Definition Of FDI• FDI is that investment, which is made to serve the business

interests of the investor in a company, which is in a different nation distinct from the investor’s country of origin.

• The parent enterprise through its foreign direct investment effort

seeks to exercise substantial “Control” over the foreign affiliate

company.

• Exp. - An American company taking a majority stake in a company

in India.

• By direction Inward Outward

• By Target Mergers and Acquisitions Horizontal FDI Vertical FDI

• By motive Resource seeking Market seeking Efficiency seeking

Types of FDI

Advantages of FDI

• Economic growth.• Trade.• Employment and skill levels.• Technology diffusion and knowledge transfer.• Linkages and spillover to domestic firms.• Improved technology.• Management expertise.• Access to international markets.

Disadvantages

• Crowding of local industry.• Loss of control.• Repatriation of profits (dividends by investor).• Effects on local culture/ sentiments- socio

cultural effects

FDI Statistics

Factors Affecting FDI

• Financial incentives (funds from local Govt.)• Fiscal incentives (Exemption from import duties)• Indirect incentives (Provides land and other

resources)• Political stability.• Market potential and accessibility.• Large economy.• Market Size.

India’s hottest destinations1. Maharashtra Maharashtra received the lion's share of the FDI $2.43

billion (Rs 11,154 crore), which is 35% of the total FDI inflows in to the country,.

2. National Capital RegionNCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region accounted for 20% of the total FDI.

3. West Bengal, Sikkim, Andaman & Nicobar IslandsThese states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050 crore)

4. Karnataka - $936 million (Rs 4,333 crore) 5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs

4,141 crore)

Source: UNCTAD survey.

Source: UNCTAD survey.

Definition of FII

• An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing.

• Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

• The term is used most commonly in India to refer to outside companies investing in the financial markets of India.

• International institutional investors must register with the Securities and Exchange Board of India to participate in the market.

• One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.

Contd….• Hedge Funds: An aggressively managed portfolio of investments that uses

advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.

• Insurance Companies: A company that offers insurance policies to the public, either

by selling directly to an individual or through another source such as an employee's benefit plan.

An insurance company is usually comprised of multiple insurance agents. An insurance company can specialize in one type of insurance, such as life insurance, health insurance, or auto insurance, or offer multiple types of insurance.

Contd….• Pension Funds: A fund established by an employer to facilitate and

organize the investment of employees' retirement funds contributed by the employer and employees.

The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement.

• Mutual Funds: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

Advantages Of FII

• Enhanced flows of equity capital: FIIs have a greater appetite for equity than debt in their

asset structure. The opening up 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.

• Managing uncertainty and controlling risks: FII inflows help in financial innovation and development

of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals.

Contd….• Equity market development aids economic development: By increasing the availability of riskier long term capital

for projects, and increasing firm’s incentives to provide more information about their operations, FIIs can help in the process of economic development.

• Improved corporate governance: FIIs constitute professional bodies of asset managers and

financial analysts, who, by contributing to better understanding of firm’s operations, improve corporate governance.

Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth.

Disadvantages Of FII• 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.

• Problems for small investor: The FIIs profit from investing in emerging financial stock

markets. If the cap on FII is high then they can bring in huge amounts of funds in the country’s stock markets and thus have great influence on the way the stock markets behaves, going up or down.

The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.

Contd….• 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.

• Hot Money: “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.

FII Activity for the Year 2012

Source : www.indiainfoline.com

Areas effected by FIIStock market The FII’s profit from investing in emerging financial stock markets, say the

Indian stock Exchange. If the cap on FII is high then they can bring in lot of funds in the countries stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. So this is how influencing FII can be, as is seen in the present downtrend of the stock markets in India courtesy heavy FII selling.

