Comparison: Chinese Foreign-Owned Enterprises Versus Private Limited Companies in India

In China, a wholly foreign-owned enterprise (WFOE) is a limited liability company (LLC) formed solely by one or more foreign investor(s) with no mandatory requirements to have a domestic partner. The flexibility afforded to a WFOE through Chinese policies makes it a popular form of foreign investment in China.

Foreign investors increasingly believe that China’s economic and legal development make it unnecessary to over-rely on guidance from a local partner.

Many factors make the establishment of WFOEs attractive in China, especially for businesses engaged in manufacturing or trade.

These include:

  • 100 percent foreign ownership and control;
  • Security guaranteed to technology and intellectual property rights;
  • Ability to develop own internal structure;
  • Capacity to retain organizational culture even on foreign land;
  • Access to China’s large market; and
  • The ability to repatriate funds to holding company.

Under Indian law, foreign investors are able to establish wholly-owned subsidiary companies (WOS) in the form of private limited companies if they operate in sectors that permit 100 percent foreign direct investment (FDI).

WOS in India work in a similar manner to Chinese WFOEs, with a few key distinctions. The specifications for establishing a wholly-owned subsidiary in India can be found here and for establishing a WFOE in China can be found here.

Regulation of foreign-owned companies in India, China

In India, both 100 percent foreign-owned private limited companies and joint venture companies are governed by the same regulations. The Companies Act, 2013, regulates joint ventures (JVs) and wholly-owned subsidiaries in India.

In China, too, JVs and WFOEs are subject to the same general laws, such as the Company Law, 2013 and the Measures of Record-Filing for Establishment and Change of FIEs. However, there are other specific measures regulating each type of legal entity as well.

For example, a corporate JV in China, whether it is a limited liability company or a joint-stock limited company, is subject to Company Law, 2013. In addition, corporate JVs with foreign investments must also comply with the Sino-Foreign Equity Joint Ventures Law and the Sino-Foreign Co-operative Joint Ventures Law.

Different types of WFOEs have different registration criteria depending on their area of operation and category of industry. Some entities need pre-approval before setting up, trading WFOEs need to register with the customs department, manufacturing WFOEs need to pass an environmental impact report, among others. This is similar to the regulatory landscape in India.

The specifications for establishing joint ventures in India are discussed here.

Securing approvals for FDI in India

Foreign investment in India is regulated under the Foreign Exchange Management Act (FEMA), and is allowed under two different routes – the automatic and the government approval routes. (See the Consolidated FDI Policy published in August 2017 here. This has been amended in January 2018, which can be seen here.)

In both India and China, the scope of the business – the company’s intended activities – dictate the need to establish either a 100 percent foreign ownership or the requirement of additional national investors.

For example, any sector in India that attracts an equity cap or falls under the 49 percent government approval route for FDI needs an Indian investor to be involved within the business.

A business eligible for 100 percent automatic FDI requires no prior approval.

Setting up in India versus China

Setting up a private limited company / wholly-owned subsidiary in India differs substantially from the WFOE set-up in China.

The standard setting up process in India is known as the ‘automatic route’, which involves a comparatively easy establishment process.

Under this route, 100 percent investment is allowed in certain sectors, as per the Master Directions issued by the Reserve Bank of India (RBI).

For these sectors, no specific approval is required prior to setting up the entity, making the establishment process quite simple.

The investors are only required to notify the RBI within 30 days of the receipt of inward remittances and file the required documents with that office within 60 days of the issuance of shares to foreign investors.

For sectors that fall under the approval route, sectoral investment caps are defined, and investment requires government approval.

In this case, there is a separate set of procedures to be followed.

Among other things, the company must obtain approval for investment from respective ministries or administrative departments through the Department of Industrial Policy and Promotion (DIPP).

To improve the ease of doing business in India, the Indian government now allows 100 percent automatic FDI in most sectors.

In China, more industries are being opened up to FDI, such as the automotive and insurance sectors. The country released its latest Negative List in July 2018 reducing the restrictive measures from 63 to 48, and for a Negative List for Free Trade Zones, where restrictions were brought down from 95 to 45.

Major industries that are highly restricted because of FDI caps or other laws or practices in China include finance, telecommunications, education, healthcare, internet businesses, and any industry engaged in the extraction or processing of natural resources.

In India, the FDI regime is more liberal.

In its foreign investment policy released in January 2018, the government allowed 100 percent FDI under the automatic route for single brand retail trading and construction development sectors besides introducing relaxations for investing in power exchanges and the medical devices sector.

As mentioned earlier, most sectors in India allow 100 percent foreign investment without the need for specific government approval.

Industries were FDI restrictions apply include mining, defence, petroleum refining, broadcasting services, print media, and air transport services. However, even in these sectors, investments beyond regulated caps can be made after securing government approval.

Difference in organizational requirements 

Foreign investors interested in setting up a WFOE in China or a WOS in India must follow the government’s organization structure guidelines. However, distinctions exist here as well.

