FOREIGN INSTITUTIONAL INVESTMENT: PORTFOLIO INVESTMENT

ContentsAcknowledgement.................................................................................................................................4

ABSTRACT..............................................................................................................................................5

Chapter I : INTRODUCTION....................................................................................................................7

Research Methodology........................................................................................................................11

CHAPTER II: NEED FOR FII IN DEVELOPING COUNTRIES.......................................................................12

Infrastructure Renewal....................................................................................................................12

2. Optimum utilization of resources........................................................................................12

3. Balancing the balance of payment position.........................................................................13

4. Develop the Diverse Market................................................................................................13

CHAPTER III: POTENTIAL FOR INVESTMENT IN INDIA..........................................................................14

a) Roads:......................................................................................................................................14

b) Railways:..................................................................................................................................14

c) Airways:...................................................................................................................................14

d) Waterways:.............................................................................................................................14

2. Better power facilities:.................................................................................................................14

3. Urban projects need investments:...............................................................................................15

4.Exploration of mineral reserves:...............................................................................................15

5. Develop Telecom IT sector:.....................................................................................................15

6. Service sector opportunities:...................................................................................................15

7. For R & D and healthcare sector development:.......................................................................15

8. Positive future of automobile industry:...................................................................................16

9. Agricultural sector:..................................................................................................................16

10. Promotion of exports:..........................................................................................................16

11. Development of Tourism industry:......................................................................................16

Chapter IV: WHO CAN BE REGISTERED AS FII......................................................................................17

Entry options for Foreign Investors.................................................................................................17

2. Unincorporated entity.................................................................................................................18

3. Incorporation of company:..........................................................................................................18

4. Liaison office/ representative office:...........................................................................................18

5. Project office:...............................................................................................................................19

6. Branch office:...............................................................................................................................19

7. Branch office on “stand-alone basis” in SEZ:................................................................................19

8. Investment in a firm or a propriety concern by NRIs:..................................................................20

9. Investment in a firm or a proprietary concern other than NRIs:..................................................20

CHAPTER V: POLICY MEASURES TO ATTRACT FII.................................................................................21

CHAPTER VI: LEGAL ASPECTS...............................................................................................................22

The eligibility criteria to be fulfilled by the applicant seeking FII registration:................................22

Documents required to be submitted at the time of applying for registration as an FII:.................23

CHAPTER VII: FACILLATION OF INVESTMENT IN INDIA........................................................................24

CHAPTER VIII: MAJOR DETRIMENTS TO FII FLOW................................................................................25

Market size:.....................................................................................................................................25

Liberalized trade policy:...............................................................................................................25

Labour costs and productivity:....................................................................................................26

Political scenario:.........................................................................................................................26

Infrastructure:.............................................................................................................................26

Incentives and operating conditions:...........................................................................................27

Dis-investment policy:.................................................................................................................27

CHAPTER IX: BENEFITS OF FII..............................................................................................................28

CHAPTER X: PROSPECTS FOR INDIAN PERSPECTIVE “FDI OR FII”........................................................29

CHAPTER XI: POSITIVE ATTITUDE TOWARDS FIIs.................................................................................31

CHAPTER XII: FIIs AS PORTFOLIO INVESTMENTS..................................................................................33

CHAPTER XIII: Zoom in view of International Portfolio Flows..............................................................35

CHAPTER XIV: SWOT ANALUSIS OF FIIs................................................................................................38

Strengths:........................................................................................................................................38

Weaknesses:....................................................................................................................................39

Opportunities:.................................................................................................................................40

Threats:............................................................................................................................................41

CONCLUSION AND SUGGESTIONS.......................................................................................................43

BIBLIOGRAPHY.....................................................................................................................................45

Books, Journals and other resources...............................................................................................45

Internet resources:..........................................................................................................................46

Acknowledgement

Is indeed a proud privilege to express my deep sense of gratitude and

indebtedness to our respected teacher and guide Prof. Vidhyutlata

madam for her valuable guidance, scholarly inspiration, which she has

extended to me for the successful completion of this endeavour. I

humbly express my profound gratitude to her for his valuable

suggestions and guidance in Corporate Governance. I sincerely

acknowledge the help rendered by the Librarian and Staff of the

NALSAR University, Hyderabad whose cordial relations helped me

for successful completion of project.

