Narasimha Project (2)

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A study on role of FDI & FII in banking & insurance sector

INTRODUCTION

Foreign Investment (FI)

Foreign Investment is an investment by citizens and government of one

country in industries of another; also investment within a country by foreigners.

The income tax treatment of foreign investment income is often governed

by Tax Treaties between the country of the investment owner and the

country where the investment is located. General Motors building a vehicle-

manufacturing plant in Mexico is an example of Foreign Investment.

Foreign Direct Investment (FDI)

Foreign Direct Investments means when a foreign company having a stake

in a public sector undertaking in India. E.g. FDI in telecom sector has been

increased to 74%.So if Vodafone wants a share in Indian market. It can penetrate

Indian market with max of 74% stake

It is an Investment made to acquire lasting interest in enterprises operating

outside of the economy of the investor. The FDI relationship consists of a parent

enterprise and a foreign affiliate which together form a Multinational corporation

(MNC). In order to qualify as FDI the investment must afford the parent enterprise

INDIAN ACADEMY DEGREE COLLEGE 1
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control over its foreign affiliate. The UN defines control in this case as owning

10% or more of the ordinary shares or voting power of an incorporated firm or its

equivalent for an unincorporated firm; lower ownership shares are known as

portfolio investment.

Foreign Institutional Investors (FII)

Foreign Institutional Investors, i.e., foreign Investment Bankers like

Goldman Sachs, Merill Lynch, Lehman brothers investing in Indian markets i.e.

buying Indian Stocks. FII's generally buy in large volumes. This has an impact on

the stock markets.

Foreign Institutional Investor (FII) is used to denote an investor - mostly of

the form of an institution or entity, which invests money in the financial markets

of a country different from the one where in the institution or entity was originally

incorporated.

FII investment is frequently referred to as hot money for the reason that it

can leave the country at the same speed at which it comes in. In countries like

India, statutory agencies like SEBI have prescribed norms to register FIIs and

also to regulate such investments flowing in through FIIs. A FEMA norm includes

maintenance of highly rated bonds (collateral) with security exchange.

Difference between FDI and FII

FDI typically brings along with the financial investment, access to modern

technologies and export market. The impact of the FDI in India is far more than

that of FII largely because the former would generally involve setting up of

production base - factories, power plant, telecom networks, etc. that generates

direct employment. There is also multiplier effect on the back of the FDI because



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of further domestic investment in downstream and upstream projects and a host of

other services.

The best example of FDI is Maruti Suzuki. India's experience in the

automobile sector with Suzuki ushering in the modern car on Indian roads

- that has been a force multiplier for the whole automobile sectors - can be

seen as a typical example of the collateral benefit of FDI. However, the downside

is that it puts an impact on local entrepreneur.

Therefore it is advisable that the FDI should ensure minimum level

of local content, have export commitment and technology transfer to India.

FII too gives large chunks of capital by way of market. The indirect

benefits of the market would include alignment of local practices to international

standards in trading, risk management, new instruments and equities research thus

facilitating market to become more deep, liquid, feeding in more information into

prices resulting in a better allocation of capital to globally competitive sectors of

the economy.

While these portfolio flows can technically reverse at any time, given that

the surfeits of international capital chase growth, as long as the host country

follows sensible economic policies, this risk is not as high as it is frequently made

out to be. India had experienced over the last decade and a half despite economic

slowdown, war, droughts, floods, political uncertainties and a nuclear test - bears

testimony to this.

While both forms of capital involve financial inflows, the additional

attribute of FDI is the feature of technology transfer, access to markets

and management inputs. Apart from this distinction there is hardly any big

difference between the two forms of capital.



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A capital deficient country like India would need to balance the distribution

of foreign There are lot of confusion between FII and FDI and which has

created so many rules and regulations. For example investment by financial

institutions under FII may sometime involve participation in management and intransfer of technology, in developing new export market and also in upgrading

management capabilities.

Thus merger proposal presently under consideration of the Government is

worthy of support.

RESEARCH DESIGN

TITLE OF THE STUDY



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A Study on Role Of FDI & FII in Banking & Insurance Sector.

STATEMENT OF THE PROBLEM

Problems arose only in the case of those entities in which single foreign

entities held more than 10 per cent equity. This was, for example, true of the

Development Credit Bank and the Catholic Syrian Bank . The problem faced by

these entities is that of finding buyers willing to acquire small blocks of equity to

ensure adequate dilution of lead stakeholder ownership in a bank being run by a

dominant foreign shareholder. As a result they have been under pressure for notcomplying with the RBIs demand to dilute equity and faced with threats of penal

action.

FDI will lead to job losses. Small retailers and other small Kirana store

owners will suffer a large loss.

Supermarkets will establish their monopoly in the Indian market. Because

of supermarkets fine tuning, they will get goods on low price and they will

sell it on low price than small retailers, it will decrease the sell of small

retailers.

Jobs in the manufacturing sector will be lost because foreign giants will

purchase their goods from the international market and not from domestic

sources.

OBJECTIVES



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To examine trends and patterns of FDI across different sectors and from

different countries.

To determine the growth and development in various sectors due to FDI.

To understand the Global Investment Scenario through FII.

To determine the important factors which motivates Banking and

Insurance Sector to pursue FDI and FII.

To Measure the role of FDI and FII in Banking and Insurance Sector

If the FDI and FII increase or decrease what will be effect of

it on Banking and Insurance Sector

Scope of the Study

Overview of the FDI & FII in India.

Regulatory framework of FDI in India.

Participants in the Banking and Insurance Sector to pursue FDI and FII.

Market Structure and Segmentation. Increase economic growth by

dealing with different international products.

Spread import and export business in different countries.

Research Methodology



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Research methodology is a way to systematically solve the research

problem. It may be understood as science of studying how research is done

systematically. The scope of Research methodology is wider than that of research

method.

Non Probability

The non probability respondents have been researched by selecting the

employees working in Bank, Insurance and Broking Firm

Exploratory and Descriptive Research

The research is primarily both exploratory and descriptive in nature. The

sources of information are both primary and secondary. The objective of the

exploratory research is to gain insights and ideas.

The objective of the descriptive research study is typically concerned with

determining the frequency with which something occurs.

SAMPLING METHODOLOGY

Sampling Techniques

Initially, a rough draft was prepared a pilot study was done to check the

accuracy of the Questionnaire and certain changes were done to prepare the final

questionnaire to make it more judgmental.

Sampling Units



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The respondents who will be asked to fill out the questionnaire in

Bangalore and Bangalore are the sampling units. These respondents mostly will

comprise of the employees working in Bank, Insurance and Broking Firm

Sample Size

The sample size was restricted to only 100 respondents.

Sampling Area

The area of the research will be Bangalore

LIMITATIONS OF THE STUDY

The various limitations of the study are:

Employees may be not willing to fill the entire questionnaire due to the less time

available to them or may be least bothered to fill the entire questionnaire.

Some respondents might be hesitant to provide personal and financial information

which can affect the validity of all responses.

There can be lack of awareness among people about FDI and FII. So the people

who are aware of such things may be found in specific areas for survey purposes.

Some of the respondents who are not aware of FDI and FII concept may be able to

respond to few questions.