A WFOE set-up requires an executive director or board of directors, at least one supervisor, and a general manager.

The Indian WOS, on the other hand, must have a minimum of two directors and between two and 200 shareholders. A shareholder can be another legal entity, such as a Hindu Undivided Family (HUF), whereas directorship is held only by individuals.

As in the case of China, the amount of paid-up capital required should be a financial exercise to determine the business’ start-up and cash flow needs. For a WOS in India, there is a minimum share capital requirement of INR 100,000 (approximately US$1,500). This has been relaxed under the Companies (Amendment) Act, 2015.

Taxation of WFOE versus WOS


India does not charge a tax on profit repatriation whereas China levies a 10 percent tax on the value of repatriated funds. Additionally, China’s labour welfare costs are higher.

However, it is also important to note that domestic companies in India are liable to pay dividend distribution tax, levied at 16.995 percent of dividend payout, which is deducted from their reserve or surplus.

Foreign investors whose countries have double tax avoidance agreements (DTAAs) with India will need to calculate their respective tax liability according to the terms of the respective DTAA.

India DTAAs Part 1India DTAAs Part 2

Preview: Vietnam’s New 2018-2023 FDI Strategy Shifts From Low-Cost Labor To High-Tech Industry

Vietnam’s Ministry of Planning and Investment, with the assistance of the World Bank, is currently drafting a new FDI strategy for 2018-2023 focusing on priority sectors and quality of investments, rather than quantity. The new draft aims to increase foreign investment in high-tech industries, rather than labor-intensive sectors. Manufacturing, services, agriculture, and travel are the four major sectors in focus in the draft.

Sectors in focus

The four major sectors in focus are:

  • Manufacturing – It includes high-grade metals, minerals, chemicals, electronic components, plastics and high-tech;
  • Services – Includes MRO (maintenance, repair, and overhaul) along with logistics;
  • Agriculture – Includes innovative agricultural products i.e. high-value products such as rice, coffee, seafood and;
  • Travel – High-value tourism services

Investment priority

The draft prioritizes FDI investments on a short-term and medium-term basis. In the short-term, industries with limited opportunities for competition will be prioritized.

Industries include:

  • Manufacturing/Production – Automotive and transport equipment OEMs and suppliers;

In the long-term, the emphasis is on sectors that focus on skills development, including:

  • Manufacturing – Manufacturing of pharmaceuticals and medical equipment;
  • Services – Services include education and health services, financial services, and financial technology (Fintech);
  • Information technology and intellectual services

The draft also includes recommendations about the further removal of entry-barriers and optimizing incentives for foreign investors such that their effect on the economy is maximized.

FDI in 2017

In the first 11 months of 2017, the total FDI capital including newly registered, additional funds and share purchase value reached US$ 33.09 billion, a year-on-year increase of 82.8 percent. FDI disbursed is expected to reach US$ 16 billion, an increase of 11.9 percent over the same period last year.

The processing and manufacturing sector received the highest capital at US$ 14.95 billion, accounting for 45.2 percent of the total. Electricity production and distribution and real estate attracted US$ 8.37 billion and US$ 2.5 billion respectively.

Japan was the leading investor amongst 112 investing countries, accounting for 27 percent of the total FDI at US$ 8.94 billion, followed by Korea and Singapore with a total registered capital of US$ 8.18 billion and US$ 4.69 billion.

Ho Chi Minh attracted the highest FDI with a total registered capital of US$ 5.68 billion, accounting for 17.2 percent of the total investment capital. Bac Ninh followed at US$ 3.28 billion, while Thanh Hoa province ranked third with a total registered capital of US$ 3.16 billion.

Need to do more

Going forward, Vietnam has to ensure that it moves away from a low labor cost economy to one focusing on technology and skilled labor. The government has to do more than just attract investments into high-value added activities. Vietnam should also focus on diversifying FDI sources, enabling domestic firms, and increasing investments in infrastructure.

Majority of the foreign investments in Vietnam are from Korea, Japan, and Singapore. Rather than been over-dependent on Asian countries, Vietnam has to promote itself further and increase investments from the EU, US, and other countries outside Asia-Pacific. With the EU-Vietnam FTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has an opportunity to increase investments from countries outside Asia.

Foreign firms in Vietnam are offered huge tax and other incentives such as exemptions or reductions in corporate income tax, import duties, and VAT. However, domestic firms that already lack the capital and technology of foreign firms are not provided any of those incentives, further hampering their growth. The government has to find a fine balance between providing incentives to domestic and foreign firms to improve competitiveness. To increase linkages, the government can incentivize foreign firms engaged with local firms, if it wants FDI to have a long and positive effect on the economy.

