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Part I – Introduction to foreign investment

Seeking investment from a foreign VC is a coveted goal for many Indian startups. Companies that manage to seek funding from Google Ventures, Intel Capital or Accel Partners are envied by startup entrepreneurs. In 2012, Olacabs, an aggregator of car rentals and point-to-point services secured investment of USD 10 million (approximately INR 50 crores) from Tiger Global, a New York based firm which has also invested in JustDial. InMobi, one of the most successful Indian startup raised $200 million from Softbank Corp of Japan which was completed in April 2012. Earlier, InMobi raised venture capital from Kleiner Perkins Caufield & Byers and Sherpalo Ventures.
Startups in India are becoming globally competitive, and drawing attention of foreign investors. Apart from startups, as companies grow in scale and stature, they often raise growth capital from foreign investors. Existing investors and promoters often liquidate their stock holdings as well as exit companies when they find foreign investors. Foreign investors are often considered to buy shares at significantly better prices/ valuation compared to domestic buyers. A major instance was that of International Paper buying a 75% stake in Andhra Pradesh Paper Mills for $388 million, a price which was much higher than the prevalent stock prices of Andhra Paper and was considered to be a windfall for the promoters who exited the company.
Foreign investors are attracted to Indian companies in various stages of growth for various reasons - India has a growing consumer base and foreign capital can witness more growth in an emerging economy like India as compared to saturated western markets which offer limited growth opportunities. An Indian business looks at foreign investment for many reasons, which equally apply to most established companies as well. Some of the reasons are listed below:
  1. a foreign investor may be able to invest much more money compared to an Indian source, which can help the startup expand faster. It is a reality that risk capital, which is a name given to the capital available to startups, is in short supply in India. For instance, the amount of risk capital available to be invested in early stage startups in Silicon Valley, Tel Aviv or Los Angeles is many hundred times more than what is available in Indian startup eco-systems. Since the domestic venture capital investment market is still at a nascent stage, startups and businesses with global potential need to look for investments outside India.
As risk capital available globally is many thousand times more compared to what is available within India for investment, entrepreneurs try to tap into the global investment market. Such investment comes in form of FDI. Also, when foreign buyers/ investors are attracted to a company, valuation usually drastically improves as result of increased competition amongst investors themselves.
  1. a foreigner who is a sophisticated financial investor may let the Indian business enjoy more autonomy to operate post the investment compared to an Indian investor. Seasoned financial investors are likely to be less concerned with day-to-day management as opposed to overall performance and long-term growth.
  2. a foreign strategic investor (that is, one which runs a business in a similar or related sector) who wants to acquire an Indian business may offer a great synergy, and may allow the Indian product to integrate with a foreign offering and expand to global markets.
  3. in various sectors technical expertise is necessary, which local businesses in India may not be able to provide without an experienced foreign partner. For example, modernized airports, metro railway, etc. are being built by Indian companies in collaboration with experienced foreign JV partners. Many automobile manufacturers also operate on a joint venture basis – e.g. Maruti Suzuki, Mahindra Renault, etc.
  4. FDI often provides exits to existing shareholders and promoters, who can make a lot of money even by selling a small component of their stake in the venture to a foreigner. The most lucrative strategic acquisitions very often come through FDI. The Redbus founders’ exit to Ibibo in 2013 is an example of such a transaction.
  5. FDI route is a major mechanism used by foreign businesses to establish a presence in India – for example, companies such as Google and Microsoft create their own subsidiaries in India. In other cases, foreigners may consider entering into partnerships and joint ventures with Indian businesses. For example, Hero-Honda is an example of a joint venture between Honda of Japan and Hero of India, and Bajaj-Allianz is an example of a joint venture between Bajaj of India and Allianz of Germany.

This module will explain the basics of foreign exchange law and take you through the essential concepts in Indian exchange control regulations that impact foreign investment, provisions dealing with bank accounts, pricing, exit-related issues and compliance-related aspects of foreign investments.

How can knowledge of FDI help you?

Foreign companies investing in India require legal services and are often some of the biggest and most well-paying clients – therefore, transactional lawyers and law firms are obsessed about FDI. A significant share of the practice of top Indian law firms are owed to such foreign clients investing through FDI route in India.

FDI-related regulations require company secretaries and chartered accountants to perform various compliance requirements. Therefore, chartered accountants, company secretaries, financial law firms, consultants and other professionals can add significant value to their profile and will be in a position to provide advice or perform compliance for companies seeking financial investors or foreign collaborations, by developing a deep understanding of FDI.

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