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LITERATURE REVIEW

Dr. patil Usha.N:

The Government of India was initially very apprehensive of the introduction

of the Foreign Direct Investment in the Retail Sector in India. The unorganized retailsector as has been mentioned earlier occupies 98% of the retail sector and the rest 2%

is contributed by the organized sector. Hence one reason why the government feared

the surge of the Foreign Direct Investments in India was the displacement of labour.

The unorganized retail sector contributes about 14% to the GDP and absorbs about

7% of our labour force. Hence the issue of displacement of labour consequent to FDI

is of primal importance. There are different viewpoints on the impact of FDI in the

retail sector in India, According to one viewpoint, the US evidence is empirical proofto the fact that FDI in the retail sector does not lead to any collapse in the existing

employment opportunities. There are divergent views as well. According to the UK

Competition Commission, there was mass scale job loss with entry of the

hypermarkets brought about by FDI in the UK retail market. This paper highlight is

Introduction & Definition of Retail, Division of Retail Industry, FDI Policy in India,

FDI Policy with Regard to Retailing in India, Foreign Investors Concern Regarding

FDI in Single and Multi Brand Retail.

Uttama,Nathapornpan Piyaareekul:

The paper examines the interaction on intra-industry trade (IIT) and foreign

direct investment (FDI) with special attention to the Association of Southeast Asian



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Nations (ASEAN). We introduce the 233 knowledge-capital model, recently

proposed by Baltagi et al. (2007) and Uttama and Pridy (2009). The theoretical

implications are suggested, not only how IIT is determined by country characteristics,

such as similarity in market size and factor differentials, but also trade costs as well asregional economic integration. Moreover, it also empirically investigates the

determinants of aggregated and disaggregated IIT in five ASEAN countries over the

period 19952008, concerned with what extent complex FDIs boost IIT. Using spatial

panel data model, we find the fact that the empirical results are consistent with the

theoretical predictions. Vertical FDI tends to discourage ASEANs IIT, whereas

complex horizontal FDI in neighbours tends to encourage its IIT in ASEAN.



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THEORITICAL BACKGROUND

Introduction

Foreign Investment means flow of capital from one nation to another in

exchange for significant ownership stakes in domestic companies or other

domestic assets. Typically, foreign investment denotes that foreigners take a

somewhat active role in management as a part of their investment. Foreign

investment typically works both ways, especially between countries of relatively

equal economic stature

Direct foreign investment is investment in real assets, rather than financialassets such as securities. This investment may take the form of joint ventures with

foreign firms, formation of foreign subsidiaries, or the acquisition of existing

foreign firms. Although the investment is in real assets, this may be accomplished

by a position in financial assets that is large enough to provide influence



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overmanagement(a 10 percent or greater position is sometimes considered

sufficient). Foreign investment in the United States grew steadily during the

1970s, but experienced a surge during the middle and late 1980s. The high levels

of foreign investment led to concerns about a loss of control over domesticeconomic activity, or "economic sovereignty," and the effect of foreign ownership

on national security.

Studies of foreign investments in the United States indicate that the primary

vehicle was acquisition, but the acquisitions were managed in basically the same

way as domestic firms, and the overall impact of foreign investment is positive.Despite the large size and prominence of some investments, and their potentially

large impact in specific areas, overall foreign investments are relatively

insignificant relative to the size of the U.S. economy. With the economic

slowdown of the early 1990s, and a drop-off in the rate of foreign investment,

concerns about economic sovereignty became muted.

Attitudes toward foreign investment also changed somewhat as localities

vied to attract investment for economic stimulus. Another factor was a surge in

foreign investment by U.S. firms during the late 1980s, and this trend continued

into the 1990s. Finally, foreign investment may help offset decreases in domestic

investment during periods of economic slowdown.

Currently there is a trend toward globalization whereby large, multinational

firms often have investments in a great variety of countries. Many see foreign

investment in a country as a positive sign and as a source for future economic

growth. The U.S. Commerce Department encourages foreign investment through

its Invest in America initiative.

BENEFITS AND COSTS- FOREIGN INVESTMENT

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The benefits motivating foreign direct investment are complex and usually

firm-specific. A primary motivation is the exploitation ofoligopoly(or monopoly)

power such as proprietary technology, brand names, or management know-how.

Entry into more profitable markets is an obvious attraction, and new and possiblylarge markets may produce economies ofscale.Foreign Investment has access to

foreign factors of production or technologies, and reaction to trade restrictions or

exchange rate movements, have also provided a motivation.

An important benefit of direct investment is diversification.National

economies are in different stages of their economic cycles, and move differently.

Just as diversification of a security portfolio across firms that react differently toeconomic cycles will reduce the variability of portfolio returns, investment across

national economies reduces the volatility of the firms' cash flow. This reduces the

possibility of inadequate liquidity and should increase the value of the firm.

These benefits must be weighed against the potential costs of foreign

investment. National interests are involved and may lead to restrictions.

Diversification may reduce variability over the longer run, but exposes the firm to

potential short term variability, especially through exchange rate

movements. International management is also more complex and difficult,

involving not only a larger organization but also different laws, conditions, and

customs. The uncertainty surrounding the likely outcomes, and the possibility of

undesirable outcomes, is larger for foreign investment than for domestic

investment. Especially for smaller or emerging economies, the concerns of

national economic sovereignty may lead to protectionism and restrictions, such as

limits on repatriation of profits.

On a global basis, and over a long time, it is generally agreed that a free

flow of capital is beneficial, since it promotes an efficient allocation of resources.

For shorter periods, and within a given country or region, the impact is mixed. For

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the individual firm the foreign direct investment decision requires consideration of

factors beyond those encountered domestically. It appears that there is no overall

answer to the desirability of foreign direct investment on either the national or

firm level, and that individual analysis of each project is required.

Entry Route for Foreign Investment

As per the FDI policy in place foreign investors can invest in India through

any of the different routes set forth below:

(i) Foreign Direct Investment(ii) Foreign Portfolio Investment

An investor planning to invest in India has the following options:

Automatic Route

Investment without any prior approval from any regulatory authority and

the only regulatory formality includes post-facto filings with the RBI.

Approval Route

Prior approval of Foreign Investment Promotion Board (FIPB) is required

for

(a) Activities not covered under the Automatic Route;

(b) Conditions, if any, under the automatic route are not fulfilled; or

(c) The investment is beyond the prescribed threshold limit.

100% FDI in almost all key sectors is permitted under automatic route

except very few sectors where either FDI is allowed with Government

approval or is totally prohibited like Atomic Energy, Lottery, gambling and



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betting, retail trading (except single brand product retailing, Nidhi company

etc.

FOREIGN INVESTMENT POLICY

The Ministry of Industry has expanded the list of industries eligible for

automatic approval of foreign investments and, in certain cases, raised the upper

level of foreign ownership from 51 percent to 74 percent and further in certain

cases to 100 percent. In January 1998, the RBI announced simplified procedures

for automatic FDI approvals. Further announcement had provided that Indian

companies will no longer require prior clearances from the RBI for inward

remittances of foreign exchange or for the issuance of shares to foreign investors.

Facilitating Foreign Investment

In the recent budget, the finance minister announced the government's

commitment to a 90-day period for approving all foreign investments.