Exchange Rates The simple way of understanding is through Demand and Supply. If say US

imports from India it is creating a demand for Rupee thus the Indian rupee appreciates w.r.t the dollar. If India imports then the dollar appreciates w.r.t the Indian rupee.

contd Exports & Imports: The FII lead to appreciation of the currency, they lead to the exports

industry becoming uncompetitive due to the appreciation of the rupee. For e.g. if 1 USD = Rs.40 and a soap costs 1 USD. Now when the rupee appreciates 1 USD = Rs. 20, I will have to sell the same soap to the US for 2 US Dollars in order to sustain the same income that I have been making i.e. Rs.40. Thus excess FII fund inflow in the country can also make a negative impact on the economy of the country.

Inflation: The huge amount 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 by the FII’s. This situation could lead to excess liquidity

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

Difference between FDI and FII FDI

1. It is long-term investment

2. Investment in physical assets

3. Aim is to increase enterprise capacity or productivity or change management control

4. Leads to technology transfer, access to markets and management inputs

5. FDI flows into the primary market

6. Entry and exit is relatively difficult

7. FDI is eligible for profits of the company

8. Does not tend be speculative

9. Direct impact on employment of labour and wages

10.Abiding interest in mgt.

FII

1. It is generally short-term investment

2. Investment in financial assets

3. Aim is to increase capital availability

4. FII results in only capital inflows

5. FII flows into the secondary market

6. Entry and exist is relatively easy

7. FII is eligible for capital gain

8. Tends to be speculative

9. No direct impact on employment of labour and wages

10.Fleeting interest in mgt.

Terms related to FII• Sub-account: Includes those forgein corporations,

forgein individuals and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by FII.

• Designated Bank: Any bank in India which has been

authorized by the RBI of India to act as a banker to FII.

Cont…

• Domestic Custodian: It means any entity registered with SEBI to

carry or the activity of providing custodial services in respect of securities.

Role of FIIs

• The Indian stock market has come of age and has substantially aligned itself with the international order.

• Market has also witnessed a growing trend of ‘institutionalization’ that may be considered as a

consequence of globalization.• It is influence of the FIIs which changed the face

of the Indian stock markets. Screen based trading and depository are realities today largely because of FIIs

Cont…

• FIIs are the trendsetters in any market. They were the first ones to identify the potential of Indian technology stocks. When the rest of the investors in these scrips, they exited the scrips and booked profits.

• Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla system.

• The FIIs are playing an important role in bringing in funds needed by the equity market.

Cont…

• A positive contribution of the FIIs has been their role in improving the stock market infrastructure.

• Led to emergence of new system called the depository system.

FDI & FII flows to India

SL.NO

ITEM 2006-07 2007-08

2008-09

2009-10

2010-11

2010-11(APRIL-SEPTEMBER

2011-12(APRIL-SEPTEMBER)

1 FDI 0.8 1.3 1.8 1.3 0.6 0.9 1.3

2 PROTFOLIO INVESTMENT

0.7 2.2 -1.2 2.4 1.8 3.1 0.1

CAPITAL FLOWS IN 2011-12CAPITAL FLOWS IN 2011-12

US$ BILLION

COMPONENT PERIOD 2010-11 2011-12

FDI TO INDIA APRIL-AUGUST 11.7 21.0

FIIs(net) APRIL-OCT. 14 27.5 0.6

ADRs/GDRs APRIL-AUGUST 1.5 0.3

ECBs Approvals

APRIL-AUGUST 7.5 15.9

NRI Deposits (net)

APRIL-AUGUST 1.9 2.1

SOURCE: www.rbi.org.in

Regulations

• The SEBI is a nodal agency for dealing with FIIs and they have to obtain initial registration with SEBI.

• The SEBI initial registration is valid for 5 years. The RBI general permission to FIIs will also hold good for five years.

• FIIs can invest in all securities traded on primary and secondary market.

• FIIs can repatriate capital gains, dividends, incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares.

Recent Statistics

• FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11.

• FII inflows projected to be $14 billion which is less than half that of the last year i.e. $30.3 billion.

• FDI flows rose by 36% to US$23.69 billion during January- October 2011.

• FDI rose by an impressive 56% to US$2.53 billion in November 2011.

