Foreign Institutional Investors

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Last updated: Apr, 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, in which 50 investors participated, 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.

India is poised to become the second biggest ecosystem option after the US in the next two years on account of the on-going high growth rates.

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$ 2.65 billion) in March 2016, out of which Rs 16,731 crore (US$ 2.45 billion) was invested in equities and Rs 1,375 crore (US$ 201 million) was invested in debt. Cumulative value of investments by FIIs during April 2000- December 2015 stood at US$ 179.32 billion.

India continues to be a preferred market for foreign investors. The assets of India-focussed offshore equity funds and ETFs stood at USD 43.1 billion in October-December 2015 quarter.!

India companies signed Merger and Acquisition (M&A) deals worth US$ 30.43 billion in 2015 across 600 deals. The total M&A transaction value for the month of February 2016 was US$ 1.83 billion involving a total of 37 transactions.

Total Private Equity (PE) deals increased by 62 per cent year-on-year to US$ 1.19 billion in February 2016 through 94 deals, whereas PE investments during the October-December 2015 period totalled US$ 3.9 billion, leading to total PE investments for 2015 to hit record highs of US$ 19.5 billion through 159 deals.@

Investments

  • 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$ 64.703 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$ 264.09 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$ 220.07 million) which will offer credit solutions to Indian companies.
  • Global private equity major Warburg Pincus plans to invest Rs 1,800 crore (US$ 264.09 million) in Piramal Realty, which will help the real estate company to expand its portfolio and to acquire land parcels in and around Mumbai.
  • Sequoia Capital, one of the leading venture capital firms, will invest Rs 125 crore (US$ 18.34 million) in Bengaluru-based MedGenome, a genomics-based diagnostics and research firm specialising in DNA sequencing and data analytics.
  • Viacom, one of the leading American global mass media companies, has acquired 50 per cent stake in Prism TV for Rs 940 crore (US$ 137.92 million). Prism TV owns and operates regional entertainment channels under the ‘Colors’ umbrella.
  • Global funds such as Macquarie Infrastructure and Real Assets (MIRA), I Squared Capital, Brookfield Asset Management Inc. are investing in Indian road construction and power projects as a result of government’s efforts to improve infrastructure and ease the operating environment for such projects.
  • Japanese conglomerate SoftBank has led a group of investors to invest Rs 630 crore (US$ 100 million) in Gurgaon-based OYO Rooms, which helps local hotels and select set of vendors to spruce up room amenities.
  • Acumen, a not-for-profit global venture fund, has invested US$ 1.8 million in Sahayog Dairy, an integrated company that sources milk from 272 centres across five districts adjoining Harda district in Madhya Pradesh.
  • Global infrastructure investment manager I Squared Capital, has decided to invest US$ 150 million in Amplus Energy Solutions Private Ltd, which sets up distributed solar power generation projects in India.
  • Zomato, a restaurant search and discovery platform, has raised US$ 60 million from Singapore government-owned investment company Temasek, along with existing investor Vy Capital, in order to explore new business verticals.

Government Initiatives

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 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$ 0.0147 as on March 01, 2016

References: Media Reports, Press Releases

Note: !- Morningstar Offshore Fund Spy, @- PWC Money Tree India report

x IBEF : India Brand Equity Foundation