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PREFACE

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

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


sensex.

.. 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 been
referred.

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

.. The legal aspects regarding Foreign Institutional Investments are


reported in the project considering India.

EXECUTIVE SUMMARY

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


cial
assets and production process of another country. It can affect the factor produ
ctivity of
the recipient country and can also affect the balance of payments. In developing
countries
there was a great need of foreign capital, not only to increase their productivi
ty of labor
but also helps to build the foreign exchange reserves to meet the trade deficit.

It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI).Foreign direct investment involves in the direct production act
ivity and
also of medium to long-term nature. But the foreign portfolio investment is a sh
ort-term
investment mostly in the financial markets and it consists of Foreign Institutio
nal
Investment (FII).

India, being a capital scarce country, has taken lot of measures to attract fore
ign
investment since the beginning of reforms in 1991. Till the end of January 2003
it could
attract a total foreign investment of around US$ 48 billions out of which US$ 23
billions
is in the form of FPI. FII consists of around US$ 12 billions in the total forei
gn
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 th
is would
affect short-term stability in the financial markets. Hence, there is a need to
determine
the push and pull factors behind any change in the FII, so that we can frame our
policies

to influence the variables which drive-in foreign investment. Also FII has been
subject of
intense discussion, as it is held responsible for intensifying currency crisis i
n 1990 s
elsewhere.

India opened its stock markets to foreign investors in September 1992 and has,
since 1993, received considerable amount of portfolio investment from foreigners
in the
form of Foreign Institutional Investments(FII) in equities. In order to trade in
Indian
equity markets, foreign corporations need to register with the SEBI as Foreign
Institutional Investors (FII).

SEBI s definition of FIIs presently includes foreign pension


funds, mutual funds, charitable/endowment/university funds etc. as well as asset
management companies and other money managers operating on their behalf.

The FIIs registered with SEBI come from as many as 28 countries (including money
management companies operating in India on behalf of foreign investors). It is,
however,
instructive to bear in mind that these national affiliations do not necessarily
mean that the
actual investor funds come from these particular countries. Given the significan
t financial
flows among the industrial countries, national affiliations are very rough indic
ators of the
home of the FII investments. In particular institutions operating from Luxembourg,
Cayman Islands or Channel Islands or even those based at Singapore or Hong Kong
are
likely to be investing funds largely on behalf of residents in other countries.
Nevertheless,
the regional breakdown of the FIIs does provide an idea of the relative importan
ce of
different regions of the world in the FII flows.

INDEX
Serial
no.
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

Major determinants of FII flows


16
10
Benefits of FII
19
11
Prospects for Indian perspective
20
12
Positive attitude towards Foreign Investment
25
13
Major roadblocks in Foreign Investment
29
14
FII as portfolio investments
31
15
The Foreign investments & Sensex & Nifty
37
16
Daily trends in FII investments
44
17
SWOT Analysis
46
18
Conclusion
52
19

Recommendations
54
20
Annexure

Introduction

We have heard people saying that


ing
towards prosperity but what does
this
scenario, which should be known.
e can
say who have contributed towards
estors.

the world is going global and India is also mov


it actual means and who are the persons behind
Among them the persons who are responsible or w
this scenario are the Foreign Institutional Inv

The world is increasingly becoming interdependent. Today the needs of the custom
er have
increased and they want goods from all over the world. We can see variety of pro
ducts
moving across the world and the world trade increased by 120%.

The developing countries are looking forward to steady flow of capital and are u
ndergoing
the learning process of how to absorb them. As regard the attendant risks, the c
entral bank
of the countries have to tackle them. There are many ways the inflow can come in
to the
country. Debt is a form of capital forms which are raised from banks or from the
markets.
The non-debt creating flows includes Foreign Direct Investment or Portfolio
Investments.

Foreign investment has clearly been a major factor in stimulating economic growt
h and
development in recent times.

MINDSET OF INDIANS IN GENERALS:

India and the Indians have undergone a paradigm shift. There have been fundament
al and
irreversible changes in the economy, government policies, outlook of business an
d
industry, and in the mindset of the Indians in general. From a shortage economy
of food
and Foreign Exchange, India has now become a surplus one.

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

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


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

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

They have become globally competitive and some of they have started becoming am
MNCS themselves. Fatalism and contentment of the Indian mind set have given way
to
optimism and ambition. The Indian culture which looks down upon wealth as a sin
and
believed in the simple living and high thinking has started recognizing prosperi
ty and
success as acceptable and necessary goals.

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

NEED FOR FII IN DEVELOPING COUNTRIES


1. Infrastructure Renewal
To keep the Indian economy growing the infrastructure sector like power, transpo
rt, mining
& metallurgy, textiles, housing, retail, social welfare, medical etc. has to be
upgraded.
After the Enron fiasco, it is difficult to persuade anybody in the west to take
interest in any
of these sectors. Hence India is left to its own devices to raise money and buil
d this sector.
Borrowing abroad supplemented with Indian resources is the only way open to Indi
a. This
upgrade is needed prior or in step with the industrial and service exports secto
r growth. It
has to be placed on a higher priority. Only recently a suggestion to use a small
portion of
India s foreign reserves met with howl of protests. The protestors in the Indian P
arliament
did not understand the proposal. Hence the government is stuck to steam roller i
ts proposal
through the legislative process or succumb to political pressure and do nothing.
The latter is
not acceptable.
If India finds its own $4 Billion a year for infrastructure then foreign investo
rs will kick in
another similar portion. The resulting money will very quickly rebuild the now
cumbersome infrastructure.
2. Bridge the technological gap
Developing countries has a very low level of technology. Their technology is not
up to the
standards and they lack in modern technology. Developing countries possess a str
ong urge
for industrialization to develop their economies and to wriggle out of the low-l
evel
equilibrium trap in which they are caught. This raises the necessity for importi
ng
technologies from advanced countries. Such technology usually comes with foreign
capital.
3. Optimum utilization of resources
A number of developing countries possess huge mineral resources which are4 untap
ped
and unexploited. Due to lack of technology these countries are not able to use t
heir
resources to the fullest. As a result they have to depend on the foreign investm
ent with the

help of which technology of the country and that will ultimately lead to the opt
imum
utilization of the resources. India has very huge reserves of mineral resources
and to
optimize their use or rather for extracting them efficiently and effectively mod
ern
technology is required which is possible through foreign investment.
4. Balancing the balance of payment position
In the initial phase of economic development, the under developing countries ne
ed
much larger imports. As a result the balance of payment position generally turns
adverse.
This creates gap between earnings and foreign exchange. The foreign capital pres
ents short
run solution to the problem. So in order to balance the Balance Of Payment Forei
gn
Investment is needed.

