Professional Documents
Culture Documents
Foreign Institutional Investments PDF
Foreign Institutional Investments PDF
1. OBJECTIVES:
The basic objective is to know the Foreign Institutional Investments in
detail.
To put forth the role played by Foreign Institutional Investments in
sensex.
2. METHODOLOGY:
Secondary data sources and literature review.
Various books and articles from magazines and newspapers have been
referred.
3. LIMITATIONS:
The project limits itself into the India regarding the Foreign Institutional
Investments.
EXECUTIVE SUMMARY
Foreign Investment refers to investments made by residents of a country in financial
assets and production process of another country. It can affect the factor productivity of
the recipient country and can also affect the balance of payments. In developing countries
there was a great need of foreign capital, not only to increase their productivity of labor
but also helps to build the foreign exchange reserves to meet the trade deficit.
It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI).Foreign direct investment involves in the direct production activity and
also of medium to long-term nature. But the foreign portfolio investment is a short-term
investment mostly in the financial markets and it consists of Foreign Institutional
Investment (FII).
India, being a capital scarce country, has taken lot of measures to attract foreign
investment since the beginning of reforms in 1991. Till the end of January 2003 it could
attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions
is in the form of FPI. FII consists of around US$ 12 billions in the total foreign
investments. This shows the importance of FII in the overall foreign investment
programme.
India opened its stock markets to foreign investors in September 1992 and has,
since 1993, received considerable amount of portfolio investment from foreigners in the
form of Foreign Institutional Investments(FII) in equities. In order to trade in Indian
equity markets, foreign corporations need to register with the SEBI as Foreign
Institutional Investors (FII).
The FIIs registered with SEBI come from as many as 28 countries (including money
management companies operating in India on behalf of foreign investors). It is, however,
instructive to bear in mind that these national affiliations do not necessarily mean that the
actual investor funds come from these particular countries. Given the significant financial
flows among the industrial countries, national affiliations are very rough indicators of the
home of the FII investments. In particular institutions operating from Luxembourg,
Cayman Islands or Channel Islands or even those based at Singapore or Hong Kong are
likely to be investing funds largely on behalf of residents in other countries. Nevertheless,
the regional breakdown of the FIIs does provide an idea of the relative importance of
different regions of the world in the FII flows.
INDEX
Serial
Topic
Page no.
no.
1
Introduction
10
11
Legal aspects
13
15
16
10
Benefits of FII
19
11
20
12
25
13
29
14
31
15
37
16
44
17
SWOT Analysis
46
18
Conclusion
52
19
Recommendations
54
20
Annexure
Introduction
We have heard people saying that the world is going global and India is also moving
towards prosperity but what does it actual means and who are the persons behind this
scenario, which should be known. Among them the persons who are responsible or we can
say who have contributed towards this scenario are the Foreign Institutional Investors.
The world is increasingly becoming interdependent. Today the needs of the customer have
increased and they want goods from all over the world. We can see variety of products
moving across the world and the world trade increased by 120%.
The developing countries are looking forward to steady flow of capital and are undergoing
the learning process of how to absorb them. As regard the attendant risks, the central bank
of the countries have to tackle them. There are many ways the inflow can come into the
country. Debt is a form of capital forms which are raised from banks or from the markets.
The non-debt creating flows includes Foreign Direct Investment or Portfolio
Investments.
Foreign investment has clearly been a major factor in stimulating economic growth and
development in recent times.
India and the Indians have undergone a paradigm shift. There have been fundamental and
irreversible changes in the economy, government policies, outlook of business and
industry, and in the mindset of the Indians in general. From a shortage economy of food
and Foreign Exchange, India has now become a surplus one.
From an agro based economy it has emerged as a service oriented one. From the lowgrowth of the past, the economy has become a high growth one in the long term. After
having been an aid recipient, India is now joining the aid givers club.
Although India was late in modernization of industry in general in the past, it is now a
front-runner in the emerging knowledge based new economy.
The government is continuing its reform and liberalization not out of compulsion but out of
conviction. Indian companies are no longer afraid of multinational corporations.
They have become globally competitive and some of they have started becoming am
MNCS themselves. Fatalism and contentment of the Indian mind set have given way to
optimism and ambition. The Indian culture which looks down upon wealth as a sin and
believed in the simple living and high thinking has started recognizing prosperity and
success as acceptable and necessary goals.
So today we are having new variety of products entering the market everyday. You order
it and you have it in few days/weeks from small things to the cars like Rolls Royce or
Ferrari.
1. Incorporated entity:
Joint venture; or
Foreign equity into such Indian companies can be up to 100% depending on the
requirements of the investor, subject to the equity caps in respect of the area of activity
under the foreign direct investment policy.