One key sector not mentioned in the draft is infrastructure. As the country progress and investments increase, infrastructure will play a crucial role in the economic development. Infrastructure projects, which are in dire need of funds in Vietnam cannot be fulfilled by the domestic sector and would require foreign capital. The government has to prioritize infrastructure projects and incentivize foreign investments to reduce the increasing gap between the current and needed investment levels. Infrastructure projects such as roads, railways, power grids, ports, and industrial parks should be a priority for the government going forward.

Once the draft is finalized by the Ministry of Planning and Investment, we will have further clarity regarding the scope of their strategy.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

In Focus: China’s Laws Introduced To Ease Restrictions On Inbound FDI And Regulate Outbound FDI

Foreign direct investment (FDI) in China has changed significantly as wages continue to rise and the country’s economy matures from a heavy manufacturing base to one led by consumption and services. Foreign investors are taking a more cautious approach to investing in China than in years past, while Chinese outbound investors have been more bullish.

Naturally, the government has taken notice. Following a slowdown in inbound FDI, and a significant increase in outbound FDI, the government in August released the Notice on Promotion of Foreign Investment Growth (“the Notice”) to ease restrictions on inbound FDI and the Administrative Measures for Outbound Investment by Enterprises to regulate outbound FDI.

These initiatives fit into a larger business reform agenda designed to improve foreign investment options, and they are already reshaping both inbound and outbound FDI. Accordingly, strategic foreign investors with an interest in China are finding that their opportunities are changing, while Chinese investors are finding new incentives to concentrate their outbound investment on specific initiatives.

The Notice on Promotion of Foreign Investment Growth

China experienced a decrease in inbound FDI last year. In 2016, capital inflows fell to US$170 billion compared to US$242 billion in 2015, a 29.7 percent drop. The first half of 2017 also saw a drop in foreign investor sentiment as capital inflows fell by 1.2 percent year-on-year.

In light of this trend, the government has pushed through several new reforms to attract more foreign investors, including the updated Catalogue for the Guidance of Foreign Investment Industries (“the Catalogue”) and Free Trade Zone Negative List (“FTZ Negative List”), simplified company establishment procedures, and revised trademark laws. The Notice is central to this wider effort to encourage FDI and support China’s transforming economy in moving up the global value chain.

On August 8, 2017, the State Council, the chief administrative body in China, set new goals for the expansion of FDI. The Notice has five key measures:

  • reduce market entry barriers for foreign investment;
  • formulate supporting fiscal policies;
  • improve investment environment of national-level development zones;
  • facilitate the entry and exit of foreign workers; and
  • improve the general business environment.

The first measure, reduce market entry barriers, extends the FTZ Negative List nationwide and relaxes FDI restrictions in sectors such as banking, brokerage, and insurance and adds high tech sectors such as augmented reality to the encouraged category. Foreign investors can expect to see foreign share limits either lowered or removed entirely in these specified industries.

The second measure encourages FDI with supporting fiscal policies. The measure details tax exemptions and preferential treatment for FDI in high tech industries and investment in the western and northeastern economic regions.

The third measure strengthens the investment environment provided by national development zones. The measure promises to speed up administrative approval in national development zones, but this mostly applies to the manufacturing sector.

The fourth measure, facilitating entry and exit of foreign talent, is part of an ongoing effort to improve residence permit rules and attract more foreign talent. However, this is expected to affect mostly foreigners working in domestic firms and not those working in foreign-invested enterprises.

Finally, the fifth measure calls for improving the business environment through free remittance of foreign profits and stronger protection for intellectual property. Whether or not free remittance of foreign dividends and interest will be secured though is yet to be seen, in light of past capital control policies.

Following through on the Notice, the Ministry of Finance announced last Friday new rules that grant foreign investors more access to Chinese banks, insurance and securities companies. Foreign investment ratio limit in securities companies is raised to 51 percent, compared to current ratio of 49 percent, and the limit will be removed completely in three years.

Previously, a single foreign investor could not own more than 20 percent of a Chinese bank, and multiple foreign investors could not hold more than 25 percent. This limit has now removed and foreign investors enjoy domestic treatment. Additionally, foreign investors will be allowed up to a 51 percent stake in insurance companies in three years and the limit will be removed entirely in five years.

The Administrative Measures for Outbound Investment by Enterprises

The government has sought to regulate outbound FDI, publishing the Measures in August. After ambitious spending by several domestic conglomerates in 2016, when outbound FDI reached US$170.1 billion, a 44.1 percent increase from 2015, the Chinese government instituted several new capital controls and is cracking down on “irrational” acquisitions by domestic firms abroad.

Domestic companies like Dalian Wanda Group, HNA Group, and Fosun International dramatically increased their acquisitions abroad in the past few years, most of which was financed through credit lines with state controlled banks. The government is concerned that the spending sprees by these companies signal the emergence of “Grey Rhinos”, and is determined to curtail excessive investment abroad.

