Foreign Institutional Investments

PREFACE

1. OBJECTIVES: ¾ The basic objective is to know the Foreign Institutional Investments in detail. ¾ To put forth the role played by Foreign Institutional Investments in sensex.

¾ To know the guidelines for investment by Foreign Institutional Investments

2. METHODOLOGY: ¾ Secondary data sources and literature review. ¾ Various books and articles from magazines and newspapers have been referred.

3. LIMITATIONS: ¾ The project limits itself into the India regarding the Foreign Institutional Investments.

¾ The legal aspects regarding Foreign Institutional Investments are reported in the project considering India.

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.

As India is in the process of liberalizing the capital account, it would have significant impact on the foreign investments and particularly on the FII, as this would affect short-term stability in the financial markets. Hence, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables which drive-in foreign investment. Also FII has been subject of intense discussion, as it is held responsible for intensifying currency crisis in 1990’s elsewhere.

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).

“SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.”

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

1

2

Need for FII in Developing Countries

3

3

Who can be registered as FIIs

5

4

Entry options for Foreign Investors

6

5

Policy measures to attract FIIs

10

6

Reasons to invest in India

11

7

Legal aspects

13

8

Facilitation for Foreign Investment in India

15

9

Major determinants of FII flows

16

10

Benefits of FII

19

11

Prospects for Indian perspective

20

12

Positive attitude towards Foreign Investment

25

13

Major roadblocks in Foreign Investment

29

14

FII as portfolio investments

31

15

The Foreign investments & Sensex & Nifty

37

16

Daily trends in FII investments

44

17

SWOT Analysis

46

18

Conclusion

52

19

Recommendations

54

20

Annexure

Foreign Institutional Investments

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.

1

Foreign Institutional Investments MINDSET OF INDIANS IN GENERALS:

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.

2

Foreign Institutional Investments

NEED FOR FII IN DEVELOPING COUNTRIES 1. Infrastructure Renewal To keep the Indian economy growing the infrastructure sector like power, transport, mining & metallurgy, textiles, housing, retail, social welfare, medical etc. has to be upgraded. After the Enron fiasco, it is difficult to persuade anybody in the west to take interest in any of these sectors. Hence India is left to its own devices to raise money and build this sector. Borrowing abroad supplemented with Indian resources is the only way open to India. This upgrade is needed prior or in step with the industrial and service exports sector growth. It has to be placed on a higher priority. Only recently a suggestion to use a small portion of India’s foreign reserves met with howl of protests. The protestors in the Indian Parliament did not understand the proposal. Hence the government is stuck to steam roller its proposal through the legislative process or succumb to political pressure and do nothing. The latter is not acceptable. If India finds its own $4 Billion a year for infrastructure then foreign investors will kick in another similar portion. The resulting money will very quickly rebuild the now cumbersome infrastructure. 2. Bridge the technological gap 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. 3. Optimum utilization of resources A number of developing countries possess huge mineral resources which are4 untapped and unexploited. Due to lack of technology these countries are not able to use their resources to the fullest. As a result they have to depend on the foreign investment with the 3

Foreign Institutional Investments help of which technology of the country and that will ultimately lead to the optimum utilization of the resources. India has very huge reserves of mineral resources and to optimize their use or rather for extracting them efficiently and effectively modern technology is required which is possible through foreign investment. 4. Balancing the balance of payment position 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.

5. Develop the Diverse Market The Indian market is widely diverse. The country has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian market and overall economy before taking the plunge. Research firms in India can provide the information to determine how, when and where to enter the market. There are also companies which can guide the foreign firm through the entry process from beginning to end --performing the requisite research, assisting with configuration of the project, helping develop Indian partners and financing, finding the land or ready premises, and pushing through the paperwork required.