5. Develop the Diverse Market


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

Who can be registered as an FII?


The applicant should be any of the following categories:
1. Pension funds
2. Mutual funds
3. Investment trust
4. Insurance or reinsurance companies
5. Endowment funds
6. University funds
7. Foundations or charitable trusts or charitable societies who propose to inves
t on
their own behalf and
a) Asset management companies
b) Nominee companies
c) Institutional portfolio managers
d) Trustees
e) Power of attorney holders
f) Bank

Who propose to invest their proprietary funds or on behalf of


on of foreign corporate and individuals.

broad based

funds or

Entry options for Foreign Investors

A foreign company planning to set up business operations in India has the follow
ing
options.

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 the
requirements of the investor, subject to the equity caps in respect of the area
of activity
under the foreign direct investment policy.

Unincorporated entity

A) As a foreign company through


.. Liaison office/ representative office.
.. Project office
.. Branch office
Such offices can undertake activities permitted under the Foreign Exchange Manag
ement
(establishment in India of branch or office of other place of business) Regulati
ons, 2000.

2. Incorporation of company:

For registration and incorporation, an application has to be filed with the regi
strar of
companies (ROC). Once a company has been duly registered and incorporated as an
Indian
company, it is subject to Indian laws and regulations as applicable to other dom
estic Indian
companies.

3. Liaison office/ representative office:

The role of liaison office is limited to collecting information about possible m


arket
opportunities and providing information about the company and its products to pr
ospective
Indian customers. It can promote export/ import from/ to India and also facilita
te technical/
financial collaboration between parent companies and company in India. Liaison o
ffice
cannot take any commercial activity directly and indirectly and cannot, therefor
e, earn any
income in India. Approval for establishing a liaison office in India is granted
by Reserve
Bank of India.

4. Project office:

Foreign companies planning to execute specific projects in India can set up temp
orary
project/ site offices in India. RBI has now granted general permission to foreig
n entities to
establish project offices subject to specified conditions. Such offices cannot u
ndertake or
carry on any activity other than the activity relating and incidental to executi
on of the
project. Project offices may remit outside India the surplus of the project on i
ts completion,
general permission for which has been granted by the RBI.

5. Branch office:

Foreign companies engaged in manufacturing and trading activities abroad are all
owed to
set up branch offices in India for the following purposes:

1. Export/ import of goods.


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

6. Rendering services in information technology and development of software in


India.
7. Rendering technical support to products supplied by the parent/ group
companies.
8. Foreign airline/ shipping company

A branch office is not allowed to carry out manufacturing activities on its own
but is
permitted to subcontract these to an Indian manufacturer.

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

6. Branch office on

stand alone basis

in SEZ:

Such branch offices would be isolated and restricted to the special economic zon
e (SEZ)
Alone and no business activity/ transaction will be allowed outside the SEZs in
India,
which include branches/ subsidiaries of its parent offices in India.
No approval shall be necessary from RBI for a company to establish a branch/unit
in SEZs
to undertake manufacturing and service activities subject to specified condition
s.

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 in


vest by
way of contribution to the capital of a firm or a proprietary concern in India o
n nonrepatriation basis provided:-

I) Amount is invested by inward remittance or out of NRE / FCNR / NRO account


maintained with AD.

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

III)Amount invested shall not be eligible for repatriation outside India NRIs/ P
IO
may invest in sole proprietorship concerns/ partnership firms with repatriation
benefits with
the approval of government/ RBI.

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

No person resident outside India other than NRIs/ PIO shall make any investment
by way
of contribution to the capital of a firm or a proprietorship concern or any asso
ciations of
persons in India. The RBI may, on an application made on it, permit a person res
ident
outside India to make such investment subject to such terms and conditions as ma
y be
considered necessary.

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 prior
ity, capital
intensive and high technology industries. Foreign investment has been allowed in
exploration, production and refining of oil and marketing of gases.

2. The Foreign Investment Promotion Board (FIPB):


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

3. A Foreign Investment Implementation Authority (FIIA):


FIIA was established in august 1999 within the Ministry of Industry in order to
ensure the
approvals for Foreign Investment (including NRI investment) are quickly translat
ed into
actual investment inflows and that proposals fructify into projects. In particul
ar, 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 f
rom 14
may 1992.

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


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

5. Disinvestment on equity:

Disinvestment on equity by foreign investors has been allowed at market rates on


stock
exchanges from 15 September 1992 with permission to repatriate the proceeds of s
uch
Disinvestment.

Reasons to invest in India

Some of the major reasons to invest in India:

1. It is one of the largest economies in the world, fourth largest economies in


terms of
purchasing power parity.

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

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

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

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

6. One of the largest manufacturing sectors in the world, spanning almost all ar
eas of
manufacturing activities.

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


n the
world.

8. Rich base of mineral and agricultural resources.

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


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

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

11. Well balanced package of fiscal incentives.

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, each
with their own problems and benefits.

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

Legal aspects
The eligibility criteria to be fulfilled by the applicant seeking FII
registration:

As per regulation 6 of SEBI (Foreign Intuitional Investors) regulations, 1995, F


oreign
Intuitional Investors are required to fulfill the following conditions to qualif
y for the grant
of registration:

1. Applicant should have track record, professional competence, financial soundn


ess,
experience, general reputation of fairness and integrity.

2. The applicant should be regulated by an appropriate foreign regulatory author


ity in the
same capacity/ category where registration is sought from SEBI. Registration wit
h
authorities, which are responsible for incorporation, is not adequate to qualify
as Foreign
Intuitional Investors.

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

4. Applicant must be legally permitted to invest in securities outside the count


ry or its
incorporation/ establishment.

5. The applicant must be a

fit and proper

person.