Government officers will be assigned to larger foreign investment proposals and

will facilitate Central and State clearances in a time-bound manner. Unlisted

companies with a good 3 year track record, have been permitted to raise funds in

international markets through the issue of Global Depository Receipts (GDRs) and

American Depository Receipts (ADRs).

A number of policy changes have reduced the discriminatory bias against foreign

firms.

The government has amended exchange control regulations previously

applicable to companies with significant foreign participation.

The ban against using foreign brand names/trademarks has been lifted.



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The FY 1994/95 budget reduced the corporate tax rate for foreign companies

from 65 percent to 55 percent. The tax rate for domestic companies was

lowered to 40 percent.

The long-term capital gains rate for foreign companies was lowered to 20

percent; a 30 percent rate applies to domestic companies.

The Indian Income Tax Act exempts export earnings from corporate income

tax for both Indian and foreign firms.

Other policy changes have been introduced to encourage foreign direct and

foreign institutional investment.

NEXT TOP ECONOMIC INDEX

Direct Investment vs. Portfolio Investment (U.S $ million)

Year Direct Investment Portfolio

Investment

Total Foreign

Investment

2002-2003 129 4 133

2003-2004 315 224 5592004-2005 586 3567 4153

2005-2006 1314 3824 5138

2006-2007 2133 2748 4881

2007-2008 2696 3312 6008

2008-2009 3197 1828 5025

2009-2010 (April-

Dec)

2511 1748 4253

2012-2012

(April- Dec)

1562 -682 880

Source: Economic Times

PORTFOLIO INVESTMENT BY FOREIGN SOURCES



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The decline in portfolio investment, from 2008-2009 onwards, has been

contributed by a decline in flows of both foreign institutional investment and

GDRs. Fresh inflow of funds by FIIs declined from U.S.$ 1,926 million in 2007-

2008 to U.S.$ 979 million in 2008-2009. This trend intensified in 2009-2010 withan estimated outflow of U.S.$ 752 million during April-December, 2009

compared to inflows of U.S.$ 973 million during the corresponding period in the

previous year. GDRs raised in 2008-2009 was U.S.$ 645 million, which was less

than half the amount of U.S.$ 1,366 million raised in 2007-2008. The declining

trend has continued during the first nine months of 2009-2010 with only U.S.$ 15

million raised compared to U.S.$ 612 million during the same period in 2008-

2009. The poor performance of portfolio investment is a consequence of both

enhanced emerging market risk-perception, and the depressed condition of the

domestic capital market.

Portfolio Investments NRIs

A number of liberalization measures have been taken in 1998-99 to

promote portfolio foreign investment. In order to avoid NRIs being crowded out

by FIIs, the aggregate ceiling for investment in a company by all

NRIs/PIOs/OCBs through stock exchanges has been made separate and exclusive

of the investment ceiling available for FIIs. In addition, the aggregate investment

ceiling for NRIs/PIOs/OCBs has been raised from 5 per cent to 10 per cent of the

paid up capital of a company. In the case of listed Indian companies, the ceiling

can be raised to 24 per cent of the paid up capital under a General Body

Resolution.

Also, the investment limit by a single NRI/PIO/OCB has been enhanced

from 1 per cent to 5 per cent of the paid up capital. Policy pertaining to investment

in unlisted companies has also been liberalized. NRIs/PIOs/OCBs are now

permitted to invest in unlisted companies. However, while investing in unlisted



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companies, the same norms and approval procedures applicable to portfolio

investments in listed companies will apply, and it will be subject to the same

investment ceilings as in the listed companies.

PORTFOLIO INVESTMENTFIIs

FIIs can purchase and sell Government Securities and Treasury Bills

within overall approved debt ceilings. To facilitate better risk management by

investors, authorized dealers have been permitted to provide forward cover to FIIs

in respect of their fresh equity investments in India. Moreover, transactions among

FIIs with respect to Indian stocks will no longer require post-facto confirmation

from the RBI. Also, 100 percent FII debt funds have been permitted to invest in

unlisted debt securities of Indian companies.

EXTERNAL COMMERCIAL BORROWINGS (ECBs)

The higher net inflows of U.S. $ 3,999 million of ECBs in 2008-2009

compared to U.S. $ 2,848 million in 2007-2008 reflected lower amortization.

Disbursements in 2008-2009 stood at U.S. $ 7,371 million, which was marginally

lower than U.S. $ 7,571 million recorded in 2007-2008. ECB approvals in 2008-

2009 have been placed at U.S. $ 8,712 million, which is slightly higher than the

level in 2007-2008. Regarding sectoral allocation, power accounted for the highest

approvals of U.S. $ 3 billion, followed by telecom with U.S. $1.5 billion given in

the table. In 2009-2010 up to 23.12.98, approvals have been placed at U.S.$ 3,804million. The reduced attractiveness of ECB of the corporate sector has been

underscored by a very steep decline in actual disbursements to U.S.$ 1.6 billion

(excluding U.S $ 4.2 billion on account of RIBs) in the first two quarters of 2009-

2010 compared to U.S.$ 4.3 billion in the same period last year. Increase in cost of



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ECB funds has come about due to a general increase in the risk premium for

emerging market borrowers, downgrades by international credit rating agencies

and the rise in forward premium. After several years of unchanged or slightly

improving ratings, major rating agencies started to re-examine our ratings in early2008. Both the deteriorating external environment and persistent large fiscal

deficits have been cited as the main reasons for downgrading.

ECB is approved by the Government within an annual ceiling that is

consistent with prudent debt management, keeping in view the balance of

payments position. The existing ECB policy was reviewed in 2009-2010 in light

of the financial needs of various sectors and the impact on international markets ofboth the East Asian crisis and economic sanctions. Regarding the sectoral

requirements, infrastructure and exports continue to be accorded high priority in

ECB allocation.

NON RESIDENT DEPOSITS (NSD)

The Resurgent India Bond (RIB) scheme, launched in the current financial

year, was open to both NRIs/OCBs and the banks acting in fiduciary capacity on

behalf of them. The scheme, that opened on August 5, 2009 and closed on August

24, 2009, mobilized U.S.$ 4.2 billion. The interest rates on these five year bonds

were 7.75 per cent for U.S. dollar, 8 per cent for Pound Sterling, and 6.25 per cent

for Deutsche Mark. Other features of Ribs include joint holding with Indian

residents, allowing them to be gifted to Indian residents, easy transferability, loan

ability, premature encashment facility, and tax benefits. 45. Net inflows under

non-resident deposits declined from U.S.$ 3,314 million in 1996-97 to U.S.$ 1,119

million in 2008-2009. The outflow under FCNRA continued due to redemption

payment. Also, the relative rates of return and the perceived risk premium on

emerging market debt has influenced the flows into these accounts.



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Some of the domestic policy-related factors which seem to have contributed

towards subdued net flows include imposition of incremental cash reserve ratio of

10 per cent on non-resident deposits and the linking of interest rates under FCNR

(B) with LIBOR, which had the effect of lowering interest rates offered under thisscheme, and thereby reducing its attractiveness. In order to encourage mobilization

of long-term deposits, and concomitantly to discourage short-term deposits, the

interest rate ceiling on FCNR(B) deposits of one year and above was raised and

the ceiling on such deposits below one year was reduced in April, 2009. As at the

end of March 1998, outstanding balances under various non-resident deposit

schemes stood at U.S.$ 20,367 million.