4

Foreign Institutional Investments

Who can be registered as an FII? The applicant should be any of the following categories: 1. Pension funds 2. Mutual funds 3. Investment trust 4. Insurance or reinsurance companies 5. Endowment funds 6. University funds 7. Foundations or charitable trusts or charitable societies who propose to invest on their own behalf and a) Asset management companies b) Nominee companies c) Institutional portfolio managers d) Trustees e) Power of attorney holders f) Bank Who propose to invest their proprietary funds or on behalf of “broad based” funds or on of foreign corporate and individuals.

5

Foreign Institutional Investments

Entry options for Foreign Investors A foreign company planning to set up business operations in India has the following options.

1. Incorporated entity:

A) By incorporating a company under the companies Act, 1956 through ƒ

Joint venture; or

ƒ

Wholly owned subsidiaries.

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

A) As a foreign company through ƒ

Liaison office/ representative office.

ƒ

Project office

ƒ

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.

6

Foreign Institutional Investments 3. Liaison office/ representative office:

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:

1. Export/ import of goods. 2. Rendering professional or consultancy services. 3. Carrying out research work, in which the parent company is engaged. 4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. 5. Representing the parent company in India and acting as buying/ selling agents in India.

7

Foreign Institutional Investments 6. Rendering services in information technology and development of software in India. 7. Rendering technical support to products supplied by the parent/ group companies. 8. Foreign airline/ shipping company

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).

6. Branch office on “stand alone basis” in SEZ:

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.

7. Investment in a firm or a propriety concern by NRIs:

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:-

8

Foreign Institutional Investments I) Amount is invested by inward remittance or out of NRE / FCNR / NRO account maintained with AD.

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.

8. Investment in a firm or a proprietary concern other than NRIs:

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.

9

Foreign Institutional Investments

Policy measures to attract FII The Government of India has introduced many policy measures to attract FII:

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.

2. The Foreign Investment Promotion Board (FIPB): FIBP has been set up to process applications in cases not covered by automatic approval.

3. A Foreign Investment Implementation Authority (FIIA): FIIA was established in august 1999 within the Ministry of Industry in order to ensure the approvals for Foreign Investment (including NRI investment) are quickly translated into actual investment inflows and that proposals fructify into projects. In particular, in case where FIBP clearance is needed, approval time has been reduced to 30 days.

Foreign companies have been allowed to use their trade marks on domestic sales from 14 may 1992.

4. Provisions of the Foreign Exchange management act (FEMA) should be liberalized: This is through an ordinance dated on 9 January 1997 as a result of which more than 40% of foreign equity is also treated on par with fully owned Indian company.

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

Foreign Institutional Investments

Reasons to invest in India Some of the major reasons to invest in India: 1.

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.

Demand for several consumer products is growing at over 12% p.a.

5.

Skilled manpower and professional managers are available at competitive cost

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.

Rich base of mineral and agricultural resources.

9.

Developed banking system- commercial banking network is over 63000 branches supported by a number of national and state level financial institutions.

10. Well developed R&D infrastructure and technical and marketing services.

11. Well balanced package of fiscal incentives.

11

Foreign Institutional Investments

12. English is widely spoken and understood.

13. Foreign brand names are freely used.

14. No income tax on profits derived from export of goods.

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

Foreign Institutional Investments

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

Foreign Institutional Investments

Documents required to be submitted at the time of applying for registration as an FII:

1. Application in form A duly signed by the authorized signatory of the applicant.

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.

4. A declaration by the applicant with registration number and other particulars in support of it s registration or regulation by a securities commission or self regulatory organization or any other appropriate regulatory authority with whom the applicant is registered in its home country.

5. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulars of domestic custodian.

6. A signed declaration statement that appears at the end of the form.

7. Declaration regarding fit and proper entity.

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Foreign Institutional Investments

Facilitation of foreign investment in India

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,

agriculture and lottery and gambling. 3.

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

information and assistance to foreign investors. It also gives information on projects available for foreign investors and contains online applications for clearances. 6.

The Various state governments in India offer competitive incentives and attractions

to foreign investors.

