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A study on role of FDI & FII in banking & insurance sector
INTRODUCTION
Foreign Investment (FI)
Foreign Investment is an investment by citizens and government of one
country in industries of another; also investment within a country by foreigners.
The income tax treatment of foreign investment income is often governed
by Tax Treaties between the country of the investment owner and the
country where the investment is located. General Motors building a vehicle-
manufacturing plant in Mexico is an example of Foreign Investment.
Foreign Direct Investment (FDI)
Foreign Direct Investments means when a foreign company having a stake
in a public sector undertaking in India. E.g. FDI in telecom sector has been
increased to 74%.So if Vodafone wants a share in Indian market. It can penetrate
Indian market with max of 74% stake
It is an Investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor. The FDI relationship consists of a parent
enterprise and a foreign affiliate which together form a Multinational corporation
(MNC). In order to qualify as FDI the investment must afford the parent enterprise
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control over its foreign affiliate. The UN defines control in this case as owning
10% or more of the ordinary shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm; lower ownership shares are known as
portfolio investment.
Foreign Institutional Investors (FII)
Foreign Institutional Investors, i.e., foreign Investment Bankers like
Goldman Sachs, Merill Lynch, Lehman brothers investing in Indian markets i.e.
buying Indian Stocks. FII's generally buy in large volumes. This has an impact on
the stock markets.
Foreign Institutional Investor (FII) is used to denote an investor - mostly of
the form of an institution or entity, which invests money in the financial markets
of a country different from the one where in the institution or entity was originally
incorporated.
FII investment is frequently referred to as hot money for the reason that it
can leave the country at the same speed at which it comes in. In countries like
India, statutory agencies like SEBI have prescribed norms to register FIIs and
also to regulate such investments flowing in through FIIs. A FEMA norm includes
maintenance of highly rated bonds (collateral) with security exchange.
Difference between FDI and FII
FDI typically brings along with the financial investment, access to modern
technologies and export market. The impact of the FDI in India is far more than
that of FII largely because the former would generally involve setting up of
production base - factories, power plant, telecom networks, etc. that generates
direct employment. There is also multiplier effect on the back of the FDI because
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of further domestic investment in downstream and upstream projects and a host of
other services.
The best example of FDI is Maruti Suzuki. India's experience in the
automobile sector with Suzuki ushering in the modern car on Indian roads
- that has been a force multiplier for the whole automobile sectors - can be
seen as a typical example of the collateral benefit of FDI. However, the downside
is that it puts an impact on local entrepreneur.
Therefore it is advisable that the FDI should ensure minimum level
of local content, have export commitment and technology transfer to India.
FII too gives large chunks of capital by way of market. The indirect
benefits of the market would include alignment of local practices to international
standards in trading, risk management, new instruments and equities research thus
facilitating market to become more deep, liquid, feeding in more information into
prices resulting in a better allocation of capital to globally competitive sectors of
the economy.
While these portfolio flows can technically reverse at any time, given that
the surfeits of international capital chase growth, as long as the host country
follows sensible economic policies, this risk is not as high as it is frequently made
out to be. India had experienced over the last decade and a half despite economic
slowdown, war, droughts, floods, political uncertainties and a nuclear test - bears
testimony to this.
While both forms of capital involve financial inflows, the additional
attribute of FDI is the feature of technology transfer, access to markets
and management inputs. Apart from this distinction there is hardly any big
difference between the two forms of capital.
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A capital deficient country like India would need to balance the distribution
of foreign There are lot of confusion between FII and FDI and which has
created so many rules and regulations. For example investment by financial
institutions under FII may sometime involve participation in management and intransfer of technology, in developing new export market and also in upgrading
management capabilities.
Thus merger proposal presently under consideration of the Government is
worthy of support.
RESEARCH DESIGN
TITLE OF THE STUDY
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A Study on Role Of FDI & FII in Banking & Insurance Sector.
STATEMENT OF THE PROBLEM
Problems arose only in the case of those entities in which single foreign
entities held more than 10 per cent equity. This was, for example, true of the
Development Credit Bank and the Catholic Syrian Bank . The problem faced by
these entities is that of finding buyers willing to acquire small blocks of equity to
ensure adequate dilution of lead stakeholder ownership in a bank being run by a
dominant foreign shareholder. As a result they have been under pressure for notcomplying with the RBIs demand to dilute equity and faced with threats of penal
action.
FDI will lead to job losses. Small retailers and other small Kirana store
owners will suffer a large loss.
Supermarkets will establish their monopoly in the Indian market. Because
of supermarkets fine tuning, they will get goods on low price and they will
sell it on low price than small retailers, it will decrease the sell of small
retailers.
Jobs in the manufacturing sector will be lost because foreign giants will
purchase their goods from the international market and not from domestic
sources.
OBJECTIVES
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To examine trends and patterns of FDI across different sectors and from
different countries.
To determine the growth and development in various sectors due to FDI.
To understand the Global Investment Scenario through FII.
To determine the important factors which motivates Banking and
Insurance Sector to pursue FDI and FII.
To Measure the role of FDI and FII in Banking and Insurance Sector
If the FDI and FII increase or decrease what will be effect of
it on Banking and Insurance Sector
Scope of the Study
Overview of the FDI & FII in India.
Regulatory framework of FDI in India.
Participants in the Banking and Insurance Sector to pursue FDI and FII.
Market Structure and Segmentation. Increase economic growth by
dealing with different international products.
Spread import and export business in different countries.
Research Methodology
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Research methodology is a way to systematically solve the research
problem. It may be understood as science of studying how research is done
systematically. The scope of Research methodology is wider than that of research
method.
Non Probability
The non probability respondents have been researched by selecting the
employees working in Bank, Insurance and Broking Firm
Exploratory and Descriptive Research
The research is primarily both exploratory and descriptive in nature. The
sources of information are both primary and secondary. The objective of the
exploratory research is to gain insights and ideas.
The objective of the descriptive research study is typically concerned with
determining the frequency with which something occurs.
SAMPLING METHODOLOGY
Sampling Techniques
Initially, a rough draft was prepared a pilot study was done to check the
accuracy of the Questionnaire and certain changes were done to prepare the final
questionnaire to make it more judgmental.
Sampling Units
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The respondents who will be asked to fill out the questionnaire in
Bangalore and Bangalore are the sampling units. These respondents mostly will
comprise of the employees working in Bank, Insurance and Broking Firm
Sample Size
The sample size was restricted to only 100 respondents.
Sampling Area
The area of the research will be Bangalore
LIMITATIONS OF THE STUDY
The various limitations of the study are:
Employees may be not willing to fill the entire questionnaire due to the less time
available to them or may be least bothered to fill the entire questionnaire.
Some respondents might be hesitant to provide personal and financial information
which can affect the validity of all responses.
There can be lack of awareness among people about FDI and FII. So the people
who are aware of such things may be found in specific areas for survey purposes.
Some of the respondents who are not aware of FDI and FII concept may be able to
respond to few questions.
