INVESTMENT OPPORTUNITIES FOR JAPANESE SMEs IN INDIA KUMAR SANJAY KRISHNA JOINT SECRETARY MINISTRY OF FINANCE GOVERNMENT OF INDIA

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1 INVESTMENT OPPORTUNITIES FOR JAPANESE SMEs IN INDIA KUMAR SANJAY KRISHNA JOINT SECRETARY MINISTRY OF FINANCE GOVERNMENT OF INDIA

2 INDIAN ECONOMY AVERAGE ANNUAL GROWTH DURING TO : 06: 6.4% Growth % % FOREIGN EXCHANGE RESERVE: USD 200 BN FISCAL DEFICIT REDUCED FROM 6.2% TO 3.7% MANUFACTURING SECTOR BOUYANT RAISING SERVICES SECTOR FDI INFLOWS GREW BY 184% IN , 07, TO REACH USD 15.7 BILLION, APPROX. 1

3 India- Advantages as a destination for FDI Young Demographic Profile- 54% population below 25 years Abundant availability of Skilled Human Resources Adequate natural resources and raw materials Large and growing domestic market Established rule of law and a vibrant three tiered democracy 2

4 FINANCIAL SECTOR CAPITAL MARKET The equity spot and derivatives market enjoy a sophisticated market design. Widespread retail participation, and resilient liquidity. India is the world s s largest single stock futures market. Indian regulatory and supervisory framework of securities market has been adequately strengthened. Market capitalisation as a percentage to GDP in India reached 76 % by February 28,

5 FINANCIAL SECTOR (contd.) BANKING SECTOR Transparency, diversified ownership and strong corporate governance practices mitigate the prospects of systemic risks in the banking sector. A roadmap for entry of foreign banks consistent with WTO commitments. Aggregate foreign investment in private banks from all sources cannot exceed 74% of paid-up capital of a bank. 4

6 PENSION REFORMS India does not have a comprehensive old age income security system. Currently retirement benefits, in one form or the other, are available to only about 11% of the working population. A new scheme called the New Pension System (NPS) has been introduced since

7 FDI Overview Transparent and Liberal Foreign Direct Investment Regime. Most Liberal among emerging and developing economies. Two ways of FDI: Automatic route: This requires no prior approval for FDI. FIPB (Foreign Investment Promotion Board) route. 6

8 Evolution of FDI Policy More sectors opened Equity caps raised Procedures simplified Allowed selectively up to 40% Up to 51% under Automatic Route for 35 Priority Sectors 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 Pre

9 Investing in India Entry Routes Investing in India 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 8

10 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 required; To execute specific projects in India; Project office is specific to the project being executed. 9

11 FDI Overview FIPB Approval: IF the proposed shareholding is above the prescribed sector caps, or the activity belongs to sectors where FDI is either not allowed or it is mandatory to route through the FIPB ( sectors that require industrial licensing, for example) The FIPB ensures single window clearance for the investment and acts as a screening agency (for sensitive/negative list sectors). FIPB approvals are normally received in 30 days. Some foreign investors take FIPB approval in case of doubt 10

12 FDI Overview Manufacturing: Manufacturing sectors are on the 100% automatic route, except in some industries like defence equipment (26%) where Industrial License (IL) is mandatory. Most mining sectors are on 100% automatic route, with foreign equity limits only on atomic minerals (74%). 100% equity is allowed in non-crop agro-allied allied sectors (agro-processing) and crop agriculture under controlled conditions (e.g. hot houses). 11

13 FDI Overview Infrastructure 100% FDI under the Automatic route is allowed in several sectors including: Highways and roads Ports Inland waterways and transport Urban infrastructure Infrastructure sectors with defined caps include: Telecom Services (74%) Existing Airports (74%) Airlines (49%, investment from airlines companies is not allowed) 12

14 FDI Overview Services 100% FDI under the Automatic route is permitted for many Service sectors such as: Real estate construction, Townships, Resorts, Hotels and Tourism Films IT and IT enabled Services ISP/ / Voic Business and Consultancy Renting And Leasing Venture Capital Funds/Companies Medical/Health Services Education Advertising Wholesale Trade Courier Services 13

15 FDI Overview Services: Media: FDI permitted with varying sector caps. Retail trade: FDI restrictions with 51% FDI in single brand retail. Wholesale cash and carry: 100% FDI permitted. Legal services: investment. not open to foreign Professional services: : 51% cap. 14

16 FDI Overview Restricted List of Sectors Railways, Atomic Energy and Atomic Minerals, Postal Service, Gambling and Betting, Lottery and basic Agriculture or plantations. Subject to these foreign equity conditions, a foreign company can set up a registered company in India and operate under the same laws, rules and regulations as any India-owned company. India extends National Treatment to foreign investors with absolutely no discrimination against foreign invested companies registered in India or in favour of domestic ones. 15

17 FDI Inflows Amount in US$ billion These FDI figures represent only the equity component 16

18 Investments from Japan Japan ranks 3 rd with a total cumulative FDI flows of USD 2.1billion till September 2006 constituting 5.85% of total inflows in to India. Steady increase in investments over the years with USD 168 million in There are announcements of commitments for more than USD 5.5 billion of investments in the next four years by major Japanese companies. 17

19 Foreign Institutional Investors The annual Net FII inflows into India steadily increased through the decade of 1990s & stood at USD billion for the year In recent times, Japanese FIIs started to show an increasing interest in India and among FIIs registered with SEBI during the last two years a significant number belonged to Japan. Japan also launched India Investment Fund to mobilize Japanese investors to invest in Indian securities market. The number of such Funds has increased from 8 in 2005 to 16 as of March The net assets of these Funds as of March 07 is USD 8.2 billion, increased from USD 4.7 billion as of November Japan s s cumulative FII inflow in equity as on 31 st January 2006 is RS. 10,348 crores. 18

20 New Opportunities for SMEs Japan is promoting exclusive Special Economic Zone (SEZ) for Small and Medium Enterprises near Delhi. This will be excellent chance for SMEs to increase their presence. Japan and India are promoting Delhi-Mumbai Industrial Corridor (DMIC) which includes investment regions, industrial estates, physical infrastructure and social infrastructure etc. India-Japan Economic Partnership Agreement (EPA) is being negotiated now. With the opening of two way trade between India and Japan immense opportunities would be opened up to the Japanese companies in investing in India. 19

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