fm foreign institutional investments

8/19/2019 FM Foreign Institutional Investments

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PREFACE

1. OBJECTIVES:.. The basic objective is to know the Foreign Institutional Investments indetail.

.. To put forth the role played by Foreign Institutional Investments insensex.

.. To know the guidelines for investment by Foreign Institutional

Investments

2. METHODOLOGY:.. Secondary data sources and literature review.

.. Various books and articles from magazines and newspapers have beenreferred.

3. LIMITATIONS:.. The project limits itself into the India regarding the Foreign InstitutionalInvestments.

.. The legal aspects regarding Foreign Institutional Investments arereported in the project considering India.


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EXECUTIVE SUMMARY

Foreign Investment refers to investments made by residents of a country in financial

assets and production process of another country. It can affect the factor productivity ofthe recipient country and can also affect the balance of payments. In developing countriesthere was a great need of foreign capital, not only to increase their productivity of laborbut also helps to build the foreign exchange reserves to meet the trade deficit.

It can come in two forms: Foreign Direct Investment (FDI) and Foreign PortfolioInvestment (FPI).Foreign direct investment involves in the direct production activity and

also of medium to long-term nature. But the foreign portfolio investment is a short-terminvestment mostly in the financial markets and it consists of Foreign InstitutionalInvestment (FII).

India, being a capital scarce country, has taken lot of measures to attract foreign

investment since the beginning of reforms in 1991. Till the end of January 2003it could

attract a total foreign investment of around US$ 48 billions out of which US$ 23 billions

is in the form of FPI. FII consists of around US$ 12 billions in the total foreign

investments. This shows the importance of FII in the overall foreign investment

programme.

As India is in the process of liberalizing the capital account, it would have

significant impact on the foreign investments and particularly on the FII, as this would

affect short-term stability in the financial markets. Hence, there is a need todetermine

the push and pull factors behind any change in the FII, so that we can frame our policies


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to influence the variables which drive-in foreign investment. Also FII has beensubject of

intense discussion, as it is held responsible for intensifying currency crisis in 1990s

elsewhere.


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India opened its stock markets to foreign investors in September 1992 and has,

since 1993, received considerable amount of portfolio investment from foreigners in the

form of Foreign Institutional Investments(FII) in equities. In order to trade in Indianequity markets, foreign corporations need to register with the SEBI as ForeignInstitutional Investors (FII).

SEBIs definition of FIIs presently includes foreign pensionfunds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.

The FIIs registered with SEBI come from as many as 28 countries (including money

management companies operating in India on behalf of foreign investors). It is,however,instructive to bear in mind that these national affiliations do not necessarilymean that theactual investor funds come from these particular countries. Given the significant financialflows among the industrial countries, national affiliations are very rough indicators of thehome of the FII investments. In particular institutions operating from Luxembourg, Cayman Islands or Channel Islands or even those based at Singapore or Hong Kongarelikely to be investing funds largely on behalf of residents in other countries.

Nevertheless,the regional breakdown of the FIIs does provide an idea of the relative importance of

different regions of the world in the FII flows.


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INDEX

Serialno.

Topic

Page no.

1

Introduction

1

2

Need for FII in Developing Countries

3

3

Who can be registered as FIIs

5

4

Entry options for Foreign Investors

6

5

Policy measures to attract FIIs

10

6

Reasons to invest in India

11

7

Legal aspects

13

8

Facilitation for Foreign Investment in India

15

9


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Major determinants of FII flows

16

10

Benefits of FII

19

11

Prospects for Indian perspective

20

12

Positive attitude towards Foreign Investment

25

13

Major roadblocks in Foreign Investment

29

14

FII as portfolio investments

31

15

The Foreign investments & Sensex & Nifty

37

16

Daily trends in FII investments

44

17

SWOT Analysis

46

18

Conclusion

52

19


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Recommendations

54

20

Annexure


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Introduction

We have heard people saying that the world is going global and India is also movingtowards prosperity but what does it actual means and who are the persons behindthisscenario, which should be known. Among them the persons who are responsible or we cansay who have contributed towards this scenario are the Foreign Institutional Investors.

The world is increasingly becoming interdependent. Today the needs of the customer haveincreased and they want goods from all over the world. We can see variety of productsmoving across the world and the world trade increased by 120%.

The developing countries are looking forward to steady flow of capital and are undergoingthe learning process of how to absorb them. As regard the attendant risks, the central bankof the countries have to tackle them. There are many ways the inflow can come into thecountry. Debt is a form of capital forms which are raised from banks or from the markets.The non-debt creating flows includes Foreign Direct Investment or PortfolioInvestments.

Foreign investment has clearly been a major factor in stimulating economic growth anddevelopment in recent times.


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MINDSET OF INDIANS IN GENERALS:

India and the Indians have undergone a paradigm shift. There have been fundamental andirreversible changes in the economy, government policies, outlook of business andindustry, and in the mindset of the Indians in general. From a shortage economyof foodand Foreign Exchange, India has now become a surplus one.

From an agro based economy it has emerged as a service oriented one. From the low-growth of the past, the economy has become a high growth one in the long term. Afterhaving been an aid recipient, India is now joining the aid givers club.

Although India was late in modernization of industry in general in the past, it

is now afront-runner in the emerging knowledge based new economy.

The government is continuing its reform and liberalization not out of compulsion but out ofconviction. Indian companies are no longer afraid of multinational corporations.

They have become globally competitive and some of they have started becoming am

MNCS themselves. Fatalism and contentment of the Indian mind set have given waytooptimism and ambition. The Indian culture which looks down upon wealth as a sinandbelieved in the simple living and high thinking has started recognizing prosperity andsuccess as acceptable and necessary goals.

So today we are having new variety of products entering the market everyday. You orderit and you have it in few days/weeks from small things to the cars like Rolls Ro

yce orFerrari.


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NEED FOR FII IN DEVELOPING COUNTRIES

1. Infrastructure Renewal

To keep the Indian economy growing the infrastructure sector like power, transport, mining& metallurgy, textiles, housing, retail, social welfare, medical etc. has to beupgraded.After the Enron fiasco, it is difficult to persuade anybody in the west to takeinterest in anyof these sectors. Hence India is left to its own devices to raise money and build this sector.Borrowing abroad supplemented with Indian resources is the only way open to India. Thisupgrade is needed prior or in step with the industrial and service exports sector growth. Ithas to be placed on a higher priority. Only recently a suggestion to use a small portion ofIndias foreign reserves met with howl of protests. The protestors in the Indian Parliamentdid not understand the proposal. Hence the government is stuck to steam roller its proposal

through the legislative process or succumb to political pressure and do nothing. The latter isnot acceptable.

If India finds its own $4 Billion a year for infrastructure then foreign investors will kick inanother similar portion. The resulting money will very quickly rebuild the nowcumbersome infrastructure.

2. Bridge the technological gap

Developing countries has a very low level of technology. Their technology is not

up to thestandards and they lack in modern technology. Developing countries possess a strong urgefor industrialization to develop their economies and to wriggle out of the low-levelequilibrium trap in which they are caught. This raises the necessity for importingtechnologies from advanced countries. Such technology usually comes with foreign capital.