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LITERATURE REVIEW
Dr. patil Usha.N:
The Government of India was initially very apprehensive of the introduction
of the Foreign Direct Investment in the Retail Sector in India. The unorganized retailsector as has been mentioned earlier occupies 98% of the retail sector and the rest 2%
is contributed by the organized sector. Hence one reason why the government feared
the surge of the Foreign Direct Investments in India was the displacement of labour.
The unorganized retail sector contributes about 14% to the GDP and absorbs about
7% of our labour force. Hence the issue of displacement of labour consequent to FDI
is of primal importance. There are different viewpoints on the impact of FDI in the
retail sector in India, According to one viewpoint, the US evidence is empirical proofto the fact that FDI in the retail sector does not lead to any collapse in the existing
employment opportunities. There are divergent views as well. According to the UK
Competition Commission, there was mass scale job loss with entry of the
hypermarkets brought about by FDI in the UK retail market. This paper highlight is
Introduction & Definition of Retail, Division of Retail Industry, FDI Policy in India,
FDI Policy with Regard to Retailing in India, Foreign Investors Concern Regarding
FDI in Single and Multi Brand Retail.
Uttama,Nathapornpan Piyaareekul:
The paper examines the interaction on intra-industry trade (IIT) and foreign
direct investment (FDI) with special attention to the Association of Southeast Asian
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Nations (ASEAN). We introduce the 233 knowledge-capital model, recently
proposed by Baltagi et al. (2007) and Uttama and Pridy (2009). The theoretical
implications are suggested, not only how IIT is determined by country characteristics,
such as similarity in market size and factor differentials, but also trade costs as well asregional economic integration. Moreover, it also empirically investigates the
determinants of aggregated and disaggregated IIT in five ASEAN countries over the
period 19952008, concerned with what extent complex FDIs boost IIT. Using spatial
panel data model, we find the fact that the empirical results are consistent with the
theoretical predictions. Vertical FDI tends to discourage ASEANs IIT, whereas
complex horizontal FDI in neighbours tends to encourage its IIT in ASEAN.
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THEORITICAL BACKGROUND
Introduction
Foreign Investment means flow of capital from one nation to another in
exchange for significant ownership stakes in domestic companies or other
domestic assets. Typically, foreign investment denotes that foreigners take a
somewhat active role in management as a part of their investment. Foreign
investment typically works both ways, especially between countries of relatively
equal economic stature
Direct foreign investment is investment in real assets, rather than financialassets such as securities. This investment may take the form of joint ventures with
foreign firms, formation of foreign subsidiaries, or the acquisition of existing
foreign firms. Although the investment is in real assets, this may be accomplished
by a position in financial assets that is large enough to provide influence
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overmanagement(a 10 percent or greater position is sometimes considered
sufficient). Foreign investment in the United States grew steadily during the
1970s, but experienced a surge during the middle and late 1980s. The high levels
of foreign investment led to concerns about a loss of control over domesticeconomic activity, or "economic sovereignty," and the effect of foreign ownership
on national security.
Studies of foreign investments in the United States indicate that the primary
vehicle was acquisition, but the acquisitions were managed in basically the same
way as domestic firms, and the overall impact of foreign investment is positive.Despite the large size and prominence of some investments, and their potentially
large impact in specific areas, overall foreign investments are relatively
insignificant relative to the size of the U.S. economy. With the economic
slowdown of the early 1990s, and a drop-off in the rate of foreign investment,
concerns about economic sovereignty became muted.
Attitudes toward foreign investment also changed somewhat as localities
vied to attract investment for economic stimulus. Another factor was a surge in
foreign investment by U.S. firms during the late 1980s, and this trend continued
into the 1990s. Finally, foreign investment may help offset decreases in domestic
investment during periods of economic slowdown.
Currently there is a trend toward globalization whereby large, multinational
firms often have investments in a great variety of countries. Many see foreign
investment in a country as a positive sign and as a source for future economic
growth. The U.S. Commerce Department encourages foreign investment through
its Invest in America initiative.
BENEFITS AND COSTS- FOREIGN INVESTMENT
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The benefits motivating foreign direct investment are complex and usually
firm-specific. A primary motivation is the exploitation ofoligopoly(or monopoly)
power such as proprietary technology, brand names, or management know-how.
Entry into more profitable markets is an obvious attraction, and new and possiblylarge markets may produce economies ofscale.Foreign Investment has access to
foreign factors of production or technologies, and reaction to trade restrictions or
exchange rate movements, have also provided a motivation.
An important benefit of direct investment is diversification.National
economies are in different stages of their economic cycles, and move differently.
Just as diversification of a security portfolio across firms that react differently toeconomic cycles will reduce the variability of portfolio returns, investment across
national economies reduces the volatility of the firms' cash flow. This reduces the
possibility of inadequate liquidity and should increase the value of the firm.
These benefits must be weighed against the potential costs of foreign
investment. National interests are involved and may lead to restrictions.
Diversification may reduce variability over the longer run, but exposes the firm to
potential short term variability, especially through exchange rate
movements. International management is also more complex and difficult,
involving not only a larger organization but also different laws, conditions, and
customs. The uncertainty surrounding the likely outcomes, and the possibility of
undesirable outcomes, is larger for foreign investment than for domestic
investment. Especially for smaller or emerging economies, the concerns of
national economic sovereignty may lead to protectionism and restrictions, such as
limits on repatriation of profits.
On a global basis, and over a long time, it is generally agreed that a free
flow of capital is beneficial, since it promotes an efficient allocation of resources.
For shorter periods, and within a given country or region, the impact is mixed. For
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the individual firm the foreign direct investment decision requires consideration of
factors beyond those encountered domestically. It appears that there is no overall
answer to the desirability of foreign direct investment on either the national or
firm level, and that individual analysis of each project is required.
Entry Route for Foreign Investment
As per the FDI policy in place foreign investors can invest in India through
any of the different routes set forth below:
(i) Foreign Direct Investment(ii) Foreign Portfolio Investment
An investor planning to invest in India has the following options:
Automatic Route
Investment without any prior approval from any regulatory authority and
the only regulatory formality includes post-facto filings with the RBI.
Approval Route
Prior approval of Foreign Investment Promotion Board (FIPB) is required
for
(a) Activities not covered under the Automatic Route;
(b) Conditions, if any, under the automatic route are not fulfilled; or
(c) The investment is beyond the prescribed threshold limit.
100% FDI in almost all key sectors is permitted under automatic route
except very few sectors where either FDI is allowed with Government
approval or is totally prohibited like Atomic Energy, Lottery, gambling and
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betting, retail trading (except single brand product retailing, Nidhi company
etc.
FOREIGN INVESTMENT POLICY
The Ministry of Industry has expanded the list of industries eligible for
automatic approval of foreign investments and, in certain cases, raised the upper
level of foreign ownership from 51 percent to 74 percent and further in certain
cases to 100 percent. In January 1998, the RBI announced simplified procedures
for automatic FDI approvals. Further announcement had provided that Indian
companies will no longer require prior clearances from the RBI for inward
remittances of foreign exchange or for the issuance of shares to foreign investors.
Facilitating Foreign Investment
In the recent budget, the finance minister announced the government's
commitment to a 90-day period for approving all foreign investments.