6. The applicant has to appoint a local custodian and enter into an agreement wi
th the
custodian. Besides it also has to appoint a designated bank to route its transac
tions.

7. Payment of registration fee of US $5000.00.


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

relevant
enclosures.

Documents required to be submitted at the time of applying for


registration as an FII:

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


t.

2. Certified copy of the relevant clauses or articles of the memorandum and Arti
cles of
association.

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

4. A declaration by the applicant with registration number and other particulars


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

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


with a
domestic custodian together with particulars of domestic custodian.

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

7. Declaration regarding fit and proper entity.

Facilitation of foreign investment in India

1. Foreign investment can be done in the Automatic Route up to 100 per cent with
out
need for any approvals. The investor has to keep the Reserve Bank of India infor
med.
2. The sectors not open to foreign investments are retail trade, housing and rea
l estate,
agriculture and lottery and gambling.
3. There are maximum limits on foreign investment. Some of these are being
increased.
4. Prior approval of the government is needed for those cases, which need indust
rial
license and those involving investment beyond the maximum limits. Such cases are
cleared
by the Foreign Investment Promotion Board in a transparent, efficient, time-boun
d and
predictable manner.
5. The Department of Industrial Policy and Promotion is the nodal agency for
information and assistance to foreign investors. It also gives information on pr
ojects
available for foreign investors and contains online applications for clearances.
6. The Various state governments in India offer competitive incentives and attra
ctions
to foreign investors.

Major Determinants of FII Flows

The unpredictability of autonomous FII flows, in both scale and direction, has d
eveloped a
substantial research effort to identify their major determinants. An extensive l
iterature
based generally on three approaches
aggregate econometric analysis, survey appra
isal of
foreign investors opinion, and econometric study at the industrial level has fai
led to arrive
at the consensus. This can be partly attributed to the lack of reliable data, pa
rticularly at the
sectoral level, and to the fact that the most empirical work has analyzed FII de
terminants
by pooling of countries that may be structurally diverse. The subject is mainly
concerned
with examining the factors influencing the destination of the investment, host c
ountry
determinants, rather than industry specific factors.

1. Market size:
Econometric studies comparing a cross section of countries indicate a well estab
lished
correlation between FII and the size of market (proxied by the size of GDP) as w
ell as
some of its characteristics (e.g. average income levels and growth rates.) some
studies
found GDP growth rate to be a significant explanatory variable, while GDP was no
t,
probably indicating that where the current size of national income is very small
, increments
may have less relevance to FII decisions than growth performance, as an indicato
r of
market potential.

2. Liberalized trade policy:


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

3. Labour costs and productivity:


Empirical research has also found relative labour costs to be statistically sign
ificant,
particularly for foreign investment in labour intensive industries and for expor
t oriented
subsidiaries. In India labour market rigidities and relatively high wages in the
formal sector
have bee reported as deterring any significant inflows into the export sector in
particular.
The decision to invest in china has been heavily influenced by the prevailing lo
w wage
rate.

4. Political scenario:
The ranking of the political risk among FII determinants remains somewhat unclea
r. Where
the host country possesses abundant natural resources, no further incentive may
be
required, as is seen in politically unstable countries such as Nigeria and Angol
a, where high
returns in the extractive industries seem to be compensated for political instab
ility. in
general ,so long as the foreign company is confident of being able to operate pr
ofitably
without undue risk to its capital and personnel, it will continue to invest. Lar
ge mining
companies, for example, overcome some of the political risks by investing in the
ir own
infrastructure maintenance and their own security forces. Moreover, these compan
ies are
limited neither by small local markets nor by exchange rate risks since they ten
d to sell
almost exclusively on the international, market at hard currency prices.

5. Infrastructure:
Infrastructure covers many dimensions, ranging from roads, ports, railways and
telecommunication systems to institutional development (e.g. accounting, legal s
ervices,
etc.) studies in china reveal the extent of transport facilities and the proximi
ty to major
ports as having a positive significant effect on the location of FII within the
country. Poor
infrastructure can be seen, as both, an obstacle and an opportunity for foreign
investment.
For the majority of the low income countries, it is often cited as one of the ma
jor
constraints. But foreign investors also point potential for attracting significa
nt FII if host
country government permits more substantial foreign participation in the infrast

ructure
sector.

6. Incentives and operating conditions:


Most of the empirical evidence supports the notion that specific incentives such
as lower
taxes have no major impact on FII particularly when they are seen as compensatio
n for
continuing comparative disadvantages. On the other hand, removing restrictions a
nd
providing good business operating conditions are generally believed to have a po
sitive
effect. Further incentives such as granting of equal treatment to foreign invest
ors in relation
to local counterparts and the opening up of markets (e.g. air transport, retaili
ng, banking,)
have been reported as important factors in encouraging FII flows in India.

7. Dis-investment policy:
Though privatization has attracted some foreign investment flows in recent years
, progress
is still slow in majority of low income countries, partly because the divestment
of the state
assets is a highly political issue. In India for example, organized labour has f
iercely resisted
privatization or other moves, which threaten existing jobs workers rights. A num
ber of
structural problems are constraining the process of privatization. Financial mar
kets in most
low income countries are slow to become competitive; they are characterized by t
he
inefficiencies, lack of debt and transparency and the absence of regulatory proc
edures.
They continue to be dominated by government activity and are often protected fro
m
competition. Existing stock markets are thin and illiquid and securitized debt i
s virtually
non-existent. An underdeveloped financial sector of this type inhibits privatiza
tion and
discourages foreign investors.

Benefits of FII:

Host countries derive several benefits from FII:

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

2. Transfer of patent technologies.

3. Access to scarce managerial skills.

4. Creation of new jobs.

5. Access to overseas market networks and marketing expertise.

6. Reduce flight of domestic capital abroad.

7. Long commitment to successful completion of FII projects.

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

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

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

11. Being subject to business calculation of private profit, it is likely to be


employed more productively as compared to public financial aid.