• The Govt. has approved 20 FDI proposals worth Rs 1,935.24 cr(US$ 384.5 million)

Source: www.ibef.org

RECENT NEWS• India is a country that has been able to restore

investor confidence in its markets, even during the toughest of times. Increase in capital inflows, foreign direct investments (FDI) and overseas entities’ participation reflect the fact that Indian markets have fared well in recent times.

• SEBI tries to soothe FIIs’ frayed nerves: Sebi said that FII sub-accounts will not be allowed

to issue PNs(Participatory Notes) any further and the 18-month period to wind up derivatives positions taken through the PN route will not be relaxed.

Cont…• India’s finance ministry allows 26% FDI in Indian

airlines companies.• Tax Caveat haunt FII investments.• FII norms for commexes eased, single- branded

retail.• Emirates airline may look at investing in India

carrier. (ET).• FII investment inflows into the country in 2011

turned negative as foreign fund managers took another Rs 1,636 crore off the table.

SOURCE: livemint.com a wall street journalPosted on: Mon, Apr 9 2012. 6:57 PM IST

Impact FDI on Indian economy Creates employment opportunity for domestic country.

Good relation between two countries. Modern technology. Inflow of foreign funds in Indian economy. To provides the goods and services at best suitable price. It creates the competition among the domestic company and

MNC in this way domestic co.can increase their efficiency. Indian company get chance to work professional body. Indian company get chance to work with world market Leader

Company. Backward area can be developed. Creating good capital market in India. Government earns in the form of licenses fees, registration

fees, taxes which is spend for public expenditure.

Flow of FII on Indian stock marketYEAR ANNUAL RETURN FII INVESTMENTS IN EQUITIES

2001 -18 11970

2002 6 3629

2003 67 30459

2004 12 38965

2005 36 47181

2006 40 36540

2007 53 71486

2008 -54 -52987

2009 81 83424

2010 15.5 133526

2011 -25 -2812

In INRSource: DIPPs

FII investments

• Adopting a bullish stance on India, overseas investors have pumped over Rs 14,000 cr. into the Indian equity market in Feb, 2012.

• Foreign institutional investors(FIIs) were gross buyers of shares worth Rs 15,362 cr., while they sold equities amounting to Rs 14,104.50 cr., translating into a net investment of Rs 1,257.30 cr. (USD 258 million) till March 9, as per the data available with market regulator SEBI.

Why encourage FII’s

• To enhance the Global liquidity into the equity markets.

• Raise the price earning ratio.• Built our reputation in the international

community.• Instrumental in capital formation.

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

Ranks Country % flows to India(upto- 2011)

% flows to india (till 2012)

1 Mauritius 42% 39%

2 Singapore 9% 10%

3 U.S.A 7% 6%

4 U.K. 5% 6%

5 Netherlands 4% 4%

6 Japan 4% 8%

7 Cyprus 4% 4%

8 Germany 2% 3%

9 U.A.E 2% 1%

10 France 1% 2%

Source: DIPP’s

Source: DIPP’s Database

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS: Amount in crores

India Vs China

• India's per capita income is USD 440.

• India received USD 4.67 billion of FDI inflows in the same year.

• FDI Inflows only contributes to 0.8 percent of India's GDP.

• India's high-tech industries claim for 2.3 percent of Gross Domestic Product.

• China's per capita income is USD 990.

• China received USD 52.7 billion of FDI inflows in the year 2002.

• FDI flows contribute 3.5% of china’s GDP.

• High-tech industries in China contributes to around 7.9 percent in the GDP of the country.

INDIA CHINA

Strengths of India And China

• India has skilled and efficient manpower.

• Talented management system.

• Rule of law.• Transparent system of

work.• Cultural affinity and

regulatory environment.

• China has a bigger market size than India.

• Offers easy accessibility to export market.

