What is FDI and FII- 2003 Project

A STUDY ON ROLE OF FDI & FII ON

BANKING & INSURANCE SECTOR

TABLE OF CONTENTS

SR.NO. CHAPTERIZATION. PAGE NO.

1 EXECUTIVE SUMMARY.

1.1- RESEARCH METHODOLOGY

1.2-LITERATURE REVIEW

1.3-LIMITATIONS OF THE STUDY

6

11

14

17

2 FOREIGN INVESTMENT

2.1- INTRODUCTION

2.2-BENEFITS AND COST

2.3-CALCULATION OF TOTAL FOREIGN INVESTMENT

2.4- FOREIGN INVESTMENT POLICY

2.5- PORTFOLIO INVESTMENT BY FOREIGN SOURCES

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18

20

22

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3 FOREIGN DIRECT INVESTMENT.

3.1- INTRODUCTION

3.2- TYPES

35

35

37

1

3.3- METHODS FOR INVESTMENT

3.4- PROCEDURE FOR FDI LICENSE

3.5- PROCEDURE FOR GOVERNMENT APPROVAL

3.6- FACT SHEET OF FDI

3.7- ROLE OF FDI IN FINANCIAL SECTOR

3.8- IMPORTANCE OF FDI TO DEVELOPING COUNTRIES AS A MEANS OF FINANCE

3.9. INVESTMENT SCENARIO

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40

42

45

46

50

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4 FOREIGN INSTITUTIONAL INVESTOR

4.1- INTRODUCTION

4.2- TYPES

4.3-METHODS FOR INVESTMENT

4.4- IMPORTANT CONCEPTS

4.5- REGISTRATION PROCEDURE

4.6- DERIVATIVE POSITION LIMITS

4.7- POLICIES

4.8- INDIA- 2008 GLOBAL FINANCIAL CRISIS

4.9- INDIA- TURNED CRISIS INTO OPPORTUNITY

4.10- FII IN INDIAN STOCK MARKET

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55

57

57

59

60

63

67

70

72

75

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4.11- FII ACTIVITY FOR THE YEAR

4.12- IMPACT ON NATION

4.13- TRENDS

4.14- INVESTMENT SCENARIO IN INDIA

4.15- ADVANTAGES AND DISADVANTAGES

4.16- FINANCIAL STABILTY AND BETTER CAPITAL

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94

100

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105

5 BANKING AND INSURANCE SECTOR OF INDIA

5.1- FDI IN BANKING

5.2- FII IN INSURANCE

5.3- FDI IN INSURANCE

5.4- FII IN INSURANCE

5.5- FLOW OF FDI OVER THE GLOBE

5.6- PRESENT SCENARIO OF BANKING AND INSURANCE SECTOR

5.7 ASSET MANAGEMENT IN BANKING SECTOR

5.8- ASSET MANAGEMENT IN INSURANCE SECTOR

5.9- THE IMF STUDY REPORT

5.10- RELATIONSHIP BETWEEN FDI AND FII

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108

110

117

118

119

122

123

127

128

129

3

5.11 FIGURES FOR TRADING ACTIVITY137

6 DATA INTERPRETATION AND ANALYSIS 141

7 CONCLUSION 162

8 BIBLIOGRAPGHY 165

ANNEXURE

4

LIST OF ABBREVIATIONS

ABBREVIATIONS FULL FORM

ADR American Depository Receipt

AUM Assets Under Management

BOA Board of Approval

DIPP Department of Industrial Policy and Promotion

DTC Direct Tax Code

EME Emerging Market Economics

ECB External Commercial Borrowing

FIPB Foreign Investment Promotion Board

FSFDI Financial Sector Foreign Direct Investment

GDR Global Depository Receipt

NSD Non Resident Deposits

OCB Overseas Corporate Body

QE Quantitative Easing

QIP Qualified Institutional Placements

5

1. EXECUTIVE SUMMARY

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 control over its foreign

affiliate. The UN defines control in this case as owning 10% or more of

6

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 FII’s 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

7

effect on the back of the FDI because 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.

8

A capital deficient country like India would need to balance the

distribution of foreign liabilities between FDI, FII and debt while trying

to attract foreign capital to supplement domestic savings. 

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 in transfer 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

OBJECTIVES

To examines 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

9

To determine the important factors which motivates Banking

and Insurance Sector to pursue FDI and FII

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

1.1- RESEARCH METHODOLOGY

Research in common refers to a search for knowledge. Research

can also be defined as a scientific and systematic search for

pertinent information on a specific topic. It is usually an art of

scientific investigation. The purpose of research is to discover

answer to question through the application of scientific procedures.

