Assignment On Ib.docx

ASSIGNMENT ON INTERNATIONAL BUSINESS

Topic: Foreign Institutional Investment

SUBMITTED TO: PROF. FARAH HUSSAIN PREPARED BY: SHIKHARANI DEKA (COM18006) RAJASHREE MUKTIAR (MCI15020) INTEGRATED M.COM 7TH SEMESTER DEPTAMENT OF COMMERCE

ACKNOWLEDGEMENT I would like to express my special gratitude to our course instructor Assistant Professor Farah Hussain (Department of Commerce) for giving me the opportunity to carry out this assignment and also for giving me his valuable suggestions and remarks throughout the learning process of this assignment. I would also like to extend my deepest gratitude to all those who have directly and indirectly guided me in writing this assignment.

INTRODUCTION Before liberalization in 1991, India was a self reliant economy with markets depending on Domestic institutions and investors. India opened its stock markets to foreign investors in September 1992, i.e.; after Liberalization and since then; considerable amount of portfolio investment from foreigners in the form of Foreign Institutional Investor’s (FII) investment in equities is coming in India. This has become one of the main channels of international portfolio investment in India for foreigners. The Indian economy has continuously recorded high growth rates and has become an attractive destination for investments. Economies like India, which offer relatively higher growth than the developed economies, have gain favor among investors as attractive investment destinations for foreign institutional investors (FIIs). Investors are optimistic on India and sentiments are favorable following government‘s announcement of a series of reform measures in recent months.

CONCEPT OF FII: According to the Securities and Exchange Board of India (SEBI), Foreign Institutional Investor (FII) means an institution established or incorporated outside India which proposes to make investment in securities in India. They are registered as FIIs in accordance with Section 2 (f) of the SEBI (FII) Regulations 1995. The organizations that pool huge amount of money from the investors and invest it in securities, real property and other investment assets are termed as Foreign Institutional Investors. The investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their position in the economy is to act as highly specialized institutions who invest on behalf of others. FIIs can invest their own funds as well as invest on behalf of their overseas clients registered with the SEBI. The client accounts are

known as ‘sub-accounts’ which may include foreign corporate, individuals, funds etc. A domestic portfolio manager can also register as FII to administer the funds of sub-accounts.

TYPES OF FII FIIs registered with the SEBI are of two types:  Regular FIIs : Regular FIIs are those who are required to invest not less than 70 per cent of their investment in equity-related instruments and up to 30 in non-equity instruments.  100 per cent debt-fund FIIs: Those FII’s who are allowed to invest only in debt instruments are known as 100 per cent debt fund FIIs.

ROAD FOR FII IN INDIA: A Foreign Institutional Investor may invest only in the following: Securities in the primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India.  Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed or not listed on a recognized stock exchange.  Dated Government securities.  Derivatives traded on a recognized stock exchange.  Commercial paper.  Security receipts.  Indian Depository Receipt  Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector  Non-convertible debentures/bonds issued by Non-Banking Financial Companies categorized as “Infrastructure Finance Companies” (IFCs) by the Reserve Bank of India.

ELIGIBLE FOREIGN REGISTERED AS FII

ENTITIES/FUNDS

TO

GET

Following are some of the foreign entities/ funds are eligible to get registered as FII • Pension funds • Mutual funds • Investment trusts • Banks • Insurance companies/ reinsurance company • Foreign central banks • Foreign governmental agencies • Sovereign wealth funds • International/ multilateral organization/ agency • University funds ( serving public interest) • Endowments (serving public interest) • Foundations (serving public interest) • Charitable trusts / charitable societies (serving public interest

RESTRICTIONS ON FII INVESTMENT: Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. FIIs are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: • Business of chit fund, • Nidhi company,

• Agricultural or plantation activities, • Real estate business or construction of farm houses, • Trading in Transferable Development Rights (TDRs).

MAJOR INDIAN COMPANIES TO ATTRACT VOLUME OF FIIs IN CURRENT PERIOD:

LARGE

FIIs held stakes worth over Rs. 2 lakh crore in following companies -

Company Name

FII stake (in %) March,2018

HDFC

74

INDUSIND BANK

52

AXIS BANK

50

SHRIRAM TRANSPORT FINAR

49

APOLLO HOSPITALS

49

ICICI BANK

48

PVR

44

DETERMINANTS OF FII FLOW IN INDIA: i.

Risk: Whenever risk in home market increases, the foreign investors would start to pull out of their home country thereby creating a deficiency of

ii.

iii.

iv.

v.

vi.

funds in domestic market, hence so as to attract investment domestic interest rate would increase thereby to ensure that the above equality is restored. Inflation: At the time of high inflation, the real return on fixed income securities like bonds and fixed deposits declines. Thus a bond which gives say around 7.5% interest rate actually gives a real return of just 1% if the inflation is 6.5%. If the inflation increases further, the real return would decline more and thus repel FII investment. Interest Rates: For the business, cost of borrowing rises this has a negative result on their profit margins. As a result, they might even delay any investment activity which may be funded by borrowing to some later period when the interest rates are lower so as to reduce their investment costs; which in turn would decrease FII flow in the country. Good news /bad news: If there is some bad news in the nation, which affects the asset price, which in turn decreases the return and hence FII would withdraw from the market. However on the other hand, if there is good news, asset prices would increase; thereby increasing return and hence FII would be attracted. But the sensitivity with which investors withdraw is greater than with which they invest i.e. they would be more cautious while investing than at the time of withdrawing. This is primarily due to their basic nature of being risk averse, thus they would react more vigorously to bad news than good news. Equity Returns: Research shows that, the equity return in India (RBSE) is the main driving force for foreign institutional investment, which is significant at all levels. That is increase in the returns in US stock market adversely affects the portfolio investment flowing to India. Predictable risk in foreign market (SDSRF) adversely affects FII flow to India and hence is highly significant. GDP of India: GDP and FII both have more or less direct relationship. The reason is change in capital account. When interest rates were high, India was attracting lot of investments so the credit balance was high for that period.

