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8/8/2019 FDI n FII final
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INTRODUCTION:
The FDI and FII is the process by which the resident of one country ( the source country)
acquire the ownership of assets for the purpose of controlling the production, distribution
and other productive activities of a firm in another country( the host country).
According to the international monetary fund(IMF), FDI and FII is defined as an
investment that made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor.
The effect of foreign investment varies from country to country. It can affect the factor
productivity of the recipient country and can also affect the balance of payments. Foreign
investments provides a channel through which countries can gain access to foreign
capital. It can come in two forms: FDI and FII. Foreign direct investment involves in
direct production activities and is also of a medium to long term nature. But foreign
institutional investment is a short term investment, mostly in the financial markets. FII
given its short term nature, can have bidirectional causation with returns of other
domestic financial markets such as money markets, stock markets and foreign exchange
markets.
Hence, understanding the determinants of FII is very important for any emerging
economy as FIIs exert larger impact on domestic financial markets in the short run and a
real impact in long run. India being a capital scarce country has taken many measures to
attract foreign investment since beginning of reforms in 1991. India is the second largest
country in the world, with a population of over 1 billion people. As a developing country,
Indian economy is characterised by wage rates that are significantly lower than those in
most developed countries. These two traits combine to make India a natural destination
for FDI and FII. Until recently, India has attracted only a small share of global FDI and
FII primarily due to government restrictions on foreign involvement in the economy. But
beginning in 1991 and accelerating rapidly since 2000, India has attracted only a small
share of global FDI and FII primarily due to government restrictions on foreign
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involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000,
India has liberalised its investment regulations and actively encouraged new foreign
investment, a sharp reversal from decades of discouraging economic integration with the
global economy.
India has been ranked at the third place in global foreign direct investments in 2009 and
will continue to remain among the top five attractive destinations for international
investors during 2010-11, according to United Nations Conference on Trade and
Development (UNCTAD) in a report on world investment prospects titled, 'World
Investment Prospects Survey 2009-2011' released in July 2009.
FOREIGN DIRECT INVESTMENT(FDI):
Foreign direct investment is an investment made by a foreign individual or company in
productive capacity of another country. It is the movement of capital across national
frontiers in a way that grants the investor control over the acquired asset.
As the third-largest economy in the world in PPP terms, India is a preferred destination
for foreign direct investments (FDI). India's recently liberalized FDI policy permits up to
a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced
industrial licensing requirements, removed restrictions on expansion and facilitated easy
access to foreign technology and FDI. The upward moving growth curve of the real-
estate sector owes some credit to a booming economy and liberalized FDI regime. A
number of changes were approved on the FDI policy to remove the cap in most of the
sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction
development, industrial parks, commodity exchanges, petroleum and natural gas, credit-
information services, Mining etc. The future of Indian economy is brighter because of its
huge human resources, rapidly upcoming service sector, availability of large number of
competent professionals, vast market for every product, increasing impact of
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consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India
and existence of four hundred million middle class people. Today, India provides highest
returns on FDI than any other country in the world.
TYPES OF FDI
There are two types of FDI
Greenfield investment: It is the direct investment in new facilities or the
expansion of existing facilities. It is the principal mode of investing in developing
countries like India. Mergers and Acquisition: It occurs when a transfer of existing assets from local
firms takes place.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
* Arms and ammunition.
* Atomic Energy.* Railway Transport.* Coal and lignite.* Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
INVESTMENT IN INDIA
Government of India accepts the key role of Foreign Direct Investment (FDI) in
economic development not only as an addition to domestic capital but also as an
important source of technology and global best practices. The Government of India has
put in place a liberal and Transparent FDI policy.
FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI
policy in India is reckoned to be among the most liberal in emerging economies. FDI
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Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in
most of the sectors including the services sector under automatic route. FDI in
sectors/activities under automatic route does not require any prior approval either by the
Government or the RBI.
BENEFITS TO HOST COUNTRY
Resource-transfer effects
Employment effects
Effects on competition & economic growth
BENEFITS TO HOME COUNTRY
Inward flow of foreign earnings
Employment benefits
The reverse resource-transfer effect
STEPS TO ATTRACT FDI
Better Investment Climate
Create a result-oriented bureaucracy
Market India
Target services
Accelerate privatization efforts
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EVOLUTION OF FDI
FDI INFLOWS
0
10
20
30
3.25 5.54
15.585
24.575 27.329
India
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SECTOR-WISE FDI CONTRIBUTION
23%
10%8%
7%
6%
4%
4%3%
3%2%Service
Compu
Teleco
Real Es
ConstrAutom
Power
Benefits of Foreign Direct Investment
Attracting foreign direct investment has become an integral part of the economic
development strategies for India. FDI ensures a huge amount of domestic capital,
production level, and employment opportunities in the developing countries, which is a
major step towards the economic growth of the country. FDI has been a booming factor
that has bolstered the economic life of India, but on the other hand it is also being blamed
for ousting domestic inflows. FDI is also claimed to have lowered few regulatory
standards in terms of investment patterns. The effects of FDI are by and largetransformative. The incorporation of a range of well-composed and relevant policies will
boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest
advantages of FDI enjoyed by India have been listed as under:
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Economic growth- This is one of the major sectors, which is enormously benefited from
foreign direct investment. A remarkable inflow of FDI in various industrial units in India
has boosted the economic life of country
Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the
trading of goods and services in India both in terms of import and export production.