In a statement published August 4, 2017, the State Council laid out the new Measures. The Measures categorize outbound investment into three categories, as follows:


  • Investments that threaten national security or interests;
  • Investments into unauthorized core military technology and products; as well as
  • Investments into the gambling and sex industries.


  • Investments in countries with which China has no formal diplomatic relationship, are at war, or has agreements with restricting investment; as well as
  • Investments into the real estate, hotel, entertainment, and sport industries.


These new government directives appear to have already made an impact.

The first 10 months of 2017 have already seen an increase of FDI in high-tech manufacturing, a 22.9 percent rise from last year, at RMB 56.65 billion. Notably, FDI in China’s central region has also seen a dramatic rise, growing 47.9 percent from last year. While much of this occurred prior to the August announcement for the Notice, foreign investors should see these directives as complementary to larger trends within the economy.

Meanwhile, outbound investment has also complemented the Measures. While the capital controls and new restrictions on outbound FDI have effectively stemmed outflows in 2017, with outbound FDI down 40.9 percent from last year, investment in OBOR projects totaled US $11.18 billion, a 4.7 percent jump from last year. With the OBOR initiative added to the Constitution, and regulators offering smooth approval process for OBOR projects, investment into the new Silk Road are expected to increase.

All of this is happening during a pivotal point in the Chinese economy. As GDP growth continues to slow down — reaching 6.2 percent industrial output last month — and wages are rapidly rising, the Chinese economy is evolving, moving farther away from manufacturing-centric economy towards a services and consumption based economy.

Increasing competition from other developing countries, and worry about the security of the RMB after a six percent drop in 2016, has further motivated the government to take action in new ways that reflect this new normal.



Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

India’s FDI Policy For 2017: Startups And Single Brand Retail Among Beneficiaries

India’s federal government released an updated and consolidated policy for foreign investors on August 28, relaxing old barriers and providing more regulatory clarity – with immediate effect.

Startups and single brand retail companies are among key beneficiaries of the changes in this year’s foreign direct investment (FDI) policy.

The new FDI policy also outlines procedures for foreign investors looking at sectors that were previously regulated by the now defunct Foreign Investment Promotion Board(FIPB).

India’s Consolidated FDI Policy for 2017

The document released by the Department of Policy and Promotion (DIPP) offers investors clarity on entry routes for investments into India, sectors requiring government approval and procedures for the same. The document serves as a guide on the regulations monitoring and permitting foreign investments across respective economic sectors.

Several changes in this year’s policy incorporate the incremental updates announced by the government for respective sectors over the last one year.

With the consolidated FDI policy in place, the Modi government hopes to showcase an investor-friendly environment and greater ease of doing business in India.

Attracting FDI is especially important for the government right now, given its ambitions on the Make in India front – establishing India a manufacturing hub and expanding its startup sector to promote job creation and economic development.

Major changes in the 2017 FDI policy

  • Inclusion of startups in the government’s foreign investment policy: Indian startups can now raise up to 100 percent funding from foreign venture capital investors (FVCIs). The policy simplifies the definition of ‘venture capital funds’ as funds registered under the Securities and Exchange Board of India or SEBI (Venture Capital Funds) Regulations of 1996.
  • Relaxation of the local sourcing rule in single-brand retail: Mandatory local sourcing norms for foreign firms will not be applicable for up to three years from the commencement of their business in the country. This refers to such entities that have ‘state of art’ and ’cutting edge’ technology, and where local souring is not possible. However, after the exemption period ends, these companies will need to comply with the domestic sourcing norm (30 percent in a year). A clear definition of what these terms mean is still missing.
  • Sales by an e-commerce platform: As it stands, an e-commerce entity can source only up to 25 percent of its sales through one of its group companies. The DIPP has now clarified that ‘sales’ will be calculated based on value (not volume) of items sold on a financial year basis – April to March.
  • 100 percent FDI in food retail: Foreign investment up to 100 percent will be permitted under the government approval route for trading, including through e-commerce in the case of food products manufactured or produced in India.
  • Extension of FDI in the pharmaceutical sector: Up to 74 percent FDI will allowed in India’s pharmaceutical sector through automatic route; beyond that limit, the foreign investment will need to secure government approval.
  • Approving authorities clarified: Investment proposals relating to banking, mining, defense, broadcasting, civil aviation, telecom, and pharmaceuticals will need the approval of the respective federal ministries.
    The DIPP will be the approving authority for proposals relating to retail – single and multi-brand and food and startups.
    For investments in financial services not regulated by any financial sector regulator such as the SEBI or Insurance Regulatory and Development Authority (IRDA), or where only part of the financial services activity is regulated, or where there is doubt regarding regulatory oversight – the federal department of economic affairs will be the deciding authority.
  • Investment by non-resident Indians (NRIs): A company, trust, or partnership firm that is incorporated outside India and owned and controlled by NRIs will be permitted to invest in India, subject to certain provisions outlined in the FDI policy.



Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Kazakhstan Leads The Five Central Asian Nations With FDI Topping $20 Billion In 2016

Expected to grow at 5.5% by 2021

The economy of Kazakhstan has outperformed in the first half of 2017 in the lead up to EXPO 2017 in Astana. GDP growth was recorded at 4.2% in June. The main drivers of expansion included the manufacturing industry, construction, agriculture, transport, warehousing, and trade.

The government expects the economy to grow by 2.4% in 2017 and by 3.5% in 2018. “Step-by-step we should reach a growth rate of 5.5% by 2021,” said Kazakh Prime Minister Bakytzhan Sagintayev at a forum held as part of the EXPO 2017 in Astana.  The frontier market (FM) (FRN) is transforming and its economy is now opening up to foreign capital and private participation.

According to the country’s Deputy Foreign Minister, Roman Vassilenko, “Kazakhstan is leading the five Central Asian (AAXJ) (VPL) nations (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan) in their collective quest for global engagement and national development.”

Kazakhstan attracted record FDI inflows in 2016

The total amount of foreign direct investment in the economy topped $20 billion last year,” said Zhenis Kassymbek, Minister of Investment and Development in Kazakhstan during an exclusive interview with The Korea Herald. “Investors regard Kazakhstan as a gateway to the Eurasian Economic Union market of 180 million people.” The economy is already taking steps towards modernization. “Korea is one of [our] top priority investors,” said Kassymbek. The minister believes that Korean enterprises (EWY) (KORU) would be able to lend the necessary high-quality, advanced technologies and qualifications that the country is currently looking to capture.

According to the National Bank of Kazakhstan, the gross inflow of FDI to Kazakhstan in 2016 stood at $20.6 billion, setting a new record with a 40% rise in FDI from the $14.8 billion attracted in 2015. The main recipients of the FDI were the mining industry, geological exploration, and processing.

For those who have been overlooking commodity-related sectors (DBC) for some time now, the mining industry in Kazakhstan certainly demands a second look.

Funds Hope Vietnam Continues To Pursue Market Reforms

Since opening its economy to foreign investors some years ago, the Vietnamese economy has grown steadily, and remains a popular investment destination. In May, the country held elections, which in a communist nation isn’t anything more than a show, and the parliament a mere rubber stamp.

The elected delegates chose the new prime minister and president. And even though I believe that the future for the Vietnamese economy looks rosy, the incoming Prime Minister Nguyen Xuan Phuc stated that the market reforms pursued by his predecessor would be scaled back. In my article from May 23, I mentioned that it would be a mistake not to continue Nguyen Tan Dung’s aggressive privatization plan, and I am glad to see that the pace has not slowed down.

The title of an article from, “Vietnam allows foreigners to own 100% in dairy giant Vinamilk, move set to boost inbound FDI,” is very welcome news. In addition, the government-owned State Capital Investment Corporation (SCIC), will exit 10 companies in order to boost FDI, which increased to $4.8 billion in the second quarter of 2016 but is still well below the peak of $8 billion recorded in 2008.

I would venture to say that if Vietnam continues the market policies of the former prime minister and president, then that number will increase dramatically.

This leads me to the result of research we performed in search of new and profitable ways to take advantage of the expanding Vietnamese economy. All indicators pointed to the Asia Frontier Capital (AFC) Vietnam Fund (AFCVIET), a fund that is run out of Hong Kong and domiciled in the Cayman Islands. Unlike the Market Vectors Vietnamese ETF (VNM), the Asia Frontier Capital (AFC) Vietnam Fund is an actively managed portfolio focusing on small and midcap stocks.

The CEO of AFC, Andreas Vogelsanger, recently explained to me the reason for their success since launching the fund in 2013. “As a fund manager we are trying to mitigate as much as possible the 2 main risks, which are liquidity and corporate governance risks. The fund therefore invests in a diversified portfolio of 86 attractively valued companies to carefully control concentration risk. This approach allows the fund to sell, or buy, positions without having a significant market impact. Also, should there be for example, a balance sheet fraud in one of our holdings, the impact on the overall fund is quite limited, given our broad diversification.”

The fund fact sheet, which is available on their website, details very impressive YTD returns for 2013, 2014, 2015, as well as 14.78% for 2016. But this investment may not be for the faint of heart. The fund management fee is in line with that of an actively managed fund at 1.8%; however, they also charge a performance fee of 12.5% and the initial deposit minimum is $10,000.

There are some restrictions mainly to do with redemptions, and investors should read the literature carefully before deciding to invest. But in my opinion, if an investor would like exposure to the Vietnamese economy beyond the usual venues, then the AFC Vietnam Fund may provide an exciting and lucrative investment.

