Particular emphasis on power sector, airports, roads

30. Recent Deals • Mumbai and Delhi airports – Public/Private Partnership (PPP) with 26% government participation • Vodafone – $11.1 billion purchase of a 67% stake in Hutchison Essar (fourth largest mobile phone company in India) • Airbus – announced $1 billion investment in an engineering facility and pilot training school • Cisco – investing $1.1 billion in various initiatives (manufacturing facility, VC investments, broadband and digital media), and planning to move 20% of top executives to India

31. Future Prospects Projections for future growth • Continued annual GDP growth of 8% • GDP of US $11 trillion by 2011, US $27 trillion by 2050 (making India the third-largest economy in the world) • Trend of increasing liberalization of foreign investment

32. In Summary • Three main regulatory categories of foreign investment: FDI, FII, FVCI • Certain sector caps and pricing restrictions may apply • Infrastructure development is a particular focus for the Government • Regulations continue to evolve

33. When You ThinkINTERNATIONAL,Think Fulbright.TM