Unincorporated entity
Project office
Branch office
Such offices can undertake activities permitted under the Foreign Exchange Management
(establishment in India of branch or office of other place of business) Regulations, 2000.
2. Incorporation of company:
For registration and incorporation, an application has to be filed with the registrar of
companies (ROC). Once a company has been duly registered and incorporated as an Indian
company, it is subject to Indian laws and regulations as applicable to other domestic Indian
companies.
The role of liaison office is limited to collecting information about possible market
opportunities and providing information about the company and its products to prospective
Indian customers. It can promote export/ import from/ to India and also facilitate technical/
financial collaboration between parent companies and company in India. Liaison office
cannot take any commercial activity directly and indirectly and cannot, therefore, earn any
income in India. Approval for establishing a liaison office in India is granted by Reserve
Bank of India.
4. Project office:
Foreign companies planning to execute specific projects in India can set up temporary
project/ site offices in India. RBI has now granted general permission to foreign entities to
establish project offices subject to specified conditions. Such offices cannot undertake or
carry on any activity other than the activity relating and incidental to execution of the
project. Project offices may remit outside India the surplus of the project on its completion,
general permission for which has been granted by the RBI.
5. Branch office:
Foreign companies engaged in manufacturing and trading activities abroad are allowed to
set up branch offices in India for the following purposes:
A branch office is not allowed to carry out manufacturing activities on its own but is
permitted to subcontract these to an Indian manufacturer.
Branch offices established with approval of RBI, may remit outside, profit of the branch,
net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up of
branch officers is granted by the Reserve Bank of India (RBI).
Such branch offices would be isolated and restricted to the special economic zone (SEZ)
Alone and no business activity/ transaction will be allowed outside the SEZs in India,
which include branches/ subsidiaries of its parent offices in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs
to undertake manufacturing and service activities subject to specified conditions.
A non-resident Indian or a person of India origin resident outside India may invest by
way of contribution to the capital of a firm or a proprietary concern in India on nonrepatriation basis provided:-
II) The firm or propriety concern is not engaged in ant agricultural/ plantation or
real estate business i.e. dealing in land and immovable property with a view to earning
profit or earning income there from.
III)Amount invested shall not be eligible for repatriation outside India NRIs/ PIO
may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with
the approval of government/ RBI.
No person resident outside India other than NRIs/ PIO shall make any investment by way
of contribution to the capital of a firm or a proprietorship concern or any associations of
persons in India. The RBI may, on an application made on it, permit a person resident
outside India to make such investment subject to such terms and conditions as may be
considered necessary.
1. Automatic approval:
Automatic approval up to a specified limit is allowed in 34 specified high priority, capital
intensive and high technology industries. Foreign investment has been allowed in
exploration, production and refining of oil and marketing of gases.
Foreign companies have been allowed to use their trade marks on domestic sales from 14
may 1992.
5. Disinvestment on equity:
Disinvestment on equity by foreign investors has been allowed at market rates on stock
exchanges from 15 September 1992 with permission to repatriate the proceeds of such
Disinvestment.
10
It is one of the largest economies in the world, fourth largest economies in terms of
purchasing power parity.
2.
Strategic location- access to the vast domestic and south Asian market.
3.
Large and rapidly growing consumer markets up to 300 million people constitute the
market for branded consumer goods- estimated to be growing at 8% per annum.
4.
5.
6.
One of the largest manufacturing sectors in the world, spanning almost all areas of
manufacturing activities.
7.
One of the largest pools of scientists, engineers, technicians and managers in the
world.
8.
9.
10. Well developed R&D infrastructure and technical and marketing services.
11
15. Complete exemption from customs duty on industrial inputs and corporate tax
Holiday for five years for 100% export oriented units and Export Processing
Zones.
A corporation must also decide where in India to set up. India has 28 unique states, each
with their own problems and benefits.
The most popular hubs for investment in India are Mumbai, Maharashtra, Bangalore,
Karnataka and New Delhi. Thus benefits make India a competitor for foreign investment.
12
Legal aspects
The eligibility criteria to be fulfilled by the applicant seeking FII
registration:
As per regulation 6 of SEBI (Foreign Intuitional Investors) regulations, 1995, Foreign
Intuitional Investors are required to fulfill the following conditions to qualify for the grant
of registration:
1. Applicant should have track record, professional competence, financial soundness,
experience, general reputation of fairness and integrity.
2. The applicant should be regulated by an appropriate foreign regulatory authority in the
same capacity/ category where registration is sought from SEBI. Registration with
authorities, which are responsible for incorporation, is not adequate to qualify as Foreign
Intuitional Investors.
