MARKET COMPASSFOR INDIASHARE IN THE GROWTH STORY

A SECURITIES SERVICES PUBLICATION

The bankfor a changing

world

The bankfor a changing

world

¡ 2 ¡

Republic of IndiaIndia has recently attracted global attention as its GDP grew faster than any other large emerging market, at 7.5 per cent in 2015 and further reforms are expected to foster even more growth opportunities.

A growing and well-diversified economy India is the world’s second most populous country and the largest democracy by population. It is likely to become the most populous country by 2022 with an estimated 1.7 billion inhabitants and the Indian labour force should increase from current 470 million to 640 million by 2030. With its many cultures and religions, India is highly diverse. This is also reflected in its federal political system, whereby power is shared between the central government and 28 states. The Indian economy is mainly driven by domestic demand. India is a net commodity importer and has benefited from falling fuel and commodity prices since 2014. These favourable conditions are reflected in the stabilisation of the Indian Rupee (INR) which performed well against US dollar in 2015 than most emerging-market currencies.

Population

Population

GDPUSD 366 bn$

Gross Domestic Product

Gross Domestic Product

GDP per capita

GDP per capita

USD 391

GDPUSD 2,308 bn$ USD 1,8081.28 bn

0.93 bn

At a glance 1995

2015

(Source: International Monetary Fund)

India’s economy is well diversified although half of the work force is in agriculture (traditional farming or modern agriculture). It relies on a wide range of industries and a multitude of services which are the major source of its economic growth. With the strength of a large educated English-speaking population and skilled workforce, India has become a major exporter of information technology (IT) services, business outsourcing and software services. Bangalore, the Indian tech capital, is already the world’s 4th largest tech centre with a majority of Indian start-ups and 35% of the IT workforce. India’s IT champions such as Infosys (market capitalisation of USD 42 billion with 185,000 employees) or Wipro (USD 35 billion with 158,000 employees) are headquartered in Bangalore. Others, such as Tata Consultancy services (TCS, USD 80 billion with 335,000 employees) are located in Mumbai.

¡ 3 ¡

Although India appears as a bright spot amongst emerging markets, it still faces major challenges such as poverty and weak infrastructure, mainly in the power generation and transport sectors. In order to foster economic development, the government is reforming the land acquisition law, replacing tax codes currently managed at the state level by a Goods and Services Tax (GST) and reforming the banking sector.

Sovereign risk rating: BBB- with a stable outlook (Standard & Poor’s)

The financial markets Indian capital market regulatorThe Securities and Exchange Board of India (SEBI) is the regulatory and registering authority for the various intermediaries and institutional investors connected with the securities market, e.g. brokers, mutual funds, foreign portfolio investors and foreign custodians alike.

The Reserve Bank of India (RBI) is India’s central banking institution and performs various functions such as:

¡ The monetary authority

¡ The regulator and supervisor of the financial system ¡ The manager of foreign exchange ¡ The issuer of currency ¡ The regulation of operations on foreign currency accounts or special non-resident rupee account by foreign portfolio investors (FPIs).

Though the stock exchanges in India are under the overall regulation of SEBI, they are self-regulatory organisations with their own rules, regulations and by-laws administered by their boards of directors. They are also responsible for ensuring orderly, transparent and fair trading practices, controlling the admission and expulsion of members, maintaining investor protection and addressing investor grievances.

Stock exchangesThe two major national stock exchanges in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), play a pivotal role in the development of India’s financial industry along with the MCX Stock Exchange (MCX-SX), the National Commodity and Derivatives Exchange (NCDEX) and 17 other regional exchanges. NSE and BSE have similar market capitalisations and the major Indian companies are listed on both exchanges. BSE, founded in 1875, is well-known outside of India thanks to its Sensex index which provides a snapshot of Indian markets, while the NSE, created in 1994, handles 80% of daily transactions in India.

India’s market is largely open to foreign investors. Sensex ownership among global funds stands at a record 28 per cent. In addition, two domestic trends are supporting the stock market’s development. First, local investors, traditionally investing in gold and properties, are changing their savings patterns turning their attention to financial products. Secondly, in 2015, India IPOs reached a five-year peak, close to $2 billion, helping Indian companies raise money.