Government officers will be assigned to larger foreign investment proposals and
will facilitate Central and State clearances in a time-bound manner. Unlisted
companies with a good 3 year track record, have been permitted to raise funds in
international markets through the issue of Global Depository Receipts (GDRs) and
American Depository Receipts (ADRs).
A number of policy changes have reduced the discriminatory bias against foreign
firms.
The government has amended exchange control regulations previously
applicable to companies with significant foreign participation.
The ban against using foreign brand names/trademarks has been lifted.
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The FY 1994/95 budget reduced the corporate tax rate for foreign companies
from 65 percent to 55 percent. The tax rate for domestic companies was
lowered to 40 percent.
The long-term capital gains rate for foreign companies was lowered to 20
percent; a 30 percent rate applies to domestic companies.
The Indian Income Tax Act exempts export earnings from corporate income
tax for both Indian and foreign firms.
Other policy changes have been introduced to encourage foreign direct and
foreign institutional investment.
NEXT TOP ECONOMIC INDEX
Direct Investment vs. Portfolio Investment (U.S $ million)
Year Direct Investment Portfolio
Investment
Total Foreign
Investment
2002-2003 129 4 133
2003-2004 315 224 5592004-2005 586 3567 4153
2005-2006 1314 3824 5138
2006-2007 2133 2748 4881
2007-2008 2696 3312 6008
2008-2009 3197 1828 5025
2009-2010 (April-
Dec)
2511 1748 4253
2012-2012
(April- Dec)
1562 -682 880
Source: Economic Times
PORTFOLIO INVESTMENT BY FOREIGN SOURCES
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The decline in portfolio investment, from 2008-2009 onwards, has been
contributed by a decline in flows of both foreign institutional investment and
GDRs. Fresh inflow of funds by FIIs declined from U.S.$ 1,926 million in 2007-
2008 to U.S.$ 979 million in 2008-2009. This trend intensified in 2009-2010 withan estimated outflow of U.S.$ 752 million during April-December, 2009
compared to inflows of U.S.$ 973 million during the corresponding period in the
previous year. GDRs raised in 2008-2009 was U.S.$ 645 million, which was less
than half the amount of U.S.$ 1,366 million raised in 2007-2008. The declining
trend has continued during the first nine months of 2009-2010 with only U.S.$ 15
million raised compared to U.S.$ 612 million during the same period in 2008-
2009. The poor performance of portfolio investment is a consequence of both
enhanced emerging market risk-perception, and the depressed condition of the
domestic capital market.
Portfolio Investments NRIs
A number of liberalization measures have been taken in 1998-99 to
promote portfolio foreign investment. In order to avoid NRIs being crowded out
by FIIs, the aggregate ceiling for investment in a company by all
NRIs/PIOs/OCBs through stock exchanges has been made separate and exclusive
of the investment ceiling available for FIIs. In addition, the aggregate investment
ceiling for NRIs/PIOs/OCBs has been raised from 5 per cent to 10 per cent of the
paid up capital of a company. In the case of listed Indian companies, the ceiling
can be raised to 24 per cent of the paid up capital under a General Body
Resolution.
Also, the investment limit by a single NRI/PIO/OCB has been enhanced
from 1 per cent to 5 per cent of the paid up capital. Policy pertaining to investment
in unlisted companies has also been liberalized. NRIs/PIOs/OCBs are now
permitted to invest in unlisted companies. However, while investing in unlisted
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companies, the same norms and approval procedures applicable to portfolio
investments in listed companies will apply, and it will be subject to the same
investment ceilings as in the listed companies.
PORTFOLIO INVESTMENTFIIs
FIIs can purchase and sell Government Securities and Treasury Bills
within overall approved debt ceilings. To facilitate better risk management by
investors, authorized dealers have been permitted to provide forward cover to FIIs
in respect of their fresh equity investments in India. Moreover, transactions among
FIIs with respect to Indian stocks will no longer require post-facto confirmation
from the RBI. Also, 100 percent FII debt funds have been permitted to invest in
unlisted debt securities of Indian companies.
EXTERNAL COMMERCIAL BORROWINGS (ECBs)
The higher net inflows of U.S. $ 3,999 million of ECBs in 2008-2009
compared to U.S. $ 2,848 million in 2007-2008 reflected lower amortization.
Disbursements in 2008-2009 stood at U.S. $ 7,371 million, which was marginally
lower than U.S. $ 7,571 million recorded in 2007-2008. ECB approvals in 2008-
2009 have been placed at U.S. $ 8,712 million, which is slightly higher than the
level in 2007-2008. Regarding sectoral allocation, power accounted for the highest
approvals of U.S. $ 3 billion, followed by telecom with U.S. $1.5 billion given in
the table. In 2009-2010 up to 23.12.98, approvals have been placed at U.S.$ 3,804million. The reduced attractiveness of ECB of the corporate sector has been
underscored by a very steep decline in actual disbursements to U.S.$ 1.6 billion
(excluding U.S $ 4.2 billion on account of RIBs) in the first two quarters of 2009-
2010 compared to U.S.$ 4.3 billion in the same period last year. Increase in cost of
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ECB funds has come about due to a general increase in the risk premium for
emerging market borrowers, downgrades by international credit rating agencies
and the rise in forward premium. After several years of unchanged or slightly
improving ratings, major rating agencies started to re-examine our ratings in early2008. Both the deteriorating external environment and persistent large fiscal
deficits have been cited as the main reasons for downgrading.
ECB is approved by the Government within an annual ceiling that is
consistent with prudent debt management, keeping in view the balance of
payments position. The existing ECB policy was reviewed in 2009-2010 in light
of the financial needs of various sectors and the impact on international markets ofboth the East Asian crisis and economic sanctions. Regarding the sectoral
requirements, infrastructure and exports continue to be accorded high priority in
ECB allocation.
NON RESIDENT DEPOSITS (NSD)
The Resurgent India Bond (RIB) scheme, launched in the current financial
year, was open to both NRIs/OCBs and the banks acting in fiduciary capacity on
behalf of them. The scheme, that opened on August 5, 2009 and closed on August
24, 2009, mobilized U.S.$ 4.2 billion. The interest rates on these five year bonds
were 7.75 per cent for U.S. dollar, 8 per cent for Pound Sterling, and 6.25 per cent
for Deutsche Mark. Other features of Ribs include joint holding with Indian
residents, allowing them to be gifted to Indian residents, easy transferability, loan
ability, premature encashment facility, and tax benefits. 45. Net inflows under
non-resident deposits declined from U.S.$ 3,314 million in 1996-97 to U.S.$ 1,119
million in 2008-2009. The outflow under FCNRA continued due to redemption
payment. Also, the relative rates of return and the perceived risk premium on
emerging market debt has influenced the flows into these accounts.
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Some of the domestic policy-related factors which seem to have contributed
towards subdued net flows include imposition of incremental cash reserve ratio of
10 per cent on non-resident deposits and the linking of interest rates under FCNR
(B) with LIBOR, which had the effect of lowering interest rates offered under thisscheme, and thereby reducing its attractiveness. In order to encourage mobilization
of long-term deposits, and concomitantly to discourage short-term deposits, the
interest rate ceiling on FCNR(B) deposits of one year and above was raised and
the ceiling on such deposits below one year was reduced in April, 2009. As at the
end of March 1998, outstanding balances under various non-resident deposit
schemes stood at U.S.$ 20,367 million.