3. The applicant is required to have permission under the provisions of the Foreign
Exchange Management act, 1999 from Reserve Bank of India.
4. Applicant must be legally permitted to invest in securities outside the country or its
incorporation/ establishment.
5. The applicant must be a fit and proper person.
6. The applicant has to appoint a local custodian and enter into an agreement with the
custodian. Besides it also has to appoint a designated bank to route its transactions.
7. Payment of registration fee of US $5000.00.
SEBI would generally communicate the eligibility for grant of registration as Foreign
Intuitional Investor, within 10-12 days of receipt of complete application with relevant
enclosures.
13
2. Certified copy of the relevant clauses or articles of the memorandum and Articles of
association.
3. Audited financial statements and annual reports for the last one year, provided that
the period covered shall not be less than twelve months.
5. A declaration by the applicant that it has entered into a custodian agreement with a
domestic custodian together with particulars of domestic custodian.
14
1.
Foreign investment can be done in the Automatic Route up to 100 per cent without
need for any approvals. The investor has to keep the Reserve Bank of India informed.
2.
The sectors not open to foreign investments are retail trade, housing and real estate,
There are maximum limits on foreign investment. Some of these are being
increased.
4.
Prior approval of the government is needed for those cases, which need industrial
license and those involving investment beyond the maximum limits. Such cases are cleared
by the Foreign Investment Promotion Board in a transparent, efficient, time-bound and
predictable manner.
5.
The Department of Industrial Policy and Promotion is the nodal agency for
The Various state governments in India offer competitive incentives and attractions
to foreign investors.
15
1. Market size:
Econometric studies comparing a cross section of countries indicate a well established
correlation between FII and the size of market (proxied by the size of GDP) as well as
some of its characteristics (e.g. average income levels and growth rates.) some studies
found GDP growth rate to be a significant explanatory variable, while GDP was not,
probably indicating that where the current size of national income is very small, increments
may have less relevance to FII decisions than growth performance, as an indicator of
market potential.
16
4. Political scenario:
The ranking of the political risk among FII determinants remains somewhat unclear. Where
the host country possesses abundant natural resources, no further incentive may be
required, as is seen in politically unstable countries such as Nigeria and Angola, where high
returns in the extractive industries seem to be compensated for political instability. in
general ,so long as the foreign company is confident of being able to operate profitably
without undue risk to its capital and personnel, it will continue to invest. Large mining
companies, for example, overcome some of the political risks by investing in their own
infrastructure maintenance and their own security forces. Moreover, these companies are
limited neither by small local markets nor by exchange rate risks since they tend to sell
almost exclusively on the international, market at hard currency prices.
5. Infrastructure:
Infrastructure covers many dimensions, ranging from roads, ports, railways and
telecommunication systems to institutional development (e.g. accounting, legal services,
etc.) studies in china reveal the extent of transport facilities and the proximity to major
ports as having a positive significant effect on the location of FII within the country. Poor
infrastructure can be seen, as both, an obstacle and an opportunity for foreign investment.
For the majority of the low income countries, it is often cited as one of the major
constraints. But foreign investors also point potential for attracting significant FII if host
country government permits more substantial foreign participation in the infrastructure
sector.
17
7. Dis-investment policy:
Though privatization has attracted some foreign investment flows in recent years, progress
is still slow in majority of low income countries, partly because the divestment of the state
assets is a highly political issue. In India for example, organized labour has fiercely resisted
privatization or other moves, which threaten existing jobs workers rights. A number of
structural problems are constraining the process of privatization. Financial markets in most
low income countries are slow to become competitive; they are characterized by the
inefficiencies, lack of debt and transparency and the absence of regulatory procedures.
They continue to be dominated by government activity and are often protected from
competition. Existing stock markets are thin and illiquid and securitized debt is virtually
non-existent. An underdeveloped financial sector of this type inhibits privatization and
discourages foreign investors.
18
Benefits of FII:
Host countries derive several benefits from FII:
1. Additional equity capital from whose profits yield tax revenues.
8. A catalyst for associated lending, for specific projects, thus increasing the
availability of external funding.
9. Free flow of capital is conducive to both the total world welfare and to the
welfare of each individual.
10. Since returns on foreign investments are linked to the profits earned by the
firm, it is more flexible as compared to the foreign loans which are guided by
rigid interest and amortization requirements.
19
FDI OR FII
FDI usually is associated with export growth. It comes only when all the criteria to set up
an export industry are met. That includes, reduced taxes, favorable labor law, freedom to
move money in and out of country, government assistance to acquire land, full grown
infrastructure,
reduced
bureaucratic
involvement
etc.