Comparison of estimated net flows under non-resident deposits during

April-November 2009 vis--vis the corresponding period in 1997 shows a

compositional shift in favor of Rupee denominated accounts in response to policy

initiatives undertaken in 2008-2009. Net inflows under non-residents deposits,

(excluding redemption payments under FCNRA which had since been

discontinued) at US $ 367 million during April-November, 1998 were

substantially lower than those of US $ 2266 million in the same period of 2008.

Positive flows have been recorded only in the NR (E) RA and NR (NR) RD

schemes. The initiatives in terms of freeing of interest rates and removal of

incremental CRR, may have acted as incentives to attract deposits in these

accounts.

For instance, the Securities and Exchange Board of India (SEBI) recently

formulated guidelines to facilitate the operations of foreign brokers in India on

behalf of registered Foreign Institutional Investors (FII's). These brokers can now

open foreign currency-denominated or rupee accounts for crediting inward

remittances, commissions and brokerage fees.



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FOREIGN DIRECT INVESTMENT (FDI)

Introduction to FDI An Overview

These three letters stand for foreign direct investment. The simplest

explanation of FDI would be a direct investment by a corporation in a commercial

venture in another country. A key to separating this action from involvement in

other ventures in a foreign country is that the business enterprise operates

completely outside the economy of the corporations home country. The investing

corporation must control 10 percent or more of the voting power of the new

venture.

The practice has grown significantly in the last couple of decades, to the

point that FDI has generated quite a bit of opposition from groups such as labor

unions. These organizations have expressed concern that investing at such a level

in another country eliminates jobs. Legislation was introduced in the early 1970s

that would have put an end to the tax incentives of FDI. But members of the Nixon

administration, Congress and business interests rallied to make sure that this attack

on their expansion plans was not successful.

One key to understanding FDI is to get a mental picture of the global scale

of corporations able to make such investment. A carefully planned FDI can

provide a huge new market for the company, perhaps introducing products and

services to an area where they have never been available. Not only that, but such

an investment may also be more profitable if construction costs and labor costs are

less in the host country.



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The definition of FDI originally meant that the investing corporation gained

a significant number of shares (10 percent or more) of the new venture. In recent

years, however, companies have been able to make a foreign direct investment that

is actually long-term management control as opposed to direct investment inbuildings and equipment.

FDI growth has been a key factor in the international nature of business

that many are familiar with in the 21st century. This growth has been facilitated by

changes in regulations both in the originating country and in the country where the

new installation is to be built.

Corporations from some of the countries that lead the worlds economy

have found fertile soil for FDI in nations where commercial development was

limited, if it existed at all. The dollars invested in such developing-country

projects increased 40 times over in less than 30 years.

The financial strength of the investing corporations has sometimes meant

failure for smaller competitors in the target country. One of the reasons is that

foreign direct investment in buildings and equipment still accounts for a vast

majority of FDI activity. Corporations from the originating country gain a

significant financial foothold in the host country. Even with this factor, host

countries may welcome FDI because of the positive impact it has on the smaller

economy.

FDI has a stronger impact on Domestic Investment than do loans or Portfolio

Investment (Source: Economic Times)



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Types of Foreign Direct Investment

FDIs can be broadly classified into two types: outward FDIs and inward

FDIs. This classification is based on the types of restrictions imposed, and the

various prerequisites required for these investments.

An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage provided to the domestic industries

and subsidies granted to the local firms stand in the way of outward FDIs, which

are also known as 'direct investments abroad.' Different economic factors

encourage inward FDIs. These include interestloans, tax breaks, grants,subsidies, and the removal of restrictions and limitations. Factors detrimental to

the growth of FDIs include necessities of differential performance and limitations

related with ownership patterns.

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Other categorizations of FDI exist as well. Vertical Foreign Direct

Investment takes place when a multinational corporation owns someshares of a

foreign enterprise, which supplies input for it or uses the output produced by the

MNC.

Horizontal foreign direct investments happen when a multinational

company carries out a similar business operation in different nations. Foreign

Direct Investment is guided by different motives. FDIs that are undertaken

to strengthen the existing market structure or explore the opportunities

of new markets can be called 'market-seeking FDIs.' 'Resource-seeking

FDIs' are aimed at factors of production which have more operational

efficiency than those available in the home country of the investor.

Some foreign direct investments involve the transfer of strategic assets. FDI

activities may also be carried out to ensure optimization of available opportunities

and economies of scale. In this case, the foreign direct investment is termed as

'efficiency-seeking.'

Investment Group

A foreign direct investor may be classified in any sector of the economy

and could be any one of the following:

An individual;

A group of related individuals;

An incorporated orunincorporated entity;

Apublic company orprivate company;

A group of related enterprises;

A government body;

An estate (law), trust or other social institution; or

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Any combination of the above.

Methods for Investment

The foreign direct investor may acquire voting power of an enterprise in an

economy through any of the following methods:

By incorporating a wholly owned subsidiary orcompany

By acquiring shares in an associated enterprise

Through a mergeror an acquisition of an unrelated enterprise

Participating in an equityjoint venture with another investor or

enterprise

Foreign Direct Investment Incentives May Take The Following Forms:

Low corporate tax andincome tax rates

Tax holidays

Other types of tax concessions

Preferential tariffs

Special economic zones

EPZ - Export Processing Zones

Bonded Warehouses

Maquiladoras

Investment financial subsidies

Soft loan or loan guarantees

Free land or land subsidies

http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guarantees


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Relocation & expatriation subsidies

Job training & employment subsidies

Infrastructure subsidies

R&D support

Derogation from regulations (usually for very large projects)

Procedure for an FDI License

Foreign direct investment (FDI) for all items / activities can be brought in

through the automatic route under powers delegated to the Reserve Bank of India

(RBI). For the remaining items / activities, it can be obtained through government

approval. Government approvals are accorded on the recommendation of the

Foreign Investment Promotion Board (FIPB).

Automatic Route

(a) New Ventures

In New Ventures all items / activities for FDI / Non Resident Indians

(NRI) / Overseas Corporate Bodies (OCB) investment (up to 100 percent)

fall under the automatic route, except where specified. Whenever any

investor chooses to make an application to the FIPB and not avail of the

automatic route, he or she may do so.

(b) Existing Companies

Besides new companies, the automatic route for FDI / NRI / OCB

investment is also available to existing companies proposing to induct

http://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Infrastructure


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foreign equity. For existing companies with an expansion program, the

additional requirements are given below

The increase in equity level must result from the expansion of the

equity base of the existing company without the acquisition of

existing shares by NRI/OCB/foreign investors,

The money to be remitted should be in foreign currency, and

The proposed expansion program should be in the sector(s) under

the automatic route. Otherwise, the proposal would need

government approval through the FIPB. For this, the proposal must

be supported by a Board Resolution of the existing Indian company.

Procedure for the Automatic Route

The proposals for approval under the automatic route are to be made to the

RBI in the FC (RBI) form. To simplify procedures for foreign direct investment

under the automatic route, RBI has given permission to Indian companies to

accept investment under this route without obtaining prior approval from the RBI.

