India Foreign Direct Investment Trends

India continues to provide opportunities in a challenging environment

April, 2012

India Foreign Direct Investment Trends

India FDI Inflows The decade gone by would be considered as the golden year for foreign direct investment (FDI) in India. Between year 2000-11, India attracted cumulative FDI inflow of USD 237 Bn. 70% of this FDI constituted equity inflows, rest being re-invested earnings and other capital. Over the last decade, FDI in India grew at CAGR 23% The bull run in India FDI started in FY 2006-07 when it grew at 146% over the previous year. FDI peaked in year FY 2007-08 and only marginally declined in the following years of economic crisis. For the eight months of FY 2011-12 (AprNov 2011), India has already garnered USD 33 Bn. of FDI matching the full year FDI of the previous year.
Total Equity FDI Inflows into India
30 20 10 0 2007-08 2008-09 2009-10 2010-11 24.6 27.3 25.8 19.4

Exhibit 1: India FDI Inflow

Share of top five investing countries in India stood at 69%. Mauritius was the top country of origin for FDI flows into India primarily driven by the tax haven status enjoyed by Mauritius. Services sector (Financial & Non-financial) attracted the largest
# 1 2 3 4 5 Country Mauritius Singapore USA UK Japan Top 5 Total Cumulative Inflows (2000-2011) 41% 10% 7% 6% 5% 69%

FDI equity flows amounting USD 31 Bn. (20.5% share). Other high share sectors in top five were Telecom (8%), Computer Software & Hardware (7%), Housing & Real Estate (7%) and Construction (7%). Over the years, Automatic route has become the most used entry route for FDI investments in India indicating the gradual liberalisation of FDI policy.

Exhibit 2: Country Share in FDI

In FY 2010-11, 64% of Equity FDI inflows in India came via Automatic Route almost trebling from 22% share in FY 2000-01. Acquisition of shares constituted 25% and FIPB/SIA constituted 11% of equity inflows in 2010-11.Indias FDI policy has progressively liberalised since nineties and only a few sectors, primarily in services sector

India Foreign Direct Investment Trends

$ Bn

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now has FDI cap on investment. Indias inward invesment regime is now be considered most liberal and transparent amongst emerging economies. Financial Sector FDI Over the last decade, BFSI (Financial, Insurance & Banking services) was the most preferred destination for FDI in India. FDI in the BFSI sector accounted for over 12% of the total cumulative FDI inflows into India, and over 59% of the FDI in Services Cumulative Services Sector FDI Inflows sector. 2000-10 (%) Between 2000-11, Services sector (BFSI and Non-Financial) attracted FDI of USD 31 Bn. With a 59% share, BFSI FDI share amounted to USD 18 Bn. The subsectors with BFSI attracted the following FDI equity inflows - Financial : USD 13 Bn., Banking: USD 2.9 Bn and Insurance: USD 2.3 Bn.
Key Deals in the Finance Sector (Jan 2000-Dec 2009) FDI Value Name of Indian Company ($ Mn) Housing Development Finance 654 Corp DSP Merrill Lynch AAA Global Ventures South Asia Communications Kotak Mahindra Tata Capital Morgan Stanley Securities Morgan Stanley Securities National Stock Exchange of India HSBC Securities & Cap Market Total 484 368 370 406 291 275 347 258 185 4,224
31% 42%

10% 7%
Financial Banking Insurance

10%
Non Financial Others

Exhibit 3: Sector wise FDI Inflow

# 1 2 3 4 5 6 7 8 9 10

Mauritius had the largest share of FDI investment at 43% amongst top countries investing in Indian Financial services sector. Singapore (14%), UK (11%), USA (8.5%) and Cyprus (3%) were the other countries in the top five list. Top 10 BFSI FDI Equity inflows in India over the last decade amounted USD 4.2 Bn. Key US investors in Indian BFSI sector included Merill Lynch, Morgan Stanley, Bank of New York Mellon, JP Morgan, Citibank Overseas, Franklin Templeton, New York Life, Metlife, AIG, Pramerica and PE/VC firms like Warburg, Blackstone, Carlyle, KKR & Co. and Apollo.

Exhibit 4: Top Financial Services FDI inflows

Development of Indian capital markets (especially corporate bond markets) and further policy liberalisation in commercial banking will be the key for future investments in Indian BFSI segment. FDI Inflows from United States United States of America has been one of the top FDI investors in India. Reported cumulative FDI Equity Inflows from USA into India between 2000 2011 were $9.8 Bn,

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placing it at rank 3rd after Mauritius & Singapore. If we account for the US FDI equity inflows into India routed through tax havens, the FDI number will be considerably higher. Keeping up with overall trend, the Services sector (Financial & Non-Financial) accounted for the highest share of cumulative FDI equity inflows from USA with share of 22% amounting USD 2.1 Bn. USA FDI equity inflows in services sector represented 7%
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

FDI Equity Inflows from USA

1.8 1.9

$ Bn

1.1 0.9 0.7 0.4 0.4 0.3 0.4 0.5

1.2

of the total FDI equity inflows Exhibit 5: FDI Flows of USA in Indian services sector and in Financial services sector represented 8.5% of the total FDI equity inflows from all countries amounting USD 2.6 Bn. Following were the top FDI inflows from USA in Indian financial services:
Top sectors for USA FDI Equity inflows (%)
Services Computers Automobile Metallurgical Power 5.1 3.9 8.3 13.7 21.7

#1 Citibank Overseas Investment Corp. into E-serve International: USD 112 Mn. #2 Bank of New York Mellon into Kotak Mahindra Bank: USD 102 Mn. #3 JP Morgan International Finance into JP Morgan Securities India Ltd.: USD 75 Mn.