IT,
BPO,
Auto
Parts,
20
21
22
9. Agricultural sector:
While India has abundant supply of food, the food processing industry is relatively nascent
and offers opportunities for FDI. Only 2 percent of fruits and vegetables and 15 percent of
milk are processed at present. There is a rapidly increasing demand for processed food
caused by rising urbanization and income levels. To meet this demand, the investment
required is about US$28 billion. Food processing has been declared as a priority sector.
23
24
25
26
27
28
Its not the case that every government may allow the FII to enter into their country.
Different government follows different policy framework for FII. One government may
follow liberal approach while other may follow the conservative approach. India has
emerged as the second most option for FII destination in Asia after china. Incidentally
successive government wasted considerable time identifying the desirable sectors where
the FII could be encouraged and those where it must be discouraged.
2.
FII are the foreign investments and they are always done if the economy of the country
supports them. The economy always follows business cycle. Economic prosperity is
followed by recession. This is inevitable. During the time when the economy is facing a
recession or depression, FII is hard to come because the foreign players do not feel safe to
invest. Apart from this there are also many factors that affect the economy adversely and
thereby discourage FII.
3.
Poor infrastructure
Infrastructure plays a very important role in affecting the decision of the Foreign
Institutional Investors whether to invest in a particular country or not. If the infrastructure
of the country is poor the Foreign Institutional Investors may not invest in that country as it
would affect their returns and at the same time they would invest where the infrastructure is
good and returns are good. So initiative should be taken by the government to improve the
infrastructure.
29
Corruption deters several efficient players from investing as they think that the clearance of
their proposal is not performance or reputation but under the table dealings. As pointed out
by a recent FICCI study only about 29% of the FDI amount approved between August
1991 and January 1999 actually came in. This clearly shows lack of transparency and
bureaucracy.
The fundamental problem is the government instability to formulate a clear and consistent
regulatory framework for FII.
30
While it is generally held that portfolio flows benefit the economies of recipient
countries, policy-makers worldwide have been more than a little uneasy about such
investments. Portfolio flows often referred to as hot money are notoriously volatile
compared to other forms of capital flows. Investors are known to pull back portfolio
investments at the slightest hint of trouble in the host country often leading to disastrous
consequences to its economy. They have been blamed for exacerbating small economic
problems in a country by making large and concerted withdrawals at the first sign of
economic weakness. They have also been held responsible for spreading financial crises
causing contagion in international financial markets.
31
While these concerns are all well-placed, comparatively less attention has been
paid so far to analyze the FII flows data and understanding their key features. A proper
understanding of the nature and determinants of these flows, however, is essential for a
meaningful debate about their effects as well as predicting the chances of their sudden
reversals.
32
It is important to note that global financial integration, however, can have two
distinct and in some ways conflicting effects on this home bias. As more and more
countries particularly the emerging markets open up their markets for foreign
investment, investors in developed countries will have a greater opportunity to hold foreign
assets. However, these flows themselves, along with greater trade flows which tend to
cause different national markets to increasingly become parts of a more unified global
market, reducing their diversification benefits. Which of these two effects will dominate
is, of course, an empirical issue, but given the extent of the home bias it is likely that for
quite a few years to come, FII flows would increase with global integration.
33
Previous research has also attempted to identify the factors behind this capital flows. The
main question is whether capital flew in to these countries primarily as a result of changes
in global (largely US) factors or in response to events and indicators in the recipient
countries like its credit rating and domestic stock market return. The question is
particularly important for policy makers in order to get a better understanding of the
reliability and stability of such flows. The answer is mixed both global and countryspecific factors seem to matter, with the latter being particularly important in the case of
Asian countries and for debt flows rather than equity flows.
As for the motivation of US equity investment in foreign markets, recent research suggest
that US portfolio managers investing abroad seem to be chasing returns in foreign markets
rather than simply diversifying to reduce overall portfolio risk. The findings include the
well-documented home bias in OECD investments, high turnover in foreign market
investments and that, in general, the patterns of foreign equity investment were far from
what an international portfolio diversification model would recommend. The share of
investments going to emerging markets has been roughly proportional to the share of these
markets in global market capitalization but the volatility of US transactions were even
higher in emerging markets than in other OECD countries. Furthermore there was no
relation between the volume of US transactions in these markets and their stock market
volatility.
34
More recent studies find that the effect of regional factors as determinants of portfolio
flows have been increasing in importance over time. In other words portfolio flows to
different countries in a region tend to be highly correlated. Also the flows are more
persistent than returns in the domestic markets. Feedback trading or return-chasing
behavior is also more pronounced. The flows appear to affect contemporaneous and future
stock returns positively, particularly in the case of emerging markets. Finally stock prices
seem to behave on the assumption of persistent portfolio inflows.