Comparison of estimated net flows under non-resident deposits during
April-November 2009 vis--vis the corresponding period in 1997 shows a
compositional shift in favor of Rupee denominated accounts in response to policy
initiatives undertaken in 2008-2009. Net inflows under non-residents deposits,
(excluding redemption payments under FCNRA which had since been
discontinued) at US $ 367 million during April-November, 1998 were
substantially lower than those of US $ 2266 million in the same period of 2008.
Positive flows have been recorded only in the NR (E) RA and NR (NR) RD
schemes. The initiatives in terms of freeing of interest rates and removal of
incremental CRR, may have acted as incentives to attract deposits in these
accounts.
For instance, the Securities and Exchange Board of India (SEBI) recently
formulated guidelines to facilitate the operations of foreign brokers in India on
behalf of registered Foreign Institutional Investors (FII's). These brokers can now
open foreign currency-denominated or rupee accounts for crediting inward
remittances, commissions and brokerage fees.
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FOREIGN DIRECT INVESTMENT (FDI)
Introduction to FDI An Overview
These three letters stand for foreign direct investment. The simplest
explanation of FDI would be a direct investment by a corporation in a commercial
venture in another country. A key to separating this action from involvement in
other ventures in a foreign country is that the business enterprise operates
completely outside the economy of the corporations home country. The investing
corporation must control 10 percent or more of the voting power of the new
venture.
The practice has grown significantly in the last couple of decades, to the
point that FDI has generated quite a bit of opposition from groups such as labor
unions. These organizations have expressed concern that investing at such a level
in another country eliminates jobs. Legislation was introduced in the early 1970s
that would have put an end to the tax incentives of FDI. But members of the Nixon
administration, Congress and business interests rallied to make sure that this attack
on their expansion plans was not successful.
One key to understanding FDI is to get a mental picture of the global scale
of corporations able to make such investment. A carefully planned FDI can
provide a huge new market for the company, perhaps introducing products and
services to an area where they have never been available. Not only that, but such
an investment may also be more profitable if construction costs and labor costs are
less in the host country.
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The definition of FDI originally meant that the investing corporation gained
a significant number of shares (10 percent or more) of the new venture. In recent
years, however, companies have been able to make a foreign direct investment that
is actually long-term management control as opposed to direct investment inbuildings and equipment.
FDI growth has been a key factor in the international nature of business
that many are familiar with in the 21st century. This growth has been facilitated by
changes in regulations both in the originating country and in the country where the
new installation is to be built.
Corporations from some of the countries that lead the worlds economy
have found fertile soil for FDI in nations where commercial development was
limited, if it existed at all. The dollars invested in such developing-country
projects increased 40 times over in less than 30 years.
The financial strength of the investing corporations has sometimes meant
failure for smaller competitors in the target country. One of the reasons is that
foreign direct investment in buildings and equipment still accounts for a vast
majority of FDI activity. Corporations from the originating country gain a
significant financial foothold in the host country. Even with this factor, host
countries may welcome FDI because of the positive impact it has on the smaller
economy.
FDI has a stronger impact on Domestic Investment than do loans or Portfolio
Investment (Source: Economic Times)
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Types of Foreign Direct Investment
FDIs can be broadly classified into two types: outward FDIs and inward
FDIs. This classification is based on the types of restrictions imposed, and the
various prerequisites required for these investments.
An outward-bound FDI is backed by the government against all types of
associated risks. This form of FDI is subject to tax incentives as well as
disincentives of various forms. Risk coverage provided to the domestic industries
and subsidies granted to the local firms stand in the way of outward FDIs, which
are also known as 'direct investments abroad.' Different economic factors
encourage inward FDIs. These include interestloans, tax breaks, grants,subsidies, and the removal of restrictions and limitations. Factors detrimental to
the growth of FDIs include necessities of differential performance and limitations
related with ownership patterns.
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Other categorizations of FDI exist as well. Vertical Foreign Direct
Investment takes place when a multinational corporation owns someshares of a
foreign enterprise, which supplies input for it or uses the output produced by the
MNC.
Horizontal foreign direct investments happen when a multinational
company carries out a similar business operation in different nations. Foreign
Direct Investment is guided by different motives. FDIs that are undertaken
to strengthen the existing market structure or explore the opportunities
of new markets can be called 'market-seeking FDIs.' 'Resource-seeking
FDIs' are aimed at factors of production which have more operational
efficiency than those available in the home country of the investor.
Some foreign direct investments involve the transfer of strategic assets. FDI
activities may also be carried out to ensure optimization of available opportunities
and economies of scale. In this case, the foreign direct investment is termed as
'efficiency-seeking.'
Investment Group
A foreign direct investor may be classified in any sector of the economy
and could be any one of the following:
An individual;
A group of related individuals;
An incorporated orunincorporated entity;
Apublic company orprivate company;
A group of related enterprises;
A government body;
An estate (law), trust or other social institution; or
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Any combination of the above.
Methods for Investment
The foreign direct investor may acquire voting power of an enterprise in an
economy through any of the following methods:
By incorporating a wholly owned subsidiary orcompany
By acquiring shares in an associated enterprise
Through a mergeror an acquisition of an unrelated enterprise
Participating in an equityjoint venture with another investor or
enterprise
Foreign Direct Investment Incentives May Take The Following Forms:
Low corporate tax andincome tax rates
Tax holidays
Other types of tax concessions
Preferential tariffs
Special economic zones
EPZ - Export Processing Zones
Bonded Warehouses
Maquiladoras
Investment financial subsidies
Soft loan or loan guarantees
Free land or land subsidies
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http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guarantees7/28/2019 Narasimha Project (2)
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Relocation & expatriation subsidies
Job training & employment subsidies
Infrastructure subsidies
R&D support
Derogation from regulations (usually for very large projects)
Procedure for an FDI License
Foreign direct investment (FDI) for all items / activities can be brought in
through the automatic route under powers delegated to the Reserve Bank of India
(RBI). For the remaining items / activities, it can be obtained through government
approval. Government approvals are accorded on the recommendation of the
Foreign Investment Promotion Board (FIPB).
Automatic Route
(a) New Ventures
In New Ventures all items / activities for FDI / Non Resident Indians
(NRI) / Overseas Corporate Bodies (OCB) investment (up to 100 percent)
fall under the automatic route, except where specified. Whenever any
investor chooses to make an application to the FIPB and not avail of the
automatic route, he or she may do so.
(b) Existing Companies
Besides new companies, the automatic route for FDI / NRI / OCB
investment is also available to existing companies proposing to induct
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foreign equity. For existing companies with an expansion program, the
additional requirements are given below
The increase in equity level must result from the expansion of the
equity base of the existing company without the acquisition of
existing shares by NRI/OCB/foreign investors,
The money to be remitted should be in foreign currency, and
The proposed expansion program should be in the sector(s) under
the automatic route. Otherwise, the proposal would need
government approval through the FIPB. For this, the proposal must
be supported by a Board Resolution of the existing Indian company.
