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FII

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Foreign Institutional Investors

April, 2016

Introduction

Economies like India, which offer relatively higher growth than the developed economies, have gain favour among investors as attractive investment destinations for foreign institutional investors (FIIs). Investors are optimistic on India and sentiments are favourable following government’s announcement of a series of reform measures in recent months.

According to a poll conducted by Bank of America Merrill Lynch (BofA-ML) recently, India was the most favourite equity market for the global investors for the year 2015 at 43 per cent, followed by China at 26 per cent. The global investment bank is of the view that India remains to be in a structural bull market.

According to Ernst & Young's (EYs) Global Capital Confidence Barometer (CCB) - Technology report, India ranks third among the most attractive investment destinations for technology transactions in the world.

India is world’s third largest tech start-up hub in terms of number of technology-driven start-ups, after the US and the UK, according to a report by The Associated Chambers of Commerce of India (Assocham) in association with Thought Arbitrage Research Institute. India’s tech start-ups numbered around 4,200 in 2015.

Market Size

FII’s net investments in Indian equities and debt have touched record highs in the past financial year, backed by expectations of an economic recovery, falling interest rates and improving earnings outlook. FIIs net investments stood at Rs 18,106 crore (US$ 2.68 billion) in March 2016, out of which Rs 16,731 crore (US$ 2.48 billion) was invested in equities and Rs 1,375 crore (US$ 203.83 million) was invested in debt. Cumulative value of investments by FIIs during April 2000-December 2015 stood at US$ 179.32 billion.

India has emerged as one of the strongest performers in terms of deals related to mergers and acquisitions (M&A). According to data from Thomson-Reuters, total M&A deals involving Indian companies grew by 82 per cent to US$ 27 billion during January to June 2016, which is the highest in the first six months in any year since 2011, led by a four and a half time increase of Indian acquisitions abroad at US$ 4.5 billion.

Total Private Equity (PE) investments during January-July 2016 period totalled US$ 9.8 billion.

Investments

  • Aspire Home Finance Corporation, a leading housing finance company, has raised Rs 100 crore (US$ 14.82 million) debt from International Finance Corporation (IFC), which will be used to fund its expansion in the lower and middle income housing market segments.
  • The Government of India has signed a US$ 100 million loan agreement with the Asian Development Bank (ADB), which will be used to strengthen key irrigation and drainage system and improve water management in the Vennar sub-basin of Cauvery Delta in Tamil Nadu.
  • The World Bank Group has committed to provide US$ 1 billion for India’s solar energy projects and plans to work with other multilateral development banks and financial institutions to develop financing instruments to support future solar energy development in the country.
  • Lendingkart, a digital lending platform, has raised Rs 130 crore (US$ 19.27 million) in series B round of funding led by Bertelsmann, the Germany-based mass media giant, which will be used for strengthening its data science capabilities, technology platform and infrastructure for improved mobile capabilities.
  • Goldman Sachs' PE fund plans to invest US$ 200-250 million in Essel Highways, the road infrastructure arm of Essel Group, which could make it one of the biggest PE transactions in the sector.
  • The Government of India will likely sign a US$ 1 billion partnership with the US government, aimed at funding off-grid solar projects, mini-grids for rural areas and other subsidy-based projects for economically backward regions in India.
  • Fairfax India Holdings Corporation, a Canada-based investment holding company, plans to acquire a 30 per cent stake for US$ 300 million in Sanmar Chemicals Group, India's major suspension Polyvinyl Chloride (PVC) manufacturer, through a combination of equity and fixed-income securities.
  • ReNew Power Ventures Pvt Ltd, a renewable energy producer, has signed a debt financing agreement of US$ 250 million with Overseas Private Investment Corporation (OPIC), the US government's development finance institution, which will be used to construct up to 400 megawatts (MW) of new solar power projects in India across multiple states.
  • Godrej Fund Management (GFM), the real estate fund management arm of Godrej Properties, has raised US$ 275 million from Netherlands-based APG Asset Management NV, which will be used to invest in residential projects in India.
  • DriveU, an on-demand driver provider operated by Humble Mobile Solutions Private Limited, has raised about US$ 1 million from Unitus Seed Fund and Silicon Valley-based angel investors.
  • Canada Pension Plan Investment Board (CPPIB), an investment management company, has bought a large stake in Kotak Mahindra Bank Ltd from Japan-based Sumitomo Mitsui Banking Corporation, which earlier held a 3.58 per cent stake in the private-sector lender.
  • 500 Startups, US based venture capital seed fund, has launched a US$ 25 million fund called 500 Kulfi, which aims at making 25-50 investment deals per year in India, Bangladesh, and Sri Lanka, with a focus on financial technology, education, health and wellness, data analytics, content, Software-as-a-Service (SaaS), and small and medium businesses.
  • Abraaj Group, a Dubai based PE investor, is set to buy a majority stake in an Indian firm Quality CARE India Ltd, which runs CARE Hospitals.
  • Global investment banking major Goldman Sachs has invested Rs 441 crore (US$ 65.37 million) to acquire an equity stake in Gurgaon-based hotel development and investment start-up SAMHI Hotels which will help fund SAMHI's expansion plans.
  • Singapore-based investment firm, Temasek Holding, has acquired 73 per cent stake in Hyderabad-based Care Hospitals, India's fifth largest private healthcare network, for Rs 1,800 crore (US$ 266.83 million).
  • Macquarie Infrastructure and Real Assets (MIRA), the realty investment arm of Australian Macquarie Group Ltd, plans to invest in real estate projects in India and is in talks with Tata Housing Development Co. to jointly set up an investment platform to invest in luxury residential projects.
  • KKR India, the Indian arm of global private equity firm KKR & Co. L.P., has planned to raise its second alternative investment fund (AIF) of Rs 1,500 crore (US$ 222.36 million) which will offer credit solutions to Indian companies.
  • Global private equity major Warburg Pincus plans to invest Rs 1,800 crore (US$ 266.8 million) in Piramal Realty, which will help the real estate company to expand its portfolio and to acquire land parcels in and around Mumbai.