35
It is commonly argued that local investors possess greater knowledge about a Countrys
financial markets than foreign investors and that this asymmetry lies at the heart of the
observed home bias among investors in industrialized countries. A key implication of
recent theoretical work in this area12 is that in the presence of such information
asymmetry, portfolio flows to a country would be related to returns in both recipient and
source countries. In the absence of such asymmetry, only the recipient countrys returns
should affect these flows.
36
In 10 months time Sensex moved from 7000 mark to 12,000 largely due to Foreign
Institutional Investor faith in Indian economy, better performance of corporates,
resurgence of agriculture sector and liquidity in the market. Mutual Funds moped record
level of money, over Rs.14, 000 crore, a more than 30 fold increase from the last year and
FII flushed nearly Rs.18, 000 crore in the equity market.
Sensex is conquering new heights, that too in lesser number of trading days than taken to
achieve the previous milestones. The sprint from 11,000 to 12,000 has taken 19 trading
days, from first touching 11,000 on March 21st to closing over 12,000 on April 20, 2006.
So far it is the second fastest 1000 point run after the Harshad Mehta led bull-run, when
Sensex touched 4,000 from the 3,000 mark in 19 trading sessions in 1992. And in 2006 (i.e.
oct 17 ) was 12,928 points up by 191 points.
2000 January 3, 1992: Liberal economic policy initiatives undertaken by the finance
Minister, Dr Man Mohan Singh.
3000 February 29, 1992: Market-friendly Budget by the then Finance Minister,
Dr Man Mohan Singh
4000 March 30, 1992: Liberal export-import policy.
37
7000 June 20, 2005: News of the settlement between the Ambani brothers boosted investor
sentiments
10000 February 6, 2006: Buying from FIIs, Local operators and retail investors
11000 March 21, 2006: Robust foreign fund inflows and a move by Government towards
greater capital account convertibility.
12000 Apr 20, 2006: Massive buying from mutual funds around Rs.3400 crore in just 19
trading sessions, favorable credit policy. Expectation of robust fourth quarter earnings by
corporate and S&P upgrading India sovereign credit rating from stable to positive
Market gives 74% return from 1st April 2005 to 31st March 2006. FY07 budget signals
low Government regulation. Credit policy defers hiking of interest rates instead cautions
key players on real estate and equity market boom.
Massive growth in inflows in equity market from Mutual Funds was Rs.14, 305 crore from
mere Rs.448 crore in FY05.
38
The above graph shows the trends in the FIIs investments made by the Foreign Institutional
Investors that have occurred from the period of April-04 to December-05. The red bars
indicate the FII investments and the blue curvy line indicates the average contribution of
the FIIs to BSE sensex points. The figures at the left indicate the FII investments made (Rs
in Crores) where as the figures to the right indicate In April 04 the investments were made
thereby moving the FIIs investments graph to 4000 and in the next month they were
withdrawn resulting into the negative effect on the Indian stock market. Then since June 04
the investments were made and they have moved in the positive direction there by leading
to the positive effect on the stock market. In April and May 2005 the investments were
withdrawn and after that the investments were again withdrawn in October 2005. But the
story continues and the positive results were shown by the FII investments.
39
The result is: Sensex has recovered 10% of the losses posted in the month of May.
In the month of August (till 25th of this month) itself, the movers and shakers of the Indian
stock markets have reinvested almost 43% of their net sales in May. Of course, the Tech
Mahindra and GMR Infrastructure IPO have played their part in getting FIIs back to the
Indian markets, believe analysts.
Despite high oil prices and an environment of rising interest rates, which have somewhat
shown signs of slowing down now, FIIs have reposed their faith in the Indian growth story.
India, the second-fastest growing economy in the world now, has been growing at a pace of
8% plus in the last three years.
FII shareholding pattern for the quarter ending June reveals that FIIs have increased their
stakes in 188 companies against paring their stake in 177 companies.
Interestingly, FIIs chose a slew of midcap companies to increase their stakes as valuations
looked cheaper and most of them were under owned during the April-June quarter
following a massive hammering post May 10 meltdown, believes Sumeet Rohra of Antique
Stock Broking.
Another interesting aspect that the data below reflects is the growing dominance of FIIs
over other set of investors like the mutual funds and retail investors. While MFs purchased
shares worth Rs 7573.04 crore in May when FIIs sold stocks worth Rs 8247.2 crore, the
markets tanked almost 15%.