Market capitalisation of the two major stock exchanges

No. of listed companies

(Source: World Federation of Exchanges, 2015)

2005 2015

2015

NSEUSB 397 bn NSE

USD 1,533 bn

BSEUSD 426 bn BSE

USD 1,600 bn

1,756NSE

5,726BSE

Post trade infrastructureThe NSE and the BSE each have their own clearing house while the Clearing Corporation of India Ltd. (CCIL) acts as central counterparty for trades undertaken on the Reserve Bank of India’s dealing system. There are three depositories:

¡ National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) for equities, mutual funds, bonds, debentures and commercial paper

¡ The Reserve Bank of India’s Public Debt Office for government securities.

Securities are dematerialised and held at the depositories on segregated securities and cash accounts. Sovereign debt is held in bearer form with Central Bank of India (RBI). Equities settlement takes place on T+2. Corporates bonds settlement cycles range from T to T+2, depending on the market place and the bond’s type. Government securities are settled on T+1 or T+2 when one of the counterparty is a foreign portfolio investor.

¡ 4 ¡

¡ 5 ¡

A simpler investment regime for foreign investorsIn order to help foreign investments in Indian securities markets, SEBI created in June 2014 a new investor class called foreign portfolio investor (FPI) by merging the previous investor classes i.e. FIIs (foreign institutional investors), sub accounts and QFIs (qualified foreign investors). In this section, we provide you with a general overview of the main principles guiding the FPI status. However, you may need to dive into further details to make informed decisions and efficiently process your investments. BNP Paribas Securities Services India details these market insights in the “Exploring India” guide. It provides a comprehensive overview of the regulatory framework, operations, risk-based Know Your Customer (KYC) procedures, corporate actions and remittance guidelines.

Who can be a FPIAn FPI is: ¡ An individual not resident in India ¡ A resident of a country where securities market regulator has signed IOSCO agreement or a bank of a country whose central bank is member of BIS (Bank of International Settlement)

¡ Legally permitted to invest in securities outside its home country

¡ Authorised to invest on its own behalf or on behalf of its clients ¡ Has sufficient experience, a good track record, is professionally competent, financially sound and a reputation of fairness and integrity.

In addition, FPIs are registered in three categories depending on their risk profile: ¡ Category I groups governments, central banks, sovereign wealth funds and international organisations

¡ Category II is professional investors such as broad-based funds (mutual funds, investment trusts, pension funds,…), asset managers, insurance companies and banks

¡ Category III FPIs (charitable societies or trusts, foundations and family offices.) are treated as retail investors.

Recent policy updatesAs part of the ongoing reforms to attract foreign portfolio investors, the following recent policy enhancements were announced. ¡ An entity can hold a licence for both Foreign Venture Capital Investor (FVCI) and FPI provided funds are clearly segregated and other conditions are met too.

¡ The Government of India has proposed to licence foreign investments in Alternate Investment Funds (AIFs) as well.

¡ The Minimum Alternate Tax will not be applicable to FII/FPIs on investments prior to 1 April 2015.

Get in touch with our expertsOur DDP (Designated depository participant) and client onboarding teams manage, clarify and keep track of FPI accounts including transitions of accounts (FIIs to FPIs), conversions or renewals.

The three step processStep 1: How to set up as an FPI When setting up an FPI account, registration can be seamless by appointing a Designated Depository Participant (DDP) to act as a custodian of securities. The DDP undertakes: ¡ The daily report to the

depositories and SEBI of the FPI’s transactions

¡ Investment monitoring of the FPI ¡ Records and documents maintenance and the reporting of FPI’s holdings.

The FPI must also appoint an Authorised Dealer bank (AD bank), a broker for trade execution and a compliance officer.

Step 2: How to invest for a FPIA FPI can invest in nearly all financial instruments available on the secondary market. When investing in government securities, a FPI is allowed to buy bonds with a minimum residual maturity of 3 years. FPIs must adhere to specified investment limits when investing in: ¡ Debt instruments: conditions are related to the debt issuer, the FPI legal status, the instrument maturity or type

¡ Or equities: conditions may be an individual, aggregate limit or related to an economic sector.

Step 3: What about taxation?The Securities Transaction Tax (STT) is payable on the value of a securities transaction i.e. purchase and sale of securities through a recognised stock exchange in India. STT is not applicable on off-market transactions. It depends on the securities type (equities, fund units and futures).Tax is payable in advance through a self-assessment process, based on an estimate for the coming year (starting on 1 April). A non-corporate must pay at least 30% of advance tax before 15 September, 60% before 15 December and 100% on or before 15 March. The FPI must also appoint a tax consultant to manage all tax related matters.