Government Initiatives

The Ministry of Finance plans to set up an expert panel to work out the modalities of implementing changes in the new tax regime post the withdrawal of capital gains benefits under the India-Mauritius tax treaty, which is expected to help prevent any potential confusion and assuage foreign investors facing changes in the tax regime.

The Maritime India Summit 2016, which was held in Mumbai between 14th-16th April, has attracted investments worth Rs 82,905 crores (US$ 12.29 billion) across 141 memoranda of understanding (MOU) and business agreements, which were signed by various players in the maritime sector.

Government of India has accepted the recommendation of A.P. Shah Committee to not impose Minimum Alternate Tax (MAT) on overseas portfolio investors retrospectively for the years prior to April 01, 2015, thereby providing significant relief to foreign portfolio investors (FPIs).

The Securities and Exchange Board of India (SEBI) has allowed Foreign Portfolio Investors (FPI) to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III Alternative Investment Funds (AIFs), and also permitted them to acquire corporate bonds under default.

In order to make India a more attractive foreign investment destination, the Ministry of Finance is planning to introduce the residency permit policy, which will allow key executives of foreign companies making investments worth US$ 2 billion or more in India, to avail various facilities such as special package on upscale housing, residency permits allowing long stay in the country, and cheap rates for utilities.

The Reserve Bank of India (RBI) has stated that it will take steps to ease doing business and contribute to the growth of start-ups by simplifying processes and creating an enabling framework for receiving foreign venture capital, in line with the Government of India's 'Start-up India' initiative.

The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India. The investment should be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with SEBI will also be deemed as eligible investors. The Government of India is also planning to relax some of the safe harbour rules set for offshore fund managers, in order to allow private equity investors to shift their base to India without attracting a tax on capital.

The People’s Bank of China (PBoC) has invested US$ 500 million in Indian bonds for the first time since the Indian government eased restrictions on foreign investors.

Road Ahead

India is being viewed as a potential opportunity by investors, with the economy having the capacity to grow tremendously. Buoyed by strong support from the government, FII investments have been strong and are expected to continue to improve going forward. "FIIs are flocking towards Indian bonds as the confidence level of central bank and the government is at one of the highest levels and benign commodity prices have added confidence," said Mr Rahul Goswami, Chief Investment Officer for fixed income at ICICI Pru Mutual fund. "India is among the few markets where interest rates are expected to drop with fair visibility, which would attract flow from FIIs" said Arvind Sethi, MD & CEO, TATA Asset Management.

A PricewaterhouseCoopers India report based on a survey of 40 PE firm partners has projected that the country has the potential to get PE funding of US$ 40 billion by 2025. Future PE investments would be driven by India’s consumption story, realistic valuations, competitive businesses, growing private entrepreneurship, among other factors, as per the report.

"The FII participation has been very consistent as far as India is concerned and we see the trend continuing. We have been overweight India in the context of Asia and emerging markets since November 2013 and that stance very much continues," said Mr Bharat Iyer, MD, Global Research, JP Morgan India.

Exchange Rate Used: INR 1 = US$ 0.0149 as on September 02, 2016

References: Media Reports, Press Releases