Procedure for the Automatic Route
The proposals for approval under the automatic route are to be made to the
RBI in the FC (RBI) form. To simplify procedures for foreign direct investment
under the automatic route, RBI has given permission to Indian companies to
accept investment under this route without obtaining prior approval from the RBI.
However, investors are required to notify the concerned Regional Offices of
RBI of receipt of the inward remittances within 30 days of such receipt. They will
also have to file the required documents with the concerned Regional Office of the
RBI within 30 days after issue of shares to foreign investors. This facility is
available for NRI/OCB investment also.
PROCEDURE FOR GOVERNMENT APPROVAL
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Foreign Investment Promotion Board (FIPB)
(a) All other proposals for foreign investment, including NRI / OCB
investment and foreign investment in EOU / EPZ / STP/ EHTP units, which do notfulfill any or all of the parameters prescribed for automatic approval, are
considered for approval by the FIPB. The FIPB also grants composite approvals
involving foreign technical collaborations and the setting up of Export Oriented
Units involving foreign investment / foreign technical collaboration.
(b) Applications to FIPB for approval of foreign investment should be
submitted in Form FC-IL. Plain paper applications carrying all relevant details are
also accepted. There is no charge for this.
The following information should form a part of the proposal submitted to the
FIPB:
Whether the applicant has any previous financial / technical collaboration
or trademark agreement in India in the same or allied field for which
approval has been sought; and ii) If so, details thereof and the justification
for proposing the new venture / technical collaboration (including
trademarks).
The application can be submitted to the FIPB unit of the Department of
Economic Affairs, Ministry of Finance, North Block, New Delhi.
Applications can also be submitted with Indian Missions abroad who will
forward them to the Department of Economic Affairs for further
processing.
Foreign investment proposals received in the Department of Economic
Affairs (DEA) are placed before the Foreign Investment Promotion Board
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(FIPB) within 15 days of its receipt. The recommendations of FIPB in
respect of project proposals involving a total investment of up to Rs. 6
billion are considered and approved by the Finance Minister. Projects with
a total investment exceeding Rs.6 billion are submitted to the CabinetCommittee on Economic Affairs (CCEA) for decision.
The decision of the Government in all cases is conveyed by the DEA,
usually within 30 days.
For inward remittance and issue of shares to NRI / OCB, even up to 100
percent equity, prior permission of the RBI is not required. These
companies have to file the required documents with the concerned Regional
Offices of the RBI within 30 days after the issue of shares to the NRI /
OCB.
Procedure for Approval for EOUs
Applications in the prescribed form for 100 percent EOUs should be
submitted to the Development Commissioners (DCs) of the Export Processing
Zones (EPZs) concerned for automatic approval and to the SIA for Government
approval. The form is printed in the Handbook of Procedures for Export and
Import, 2002-2007 published by the Ministry of Commerce & Industry and is also
available at all outlets dealing in government publications.
The application should be submitted along with a crossed demand draft of
Rs. 5,000 drawn in favor of The Pay & Accounts Officer, Department of
Industrial Development, Ministry of Commerce and Industry, payable at the State
Bank of India, Nirman Bhavan Branch, New Delhi.
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Procedure for Automatic Approval for EOUs
Applications in the prescribed form for 100 percent E0Us should be
submitted to the DCs of the EPZs. Wherever the proposals meet the criteria forautomatic approval, the DC of the EPZ would issue approval letters within two
weeks.
Procedure for Government Approval for EOUs
Proposals not covered by the automatic route shall be forwarded by the DC
to the Board of Approval (BOA) for consideration. On consideration of the
proposal by the board, the decision is usually conveyed within six weeks.
Government approval would be necessary for the following categories:
Proposals attracting compulsory licensing
Items of manufacture reserved for the small-scale sector
Proposals involving any previous joint venture or technology transfer /
trademark agreement in the same or allied field in India. The definition of
same and allied would be as per the 4-digit NIC 1987 Code and 3-
digit NIC 1987 Code
Extension of foreign technology collaboration agreements (including those
cases that may have received automatic approval in the first instance)
Proposals not meeting any or all of the parameters for automatic approval
under foreign technology collaboration agreements
ROLE OF FDI IN FINANCIAL SECTOR
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BANKING
The Reserve Bank of India (RBI) governs the investment matters in the
banking sector.
Private Sector Bank
49% is under automatic route. 74% is with approval including FIIs,
PIS. Individual FFI holding restricted to 10% voting right limited to
10%.
Public Sector Bank
FDI and portfolio investment is up to 20% with government
approval.
Subsidiaries by Foreign Banks
Foreign Banks can have branches or subsidiary in India but not both
with RBI permission
INSURANCE
FDI up to 26% in the Insurance sector is allowed on the automatic route
subject to obtaining license from Insurance Regulatory & Development
Authority (IRDA)
NBFC
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Over the years, there has been a significant increase in the role of non-
banking financial company (NBFC) considering their crucial role in the
Indian financial system by complementing banks in providing financial
services. A NBFC is a company registered under the Companies Act, 1956and could be a loan company or an investment company or an asset finance
company (or a mutual benefit financial company.
NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company
(ii) Investment Company
(iii) Loan Company
FDI in NBFC is allowed in 18 specified activities
Merchant Banking
Underwriting
Portfolio Management services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodial Services
Factoring
Credit Rating Agencies
Leasing and Finance
Housing Finance
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set up subsidiaries for undertaking other NBFC activities, subject to the
subsidiaries complying with the minimum capitalization norms.
TYPES OF INSTRUMENTS
FDI under a fresh issue is allowed only for equity shares and fully
compulsorily and mandatorily convertible instruments viz. preference shares and
debentures, subject to pricing guidelines/valuation norms prescribed under FEMA
regulations. Non-convertible, optionally convertible or partially convertible
instruments are considered as debt since 1st
May 2007 and therefore attract the
provisions of External Commercial Borrowings (ECB).
Other Modes of Foreign Direct Investment
Global Depository Receipts (GDR) or American Deposit Receipts
(ADR) or Foreign Currency Convertible Bonds (FCCB)
Indian companies are allowed to raise equity capital in the international
market through the issue of GDRs/ADRs/FCCBs in accordance with the
Scheme for issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme 1993 and guidelines issued by the
Central Government there under from time to time subject to meeting the
eligibility criteria.
There are no end-use restrictions on GDR/ADR issue proceeds, expect for
an express ban on investment in real estate and stock markets.
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The Government of India has also provided for a limited two-way
flexibility scheme for ADRs / GDRs. Indian companies are also permitted to
sponsor an issue of ADR / GDR.
The Importance of FDI to Developing Countries as a Means of Finance
Foreign direct investment (FDI) flows into the primary market whereas
foreign institutional investment (FII) flows into the secondary market, that is, into
the stock market.
All other differences flow from this primary difference. FDI is perceived to
be more beneficial because it increases production, brings in more and better
products and services besides increasing the employment opportunities and
revenue for the Government by way of taxes. FII, on the other hand, is perceived
to be inferior to FDI because it only widens and deepens the stock exchanges and
provides a better price discovery process for the scrip.