Prospects for Indian perspective


FDI OR FII
FDI usually is associated with export growth. It comes only when all the criter
ia to set up
an export industry are met. That includes, reduced taxes, favorable labor law, f
reedom to
move money in and out of country, government assistance to acquire land, full gr
own
infrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts,
Pharmaceuticals, unexplored service sectors including accounting; drug testing,
medical
care etc are key sectors for foreign investment.
Manufacturing is a brick and mortar investment. It is permanent and stays in the
country
for a very long time. Huge investments are needed to set this industry. It provi
des
employment potential to semi- skilled and skilled labor.
On the other hand the service sector requires fewer but highly skilled workers.
Both
manufacturing and service sector foreign investment are needed in India. Still h
igh end
manufacturing in auto parts and pharmaceuticals should be India s target.
The FII (Foreign Institutional Investor) is monies, which chases the stocks in t
he market
place. It is not exactly brick and mortar money, but in the long run it may tran
slate into
brick and mortar. Sudden influx of this drives the stock market up as too much m
oney
chases too little stock. In last four months an influx of about $1.5 Billion has
driven the
Indian stock market 20% higher.
Where FDI is a bit of a permanent nature, the FII flies away at the shortest pol
itical or
economical disturbance. The late nineties economic disaster of Asian Tigers is a
key
example of the latter. Once this, money leaves and it leaves ruined economy and
ruined
lives behind. Hence FII is to be welcomed with strict political and economical d
iscipline.
Thus it can be said that India should welcome, FDI as well as FII and work hard
to retain
both.

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 opene
d
this up for private sector participation. 48 new road projects worth US$ 12 bill
ion are
under construction. Development and up gradation of roads will require an invest
ment
of US$ 24 billion till 2008. Private sector participation in road projects will
grow
significantly.
b) Railways:
The railway sector will need an investment of US$ 22 billion for new coaches, tr
acks,
and communications and safety equipment over the next ten years.
c) Airways:
Up gradation and modernization of airports will require US$ 33 billion investmen
t in
the next ten years.
d) Waterways:
There is potential for investment in the expansion and modernization of ports. T
he
government has taken up a US$22 billion 'Sagarmala' project to develop the Port
and
Shipping sector under Public-Private Partnership. 100 percent FDI is permitted f
or
construction and maintenance of ports. The government is offering incentives to
investors.

2. Better power facilities:


The Ministry of Power has formulated a blueprint to provide reliable, affordable
and
quality power to all users by 2012. This calls for investment of US$ 73 billion
in the
next five years. The gap between demand and production of power is around 10000
MW. Opportunities are there for investment in power generation and distribution
and
development of non-conventional energy sources.
3. Urban projects need investments:
There is potential for investment in urban infrastructure projects. Water supply
and
sanitation projects alone offer scope for annual investment of US$ 5.71 billion.
The
entire gamut of exploration, production, refining, distribution and retail marke
ting
present opportunities for FDI.
4. Exploration of mineral reserves:
India has an estimated 85 billion tones of mineral reserves remaining to be expl
oited.
Potential areas for exploration ventures include gold, diamonds, copper, lead zi
nc,
cobalt silver, tin etc. There is also scope for setting up manufacturing units f
or value
added products.
5. Develop Telecom IT sector:
The telecom market, which is one of the world's largest and fastest growing, has
an
investment potential of US$ 20-25 billion over the next five years. The telecom
market
turnover is expected to increase from US$ 8.6 billion in 2003 to US$ 13 billion
by
2007. Mobile telephony has started growing at the rate of 10-12 million subscrib
ers per
year. The IT industry and IT-enabled services, which are rapidly growing offer
opportunities for FDI.

6. Service sector opportunities:


India has emerged as an important venue for the services sector including financ
ial
accounting, call centers, and business process outsourcing. There is considerabl
e
potential for growth in these areas.

7. For R & D and healthcare sector development:


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

8. Positive future of automobile industry:


The Indian auto industry with a turnover US $ 12 billion and the auto parts indu
stry
with a turnover of 3 billion dollars offer scope for FDI. The government is enco
uraging
the establishment of world-class integrated textile complexes and processing uni
ts. FDI
is welcome.
9. Agricultural sector:
While India has abundant supply of food, the food processing industry is relativ
ely nascent
and offers opportunities for FDI. Only 2 percent of fruits and vegetables and 15
percent of
milk are processed at present. There is a rapidly increasing demand for processe
d food
caused by rising urbanization and income levels. To meet this demand, the invest
ment
required is about US$28 billion. Food processing has been declared as a priority
sector.

10. Promotion of exports:


The Government has recently established Special Economic Zones with the purpose
of
promoting exports and attracting FDI. These SEZs do not have duty on imports of
inputs and they enjoy simplified fiscal and foreign exchange procedures and allo
w
100% FDI.
11. Development of Tourism industry:
The travel and tourism industry which has grown to a size of US$ 32 billion offe
rs
scope for investment in budget hotels and tourism infrastructure.

POSITIVE ATTITUDE TOWARDS FIIs


Positive tidings about the Indian economy combined with a fast-growing market ha
ve made
India an attractive destination for Foreign Institutional Investors (FIIs).
The Foreign Institutional Investors' (FIIs) net investment in the Indian stock m
arkets in
calendar year 2005 crossed US$ 10 billion in the 2005 calendar, the highest ever
by the
foreign funds in a single year after FIIs were allowed to make portfolio investm
ents in the
country's stock markets in the early 90s.
As per the Securities Exchange Board of India (SEBI) figures, FIIs made net purc
hases
of US$ 587.3 million on December 16, 2005, taking the total net investments in t
he 2005
calendar to US$ 10.11 billion.
India's popularity among investors can be gauged from the fact that the number o
f FIIs
registered with SEBI has increased from none in 1992-93 to 528 in 2000-01 to 803
in
2005-06. In 2005 alone, 145 new FIIs registered themselves, taking the total reg
istered FIIs
to 803 (as on October 31, 2005) from 685 in 2004-05.
A number of these investors are Japanese and European funds aiming to cash in on
the
rising equity markets in India. In addition, there was increased registration by
nontraditional countries like Denmark, Italy, Belgium, Canada and Sweden.
The Japanese have, in fact, been increasing their foothold in India. Mizuho Corp
orate
Bank's decision to successfully expand base in the country has managed to convin
ce almost
60-65 major Japanese corporates to set up manufacturing or marketing base in Ind
ia.
1. This list of corporates includes big names in auto sectors such as Honda, Toy
ota and
Yamaha, as well as those in home appliances, pharmaceuticals, and communications
.
2. While Nissan has already set up its base in India, other new entrants include
Japanese
business conglomerate Mitsui Metal, Sanyo, and major Eisai. Japanese Telecom maj
or
Nippon Telegraph (NTT) is also in the process of entering the Indian market.