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Foreign Institutional Investments

Major Determinants of FII Flows The unpredictability of autonomous FII flows, in both scale and direction, has developed a substantial research effort to identify their major determinants. An extensive literature based generally on three approaches – aggregate econometric analysis, survey appraisal of foreign investors opinion, and econometric study at the industrial level – has failed to arrive at the consensus. This can be partly attributed to the lack of reliable data, particularly at the sectoral level, and to the fact that the most empirical work has analyzed FII determinants by pooling of countries that may be structurally diverse. The subject is mainly concerned with examining the factors influencing the destination of the investment, host country determinants, rather than industry specific factors.

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.

2. Liberalized trade policy: Whilst across to specific markets – judged by their size and growth- is important, domestic market factors are predictability much less relevant in export oriented foreign firms. A range of surveys suggests a widespread perception that ‘open’ economies encourage more foreign investment. One indicator of openness is the relative size of the export sector.

16

Foreign Institutional Investments 3. Labour costs and productivity: Empirical research has also found relative labour costs to be statistically significant, particularly for foreign investment in labour intensive industries and for export oriented subsidiaries. In India labour market rigidities and relatively high wages in the formal sector have bee reported as deterring any significant inflows into the export sector in particular. The decision to invest in china has been heavily influenced by the prevailing low wage rate.

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

Foreign Institutional Investments 6. Incentives and operating conditions: Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FII particularly when they are seen as compensation for continuing comparative disadvantages. On the other hand, removing restrictions and providing good business operating conditions are generally believed to have a positive effect. Further incentives such as granting of equal treatment to foreign investors in relation to local counterparts and the opening up of markets (e.g. air transport, retailing, banking,) have been reported as important factors in encouraging FII flows in India.

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.

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Foreign Institutional Investments

Benefits of FII: Host countries derive several benefits from FII: 1. Additional equity capital from whose profits yield tax revenues.

2. Transfer of patent technologies.

3. Access to scarce managerial skills.

4. Creation of new jobs.

5. Access to overseas market networks and marketing expertise.

6. Reduce flight of domestic capital abroad.

7. Long commitment to successful completion of FII projects.

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.

11. Being subject to business calculation of private profit, it is likely to be employed more productively as compared to public financial aid.

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Foreign Institutional Investments

Prospects for Indian perspective

“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,

Pharmaceuticals, unexplored service sectors including accounting; drug testing, medical care etc are key sectors for foreign investment. Manufacturing is a brick and mortar investment. It is permanent and stays in the country for a very long time. Huge investments are needed to set this industry. It provides employment potential to semi- skilled and skilled labor. On the other hand the service sector requires fewer but highly skilled workers. Both manufacturing and service sector foreign investment are needed in India. Still high end manufacturing in auto parts and pharmaceuticals should be India’s target. The FII (Foreign Institutional Investor) is monies, which chases the stocks in the market place. It is not exactly brick and mortar money, but in the long run it may translate into brick and mortar. Sudden influx of this drives the stock market up as too much money chases too little stock. In last four months an influx of about $1.5 Billion has driven the Indian stock market 20% higher. Where FDI is a bit of a permanent nature, the FII flies away at the shortest political or economical disturbance. The late nineties economic disaster of Asian Tigers is a key example of the latter. Once this, money leaves and it leaves ruined economy and ruined lives behind. Hence FII is to be welcomed with strict political and economical discipline. Thus it can be said that India should welcome, FDI as well as FII and work hard to retain both.

20

Foreign Institutional Investments

Potential for investment in India 1. Expansion of various transport facilities: a) Roads: The Government is focusing on expansion and modernization of roads and has opened this up for private sector participation. 48 new road projects worth US$ 12 billion are under construction. Development and up gradation of roads will require an investment of US$ 24 billion till 2008. Private sector participation in road projects will grow significantly. b) Railways: The railway sector will need an investment of US$ 22 billion for new coaches, tracks, and communications and safety equipment over the next ten years. c) Airways: Up gradation and modernization of airports will require US$ 33 billion investment in the next ten years. d) Waterways: There is potential for investment in the expansion and modernization of ports. The government has taken up a US$22 billion 'Sagarmala' project to develop the Port and Shipping sector under Public-Private Partnership. 100 percent FDI is permitted for construction and maintenance of ports. The government is offering incentives to investors.