40
Sensex
Gain/
Loss (%)
May
-14.9
-8247.2
June
5.34
1418.2
July
0.45
1447.9
August
8.07
3537.7
-1843.4
In June and July combined together MFs were sellers to the tune of Rs 2058.15 crore
against FIIs net purchases of Rs 2866.1 crore, the Sensex gained a smart 5.79%. The same
trend can be witnessed in the month of August. FIIs net purchases worth Rs 3537.7 crore
against MFs net buys of Rs 251.46 crore, the Sensex has soared by 8.07%.
This leads one to believe that FIIs, at least in the short-term (the period between MayAugust under consideration) tend to influence the course of the markets vis--vis domestic
and institutional investors.
41
The above diagram represents the country ranking in relation to the Net International
Reserves. Reserves are the money which is left after all the business activities are over
China is the leading economy and most emerging country among all others. These are the
list of the countries which are developing and are acting as attractive destinations for the
Foreign Institutional Investments. The Net International Reserves of all countries had
shown a steady growth and are providing the opportunities as a Foreign Investment
destination. India ranks seventh and the percent of reserves to the imports are very much
(90%).
42
The above graph explains the percentage increase in relation to the FII investments made in
various countries. This graph shows the percentage change in the international stock
markets between December 31, 2004 and January 11, 2006. The percentage change was
highest i.e. 141.1%. Data about various countries is also given. The purpose of the graph is
to make the comparison so that the exact percentage change in relation to the comparison
can be made and the position of the stock market can be determined. India was in a good
position but it needs a still more investments to make it to move toward one of the most
emerging and powerful economy. The percentage change in the Indias stock market was
43.1%.
43
Reporting
Date
Gross
Purchases
Debt/Equity
(Rs
Crores)
01-SEP-2006 Equity
Debt
04-SEP-2006 Equity
Debt
05-SEP-2006 Equity
Debt
06-SEP-2006 Equity
Debt
07-SEP-2006 Equity
Debt
08-SEP-2006 Equity
Debt
11-SEP-2006 Equity
Debt
12-SEP-2006 Equity
Debt
13-SEP-2006 Equity
Debt
14-SEP-2006 Equity
Debt
15-SEP-2006 Equity
Debt
18-SEP-2006 Equity
Debt
19-SEP-2006 Equity
2194.50
7.10
1379.10
27.20
1186.80
52.70
846.90
228.20
1391.10
68.80
1396.50
46.40
1249.10
93.50
1495.90
59.10
1216.20
0.00
1962.50
0.00
1604.90
162.80
1597.30
96.00
1372.20
44
Gross
Net
Sales
Investment
(Rs
(Rs Crores)
Crores)
1707.40
0.00
1142.50
74.30
735.70
0.00
916.40
34.60
939.90
0.00
1412.80
0.00
1298.00
0.00
1401.20
25.00
1336.80
167.80
1443.10
0.00
1113.30
0.00
1138.30
157.90
877.10
487.10
7.10
236.60
(47.10)
451.10
52.70
(69.60)
193.60
451.20
68.80
(16.30)
46.40
(48.90)
93.50
94.70
34.10
(120.60)
(167.80)
519.40
0.00
491.50
162.80
459.00
(61.90)
495.10
Net
Investment
US($)
million
at
month
exchange
rate
104.70
1.50
50.90
(10.10)
96.90
11.30
(14.90)
41.60
97.00
14.80
(3.50)
10.00
(10.50)
20.10
20.40
7.30
(25.90)
(36.10)
111.60
0.00
105.60
35.00
98.60
(13.30)
106.40
20-SEP-2006
21-SEP-2006
22-SEP-2006
25-SEP-2006
26-SEP-2006
Debt
Equity
Debt
Equity
Debt
Equity
Debt
Equity
Debt
Equity
Debt
03-OCT-2006 Equity
Debt
04-OCT-2006 Equity
Debt
05-OCT-2006 Equity
Debt
06-OCT-2006 Equity
Debt
09-OCT-2006 Equity
Debt
10-OCT-2006 Equity
Debt
11-OCT-2006 Equity
Debt
12-OCT-2006 Equity
Debt
13-OCT-2006 Equity
Debt
449.00
1540.70
0.00
1377.10
0.00
1878.70
167.80
1401.50
88.00
1156.10
0.00
2996.50
0.00
1443.30
0.00
1648.20
304.80
1863.20
44.20
1420.90
0.00
929.30
0.00
1509.10
0.00
2234.40
0.00
2116.30
0.00
45
321.90
1264.00
0.00
1141.10
3.00
1589.80
0.00
1249.40
0.00
1424.60
304.80
127.10
276.60
0.00
236.00
(3.00)
288.80
167.80
152.10
88.00
(268.50)
(304.80)
27.30
59.40
0.00
50.70
(0.60)
62.10
36.10
32.70
18.90
(57.70)
(65.50)
1702.90
0.00
1737.60
39.90
2067.60
0.00
1739.50
0.00
1349.90
210.00
975.00
69.80
1412.60
0.00
1431.00
0.00
1577.00
0.00
1293.50
0.00
(294.30)
(39.90)
(419.40)
304.80
123.70
44.20
71.00
(210.00)
(45.70)
(69.80)
96.40
0.00
803.40
0.00
539.30
0.00
277.90
0.00
(63.20)
(8.60)
(90.10)
65.50
26.60
9.50
15.30
(45.10)
(9.80)
(15.00)
20.90
0.00
174.20
0.00
116.90
0.00
Swot Analysis
Foreign Institutional Investments
Strengths
Weakness
i.e. is finance.