3. Optimum utilization of resources

A number of developing countries possess huge mineral resources which are4 untappedand unexploited. Due to lack of technology these countries are not able to use theirresources to the fullest. As a result they have to depend on the foreign investment with the


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help of which technology of the country and that will ultimately lead to the optimumutilization of the resources. India has very huge reserves of mineral resourcesand tooptimize their use or rather for extracting them efficiently and effectively moderntechnology is required which is possible through foreign investment.

4. Balancing the balance of payment position

In the initial phase of economic development, the under developing countries needmuch larger imports. As a result the balance of payment position generally turns adverse.This creates gap between earnings and foreign exchange. The foreign capital presents shortrun solution to the problem. So in order to balance the Balance Of Payment ForeignInvestment is needed.

5. Develop the Diverse Market

The Indian market is widely diverse. The country has 17 official languages, 6 majorreligions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differgreatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian marketand overalleconomy before taking the plunge. Research firms in India can provide the information to

determine how, when and where to enter the market. There are also companies which canguide the foreign firm through the entry process from beginning to end --performing therequisite research, assisting with configuration of the project, helping develop Indianpartners and financing, finding the land or ready premises, and pushing throughthepaperwork required.


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Who can be registered as an FII?

The applicant should be any of the following categories:

1. Pension funds2. Mutual funds3. Investment trust4. Insurance or reinsurance companies5. Endowment funds6. University funds7. Foundations or charitable trusts or charitable societies who propose to invest ontheir own behalf anda) Asset management companiesb) Nominee companiesc) Institutional portfolio managersd) Trusteese) Power of attorney holdersf) Bank

Who propose to invest their proprietary funds or on behalf of broad based funds or on of foreign corporate and individuals.


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Entry options for Foreign Investors

A foreign company planning to set up business operations in India has the followingoptions.

1. Incorporated entity:

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

.. Joint venture; or

.. Wholly owned subsidiaries.

Foreign equity into such Indian companies can be up to 100% depending on therequirements of the investor, subject to the equity caps in respect of the areaof activity

under the foreign direct investment policy.

Unincorporated entity

A) As a foreign company through

.. Liaison office/ representative office.

.. Project office

.. Branch office

Such offices can undertake activities permitted under the Foreign Exchange Management(establishment in India of branch or office of other place of business) Regulations, 2000.

2. Incorporation of company:

For registration and incorporation, an application has to be filed with the registrar ofcompanies (ROC). Once a company has been duly registered and incorporated as anIndiancompany, it is subject to Indian laws and regulations as applicable to other domestic Indiancompanies.


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3. Liaison office/ representative office:

The role of liaison office is limited to collecting information about possible marketopportunities and providing information about the company and its products to prospectiveIndian customers. It can promote export/ import from/ to India and also facilitate technical/financial collaboration between parent companies and company in India. Liaison officecannot take any commercial activity directly and indirectly and cannot, therefore, earn anyincome in India. Approval for establishing a liaison office in India is grantedby ReserveBank of India.

4. Project office:

Foreign companies planning to execute specific projects in India can set up temporaryproject/ site offices in India. RBI has now granted general permission to foreign entities toestablish project offices subject to specified conditions. Such offices cannot undertake orcarry on any activity other than the activity relating and incidental to execution of theproject. Project offices may remit outside India the surplus of the project on its completion,general permission for which has been granted by the RBI.

5. Branch office:

Foreign companies engaged in manufacturing and trading activities abroad are allowed toset up branch offices in India for the following purposes:

1. Export/ import of goods.

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


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6. Rendering services in information technology and development of software inIndia.7. Rendering technical support to products supplied by the parent/ groupcompanies.8. Foreign airline/ shipping company

A branch office is not allowed to carry out manufacturing activities on its ownbut ispermitted to subcontract these to an Indian manufacturer.

Branch offices established with approval of RBI, may remit outside, profit of the branch,net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up ofbranch officers is granted by the Reserve Bank of India (RBI).

6. Branch office on stand alone basis in SEZ:

Such branch offices would be isolated and restricted to the special economic zone (SEZ)

Alone and no business activity/ transaction will be allowed outside the SEZs inIndia,which include branches/ subsidiaries of its parent offices in India.

No approval shall be necessary from RBI for a company to establish a branch/unit in SEZsto undertake manufacturing and service activities subject to specified conditions.

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

A non-resident Indian or a person of India origin resident outside India may invest byway of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:-


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I) Amount is invested by inward remittance or out of NRE / FCNR / NRO accountmaintained with AD.

II) The firm or propriety concern is not engaged in ant agricultural/ plantation orreal estate business i.e. dealing in land and immovable property with a view toearningprofit or earning income there from.

III)Amount invested shall not be eligible for repatriation outside India NRIs/ PIOmay invest in sole proprietorship concerns/ partnership firms with repatriationbenefits withthe approval of government/ RBI.

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

No person resident outside India other than NRIs/ PIO shall make any investmentby wayof contribution to the capital of a firm or a proprietorship concern or any associations ofpersons in India. The RBI may, on an application made on it, permit a person residentoutside India to make such investment subject to such terms and conditions as may beconsidered necessary.


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Policy measures to attract FII

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

1. Automatic approval:

Automatic approval up to a specified limit is allowed in 34 specified high priority, capitalintensive and high technology industries. Foreign investment has been allowed in exploration, production and refining of oil and marketing of gases.

2. The Foreign Investment Promotion Board (FIPB):

FIBP has been set up to process applications in cases not covered by automatic a

pproval.

3. A Foreign Investment Implementation Authority (FIIA):

FIIA was established in august 1999 within the Ministry of Industry in order toensure theapprovals for Foreign Investment (including NRI investment) are quickly translated intoactual investment inflows and that proposals fructify into projects. In particular, in case

where FIBP clearance is needed, approval time has been reduced to 30 days.

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

4. Provisions of the Foreign Exchange management act (FEMA) should beliberalized:

This is through an ordinance dated on 9 January 1997 as a result of which more than 40%of foreign equity is also treated on par with fully owned Indian company.

5. Disinvestment on equity:


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Disinvestment on equity by foreign investors has been allowed at market rates on stockexchanges from 15 September 1992 with permission to repatriate the proceeds of suchDisinvestment.


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Reasons to invest in India

Some of the major reasons to invest in India:

1. It is one of the largest economies in the world, fourth largest economies interms ofpurchasing power parity.

2. Strategic location- access to the vast domestic and south Asian market.

3. Large and rapidly growing consumer markets up to 300 million people constitute themarket for branded consumer goods- estimated to be growing at 8% per annum.

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

5. Skilled manpower and professional managers are available at competitive cost

6. One of the largest manufacturing sectors in the world, spanning almost all areas ofmanufacturing activities.

7. One of the largest pools of scientists, engineers, technicians and managers in theworld.

8. Rich base of mineral and agricultural resources.

9. Developed banking system- commercial banking network is over 63000 branches

supported by a number of national and state level financial institutions.

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

11. Well balanced package of fiscal incentives.


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12. English is widely spoken and understood.

13. Foreign brand names are freely used.

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

15. Complete exemption from customs duty on industrial inputs and corporate tax

Holiday for five years for 100% export oriented units and Export Processing

Zones.