21

Foreign Institutional Investments

2. Better power facilities: The Ministry of Power has formulated a blueprint to provide reliable, affordable and quality power to all users by 2012. This calls for investment of US$ 73 billion in the next five years. The gap between demand and production of power is around 10000 MW. Opportunities are there for investment in power generation and distribution and development of non-conventional energy sources.

3. Urban projects need investments: There is potential for investment in urban infrastructure projects. Water supply and sanitation projects alone offer scope for annual investment of US$ 5.71 billion. The entire gamut of exploration, production, refining, distribution and retail marketing present opportunities for FDI.

4. Exploration of mineral reserves: India has an estimated 85 billion tones of mineral reserves remaining to 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.

5. Develop Telecom IT sector: The telecom market, which is one of the world's largest and fastest growing, has an investment potential of US$ 20-25 billion over the next five years. The telecom market turnover is expected to increase from US$ 8.6 billion in 2003 to US$ 13 billion by 2007. Mobile telephony has started growing at the rate of 10-12 million subscribers per year. The IT industry and IT-enabled services, which are rapidly growing offer opportunities for FDI.

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Foreign Institutional Investments

6. Service sector opportunities: India has emerged as an important venue for the services sector including financial accounting, call centers, and business process outsourcing. There is considerable potential for growth in these areas.

7. For R & D and healthcare sector development: Biotechnology and Bioinformatics, which are in the government's priority list for development, offer scope for FDI. There are over 50 R&D labs in the public sector to support growth in these areas. The Healthcare industry is expected to increase in size from its current US$ 17.2 billion to US$ 40 billion by 2012.

8. Positive future of automobile industry: The Indian auto industry with a turnover US $ 12 billion and the auto parts industry with a turnover of 3 billion dollars offer scope for FDI. The government is encouraging the establishment of world-class integrated textile complexes and processing units. FDI is welcome.

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.

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Foreign Institutional Investments 10. Promotion of exports: The Government has recently established Special Economic Zones with the purpose of promoting exports and attracting FDI. These SEZs do not have duty on imports of inputs and they enjoy simplified fiscal and foreign exchange procedures and allow 100% FDI.

11. Development of Tourism industry: The travel and tourism industry which has grown to a size of US$ 32 billion offers scope for investment in budget hotels and tourism infrastructure.

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Foreign Institutional Investments

POSITIVE ATTITUDE TOWARDS FIIs Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for Foreign Institutional Investors (FIIs). The Foreign Institutional Investors' (FIIs) net investment in the Indian stock markets in calendar year 2005 crossed US$ 10 billion in the 2005 calendar, the highest ever by the foreign funds in a single year after FIIs were allowed to make portfolio investments in the country's stock markets in the early 90s. As per the Securities Exchange Board of India (SEBI) figures, FIIs made net purchases of US$ 587.3 million on December 16, 2005, taking the total net investments in the 2005 calendar to US$ 10.11 billion. India's popularity among investors can be gauged from the fact that the number of FIIs registered with SEBI has increased from none in 1992-93 to 528 in 2000-01 to 803 in 2005-06. In 2005 alone, 145 new FIIs registered themselves, taking the total registered FIIs to 803 (as on October 31, 2005) from 685 in 2004-05. A number of these investors are Japanese and European funds aiming to cash in on the rising equity markets in India. In addition, there was increased registration by nontraditional countries like Denmark, Italy, Belgium, Canada and Sweden. The Japanese have, in fact, been increasing their foothold in India. Mizuho Corporate Bank's decision to successfully expand base in the country has managed to convince almost 60-65 major Japanese corporates to set up manufacturing or marketing base in India. 1. This list of corporates includes big names in auto sectors such as Honda, Toyota and Yamaha, as well as those in home appliances, pharmaceuticals, and communications. 2. While Nissan has already set up its base in India, other new entrants include Japanese business conglomerate Mitsui Metal, Sanyo, and major Eisai. Japanese Telecom major Nippon Telegraph (NTT) is also in the process of entering the Indian market.