Peter Kohli, CEO of emerging market specialist DMS Funds.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Frontera

Billion Dollar Scandal In Malaysia Casts Shadow Over Country

Originally it was an investment fund started with good intent, but as is often the case, when there are bad actors lurking just below the dollar bills, intent is replaced by theft. And so it is with Malaysian state fund 1MDB. At the outset, the fund was set up to help the Southeast Asian nation’s economic development, with a business model built on raising debt from across the world to acquire assets. On the fund’s webpage the mission statement is very clear, “to drive sustainable economic development by forging strategic global partnerships and promoting FDI.” Nowhere on the page is there any mention about purchasing high-end real-estate and hotels in New York, London, and Los Angeles, or for that matter artwork of Van Gogh or Claude Monet, or a 35 million dollar jet, but that’s exactly what has happened, among other things.

Recently, the opposition party has accused the current Prime Minister Mr. Najib Razak of raiding the fund for his own personal gain. Something he has denied doing. Interestingly though, in a civil forfeiture suit brought by the US Department of Justice on 20 July 2016 seeking the return of one billion dollars in assets acquired by misappropriated money, it mentions a person cryptically named as “Malaysian Official 1.” Through what appears to be an elaborate scheme of laundering money through offshore companies, $681 million mysteriously appeared in the prime minister’s personal bank account. He first insisted it was a donation from the Saudi Royal Family, though there is of course a question about that. What is very clear is that Malaysia, which was recently knocking on the door of developed market status, has just taken a huge step backwards. An article in the 15 April, 2016 edition of details the transactions in full.

So besides the country and its political system walking around with a black eye, it appears that certain investment banks and at least one international accounting firm is also involved in aspects of the transactions, and the cover-up. According to an article on Malaysiakini, accounting firm KPMG refused to sign off on 1MDB’s financial statements in 2013 because they were unable to authenticate a $2 billion investment in what they called “a dodgy investment fund parked in the Caymans.” Shortly after this, KPMG resigned as the company’s external auditors, and was replaced by Deloitte Malaysia where Najib’s first son – Nizar – is a partner.

In addition to the US, Malaysia also has seven other countries investigating the fund’s activities, so we haven’t seen the end of this yet. By the time it is resolved, the country will have to dig itself out of a hole of substantial proportions.

Malaysia has a lot going for it economically from natural resources, to being a global manufacturing hub. Recently GDP growth has begun to trend downwards from a high of 6.5% year-on-year in January 2014, down to 4.2% the first six months of 2016 mainly due to a significant decrease in investment and exports. According to the UNCTAD 2015 World Investment Report, Malaysia is the fifth largest recipient of FDI inflows in the world, and is one of the top 15 countries favored by multinational companies according to

So it would behoove the political powers to resolve the 1MDB situation that stinks to high heaven, before it metastasizes and in the process scares away any and all future foreign investments.

Peter Kohli, CEO of emerging market specialist DMS Funds.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Frontera

Mongolian Election Shocks, New Government Looks To Reverse Fortunes

It was an old fashioned blowout. Not even close. The Mongolian election shocked everyone, from pundits who have more degrees than a thermometer to mere mortals like me. No one predicted such a lopsided result. Indications leading right up to the eve of the election were that it was too close to call. But when the votes were counted, the Mongolian People’s Party (MPP) won a super majority in parliament by taking 65 seats out of 76. Of course, this has been taken, maybe a little unfairly, as a massive repudiation of the current Democratic Party and its leader, Prime Minister Chimediin Saikhanbileg, who was further humiliated by losing his own seat.

The Democratic Party made some major errors that cost them dearly in the realm of FDI. One was taking aim at Rio Tinto, the Anglo American mining company, with regards to the Oyu Tolgoi (OT) mine. OT being one of the world’s largest known copper/gold deposits, news of the government’s action traveled quickly, spooking foreign investors well beyond the commodities sector. The flow of foreign capital soon, all but dried up.

But when Saikhanbileg came to power as Prime Minister, he realized the errors that had been made and set about correcting them. He made a high profile visit to the U.S. where he met not only with politicians in Washington, but also with the investment banking community in New York. Soon thereafter, Indian Prime Minister Narendra Modi made a high profile visit to Ulaanbaatar, pledging $1 billion for infrastructure projects.

A persistent criticism towards Mongolia has been that it is very reliant on China for exports, and attention should be pivoted towards opening new markets, so that they can give themselves some immunity against that risk. An all too familiar story of a commodity exporting nation suffering due to a downturn in the global economy.

However, as a result of the inroads Saikhanbileg has made, FDI has picked up and GDP growth rose in the first quarter of 2016. As a result, many assumed that the ruling party would be given the benefit of the doubt and be reelected. However, it appears that too much damage was done to the psyche of the Mongolian electorate, and whatever changes were made were too little too late.

So the question is, will the new government make a difference? Well, it depends if the incoming government reverts to its center-left ideology. If it does, then I recommend investors stay clear. Only time will tell. Either way rebuilding state finances and reviving an economy so heavily reliant upon mining of coal, copper, and gold will not happen overnight.

Peter Kohli, CEO of emerging market specialist DMS Funds.