Prachirani Kate

Roll No. 2010- 18

LL.M-1st year (2nds sem)

ABSTRACT

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

and production process of another country. It can affect the factor productivity 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 productivity 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 activity and also of medium to long-term

nature. But the foreign portfolio investment is a short-term investment mostly in the financial

markets and it consists of Foreign Institutional Investment (FII).

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

since the beginning of reforms in 1991. Till the end of January 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 foreign investments. This shows the

importance of FII in the overall foreign investment programme.

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

on the foreign investments and particularly on the FII, as this would affect short-term stability

in the financial markets. Hence, there is a need 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 in 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 significant financial

flows among the industrial countries, national affiliations are very rough indicators 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 importance of different regions of

the world in the FII flows.

Chapter I : INTRODUCTION

What Does Foreign Institutional Investor - FII Mean?

We have heard people saying that the world is going global and India is also moving towards

prosperity but what does it actual means and who are the persons behind this scenario, which

should be known. Among them the persons who are responsible or we can say who have

contributed towards this scenario are the Foreign Institutional Investors.

The world is increasingly becoming interdependent. Today the needs of the customer have

increased and they want goods from all over the world. We can see variety of products

moving across the world and the world trade increased by120%.1

The developing countries are looking forward to steady flow of capital and are undergoing

the learning process of how to absorb them. As regard the attendant risks, the central bank of

the countries have to tackle them. There are many ways the inflow can come into 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 growth and development

in recent times.

An investor or investment fund that is from or registered in a country outside of the one in

which it is currently investing. Institutional investors include hedge funds, insurance

companies, pension funds and mutual funds.

The term is used most commonly in India to refer to outside companies investing in the

financial markets of India. International institutional investors must register with the

Securities and Exchange Board of India to participate in the market. One of the major market

regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies2.

1 Abraham, Joseph, Boosting Flow of Foreign Private Investment, Yojana, Vol. 38, No. 19, Oct. 31, 1994

2 Abrams, Richard K. and Kimball, Donald V., U.S. Investment in Foreign Equity Markets, Economic Review, (Federal Reserve Bank of Kansas City) Vol. 66, April 1981, pp. 17-31

The term foreign institutional investment denotes all those investors or investment companies

that are not located within the territory of the country in which they are investing.

These are actually the outsiders in the financial markets of the particular company. Foreign

institutional investment is a common term in the financial sector of India.

The types of institutions that are involved in the foreign institutional investment are as

follows:

* Mutual Funds

* Hedge Funds

* Pension Funds

* Insurance Companies

The economies like India, which are growing very rapidly, are becoming hot favourite

investment destinations for the foreign institutional investors. These markets have the

potential to grow in the near future. This is the prime reason behind the growing interests of

the foreign investors. The promise of rapid growth of the investable fund is tempting the

investors and so they are coming in huge numbers to these countries. The money, which is

coming through the foreign institutional investment, is referred as 'hot money' because the

money can be taken out from the market at any time by these investors.

The foreign investment market was not so developed in the past. But once the globalization

took the whole world in its grip, the diversified global market became united. Because of this

the investment sector became very strong and at the same time allowed the foreigners to enter

the national financial market.

At the same time the developing countries understood the value of foreign investment and

allowed the foreign direct investment and foreign institutional investment in their financial

markets. Although the foreign direct investments are long term investments but the foreign

institutional investments are unpredictable. The Securities and Exchange Board of India looks

after the foreign institutional investments in India. SEBI has imposed several rules and

regulations on these investments.

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

and production process of another country. It can affect the factor productivity 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 productivity of labour 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 activity and also of medium

to long-term nature. But the foreign portfolio investment is a short-term investment mostly in

the financial markets and it consists of Foreign Institutional Investment (FII). India, being a

capital scarce country, has taken lot of measures to attract foreign investment since the

beginning of reforms in 1991. Till the end of January 2003 it could attract a total foreign

investment of around US$ 48 billion out of which US$ 23 billion is in the form of FPI. FII

consists of around US$ 12 billion in the total foreign investments. This shows the importance

of FII in the overall foreign investment programme3.

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

on the foreign investments and particularly on the FII, as this would affect short-term stability

in the financial markets. Hence, there is a need 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 in 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)4.

“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.”

3 Acocella, N., Strategic Foreign Direct Investment in EC., Economic Notes, Vol. 20, No. 2, 1991, pp. 279-3024 Chen, C., Chang, L. and Zhang, Y., The Role of Foreign Direct Investment in China’s Post-1989 Economic Development, World Development, Vol. 23, No. 4, April 1995.