A corporation must also decide where in India to set up. India has 28 unique sta

tes, eachwith their own problems and benefits.

The most popular hubs for investment in India are Mumbai, Maharashtra, Bangalore,Karnataka and New Delhi. Thus benefits make India a competitor for foreign investment.


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Legal aspects

The eligibility criteria to be fulfilled by the applicant seeking FIIregistration:

As per regulation 6 of SEBI (Foreign Intuitional Investors) regulations, 1995, ForeignIntuitional Investors are required to fulfill the following conditions to qualify for the grantof registration:

1. Applicant should have track record, professional competence, financial soundness,experience, general reputation of fairness and integrity.

2. The applicant should be regulated by an appropriate foreign regulatory authority in the

same capacity/ category where registration is sought from SEBI. Registration withauthorities, which are responsible for incorporation, is not adequate to qualify as ForeignIntuitional Investors.

3. The applicant is required to have permission under the provisions of the ForeignExchange Management act, 1999 from Reserve Bank of India.

4. Applicant must be legally permitted to invest in securities outside the country or itsincorporation/ establishment.

5. The applicant must be a fit and proper person.

6. The applicant has to appoint a local custodian and enter into an agreement with the

custodian. Besides it also has to appoint a designated bank to route its transactions.

7. Payment of registration fee of US $5000.00.

SEBI would generally communicate the eligibility for grant of registration as ForeignIntuitional Investor, within 10-12 days of receipt of complete application with


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relevantenclosures.


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

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

2. Certified copy of the relevant clauses or articles of the memorandum and Articles ofassociation.

3. Audited financial statements and annual reports for the last one year, provided thatthe period covered shall not be less than twelve months.

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

5. A declaration by the applicant that it has entered into a custodian agreement

with adomestic custodian together with particulars of domestic custodian.

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

7. Declaration regarding fit and proper entity.


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Facilitation of foreign investment in India

1. Foreign investment can be done in the Automatic Route up to 100 per cent withoutneed for any approvals. The investor has to keep the Reserve Bank of India informed.2. The sectors not open to foreign investments are retail trade, housing and real estate,agriculture and lottery and gambling.3. There are maximum limits on foreign investment. Some of these are beingincreased.4. Prior approval of the government is needed for those cases, which need industriallicense and those involving investment beyond the maximum limits. Such cases are clearedby the Foreign Investment Promotion Board in a transparent, efficient, time-bound andpredictable manner.5. The Department of Industrial Policy and Promotion is the nodal agency forinformation and assistance to foreign investors. It also gives information on projects

available for foreign investors and contains online applications for clearances. 6. The Various state governments in India offer competitive incentives and attractionsto foreign investors.


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Major Determinants of FII Flows

The unpredictability of autonomous FII flows, in both scale and direction, has developed asubstantial research effort to identify their major determinants. An extensive literaturebased generally on three approaches aggregate econometric analysis, survey appraisal offoreign investors opinion, and econometric study at the industrial level has failed to arriveat the consensus. This can be partly attributed to the lack of reliable data, particularly at thesectoral level, and to the fact that the most empirical work has analyzed FII determinantsby pooling of countries that may be structurally diverse. The subject is mainlyconcernedwith examining the factors influencing the destination of the investment, host countrydeterminants, rather than industry specific factors.

1. Market size:

Econometric studies comparing a cross section of countries indicate a well establishedcorrelation between FII and the size of market (proxied by the size of GDP) as well assome of its characteristics (e.g. average income levels and growth rates.) somestudiesfound GDP growth rate to be a significant explanatory variable, while GDP was not,probably indicating that where the current size of national income is very small

, incrementsmay have less relevance to FII decisions than growth performance, as an indicator ofmarket potential.

2. Liberalized trade policy:

Whilst across to specific markets judged by their size and growth- is important, domesticmarket factors are predictability much less relevant in export oriented foreign

firms. Arange of surveys suggests a widespread perception that open economies encourage moreforeign investment. One indicator of openness is the relative size of the export sector.


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3. Labour costs and productivity:

Empirical research has also found relative labour costs to be statistically significant,particularly for foreign investment in labour intensive industries and for export orientedsubsidiaries. In India labour market rigidities and relatively high wages in the formal sectorhave bee reported as deterring any significant inflows into the export sector in particular.The decision to invest in china has been heavily influenced by the prevailing low wagerate.

4. Political scenario:

The ranking of the political risk among FII determinants remains somewhat unclear. Wherethe host country possesses abundant natural resources, no further incentive may

berequired, as is seen in politically unstable countries such as Nigeria and Angola, where highreturns in the extractive industries seem to be compensated for political instability. ingeneral ,so long as the foreign company is confident of being able to operate profitablywithout undue risk to its capital and personnel, it will continue to invest. Large miningcompanies, for example, overcome some of the political risks by investing in their owninfrastructure maintenance and their own security forces. Moreover, these companies are

limited neither by small local markets nor by exchange rate risks since they tend to sellalmost exclusively on the international, market at hard currency prices.

5. Infrastructure:

Infrastructure covers many dimensions, ranging from roads, ports, railways andtelecommunication systems to institutional development (e.g. accounting, legal services,etc.) studies in china reveal the extent of transport facilities and the proximi

ty to majorports as having a positive significant effect on the location of FII within thecountry. Poorinfrastructure can be seen, as both, an obstacle and an opportunity for foreigninvestment.For the majority of the low income countries, it is often cited as one of the majorconstraints. But foreign investors also point potential for attracting significant FII if hostcountry government permits more substantial foreign participation in the infrast


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ructuresector.


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6. Incentives and operating conditions:

Most of the empirical evidence supports the notion that specific incentives such as lowertaxes have no major impact on FII particularly when they are seen as compensation forcontinuing comparative disadvantages. On the other hand, removing restrictions andproviding good business operating conditions are generally believed to have a positiveeffect. Further incentives such as granting of equal treatment to foreign investors in relationto local counterparts and the opening up of markets (e.g. air transport, retailing, banking,)have been reported as important factors in encouraging FII flows in India.

7. Dis-investment policy:

Though privatization has attracted some foreign investment flows in recent years

, progressis still slow in majority of low income countries, partly because the divestment of the stateassets is a highly political issue. In India for example, organized labour has fiercely resistedprivatization or other moves, which threaten existing jobs workers rights. A number ofstructural problems are constraining the process of privatization. Financial markets in mostlow income countries are slow to become competitive; they are characterized by theinefficiencies, lack of debt and transparency and the absence of regulatory procedures.

They continue to be dominated by government activity and are often protected fromcompetition. Existing stock markets are thin and illiquid and securitized debt is virtuallynon-existent. An underdeveloped financial sector of this type inhibits privatization anddiscourages foreign investors.


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Benefits of FII:

Host countries derive several benefits from FII:

1. Additional equity capital from whose profits yield tax revenues.

2. Transfer of patent technologies.

3. Access to scarce managerial skills.

4. Creation of new jobs.

5. Access to overseas market networks and marketing expertise.

6. Reduce flight of domestic capital abroad.

7. Long commitment to successful completion of FII projects.


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8. A catalyst for associated lending, for specific projects, thus increasing the availability of external funding.

