FDI & FII

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Understanding the Terms

FOREIGN DIRECT MARKET (FDI): - This category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. FOREIGN INSTITUTIONAL INVESTOR (FII):- An investor or investment fund that is from of or registered in a country outside of the one in which it is currently investing. Foreign institutional

The Basic Differences

FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

The Basic Differences

FDI FII FII is when a foreign company buys equity in any company through stock

FDI is when a foreign company brings into company capital a or

Contd.

FDIis FII involves mostly in direct the short term production investment activityin mostly and is long term in financial nature. market.

It does enables nota

Modes of FDI
1) By Direction Inward Outward 2) By Target Mergers and Acquisitions Horizontal FDI Vertical FDI 3 )By Motive

Resource-Seeking Market-Seeking Efficiency-Seeking

Factors Affecting FDI

Financial incentives (Funds from local Government)

Fiscal incentives (Exemption from import duties) Indirect incentives (Provides land and other resources)

Political stability Market potential & accessibility Large economy Market size

FDI in India

SHARE OF TOP INVESTING COUNTRIES FDI INFLOWS (US$ Mn.)

Rank Country Total 2000 to % of 2009 Total of all Countries 1. 2. 3. 4. 5. 5. 6. 7. Mauritius Singapore U.S.A U.K Netherlands Cyprus Germany France 39,379 8,071 6,508 5,289 3,701 2,579 2,379 1,233 44 9 7 6 4 3 3 1

Share of countries

Investing in India Entry Routes

Investing in India

Automatic Route

Prior Permission (FIPB)

By exception Prior Government Approval needed Decision generally Within 4-6 weeks

General rule No prior permission required

Only information to the Reserve Bank of India within 15 days of inflow/ Issue of shares

FDI Limit in Different Sector

Sector/Activity Airports Construction Development Petroleum & Natural Gas (b) Refining Other than Refining Telecommunication Basic and cellular;STD/ISD 74% Automatic up to 49% Automatic 26% (For 100% ( companies) 100% PSUs)FIPB PrivateAutomatic Automatic FDI Cap/Equity 100% 100% Entry Route Automatic Automatic

Manufacture of telecom 100% equipment Power ( Except Atomic energy); regulations transmission, distribution and Power

Sectors attracting highest FDI Equity Inflows

Ranks Sector 200607 (AprMar)
SERVICES SECTOR (fin& nonfinancial) 21,047 (4,664)

200708 (AprMar)

200708 (AprMar)
28,411 (6,116)

200708 (AprMar)
16,566 (3,438)

Cum % of Inflows total Till Nov09

Inflows

1.

26,589 (6,615)

101,019 (22,687)

22 %

2.

3.

COMPUT. SOFT & HARD. TELE COMMUNI CATIONS HOUSING & REAL ESTATE

11,786 (2,614) 2,155 (478)

5,623 (1,410) 5,103 (1,261)

7,329 (1,677) 11,727 (2,558)

2,763 (575) 10,811 (2,223)

42,259 (9,529) 39,179 (8,600)

9%

8%

4.

2,121 (467)

8,749 (2,179)

12,621 (2,801)

10,565 (2,189)

34,348 (7,701)

7%

Advantages of FDI

Economic growth Trade Employment and skill levels Technology diffusion and knowledge transfer Linkages and spillover to domestic firms Improved technology. Management expertise. Access to international markets

Prohibited Sectors For FDI

Gambling and betting Lottery Business Atomic Energy Retail Trading Agricultural or plantation activities of Agriculture

Negative effects of FDI

Targeting tax bottom where it will lead? Form of FDI which one? Government policy pressures will they or wont they? Employment opportunities really? Foreign exchange strength to what extent? FDI concessions seemed to be

Advantages of FDI How far? How true? How realistic?

Acts as an attractive investing anchor and a tool of development Acts as source of funding for third world countries Foreign investors increase tax revenue and treasury FDI improves competitiveness and stimulates local industries FDI creates new enterprises, expands markets and

Foreign Institutional Investor

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,

Entities / funds eligible to get registered as FII:

Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks Endowments Foundations Charitable Trusts / Charitable Societies

Parameters on which SEBI decides FII applicants eligibility

Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year)

whether the applicant is registered with and regulated by an appropriate Foreign Regulatory

Authority in the same capacity in which the application is filed with SEBI

Indian stock Market

A statistical overview

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. As per 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 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

A statistical overview

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 percentage of 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 is expected to receive more

Key Points
Foreign Institutional Investors can individually purchase up to 10% and collectively up to 24% of the paid up share capital of any company. This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing Board or shareholder resolution. FIIs can purchase shares through open offer/ private placement/ stock exchange. shares purchased by FII through stock exchange cant be sold through a private arrangement.

Government Initiatives

The Securities and Exchange Board of India (SEBI), in January 2010, allowed equity investors to lend and borrow shares for 12 months compared with the current limit of one month. The new norms will also allow a lender or a borrower to close his position before the agreed-upon expiry date. The Reserve Bank of India (RBI) has ruled that foreign VC funds will have to provide their financial statements for regulatory approval to invest in India.

Government Initiatives

According to a SEBI circular dated June 29, 2010, FIIs will now have to disclose information on Indian securities lent by them to overseas entities (for the purpose of short selling) on a weekly rather than a daily basis. Government increased the current limit of Fll investment in Government Securities by US$ 5 billion. It has been decided that above incremental limits, shall be allocated to the market participants through bidding process and first come first served process.

Positives and Negatives of FII

Advantages Disadvantages Problem inflation of

Unavailability of Debt Corporate

Reduces flexibility of Policy makers

Increase Forex Reserve

Increase

Hot Money

Sources

Prof. James Petras, The Pretensions of Neoliberalism, Binghamtom University Prof. Jayati Ghosh, Jawaharlal Nehru University, Article on Frontline David Woodward, The next crisis? Direct and Equity Investment in Developing Countries.