anytime withdrawal.
the country.
position.
domestic countries.
5) Develops relationship between two
countries.
Opportunities
Threats
1) Better infrastructure.
maximum.
3) Increased returns.
46
Swot Analysis
Strengths:
1
To start any business and to make the idea to be actually implemented it needs finance.
The FIIs brings the inflow of money into the country. Many projects that require funding is
done with the help of FIIs. Today in this world, the Finance is the only resource, which has
the capability to be easily transferred from one place to another, and hence providing as a
base for business opportunities .Free flow of capital is conducive to both the total world
welfare and to the welfare of each individual.
When FIIs enters the domestic country they bring in the money and acts as the facilitator of
the business development. As money comes into the country, it provides various benefits to
the leading sectors and ultimately results into the development of various sectors.
For e.g. in India I.T sector is the most booming sector and has shown the signs of
improvement thus attracting the FIIs.
In the initial phase of economic development, the under developing countries need much
larger imports. As a result, the balance of payment position generally turns adverse. This
creates gap between earnings and foreign exchange. The foreign capital presents short run
solution to the problem. So in order to balance the Balance of Payment Foreign Investment
is needed.
47
FIIs provide more returns to the investors as compared to the domestic country. This is one
of the most important strength of FIIs. The main reason is that the countries in which th
Foreign Institutional Investors invest their money, provides more opportunities and many
benefits. So investors invest in foreign countries rather than in the domestic countries.
Due to FIIs the investors from different countries come into picture and various people also
come into the contact with each other. This develops a sense of relationship between
different people and develops a nice intra-cultural atmosphere.
48
Weaknesses
The main weakness of foreign institutional investments is that they provide opportunities to
only the developing and developed countries. The Foreign institutional investors focuses on
the developing countries rather than on the underdeveloped countries and because of this
the under developed countries remain underdeveloped. So this drawback of the FIIs should
be improved upon by making their investments in the under developed countries.
The FIIs do not provide any guarantee i.e. the Foreign institutional investors can anytime
withdraw their money when they want to so this makes the nature of the FIIs unpredictable
and ultimately hampering the progress of the economy of that country. The very good
example of this is the mass withdrawal of the FIIs in the far eastern countries like Malaysia,
Indonesia etc in 1996-97.
FIIs provide only the short term opportunities i.e. they do not provide the long term
opportunities as they are very much supple in nature and there by limiting its scope to short
term opportunities. As far as the market seems to be good the FIIs are attracted and after
that they are not predictable. So FIIs are bound to provide only the short term opportunities.
49
Opportunities:
1
Better infrastructure:
Better infrastructure is available only when there is adequate finance available and this
comes with the help of FIIs. Infrastructure covers many dimensions, ranging from roads,
ports, railways and telecommunication systems to institutional development (e.g.
accounting, legal services, etc.) studies in china reveal the extent of transport facilities and
the proximity to major ports as having a positive significant effect on the location of FII
within the country. Poor infrastructure can be developed with the help of the foreign
investment. Foreign investors also point potential for attracting significant FII if host
country government permits more substantial foreign participation in the infrastructure
sector.
The major resources i.e. manpower, material and machines can be utilized to its fullest so
as to get the maximum benefit out of it. Through FIIs, the reserves or the resources that are
untapped because of the lack of funds can be exploited. Potential areas for exploration
ventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc. There is also
scope for setting up manufacturing units for value added products.
Technology is the main aspect on which the growth of the country is determined.
Developing countries has a very low level of technology. Their technology is not up to the
standards and they lack in modern technology. Developing countries possess a strong urge
for industrialization to develop their economies and to wriggle out of the low-level
equilibrium trap in which they are caught. This raises the necessity for importing
technologies from advanced countries. Such technology usually comes with foreign capital.