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 significant financial

flows among the industrial countries, national affiliations are very rough indicators 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 importance of different regions of

the world in the FII flows.

Research Methodology

The research methodology adopted in this work can be summed up as under:

Style of Writing:- Descriptive, Comparative, Analytical style of writing has been used in this

work

Sources:-

In this work, Doctrinal method of research has been applied. This primary and secondary

source of data has been used for this work. The primary sources of data used include Statutes,

Regulations, and Committee reports. The secondary sources of data used are Books,

Dictionaries, Encyclopaedias, periodicals, Journals, Law reports, Newspaper, and websites

CHAPTER II: NEED FOR FII IN DEVELOPING COUNTRIES

Infrastructure Renewal

To keep the Indian economy growing the infrastructure sector like power, transport, mining&

metallurgy, textiles, housing, retail, social welfare, medical etc. has to 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 build this sector. Borrowing

abroad supplemented with Indian resources is the only way open to India. This upgrade is

needed prior or in step with the industrial and service exports sector 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 Parliament did not

understand the proposal. Hence the government is stuck to steam roller its proposal through

the legislative process or succumb to political pressure and do nothing. The latter is not

acceptable5.

If India finds its own $4 Billion a year for infrastructure then foreign investors will kick in

another similar portion. The resulting money will very quickly rebuild the now cumbersome

infrastructure.

1. 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 strong urge for

industrialization to develop their economies and to wriggle out of the low-level equilibrium

trap in which they are caught. This raises the necessity for importing technologies from

advanced countries. Such technology usually comes with foreign capital.

5 Eric, D. Ramstetter, Prospects for Foreign Forms in Developing Economies of the Asian and Pacific Region, Asian Development Review, Vol. 11, No. 1, 1993.

2. Optimum utilization of resources

A number of developing countries possess huge mineral resources which are4 untapped and

unexploited. Due to lack of technology these countries are not able to use their resources to

the fullest. As a result they have to depend on the foreign investment with the help of which

technology of the country and that will ultimately lead to the optimum 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 modern technology is required which is

possible through foreign investment.

3. Balancing the balance of payment position

In the initial phase of economic development, the under developing countries need 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 presents short run

solution to the problem. So in order to balance the Balance Of Payment Foreign Investment is

needed.

4. Develop the Diverse Market

The Indian market is widely diverse. The country has 17 official languages, 6 major religions,

and ethnic diversity as wide as all of Europe. Thus, tastes and preferences 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 information to

determine how, when and where to enter the market. There are also companies which can

guide the foreign firm through the entry process from beginning to end --performing 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.

CHAPTER III: 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 opened this up

for private sector participation. 48 new road projects worth US$ 12 billion are under

construction. Development and up gradation of roads will require an investment 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, tracks, and

communications and safety equipment over the next ten years.

c) Airways:

Up gradation and modernization of airports will require US$ 33 billion investment in the next

ten years.

d) Waterways:

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

government has taken up a US$22 billion 'Sagarmala' project to develop the Port and

Shipping sector under Public-Private Partnership. 100 per cent FDI is permitted for

construction and maintenance of ports. The government is offering incentives to investors6.

6 Raymond, Vernon, International Investment and International Trade in the Product-Life Cycle, Quarterly Journal of Economics, May 1966, pp. 190- 127.

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 10000MW. Opportunities are

there for investment in power generation and distribution and development of non-

conventional energy sources.

3. Urban projects need investments7:

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 marketing present opportunities for

FDI.

4.Exploration of mineral reserves:

India has an estimated 85 billion tons of mineral reserves remaining to be exploited. Potential

areas for exploration ventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc.

There is also scope for setting up manufacturing units for value added products.

5. Develop Telecom IT sector:

The telecom market, which is one of the world 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 by2007. Mobile

telephony has started growing at the rate of 10-12 million subscribers per year. The IT

industry and IT-enabled services, which are rapidly growing offer opportunities for FDI.

6. Service sector opportunities:

7 Sample, M., Developing Countries Attractiveness for Foreign Direct Investment Debt Overhang and Foreign Risk as Major Impediments? Comment, Pakistan Development Review, Vol. 30, No. 4, Winter 1991, pp. 1155-1158.

India has emerged as an important venue for the services sector including financial

accounting; call centres, and business process outsourcing. There is considerable 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 for

development, offer scope for FDI. There are over 50 R&D labs in the public sector to support

growth in these areas. The Healthcare industry is expected to increase in 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 industry with a

turnover of 3 billion dollars offer scope for FDI. The government is encouraging the

establishment of world-class integrated textile complexes and processing units. FDI is

welcome.