The main aim of research is find out the truth which is hidden and

which has not been discovered as yet.

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.

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The basic task of research is to generate accurate information

which can be used in for decision making. The methodology of any

survey depends upon its nature, its scope and availability of

resources. This research work is a combination of data collected

both from secondary data as well as primary data in the following

ways.

First Phase is the collection of Secondary Data:

This involves the collection of Secondary data using internet and

internal sources for comparison of role of FDI and FII in various

financial sectors in the market.

Second Phase is Collection of Primary Data and Analysis:

After collecting the Secondary data the next phase will be

collection of primary data using Questionnaires. The questionnaire

will be filled by around 100 employees of Mumbai and Navi

Mumbai. The sample will consist of employees working in Bank,

Insurance and Broking Firm to know their financial requirements.

RESEARCH DESIGN

Non Probability

The non –probability respondents have been researched by

selecting the employees working in Bank, Insurance and Broking

Firm

Exploratory and Descriptive Research

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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

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

Mumbai and Navi Mumbai 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.

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Sampling Area

The area of the research will be Mumbai and Navi Mumbai.

1.2- LITERATURE REVIEW

Indian Financial System by M Y Khan discusses the meaning of finance

and Indian Financial System and focus on the financial markets, financial

intermediaries and financial instruments. In this respect providing or

securing finance by itself is a distinct activity or function, which results in

Financial Management. A financial system or financial sector functions

as an intermediary and facilitates the flow of funds from the areas of

surplus to the areas of deficit.  A Financial System is a composition of

various institutions, markets, regulations and laws, practices, money

manager, analysts, transactions and claims and liabilities

.

Research Methodology by C R Kothari provides the basic tenets of

methodological research so that researchers may become familiar with

the art of using research methods and techniques

13

Wealth Management by Arindam Banerjee describes each type of market,

it emphasizes on the securities traded in that market and how financial

institutions participate in it, while descriptions of financial institutions

focus on their management, performance, regulatory aspects, use of

financial markets, and sources and uses of funds. Following the

introduction of key financial markets and institutions, the book explores

the functions of the Federal Reserve System, the major debt security

markets, equity security markets, and the derivative security market.

Foreign direct investment in India is the catalyst to economic growth in

developing countries. Countries should attract FDI for those areas in

which they have a competitive edge. This book is a lively compilation of

articles, dealing with this concept, trends and strategies of FDI in India

A significant improvement has taken place in India relating to the flow of

foreign capital in the post-economic reforms era. Foreign Institutional

Investors (FIIs) investments in trade and industrial segments have

particularly increased. There has been a consistent upsurge in FII since

2002-2003 and they have started playing a significant role in the Indian

capital market. In the international context, with the increasing global

significance of institutional investors and their portfolio managers,

common standards set within well-defined parameters are clearly on the

agenda – convergence is the name of the game. The Indian market is

driven by global decisions, which in turn, are determined by speculative

activities of key investors. Equities have been converted into a day-

trading market, which makes markets highly volatile. The situation calls

for appropriate measures to reduce the influence of these investors in

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order to stabilize the economy and thereby, its growth. This book

attempts to capture the various perspectives of FIIs in the contemporary

economies of the world. In the Indian scenario, it focuses on the current

trends of FIIs, their impact on Indian economy, the effect on the Indian

stock markets, and the regulatory framework pertaining to FIIs. It also

provides an insight into the global perspectives of FIIs with reference to

select countries. It is hoped that readers find the book informative and

resourceful

INTERNET SITES

www.rbi.org.in/ home.aspx

www.insurance.com

www.banks.com

www.bseindia.com

www. on-line trading.com

www.nseindia.com

www.livemint.com

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1.3- LIMITATION 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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2. FOREIGN INVESTMENT

2.1- 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

financial assets 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 over management (a 10 percent or

greater position is sometimes considered sufficient). Foreign investment

in the United States grew steadily during the 1970s, but experienced a

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surge during the middle and late 1980s. The high levels of foreign

investment led to concerns about a loss of control over domestic

economic 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.

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2.2-BENEFITS AND COSTS- FOREIGN INVESTMENT

The benefits motivating foreign direct investment are complex and

usually firm-specific. A primary motivation is the exploitation

of oligopoly (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 possibly large markets may

produce economies of scale. 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 to economic 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

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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 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

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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 betting, retail trading (except single brand

product retailing, Nidhi company etc.