25

Foreign Institutional Investments 3. Sabre Capital and Singapore's Temasek Holding have teamed up to float a fund that will invest up to US$ 5 billion in Indian equities as well as fixed income instruments over the next five years. 4. Fidelity International, a leading foreign institutional investor, has picked up about 9 per cent in the Multi Commodity Exchange of India Ltd (MCX) for US$ 49 million. If FIIs have been flocking to India, it is obvious the returns are handsome. According to Kamal Nath, the Indian Minister for Commerce and Industry, of all the foreign investors in India, at least 77 per cent make profit and 8 per cent break even.

26

Foreign Institutional Investments

POSITIVE ATTITUDE OF FINANCE MINISTER The Finance Minister, Mr. P Chidambaram, today expressed confidence that the country would continue to attract foreign institutional investors' capital even as he asserted that temporary net selling by such investors does not mean that there was outflow of foreign capital. "My information is that there is lot of foreign capital waiting to come through FIIs. We will continue to attract FII capital. We also need to attract more foreign direct investment (FDI) and we will attract more FDI in the current year than that of last year," Mr. Chidambaram said, when asked about net selling undertaken by FIIs during the last 11 trading days. He also attributed the slide in stock indices to global factors. "Global markets are down and this is partly reflected in the Indian markets also," he said. On the recent movement of the rupee, Mr. Chidambaram said that rupee is market determined and that there was huge demand for dollars for import of capital goods to support manufacturing. "I don't see any reason why we should be unhappy. There is no reason to be concerned about exchange rate. So long as the movements are orderly both ways, it is not a cause for worry," he said. Asked whether any increase in international oil prices would impact GDP growth of fiscal 2006-07, Mr. Chidambaram said that if oil prices rise and if that rise is reflected in the domestic prices, then it will have some impact on inflation. "There is no reason why it will impact growth rates. Rise in oil prices will not impact growth if industry is able to absorb increasing costs and remain competitive," he said. Mr. Chidambaram said that in the short, medium and long term, the country requires larger capital investment, which is only possible if reforms continue at steady pace in every sector.

27

Foreign Institutional Investments "Foreign capital goes to that country where governments carry out structural reforms, legal reforms and administrative reforms and that is the road we have taken so far," he said. Meanwhile, the Deputy Chairman of the Planning Commission, Mr. Montek Singh Ahluwalia, told presspersons that there was no evidence of the Indian economy being overheated and that "all macro indicators are in reasonable okay shape."

28

Foreign Institutional Investments

Major Road blocks in foreign investment The major obstacle is fortunately a non economic one. Rampant corruption is also said to prevail is, of course, is most common in developing economies, which are on path of reforms. 1.

Lack of political stability

It’s 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.

Lack of economic stability

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

Foreign Institutional Investments 4.

Corruption cum lack of transparency

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

Foreign Institutional Investments

FIIs AS PORTFOLIO INVESTMENTS Introduction Portfolio investment flows from industrial countries have become increasingly important for developing countries in recent years. The Indian situation has been no different. In the year 2000-01 portfolio investments in India accounted for over 37% of total foreign investment in the country and 47% of the current account deficit. The corresponding figures in the previous year were 59% and 64% respectively. A significant part of these portfolio flows to India comes in the form of Foreign Institutional Investors’ (FIIs’) investments, mostly in equities. Ever since the opening of the Indian equity markets to foreigners, FII investments have steadily grown from about Rs. 2600 crores in 1993 to over Rs.11, 000 crores in the first half of 2001 alone. Their share in total portfolio flows to India grew from 47% in 1993-94 to over 70% in 1999-2001.

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

Foreign Institutional Investments International capital flows and capital controls have emerged as an important policy issues in the Indian context as well. Some authors have argued that FII flows have, in fact, had no significant benefits for the economy at large.