9. Agricultural sector:

While India has abundant supply of food, the food processing industry is relatively nascent

and offers opportunities for FDI. Only 2 per cent of fruits and vegetables and 15 per cent of

milk are processed at present. There is a rapidly increasing demand for processed food caused

by rising urbanization and income levels. To meet this demand, the investment required is

about US$28 billion. Food processing has been declared as a priority sector8.

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 allow100% FDI.

8 Sau, Ranjit, Foreign Direct Investment Portfolio Investment and Micro-EconomicStability, Economic & Political Weekly, Vol. 29, No. 4, 1994, pp. 386-87.

11. Development of Tourism industry:

The travel and tourism industry which has grown to a size of US$ 32 billion offers scope for

investment in budget hotels and tourism infrastructure9

Chapter IV: WHO CAN BE REGISTERED AS 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 invest 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

9 Solnik, Bruno, International Investments, Addison Wesley Publishing Co. Inc. 1986.

Who propose to invest their proprietary funds or on behalf of “broad based” funds or on of

foreign corporate and individuals10.

Entry options for Foreign Investors

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

2. Unincorporated entity

A) As a foreign company through

Liaison office/ representative office.

Project office

Branch office

Such offices can undertake activities permitted under the Foreign Exchange Management

(establishment in India of branch or office of other place of business) Regulations, 200011.

3. Incorporation of company:

For registration and incorporation, an application has to be filed with the registrar 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 domestic Indian

companies.

4. Liaison office/ representative office:

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

opportunities and providing information about the company and its products to prospective

10 Stevens, G.V.G., and Lipsey, R.E., Interaction between Domestic and Foreign Investment, Journal of International Money Finance, Vol. 11, No. 1, February 1992, pp. 48-49.11 FEMA Regulations 2000.

Indian customers. It can promote export/ import from/ to India and also facilitate

technical/financial collaboration between parent companies and company in India. Liaison

office cannot take any commercial activity directly and indirectly and cannot, therefore, earn

any income in India. Approval for establishing a liaison office in India is granted by Reserve

Bank of India12.

5. Project office:

Foreign companies planning to execute specific projects in India can set up temporary

project/ site offices in India. RBI has now granted general permission to foreign entities to

establish project offices subject to specified conditions. Such offices cannot undertake or

carry on any activity other than the activity relating and incidental to execution of the project.

Project offices may remit outside India the surplus of the project on its completion, general

permission for which has been granted by the RBI.

6. Branch office:

Foreign companies engaged in manufacturing and trading activities abroad are allowed 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

12 Tsai, P.L., Foreign Direct Investment and Income Inequality: Further Evidence, World Development, Vol. 23, No. 3, March 1995

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 the branch, net

of applicable Indian taxes and subject to RBI guidelines. Permission for setting up of branch

officers is granted by the Reserve Bank of India (RBI).

7. Branch office on “stand-alone basis” in SEZ:

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

Alone and no business activity/ transaction will be allowed outside the SEZs 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 conditions.

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

A non-resident Indian or a person of India origin resident outside India may invest byway of

contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis

provided:-

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 an 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/ PIO may invest

in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval

of government/ RBI13.

9. 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 associations of persons

13 Tsai, P.L., Determinants of Foreign Direct Investment in Taiwan: An Alternative Approach with Time Series Data, World Development, Vol. 19, No. 2-3, January-March 1991, pp. 275-285.

in India. The RBI may, on an application made on it, permit a person resident outside India to

make such investment subject to such terms and conditions as may be considered necessary.

CHAPTER V: POLICY MEASURES TO ATTRACT FII

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

1. Automatic approval:

Automatic approval up to a specified limit is allowed in 34 specified high priority, 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 approval.

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 translated

into actual investment inflows and that proposals fructify into projects. In particular, in

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

Foreign companies have been allowed to use their trade marks on domestic sales from 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 than 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 such

Disinvestment14.

CHAPTER VI: 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, Foreign

Intuitional Investors are required to fulfil the following conditions to qualify for the grant of

registration:

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

experience, general reputation of fairness and integrity.

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

same capacity/ category where registration is sought from SEBI. Registration with

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 Foreign Exchange

Management act, 1999 from Reserve Bank of India.