2.3-CALCULATION OF TOTAL FOREIGN

INVESTMENT

In order to enable determination of total foreign investment in Indian

Companies, the FDI policy has detailed out the calculation of total

foreign investment, both direct and indirect in an Indian company, at

every stage of investment.

For direct foreign investment, all investment directly by a non-resident

entity into the Indian company would be counted towards foreign

investment.

For calculation of indirect foreign investment, foreign investment is an

Indian company shall include all types of foreign investment, namely

FDI; investment by FII’s; NRI’s, ADR’s; GDR’s; foreign currency

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convertible bonds (FCCB’s); fully, compulsorily and mandatory

convertible preference shares/convertible debentures.

Foreign investment through the investing Indian company, ‘owned and

controlled’ by resident Indian citizens and / or Indian companies which

are owned and controlled by resident Indian citizens, would not be

considered for calculation of the indirect foreign investment in the Indian

company. Therefore, both the ownership and control conditions are to be

satisfied.

The policy has defined the terms “owned” and “controlled”. A company

is considered as: “owned” by resident Indian citizens if more than 50% of

the equity interest in it is beneficially owned by resident Indian citizens

and/or Indian companies which are owned and controlled ultimately by

resident Indian citizens; and “controlled” by resident Indian, if the

resident Indian citizens and Indian companies, which are owned and

controlled by resident Indian citizens, have the power to appoint a

majority of its directors.

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Conversely, an Indian company is considered as: “owned” by ‘non

resident entities’, if more than 50% of the equity interest in it is

beneficially owned by non-residents; and “controlled” by ‘non resident

entities’, if non-residents have the power to appoint a majority of its

directors.

If the investing Indian company is owned or controlled by ‘non resident

entities’, the entire investment by investing Indian company into the

subject Indian Company would be considered as indirect foreign

investment.

An exception to above has been provided which states that indirect

foreign investment in wholly owned subsidiaries of operating-cum-

investing/investing companies will be limited to any foreign investment

in the operating-cum-investing/ investing company.

Further, there are additional conditions specified which also needs to be

complied.

The policy and the methodology would not be applicable for determining

the total foreign investment in sectors governed specifically under any

statutes or rules there under such as the insurance sector.

2.4- FOREIGN INVESTMENT POLICY

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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.

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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.

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.

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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 315 224 559

2004-2005 586 3567 4153

2005-2006 1314 3824 5138

2006-2007 2133 2748 4881

2007-2008 2696 3312 6008

2008-2009 3197 1828 5025

2008-2009

(April- Dec)

2511 1748 4253

2009-2010

(April- Dec)

1562 -682 880

Source: Economic Times

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Foreign Direct Investment: Actual Flows vs. Approvals (U.S

million)

Year Approvals

in Rs

(crores)

Approvals

in US $

million

Actual

Inflows

in Rs

(crores)

Actual

Inflows

in US $

million

Actual

Inflows as

% of

Approvals

(US $

million)

2002 739 325 351 155 47.7

2003 5256 1781 675 233 13.1

2004 1189 3559 1786 574 16.1

2005 13590 4332 3009 958 22.1

2006 37489 11245 6720 2100 18.7

2007 39453 11142 8431 2383 21.4

2008 57149 15752 12085 3330 21.1

2009 25103 6132 8433 2073 33.8

TOTAL 189968 54268 41490 11806 21.7

Source: Reserve Bank of India

Foreign Direct Investment (FDI) inflows to developing countries are

estimated to have gone up to U.S.$ 149 billion in 2009 from U.S.$ 130

billion in 2008. India’s share of global FDI flows raised from 1.8 per cent

in 2008 to 2.2 per cent in 2009. On the other hand, India’s share in net

portfolio investment flows to the developing countries declined to 5.1 per

cent in 2008 after increasing to 8.7 per cent in 2009.

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FDI in India in 2008- 2009 was lower at U.S.$ 5,025 million compared to

U.S.$ 6,008 million in 2008-2009 because of a decline in portfolio

investment as shown in the table. Although foreign direct investment

(FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 2008-2009

to U.S.$ 3,197 million in 2008- 2009, portfolio investment declined from

U.S.$ 3,312 million in 2007-2008 to U.S.$ 1,828 million in 2008- 2009.

This decline in portfolio investment is mainly attributable to the

contagion from the East Asian crisis, which adversely affected capital

flows to all emerging markets.