9. Free flow of capital is conducive to both the total world welfare and to thewelfare of each individual.

10. Since returns on foreign investments are linked to the profits earned by the firm, it is more flexible as compared to the foreign loans which are guided byrigid interest and amortization requirements.

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


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Prospects for Indian perspective

FDI OR FII

FDI usually is associated with export growth. It comes only when all the criteria to set upan export industry are met. That includes, reduced taxes, favorable labor law, freedom tomove money in and out of country, government assistance to acquire land, full growninfrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts,Pharmaceuticals, unexplored service sectors including accounting; drug testing,medicalcare etc are key sectors for foreign investment.

Manufacturing is a brick and mortar investment. It is permanent and stays in the countryfor a very long time. Huge investments are needed to set this industry. It providesemployment potential to semi- skilled and skilled labor.

On the other hand the service sector requires fewer but highly skilled workers.Both

manufacturing and service sector foreign investment are needed in India. Still high endmanufacturing in auto parts and pharmaceuticals should be Indias target.

The FII (Foreign Institutional Investor) is monies, which chases the stocks in the marketplace. It is not exactly brick and mortar money, but in the long run it may translate intobrick and mortar. Sudden influx of this drives the stock market up as too much moneychases too little stock. In last four months an influx of about $1.5 Billion has driven theIndian stock market 20% higher.

Where FDI is a bit of a permanent nature, the FII flies away at the shortest political oreconomical disturbance. The late nineties economic disaster of Asian Tigers is a keyexample of the latter. Once this, money leaves and it leaves ruined economy andruinedlives behind. Hence FII is to be welcomed with strict political and economical discipline.Thus it can be said that India should welcome, FDI as well as FII and work hardto retainboth.


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Potential for investment in India

1. Expansion of various transport facilities:a) Roads:

The Government is focusing on expansion and modernization of roads and has openedthis up for private sector participation. 48 new road projects worth US$ 12 billion areunder construction. Development and up gradation of roads will require an investmentof US$ 24 billion till 2008. Private sector participation in road projects willgrowsignificantly.

b) Railways:

The railway sector will need an investment of US$ 22 billion for new coaches, tracks,

and communications and safety equipment over the next ten years.

c) Airways:

Up gradation and modernization of airports will require US$ 33 billion investment inthe next ten years.

d) Waterways:

There is potential for investment in the expansion and modernization of ports. T

hegovernment has taken up a US$22 billion 'Sagarmala' project to develop the PortandShipping sector under Public-Private Partnership. 100 percent FDI is permitted forconstruction and maintenance of ports. The government is offering incentives toinvestors.


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2. Better power facilities:

The Ministry of Power has formulated a blueprint to provide reliable, affordable andquality power to all users by 2012. This calls for investment of US$ 73 billionin thenext five years. The gap between demand and production of power is around 10000MW. Opportunities are there for investment in power generation and distributionanddevelopment of non-conventional energy sources.

3. Urban projects need investments:

There is potential for investment in urban infrastructure projects. Water supply andsanitation projects alone offer scope for annual investment of US$ 5.71 billion. Theentire gamut of exploration, production, refining, distribution and retail marketingpresent opportunities for FDI.

4. Exploration of mineral reserves:

India has an estimated 85 billion tones of mineral reserves remaining to be exploited.Potential areas for exploration ventures include gold, diamonds, copper, lead zinc,cobalt silver, tin etc. There is also scope for setting up manufacturing units for valueadded products.

5. Develop Telecom IT sector:

The telecom market, which is one of the world's largest and fastest growing, has aninvestment potential of US$ 20-25 billion over the next five years. The telecommarketturnover is expected to increase from US$ 8.6 billion in 2003 to US$ 13 billionby2007. Mobile telephony has started growing at the rate of 10-12 million subscribers peryear. The IT industry and IT-enabled services, which are rapidly growing offeropportunities for FDI.


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6. Service sector opportunities:

India has emerged as an important venue for the services sector including financialaccounting, call centers, and business process outsourcing. There is considerablepotential for growth in these areas.

7. For R & D and healthcare sector development:

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

8. Positive future of automobile industry:

The Indian auto industry with a turnover US $ 12 billion and the auto parts industrywith a turnover of 3 billion dollars offer scope for FDI. The government is encouragingthe establishment of world-class integrated textile complexes and processing units. FDIis welcome.

9. Agricultural sector:

While India has abundant supply of food, the food processing industry is relatively nascentand offers opportunities for FDI. Only 2 percent of fruits and vegetables and 15 percent ofmilk are processed at present. There is a rapidly increasing demand for processed foodcaused by rising urbanization and income levels. To meet this demand, the investmentrequired is about US$28 billion. Food processing has been declared as a priority sector.


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10. Promotion of exports:

The Government has recently established Special Economic Zones with the purposeofpromoting exports and attracting FDI. These SEZs do not have duty on imports ofinputs and they enjoy simplified fiscal and foreign exchange procedures and allow100% FDI.

11. Development of Tourism industry:

The travel and tourism industry which has grown to a size of US$ 32 billion offersscope for investment in budget hotels and tourism infrastructure.


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POSITIVE ATTITUDE TOWARDS FIIs

Positive tidings about the Indian economy combined with a fast-growing market have madeIndia an attractive destination for Foreign Institutional Investors (FIIs).

The Foreign Institutional Investors' (FIIs) net investment in the Indian stock markets incalendar year 2005 crossed US$ 10 billion in the 2005 calendar, the highest ever by theforeign funds in a single year after FIIs were allowed to make portfolio investments in thecountry's stock markets in the early 90s.

As per the Securities Exchange Board of India (SEBI) figures, FIIs made net purchasesof US$ 587.3 million on December 16, 2005, taking the total net investments in the 2005calendar to US$ 10.11 billion.

India's popularity among investors can be gauged from the fact that the number of FIIsregistered with SEBI has increased from none in 1992-93 to 528 in 2000-01 to 803

in2005-06. In 2005 alone, 145 new FIIs registered themselves, taking the total registered FIIsto 803 (as on October 31, 2005) from 685 in 2004-05.

A number of these investors are Japanese and European funds aiming to cash in on therising equity markets in India. In addition, there was increased registration by non-traditional countries like Denmark, Italy, Belgium, Canada and Sweden.

The Japanese have, in fact, been increasing their foothold in India. Mizuho Corporate

Bank's decision to successfully expand base in the country has managed to convince almost60-65 major Japanese corporates to set up manufacturing or marketing base in India.

1. This list of corporates includes big names in auto sectors such as Honda, Toyota andYamaha, as well as those in home appliances, pharmaceuticals, and communications.2. While Nissan has already set up its base in India, other new entrants include Japanesebusiness conglomerate Mitsui Metal, Sanyo, and major Eisai. Japanese Telecom major

Nippon Telegraph (NTT) is also in the process of entering the Indian market.


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3. Sabre Capital and Singapore's Temasek Holding have teamed up to float a fundthatwill invest up to US$ 5 billion in Indian equities as well as fixed income instrumentsover the next five years.4. Fidelity International, a leading foreign institutional investor, has pickedup about 9per cent in the Multi Commodity Exchange of India Ltd (MCX) for US$ 49 million.

If FIIs have been flocking to India, it is obvious the returns are handsome. According toKamal Nath, the Indian Minister for Commerce and Industry, of all the foreign investorsin India, at least 77 per cent make profit and 8 per cent break even.