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

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

1414 Panidia, M. Rajeev, Foreign Investment — How to Attract It, The Economic Times, Oct 6, 1988

7. Payment of registration fee of US $5000.00. SEBI would generally communicate the

eligibility for grant of registration as Foreign Intuitional Investor, within 10-12 days of

receipt of complete application with relevant enclosures15.

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 applicant.

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

association.

3. Audited financial statements and annual reports for the last one year, provided 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

its 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 entity16.

15 Panidia, M. Rajeev, Foreign Investment — How to Attract It, The Economic Times, Oct 6, 198816 SEBI and RBI guidelines on FIIs

CHAPTER VII: FACILLATION OF INVESTMENT IN INDIA

1. Foreign investment can be done in the Automatic Route up to 100 per cent without need

for any approvals. The investor has to keep the Reserve Bank of India informed.

2. The sectors not open to foreign investments are retail trade, housing and real estate,

agriculture and lottery and gambling.

3. There are maximum limits on foreign investment. Some of these are being increased.

4. Prior approval of the government is needed for those cases, which need industrial license

and those involving investment beyond the maximum limits. Such cases are cleared by the

Foreign Investment Promotion Board in a transparent, efficient, time-bound 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 projects available for foreign

investors and contains online applications for clearances.

6. The Various state governments in India offer competitive incentives and attraction17.

17 Mani, Sunil, New Industrial Policy: Barriers to Entry Foreign Investment andPrivatization, Economic and Political Weekly, Vol. XXVII, No. 35, Aug. 29,1992.

CHAPTER VIII: MAJOR DETRIMENTS TO FII FLOW

The unpredictability of autonomous FII flows, in both scale and direction, has developed a

substantial research effort to identify their major determinants. An extensive literature based

generally on three approaches – aggregate econometric analysis, survey appraisal of foreign

investors opinion, and econometric study at the industrial level – has failed to arrive at the

consensus. This can be partly attributed to the lack of reliable data, particularly at the

sectorial level, and to the fact that the most empirical work has analysed FII determinants 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 country

determinants, rather than industry specific factors.

Market size:

Econometric studies comparing a cross section of countries indicate a well-established

correlation between FII and the size of market (proxied by the size of GDP) as well 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 not,

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

indicator of market potential.

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 more foreign investment. One indicator of openness is the relative size of the

export sector.

Labour costs and productivity:

Empirical research has also found relative labour costs to be statistically significant,

particularly for foreign investment in labour intensive industries and for export oriented

subsidiaries. In India labour market rigidities and relatively high wages in the formal

sector have been reported as deterring any significant inflows into the export sector in

particular. The decision to invest in china has been heavily influenced by the prevailing

low wage rate.

Political scenario:

The ranking of the political risk among FII determinants remains somewhat unclear.

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 Angola,

where high returns in the extractive industries seem to be compensated for political

instability. In general, so long as the foreign company is confident of being able to

operate profitably without undue risk to its capital and personnel, it will continue to

invest. Large mining companies, for example, overcome some of the political risks by

investing in their own infrastructure maintenance and their own security forces.

Moreover, these companies are limited neither by small local markets nor by exchange

rate risks since they tend to sell almost exclusively on the international, market at hard

currency prices.

Infrastructure:

Infrastructure covers many dimensions, ranging from roads, ports, railways and

telecommunication systems to institutional development (e.g. accounting, legal services,

etc.) studies in china reveal the extent of transport facilities and the proximity 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

major constraints. But foreign investors also point potential for attracting significant FII

if host country government permits more substantial foreign participation in the

infrastructure sector.

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 compensation for

continuing comparative disadvantages. On the other hand, removing restrictions and

providing good business operating conditions are generally believed to have a positive

effect. Further incentives such as granting of equal treatment to foreign investors in

relation to local counterparts and the opening up of markets (e.g. air transport, retailing,

banking,) have been reported as important factors in encouraging FII flows in India

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

fiercely resisted privatization or other moves, which threaten existing jobs workers

rights. A number of structural problems are constraining the process of privatization.

Financial markets in most low income countries are slow to become competitive; they

are characterized by the inefficiencies, lack of debt and transparency and the absence of

regulatory procedures. They continue to be dominated by government activity and are

often protected from competition. Existing stock markets are thin and illiquid and

securitized debt is virtually non-existent. An underdeveloped financial sector of this type

inhibits privatization and discourages foreign investors18.

CHAPTER IX: 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

18 Lincoln, Gordon, The Investors’ Point of View in International Investment, The Dusseldorf Conference on Multinational Enterprise, New York, Praeger, 1974.