International developments continue to affect capital flows into India in

2009-2010 as well. The provisional estimate of total foreign investment at

U.S.$ 880 million during April-December, 2009 was sharply lower

compared to the inflow of U.S.$ 4253 million during the corresponding

period in the previous year. Although FDI flows were weaker, this overall

decline in capital flows was mainly attributable to a net outflow in

portfolio investment of U.S.$ 682 million during April-December, 2009

as against an inflow of U.S.$ 1742 million during the same period in

2008. Trends in approvals and actual inflows of foreign direct investment

are shown in Table below.

Mauritius, as in the previous two years, was the dominant source of FDI

inflows in 2008- 2009. U.S.A. and S. Korea were, respectively, the

second and third largest sources of FDI. The striking feature was that S.

Korea increased its flow of investment in India from a meager U.S.$ 6.3

million in 2007-2008 (0.2 per cent of total FDI) to U.S.$ 333.1 million in

2008-2009 (10.4 per cent share).

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On the sect oral side, although the engineering industry witnessed a

decline in inflows in 2008-2009, it remained an attractive area for FDI,

being the second largest recipient after electronics & electrical equipment

2.5-PORTFOLIO INVESTMENT BY FOREIGN SOURCES

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 with an 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

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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

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 INVESTMENT—FIIs

FII’s 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 FII’s in respect of their fresh equity investments

in India. Moreover, transactions among FII’s 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

30

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.$ 3,804

million. 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 RIB’s) 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 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 early 2008.

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 of both 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

31

features of Rib’s 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. 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 this

scheme, 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-à-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

32

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.

33

3. FOREIGN DIRECT INVESTMENT (FDI)

3.1-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

corporation’s 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.

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

34

foreign direct investment that is actually long-term management control

as opposed to direct investment in buildings 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 world’s 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.

35

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

Portfolio Investment (Source: Economic Times)

3.2- Types of Foreign Direct   Investment

FDI’s can be broadly classified into two types: outward FDI’s and inward

FDI’s. 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 FDI’s. These include

interest loans, tax breaks, grants, subsidies, and the removal of

restrictions and limitations. Factors detrimental to the growth of FDI’s

36

include necessities of differential performance and limitations related

with ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign Direct

Investment takes place when a multinational corporation owns

some shares 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 or unincorporated entity;

A public company or private company;

37

A group of related enterprises;

A government body;

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

Any combination of the above.

3.3-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 or company

By acquiring shares in an associated enterprise

Through a merger or an acquisition of an unrelated enterprise

Participating in an equity joint venture with another investor or

enterprise

Foreign Direct Investment Incentives May Take The

Following Forms:

Low corporate tax and income 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

38

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)

3.4-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 foreign equity. For existing companies with an expansion

program, the additional requirements are given below

39

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.

3.5-PROCEDURE FOR GOVERNMENT APPROVAL

40

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 not fulfill 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 (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

41

approved by the Finance Minister. Projects with a total investment

exceeding Rs.6 billion are submitted to the Cabinet Committee 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 EOU’s

Applications in the prescribed form for 100 percent EOU’s should be

submitted to the Development Commissioners (DC’s) of the Export

Processing Zones (EPZ’s) 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.

Procedure for Automatic Approval for EOU’s

Applications in the prescribed form for 100 percent E0Us should be

submitted to the DC’s of the EPZ’s. Wherever the proposals meet the

42

criteria for automatic approval, the DC of the EPZ would issue approval

letters within two weeks.

Procedure for Government Approval for EOU’s

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

3.6-FACT SHEET ON FOREIGN DIRECT INVESTMENT 

A. CUMULATIVE FDI EQUITY INFLOWS 

43

1. Cumulative amount of FDI inflows (from August 1991 to

December 2010) Rs. 6,25,611 crore US$ 1,42,934 million 

2. Amount of FDI inflows during 2006-2007 (from April 2000

– December 2010) Rs.565,380 crore US$ 126,329 million 

3. During Financial year 2010-2011 is Rs. 73,177 crore US$

16,039 million 

B. FDI EQUITY INFLOWS DURING FINANCIAL 

YEAR 2010-2011

1. April 2010 is 9697 crore , US $ 2179 million

2. May 2010 is 10,135 crore, US $ 2213 million

3. June 2010 is 6,429 crore, 1380 million

4. July 2010 is 8,359 crore, 1785 million

5. August 2010 is 8359 crore, US $ 1785 million

6. September 2010 is 9,754 crore, US $ 2,118 million

7. October 2010 is 6,185 crore, US $ 1,392 million

8. November 2010 is 7,328 crore, US $ 1,628 million

9. December 2010 is 9,094 crore, US $ 2014 million

10. 2010-2011 (Up to December 2010) is 73,177 crore, US $ 16,039

11. 2009-2010 (Up to December 2009) is 1, 00,281 crore,

US $ 20,867

12. %Age growth over last year (-) 27 % (-) 23 % 

3.7- ROLE OF FDI IN FINANCIAL SECTOR

BANKING

44

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

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, 1956 and 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

45

(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

Foreign Exchange Broking

Credit Card Business

Money Changing Business

Micro Credit

Rural Credit.