50
Threats:
1
The FIIs are more flexible in nature i.e. unlike FDI they are not guaranteed. Foreign
Institutional Investors can withdraw at any time they want. Foreign Direct Investment is for
a fixed period and the investments could not be withdrawn until a specified period. The
recent example was the net outflows of the money from the stock market that affected the
whole economy and its consequences are very much appalling resulting into posing threats
to the economy.
Many MNCs have their set up in India and these MNCs provide a stiff competition to the
domestic industries. The Foreign Institutional Investors invest their money in these MNCs
and they are equipped with the latest technology to provide products at cheaper rates.
Moreover, the Indian labourers are opposing the use of modern technology as the company
downsizes the number of workers that substitutes the modern technology.
Increased returns can pose a threat to the domestic country as the money flows out of the
country and this may affect the economy of the domestic country. The returns that the
Foreign Institutional Investors are getting are very much high and this returns they take to
their home country and this leads to the outflow of money from domestic country to the
foreign country.
51
Conclusion:
Foreign Institutional Investments are very much needed for India. They are necessary for
the continuous development of our country. The economy of our country has shown a
better performance and has led to the economic growth due to the FIIs. Though there are
threats from the Foreign Institutional Investments we should be positive and see the future
of our country.
52
Indias Future
The future of the India is bright and moreover due to FIIs the economy will gain a swing in
the future in short run as well as long run. India is a pool of various resources, their
effective utilization is possible only with the investments and in large sum. The prosperity
of India will soon be visible in the near future. By evolving the strategy to improve the
competitive position in these areas, overall level of competitiveness can be raised thereby
enhancing the export potential of the country.
Thus, India could take a proactive initiative in seeking an international discipline on
investment incentives with a built in exception based on the level of industrialization. Soon
India will be leading country.
53
Recommendations
Foreign investment is a valuable non-debt creating, external resource supplement
inadequate savings and has a major role in transforming technology, improving managerial
skills and facilitating market development. In our economic system, capital is the fuel that
generates profits.
India must extend a hospitable environment for foreign investors by providing essential
guarantees for investors for
India has a pool of human resource and this can attract the Foreign Institutional Investors to
invest their money into our country there by increasing the output with the help of tapping
the human resource.
The ready availability of the required infrastructure in the form of serviceable roads, ports,
telecommunications, airports and water and power facilities is a pre-requisite for attracting
large volume of foreign investments.
Continued export and careful management of Indias imports will also be crucial in
maintaining Indias ability to maintain and continue to build international equity and debt
Institutional Investors confidence.
54
Both the FIIs and FDI should be invited to the fullest and given importance so that it will
create a win-win situation on the part of both the parties. Both the parties will be benefited
from Foreign Investments i.e. India will get capital and the investors will get returns to
maximum.
55
Annexure
Article:
FII inflows cross $4 bn mark Friday, April 07, 2006
(Economic Times)
The impressive returns given by Indian equities have received yet another stamp
of approval and this time by the prime drivers of the Bull Run, the Foreign
Institutional Investors (FIIs) themselves. The net FII inflows in Indian equities have
crossed the $4 billion mark in the current calendar year (CY06). As on April 4, FII
inflows stood at $4.03 billion.
Interestingly, experts opine that the Indian markets have become a global force
and the coming days will only further cement Indias place in the global arena. This
will, in turn, attract more and more FIIs to the country, too. Uday Kotak, managing
director, Kotak Mahindra Bank, said, I expect that in the next five years, if nothing
goes wrong, India will be the second largest capital market in the world after the
US.
A section of market participants is also of the view that while on one hand, Indian
equities look a bit overvalued, on the other hand, they have been able to outpace
most of the other global and emerging markets in the recent past. This will only
lead to an increase in the inflows to the equity markets. However, it seems that the
dependence of the markets on foreign inflows is dipping at a time when the
bourses are moving further northwards.
57
The rise of the Sensex from 10,000 to 11,000 levels witnessed FII inflows of only
$2.31 billion. Contrary to this, when the Sensex rose from 9,000 to 10,000, it was
pegged at $ 3.1 billion. The journey from 7,000 to 8,000 also saw higher FII inflows
of nearly $4 billion. The recent past also witnessed huge mobilization from the
domestic mutual fund industry and they have also played an important role in the
rise of the equity bourses. Incidentally, in the current calendar year, February
proved to be the best month with FII inflows pegged at $1.7 billion. March also
witnessed net FII inflows at $1.5 billion. In Jan, FII inflows were pegged at only
$737.50 million.
58