Besides, FII is a fair-weather friend and can desert the nation which is what is
happening in India right now, thereby puling down not only our share prices but
also wrecking havoc with the Indian rupee because when FIIs sell in a big way and
leave India they take back the dollars they had brought in.
Impact of FDI on Nation
Foreign direct investment (FDI) policies play a major role in the economic
growth of developing countries around the world. Attracting FDI inflows with
conductive policies has therefore become a key battleground in the emerging
markets.
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Developed countries also seek to bring in more FDI and use various
policies and incentives to attract overseas investors, particularly for capital-
intensive industries and advanced technology.
The primary aim of these policies is to create a friendly business
environment where foreign investors feel comfortable with the legal and financial
framework of the country, and have the potential to reap profits from
economically viable businesses.
The prospect of new growth opportunities and increased profits encourage
large capital inflows. Ultimately this results in economic development of the
nation.
Advantage India (Growth Prospect) FDI
Foreign Direct Investments are that the majority victorious domestic
companies, particularly those with only one of its kind compensation, spend
abroad.
It is the direct investment that makes companies more victorious internally.
Companies with Foreign investment generally tend to be most profitable as
well as it is to have a more stable sales and earnings.
It sells at 12% discount to net assets. Distribution rate is 5.6%. Has a long
track record. It has been in existence since 1972.
Disadvantages of FDI
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Foreign direct investments are cost of travel and communications abroad. It
also does not very much relate to local business tax laws, business
atmosphere in particular and other government regulations.
Language and culture differences.
It invests in debt instruments which are subject to interest rate fluctuations.
Income is mostly taxable at full tax rate. 5 year total return rate is only
4.95%.
Limits for FDI
FDI in the banking sector has been liberalized by raising FDI limit in
private sector banks to 74 per cent under automatic root including investment
by foreign investment in India. The aggregate foreign investment in a private bank
from all sources will be 74 per cent of paid-up capital of the bank. FDI
and Portfolio investment in nationalized banks are subject to overall statutory limit
of 20 per cent.
Investment Scenario
In the year 2012, India has assumed a notable position on the world canvas
as a key international trading partner, majorly because of the implementation of its
consolidated FDI policy. The consolidation, first undertaken in March 2012, pulls
together in one document all previous acts, regulations, press notes, press releases
and clarifications issued either by the DIPP or the Reserve Bank of India (RBI)
where they relate to FDI into India.
According to the modified policy, foreign investors can inject their funds
though the automatic route in the Indian economy. Such investments do not
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Source: Economic Times
The reasons for Indias rise in rankings are its highly-educated workforce,
management talent, rule of law, transparency, cultural affinity and regulatory
environment, apart from its expertise in IT, business processing and research-
oriented activities.
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FOREIGN INSTITUTIONAL INVESTOR
Introduction An Overview
Foreign Institutional Investor (FII) is used to denote an investor - mostly of
the form of an institution or entity, which invests money in the financial markets
of a country different from the one where in the institution or entity was originally
incorporated.
FII investment is frequently referred to as hot money for the reason that it
can leave the country at the same speed at which it comes in.In countries like
India, statutory agencies like SEBI have prescribed norms to register FIIs and also
to regulate such investments flowing in through FIIs. FEMA norms include
maintenance of highly rated bonds (collateral) with security exchange.
It 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.
Foreign injections amounted to US$ 6.4 billion in October 2010, which was
almost 25 per cent of the total inflows in the stock market registered so far in
2010. The net foreign fund investment crossed the US$ 100 billion mark on
November 8, 2010, since the liberalization policy was implemented in 1992. Asper the data given by SEBI, the total figure stood at US$ 100.9 billion, wherein
US$ 4.78 billion were infused in November itself. The humungous increase in
investment mirrors the foreign investors faith in the Indian markets. FIIs have
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made investments worth US$ 4.11 billion in equities and poured US$ 667.71
million into the debt market.
Data sourced from SEBI shows that the number of registered FIIs stood at
1,738 and number of registered sub-accounts rose to 5,592 as of November 10,
2010
According to research reports, India has received more FII funds as
compared to its Asian peers. According to Bloomberg, Net FII inflow (till
November 23 2010) stood at US$ 28.5 billion, far ahead of South Korea (US$ 16
billion) and Japan (US$ 13 billion). Net FII inflows as a percentageof the market
capitalization are also the highest in India at 1.8 per cent in 2010, followed by
South Korea at 1.6 per cent.
Quenching its thirst for foreign assets, India Inc announced merger and
acquisition (M&A) deals worth a record US$ 55 billion in 2010, including a
record number of billion-dollar transactions.
According to a global consultancy firm Ernst & Young (E&Y), India isexpected to receive more than US$ 7 billion in private equity (PE) investments in
2010, up from US$ 3.5 billion in 2009. Sectors such as power and transportation,
consumer and branded products, infrastructure ancillaries, education and financial
services, and healthcare are likely to witness increased PE activity in 2012
Types of Financial Institutional Investor (FII)
Pension Fund
Mutual Fund
Investment Trust
Unit Trust And Unit Investment Trust
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Investment Banking
Hedge Fund
Sovereign Wealth Fund
Endowment Fund
Private Equity Firms
Insurance Companies
Methods of Investment
The foreign direct investor may acquire voting power of an enterprise in an
economy through any of the following methods:
By incorporating a wholly owned subsidiary orcompany
By acquiring shares in an associated enterprise
Through a mergeror an acquisition of an unrelated enterprise
Participating in an equityjoint venture with another investor or enterprise
Foreign Direct Investment Incentives May Take The Following Forms:
Low Corporate Tax And Income Tax Rates
Other Types Of Tax Concessions
Preferential Tariffs
Special Economic Zones
EPZ - Export Processing Zones
Bonded Warehouses
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http://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Sovereign_wealth_fundhttp://en.wikipedia.org/wiki/Endowment_fundhttp://en.wikipedia.org/wiki/Private_equity_firmshttp://en.wikipedia.org/wiki/Insurance_companieshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Sovereign_wealth_fundhttp://en.wikipedia.org/wiki/Endowment_fundhttp://en.wikipedia.org/wiki/Private_equity_firmshttp://en.wikipedia.org/wiki/Insurance_companieshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehouse7/28/2019 Narasimha Project (2)
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Maquiladoras
Investment Financial Subsidies
Soft Loan Or Loan Guarantees
Free Land Or Land Subsidies
Relocation & Expatriation Subsidies
Job Training & Employment Subsidies
Infrastructure Subsidies
R&D Support
Derogation From Regulations (Usually For Very Large Projects)
Important Concepts
Foreign Institutional Investor (FII)
FII means an entity established or incorporated outside India which
proposes to make investment in India.
Sub-Account
Sub-account includes those foreign corporate, foreign individuals, and
institutions, funds or portfolios established or incorporated outside India on whose
behalf investments are proposed to be made in India by a FII.
Designated Bank
Designated Bank means any bank in India which has been authorized by
the Reserve Bank of India to act as a banker to FII.