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

POSITIVE ATTITUDE OF FINANCE MINISTER


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

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

Major Road blocks in foreign investment

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

1. Lack of political stability

It s not the case that every government may allow the FII to enter into their coun
try.
Different government follows different policy framework for FII. One government
may
follow liberal approach while other may follow the conservative approach. India
has
emerged as the second most option for FII destination in Asia after china. Incid
entally
successive government wasted considerable time identifying the desirable sectors
where
the FII could be encouraged and those where it must be discouraged.

2. Lack of economic stability

FII are the foreign investments and they are always done if the economy of the c
ountry
supports them. The economy always follows business cycle. Economic prosperity is
followed by recession. This is inevitable. During the time when the economy is f
acing a
recession or depression, FII is hard to come because the foreign players do not
feel safe to
invest. Apart from this there are also many factors that affect the economy adve
rsely and
thereby discourage FII.

3. Poor infrastructure

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

of the country is poor the Foreign Institutional Investors may not invest in tha
t country as it
would affect their returns and at the same time they would invest where the infr
astructure is
good and returns are good. So initiative should be taken by the government to im
prove the
infrastructure.

4. Corruption cum lack of transparency

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

The fundamental problem is the government instability to formulate a clear and c


onsistent
regulatory framework for FII.

FIIs AS PORTFOLIO INVESTMENTS

Introduction

Portfolio investment flows from industrial countries have become increasingly im


portant
for developing countries in recent years. The Indian situation has been no diffe
rent. In the
year 2000-01 portfolio investments in India accounted for over 37% of total fore
ign
investment in the country and 47% of the current account deficit. The correspond
ing
figures in the previous year were 59% and 64% respectively. A significant part o
f these
portfolio flows to India comes in the form of Foreign Institutional Investors (FI
Is )
investments, mostly in equities. Ever since the opening of the Indian equity mar
kets to
foreigners, FII investments have steadily grown from about Rs. 2600 crores in 19
93 to over
Rs.11, 000 crores in the first half of 2001 alone. Their share in total portfoli
o flows to India
grew from 47% in 1993-94 to over 70% in 1999-2001.

While it is generally held that portfolio flows benefit the economies of recipie
nt
countries, policy-makers worldwide have been more than a little uneasy about suc
h
investments. Portfolio flows
often referred to as hot money
are notoriously volati
le
compared to other forms of capital flows. Investors are known to pull back portf
olio
investments at the slightest hint of trouble in the host country often leading t
o disastrous
consequences to its economy. They have been blamed for exacerbating small econom
ic
problems in a country by making large and concerted withdrawals at the first sig
n of
economic weakness. They have also been held responsible for spreading financial
crises
causing contagion in international financial markets.

International capital flows and capital controls have emerged as an important po


licy issues
in the Indian context as well. Some authors have argued that FII flows have, in
fact, had no
significant benefits for the economy at large.

While these concerns are all well-placed, comparatively less attention has been
paid so far to analyze the FII flows data and understanding their key features.
A proper
understanding of the nature and determinants of these flows, however, is essenti
al for a
meaningful debate about their effects as well as predicting the chances of their
sudden
reversals.

Zoom in view of International Portfolio Flows

International portfolio flows are, as opposed to foreign direct investment, liqu


id in nature
and are motivated by international portfolio diversification benefits for indivi
dual and
institutional investors in industrial countries. They are usually undertaken by
institutional
investors like pension funds and mutual funds. Such flows are, therefore, largel
y
determined by the performance of the stock markets of the host countries relativ
e to world
markets. With the opening of stock markets in various emerging economies to fore
ign
investors, investors in industrial countries have increasingly sought to realize
the potential
for portfolio diversification that these markets offer. While the Mexican crisis
of 1994, the subsequent Tequila effect , and the widespread Asian crisis have had
temporary dampening effects on international portfolio flows, they have failed t
o counter
the long-term momentum of these flows. Indeed, several researchers have found ev
idence
of persistent home bias in the portfolios of investors in industrial countries in
the 90 s.
This home bias
has the tendency to hold disproportionate amounts of stock from the
home country
suggests substantial potential for further portfolio flows as global
market
integration increases over time.

It is important to note that global financial integration, however, can have two
distinct and in some ways conflicting effects on this home bias . As more and more
countries particularly the emerging markets
open up their markets for foreign
investment, investors in developed countries will have a greater opportunity to
hold foreign
assets. However, these flows themselves, along with greater trade flows which te
nd to
cause different national markets to increasingly become parts of a more unified g
lobal
market, reducing their diversification benefits. Which of these two effects will
dominate
is, of course, an empirical issue, but given the extent of the home bias it is lik
ely that for
quite a few years to come, FII flows would increase with global integration.

In recent years, international portfolio flows to developing countries have rece


ived the
attention of scholars in the areas of finance and international economics alike.
Portfolio
Investment. While papers in the finance tradition have focused on the nature and
determinants of portfolio flows from the perspective of the diversifying investo
rs, those
from the international macroeconomics perspective have focused on the recipient
country s
situation and appropriate policy response to such flows. For the present purpose
s, we shall
focus only on papers that address the issue of portfolio flows exclusively.

Previous research has also attempted to identify the factors behind this capital
flows. The
main question is whether capital flew in to these countries primarily as a resul
t of changes
in global (largely US) factors or in response to events and indicators in the re
cipient
countries like its credit rating and domestic stock market return. The question
is
particularly important for policy makers in order to get a better understanding
of the
reliability and stability of such flows. The answer is mixed
both global and cou
ntryspecific factors seem to matter, with the latter being particularly important in
the case of
Asian countries and for debt flows rather than equity flows.