As per the FDI Policy, certain categories such as merchant banking or

investment advisory are also treated as NBFCs even though not under the

RBI Act.

NBFCs having FDI have to comply with the stipulated minimum

capitalization norms indicated below.

Fund Based Activities

46

FDI Amount Upfront Investment Required

51% USD 0.5 million

More than 51% but not exceeding

75%

USD 5 million

more than 75% USD 50 million of which USD 7.5

million would need to be brought

upfront and the balance in 24 months

Non-Fund Based Activities

Under the existing norms for permitted non-fund based activities, the

minimum capitalization norms have been fixed at USD 0.5 million.

100% foreign owned NBFCs bringing in at least USD 50 million are

permitted to set up step down subsidiaries without any restriction on

number of operating subsidiaries and without any additional capital

requirement. Joint Venture operating NBFCs, having up to 75% foreign

investment, are allowed to 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

47

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.

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.

3.8-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.

48

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.

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.

49

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

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%.

Here are a couple of alternatives that can be considered.

GIM invests in foreign government bonds mostly. Current distribution

rate is 5.5%.It pays distribution monthly as opposed to quarterly. This is

rather a bet that the value of the dollar is going to keep falling. For 5 year

50

total rate of return is 15% and for I year rate of return is 23%. For the bad

time currently it trades at a 2% premium to net assets. ERC is a similar

fund but is leveraged. It is selling at a discount of about 7% and currently

pays a monthly distribution of 8%. It does have a somewhat high expense

ratio though of 1.13%. BWC is an equity fund, but pays a monthly

distribution of about 8.3%. It is a newer fund and does not have much of

a track record but life to date has yielded 19% annually. It invests mainly

in foreign equities. Largest holding is Royal Dutch, followed by Petro

China. But both make up less than 3% of the total holdings. Because this

is a world equity fund, there is a good chance of capital gains. The

dividends are taxed at the favorable dividend rate rather than the full rate.

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. The same ceiling also applies in respect of

such investment in State Bank of India and its associate banks. 

3.9-Investment Scenario

In the year 2010, 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 2010, pulls together in one document all previous

51

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 mandate any prior government permission. However, the Indian

company receiving such investment would be required to intimate the

RBI of any such investment.

An analysis of the FDI inflows to India over the last year shows that

while there was an exit during the toughest time of the crisis, Oct-Dec

2008, positive flows started as early as December. The short-term

outlook, however, is negative since the performance in 2009 so far is

considerably lower when compared to the same period in the last two

years.

One notable point in the RBI data, though, is that even at the lowest

point, the funds have not gone down to pre-2003-04 levels. 2003-04 was

a noteworthy year for India since it jumped three ranks in the AT Kearny

FDI Confidence Index to become the third most preferred destination for

foreign investments, following only US and China.

The AT Kearney FDI Confidence Index tracks the impact of likely

political, economic and regulatory changes on the foreign direct

investment intentions and preferences of the leaders of the world’s

leading companies, which account for about 70 percent of the world’s

FDI flows. In 2004-05, India overtook the US to rank second, and

maintains this rank until the last report.

52

Source: Economic Times

The reasons for India’s 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.

4. FOREIGN INSTITUTIONAL INVESTOR

4.1- 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

53

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. 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. FII’s 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 FII’s 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

54

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 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 2011

4.2-Types of Financial Institutional Investor (FII)

Pension Fund

Mutual Fund

Investment Trust

Unit Trust And Unit Investment Trust

Investment Banking

Hedge Fund

Sovereign Wealth Fund

Endowment Fund

Private Equity Firms

55

Insurance Companies

4.3- 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 or company

By acquiring shares in an associated enterprise

Through a merger or an acquisition of an unrelated enterprise

Participating in an equity joint 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

Maquiladoras

Investment Financial Subsidies

Soft Loan Or Loan Guarantees

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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)

HIGHLIGHTS FOR AN INVESTOR

CLSA, HSBC, Citigroup and Merrill Lynch has been the most active

foreign investors.