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 aid19.

CHAPTER X: PROSPECTS FOR INDIAN PERSPECTIVE “FDI OR FII”

FDI usually is associated with export growth. It comes only when all the criteria to set up

an export industry are met. That includes, reduced taxes, favourable labour law, freedom

to move money in and out of country, government assistance to acquire land, full grown

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 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 provides

employment potential to semi- skilled and skilled labour.

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

manufacturing and service sector foreign investment are needed in India. Still high end

manufacturing in auto parts and pharmaceuticals should be India’s target.

19 Malhotra, S.K., Encouraging Foreign Investment in India, Chartered Secretary, Vol. XXIV, No. 11, November 1994.

The FII (Foreign Institutional Investor) is monies, which chases the stocks in the market

place. It is not exactly brick and mortar money, but in the long run it may translate into

brick and mortar. Sudden influx of this drives the stock market up as too much money

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 political or

economic 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 economic discipline.

Thus it can be said that India should welcome, FDI as well as FII and work hard to retain

both20.

20 Kozlow, R., Rutter, J.W., and Walker, P.C., U.S. Direct Investment Abroad in 1977, Survey of Current Business, Vol. 8, No. 8, August 1978, pp. 16

CHAPTER XI: POSITIVE ATTITUDE TOWARDS FIIs

Positive tidings about the Indian economy combined with a fast-growing market have

made India an attractive destination for Foreign Institutional Investors (FIIs).

The Foreign Institutional Investors' (FIIs) net investment in the Indian stock markets in

calendar year 2005 crossed US$ 10 billion in the2005 calendar, the highest ever by the

foreign funds in a single year after FIIs were allowed to make portfolio investments in

the country's stock markets in the early 90s.

As per the Securities Exchange Board of India (SEBI) figures, FIIs made net purchases

of US$ 587.3 million on December 16, 2005, taking the total net investments in the 2005

calendar to US$ 10.11 billion.

India's popularity among investors can be gauged from the fact that the number of FIIs

registered with SEBI has increased from none in 1992-93 to528 in 2000-01 to803 in

2005-06. In 2005 alone, 145 new FIIs registered themselves, taking the total registered

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 non-

traditional countries like Denmark, Italy, Belgium, Canada and Sweden.

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

Bank's decision to successfully expand base in the country has managed to convince

almost 60-65 major Japanese corporates to set up manufacturing or marketing base in

India.

1. This list of corporates includes big names in auto sectors such as Honda, Toyota 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 major

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 instruments

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. According to

Kamal Nath, the Indian Minister for Commerce and Industry, of all the foreign investors

in India, at least 77 per cent make profit and 8 per cent break even21.

21 Kumar, Nagesh, Foreign Investment and Export Orientation: The Case of India, Direct Foreign Investment and Export Promotion Policies and Experience in Asia, ed

CHAPTER XII: FIIs AS PORTFOLIO INVESTMENTS

Introduction Portfolio investment flows from industrial countries have become

increasingly important for developing countries in recent years. The Indian situation has

been no different. In the year 2000-01 portfolio investments in India accounted for over

37% of total foreign investment in the country and 47% of the current account deficit.

The corresponding figures in the previous year were 59% and 64% respectively. A

significant part of these portfolio flows to India comes in the form of Foreign

Institutional Investors’ (FIIs’) investments, mostly in equities. Ever since the opening of

the Indian equity markets to foreigners, FII investments have steadily grown from about

Rs. 2600 crores in 1993 to over Rs.11, 000 crores in the first half of 2001 alone. Their

share in total portfolio 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 recipient

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

investments. Portfolio flows – often referred to as “hot money” – are notoriously volatile

compared to other forms of capital flows. Investors are known to pull back portfolio

investments at the slightest hint of trouble in the host country often leading to disastrous

consequences to its economy. They have been blamed for exacerbating small economic

problems in a country by making large and concerted withdrawals at the first sign 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 policy

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 analyse the FII flows data and understanding their key features. A proper

understanding of the nature and determinants of these flows, however, is essential for a

meaningful debate about their effects as well as predicting the chances of their sudden

reversals22.