However, investors are required to notify the concerned Regional Offices of

RBI of receipt of the inward remittances within 30 days of such receipt. They will

also have to file the required documents with the concerned Regional Office of the

RBI within 30 days after issue of shares to foreign investors. This facility is

available for NRI/OCB investment also.

PROCEDURE FOR GOVERNMENT APPROVAL



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Foreign Investment Promotion Board (FIPB)

(a) All other proposals for foreign investment, including NRI / OCB

investment and foreign investment in EOU / EPZ / STP/ EHTP units, which do notfulfill any or all of the parameters prescribed for automatic approval, are

considered for approval by the FIPB. The FIPB also grants composite approvals

involving foreign technical collaborations and the setting up of Export Oriented

Units involving foreign investment / foreign technical collaboration.

(b) Applications to FIPB for approval of foreign investment should be

submitted in Form FC-IL. Plain paper applications carrying all relevant details are

also accepted. There is no charge for this.

The following information should form a part of the proposal submitted to the

FIPB:

Whether the applicant has any previous financial / technical collaboration

or trademark agreement in India in the same or allied field for which

approval has been sought; and ii) If so, details thereof and the justification

for proposing the new venture / technical collaboration (including

trademarks).

The application can be submitted to the FIPB unit of the Department of

Economic Affairs, Ministry of Finance, North Block, New Delhi.

Applications can also be submitted with Indian Missions abroad who will

forward them to the Department of Economic Affairs for further

processing.

Foreign investment proposals received in the Department of Economic

Affairs (DEA) are placed before the Foreign Investment Promotion Board



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(FIPB) within 15 days of its receipt. The recommendations of FIPB in

respect of project proposals involving a total investment of up to Rs. 6

billion are considered and approved by the Finance Minister. Projects with

a total investment exceeding Rs.6 billion are submitted to the CabinetCommittee on Economic Affairs (CCEA) for decision.

The decision of the Government in all cases is conveyed by the DEA,

usually within 30 days.

For inward remittance and issue of shares to NRI / OCB, even up to 100

percent equity, prior permission of the RBI is not required. These

companies have to file the required documents with the concerned Regional

Offices of the RBI within 30 days after the issue of shares to the NRI /

OCB.

Procedure for Approval for EOUs

Applications in the prescribed form for 100 percent EOUs should be

submitted to the Development Commissioners (DCs) of the Export Processing

Zones (EPZs) concerned for automatic approval and to the SIA for Government

approval. The form is printed in the Handbook of Procedures for Export and

Import, 2002-2007 published by the Ministry of Commerce & Industry and is also

available at all outlets dealing in government publications.

The application should be submitted along with a crossed demand draft of

Rs. 5,000 drawn in favor of The Pay & Accounts Officer, Department of

Industrial Development, Ministry of Commerce and Industry, payable at the State

Bank of India, Nirman Bhavan Branch, New Delhi.



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Procedure for Automatic Approval for EOUs

Applications in the prescribed form for 100 percent E0Us should be

submitted to the DCs of the EPZs. Wherever the proposals meet the criteria forautomatic approval, the DC of the EPZ would issue approval letters within two

weeks.

Procedure for Government Approval for EOUs

Proposals not covered by the automatic route shall be forwarded by the DC

to the Board of Approval (BOA) for consideration. On consideration of the

proposal by the board, the decision is usually conveyed within six weeks.

Government approval would be necessary for the following categories:

Proposals attracting compulsory licensing

Items of manufacture reserved for the small-scale sector

Proposals involving any previous joint venture or technology transfer /

trademark agreement in the same or allied field in India. The definition of

same and allied would be as per the 4-digit NIC 1987 Code and 3-

digit NIC 1987 Code

Extension of foreign technology collaboration agreements (including those

cases that may have received automatic approval in the first instance)

Proposals not meeting any or all of the parameters for automatic approval

under foreign technology collaboration agreements

ROLE OF FDI IN FINANCIAL SECTOR



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BANKING

The Reserve Bank of India (RBI) governs the investment matters in the

banking sector.

Private Sector Bank

49% is under automatic route. 74% is with approval including FIIs,

PIS. Individual FFI holding restricted to 10% voting right limited to

10%.

Public Sector Bank

FDI and portfolio investment is up to 20% with government

approval.

Subsidiaries by Foreign Banks

Foreign Banks can have branches or subsidiary in India but not both

with RBI permission

INSURANCE

FDI up to 26% in the Insurance sector is allowed on the automatic route

subject to obtaining license from Insurance Regulatory & Development

Authority (IRDA)

NBFC



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Over the years, there has been a significant increase in the role of non-

banking financial company (NBFC) considering their crucial role in the

Indian financial system by complementing banks in providing financial

services. A NBFC is a company registered under the Companies Act, 1956and could be a loan company or an investment company or an asset finance

company (or a mutual benefit financial company.

NBFCs registered with RBI have been reclassified as

(i) Asset Finance Company

(ii) Investment Company

(iii) Loan Company

FDI in NBFC is allowed in 18 specified activities

Merchant Banking

Underwriting

Portfolio Management services

Investment Advisory Services

Financial Consultancy

Stock Broking

Asset Management

Venture Capital

Custodial Services

Factoring

Credit Rating Agencies

Leasing and Finance

Housing Finance



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set up subsidiaries for undertaking other NBFC activities, subject to the

subsidiaries complying with the minimum capitalization norms.

TYPES OF INSTRUMENTS

FDI under a fresh issue is allowed only for equity shares and fully

compulsorily and mandatorily convertible instruments viz. preference shares and

debentures, subject to pricing guidelines/valuation norms prescribed under FEMA

regulations. Non-convertible, optionally convertible or partially convertible

instruments are considered as debt since 1st

May 2007 and therefore attract the

provisions of External Commercial Borrowings (ECB).

Other Modes of Foreign Direct Investment

Global Depository Receipts (GDR) or American Deposit Receipts

(ADR) or Foreign Currency Convertible Bonds (FCCB)

Indian companies are allowed to raise equity capital in the international

market through the issue of GDRs/ADRs/FCCBs in accordance with the

Scheme for issue of

Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depository Receipt Mechanism) Scheme 1993 and guidelines issued by the

Central Government there under from time to time subject to meeting the

eligibility criteria.

There are no end-use restrictions on GDR/ADR issue proceeds, expect for

an express ban on investment in real estate and stock markets.



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The Government of India has also provided for a limited two-way

flexibility scheme for ADRs / GDRs. Indian companies are also permitted to

sponsor an issue of ADR / GDR.

The Importance of FDI to Developing Countries as a Means of Finance

Foreign direct investment (FDI) flows into the primary market whereas

foreign institutional investment (FII) flows into the secondary market, that is, into

the stock market.

All other differences flow from this primary difference. FDI is perceived to

be more beneficial because it increases production, brings in more and better

products and services besides increasing the employment opportunities and

revenue for the Government by way of taxes. FII, on the other hand, is perceived

to be inferior to FDI because it only widens and deepens the stock exchanges and

provides a better price discovery process for the scrip.

Besides, FII is a fair-weather friend and can desert the nation which is what is

happening in India right now, thereby puling down not only our share prices but

also wrecking havoc with the Indian rupee because when FIIs sell in a big way and

leave India they take back the dollars they had brought in.