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POSITIVE ATTITUDE OF FINANCE MINISTER

The Finance Minister, Mr. P Chidambaram, today expressed confidence that the countrywould continue to attract foreign institutional investors' capital even as he asserted thattemporary net selling by such investors does not mean that there was outflow offoreigncapital.

"My information is that there is lot of foreign capital waiting to come throughFIIs. We willcontinue to attract FII capital. We also need to attract more foreign direct investment (FDI)and we will attract more FDI in the current year than that of last year," Mr. Chidambaramsaid, when asked about net selling undertaken by FIIs during the last 11 trading days.

He also attributed the slide in stock indices to global factors. "Global markets are down andthis is partly reflected in the Indian markets also," he said.

On the recent movement of the rupee, Mr. Chidambaram said that rupee is marketdetermined and that there was huge demand for dollars for import of capital goods tosupport manufacturing. "I don't see any reason why we should be unhappy. There is noreason to be concerned about exchange rate. So long as the movements are orderly bothways, it is not a cause for worry," he said.

Asked whether any increase in international oil prices would impact GDP growth of fiscal2006-07, Mr. Chidambaram said that if oil prices rise and if that rise is reflected in the

domestic prices, then it will have some impact on inflation.

"There is no reason why it will impact growth rates. Rise in oil prices will not impactgrowth if industry is able to absorb increasing costs and remain competitive," he said.

Mr. Chidambaram said that in the short, medium and long term, the country requires largercapital investment, which is only possible if reforms continue at steady pace in everysector.


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"Foreign capital goes to that country where governments carry out structural reforms, legalreforms and administrative reforms and that is the road we have taken so far," he said.

Meanwhile, the Deputy Chairman of the Planning Commission, Mr. Montek SinghAhluwalia, told presspersons that there was no evidence of the Indian economy beingoverheated and that "all macro indicators are in reasonable okay shape."


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Major Road blocks in foreign investment

The major obstacle is fortunately a non economic one. Rampant corruption is also said toprevail is, of course, is most common in developing economies, which are on path ofreforms.

1. Lack of political stability

Its not the case that every government may allow the FII to enter into their country.Different government follows different policy framework for FII. One governmentmayfollow liberal approach while other may follow the conservative approach. Indiahas

emerged as the second most option for FII destination in Asia after china. Incidentallysuccessive government wasted considerable time identifying the desirable sectors wherethe FII could be encouraged and those where it must be discouraged.

2. Lack of economic stability

FII are the foreign investments and they are always done if the economy of the countrysupports them. The economy always follows business cycle. Economic prosperity is followed by recession. This is inevitable. During the time when the economy is facing arecession or depression, FII is hard to come because the foreign players do notfeel safe toinvest. Apart from this there are also many factors that affect the economy adversely andthereby discourage FII.

3. Poor infrastructure

Infrastructure plays a very important role in affecting the decision of the ForeignInstitutional Investors whether to invest in a particular country or not. If the infrastructure


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of the country is poor the Foreign Institutional Investors may not invest in that country as itwould affect their returns and at the same time they would invest where the infrastructure isgood and returns are good. So initiative should be taken by the government to improve theinfrastructure.


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4. Corruption cum lack of transparency

Corruption deters several efficient players from investing as they think that the clearance oftheir proposal is not performance or reputation but under the table dealings. As pointed outby a recent FICCI study only about 29% of the FDI amount approved between August 1991 and January 1999 actually came in. This clearly shows lack of transparencyandbureaucracy.

The fundamental problem is the government instability to formulate a clear and consistentregulatory framework for FII.


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FIIs AS PORTFOLIO INVESTMENTS

Introduction

Portfolio investment flows from industrial countries have become increasingly importantfor developing countries in recent years. The Indian situation has been no different. In theyear 2000-01 portfolio investments in India accounted for over 37% of total foreigninvestment in the country and 47% of the current account deficit. The correspondingfigures in the previous year were 59% and 64% respectively. A significant part of theseportfolio flows to India comes in the form of Foreign Institutional Investors (FIIs)investments, mostly in equities. Ever since the opening of the Indian equity markets toforeigners, FII investments have steadily grown from about Rs. 2600 crores in 19

93 to overRs.11, 000 crores in the first half of 2001 alone. Their share in total portfolio flows to Indiagrew from 47% in 1993-94 to over 70% in 1999-2001.

While it is generally held that portfolio flows benefit the economies of recipient

countries, policy-makers worldwide have been more than a little uneasy about suc

hinvestments. Portfolio flows often referred to as hot money are notoriously volatlecompared to other forms of capital flows. Investors are known to pull back portfolioinvestments at the slightest hint of trouble in the host country often leading to disastrousconsequences to its economy. They have been blamed for exacerbating small economicproblems in a country by making large and concerted withdrawals at the first sign ofeconomic weakness. They have also been held responsible for spreading financialcrises

causing contagion in international financial markets.


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International capital flows and capital controls have emerged as an important policy issuesin the Indian context as well. Some authors have argued that FII flows have, infact, had nosignificant benefits for the economy at large.

While these concerns are all well-placed, comparatively less attention has been

paid so far to analyze the FII flows data and understanding their key features.A properunderstanding of the nature and determinants of these flows, however, is essential for ameaningful debate about their effects as well as predicting the chances of their suddenreversals.


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Zoom in view of International Portfolio Flows

International portfolio flows are, as opposed to foreign direct investment, liquid in natureand are motivated by international portfolio diversification benefits for individual andinstitutional investors in industrial countries. They are usually undertaken byinstitutionalinvestors like pension funds and mutual funds. Such flows are, therefore, largelydetermined by the performance of the stock markets of the host countries relative to worldmarkets. With the opening of stock markets in various emerging economies to foreigninvestors, investors in industrial countries have increasingly sought to realize the potentialfor portfolio diversification that these markets offer. While the Mexican crisis

of 1994, the subsequent Tequila effect, and the widespread Asian crisis have hadtemporary dampening effects on international portfolio flows, they have failed t

o counterthe long-term momentum of these flows. Indeed, several researchers have found evidenceof persistent home bias in the portfolios of investors in industrial countries inthe 90s.This home bias has the tendency to hold disproportionate amounts of stock from thehome country suggests substantial potential for further portfolio flows as globalmarketintegration increases over time.

It is important to note that global financial integration, however, can have two

distinct and in some ways conflicting effects on this home bias. As more and morecountries particularly the emerging markets open up their markets for foreigninvestment, investors in developed countries will have a greater opportunity tohold foreignassets. However, these flows themselves, along with greater trade flows which tend tocause different national markets to increasingly become parts of a more unified global market, reducing their diversification benefits. Which of these two effects will dominateis, of course, an empirical issue, but given the extent of the home bias it is lik

ely that forquite a few years to come, FII flows would increase with global integration.


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In recent years, international portfolio flows to developing countries have received theattention of scholars in the areas of finance and international economics alike. PortfolioInvestment. While papers in the finance tradition have focused on the nature and determinants of portfolio flows from the perspective of the diversifying investors, thosefrom the international macroeconomics perspective have focused on the recipientcountryssituation and appropriate policy response to such flows. For the present purposes, we shallfocus only on papers that address the issue of portfolio flows exclusively.