Products of superior quality are manufactured by various industries in India due to
greater amount of FDI inflows in the country.
Employment and skill levels- FDI has also ensured a number of employment
opportunities by aiding the setting up of industrial units in various corners of India.
Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing
of knowledge from India especially in the Information Technology sector. It helps in
developing the know-how process in India in terms of enhancing the technological
advancement in India.
Linkages and spillover to domestic firms- Various foreign firms are now occupying a
position in the Indian market through Joint Ventures and collaboration concerns. The
maximum amount of the profits gained by the foreign firms through these joint ventures
is spent on the Indian market.
Foreign Institutional Investors in India
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Foreign institutional investors (FIIs) poured inflows heavily to bet on the India growth
story. As per data released by the Securities and Exchange board of India (SEBI), FIIs
invested US$ 2055.74 million in equities between July 1 and July 21, 2010, and US$
1566.98 million in debt between the same periods. Data sourced from SEBI shows thatthe number of registered FIIs stood at 1713 and number of registered sub-accounts rose
to 5,426 as of June 30, 2010. Moreover, India accounted for more than one-fifth of the
US$ 22.1 billion private equity (PE) investments received by the emerging markets
across the globe in 2009, according to a report by Emerging Markets Private Equity
Association (EMPEA). In 2009, emerging markets accounted for about 26 per cent of
global PE investment. In addition, the report added that global PE investment in
emerging markets totaled US$ 22.1 billion with a total of 674 deals in 2009.
Furthermore, Asia captured 63 per cent of total emerging market PE investments in terms
of value in 2009, with India capturing US$ 4 billion, according to the report.
According to advisory firm Grant Thornton, 439 corporate merger & acquisitions
(M&As) and PE transactions have been announced during January-May 2010 compared
to 179 during the same period in 2009. The total deal value during January-May 2010
topped the US$ 30 billion mark, as compared to US$ 8.1 billion recorded in January-May2009. May 2010 alone witnessed 59 deals worth US$ 8.33 billion against 35 deals valued
at US$ 1.85 billion in 2009. Out of this, 44 were M&As and the remaining 15 were PE
transactions. Some of the key sectors that attracted significant investor interest in the
M&A space were pharma and healthcare, banking and finance, mining, fast moving
consumer goods (FMCG) and information technology (IT)/ information technology
enabled services (ITeS), while PE firms struck deals in cement, education and real estate
sectors, among others.
According to 'India PE Report 2010', released by global consultancy Bain & Company,
PE and venture capital (VC) investments are projected to reach US$ 17 billion (around
Rs 80,000 crore) in 2010. The report includes a survey conducted across over 75 leading
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PE investors globally. The survey revealed that the number of respondents planning to
invest in the range of US$ 200-500 million in the next two years has risen four-fold to 27
per cent in 2010.
The Securities and Exchange Board of India (SEBI), in January 2010, allowed equity
investors to lend and borrow shares for 12 months compared with the current limit of one
month. The new norms will also allow a lender or a borrower to close his position before
the agreed-upon expiry date. The Reserve Bank of India (RBI) has ruled that foreign VC
funds will have to provide their financial statements for regulatory approval to invest in
India. According to a SEBI circular dated June 29, 2010, FIIs will now have to disclose
information on Indian securities lent by them to overseas entities (for the purpose of short
selling) on a weekly rather than a daily basis.
Currently, entities eligible to invest under the FII route are as follows:
i) As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university funds,
endowments, foundations, charitable trusts, charitable societies, a trustee or power of
attorney holder incorporated or established outside India proposing to make proprietary
investments or with no single investor holding more than 10 per cent of the shares or
units of the fund.
ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf
the FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust, and
individuals.
FIIs registered with SEBI fall under the following categories:
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a) Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
Registration Procedure
Documents Needed
Form A
Certified copy of clauses of MOA & AOA
Audited Financial Statement & Annual Report for last year
Registration Fee: US$ 10,000
Validity : 3 yrs
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Renewal Fee: US$ 10,000
Prohibitions on Investments:
FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.They are also not allowed to invest in any company which is engaged or proposes to
engage in the following activities:
1) Business of chit fund
2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does not
include development of townships, construction of residential/commercial premises,
roads or bridges).
5) Trading in Transferable Development Rights (TDRs).
Impact on Indian economy
Better side
Reduced cost of equity capital
FII inflows augment the sources of funds in the Indian capital markets. In a
commonsense way, the impact of FIIs upon the cost of equity capital may be visualized
by asking what stock prices would be if there were no FIIs operating in India. FII
investment reduces the required rate of return for equity, enhances stock prices, and
fosters investment by Indian firms in the country.
