FDI n FII final

8/8/2019 FDI n FII final

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INTRODUCTION:

The FDI and FII is the process by which the resident of one country ( the source country)

acquire the ownership of assets for the purpose of controlling the production, distribution

and other productive activities of a firm in another country( the host country).

According to the international monetary fund(IMF), FDI and FII is defined as an

investment that made to acquire a lasting interest in an enterprise operating in an

economy other than that of investor.

The effect of foreign investment varies from country to country. It can affect the factor

productivity of the recipient country and can also affect the balance of payments. Foreign

investments provides a channel through which countries can gain access to foreign

capital. It can come in two forms: FDI and FII. Foreign direct investment involves in

direct production activities and is also of a medium to long term nature. But foreign

institutional investment is a short term investment, mostly in the financial markets. FII

given its short term nature, can have bidirectional causation with returns of other

domestic financial markets such as money markets, stock markets and foreign exchange

markets.

Hence, understanding the determinants of FII is very important for any emerging

economy as FIIs exert larger impact on domestic financial markets in the short run and a

real impact in long run. India being a capital scarce country has taken many measures to

attract foreign investment since beginning of reforms in 1991. India is the second largest

country in the world, with a population of over 1 billion people. As a developing country,

Indian economy is characterised by wage rates that are significantly lower than those in

most developed countries. These two traits combine to make India a natural destination

for FDI and FII. Until recently, India has attracted only a small share of global FDI and

FII primarily due to government restrictions on foreign involvement in the economy. But

beginning in 1991 and accelerating rapidly since 2000, India has attracted only a small

share of global FDI and FII primarily due to government restrictions on foreign


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involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000,

India has liberalised its investment regulations and actively encouraged new foreign

investment, a sharp reversal from decades of discouraging economic integration with the

global economy.

India has been ranked at the third place in global foreign direct investments in 2009 and

will continue to remain among the top five attractive destinations for international

investors during 2010-11, according to United Nations Conference on Trade and

Development (UNCTAD) in a report on world investment prospects titled, 'World

Investment Prospects Survey 2009-2011' released in July 2009.

FOREIGN DIRECT INVESTMENT(FDI):

Foreign direct investment is an investment made by a foreign individual or company in

productive capacity of another country. It is the movement of capital across national

frontiers in a way that grants the investor control over the acquired asset.

As the third-largest economy in the world in PPP terms, India is a preferred destination

for foreign direct investments (FDI). India's recently liberalized FDI policy permits up to

a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced

industrial licensing requirements, removed restrictions on expansion and facilitated easy

access to foreign technology and FDI. The upward moving growth curve of the real-

estate sector owes some credit to a booming economy and liberalized FDI regime. A

number of changes were approved on the FDI policy to remove the cap in most of the

sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction

development, industrial parks, commodity exchanges, petroleum and natural gas, credit-

information services, Mining etc. The future of Indian economy is brighter because of its

huge human resources, rapidly upcoming service sector, availability of large number of

competent professionals, vast market for every product, increasing impact of


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consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India

and existence of four hundred million middle class people. Today, India provides highest

returns on FDI than any other country in the world.

TYPES OF FDI

There are two types of FDI

Greenfield investment: It is the direct investment in new facilities or the

expansion of existing facilities. It is the principal mode of investing in developing

countries like India. Mergers and Acquisition: It occurs when a transfer of existing assets from local

firms takes place.

Forbidden Territories:

FDI is not permitted in the following industrial sectors:

* Arms and ammunition.

* Atomic Energy.* Railway Transport.* Coal and lignite.* Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

INVESTMENT IN INDIA

Government of India accepts the key role of Foreign Direct Investment (FDI) in

economic development not only as an addition to domestic capital but also as an

important source of technology and global best practices. The Government of India has

put in place a liberal and Transparent FDI policy.

FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI

policy in India is reckoned to be among the most liberal in emerging economies. FDI


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Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in

most of the sectors including the services sector under automatic route. FDI in

sectors/activities under automatic route does not require any prior approval either by the

Government or the RBI.

BENEFITS TO HOST COUNTRY

Resource-transfer effects

Employment effects

Effects on competition & economic growth

BENEFITS TO HOME COUNTRY

Inward flow of foreign earnings

Employment benefits

The reverse resource-transfer effect

STEPS TO ATTRACT FDI

Better Investment Climate

Create a result-oriented bureaucracy

Market India

Target services

Accelerate privatization efforts


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EVOLUTION OF FDI

FDI INFLOWS

0

10

20

30

3.25 5.54

15.585

24.575 27.329

India


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SECTOR-WISE FDI CONTRIBUTION

23%

10%8%

7%

6%

4%

4%3%

3%2%Service

Compu

Teleco

Real Es

ConstrAutom

Power

Benefits of Foreign Direct Investment

Attracting foreign direct investment has become an integral part of the economic

development strategies for India. FDI ensures a huge amount of domestic capital,

production level, and employment opportunities in the developing countries, which is a

major step towards the economic growth of the country. FDI has been a booming factor

that has bolstered the economic life of India, but on the other hand it is also being blamed

for ousting domestic inflows. FDI is also claimed to have lowered few regulatory

standards in terms of investment patterns. The effects of FDI are by and largetransformative. The incorporation of a range of well-composed and relevant policies will

boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest

advantages of FDI enjoyed by India have been listed as under:


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Economic growth- This is one of the major sectors, which is enormously benefited from

foreign direct investment. A remarkable inflow of FDI in various industrial units in India

has boosted the economic life of country

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the

trading of goods and services in India both in terms of import and export production.