Previous research has also attempted to identify the factors behind this capital flows. Themain question is whether capital flew in to these countries primarily as a result of changesin global (largely US) factors or in response to events and indicators in the recipientcountries like its credit rating and domestic stock market return. The question

isparticularly important for policy makers in order to get a better understandingof thereliability and stability of such flows. The answer is mixed both global and country-specific factors seem to matter, with the latter being particularly important in the case ofAsian countries and for debt flows rather than equity flows.

As for the motivation of US equity investment in foreign markets, recent research suggest

that US portfolio managers investing abroad seem to be chasing returns in foreign marketsrather than simply diversifying to reduce overall portfolio risk. The findings include thewell-documented home bias in OECD investments, high turnover in foreign marketinvestments and that, in general, the patterns of foreign equity investment were far fromwhat an international portfolio diversification model would recommend. The share ofinvestments going to emerging markets has been roughly proportional to the share of thesemarkets in global market capitalization but the volatility of US transactions were even

higher in emerging markets than in other OECD countries. Furthermore there was norelation between the volume of US transactions in these markets and their stockmarketvolatility.


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It is commonly argued that local investors possess greater knowledge about a Countrysfinancial markets than foreign investors and that this asymmetry lies at the heart of theobserved home bias among investors in industrialized countries. A key implicationofrecent theoretical work in this area12 is that in the presence of such informationasymmetry, portfolio flows to a country would be related to returns in both recipient andsource countries. In the absence of such asymmetry, only the recipient countrys returnsshould affect these flows.


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The Foreign Investments and Sensex and nifty

The chronicles of Sensex:

In 10 months time Sensex moved from 7000 mark to 12,000 largely due to ForeignInstitutional Investor faith in Indian economy, better performance of corporates,resurgence of agriculture sector and liquidity in the market. Mutual Funds moped recordlevel of money, over Rs.14, 000 crore, a more than 30 fold increase from the last year andFII flushed nearly Rs.18, 000 crore in the equity market.

Sensex is conquering new heights, that too in lesser number of trading days than taken toachieve the previous milestones. The sprint from 11,000 to 12,000 has taken 19 tradingdays, from first touching 11,000 on March 21st to closing over 12,000 on April 2

0, 2006.So far it is the second fastest 1000 point run after the Harshad Mehta led bull-run, whenSensex touched 4,000 from the 3,000 mark in 19 trading sessions in 1992. And in2006 (i.e.oct 17 ) was 12,928 points up by 191 points.

Sensex level Date Sensex Drivers:

1000 July 25, 1990: Good monsoon and excellent corporate results.

2000 January 3, 1992: Liberal economic policy initiatives undertaken by the finance

Minister, Dr Man Mohan Singh.

3000 February 29, 1992: Market-friendly Budget by the then Finance Minister,

Dr Man Mohan Singh

4000 March 30, 1992: Liberal export-import policy.


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

6000 February 11, 2000: Infotech boom

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

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

9000 November 28, 2005: FIIs on buying Spree.

10000 February 6, 2006: Buying from FIIs, Local operators and retail investors

11000 March 21, 2006: Robust foreign fund inflows and a move by Government towardsgreater capital account convertibility.

12000 Apr 20, 2006: Massive buying from mutual funds around Rs.3400 crore in just 19trading sessions, favorable credit policy. Expectation of robust fourth quarterearnings bycorporate and S&P upgrading India sovereign credit rating from stable to positiveMarket gives 74% return from 1st April 2005 to 31st March 2006. FY07 budget signalslow Government regulation. Credit policy defers hiking of interest rates instead cautionskey players on real estate and equity market boom.

Massive growth in inflows in equity market from Mutual Funds was Rs.14, 305 crore frommere Rs.448 crore in FY05.

Source: SEBI website


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FIIs are back with a vengeance since Nov 05:

The above graph shows the trends in the FIIs investments made by the Foreign InstitutionalInvestors that have occurred from the period of April-04 to December-05. The red barsindicate the FII investments and the blue curvy line indicates the average contribution ofthe FIIs to BSE sensex points. The figures at the left indicate the FII investments made (Rsin Crores) where as the figures to the right indicate In April 04 the investments were madethereby moving the FIIs investments graph to 4000 and in the next month they wer

ewithdrawn resulting into the negative effect on the Indian stock market. Then since June 04the investments were made and they have moved in the positive direction there by leadingto the positive effect on the stock market. In April and May 2005 the investments werewithdrawn and after that the investments were again withdrawn in October 2005. But thestory continues and the positive results were shown by the FII investments.


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Sensex and the FIIs

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

The result is: Sensex has recovered 10% of the losses posted in the month of May.

In the month of August (till 25th of this month) itself, the movers and shakersof the Indianstock markets have reinvested almost 43% of their net sales in May. Of course, the TechMahindra and GMR Infrastructure IPO have played their part in getting FIIs backto theIndian markets, believe analysts.

Despite high oil prices and an environment of rising interest rates, which havesomewhatshown signs of slowing down now, FIIs have reposed their faith in the Indian growth story.India, the second-fastest growing economy in the world now, has been growing ata pace of8% plus in the last three years.

FII shareholding pattern for the quarter ending June reveals that FIIs have increased theirstakes in 188 companies against paring their stake in 177 companies.

Interestingly, FIIs chose a slew of midcap companies to increase their stakes as valuationslooked cheaper and most of them were under owned during the April-June quarterfollowing a massive hammering post May 10 meltdown, believes Sumeet Rohra of AntiqueStock Broking.

Another interesting aspect that the data below reflects is the growing dominance of FIIsover other set of investors like the mutual funds and retail investors. While MFs purchasedshares worth Rs 7573.04 crore in May when FIIs sold stocks worth Rs 8247.2 crore, themarkets tanked almost 15%.


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Sensex V/S FII correlation

Months

Sensex Gain/Loss (%)

FII Net Purchases/Sales (Rs Cr)

May

-14.9

-8247.2

June

5.34

1418.2

July

0.45

1447.9

August

8.07

3537.7

Net FII Sales betweenMay-Aug (2006)

-1843.4

In June and July combined together MFs were sellers to the tune of Rs 2058.15 croreagainst FIIs net purchases of Rs 2866.1 crore, the Sensex gained a smart 5.79%. T

he sametrend can be witnessed in the month of August. FIIs net purchases worth Rs 3537.7 croreagainst MFs net buys of Rs 251.46 crore, the Sensex has soared by 8.07%.

This leads one to believe that FIIs, at least in the short-term (the period between May-August under consideration) tend to influence the course of the markets vis-à-visdomesticand institutional investors.


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The above diagram represents the country ranking in relation to the Net InternationalReserves. Reserves are the money which is left after all the business activities are overChina is the leading economy and most emerging country among all others. These are thelist of the countries which are developing and are acting as attractive destinations for theForeign Institutional Investments. The Net International Reserves of all countries hadshown a steady growth and are providing the opportunities as a Foreign Investmentdestination. India ranks seventh and the percent of reserves to the imports arevery much(90%).


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Indian investors had it good in 05, just look at

Egypt!