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

Foreign Institutional Investments

Zoom in view of International Portfolio Flows International portfolio flows are, as opposed to foreign direct investment, liquid in nature and are motivated by international portfolio diversification benefits for individual and institutional investors in industrial countries. They are usually undertaken by institutional investors like pension funds and mutual funds. Such flows are, therefore, largely determined by the performance of the stock markets of the host countries relative to world markets. With the opening of stock markets in various emerging economies to foreign investors, investors in industrial countries have increasingly sought to realize the potential for portfolio diversification that these markets offer. While the Mexican crisis of 1994, the subsequent ‘Tequila effect’, and the widespread ‘Asian crisis’ have had temporary dampening effects on international portfolio flows, they have failed to counter the long-term momentum of these flows. Indeed, several researchers have found evidence of persistent ‘home bias’ in the portfolios of investors in industrial countries in the 90’s. This ‘home bias’ –has the tendency to hold disproportionate amounts of stock from the ‘home’ country – suggests substantial potential for further portfolio flows as global market integration increases over time.

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

Foreign Institutional Investments In recent years, international portfolio flows to developing countries have received the attention of scholars in the areas of finance and international economics alike. Portfolio Investment. While papers in the finance tradition have focused on the nature and determinants of portfolio flows from the perspective of the diversifying investors, those from the international macroeconomics perspective have focused on the recipient country’s situation and appropriate policy response to such flows. For the present purposes, we shall focus only on papers that address the issue of portfolio flows exclusively.

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

Foreign Institutional Investments The Mexican and Asian crises and the widespread outcry against international portfolio investors in both cases have prompted analyses of short-term movements in international portfolio investment flows. The question of ‘feedback trading’ has received international capital flows in general (comprising both FDI and portfolio flows) considerable attention. This refers to investors’ reaction to recent changes in equity prices. If a gain in equity values tends to bring in more portfolio inflows, it is an instance of ‘positive feedback trading’ while a decline in flows following a rise in equity values is termed ‘negative feedback trading’. Between 1989 and 1996 unexpected equity flows from abroad raised stock prices in Mexico with at the rate of 13 percentage points for every 1% rise in the flows.

There has been, however, no evidence of ‘feedback trading’ among foreign investors in Mexico. In the period leading to the Asian crisis, on the other hand, Korea witnessed positive feedback trading and significant ‘herding’ among foreign investors. Nevertheless, contrary to the belief in some segments, these tendencies actually diminished markedly in the crisis period and there has been no evidence of any ‘destabilizing role’ of foreign equity investors in the Korean crisis. While FII flows to the Asian Crisis countries dropped sharply in 1997 and 1998 from their pre-crisis levels, it is generally held that the flows reacted to the crisis (possibly exacerbating it) rather than causing it.

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

Foreign Institutional Investments

It is commonly argued that local investors possess greater knowledge about a Country’s 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 country’s returns should affect these flows.

36

Foreign Institutional Investments

The Foreign Investments and Sensex and nifty The chronicles of Sensex:

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.

Sensex level Date Sensex Drivers: 1000 July 25, 1990: Good monsoon and excellent corporate results.

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

Foreign Institutional Investments 5000 October 8, 1999: BJP-led coalition won the majority.

6000 February 11, 2000: Infotech boom

7000 June 20, 2005: News of the settlement between the Ambani brothers boosted investor sentiments

8000 September 8, 2005: Buying by foreign and domestic funds

9000 November 28, 2005: FIIs on buying Spree.

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.

Source: SEBI website

38

Foreign Institutional Investments

FIIs are back with a vengeance since Nov ‘05:

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

Foreign Institutional Investments

Sensex and the FIIs Foreign institutional investors, FIIs, who had pressed the sell button after May 11,2006 seem to have come back to the Indian equity markets. After selling shares worth Rs 8247.2 crore in May they have put back Rs 6403.8 crore or 77% of their net May withdrawals.