Impact of FDI on Nation

Foreign direct investment (FDI) policies play a major role in the economic

growth of developing countries around the world. Attracting FDI inflows with

conductive policies has therefore become a key battleground in the emerging

markets.



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Developed countries also seek to bring in more FDI and use various

policies and incentives to attract overseas investors, particularly for capital-

intensive industries and advanced technology.

The primary aim of these policies is to create a friendly business

environment where foreign investors feel comfortable with the legal and financial

framework of the country, and have the potential to reap profits from

economically viable businesses.

The prospect of new growth opportunities and increased profits encourage

large capital inflows. Ultimately this results in economic development of the

nation.

Advantage India (Growth Prospect) FDI

Foreign Direct Investments are that the majority victorious domestic

companies, particularly those with only one of its kind compensation, spend

abroad.

It is the direct investment that makes companies more victorious internally.

Companies with Foreign investment generally tend to be most profitable as

well as it is to have a more stable sales and earnings.

It sells at 12% discount to net assets. Distribution rate is 5.6%. Has a long

track record. It has been in existence since 1972.

Disadvantages of FDI



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Foreign direct investments are cost of travel and communications abroad. It

also does not very much relate to local business tax laws, business

atmosphere in particular and other government regulations.

Language and culture differences.

It invests in debt instruments which are subject to interest rate fluctuations.

Income is mostly taxable at full tax rate. 5 year total return rate is only

4.95%.

Limits for FDI

FDI in the banking sector has been liberalized by raising FDI limit in

private sector banks to 74 per cent under automatic root including investment

by foreign investment in India. The aggregate foreign investment in a private bank

from all sources will be 74 per cent of paid-up capital of the bank. FDI

and Portfolio investment in nationalized banks are subject to overall statutory limit

of 20 per cent.

Investment Scenario

In the year 2012, India has assumed a notable position on the world canvas

as a key international trading partner, majorly because of the implementation of its

consolidated FDI policy. The consolidation, first undertaken in March 2012, pulls

together in one document all previous acts, regulations, press notes, press releases

and clarifications issued either by the DIPP or the Reserve Bank of India (RBI)

where they relate to FDI into India.

According to the modified policy, foreign investors can inject their funds

though the automatic route in the Indian economy. Such investments do not



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Source: Economic Times

The reasons for Indias rise in rankings are its highly-educated workforce,

management talent, rule of law, transparency, cultural affinity and regulatory

environment, apart from its expertise in IT, business processing and research-

oriented activities.



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FOREIGN INSTITUTIONAL INVESTOR

Introduction An Overview

Foreign Institutional Investor (FII) is used to denote an investor - mostly of

the form of an institution or entity, which invests money in the financial markets

of a country different from the one where in the institution or entity was originally

incorporated.

FII investment is frequently referred to as hot money for the reason that it

can leave the country at the same speed at which it comes in.In countries like

India, statutory agencies like SEBI have prescribed norms to register FIIs and also

to regulate such investments flowing in through FIIs. FEMA norms include

maintenance of highly rated bonds (collateral) with security exchange.

It is used most commonly in India to refer to outside companies investing in

the financial markets of India. International institutional investors must register

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

of the major market regulations pertaining to FIIs involves placing limits on

FII ownership in Indian companies.

Foreign injections amounted to US$ 6.4 billion in October 2010, which was

almost 25 per cent of the total inflows in the stock market registered so far in

2010. The net foreign fund investment crossed the US$ 100 billion mark on

November 8, 2010, since the liberalization policy was implemented in 1992. Asper the data given by SEBI, the total figure stood at US$ 100.9 billion, wherein

US$ 4.78 billion were infused in November itself. The humungous increase in

investment mirrors the foreign investors faith in the Indian markets. FIIs have



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made investments worth US$ 4.11 billion in equities and poured US$ 667.71

million into the debt market.

Data sourced from SEBI shows that the number of registered FIIs stood at

1,738 and number of registered sub-accounts rose to 5,592 as of November 10,

2010

According to research reports, India has received more FII funds as

compared to its Asian peers. According to Bloomberg, Net FII inflow (till

November 23 2010) stood at US$ 28.5 billion, far ahead of South Korea (US$ 16

billion) and Japan (US$ 13 billion). Net FII inflows as a percentageof the market

capitalization are also the highest in India at 1.8 per cent in 2010, followed by

South Korea at 1.6 per cent.

Quenching its thirst for foreign assets, India Inc announced merger and

acquisition (M&A) deals worth a record US$ 55 billion in 2010, including a

record number of billion-dollar transactions.

According to a global consultancy firm Ernst & Young (E&Y), India isexpected to receive more than US$ 7 billion in private equity (PE) investments in

2010, up from US$ 3.5 billion in 2009. Sectors such as power and transportation,

consumer and branded products, infrastructure ancillaries, education and financial

services, and healthcare are likely to witness increased PE activity in 2012

Types of Financial Institutional Investor (FII)

Pension Fund

Mutual Fund

Investment Trust

Unit Trust And Unit Investment Trust

http://en.wikipedia.org/wiki/Pension_fundhttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Investment_trusthttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Unit_Investment_Trusthttp://en.wikipedia.org/wiki/Pension_fundhttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Investment_trusthttp://en.wikipedia.org/wiki/Unit_trusthttp://en.wikipedia.org/wiki/Unit_Investment_Trust


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Investment Banking

Hedge Fund

Sovereign Wealth Fund

Endowment Fund

Private Equity Firms

Insurance Companies

Methods of Investment

The foreign direct investor may acquire voting power of an enterprise in an

economy through any of the following methods:

By incorporating a wholly owned subsidiary orcompany

By acquiring shares in an associated enterprise

Through a mergeror an acquisition of an unrelated enterprise

Participating in an equityjoint venture with another investor or enterprise

Foreign Direct Investment Incentives May Take The Following Forms:

Low Corporate Tax And Income Tax Rates

Other Types Of Tax Concessions

Preferential Tariffs

Special Economic Zones

EPZ - Export Processing Zones

Bonded Warehouses

http://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Sovereign_wealth_fundhttp://en.wikipedia.org/wiki/Endowment_fundhttp://en.wikipedia.org/wiki/Private_equity_firmshttp://en.wikipedia.org/wiki/Insurance_companieshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Investment_bankinghttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Sovereign_wealth_fundhttp://en.wikipedia.org/wiki/Endowment_fundhttp://en.wikipedia.org/wiki/Private_equity_firmshttp://en.wikipedia.org/wiki/Insurance_companieshttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehouse


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Maquiladoras

Investment Financial Subsidies

Soft Loan Or Loan Guarantees

Free Land Or Land Subsidies

Relocation & Expatriation Subsidies

Job Training & Employment Subsidies

Infrastructure Subsidies

R&D Support

Derogation From Regulations (Usually For Very Large Projects)

Important Concepts

Foreign Institutional Investor (FII)

FII means an entity established or incorporated outside India which

proposes to make investment in India.

Sub-Account

Sub-account includes those foreign corporate, foreign individuals, and

institutions, funds or portfolios established or incorporated outside India on whose

behalf investments are proposed to be made in India by a FII.