Many others, including Crown Capital, Fidelity, Goldman Sachs, Morgan

Stanley, UBS, T Rowe Price International, Capital International and

ABN Amro, have taken a significant exposure to Indian equities.

4.4- 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

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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

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.

4.5-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.Foundations

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9.CharitableTrusts/CharitableSocieties

Further, following entities proposing to invest on behalf of broad

based funds, are also eligible to be registered as FII’s:

a. Asset Management Companies

b. Institutional Portfolio Managers

c. Trustees

d. Power of Attorney Holders

e.

Fee for Registration as FII

Registration Fees is US $ 5,000. Demand Draft in favor of

“Securities and Exchange Board of India” payable at New

York

Days taken for FII Registration

SEBI generally takes seven working days in granting FII registration.

Validity period of FII registration

It is valid for 5 years. After expiry of 5 years, the registration needs

to be renewed. US $ 5,000 needs to be paid for renewal of FII

registration.

100 % debts FII’s/sub-accounts, and the process for their

registration

100 % debt FII’s are debt dedicated FII’s which invest in debt

securities only. The procedure for registration of FII/sub-account,

fewer than 100% debt route is similar to that of normal funds 

Eligible for Sub-Account

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a) Institution or funds or portfolios established outside India,

whether incorporated or not.

b) Proprietary fund of FII.

c) Foreign Corporate

d) Foreign Individuals

Fee for Sub-Account Registration

Fee is US $ 1,000

OCBs / NRIs are not permitted to get registered as FII/sub-

account

For not renewing FII sub-account’s registration

The registration of the FII / Sub-account would get expired at due

date and it would not be allowed to trade in Indian securities

markets. 

Financial Instruments Available For FII Investments

a) Securities in primary and secondary markets including shares,

debentures and warrants of companies, unlisted, listed or to be

listed on a recognized stock exchange in India;

b) Units of mutual funds;

c) Dated Government Securities;

d) Derivatives traded on a recognized stock exchange

Investment limits on equity investments by FII/sub-account

a) FII, on its own behalf, shall not invest in equity more than 10%

of total issued capital of an Indian company.

b) Investment on behalf of each sub-account shall not exceed 10%

of total issued capital of an India company.

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c) For the sub-account registered under Foreign

Companies/Individual category, the investment limit is fixed at 5%

of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral

caps a prescribed by Government of India / Reserve Bank of India.

The Investment Limits On Debt Investments By FII/Sub-

Account

a) 100 % Debt Route US $ 1.75 billion

b) 70 : 30 Route US $ 0.25 billion

c) Total Limit US $ 2.00 billion

d) For corporate debt 100 % Debt Route US $1.35 billion

e) 70: 30 Route US $0.15 billion Total Limit US $1.5 billion

FDI other investment limits

a) Normal FII (70:30 Route) 100% Debt FII

b) Total investment in equity and equity related instruments shall

not be less than 70% of aggregate of all investments.100%

investment shall be made in debt security only.

4.6-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.

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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 or 15 % 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.

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 FII’s

holding of stocks.

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Long positions in index derivatives (long futures, long calls

and short puts) not exceeding (in notional value) the FII’s

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

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

interest

rate derivative contracts.

OFFSHORE DERIVATIVES/PARTICIPATORY NOTES

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FII/sub-account issue Offshore Derivatives / Participatory

Notes

Entities eligible to invest in Participatory Notes

a) Any entity incorporated in a jurisdiction that requires filing

of constitutional and/or other documents with a registrar of

companies or comparable regulatory agency or body under the

applicable companies legislation in that jurisdiction;

b) Any entity that is regulated, authorized or supervised by a

central bank, such as the Bank of England, the Federal Reserve,

the Hong Kong Monetary Authority, the Monetary Authority of

Singapore 

c) Any entity that is regulated, authorized or supervised by a

securities or futures commission, such as the Financial Services

Authority (UK), the Securities and Exchange Commission

(Sub-account), the Commodities Futures Trading Commission

(Sub-account), the Securities and Futures Commission (Hong

Kong or Taiwan), Australian Securities and Investments

Commission (Australia) or other securities or futures authority

or commission in any country, state or territory;

d) Any entity that is a member of securities or futures

exchanges such as the New York Stock Exchange (Sub-

account), London Stock Exchange (UK), Tokyo Stock

Exchange (Japan), NASD (Sub-account) 

e) Any individual or entity (such as fund, trust, collective

investment scheme, Investment Company or limited

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partnership) whose investment advisory function is managed by

an entity satisfying the criteria of (a), (b), (c) or (d) above 

PARTICIPATORY NOTES

a) FII/sub-account who issue/renew/cancel/redeem PN’s, 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 of instruments/securities with underlying Indian market

securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-

Sep and Oct-Dec).

c) FII’s/sub-accounts who do not issue PN’s 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.