The above graph explains the percentage increase in relation to the FII investments made invarious countries. This graph shows the percentage change in the international stockmarkets between December 31, 2004 and January 11, 2006. The percentage change washighest i.e. 141.1%. Data about various countries is also given. The purpose ofthe graph isto make the comparison so that the exact percentage change in relation to the comparisoncan be made and the position of the stock market can be determined. India was in

a goodposition but it needs a still more investments to make it to move toward one ofthe mostemerging and powerful economy. The percentage change in the Indias stock market was43.1%.


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Daily trends occurred in FII investments

Daily Trends in FII Investments on 26-SEP-2006

ReportingDate

Debt/Equity

GrossPurchases

(RsCrores)

GrossSales

(RsCrores)

NetInvestment(Rs Crores)

NetInvestmentUS($)million atmonth

exchangerate

01-SEP-2006

Equity

2194.50

1707.40

487.10

104.70

Debt

7.10

0.00

7.10


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1.50

04-SEP-2006

Equity

1379.10

1142.50

236.60

50.90

Debt

27.20

74.30

(47.10)

(10.10)

05-SEP-2006

Equity

1186.80

735.70

451.10

96.90

Debt

52.70

0.00

52.70

11.30

06-SEP-2006

Equity

846.90

916.40

(69.60)

(14.90)

Debt


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228.20

34.60

193.60

41.60

07-SEP-2006

Equity

1391.10

939.90

451.20

97.00

Debt

68.80

0.00

68.80

14.80

08-SEP-2006

Equity

1396.50

1412.80

(16.30)

(3.50)

Debt

46.40

0.00

46.40

10.00

11-SEP-2006

Equity

1249.10

1298.00


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(48.90)

(10.50)

Debt

93.50

0.00

93.50

20.10

12-SEP-2006

Equity

1495.90

1401.20

94.70

20.40

Debt

59.10

25.00

34.10

7.30

13-SEP-2006

Equity

1216.20

1336.80

(120.60)

(25.90)

Debt

0.00

167.80

(167.80)

(36.10)

14-SEP-2006


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Equity

1962.50

1443.10

519.40

111.60

Debt

0.00

0.00

0.00

0.00

15-SEP-2006

Equity

1604.90

1113.30

491.50

105.60

Debt

162.80

0.00

162.80

35.00

18-SEP-2006

Equity

1597.30

1138.30

459.00

98.60

Debt

96.00

157.90


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(61.90)

(13.30)

19-SEP-2006

Equity

1372.20

877.10

495.10

106.40


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Debt

449.00

321.90

127.10

27.30

20-SEP-2006

Equity

1540.70

1264.00

276.60

59.40

Debt

0.00

0.00

0.00

0.00

21-SEP-2006

Equity

1377.10

1141.10

236.00

50.70

Debt

0.00

3.00

(3.00)

(0.60)

22-SEP-2006

Equity


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1878.70

1589.80

288.80

62.10

Debt

167.80

0.00

167.80

36.10

25-SEP-2006

Equity

1401.50

1249.40

152.10

32.70

Debt

88.00

0.00

88.00

18.90

26-SEP-2006

Equity

1156.10

1424.60

(268.50)

(57.70)

Debt

0.00

304.80

(304.80)


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(65.50)

03-OCT-2006

Equity

2996.50

1702.90

1293.50

277.90

Debt

0.00

0.00

0.00

0.00

04-OCT-2006

Equity

1443.30

1737.60

(294.30)

(63.20)

Debt

0.00

39.90

(39.90)

(8.60)

05-OCT-2006

Equity

1648.20

2067.60

(419.40)

(90.10)

Debt


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304.80

0.00

304.80

65.50

06-OCT-2006

Equity

1863.20

1739.50

123.70

26.60

Debt

44.20

0.00

44.20

9.50

09-OCT-2006

Equity

1420.90

1349.90

71.00

15.30

Debt

0.00

210.00

(210.00)

(45.10)

10-OCT-2006

Equity

929.30

975.00


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(45.70)

(9.80)

Debt

0.00

69.80

(69.80)

(15.00)

11-OCT-2006

Equity

1509.10

1412.60

96.40

20.90

Debt

0.00

0.00

0.00

0.00

12-OCT-2006

Equity

2234.40

1431.00

803.40

174.20

Debt

0.00

0.00

0.00

0.00

13-OCT-2006


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Equity

2116.30

1577.00

539.30

116.90

Debt

0.00

0.00

0.00

0.00


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Swot Analysis

Foreign Institutional Investments

Strengths

1) Provides the most important resourcei.e. is finance.

2) Contributes to the economic growth ofthe country.

3) Balances the balance of paymentposition.

Weakness

1) Focuses more on developing countries.

2) Hampering the progress due toanytime withdrawal.

3) Provides only short term opportunities.

4) Provides more returns than indomestic countries.

5) Develops relationship between twocountries.

Opportunities

1) Better infrastructure.

2) Exploitation of resources to themaximum.

3) Better technology available.

Threats

1) Anytime withdrawal of investments.

2) Investments made in Foreign countriesposes threat to the Indian companies.

3) Increased returns.


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Swot Analysis

Strengths:

1 Provides most important resource i.e. finance:

To start any business and to make the idea to be actually implemented it needs finance.The FIIs brings the inflow of money into the country. Many projects that require funding isdone with the help of FIIs. Today in this world, the Finance is the only resource, which hasthe capability to be easily transferred from one place to another, and hence providing as abase for business opportunities .Free flow of capital is conducive to both the total world

welfare and to the welfare of each individual.

2 Contributes to the economic growth of the country:

When FIIs enters the domestic country they bring in the money and acts as the facilitator ofthe business development. As money comes into the country, it provides various benefits to

the leading sectors and ultimately results into the development of various sectors.

For e.g. in India I.T sector is the most booming sector and has shown the signsofimprovement thus attracting the FIIs.

3 Balances the balance of payments:

In the initial phase of economic development, the under developing countries need muchlarger imports. As a result, the balance of payment position generally turns adverse. Thiscreates gap between earnings and foreign exchange. The foreign capital presentsshort runsolution to the problem. So in order to balance the Balance of Payment Foreign Investmentis needed.


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4 Provides more returns than in domestic countries:

FIIs provide more returns to the investors as compared to the domestic country.This is oneof the most important strength of FIIs. The main reason is that the countries in which thForeign Institutional Investors invest their money, provides more opportunitiesand manybenefits. So investors invest in foreign countries rather than in the domestic countries.

5 Develops relationship between two countries:

Due to FIIs the investors from different countries come into picture and various people alsocome into the contact with each other. This develops a sense of relationship betweendifferent people and develops a nice intra-cultural atmosphere.


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Weaknesses

1 Focuses more on developing countries:

The main weakness of foreign institutional investments is that they provide opportunities toonly the developing and developed countries. The Foreign institutional investors focuses onthe developing countries rather than on the underdeveloped countries and because of thisthe under developed countries remain underdeveloped. So this drawback of the FIIs shouldbe improved upon by making their investments in the under developed countries.

2 Hampering the progress due to anytime withdrawal:

The FIIs do not provide any guarantee i.e. the Foreign institutional investors can anytimewithdraw their money when they want to so this makes the nature of the FIIs unpredictableand ultimately hampering the progress of the economy of that country. The very good

example of this is the mass withdrawal of the FIIs in the far eastern countrieslike Malaysia,Indonesia etc in 1996-97.