EFFECT OF FII ON INDIAN STOCK MARKET AS WELL AS INDIAN RUPEE: Positive fundamentals combined with fast growing markets have made India an attractive destination for Foreign Institutional Investors (FIIs). Portfolio investments brought in by FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the volatility in FII flows and its impact on the stock market and Indian economy. FIIs are the largest group of investors in Indian stock market and their buying and selling has a big influence on domestic stock prices. FIIs tend to track rupee movement closely as the returns they make on their Indian holdings can be affected significantly by currency movements. Markets advisors often attribute the rally of stock market and fail of stock to the flow of funds by FIIs. Some major impacts of FIIs are –  They increased depth and breadth of the market.  They played major role in expanding securities business.  Their policy on focusing on fundamental of the shares had caused efficient pricing of shares. These impacts made the Indian stock market more attractive to FIIs and also domestic investors. The impact of FIIs is so high that whenever FIIs tend to withdraw the money from market, the domestic investors become fearful and they also withdraw from market. Indian economy’s growth prognosis remains strong, which, in turn, is attracting major capital inflows from Foreign Institutional Investors (FIIs). FIIs not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals. FIIs are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize market. India’s forex reserves are largely built through FII inflows, which have influence on the rupee’s direction. FIIs need the Indian currency to invest in the Indian market the demand for the rupee goes up, it boosts the currency. A stronger market leads to a better outlook for the rupee leading to further inflows and thus to the rupee’s appreciation. This is a mutually beneficial, positive cycle. But the reserve

too is very much a possibility. Like in bad situations, when there are FII outflows, the markets go down and the rupee depreciates. The rupee depreciates on fears when Indian stocks witnessed a sell – off situation, due to this FIIs could be moving out of India stock markets. FIIs from other countries would made losses up to a lower extent as the rupee has been depreciating against most major currencies like yen, euro, pound and dollar. Therefore, it is not surprising that FIIs would track rupee closely.

FII FLOWS INTO A COUNTRY ARE ASSOCIATED WITH SEVERAL BENEFITS AND COSTS BENEFITS OF FII: 1.

2.

3.

Enhanced flows of capital – FIIs are always want equity than debt in their asset structure. They have greater hunger of equity. The opening of the economy to FIIs has been in line with the accepted preference for non – debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap. It can not only help in increasing the domestic savings for the purpose of development projects like building economic and social infrastructure but can also help in growth of rate of investment, it boosts the production, employment and income of the host country. Managing uncertainty and controlling risks – FIIs promote financial innovation and development of hedging instrument. FIIs not only improve the competition in financial market but also alignment of assets prices to fundamentals which help in stabilizing markets. FIIs in general are known to have good information and low transaction costs. Many FIIs with a variety of risk-return preferences also help in dampening volatility. Improved Corporate Governance – Good corporate governance is essential to overcome the principal–agent problem between shareholders and management. Information dissimilarities and incomplete contracts between shareholders and management are at the root of the agency costs. Bad corporate governance makes equity finance a costly option. FIIs constitute

professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. They contribute to better understanding of firms’ operations; improve corporate governance. Also, institutionalization increases dividend payouts, and enhances productivity growth. 4. Improving capital markets – FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the availability of riskier long term capital for projects, and increasing firm’s incentives to supply more information about them, the FIIs can help in the process of economic development. 5. Increases Forex reserves – The build-up of forex reserves is linked to the inflow of foreign currency. Being a strong emerging market, India finds favour among foreign investors as an investment destination. FII is the most convenient way for large foreign investors to invest in promising Indian companies. FIIs increase foreign inflow into India when they invest in which usually translates into more rupee liquidity in the system. This increases the money supply and facilitates easy availability of credit from banks.

COSTS OF FII: 1. Problems of inflation- Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. 2.

Problems for small investor- The FIIs profit from investing in emerging financial stock markets. FII have great influence on the way the stock markets situations, going up or down because when the cap on FII is high then they can bring in huge amounts of funds in the country’s stock markets. The FII buying pushes the stocks up and their selling shows the stock market the

3.

4.

downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. Adverse impact on Exports- FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Potential capital outflows- “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. “Hot money” can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

CONCLUSION The Foreign Institutional Investors have gained a significant role in Indian Capital Market. In the recent years, it has shown an increasing trend which is a good sign for Indian economy. Industrial studies have revealed that as foreign investors’ confidence in the Indian government will increase, their levels of investment in India will also go up. Therefore, more and more attractive policies must be formulated by the Government to attract more and more FII. Over the years, manufacturing sector has attracted a major part of FII in India followed by financial services, construction industry, electricity and other energy generation, distribution & transmission, communication services. Mauritius is the biggest investor in India followed by Singapore. The FII from U.S.A. is decreasing over the years, which is not a good indicator for India. Investment from Japan and Netherlands is increasing which is a good sign for India. India stands committed to have a better policy and regime which is investor friendly and also promotes investment leading to increased manufacturing, job creation and overall economic growth of the country.