Domestic Custodian
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Domestic Custodian is any entity registered with SEBI to carry on the
activity of providing custodial services in respect of securities.
Broad Based Fund
It is a fund established or incorporated outside India, which has at least
twenty investors with no single individual investor holding more than 10% shares
or units of the fund.
It is provided because if the fund has institutional investor(s) it shall not be
necessary for the fund to have twenty investors and if the fund has an institutional
investor holding more than 10% of shares or units in the fund, then the
institutional investor must itself be broad based fund.
FII REGISTRATION PROCEDURE
Eligible for FII Registration
Following entities / funds are eligible to get registered as FII:
1.PensionFunds
2.MutualFunds
3.InsuranceCompanies
4.InvestmentTrusts
5.Banks
6.UniversityFunds
7.Endowments
8.Foundations9.CharitableTrusts/CharitableSocieties
Further, following entities proposing to invest on behalf of broad based
funds, are also eligible to be registered as FIIs:
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a. Asset Management Companies
b. Institutional Portfolio Managers
c. Trustees
d. Power of Attorney Holders
DERIVATIVES POSITION LIMITS
Restrictions on Investment In Derivatives
The FII position limits in a derivative contracts (Individual Stocks) in
which the market wide position limit is less than or equal to Rs. 250 Cr, the
FII position limit in such stock shall be 20% of the market wide limit.
For stocks in which the market wide position limit is greater than Rs. 250
Cr, the FII position limit in such stock shall be Rs. 50 Cr.
FII Position limits in Index options contracts
FII position limit in all index options contracts on a particular underlying
index shall be Rs. 250 Crore or15 % of the total open interest of the
market in index options, whichever is higher, per exchange.
This limit would be applicable on open positions in all option contracts on a
particular underlying index.
FII Position limits in Index futures contracts
FII position limit in all index futures contracts on a particular underlying
index shall be Rs. 250 Crore or 15 % of the total open interest of the market
in index futures, whichever is higher, per exchange.
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FIIs shall take exposure in equity index derivatives subject to the following
limits:
Short positions in index derivatives (short futures, short calls and
long puts) not exceeding (in notional value) the FIIs holding of
stocks.
Long positions in index derivatives (long futures, long calls and
short puts) not exceeding (in notional value) the FIIs holding of
cash, government securities, T-Bills and similar instruments.
FII Position Limits in Interest rate derivative contracts
At the level of the FII
The notional value of gross open position of a FII in exchange traded
interest rate derivative contracts shall be US $ 100 million.
FII may take exposure in exchange traded in interest rate derivative
contracts to the extent of the book value of their cash market
exposure in Government Securities.
At the level of the sub-account
The position limits for a Sub-account in near month exchange traded
interest rate derivative contracts shall be higher of:
Rs. 100 Cr or
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15% of total open interest in the market in exchange traded interest
rate derivative contracts.
PARTICIPATORY NOTES
a) FII/sub-account who issue/renew/cancel/redeem PNs, require to report on
Monthly basis. The report should reach SEBI by the 7th day of the following
month.
b) The FII/sub-account merely investing/subscribing in/to the Participatory
Notes/Access Products/Offshore Derivative Instruments or any such type ofinstruments/securities with underlying Indian market securities are required to
report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).
c) FIIs/sub-accounts who do not issue PNs but have trades/holds Indian
securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec)
require to submit 'Nil' undertaking on a quarterly basis.
FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings inIndian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-
Dec): No reports required for that reporting quarter
INDIA: TURNED CRISIS INTO OPPORTUNITY
India's economic managers and particularly the Reserve Bank of India
(RBI) take considerable pride in having protected India from Asia's financial crisis
in 1997-98. Although India did experience a period of slow growth in the years
that followed that crisis, the basic financial machinery of the country remained
relatively robust, providing a solid foundation for the much more rapid growth that
has taken place this decade.
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In common with its East Asian neighbors, India is grappling once again
with many of the same challenges that the region faced a decade ago, creating
difficult choices for economic and financial policy. The broad goal of India's
policy is to try to ensure that any reduction in India's growth is temporary, so thatthe economy can return quickly to a nine per cent growth rate.
In charting its course, the Government is juggling multiple considerations:
the state of the domestic business cycle; ensuring financing for the balance of
payments deficit; the sharp shift in the availability of global risk capital for
financing Indian investment; and the slowdown in growth in the world's rich
economies.
After three years of buoyant, investment-led growth, the Indian economy
started to slow late last year (2007). This growth slowdown was initially
welcomed by the RBI, which had been gradually tightening monetary policy
(since 2004) in a fight against inflation.
Price pressures were further exacerbated by the sharp rise in commodity
prices late last year and early this year. The net effect has been partially to reverse
the measured (but inadequate) progress toward fiscal consolidation, as well as to
increase the current account deficit in the balance of payments.
The political cycle is at an awkward point. Parliamentary elections are due
by next summer, and there is considerable uncertainty as to the government that is
to follow. India continues to suffer a series of terrorist incidents in its larger cities,
and the political and economic instability in Pakistan adds another layer of
uncertainty.
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Taking economic and political pressures together, it is perhaps not
surprising that, for many Indians the present moment is compared less with 1997
than with 1990-91. That was the year when India suffered a major external
payments crisis and was obliged to apply to the IMF for assistance. Thanks,however, to inspired political and economic leadership at that time, that payments
crisis was turned into an opportunity for major structural reform from which India
continues to benefit till this day.
The interesting question is whether a similar opportunity can be created
again. Policy until late August operated on a business-as-usual basis. Even though
the financial crisis had been underway for almost a year, policy action was basedon the assumption that India could remain largely unscathed.
Government attitudes changed sharply in September. Notwithstanding the
generally sound domestic financial position of India's commercial banks, bank
liquidity came under strain as banks' overseas subsidiaries found their sources of
wholesale finance withdrawn.
This effect was compounded by the intensified sell-off by foreign investors
in domestic equity markets and the repatriation of funds to meet liquidity calls
abroad.
Over the course of October, the RBI has sharply reversed course on the two
key instruments at its disposal: the cash-reserve ratio (that is, reserve
requirements) that banks are required to hold in their accounts with the RBI; and
the overnight secured lending rate at which the RBI lends to banks.
India's policymakers have both the experience and the tools to ride out the
present storm. They will be helped by India's lower integration with world trade
and finance, and by a variety of institutional features.
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Yet by itself this is not enough: the larger challenge will be, as in 1991, to
use this crisis also to resume the momentum of reforms that have largely stalled.
Of this there is as yet little sign.
FIIs INDIAN STOCK MARKET
A major development in our country post 1991 has been liberalization of
the financial sector, especially that of capital markets. Our country today has one
of the most prominent and followed stock exchanges in the world. Further, India
has also been consistently gaining prominence in various international forums,
though we still have a long way to go.
Developing countries like India are generally capital scarce. This is because
levels of income are lower in comparison to other developed countries, which in
turn means savings and investments are also lower. So how do developing nations
get out of such a situation? Simple! They borrow money, like we all do when we
need to buy a house or a car. Countries can thus invest this borrowed money in
various social and physical infrastructures; earn a return on them which helps them
pay off their debt, and simultaneously propel the country to a higher growth
trajectory.