Products of superior quality are manufactured by various industries in India due to

greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment

opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing

of knowledge from India especially in the Information Technology sector. It helps in

developing the know-how process in India in terms of enhancing the technological

advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a

position in the Indian market through Joint Ventures and collaboration concerns. The

maximum amount of the profits gained by the foreign firms through these joint ventures

is spent on the Indian market.

Foreign Institutional Investors in India


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Foreign institutional investors (FIIs) poured inflows heavily to bet on the India growth

story. As per data released by the Securities and Exchange board of India (SEBI), FIIs

invested US$ 2055.74 million in equities between July 1 and July 21, 2010, and US$

1566.98 million in debt between the same periods. Data sourced from SEBI shows thatthe number of registered FIIs stood at 1713 and number of registered sub-accounts rose

to 5,426 as of June 30, 2010. Moreover, India accounted for more than one-fifth of the

US$ 22.1 billion private equity (PE) investments received by the emerging markets

across the globe in 2009, according to a report by Emerging Markets Private Equity

Association (EMPEA). In 2009, emerging markets accounted for about 26 per cent of

global PE investment. In addition, the report added that global PE investment in

emerging markets totaled US$ 22.1 billion with a total of 674 deals in 2009.

Furthermore, Asia captured 63 per cent of total emerging market PE investments in terms

of value in 2009, with India capturing US$ 4 billion, according to the report.

According to advisory firm Grant Thornton, 439 corporate merger & acquisitions

(M&As) and PE transactions have been announced during January-May 2010 compared

to 179 during the same period in 2009. The total deal value during January-May 2010

topped the US$ 30 billion mark, as compared to US$ 8.1 billion recorded in January-May2009. May 2010 alone witnessed 59 deals worth US$ 8.33 billion against 35 deals valued

at US$ 1.85 billion in 2009. Out of this, 44 were M&As and the remaining 15 were PE

transactions. Some of the key sectors that attracted significant investor interest in the

M&A space were pharma and healthcare, banking and finance, mining, fast moving

consumer goods (FMCG) and information technology (IT)/ information technology

enabled services (ITeS), while PE firms struck deals in cement, education and real estate

sectors, among others.

According to 'India PE Report 2010', released by global consultancy Bain & Company,

PE and venture capital (VC) investments are projected to reach US$ 17 billion (around

Rs 80,000 crore) in 2010. The report includes a survey conducted across over 75 leading


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PE investors globally. The survey revealed that the number of respondents planning to

invest in the range of US$ 200-500 million in the next two years has risen four-fold to 27

per cent in 2010.

The Securities and Exchange Board of India (SEBI), in January 2010, allowed equity

investors to lend and borrow shares for 12 months compared with the current limit of one

month. The new norms will also allow a lender or a borrower to close his position before

the agreed-upon expiry date. The Reserve Bank of India (RBI) has ruled that foreign VC

funds will have to provide their financial statements for regulatory approval to invest in

India. According to a SEBI circular dated June 29, 2010, FIIs will now have to disclose

information on Indian securities lent by them to overseas entities (for the purpose of short

selling) on a weekly rather than a daily basis.

Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management

company, nominee company, bank, institutional portfolio manager, university funds,

endowments, foundations, charitable trusts, charitable societies, a trustee or power of

attorney holder incorporated or established outside India proposing to make proprietary

investments or with no single investor holding more than 10 per cent of the shares or

units of the fund.

ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf

the FII invests. The following entities are eligible to be registered as sub-accounts, viz.

partnership firms, private company, public company, pension fund, investment trust, and

individuals.

FIIs registered with SEBI fall under the following categories:


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a) Regular FIIs- those who are required to invest not less than 70 % of their investment in

equity-related instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

Registration Procedure

Documents Needed

Form A

Certified copy of clauses of MOA & AOA

Audited Financial Statement & Annual Report for last year

Registration Fee: US$ 10,000

Validity : 3 yrs


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Renewal Fee: US$ 10,000

Prohibitions on Investments:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.They are also not allowed to invest in any company which is engaged or proposes to

engage in the following activities:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) Real estate business or construction of farm houses (real estate business does not

include development of townships, construction of residential/commercial premises,

roads or bridges).

5) Trading in Transferable Development Rights (TDRs).

Impact on Indian economy

Better side

Reduced cost of equity capital

FII inflows augment the sources of funds in the Indian capital markets. In a

commonsense way, the impact of FIIs upon the cost of equity capital may be visualized

by asking what stock prices would be if there were no FIIs operating in India. FII

investment reduces the required rate of return for equity, enhances stock prices, and

fosters investment by Indian firms in the country.