Designated Bank

Designated Bank means any bank in India which has been authorized by

the Reserve Bank of India to act as a banker to FII.

Domestic Custodian

http://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructure


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Domestic Custodian is any entity registered with SEBI to carry on the

activity of providing custodial services in respect of securities.

Broad Based Fund

It is a fund established or incorporated outside India, which has at least

twenty investors with no single individual investor holding more than 10% shares

or units of the fund.

It is provided because if the fund has institutional investor(s) it shall not be

necessary for the fund to have twenty investors and if the fund has an institutional

investor holding more than 10% of shares or units in the fund, then the

institutional investor must itself be broad based fund.

FII REGISTRATION PROCEDURE

Eligible for FII Registration

Following entities / funds are eligible to get registered as FII:

1.PensionFunds

2.MutualFunds

3.InsuranceCompanies

4.InvestmentTrusts

5.Banks

6.UniversityFunds

7.Endowments

8.Foundations9.CharitableTrusts/CharitableSocieties

Further, following entities proposing to invest on behalf of broad based

funds, are also eligible to be registered as FIIs:



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a. Asset Management Companies

b. Institutional Portfolio Managers

c. Trustees

d. Power of Attorney Holders

DERIVATIVES POSITION LIMITS

Restrictions on Investment In Derivatives

The FII position limits in a derivative contracts (Individual Stocks) in

which the market wide position limit is less than or equal to Rs. 250 Cr, the

FII position limit in such stock shall be 20% of the market wide limit.

For stocks in which the market wide position limit is greater than Rs. 250

Cr, the FII position limit in such stock shall be Rs. 50 Cr.

FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying

index shall be Rs. 250 Crore or15 % of the total open interest of the

market in index options, whichever is higher, per exchange.

This limit would be applicable on open positions in all option contracts on a

particular underlying index.

FII Position limits in Index futures contracts

FII position limit in all index futures contracts on a particular underlying

index shall be Rs. 250 Crore or 15 % of the total open interest of the market

in index futures, whichever is higher, per exchange.



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FIIs shall take exposure in equity index derivatives subject to the following

limits:

Short positions in index derivatives (short futures, short calls and

long puts) not exceeding (in notional value) the FIIs holding of

stocks.

Long positions in index derivatives (long futures, long calls and

short puts) not exceeding (in notional value) the FIIs holding of

cash, government securities, T-Bills and similar instruments.

FII Position Limits in Interest rate derivative contracts

At the level of the FII

The notional value of gross open position of a FII in exchange traded

interest rate derivative contracts shall be US $ 100 million.

FII may take exposure in exchange traded in interest rate derivative

contracts to the extent of the book value of their cash market

exposure in Government Securities.

At the level of the sub-account

The position limits for a Sub-account in near month exchange traded

interest rate derivative contracts shall be higher of:

Rs. 100 Cr or



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15% of total open interest in the market in exchange traded interest

rate derivative contracts.

PARTICIPATORY NOTES

a) FII/sub-account who issue/renew/cancel/redeem PNs, require to report on

Monthly basis. The report should reach SEBI by the 7th day of the following

month.

b) The FII/sub-account merely investing/subscribing in/to the Participatory

Notes/Access Products/Offshore Derivative Instruments or any such type ofinstruments/securities with underlying Indian market securities are required to

report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).

c) FIIs/sub-accounts who do not issue PNs but have trades/holds Indian

securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec)

require to submit 'Nil' undertaking on a quarterly basis.

FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings inIndian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-

Dec): No reports required for that reporting quarter

INDIA: TURNED CRISIS INTO OPPORTUNITY

India's economic managers and particularly the Reserve Bank of India

(RBI) take considerable pride in having protected India from Asia's financial crisis

in 1997-98. Although India did experience a period of slow growth in the years

that followed that crisis, the basic financial machinery of the country remained

relatively robust, providing a solid foundation for the much more rapid growth that

has taken place this decade.



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In common with its East Asian neighbors, India is grappling once again

with many of the same challenges that the region faced a decade ago, creating

difficult choices for economic and financial policy. The broad goal of India's

policy is to try to ensure that any reduction in India's growth is temporary, so thatthe economy can return quickly to a nine per cent growth rate.

In charting its course, the Government is juggling multiple considerations:

the state of the domestic business cycle; ensuring financing for the balance of

payments deficit; the sharp shift in the availability of global risk capital for

financing Indian investment; and the slowdown in growth in the world's rich

economies.

After three years of buoyant, investment-led growth, the Indian economy

started to slow late last year (2007). This growth slowdown was initially

welcomed by the RBI, which had been gradually tightening monetary policy

(since 2004) in a fight against inflation.

Price pressures were further exacerbated by the sharp rise in commodity

prices late last year and early this year. The net effect has been partially to reverse

the measured (but inadequate) progress toward fiscal consolidation, as well as to

increase the current account deficit in the balance of payments.

The political cycle is at an awkward point. Parliamentary elections are due

by next summer, and there is considerable uncertainty as to the government that is

to follow. India continues to suffer a series of terrorist incidents in its larger cities,

and the political and economic instability in Pakistan adds another layer of

uncertainty.



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Taking economic and political pressures together, it is perhaps not

surprising that, for many Indians the present moment is compared less with 1997

than with 1990-91. That was the year when India suffered a major external

payments crisis and was obliged to apply to the IMF for assistance. Thanks,however, to inspired political and economic leadership at that time, that payments

crisis was turned into an opportunity for major structural reform from which India

continues to benefit till this day.

The interesting question is whether a similar opportunity can be created

again. Policy until late August operated on a business-as-usual basis. Even though

the financial crisis had been underway for almost a year, policy action was basedon the assumption that India could remain largely unscathed.

Government attitudes changed sharply in September. Notwithstanding the

generally sound domestic financial position of India's commercial banks, bank

liquidity came under strain as banks' overseas subsidiaries found their sources of

wholesale finance withdrawn.

This effect was compounded by the intensified sell-off by foreign investors

in domestic equity markets and the repatriation of funds to meet liquidity calls

abroad.

Over the course of October, the RBI has sharply reversed course on the two

key instruments at its disposal: the cash-reserve ratio (that is, reserve

requirements) that banks are required to hold in their accounts with the RBI; and

the overnight secured lending rate at which the RBI lends to banks.

India's policymakers have both the experience and the tools to ride out the

present storm. They will be helped by India's lower integration with world trade

and finance, and by a variety of institutional features.



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Yet by itself this is not enough: the larger challenge will be, as in 1991, to

use this crisis also to resume the momentum of reforms that have largely stalled.

Of this there is as yet little sign.

FIIs INDIAN STOCK MARKET

A major development in our country post 1991 has been liberalization of

the financial sector, especially that of capital markets. Our country today has one

of the most prominent and followed stock exchanges in the world. Further, India

has also been consistently gaining prominence in various international forums,

though we still have a long way to go.

Developing countries like India are generally capital scarce. This is because

levels of income are lower in comparison to other developed countries, which in

turn means savings and investments are also lower. So how do developing nations

get out of such a situation? Simple! They borrow money, like we all do when we

need to buy a house or a car. Countries can thus invest this borrowed money in

various social and physical infrastructures; earn a return on them which helps them

pay off their debt, and simultaneously propel the country to a higher growth

trajectory.