• Government incentives.• Developed infrastructure.• Cost-effectiveness.• Macro-economic climate

INDIA CHINA

Caveat for FII investment in India

However, the FII activities come with a caveat. When the FII find that the markets are performing badly, they will quickly cash out to save their positions.

Maruti Suzuki shares jumped over 2 per cent as theReserve Bank of India removed the company from the caution list for FII investment, dealers said.

In a press release, the central bank said the aggregate shareholding in Maruti Suzuki by foreign institutional investors under the Portfolio Investment Scheme has gone below the prescribed trigger limit and restrictions placed earlier on purchase of its shares were withdrawn.

In August as the stock markets fell on the news of the problems with Greece financial situation and the down rating of US credit rating, the FII’s have been selling heavily. This means that the investment will be sent out of the country.

Contd.. Mid-cap and small cap indices have recorded higher gains, rising by 14.4 per cent and 17 per

cent respectively.

The sectors that were so far sluggish are now the biggest gainers. Capital goods, metals, real estate and banking sectors saw their respective indices surge by the high twenties.

The capital goods index rose 28 per cent while metals, real estate and banking witnessed a jump in the range of 23-25 per cent.

The information technology (IT) and fast moving consumer goods indices traded flat. Mutual funds, domestic institutions and FIIs too have gained. FIIs remained more or less

invested in the market in 2011 and have been entering at attractive levels leading to a rally in the market.

Experts, however say that the market is getting into a phase where it is in an overbought position and any bad news could possibly lead to a reversal in the rally.

FII and FDI connection

The relationship between FII and FDI (Foreign Direct Investment) is intertwined.

In 1998 – 1999 a number of reforms were initiated, that were designed specifically for attracting FDI. In India FDI is allowed through FII’s.

This is done through private equity, preferential allotment, joint ventures and capital market operations.

Contd.. The only industries in which FDI isn’t allowed are arms,

railways, coal, nuclear and mining. 100% financing by FDI is allowed in infrastructural projects such as construction of the bridges and the tunnels.

In the financial sector, insurance and banking operations can have foreign investors.

Even though the current financial crisis is affecting the markets, it will be some time before the markets will rise again.

Why India?

• Liberal, largest democracy, political stability.• Second largest emerging market.• Skilled and competitive labor force.• Highest rates of return on investment.• One hundred of the fortune 500 have R&D

facilities in India.• Second largest group of software developers

after the U.S.• Lists 6,500 companies on the BSE

Cont……

• World’s fourth largest economy and second largest pharmaceutical industry.

• Growth over the past few years averaging 8%.• Destination for business process outsourcing,

knowledge processing etc.• Second largest English speaking, scientific,

technical and executive manpower.• Low costs and tax exemptions in SEZ. •

Recommendations for India India should open more sectors to FDI to boost

foreign cash inflows unlike China.• Chinese government has opened more sectors to foreign direct

investment (FDI) to increase the foreign investment flows in side the country which has seen some drop in last month due to ongoing global economic slowdown and euro zone debt crisis.China’s FDI dropped nearly 9.76% to USD 8.76 billion in November which has prompted the Chinese

government to take this decision.

The new sectors such as energy-saving and environment-friendly technologies, new-generation information technology, biotechnology, high-end equipment manufacturing, alternative energy, advanced materials and alternative fuel cars should be opened for FDI by India .

Contd.. Recently Indian Government failed to approve FDI in

multi brand retail and current policy paralysis by the government who is hurting the FDI in India. During this time, China’s move to allow FDI in more sectors is definitely a confidence booster for the global investors who bet on emerging markets for more return.

India should follow the same step to attract more FDI inside the country which will also support its continuously depreciating currency.

Conclusion

There is little doubt that FII inflows have significantly grown in importance over the last few years. In the absence of any other substantial form of capital inflows, the potential ill effects of a reduction in the FII flows into the Indian economy can be severe. Thus, while it does not indicate that FII inflows are per-se bad, there is possibly a need to gear up macro-economic policies to target other form of foreign investments into the economy and reduce the over-reliance of the economy on portfolio flows.