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

Foreign Institutional Investments

Sensex V/S FII correlation Months

Sensex

Gain/

Loss (%)

FII Net Purchases/Sales (Rs Cr)

May

-14.9

-8247.2

June

5.34

1418.2

July

0.45

1447.9

August

8.07

3537.7

Net FII Sales between May-Aug (2006)

-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-à-vis domestic and institutional investors.

41

Foreign Institutional Investments

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

Foreign Institutional Investments

Indian investors had it good in ‘05, just look at Egypt!

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 India’s stock market was 43.1%.

43

Foreign Institutional Investments

Daily trends occurred in FII investments Daily Trends in FII Investments on 26-SEP-2006

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

Foreign Institutional Investments

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

Foreign Institutional Investments

Swot Analysis Foreign Institutional Investments Strengths

Weakness

1) Provides the most important resource

1) Focuses more on developing countries.

i.e. is finance.

2) Hampering the progress due to

2) Contributes to the economic growth of

anytime withdrawal.

the country.

3) Provides only short term opportunities.

3) Balances the balance of payment

4) Provides more returns than in

position.

domestic countries. 5) Develops relationship between two countries.

Opportunities

Threats

1) Better infrastructure.

1) Anytime withdrawal of investments.

2) Exploitation of resources to the

2) Investments made in Foreign countries

maximum.

poses threat to the Indian companies.

3) Better technology available.

3) Increased returns.

46

Foreign Institutional Investments

Swot Analysis

Strengths: 1

Provides most important resource i.e. finance:

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.

2

Contributes to the economic growth of the country:

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.

3

Balances the balance of payments:

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

Foreign Institutional Investments

4

Provides more returns than in domestic countries:

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.

5

Develops relationship between two 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

Foreign Institutional Investments

Weaknesses

1

Focuses more on developing countries:

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.

2

Hampering the progress due to anytime withdrawal:

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.

3

Provides only the short term opportunities:

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

Foreign Institutional Investments

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.

2

Exploitation of resources to the maximum:

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.

3

Better technology available:

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

Foreign Institutional Investments

Threats: 1

Anytime withdrawal of investments:

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.

2

Investments made in Foreign Companies poses threat to Indian companies:

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.

3

Increased returns results in outflow of money:

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

Foreign Institutional Investments

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.

In last 50 years, India has developed a strong and professionally

competent technical, marketing and business manpower in Livestock production and Information Technology. This is an added advantage over many developing countries of Asia and Africa. Availability of competent and comparatively low-cost manpower in India is a great asset which is attracting foreign investors. As a result of stagnancy or in some cases reduction in agricultural production, demand for several inputs like machinery and equipment, feeds, pharmaceuticals etc. has reduced in some countries of America and Europe. It is therefore not surprising that these business enterprises have focused their attention to emerging Asian markets, particularly India and China. India is in a better position as it has a strong technical manpower base and large number of English speaking population.

52

Foreign Institutional Investments

India’s 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

Foreign Institutional Investments

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

1) Enter and exit. 2) Operate on equal terms alongside local operators. 3) Repatriate their investments when needed

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 India’s imports will also be crucial in maintaining India’s ability to maintain and continue to build international equity and debt Institutional Investors confidence.

An environment should be created in India whereby investors would be confident in remitting funds into India, instead of just obtaining approval and waiting for the time to invest.

54

Foreign Institutional Investments Though Foreign Investments poses threats, the strengths should also be considered and the opportunities that Foreign Institutional Investments provide. If India has to attract huge amounts of Foreign Investments, it needs to first overcome the barriers that exist. There should be no room for Bureaucracy, Red Tapism and a laid back attitude. Approvals should be easily forth coming.

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

Foreign Institutional Investments

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 India’s 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.

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Foreign Institutional Investments This can be clearly seen if one compares the movement of the benchmark Sensex of the Bombay Stock Exchange (BSE) with the FII inflows. In the Sensex’s journey from 7,000 points to 11,000 points, the addition of every subsequent 1,000 points has seen lesser amount of FII inflows with the exception of the move from 8K to 9K.

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.

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