Exhibit 6: Top sectors for FDI from USA

FDI in Insurance sector Indian insurance sector got liberalised in 2001. Since then the sector has grown at 20% annually and have seen entry of 41 private insurance companies (Life: 23, General: 18) with many of them choosing to enter with a foreign joint venture partner. Investment through the FDI can be a maximum of 26%. In 2011, India was ranked 9th in life insurance business and 19th in general insurance business globally. The insurance density stood at USD 64.4 (USD 9.9 in 2001) and insurance penetration was 5.2% (2.3% in 2001).India has 49 life and general insurance companies with total investment of USD 6 Bn. as of March 2011. There are 24 companies operating each in the life insurance and general insurance with an investment of USD 4.7 Bn. and USD 1.3 Bn. respectively. One company operates in re-insurance sector.

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FDI in Indian insurance sector stood at USD 1.36 Bn of which life insurance comprised USD1.1 Bn and general insurance comprised USD 0.2 Bn of FDI. American companies have been investing in the Indian insurance sector since it opened up in 2001. As of March 2011, there are four American insurance players operating in India as joint venture partners namely - New York Life, Metlife, AIG and Pramerica Financial. In 2011, Berkshire Hathway announced its entry into India Life insurance segment and Libery Mutual Group also got necessary approvals from IRDA for entry into general insurance business with an Indian partner. Besides insurers, US based brokers like Marsh & McLennan and Aon corp have also entered Indian markets. The total investment by American insurance companies in India is USD 315 Mn contributing 26% equity capital of USD 1.2 Bn. share capital of the entities they were joint venture partners of. American origin FDI constituted 23% of FDI. Indias insurance industry is expected to reach USD 350-400 Bn. in premium income by 2020 making it among the top 3 life insurance markets and amongst top 15 general insurance markets. Its estimated the Indian insurance sector would attract USD 15-20 Bn. of investments in next couple of years. Liberalisation of foreign investment in nsurance sector thereby permitting upto 49% FDI will accelerate this flow of investments putting Indian insurance sector on a fast track to the top of the global insurance market FDI in Financial Inclusion Indian Financial Inclusion sector is predominantly characterised by rural retail banking, Non-Banking Financial Corporations & Micro Finance Institutions (MFIs). For over a decade now, the Indian microfinance industry has been a poster child of Indian Financial Inclusion. As of 2010, microfinance insitutions had a client base of 26 million borrowrers and the total loan outstanding was in excess of $3 Bn. The number of clients is expected to increase to 64 million in 2012.
No. & Value of PE deals in MFI
150 13 8 4 10 2006 15 2007 Value 7 130 75 15 10 5 0 2008 2009 Number

USD Mn

100 50 0

Exhibit 7: Private Equity in MFI

Investments in NBFCs & MFIs not traded on the stock exchange fall under the purview of Foreign Investment Promotion Board (FIPB). FIPB has set the following rules for FDI in start-up companies. From a slow start in 2006, equity investments in the Indian Microfinance sector skyrocketed in the 3 years from 2006 to 2009. The sector saw a total of 32 deals with a total invested

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capital of ~$230 mn between 2006 to 2009. Private equity investments constitute ~70% of the total investments in Indian Micro Finance sector. 30% is contituted by Microfinance focused funds and private investors.
FDI Regulations Upto 51% for companies with $0.5 Mn or less in capitalization Upto 75% for companies with $0.5$ 5 Mn in capitalization Above 75% for companies with $50 Mn in capitalization

US based private equity firms, Sequioa capital, Silicon Valley Bank & Sandstone capital have invested ~$150 mn in the Indian Microfinance sector. Another area within Financial Inclusion which has attracted private equity investors is technology services for microfinance institutions. US based Private equity firms like Blackstone, Intel Capital have invested ~$50 mn in Financial Information Network & Operations (FINO), a technology services company in the Financial Inclusion sector. The large size of the unbanked population means that there is great potential for for continued high growth. Although the MFI sector is currently tweaking its business model to new regulatory reality, the high growth potential holds a significant promise for the investors in years to come.