Investing In India: Who Should Replace Raghuram Rajan?

In line with other global currencies, the Indian Rupee (INR) rose against the U.S. dollar after a third day in a row of slides, due mostly to Raghuram Rajan’s exit but also because of the uncertainty surrounding Brexit. For today the Indian markets have stabilized, though I am sure that the uncertainty will add volatility until Rajan’s replacement has been selected.

In the meantime, the Indian economy is firing on all cylinders. Ken Rapoza of Forbes magazine, with whom I had lunch with last week, has recently returned from India and is duly impressed by the excitement in the air. Indians are now purpose-driven; a bright future awaits them and that future is available in India.

Political hurdles remain, but as time passes, the Congress Party is losing its relevance and being swept into the gutter with the rest of India’s rubbish. BJP hopes for a clean sweep in the latest state elections did not materialize, but unaffiliated local parties have won and are willing to work with the government for the good of the country.

In West Bengal, that powerhouse known as Mamata Banerjee said, “I am politically opposed to the BJP government. But it doesn’t mean I would block the passage for the pro-people bill. Why some parties are unnecessarily being politically vindictive and blocking the bill?”

A very good question. Unfortunately, the one economic policy that would benefit India greatly, the GST, has been blocked by the obstructionist Congress Party in the Rajya Sabha, but new alliances can overcome that. Prime Minister Narendra Modi still remains very popular and an article from CNBC titled “Citizens mostly satisfied with govt’s 2-yr performance: N18 poll” details the findings of an exhaustive recent poll. To me, the most overwhelming number was that 90% of those polled believe that India’s stature has grown internationally. 68% believe that Modi will deliver on the rest of his election promises before 2019.

With those sorts of tailwinds, there is no doubt that Modi will be reelected for another five-year term. The architect of the 2014 victory, Amit Shah, has said that the results of the 2019 election will dwarf the prior one. This has to be a source of confidence for the foreign investor. The long term prospects of an Indian economic powerhouse are still intact regardless of what some in the West may say, or hope for.

As reported by the Economic Times, brokerage houses such as Credit Suisse, Merrill Lynch, and Nomura have informed their clients that the overall India story remains intact. Yes, there will be volatility in the Indian equity and debt markets in the short term, but this can be truncated by Modi naming Rajan’s successor very quickly.

If you remember, I had asked my friend Dr. Rabikar Chatterjee who he would nominate if the decision was his. His choice? Gita Gopinath, a professor of economics at Harvard University. And after a quick look at her resume, I totally agree.

Dr. Gopinath is young, dynamic, very well educated, and very intelligent. She would be immune from the vitriol of Subramanian Swamy because she teaches at his alma mater, so she has to be considered Indian. Among her most important qualifications is being on the economic advisory panel for the Federal Reserve Bank of New York. But what nailed it for me was this glowing article in the Harvard Gazette written by Corydon Ireland. So, Mr. Modi if you’re reading, Gita Gopinath is, in my opinion, just the sort of person that India needs right now.

Now on to the sectors and stock picks that I believe will benefit from the government’s recent changes in FDI policy. The five sectors I am going to be looking at are consumer products, banking and finance, infrastructure, transportation, and pharmaceuticals. One other sector that is of great interest to me, and one that I believe will be a major driver of the Indian economy, is Fintech. But I will leave that to another day, because it deserves an article all to itself. ITC Ltd. (ITC), which is part of a larger conglomerate, has a diversified presence in India with products ranging from cigarettes to hotels and is my choice in the consumer products sector.

Banking and finance has a lot to choose from, but I will limit my choices to the private banks and not venture into the public sector banks as they have inherently held back the sector index due to their mismanagement and corruption. My choices are Kotak Bank (KMB), an exceptionally well run company and a bank with an aggressive growth plan including the U.S.; Axis Bank (AXSB), another well run bank; and YES Bank (YES), which has experienced explosive growth over the past few years. I have not included some of the old warhorses such as ICICI and HDFC here, as they have been given extensive exposure over the years.

In the infrastructure sector, the only company that I can justly invest in is the oldie but goodie Larsen Tubro (LT).

In the transportation sector, my choice is a company that was started by a Malaysian entrepreneur of Indian origin, Tony Fernandes. Since its inception in 2006, this company has expanded dramatically across 22 Asian nations. The reason I include them in an article about India is that since FDI limits were raised earlier, the company has partnered with Tata to launch Air Asia India to provide low cost air travel across the country. Look for other carriers to follow suit. Air Asia (AIRA), traded on the Malaysian Stock Exchange, has an equally inspiring YTD return of 106%.

Now let’s move on to the sector that will experience explosive growth now that FDI limits have been raised to 100%: pharmaceuticals. Aurobindo (ARBP) the maker of simvastatin, Dr. Reddy’s Labs (DRRD), Sun Pharmaceuticals (SUNP), Biocon (BIOS), and Cadila Healthcare (CDH) are companies that in my opinion will be able to take advantage of the new FDI rules.