3 Provides only the short term opportunities:

FIIs provide only the short term opportunities i.e. they do not provide the long term

opportunities as they are very much supple in nature and there by limiting its scope to shortterm opportunities. As far as the market seems to be good the FIIs are attracted and afterthat they are not predictable. So FIIs are bound to provide only the short termopportunities.


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Opportunities:

1 Better infrastructure:

Better infrastructure is available only when there is adequate finance available and thiscomes with the help of FIIs. Infrastructure covers many dimensions, ranging from roads,ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.) studies in china reveal the extent of transport facilities andthe proximity to major ports as having a positive significant effect on the location of FIIwithin the country. Poor infrastructure can be developed with the help of the foreigninvestment. Foreign investors also point potential for attracting significant FII if host

country government permits more substantial foreign participation in the infrastructuresector.

2 Exploitation of resources to the maximum:

The major resources i.e. manpower, material and machines can be utilized to itsfullest soas to get the maximum benefit out of it. Through FIIs, the reserves or the resources that are

untapped because of the lack of funds can be exploited. Potential areas for explorationventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc. There is alsoscope for setting up manufacturing units for value added products.

3 Better technology available:

Technology is the main aspect on which the growth of the country is determined.Developing countries has a very low level of technology. Their technology is not

up to thestandards and they lack in modern technology. Developing countries possess a strong urgefor industrialization to develop their economies and to wriggle out of the low-levelequilibrium trap in which they are caught. This raises the necessity for importingtechnologies from advanced countries. Such technology usually comes with foreign capital.


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Threats:

1 Anytime withdrawal of investments:

The FIIs are more flexible in nature i.e. unlike FDI they are not guaranteed. ForeignInstitutional Investors can withdraw at any time they want. Foreign Direct Investment is fora fixed period and the investments could not be withdrawn until a specified period. Therecent example was the net outflows of the money from the stock market that affected thewhole economy and its consequences are very much appalling resulting into posing threatsto the economy.

2 Investments made in Foreign Companies poses threat to Indian companies:

Many MNCs have their set up in India and these MNCs provide a stiff competitionto thedomestic industries. The Foreign Institutional Investors invest their money in these MNCsand they are equipped with the latest technology to provide products at cheaperrates.

Moreover, the Indian labourers are opposing the use of modern technology as thecompanydownsizes the number of workers that substitutes the modern technology.

3 Increased returns results in outflow of money:

Increased returns can pose a threat to the domestic country as the money flows out of the

country and this may affect the economy of the domestic country. The returns that theForeign Institutional Investors are getting are very much high and this returnsthey take totheir home country and this leads to the outflow of money from domestic countryto theforeign country.


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Conclusion:

Foreign Institutional Investments are very much needed for India. They are necessary forthe continuous development of our country. The economy of our country has shownabetter performance and has led to the economic growth due to the FIIs. Though there arethreats from the Foreign Institutional Investments we should be positive and see the futureof our country. In last 50 years, India has developed a strong and professionallycompetent technical, marketing and business manpower in Livestock production and Information Technology.

This is an added advantage over many developing countries of Asia and Africa.Availability of competent and comparatively low-cost manpower in India is a great assetwhich is attracting foreign investors. As a result of stagnancy or in some cases reduction in

agricultural production, demand for several inputs like machinery and equipment, feeds,pharmaceuticals etc. has reduced in some countries of America and Europe.

It is therefore not surprising that these business enterprises have focused their attention toemerging Asian markets, particularly India and China. India is in a better position as it hasa strong technical manpower base and large number of English speaking population.


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Indias Future

The future of the India is bright and moreover due to FIIs the economy will gain a swing inthe future in short run as well as long run. India is a pool of various resources, theireffective utilization is possible only with the investments and in large sum. The prosperityof India will soon be visible in the near future. By evolving the strategy to improve thecompetitive position in these areas, overall level of competitiveness can be raised therebyenhancing the export potential of the country.

Thus, India could take a proactive initiative in seeking an international discipline oninvestment incentives with a built in exception based on the level of industrialization. SoonIndia will be leading country.


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Recommendations

Foreign investment is a valuable non-debt creating, external resource supplement inadequate savings and has a major role in transforming technology, improving managerialskills and facilitating market development. In our economic system, capital is the fuel thatgenerates profits.

India must extend a hospitable environment for foreign investors by providing essentialguarantees for investors for

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

India has a pool of human resource and this can attract the Foreign Institutional Investors toinvest their money into our country there by increasing the output with the help of tappingthe human resource.

The ready availability of the required infrastructure in the form of serviceable

roads, ports,telecommunications, airports and water and power facilities is a pre-requisite for attractinglarge volume of foreign investments.

Continued export and careful management of Indias imports will also be crucial in maintaining Indias ability to maintain and continue to build international equity and debtInstitutional Investors confidence.

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


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

Both the FIIs and FDI should be invited to the fullest and given importance so that it willcreate a win-win situation on the part of both the parties. Both the parties will be benefitedfrom Foreign Investments i.e. India will get capital and the investors will getreturns tomaximum.


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Annexure

Article:

FII inflows cross $4 bn mark Friday, April 07, 2006

(Economic Times)

The impressive returns given by Indian equities have received yet another stampof approval and this time by the prime drivers of the Bull Run, the ForeignInstitutional Investors (FIIs) themselves. The net FII inflows in Indian equities havecrossed the $4 billion mark in the current calendar year (CY06). As on April 4,FIIinflows stood at $4.03 billion.

Interestingly, experts opine that the Indian markets have become a global forceand the coming days will only further cement Indias place in the global arena. Thiswill, in turn, attract more and more FIIs to the country, too. Uday Kotak, managingdirector, Kotak Mahindra Bank, said, I expect that in the next five years, if nothinggoes wrong, India will be the second largest capital market in the world after theUS.

A section of market participants is also of the view that while on one hand, Indianequities look a bit overvalued, on the other hand, they have been able to outpacemost of the other global and emerging markets in the recent past. This will only lead to an increase in the inflows to the equity markets. However, it seems that the

dependence of the markets on foreign inflows is dipping at a time when thebourses are moving further northwards.


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This can be clearly seen if one compares the movement of the benchmark Sensexof the Bombay Stock Exchange (BSE) with the FII inflows. In the Sensexs journeyfrom 7,000 points to 11,000 points, the addition of every subsequent 1,000 pointshas seen lesser amount of FII inflows with the exception of the move from 8K to9K.

The rise of the Sensex from 10,000 to 11,000 levels witnessed FII inflows of only$2.31 billion. Contrary to this, when the Sensex rose from 9,000 to 10,000, it waspegged at $ 3.1 billion. The journey from 7,000 to 8,000 also saw higher FII inflowsof nearly $4 billion. The recent past also witnessed huge mobilization from thedomestic mutual fund industry and they have also played an important role in the rise of the equity bourses. Incidentally, in the current calendar year, February proved to be the best month with FII inflows pegged at $1.7 billion. March alsowitnessed net FII inflows at $1.5 billion. In Jan, FII inflows were pegged at only

$737.50 million.


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