However, there is another way in which a country can attract foreign

money. This is by way of Foreign Direct Investment (FDI) of Portfolio Investment

(better known as Institutional Investment). The difference between the two is

subtle.FDI is investment made to acquire lasting interest in enterprises operating

outside of the economy of the investor. Examples of FDI would include POSCO

setting up a steel plant in Orissa (in-bound FDI); Tata buying Arcelor (out-bound

FDI) and so on.



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On the other hand, FII is used to denote an investor, who invests money in

the financial markets of a country different from the one in which that

investor is incorporated. So, if you as an Indian decide to invest in the US stockmarkets, it is an out-bound foreign institutional investment. Similarly, suppose a

rich American millionaire invests in the Indian stock markets, it would be termed

as in-ward FII.

FIIs remained net buyers which implies that foreign investors poured more

money into the stock market than they took out, which is generally seen as a

positive development as far as our economy is concerned.

The Sensex soared 408 points reaching a 32-month high, as foreign

institutions poured in more than Rs. 2,500 crore, according to provisional data.

The benchmark index closed at 19,208.33, up 2.1 per cent from its previous

close. The Nifty closed at 5,760, up 2.13 per cent.

The strong performance was led by RIL and the entire banking sector.

Bank stocks were at their all-time high with SBI, India's largest bank,

hitting a peak of Rs. 3,148.55 on the NSE.

According to analysts, the gains made by stocks over the last few trading

sessions have been primarily liquidity driven as is evident from the heavy FII

inflows.

Domestic institutions, which were net sellers for Rs 960 crore, and retail

investors, who sold for a net of Rs 219 crore (on the BSE), took advantage of the

highs and booked profits. It was fantastic opportunity for retail investors like us to

sell and especially for those who had bought at April 2009 levels.

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According to the data certain by the Securities and Exchange Board of

India (SEBI), the FII investments in equities as on March 17, 2009 stood at US$

50950.20 million and in debts, equaled US$ 6541.50 million at exchange rate of 1USD = 40.34 INR. As per SEBI, number of register FIIs stand at 1626 and

number of registered sub-accounts stood at 4972 as on March 17, 2009.

Standard Chartered Bank got the highest bids of US$ 1.05 billion, followed

by Barclays Bank US$ 998.81 million, Kotak Mahindra UK US$ 818.86 million

and Deutsche Bank International Asia US$ 700.14 million, and JP Morgan

Chase Bank, US$ 532.5 million. The bids had to be executed in the next 45 days.

This bidding should beginning a sound FII investment trend in the near future, as

the US markets continue to weaken and yields of Indian public sector units (PSU)

and corporate debt papers remain eye-catching. FIIs will invest in eye-catching

PSU bonds floated by quasi-government entities like Power Finance

Corporation and Rural Electrification Corporation.

Investment banks (I-banks) are now looking at minor venture capital deals

in the US$ 2 million US$ 7 million range. I-banks are now willing to work on

poorer margins. Venture capital firms say the number of deals they are getting

from i-bankers currently has gone up considerably.

The mutual fund industry consists of 35 fund houses. To a certain extent

unlike in 2007 and 2008, when real estate and IT and ITES sectors enjoyed most

of the concentration, 2009 is witnessing a broad-basing of sectors on the PE radar.

Investments in sectors such as healthcare, education, consumer goods and

infrastructure are expected to be more attractive, given their relatively strong

domestic demand, even as export-oriented businesses look blow of recession in



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US and Europe. Funds are also progressively buying more stakes in agro-based

companies.

IMPACT OF FII ON NATION

Well, thats because we need to look beyond the numbers! In any kind of

market, financial or real, investor sentiment and psychology play a crucial role.

This is something that just cannot be captured in a few numbers. Now an in-depth

explanation of investor psychology is not possible here, but I can give a few

examples of it. For instance, when the stock markets rise, they just seem to be

rising (as you may have observed recently)! Experts and academicians have

studied the behavior of investors, and found that frenzy and greed drive investors

during a bull run, and especially when a bull run is at its full momentum, investors

tend to follow the band-wagon and overlook economic fundamentals while

investing. In fact, stock market crashes too occur in similar ways. One major

investor may begin selling his stocks suddenly. Looking at him, others may panic,

and they too follow suit. Such panic spreads like wild fire in the markets, and

ultimately leads to a major crash.



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It isbecause of the volatile nature of investors sentiments that FIIs are tracked so

closely. It would not be prudent to drive away foreign investors from investing in

our country. I had mentioned the importance of foreign capital in the context of a

developing economy, and that isprecisely why the government has been so keenon liberalizing the external financial sector since 1991. If one foreign investor has

had a good experience investing in our country, it builds up our reputation in the

international community, and encourages more foreign investors to invest in our

economy. However, a crisis of any kind will create panic among foreign investors

as well, and regaining their trust and confidence in our economy will entail

another mammoth task!

FII Growth Prospect in India

More and more foreign institutional investors (FIIs) are coming to India. Almost

everyday you have a new FII setting up shop in India. It doesnt seem the party

(Bombay Stock Exchanges Sensitive Index) is going to stop at 14,000 levels -

Head of Investor Relations with an FMCG firm.

Four years back if you had attended an investment conference organized by

leading brokerage firms like DSP Merrill Lynch, JM Morgan Stanley or Kotak

Securities, you would be lucky to find 20 foreign institutional investors (FIIs).

This year, more than 170 FIIs participated in just two conferences organized by

DSP and Morgan Stanley that were held in Bangalore and Goa in the second week

of February.

In fact, JM Morgan Stanley saw participation from foreign investors double to 320

this year, with 200 people coming from overseas. "Every year, we see new



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investor, which explains how seriously people are looking at India. Earlier,

investors came largely from Asia and the US. Now, they also come from places

like Hong Kong, London and Japan," said a senior manager with a brokerage firm,

who didnt wish to be identified.

Advantages of FIIs in Indian Markets

FIIs are contributing to the foreign exchange inflow as the funds from multilateral

finance institutions and FDI are insufficient, says Abhijit Roy

THE RECENT spat over the tax authorities issuing notices to foreign institutional

investors (FIIs) which take advantage under the Indo-Mauritius Bouble Taxation

Avoidance Agreement, has once again drawn attention to the role that FII

investment is playing in the capital markets in India. It endeavors to place the

overall picture in perspective. The Union Government allowed the entry of FIIs in

order to encourage the capital market and attract foreign funds to India. Today,

FIIs are permitted to invest in all securities traded on the primary and secondary

markets, including equity shares and other securities listed or to be listed on the

stock exchanges. The original guidelines were issued in September 1992.

Subsequently, the Securities and Exchange Board of India (SEBI) notified the

SEBI (Foreign Institutional Investors) Regulations.

FII INFLOW

Institutional and corporate investment in any market is usually a good sign for

retail investors to follow when looking for investment opportunities abroad.

Especially now, with stories of resurgent markets and strengthening indicators

doing the rounds along with cautionary lists of risk factors. India is a good case in

point. We examine the flow of foreign funds into India for a better idea of which

way the winds are blowing.



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Data from Indias central bank, the Reserve Bank of India (RBI), shows

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