As things begin to unfold in the relaxation of the FDI rules, I may be able to point to other such investment opportunities. So, with Modi at the helm, the possibility of an economist like Gopinath as Central Banker, and the relaxation of FDI restrictions, India has a chance to be the brightest star in a universe cluttered with other stars.

In an upcoming article I will discuss how I am taking advantage of the new rules which will benefit from the world of Fintech. Until then, treat yourself well.


The Politician Who Forced Out India’s Central Bank Chief, And Life After ‘The Rajan Effect’

I for one was disappointed that Raghuram Rajan decided not to seek a second term as the central banker for India. I believe that he has brought a lot of credibility to the monetary system and has been well respected for his views and policies. India’s FDI increased dramatically during his term and he will surely be missed. I have just one thing to add to this topic, before I move on to other more positive subjects.

There are always people who are not completely attuned to certain policies and have disagreements with how they may be implemented and in those cases their voices need to be heard. Indeed, that should be encouraged, but limited to policy. When a member of parliament resorts to name-calling, not only does he lower himself in stature with investors, he also does a great disservice to the institution he apparently represents.

The person in this case is Subramanian Swamy, who I am told is extremely peeved that he wasn’t named the Reserve Bank Chairman or for that matter the Finance Secretary, and because of that he carries out a campaign against both individuals. His accusations are pathetic and without merit, accusing Rajan of an “apparently deliberate attempt to wreck the Indian economy” and then added a personal invective stating that Rajan was “mentally not fully Indian.”

What the heck does that mean? And who put him in charge of deciding who’s Indian and who’s not? The problem with such pronouncements is that even coming from a man like this, it jars the markets which are already jittery. Prior to his remarks foreign investors purchased $22.8 million; however, after his outburst they sold Indian debt amounting to $1.1 billion. So who’s trying to destroy the Indian economy now? Should we ignore him or is there something bigger happening that doesn’t bode well for foreign investors?

Rajan’s achievements in three years have been remarkable and long-lasting. Three years ago I wrote an article and coined the term “the Rajan effect” for which I was soundly chastised by those who felt I knew nothing. But there is definitely a Rajan effect. With him at the controls, markets were calmed, the Rupee stabilized, and most importantly, India was heralded as the country to invest in.

On the domestic front, he tackled the age old nemesis of institutional corruption, where politicians used the public sector banks as their own private funds to lend to their corporate cronies and then write off the debts. One look at the current account deficit, which in the latest quarter stands at 0.1% of GDP, should be enough to seal his legacy.

I remember being in India in 2014 when Narendra Modi was elected as Prime Minister in a landslide, and I knew then that with those two at the helm, there was no other way for India to go but up. Now, with one of the main architects of the economic resurgence leaving, the government has decided to spring into action as fast as possible to avoid any fallout from Rajan’s departure.

Modi in his own aggressive manner stepped in and announced a series of liberalizations aimed at the foreign investor. I have read them and I approve. But I am also waiting with bated breath to see who will step into Rajan’s rather outsized shoes. There are a number of qualified applicants, as Ken Rapoza of Forbes magazine lays out in his article titled, “Who Is On The Short List To Replace India’s Central Banker Rajan?” I do have my favorite, but that’s for another article.

One man I know won’t get the job is Swamy.

By the way, I would love to see his rationale for saying that Rajan is “not mentally Indian.” After all, Swamy himself was educated at Harvard! Tune in tomorrow when I will address the changes in the FDI rules and stocks that stand to benefit.

In Vietnam, The Tax-Man Cometh

New foreign direct investment (FDI) pledges into Vietnam grew by nearly 25% in the first 10 months of 2015, to US$ 12.4 billion. Any nation would be quite pleased with that growth, but this is hyper-ambitious Vietnam – who have previously set a goal of 40% growth in FDI this year. They will need to ratchet things up a notch if they are to meet their target by year end.

Why the particularly aggressive drive for foreign investment? FDI is the solution for two critical points that authorities are keeping a watchful eye on – tax dollars, and foreign currency reserves. Vietnam’s trade deficit through the end of October 2015 hit US$4.1 billion, which means FDI is relied upon as one of the primary sources for foreign exchange. On the tax front, 460 of the country’s top 1,000 taxpayers were foreign-owned. And that number is highly concentrated – over 60 percent of the US$ 3.6 billion in tax payments came from the top 10, which includes Honda, Samsung Electronics, and Unilever. After some recent scrutiny by local tax officers, even Coca Cola has suddenly started claiming profits after two decades of annual ‘losses’ since it began operating there in 1994.

One aspect of Vietnam’s FDI outreach initiative requiring slightly less effort is attracting investors for public projects. The Chinese government, UK government, and many other multinationals have been beating down Vietnam’s door over the past month. They are vying for large tenders soon to be awarded for projects in power, infrastructure and high technology.