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


h suggest
that US portfolio managers investing abroad seem to be chasing returns in foreig
n markets
rather than simply diversifying to reduce overall portfolio risk. The findings i
nclude the
well-documented home bias in OECD investments, high turnover in foreign market
investments and that, in general, the patterns of foreign equity investment were
far from
what an international portfolio diversification model would recommend. The share
of
investments going to emerging markets has been roughly proportional to the share
of these
markets in global market capitalization but the volatility of US transactions we
re even
higher in emerging markets than in other OECD countries. Furthermore there was n
o
relation between the volume of US transactions in these markets and their stock
market
volatility.

The Mexican and Asian crises and the widespread outcry against international por
tfolio
investors in both cases have prompted analyses of short-term movements in intern
ational
portfolio investment flows. The question of feedback trading has received internat
ional
capital flows in general (comprising both FDI and portfolio flows) considerable
attention.
This refers to investors reaction to recent changes in equity prices. If a gain i
n equity
values tends to bring in more portfolio inflows, it is an instance of positive fe
edback
trading while a decline in flows following a rise in equity values is termed negat
ive
feedback trading . Between 1989 and 1996 unexpected equity flows from abroad raise
d
stock prices in Mexico with at the rate of 13 percentage points for every 1% ris
e in the
flows.

There has been, however, no evidence of feedback trading


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

More recent studies find that the effect of regional factors as determinants of po
rtfolio
flows have been increasing in importance over time. In other words portfolio flo
ws to
different countries in a region tend to be highly correlated. Also the flows are
more
persistent than returns in the domestic markets. Feedback trading or return-chas
ing
behavior is also more pronounced. The flows appear to affect contemporaneous and
future
stock returns positively, particularly in the case of emerging markets. Finally
stock prices
seem to behave on the assumption of persistent portfolio inflows.

It is commonly argued that local investors possess greater knowledge about a Cou
ntry s
financial markets than foreign investors and that this asymmetry lies at the hea
rt of the
observed home bias among investors in industrialized countries. A key implication
of
recent theoretical work in this area12 is that in the presence of such informati
on
asymmetry, portfolio flows to a country would be related to returns in both reci
pient and
source countries. In the absence of such asymmetry, only the recipient country s r
eturns
should affect these flows.

The Foreign Investments and Sensex and nifty

The chronicles of Sensex:

In 10 months time Sensex moved from 7000 mark to 12,000 largely due to Foreign
Institutional Investor faith in Indian economy, better performance of corporates
,
resurgence of agriculture sector and liquidity in the market. Mutual Funds moped
record
level of money, over Rs.14, 000 crore, a more than 30 fold increase from the las
t year and
FII flushed nearly Rs.18, 000 crore in the equity market.
Sensex is conquering new heights, that too in lesser number of trading days than
taken to
achieve the previous milestones. The sprint from 11,000 to 12,000 has taken 19 t
rading
days, 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 bullrun, when
Sensex touched 4,000 from the 3,000 mark in 19 trading sessions in 1992. And in
2006 (i.e.
oct 17 ) was 12,928 points up by 191 points.

Sensex level Date Sensex Drivers:

1000 July 25, 1990: Good monsoon and excellent corporate results.
2000 January 3, 1992: Liberal economic policy initiatives undertaken by the fina
nce
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.

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 i
nvestor
sentiments
8000 September 8, 2005: Buying by foreign and domestic funds
9000 November 28, 2005: FIIs on buying Spree.
10000 February 6, 2006: Buying from FIIs, Local operators and retail investors
11000 March 21, 2006: Robust foreign fund inflows and a move by Government towar
ds
greater capital account convertibility.
12000 Apr 20, 2006: Massive buying from mutual funds around Rs.3400 crore in jus
t 19
trading sessions, favorable credit policy. Expectation of robust fourth quarter
earnings by
corporate and S&P upgrading India sovereign credit rating from stable to positiv
e
Market gives 74% return from 1st April 2005 to 31st March 2006. FY07 budget sign
als
low Government regulation. Credit policy defers hiking of interest rates instead
cautions
key players on real estate and equity market boom.
Massive growth in inflows in equity market from Mutual Funds was Rs.14, 305 cror
e from
mere Rs.448 crore in FY05.
Source: SEBI website

FIIs are back with a vengeance since Nov

05:

The above graph shows the trends in the FIIs investments made by the Foreign Ins
titutional
Investors that have occurred from the period of April-04 to December-05. The red
bars
indicate the FII investments and the blue curvy line indicates the average contr
ibution of
the FIIs to BSE sensex points. The figures at the left indicate the FII investme
nts made (Rs
in Crores) where as the figures to the right indicate In April 04 the investment
s were made
thereby moving the FIIs investments graph to 4000 and in the next month they wer
e
withdrawn resulting into the negative effect on the Indian stock market. Then si
nce June 04
the investments were made and they have moved in the positive direction there by
leading
to the positive effect on the stock market. In April and May 2005 the investment
s were
withdrawn and after that the investments were again withdrawn in October 2005. B
ut the
story continues and the positive results were shown by the FII investments.

Sensex and the FIIs

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

The result is: Sensex has recovered 10% of the losses posted in the month of May
.
In the month of August (till 25th of this month) itself, the movers and shakers
of the Indian
stock markets have reinvested almost 43% of their net sales in May. Of course, t
he Tech
Mahindra and GMR Infrastructure IPO have played their part in getting FIIs back
to the
Indian markets, believe analysts.

Despite high oil prices and an environment of rising interest rates, which have
somewhat
shown signs of slowing down now, FIIs have reposed their faith in the Indian gro
wth story.
India, the second-fastest growing economy in the world now, has been growing at
a pace of
8% plus in the last three years.

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

Interestingly, FIIs chose a slew of midcap companies to increase their stakes as


valuations
looked cheaper and most of them were under owned during the April-June quarter
following a massive hammering post May 10 meltdown, believes Sumeet Rohra of Ant
ique
Stock Broking.

Another interesting aspect that the data below reflects is the growing dominance
of FIIs
over other set of investors like the mutual funds and retail investors. While MF
s purchased
shares worth Rs 7573.04 crore in May when FIIs sold stocks worth Rs 8247.2 crore
, the
markets tanked almost 15%.