FDI in Capital Markets Indian bourses both securities & commodities are amongst the favourite hunting spots for foreign investors betting on Indias growth story. These businesses apeal to investors as they have long term horizons and signify bets on the countrys growth. In 2004, 13% of the total PE investments made in the banking & financial services space were in stock exchanges. Since the beginning of 2007, 17 transactions (including consortium deals) took place with a disclosed deal value of more than $1.15 billion. Out of this, 8 deals with disclosed value of more than $268 million happened in 2010 only.
FDI Regulations FIIs can hold hold upto 23% in an exchange while investment through the FDI can be a maximum of 26%. No single investor can hold more than 5%. Total Foreign investment (both FDI and FII) is limited to 49%.
4 3

Total Foreign Investment

32% 27% 22% 3.0 15% 1.1 MCX

40% 30% 20% 10%

USD Bn

2 1 0 NSE 0.8 BSE

0.1 NCDEX

0%

Exchange Valuation

Foreign Holding

Exhibit 8: Foreign Holding in Indian Exchanges

In 2010, NSE had 12 foreign investors with a total foreign investment of 32% compared to BSE which had 8 foreign investors with share of 27% investments. In the same period, MCX had 22% foreign holding & NCDEX 15% foreign investments. Some of the key US investors active in Indian exchanges are NYSE group, Atlantic LLC, Goldman Sachs, Morgan Stanley, Citigroup, Northwest Venture Partners, George Soros, Argonaut ventures.

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Fidelity, Intel Capital, Merril Lynch, and Bessemer Capital are some of the US investors. Most of the transactions involving these exchanges have been secondary in nature. The change in regulations (restricting the single investor holding to 5%) also added to the spurt in secondary deals. The lucrative exchange space continues to attract more players who are looking to increase their market shares. India outward FDI in USA Strong economic growth and progressive liberalization has induced Indian companies to expand their presence into new markets and USA is the largest recipient of Indian outbound investments. During 2004-09, India invested USD 5.5 Bn. in US across 127 greenfield projects. 80% of this investement went into five sectors Metals, Software & IT services, Leisure & Entertainment, industrial machinery, equipment & tools and financial services. The top three states for Indian investments were Minnesota, Virginia and Texas. 10 Indian companies accounted for more than 70% of the US $5.5 Bn invested in greenfield initiatives in US. In the same period, Indian companies invested USD 21 Bn. in mergers & acquisitions in United States. 83% of M&A investments from India were in the following sectors Manufacturing, IT & IT enabled services, Biotech, Chemicals & Pharmaceuticals, Automotive and Telecom. As of FY2010, US accounted for 6.5% of Indias outward FDI flows making India the second largest investor in USA.
Exchange Control Regulations RBI regulations permit automatic investment of upto 400% of the Indian companys networth. This ceiling includes contribution to the capital, loans or guarrantees in overseas JVs or wholly owned subsidiaries.
% share in deal volumes
21% 5% 5% 5% 10%
IT/ITes Education Retail Chemical Pharma Others

54%

Exhibit 9: Sector wise share of India FDI in USA

As far as Indian Financial services sector investments in US goes, Only a few public and private sector banks have expanded in USA by providing niche services (e.g. remittances). Indian outbound deals in the US are predominantly majority stakes paid in cash and financed with debt. In future, the nature of collaboration is likely to evolve with Indian companies seeking more alliances and transactions involving minority stakes & joint ventures rather than focusing on majority stakes.

US offers Indian companies many benefits for investment notabaly - abundant natural resources, large consumer markets and access to innovation. Reciprocally, Indias investments in this worlds largest recipient of FDI brings new skills, strengthen manufacturing and will create jobs in the US.

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Conclusion Over the last decade, the fast pace of economic growth and progressive policy liberalisation has made India an attractive destination for worlds investments. United States have been at the forefront of investments in India strengthening the partnership between the two largest democracies in the world. In the years to come this partnership will grow to next level. United States technological innovation will complement Indias skilled resources. Indias large middle class consumer market will go hand in hand with strategic investments by United States. Complementing this partnership will be the regulatory regime in both the countries. Indias FDI policy has progressivly evolved into more and more liberal and further opening up of the service sector which has been most preferred sector for FDI will help realize India its true potential of economic growth on worlds arena.

About Cedar Cedar is a global consulting and advisory firm. With over 20 years of experience and 500 professionals, Cedar has assisted more than 1,000 clients across industry sectors. Formerly part of Renaissance Worldwide, a $1 Billion consulting firm, co-founded by the creators of the Balanced Scorecard, Cedar has significant capability in the international market strategy, business strategy development, organizational and operational transformation. Cedar, winner of the 2010 & 2011 BME Industry Award for The Best Advisory Firm, is headquartered in the US and has a network of offices in 15 locations, worldwide. It has been assisting US clients assessing Indian opportunities and enter India since 1985.
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The US-India Business Council is the premier business advocacy organization comprised of top tier U.S. and India companies. Its aim is to deepen two way trade and strengthen commercial ties. USIBC was formed in 1975 at the request of both the United States and the Indian governments and is governed by the distinguished Board of Directors, led by Chairman Harold McGraw III. USIBC organizes major policy and business development conferences in both the US and India. On behalf of its members, it facilitates key meetings with government officials and industry leaders providing America and Indian businesses with direct access to high level decision makers. Additionally, USIBC organizes industry-led advocacy missions to India to directly forge policy reforms For more information, please visit www.usibc.com

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