FII’s/sub-accounts who do not issue PN’s and do not have trades/

holdings in Indian securities during the reporting quarter. (Jan-Mar, Apr-

Jun, Jul-Sep and Oct-Dec): No reports required for that reporting quarter

4.7- POLICY OF FII

Quantitative Easing 

Quantitative Easing is a government monetary policy occasionally used

to increase the money supply by buying government securities or other

securities from the market. Quantitative easing increases the money

supply by flooding financial institutions with capital in an effort to

promote increased lending and liquidity. Central banks tend to use

quantitative easing when interest rates have already been lowered to near

0% levels and have failed to produce the desired effect. 

65

For example, in introducing its QE program, the Bank of England bought

gilts from financial institutions, along with a smaller amount of relatively

high-quality debt issued by private companies. The banks, insurance

companies and pension funds can then use the money they have received

for lending or even to buy back more bonds from the bank. The central

bank can also lend the new money to private banks or buy assets from

banks in exchange for currency. These have the effect of depressing

interest yields on government bonds and similar investments, making it

cheaper for business to raise capital. Another side effect is that investors

will switch to other investments, such as shares, boosting their price and

thus creating the illusion of increasing wealth in the economy. 

The major risk of quantitative easing is that although more money is

floating around, there is still a fixed amount of goods for sale. This will

eventually lead to higher prices or inflation. Also Quantitative easing runs

the risk of going too far. An increase in money supply to a system has an

inflationary effect by diluting the value of a unit of currency. If

devaluation of a currency is seen externally to the country it can affect the

international credit rating of the country which in turn can lower the

likelihood of foreign investment. 

Effect of QE (II) By Federal Reserve on Indian Equity Market 

It has a very crucial effect on Indian equity markets as second

quantitative easing would yield positive results for the Indian stock

market. As we mentioned earlier, India is amongst the best performing

markets and a hot spot for FIIs to invest money. FIIs have also started

taking positions before the stock prices move up. This has helped Nifty

and Sensex to breach the level of 6000 and 20000 respectively. And now

with all the festivities coming up it is expected that this level may sustain

and we can soon see Sensex at 21k level. 

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Advantage of QE (II) 

If there is no second QE then it may force the FIIs to take the money out,

which they have already started investing in Indian stock market. This

may have adverse effect on our booming stock market which is expected

to reach 21k. Also, the earnings of Indian companies may be subdued due

to a higher base effect. If inflation stays high, RBI will be forced to raise

rates again and if a contract monetary policy is issued then that would

further worsen the situation. So it can be said that nasty global surprises

can come from anywhere in coming weeks. 

USA is also trying to pressurize china to revalue the Yuan which is right

now undervalued. China deliberately undervalues its currency by as much

as 25% to 40% to give Chinese companies an unfair trade advantage,

hurting US exports and job prospects. US lawmakers have pressed this

issue for years with little success, but it appears to be gaining momentum

now and bipartisan support, six weeks before the congressional elections

in which the high unemployment rate is the top issue. 

The proposed legislation would essentially treat China's

"undervalued" currency as an export subsidy and allow the Commerce

Department to impose countervailing duties to offset the undervaluation.

US companies applying for the duties would have to show they have been

injured by China's exchange rate practices. If this bill is passed then there

may be no need for the second quantitative easing. 

DOMESTIC POLICY

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While these trends are still in process, their effects were already being

felt. They were not the only causes for the downturn the economy has

been experiencing, but they were found to be important contributory

factors. Yet, this does not justify the argument that India's difficulties are

all imported. They have been induced by domestic policy as well.

The extent of imported difficulties would have been far less if the

Government had not increased the vulnerability of the country to external

shocks by drastically opening up the real and financial sectors. It is

disconcerting; therefore, that when faced with this crisis the Government

is not rethinking its own liberalization strategy, despite the backlash

against neo-liberalism worldwide.

By deciding to relax conditions that apply to FII investments in the vain

hope of attracting them back and by focusing on pumping liquidity into

the system rather than using public expenditure and investment to stall a

recession, it is indicating that it hopes that more of what created the

problem would help solve it.

4.8- INDIA: 2008 GLOBAL FINANCIAL CRISIS

Recent events in the global financial system have been nothing short of

seismic. Hundreds of billions, if not trillions of dollars in capital value

have been lost in stock markets. Inter-bank credit has almost frozen up.