Sensex V/S FII correlation


Months
Sensex Gain/
Loss (%)
FII Net Purchases/Sales (Rs Cr)
May
-14.9
-8247.2
June
5.34
1418.2
July
0.45
1447.9
August
8.07
3537.7
Net FII Sales between
May-Aug (2006)
-1843.4

In June and July combined together MFs were sellers to the tune of Rs 2058.15 cr
ore
against FIIs net purchases of Rs 2866.1 crore, the Sensex gained a smart 5.79%. T
he same
trend can be witnessed in the month of August. FIIs net purchases worth Rs 3537.7
crore
against MFs net buys of Rs 251.46 crore, the Sensex has soared by 8.07%.
This leads one to believe that FIIs, at least in the short-term (the period betw
een MayAugust under consideration) tend to influence the course of the markets vis--vis
domestic
and institutional investors.

The above diagram represents the country ranking in relation to the Net Internat
ional
Reserves. Reserves are the money which is left after all the business activities
are over
China is the leading economy and most emerging country among all others. These a
re the
list of the countries which are developing and are acting as attractive destinat
ions for the
Foreign Institutional Investments. The Net International Reserves of all countri
es had
shown a steady growth and are providing the opportunities as a Foreign Investmen
t
destination. India ranks seventh and the percent of reserves to the imports are
very much
(90%).

Indian investors had it good in

05, just look at

Egypt!

The above graph explains the percentage increase in relation to the FII investme
nts made in
various countries. This graph shows the percentage change in the international s
tock
markets between December 31, 2004 and January 11, 2006. The percentage change wa
s
highest i.e. 141.1%. Data about various countries is also given. The purpose of
the graph is
to make the comparison so that the exact percentage change in relation to the co
mparison
can be made and the position of the stock market can be determined. India was in
a good
position but it needs a still more investments to make it to move toward one of
the most
emerging and powerful economy. The percentage change in the India s stock market w
as
43.1%.

Daily trends occurred in FII investments

Daily Trends in FII Investments on 26-SEP-2006

Reporting
Date
Debt/Equity
Gross
Purchases
(Rs
Crores)
Gross
Sales
(Rs
Crores)
Net
Investment
(Rs Crores)
Net
Investment
US($)
million at
month
exchange
rate
01-SEP-2006
Equity
2194.50
1707.40
487.10
104.70
Debt
7.10
0.00
7.10

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

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

(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

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

(61.90)
(13.30)
19-SEP-2006
Equity
1372.20
877.10
495.10
106.40

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

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)

(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

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

(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

Equity
2116.30
1577.00
539.30
116.90
Debt
0.00
0.00
0.00
0.00

Swot Analysis
Foreign Institutional Investments
Strengths
1) Provides the most important resource
i.e. is finance.
2) Contributes to the economic growth of
the country.
3) Balances the balance of payment
position.
Weakness
1) Focuses more on developing countries.
2) Hampering the progress due to
anytime withdrawal.
3) Provides only short term opportunities.
4) Provides more returns than in
domestic countries.
5) Develops relationship between two
countries.
Opportunities
1) Better infrastructure.
2) Exploitation of resources to the
maximum.
3) Better technology available.

Threats
1) Anytime withdrawal of investments.
2) Investments made in Foreign countries
poses threat to the Indian companies.
3) Increased returns.

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 f
inance.
The FIIs brings the inflow of money into the country. Many projects that require
funding is
done with the help of FIIs. Today in this world, the Finance is the only resourc
e, which has
the capability to be easily transferred from one place to another, and hence pro
viding as a
base for business opportunities .Free flow of capital is conducive to both the t
otal 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 fa
cilitator of
the business development. As money comes into the country, it provides various b
enefits to
the leading sectors and ultimately results into the development of various secto
rs.
For e.g. in India I.T sector is the most booming sector and has shown the signs
of
improvement thus attracting the FIIs.

3 Balances the balance of payments:

In the initial phase of economic development, the under developing countries nee
d much
larger imports. As a result, the balance of payment position generally turns adv
erse. This
creates gap between earnings and foreign exchange. The foreign capital presents
short run
solution to the problem. So in order to balance the Balance of Payment Foreign I
nvestment
is needed.

4 Provides more returns than in domestic countries:

FIIs provide more returns to the investors as compared to the domestic country.
This is one
of the most important strength of FIIs. The main reason is that the countries in
which th
Foreign Institutional Investors invest their money, provides more opportunities
and many
benefits. So investors invest in foreign countries rather than in the domestic c
ountries.

5 Develops relationship between two countries:

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

Weaknesses

1 Focuses more on developing countries:

The main weakness of foreign institutional investments is that they provide oppo
rtunities to
only the developing and developed countries. The Foreign institutional investors
focuses on
the developing countries rather than on the underdeveloped countries and because
of this
the under developed countries remain underdeveloped. So this drawback of the FII
s should
be improved upon by making their investments in the under developed countries.

2 Hampering the progress due to anytime withdrawal:

The FIIs do not provide any guarantee i.e. the Foreign institutional investors c
an anytime
withdraw their money when they want to so this makes the nature of the FIIs unpr
edictable
and ultimately hampering the progress of the economy of that country. The very g
ood
example of this is the mass withdrawal of the FIIs in the far eastern countries
like Malaysia,
Indonesia etc in 1996-97.

3 Provides only the short term opportunities:

FIIs provide only the short term opportunities i.e. they do not provide the long
term
opportunities as they are very much supple in nature and there by limiting its s
cope to short
term opportunities. As far as the market seems to be good the FIIs are attracted
and after
that they are not predictable. So FIIs are bound to provide only the short term
opportunities.

Opportunities:

1 Better infrastructure:

Better infrastructure is available only when there is adequate finance available


and this
comes with the help of FIIs. Infrastructure covers many dimensions, ranging from
roads,
ports, railways and telecommunication systems to institutional development (e.g.
accounting, legal services, etc.) studies in china reveal the extent of transpor
t facilities and
the proximity to major ports as having a positive significant effect on the loca
tion of FII
within the country. Poor infrastructure can be developed with the help of the fo
reign
investment. Foreign investors also point potential for attracting significant FI
I if host
country government permits more substantial foreign participation in the infrast
ructure
sector.