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Imparting stability to Indias Balance of Payments
For promoting growth in a developing country such as India, there is need to augment
domestic investment, over and beyond domestic saving, through capital flows. The
excess of domestic investment over domestic savings result in a current account deficit
and this deficit is financed by capital flows in the balance of payments. Prior to 1991,
debt flows and official development assistance dominated these capital flows. This
mechanism of funding the current account deficit is widely believed to have played a role
in the emergence of balance of payments difficulties in 1981 and 1991. Portfolio flows in
the equity markets, and FDI, as opposed to debt-creating flows, are important as safer
and more sustainable mechanisms for funding the current account deficit.
Knowledge flows
The activities of international institutional investors help strengthen Indian finance. FIIs
advocate modern ideas in market design, promote innovation, development of
sophisticated products such as financial derivatives, enhance competition in financial
intermediation, and lead to spillovers of human capital by exposing Indian participants to
modern financial techniques, and international best practices and systems.
Strengthening corporate governance
Domestic institutional and individual investors, used as they are to the ongoing practices
of Indian corporates, often accept such practices, even when these do not measure up to
the international benchmarks of best practices. FIIs, with their vast experience with
modern corporate governance practices, are less tolerant of malpractice by corporate
managers and owners (dominant shareholder). FII participation in domestic capital
markets often lead to vigorous advocacy of sound corporate governance practices,
improved efficiency and better shareholder value.
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Improvements to market efficiency
A significant presence of FIIs in India can improve market efficiency through two
channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles
many domestic investors, it may be easier for a globally diversified portfolio manager to
be more dispassionate about Indias prospects, and engage in stabilizing trades. Second,
at the level of individual stocks and industries, FIIs may act as a channel through which
knowledge and ideas about valuation of a firm or an industry can more rapidly propagate
into India. For example, foreign investors were rapidly able to assess the potential of
firms like Infosys, which are primarily export-oriented, applying valuation principles that
prevailed outside India for software services companies.
Capital formation in domestic market:
If there is much FII inflow in the country will not borrow from other country or from
international bank. If home countrys saving rate are not sufficient to meet its investment
programmed but if FII inflow is well there is no problem. India is developing country and
its domestic saving is low compared to developed countries. So here is need for FII
inflow.
Ill Effects
A downfall of the market too can also be fueled by these FIIs. When they take out
some of their invested money. Though there is a lot of value in this market and
fundamentally there is a lot of upside in it. For long-term value investors, theres
little because for worry but short term traders are adversely getting affected by the
role of FIIs are playing at the present.
The large build-up of foreign exchange reserves through FII inflows poses a
potential threat of destabilization of the economy. Portfolio flows are most often
referred to as hot money that can be notoriously volatile when compared to
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other forms of capital flows. The Mexican crisis and the East Asian crisis are
classic examples of the damage that sudden outflows of portfolio money can do to
an economy.
There are likely to be repercussions on the growth momentum of the Indianeconomy if FII inflows significantly slow down.
It needs to be noted that outflows of FII capital from the market could adversely
impact the value of the Indian currency, as FII inflows form the most significant
part of foreign inflows into the economy. Indeed, the recent soft trends in FII
inflows in May had led the Indian currency to depreciate against the US dollar.
FII and exports: If our Indian currency appreciates just because of FII (net inflow
in India) there is adverse effect on our export. Our export industry will become
uncompetitive due to appreciation of rupees.
FII and inflation: The huge amount of FII fund flow creates the huge demand for
Indian rupees. In that situation RBI print more money in the market. This situation
could lead to excess liquidity thereby leading to inflation, where too much money
chase too few goods and service (perfect example of demand pull inflation). Thus
there should be a limit to the FII inflow in the country.
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CONCLUSION
It is generally said that future is always uncertain. This saying is correct to some extent.
But at the same time it is also said that exceptions are always there. This exception is
about India's certain higher rate of growth in the coming future. The future of Indian
economy is brighter because of its huge human resources, rapidly upcoming service
sector, availability of large number of competent professionals, vast market for every
product, increasing impact of consumerism, absence of controls and licenses, interest of
foreign entrepreneurs in India and existence of four hundred million middle class people.
Even today, India is producing largest number of billionaires in a year, take over by
Indian multinationals is amazing, the craze of Indians to go abroad is rapidly
diminishing, the Rupee is becoming stronger and stronger in relation to Dollar. India's
say in the international diplomacy and political affairs has now become meaningful,
thousands of foreigners are working as executives in India, packages are becoming
lucrative and competitive and annual rate of growth is highest after China. This present
picture gives some reflections of the future. But this is all in the absolute sense and not in
the relative terms. A country can only grow if the Govt. policies allow more
participation and is able to attract more and more foreign direct investment in India.
Today, India provides highest returns on FDI and FII than any other country in the world.
India is poised for further growth in manufacturing, infrastructure, automobiles, auto
components, food processing sectors, real estate development etc. In this context it is also
worth mentioning that savings rate has also increased from 23% to 31% over the last year
to this year. India's continuing ambivalence on FDI and FII, as a result, exacts a heavy
toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI and FII to its
neighbors each year.