22Gerlowski, D.A., Fung, H.G. and Ford D., The Location of Foreign Direct Investment for U.S. Real Estate: An Empirical Analysis, Land Economics Vol. 70, No. 3, August 1994, pp. 286-93

CHAPTER XIII: Zoom in view of International Portfolio Flows

International portfolio flows are, as opposed to foreign direct investment, liquid in nature

and are motivated by international portfolio diversification benefits for individual and

institutional investors in industrial countries. They are usually undertaken by institutional

investors like pension funds and mutual funds. Such flows are, therefore, largely

determined by the performance of the stock markets of the host countries relative to

world markets. With the opening of stock markets in various emerging economies to

foreign 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 to counter

the long-term momentum of these flows. Indeed, several researchers have found

evidence of persistent ‘home bias’ in the portfolios of investors in industrial countries in

the90’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 tend to cause

different national markets to increasingly become parts of a more unified ‘global’

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 likely 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 received 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 investors, those

from the international macroeconomics perspective have focused on the recipient

country’s situation and appropriate policy response to such flows. For the present

purposes, 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 result of

changes in global (largely US) factors or in response to events and indicators in the

recipient 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 country-

specific 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 research

suggest that US portfolio managers investing abroad seem to be chasing returns in

foreign markets rather than simply diversifying to reduce overall portfolio risk. The

findings include 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 were even higher in emerging markets than in other OECD

countries. Furthermore there was no 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 portfolio

investors in both cases have prompted analyses of short-term movements in international

portfolio investment flows. The question of ‘feedback trading’ has received international

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 in

equity values tends to bring in more portfolio inflows, it is an instance of ‘positive

feedback trading’ while a decline in flows following a rise in equity values is termed

‘negative feedback trading’. Between 1989 and 1996unexpected equity flows from

abroad raised stock prices in Mexico with at the rate of 13 percentage points for every

1% rise 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 foreign investors.

Nevertheless, contrary to the belief in some segments, these tendencies 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 flows to the

Asian Crisis countries dropped sharply in 1997 and 1998 from their pre-crisis levels, it is

generally held that the flows reacted to the crisis (possibly exacerbating it) rather than

causing it.

More recent studies find that the effect of ‘regional factors’ as determinants of portfolio

flows have been increasing in importance over time. In other words portfolio flows 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-chasing

behaviour 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 Country’s

financial markets than foreign investors and that this asymmetry lies at the heart 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 information

asymmetry, portfolio flows to a country would be related to returns in both recipient and

source countries. In the absence of such asymmetry, only the recipient country’s returns

should affect these flows23.

CHAPTER XIV: SWOT ANALUSIS OF FIIs

SWOT analysis (alternately SLOT analysis) is a strategic planning method used to

evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a

project or in a business venture

Strengths Weakness

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

1) Focuses more on developing

country

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 Threats

1) Better infrastructure

2) Exploitation of resources to the

maximum

3) Better technology available.

1) Anytime withdrawal of investment

2) Investments made in Foreign

country poses threat to the Indian

companies

3) Increased returns.

23 Hawkins, Robert, Norman, Mintz and Michael Provissiero, Government Takeovers of U.S. Foreign Affiliates, Journal of International Business Studies, Spring 1976, pp. 3-16.

Strengths:

1. Provides most important resource i.e. finance:

To start any business and to make the idea to be actually implemented it needs

finance. The FIIs brings the inflow of money into the country. Many projects that

require funding is done with the help of FIIs. Today in this world, the Finance is the

only resource, which has the capability to be easily transferred from one place to

another, and hence providing as a base for business opportunities .Free flow of

capital is conducive to both the total world welfare and to the welfare of each

individual.

2. Contributes to the economic growth of the country:

When FIIs enters the domestic country they bring in the money and acts as the

facilitator of the business development. As money comes into the country, it provides

various benefits to the leading sectors and ultimately results into the development of

various sectors. For e.g. in India I.T sector is the most booming sector and has shown

the signs of improvement thus attracting the FIIs.

3. Balances the balance of payments:

In the initial phase of economic development, the under developing countries need

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

presents short run solution to the problem. So in order to balance the Balance of

Payment Foreign Investment 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 the Foreign Institutional Investors invest their money, provides more

opportunities and many benefits. So investors invest in foreign countries rather than

in the domestic countries

5. Develops relationship between two countries:

Due to FIIs the investors from different countries come into picture and various

people also come into the contact with each other. This develops a sense of

relationship between 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

opportunities 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 FIIs 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 can

anytime withdraw their money when they want to so this makes the nature of the FIIs

unpredictable and ultimately hampering the progress of the economy of that country.