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Imparting stability to Indias Balance of Payments

For promoting growth in a developing country such as India, there is need to augment

domestic investment, over and beyond domestic saving, through capital flows. The

excess of domestic investment over domestic savings result in a current account deficit

and this deficit is financed by capital flows in the balance of payments. Prior to 1991,

debt flows and official development assistance dominated these capital flows. This

mechanism of funding the current account deficit is widely believed to have played a role

in the emergence of balance of payments difficulties in 1981 and 1991. Portfolio flows in

the equity markets, and FDI, as opposed to debt-creating flows, are important as safer

and more sustainable mechanisms for funding the current account deficit.

Knowledge flows

The activities of international institutional investors help strengthen Indian finance. FIIs

advocate modern ideas in market design, promote innovation, development of

sophisticated products such as financial derivatives, enhance competition in financial

intermediation, and lead to spillovers of human capital by exposing Indian participants to

modern financial techniques, and international best practices and systems.

Strengthening corporate governance

Domestic institutional and individual investors, used as they are to the ongoing practices

of Indian corporates, often accept such practices, even when these do not measure up to

the international benchmarks of best practices. FIIs, with their vast experience with

modern corporate governance practices, are less tolerant of malpractice by corporate

managers and owners (dominant shareholder). FII participation in domestic capital

markets often lead to vigorous advocacy of sound corporate governance practices,

improved efficiency and better shareholder value.


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Improvements to market efficiency

A significant presence of FIIs in India can improve market efficiency through two

channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles

many domestic investors, it may be easier for a globally diversified portfolio manager to

be more dispassionate about Indias prospects, and engage in stabilizing trades. Second,

at the level of individual stocks and industries, FIIs may act as a channel through which

knowledge and ideas about valuation of a firm or an industry can more rapidly propagate

into India. For example, foreign investors were rapidly able to assess the potential of

firms like Infosys, which are primarily export-oriented, applying valuation principles that

prevailed outside India for software services companies.

Capital formation in domestic market:

If there is much FII inflow in the country will not borrow from other country or from

international bank. If home countrys saving rate are not sufficient to meet its investment

programmed but if FII inflow is well there is no problem. India is developing country and

its domestic saving is low compared to developed countries. So here is need for FII

inflow.

Ill Effects

A downfall of the market too can also be fueled by these FIIs. When they take out

some of their invested money. Though there is a lot of value in this market and

fundamentally there is a lot of upside in it. For long-term value investors, theres

little because for worry but short term traders are adversely getting affected by the

role of FIIs are playing at the present.

The large build-up of foreign exchange reserves through FII inflows poses a

potential threat of destabilization of the economy. Portfolio flows are most often

referred to as hot money that can be notoriously volatile when compared to


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other forms of capital flows. The Mexican crisis and the East Asian crisis are

classic examples of the damage that sudden outflows of portfolio money can do to

an economy.

There are likely to be repercussions on the growth momentum of the Indianeconomy if FII inflows significantly slow down.

It needs to be noted that outflows of FII capital from the market could adversely

impact the value of the Indian currency, as FII inflows form the most significant

part of foreign inflows into the economy. Indeed, the recent soft trends in FII

inflows in May had led the Indian currency to depreciate against the US dollar.

FII and exports: If our Indian currency appreciates just because of FII (net inflow

in India) there is adverse effect on our export. Our export industry will become

uncompetitive due to appreciation of rupees.

FII and inflation: The huge amount of FII fund flow creates the huge demand for

Indian rupees. In that situation RBI print more money in the market. This situation

could lead to excess liquidity thereby leading to inflation, where too much money

chase too few goods and service (perfect example of demand pull inflation). Thus

there should be a limit to the FII inflow in the country.


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CONCLUSION

It is generally said that future is always uncertain. This saying is correct to some extent.

But at the same time it is also said that exceptions are always there. This exception is

about India's certain higher rate of growth in the coming future. The future of Indian

economy is brighter because of its huge human resources, rapidly upcoming service

sector, availability of large number of competent professionals, vast market for every

product, increasing impact of consumerism, absence of controls and licenses, interest of

foreign entrepreneurs in India and existence of four hundred million middle class people.

Even today, India is producing largest number of billionaires in a year, take over by

Indian multinationals is amazing, the craze of Indians to go abroad is rapidly

diminishing, the Rupee is becoming stronger and stronger in relation to Dollar. India's

say in the international diplomacy and political affairs has now become meaningful,

thousands of foreigners are working as executives in India, packages are becoming

lucrative and competitive and annual rate of growth is highest after China. This present

picture gives some reflections of the future. But this is all in the absolute sense and not in

the relative terms. A country can only grow if the Govt. policies allow more

participation and is able to attract more and more foreign direct investment in India.

Today, India provides highest returns on FDI and FII than any other country in the world.

India is poised for further growth in manufacturing, infrastructure, automobiles, auto

components, food processing sectors, real estate development etc. In this context it is also

worth mentioning that savings rate has also increased from 23% to 31% over the last year

to this year. India's continuing ambivalence on FDI and FII, as a result, exacts a heavy

toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI and FII to its

neighbors each year.