2 Exploitation of resources to the maximum:


The major resources i.e. manpower, material and machines can be utilized to its
fullest so
as to get the maximum benefit out of it. Through FIIs, the reserves or the resou
rces that are
untapped because of the lack of funds can be exploited. Potential areas for expl
oration
ventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc. Ther
e is also
scope for setting up manufacturing units for value added products.

3 Better technology available:


Technology is the main aspect on which the growth of the country is determined.
Developing countries has a very low level of technology. Their technology is not
up to the
standards and they lack in modern technology. Developing countries possess a str
ong urge
for industrialization to develop their economies and to wriggle out of the low-l
evel
equilibrium trap in which they are caught. This raises the necessity for importi
ng
technologies from advanced countries. Such technology usually comes with foreign
capital.

Threats:

1 Anytime withdrawal of investments:

The FIIs are more flexible in nature i.e. unlike FDI they are not guaranteed. Fo
reign
Institutional Investors can withdraw at any time they want. Foreign Direct Inves
tment is for
a fixed period and the investments could not be withdrawn until a specified peri
od. The
recent example was the net outflows of the money from the stock market that affe
cted the
whole economy and its consequences are very much appalling resulting into posing
threats
to the economy.

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

Many MNCs have their set up in India and these MNCs provide a stiff competition
to the
domestic industries. The Foreign Institutional Investors invest their money in t
hese MNCs
and they are equipped with the latest technology to provide products at cheaper
rates.
Moreover, the Indian labourers are opposing the use of modern technology as the
company
downsizes the number of workers that substitutes the modern technology.

3 Increased returns results in outflow of money:

Increased returns can pose a threat to the domestic country as the money flows o
ut of the
country and this may affect the economy of the domestic country. The returns tha
t the
Foreign Institutional Investors are getting are very much high and this returns
they take to
their home country and this leads to the outflow of money from domestic country
to the
foreign country.

Conclusion:

Foreign Institutional Investments are very much needed for India. They are neces
sary for
the continuous development of our country. The economy of our country has shown
a
better performance and has led to the economic growth due to the FIIs. Though th
ere are
threats from the Foreign Institutional Investments we should be positive and see
the future
of our country. In last 50 years, India has developed a strong and professionall
y
competent technical, marketing and business manpower in Livestock production and
Information Technology.
This is an added advantage over many developing countries of Asia and Africa.
Availability of competent and comparatively low-cost manpower in India is a grea
t asset
which is attracting foreign investors. As a result of stagnancy or in some cases
reduction in
agricultural production, demand for several inputs like machinery and equipment,
feeds,
pharmaceuticals etc. has reduced in some countries of America and Europe.
It is therefore not surprising that these business enterprises have focused the
ir attention to
emerging Asian markets, particularly India and China. India is in a better posit
ion as it has
a strong technical manpower base and large number of English speaking population
.

India s Future
The future of the India is bright and moreover due to FIIs the economy will gain
a swing in
the future in short run as well as long run. India is a pool of various resource
s, their
effective utilization is possible only with the investments and in large sum. Th
e prosperity
of India will soon be visible in the near future. By evolving the strategy to im
prove the
competitive position in these areas, overall level of competitiveness can be rai
sed thereby
enhancing the export potential of the country.
Thus, India could take a proactive initiative in seeking an international discip
line on
investment incentives with a built in exception based on the level of industrial
ization. Soon
India will be leading country.

Recommendations

Foreign investment is a valuable non-debt creating, external resource supplement


inadequate savings and has a major role in transforming technology, improving ma
nagerial
skills and facilitating market development. In our economic system, capital is t
he fuel that
generates profits.

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


sential
guarantees for investors for

1) Enter and exit.


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

India has a pool of human resource and this can attract the Foreign Institutiona
l Investors to
invest their money into our country there by increasing the output with the help
of tapping
the human resource.

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


roads, ports,
telecommunications, airports and water and power facilities is a pre-requisite f
or attracting
large volume of foreign investments.

Continued export and careful management of India s imports will also be crucial in
maintaining India s ability to maintain and continue to build international equity
and debt
Institutional Investors confidence.

An environment should be created in India whereby investors would be confident i


n
remitting funds into India, instead of just obtaining approval and waiting for t
he time to
invest.

Though Foreign Investments poses threats, the strengths should also be considere
d and the
opportunities that Foreign Institutional Investments provide. If India has to at
tract huge
amounts of Foreign Investments, it needs to first overcome the barriers that exi
st. There
should be no room for Bureaucracy, Red Tapism and a laid back attitude. Approval
s should
be easily forth coming.

Both the FIIs and FDI should be invited to the fullest and given importance so t
hat it will
create a win-win situation on the part of both the parties. Both the parties wil
l be benefited
from Foreign Investments i.e. India will get capital and the investors will get
returns to
maximum.

Annexure
Article:

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


(Economic Times)

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

Interestingly, experts opine that the Indian markets have become a global force
and the coming days will only further cement India s place in the global arena. Th
is
will, in turn, attract more and more FIIs to the country, too. Uday Kotak, manag
ing
director, Kotak Mahindra Bank, said, I expect that in the next five years, if not
hing
goes wrong, India will be the second largest capital market in the world after t
he
US.

A section of market participants is also of the view that while on one hand, Ind
ian
equities look a bit overvalued, on the other hand, they have been able to outpac
e
most of the other global and emerging markets in the recent past. This will only
lead to an increase in the inflows to the equity markets. However, it seems that
the
dependence of the markets on foreign inflows is dipping at a time when the
bourses are moving further northwards.

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

The rise of the Sensex from 10,000 to 11,000 levels witnessed FII inflows of onl
y
$2.31 billion. Contrary to this, when the Sensex rose from 9,000 to 10,000, it w
as
pegged at $ 3.1 billion. The journey from 7,000 to 8,000 also saw higher FII inf
lows
of nearly $4 billion. The recent past also witnessed huge mobilization from the
domestic mutual fund industry and they have also played an important role in the
rise of the equity bourses. Incidentally, in the current calendar year, February
proved to be the best month with FII inflows pegged at $1.7 billion. March also
witnessed net FII inflows at $1.5 billion. In Jan, FII inflows were pegged at on
ly
$737.50 million.