The very good example of this is the mass withdrawal of the FIIs in the far eastern

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 thereby limiting its scope 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 transport facilities and the proximity to major ports as having a positive

significant effect on the location of FII within the country. Poor infrastructure can

be developed with the help of the foreign investment. Foreign investors also point

potential for attracting significant FII if host country government permits more

substantial foreign participation in the infrastructure 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

resources that are untapped because of the lack of funds can be exploited.Potential

areas for exploration ventures include gold, diamonds, copper, lead zinc, cobalt

silver, tin etc. There is also scope for setting up manufacturing units for value

added product

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 strong urge for industrialization to develop their economies and to

wriggle out of the low-level equilibrium trap in which they are caught. This raises

the necessity for importing 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.

Foreign Institutional Investors can withdraw at any time they want. Foreign

Direct Investment is for a fixed period and the investments could not be

withdrawn until a specified period. The recent example was the net outflows of

the money from the stock market that affected 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 these 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

out of the country and this may affect the economy of the domestic country. The

returns that 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 country24.

24 Armstrong.M Management Processes and Functions, 1996, London CIPD ISBN 0-85292-438-0

CONCLUSION AND SUGGESTIONS

Foreign Institutional Investments are very much needed for India. They are

necessary 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 there 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 professionally 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

great 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 their

attention to emerging Asian markets, particularly India and China. India is in a

better position as it has a strong technical manpower base and large number of

English speaking population

Suggestions:

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

inadequate savings and has a major role in transforming technology, improving

managerial skills and facilitating market development. In our economic system,

capital is the fuel that generates profits. India must extend a hospitable

environment for foreign investors by providing essential 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 Institutional

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 for 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

in remitting funds into India, instead of just obtaining approval and waiting for

the time to invest.

Though Foreign Investments poses threats, the strengths should also be

considered and the opportunities that Foreign Institutional Investments provide. If

India has to attract huge amounts of Foreign Investments, it needs to first

overcome the barriers that exist. There should be no room for Bureaucracy, Red

Tapism and a laid back attitude. Approvals should be easily forth coming.

Both the FIIs and FDI should be invited to the fullest and given importance so

that it will create a win-win situation on the part of both the parties. Both the

parties will be benefited from Foreign Investments i.e. India will get capital and

the investors will get returns to maximum25.

25 Jindal, V.G., Miles to Go Before Foreign Investors Come, The Economic Times, August 27, 1992

BIBLIOGRAPHY

Books, Journals and other resources.

1. Hymer, Stephen H., The International Operations of National Firms: A Study

Of Direct Foreign Investment, Cambridge: MIT Press, 1976

2. Hamar, J., Foreign Direct Investment and Privatization in Hungary, Acta Oecon.,

Vol. 46, No. 1, 1994, pp. 183-98

3. Krishnan, U.R., Flow of Foreign Institutional Investments, Chartered Secretary, Vol.

XXIV, No. 11, November 1994.

4. Kumar, Nagesh, Foreign Investment and Export Orientation: The Case of India,

Direct Foreign Investment and Export Promotion Policies and Experience in Asia, ed.

5. Kumar, Naresh, Foreign Investment in India: An Overview, Chartered Secretary,

Vol. XXIV, No. 11, November 1994.

6. John G. Greenwood, Portfolio Investment in Asian and Pacific Economies, Asian

Development Review, Vol. 11, No. 1, 1993.

7. Gerlowski, D.A., Fung, H.G. and Ford D., The Location of Foreign Direct

Investment for U.S. Real Estate: An Empirical Analysis, Land Economic Vol. 70,

No. 3, August 1994, pp. 286-93.

8. Liu, P.C. and Maddala, G.S., Rationality of Survey Data and Tests for Market

Efficiency in the Foreign Exchange Markets, Journal of International Money and

Finance, Vol. 11, No. 4, August 1992.

9. Lee, C.H., Direct Foreign Investment, Structural Adjustment, and International

Division of Labour- A Dynamic Macroeconomic Theory of Direct Foreign

Investment, Hitotsubaski Journal of Economics, Vol. 31, No. 2, December 1990, pp.

61-72

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1. http://economictimes.indiatimes.com/FII_inflows_may_pour_in_this_year/at

2. http://economictimes.Indiatimes .com/articles how/2712504.c ms

3. http://economictimes.Indiatimes.com/Markets/IPOs/reliance_Powers_FII_

4. http://economictimes.Indiatimes .com/articles how/2715498.c ms

5. http://economictimes.indiatimes.com/markets/indices/SEBI_to_notify_new_