¡ 6 ¡

Get in touch with our expertsA dedicated team files the FPI registration meeting all KYC requirements, maintenance of books of records or code of conduct.

Get in touch with our experts ¡ Flexibility to work with the tax consultant of your choice

¡ Efficient co-working with your tax consultant

Get in touch with our expertsDiscover your options with our specialists

¡ The issuance of FPI registration ¡ Daily reports to the depositories and SEBI of the FPI’s transactions and the investment monitoring of an FPI

$

How to repatriate funds out of IndiaThe Reserve Bank of India has delegated the powers for remittance outside India to permitted authorised dealer (AD) banks. A FPI has to provide a form and supporting documents to the AD bank. Cash remittance out of India is allowed under a number of conditions, among others net of applicable taxes.

¡ 7 ¡

Get in touch with our experts ¡ Facilitate remittance via our dedicated team ¡ Clarify the remittance rules and funds repatriation process out of India

Your support in India Investors can partner with our local custody experts who care about their challenges and understand the intricacies of the securities services sector. We are one of the world’s leading providers, with the expertise, track record and financial strength to continue building solutions for tomorrow.We have a local presence in 34 countries across five continents and a global custody network covering over 100 markets. Our top priority has always been to stay close to our clients and the market.Based in Mumbai, our team of local experts has an average experience today of more than 10 years with experienced dedicated teams for FPI opening and license registration.

Find out more ¡ Our “Exploring India” guide is over 100 pages of detailed explanations of the foreign

investment framework in India, covering the direct investment, portfolio investment and venture capital investor route. Contact our specialists in India for more information.

¡ Related articles on our Securities Services website ¡ “The Indian Summer”: with its Asian neighbours spending more time in the spotlight

of late, now it’s time to focus on India http://bit.ly/IndianSummer-TheTrade ¡ “Innovating through partnerships”: This article, written by The Economist

Intelligence Unit, looks in more detail at India-based Infosys http://bit.ly/FinSupplyChain

¡ Video (BNP Paribas Economic research) on

¡ “India: good student” http://bit.ly/IndiaGoodStudent

¡ Market Information database on our NeoLink client portal brings in-depth information on market practices

The information contained within this document (‘information’) is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors, omissions or opinions contained within this document. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request.BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the European Central Bank (ECB), the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).BNP Paribas Securities Services, London branch is authorised by the ACPR, the AMF and the Prudential Regulation Authority and is subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority and regulation by the Financial Conduct Authority are available from us on request. BNP Paribas Securities Services, London branch is a member of the London Stock Exchange. BNP Paribas Trust Corporation UK Limited (a wholly owned subsidiary of BNP Paribas Securities Services), incorporated in the UK is authorised and regulated by the Financial Conduct Authority.In the U.S., BNP Paribas Securities Services is a business line of BNP Paribas which is incorporated in France with limited liability. Services provided under this business line, including the services described in this document, if offered in the U.S., are offered through BNP Paribas, New York Branch (which is duly authorized and licensed by the State of New York Department of Financial Services); if a securities product, through BNP Paribas Securities Corp. or BNP Paribas Prime Brokerage, Inc., each of which is a broker-dealer registered with the Securities and Exchange Commission and a member of SIPC and the Financial Industry Regulatory Authority; or if a futures product through BNP Paribas Securities Corp., a Futures Commission Merchant registered with the Commodities Futures Trading Commission and a member of the National Futures Association.Printed on recycled paper with vegetable inks – Designed by the graphics department, corporate communications, BNP Paribas Securities Services.160205C_MCFI_BR_EN

Follow us: Visit us:

securities.bnpparibas.com

For additional information, please contactVivek Harlalka Vice President, Sales, IndiaBNP Paribas House, 7th Floor, 1 North Avenue, Maker MaxityBandra Kurla Complex, Bandra (East), Mumbai 400 051Mobile : +91 99200 34655Direct : +91 22 6196 4682Email : vivek.harlalka@asia.bnpparibas.com

MARKET COMPASSFOR INDIASHARE IN THE GROWTH STORY

A SECURITIES SERVICES PUBLICATION

The bankfor a changing

world

The bankfor a changing

world

Christophe Beelaerts Head of Securities Services, IndiaBNP Paribas House, 7th Floor, 1 North Avenue,Maker MaxityBandra Kurla Complex, Bandra (East), Mumbai 400 051Mobile : +91 75060 67954Direct : +91 (22) 6196 5050E-mail : christophe.beelaerts@asia.bnpparibas.com