However, there is another way in which a country can attract foreign
money. This is by way of Foreign Direct Investment (FDI) of Portfolio Investment
(better known as Institutional Investment). The difference between the two is
subtle.FDI is investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor. Examples of FDI would include POSCO
setting up a steel plant in Orissa (in-bound FDI); Tata buying Arcelor (out-bound
FDI) and so on.
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On the other hand, FII is used to denote an investor, who invests money in
the financial markets of a country different from the one in which that
investor is incorporated. So, if you as an Indian decide to invest in the US stockmarkets, it is an out-bound foreign institutional investment. Similarly, suppose a
rich American millionaire invests in the Indian stock markets, it would be termed
as in-ward FII.
FIIs remained net buyers which implies that foreign investors poured more
money into the stock market than they took out, which is generally seen as a
positive development as far as our economy is concerned.
The Sensex soared 408 points reaching a 32-month high, as foreign
institutions poured in more than Rs. 2,500 crore, according to provisional data.
The benchmark index closed at 19,208.33, up 2.1 per cent from its previous
close. The Nifty closed at 5,760, up 2.13 per cent.
The strong performance was led by RIL and the entire banking sector.
Bank stocks were at their all-time high with SBI, India's largest bank,
hitting a peak of Rs. 3,148.55 on the NSE.
According to analysts, the gains made by stocks over the last few trading
sessions have been primarily liquidity driven as is evident from the heavy FII
inflows.
Domestic institutions, which were net sellers for Rs 960 crore, and retail
investors, who sold for a net of Rs 219 crore (on the BSE), took advantage of the
highs and booked profits. It was fantastic opportunity for retail investors like us to
sell and especially for those who had bought at April 2009 levels.
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According to the data certain by the Securities and Exchange Board of
India (SEBI), the FII investments in equities as on March 17, 2009 stood at US$
50950.20 million and in debts, equaled US$ 6541.50 million at exchange rate of 1USD = 40.34 INR. As per SEBI, number of register FIIs stand at 1626 and
number of registered sub-accounts stood at 4972 as on March 17, 2009.
Standard Chartered Bank got the highest bids of US$ 1.05 billion, followed
by Barclays Bank US$ 998.81 million, Kotak Mahindra UK US$ 818.86 million
and Deutsche Bank International Asia US$ 700.14 million, and JP Morgan
Chase Bank, US$ 532.5 million. The bids had to be executed in the next 45 days.
This bidding should beginning a sound FII investment trend in the near future, as
the US markets continue to weaken and yields of Indian public sector units (PSU)
and corporate debt papers remain eye-catching. FIIs will invest in eye-catching
PSU bonds floated by quasi-government entities like Power Finance
Corporation and Rural Electrification Corporation.
Investment banks (I-banks) are now looking at minor venture capital deals
in the US$ 2 million US$ 7 million range. I-banks are now willing to work on
poorer margins. Venture capital firms say the number of deals they are getting
from i-bankers currently has gone up considerably.
The mutual fund industry consists of 35 fund houses. To a certain extent
unlike in 2007 and 2008, when real estate and IT and ITES sectors enjoyed most
of the concentration, 2009 is witnessing a broad-basing of sectors on the PE radar.
Investments in sectors such as healthcare, education, consumer goods and
infrastructure are expected to be more attractive, given their relatively strong
domestic demand, even as export-oriented businesses look blow of recession in
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US and Europe. Funds are also progressively buying more stakes in agro-based
companies.
IMPACT OF FII ON NATION
Well, thats because we need to look beyond the numbers! In any kind of
market, financial or real, investor sentiment and psychology play a crucial role.
This is something that just cannot be captured in a few numbers. Now an in-depth
explanation of investor psychology is not possible here, but I can give a few
examples of it. For instance, when the stock markets rise, they just seem to be
rising (as you may have observed recently)! Experts and academicians have
studied the behavior of investors, and found that frenzy and greed drive investors
during a bull run, and especially when a bull run is at its full momentum, investors
tend to follow the band-wagon and overlook economic fundamentals while
investing. In fact, stock market crashes too occur in similar ways. One major
investor may begin selling his stocks suddenly. Looking at him, others may panic,
and they too follow suit. Such panic spreads like wild fire in the markets, and
ultimately leads to a major crash.
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It isbecause of the volatile nature of investors sentiments that FIIs are tracked so
closely. It would not be prudent to drive away foreign investors from investing in
our country. I had mentioned the importance of foreign capital in the context of a
developing economy, and that isprecisely why the government has been so keenon liberalizing the external financial sector since 1991. If one foreign investor has
had a good experience investing in our country, it builds up our reputation in the
international community, and encourages more foreign investors to invest in our
economy. However, a crisis of any kind will create panic among foreign investors
as well, and regaining their trust and confidence in our economy will entail
another mammoth task!
FII Growth Prospect in India
More and more foreign institutional investors (FIIs) are coming to India. Almost
everyday you have a new FII setting up shop in India. It doesnt seem the party
(Bombay Stock Exchanges Sensitive Index) is going to stop at 14,000 levels -
Head of Investor Relations with an FMCG firm.
Four years back if you had attended an investment conference organized by
leading brokerage firms like DSP Merrill Lynch, JM Morgan Stanley or Kotak
Securities, you would be lucky to find 20 foreign institutional investors (FIIs).
This year, more than 170 FIIs participated in just two conferences organized by
DSP and Morgan Stanley that were held in Bangalore and Goa in the second week
of February.
In fact, JM Morgan Stanley saw participation from foreign investors double to 320
this year, with 200 people coming from overseas. "Every year, we see new
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investor, which explains how seriously people are looking at India. Earlier,
investors came largely from Asia and the US. Now, they also come from places
like Hong Kong, London and Japan," said a senior manager with a brokerage firm,
who didnt wish to be identified.
Advantages of FIIs in Indian Markets
FIIs are contributing to the foreign exchange inflow as the funds from multilateral
finance institutions and FDI are insufficient, says Abhijit Roy
THE RECENT spat over the tax authorities issuing notices to foreign institutional
investors (FIIs) which take advantage under the Indo-Mauritius Bouble Taxation
Avoidance Agreement, has once again drawn attention to the role that FII
investment is playing in the capital markets in India. It endeavors to place the
overall picture in perspective. The Union Government allowed the entry of FIIs in
order to encourage the capital market and attract foreign funds to India. Today,
FIIs are permitted to invest in all securities traded on the primary and secondary
markets, including equity shares and other securities listed or to be listed on the
stock exchanges. The original guidelines were issued in September 1992.
Subsequently, the Securities and Exchange Board of India (SEBI) notified the
SEBI (Foreign Institutional Investors) Regulations.
FII INFLOW
Institutional and corporate investment in any market is usually a good sign for
retail investors to follow when looking for investment opportunities abroad.
Especially now, with stories of resurgent markets and strengthening indicators
doing the rounds along with cautionary lists of risk factors. India is a good case in
point. We examine the flow of foreign funds into India for a better idea of which
way the winds are blowing.
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Data from Indias central bank, the Reserve Bank of India (RBI), shows