Actual costs of borrowing have gone up (even with falling central bank

interest rates), unemployment has been rising in the major world

economies, and home foreclosures and bankruptcies are on the rise.

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This crisis is sought to be addressed by a variety of policy initiatives, the

most important aspects of which are the injection of vast amounts of

public funds into financial institutions and the provision of sovereign

guarantees on bank accounts.

But the ability to do so is limited. The budget deficit for 2008 in the US

has trebled as compared to its forecasted value and the ratio of public plus

private debt to GDP is well over 300 percent. The huge injection of funds

to stabilise the financial system will need to be financed. But the US

treasury is already stretched and, with a recession looming, prospects for

enhanced tax revenue in 2009 do not appear bright. Similar comments

apply to Europe.

So far the global financial crisis has had three major impacts on the

Indian economy: (i) the quantum of liquidity available during the first

half of FY 2008-09 is about a third lower than during the first half of FY

2007-08; (ii) with slackening external demand, export growth is expected

to slow; and (iii) Foreign Institutional Investors have withdrawn from

Indian stock markets leading to sharp falls in key indices.

India's economic growth has been rising and becoming more stable for

the past 25 years, fuelled by higher savings and investment (now over 35

percent and 36 percent of GDP respectively), the demographic dividend

of a younger, more educated labor force and accelerated total factor

productivity growth. For the past three years, the economy has grown at 9

percent giving the Indian economy considerable momentum. Second,

during the current FY trade growth has been impressive, with exports

rising 35.1 percent in dollar terms and imports rising 37.7 percent during

the period from April-August 2008. Investment has been buoyant and

FDI during 2008-09 is expected to reach US$35 billion.

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Indian banks have strong balance sheets, are well-capitalized and well

regulated. The capital adequacy ratio of every Indian bank is well above

Basel norms and those stipulated by the RBI. Not one Indian bank has

had to be rescued in the aftermath of the crisis. India has a long history of

working with public sector banks and in engineering bank rescues.

India's growth rate will slow in 2008-09. Growth during the quarter

ending June 2008 was 7.9 percent. The current consensus for the 2008-09

FY is 7.5 percent to 8 percent.

Principal reasons for this modest drop in economic growth include

A large and diversified consumption base for the Indian economy

India's trade to GDP ratio is much smaller than that of, say, China

Indian financial markets are still relatively insulated from global

financial markets. India has a healthy external balance, with high

foreign exchange reserves, low ratio of short term external debt to

GDP and less than complete capital account convertibility.

Nevertheless, that will be a significant slowdown compared to recent

experience, but it will still be robust growth. The slower growth will be

accompanied by reduced employment growth and slower poverty

reduction.

Indian policymakers have responded with measures to enhance liquidity –

primarily by reducing the cash reserve ratio and the repo rate – and

enhancing confidence. Bank guarantees, beyond those that already exist,

have been deemed unnecessary.

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In 2009-10, the world economy recovers, India grow at 9 percent or

more. If the world economy remains in recession, forecasts of Indian

growth rates are harder to make.

4.9-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.

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 that the 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.

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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.

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 based on 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,

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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.

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.

4.10-FII’s 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

73

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.

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

stock markets, 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.

74

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.

Technical analysts said the Nifty was moving in the 4300-5600 range for

a long time and Monday's "break-out" could prompt an up-move equal to

the width of the channel, that is, 1,200-1,300 points.

The so-called laggards in the benchmark indices seem to have started to

move. RIL has moved from Rs 920 to Rs 990 over the last couple of

weeks and being an index heavyweight, this gave a lot of momentum

Experts also suggested that investors should be cautious while entering at

these levels as they expect a 10-15 per cent "correction". If investor takes

75

away the 10 underperforming stocks of the Nifty-50, we can see that the

remaining 40 are already at all-time highs. With next year's valuations

also factored in, these stocks don't come cheap, and have little scope for

gains.

FII’s Importance in Stock Market

India's outstanding growth story and its booming economy have made the

country a favorite destination with foreign institutional investors (FIIs). It

has sustained to attract investment despite the Satyam non-governance

issue and the global economic infectivity impact on Indian markets.

The INSTANEX FII INDEX in India launched by Instanex Capital

Consultants Pvt. Ltd., Mumbai, tracks the price presentation of the

portfolio of listed Indian equity shares owned by FIIs. The Index

comprises of the top 15 companies by significance of FII holdings.

Reviews are conducted quarterly and companies are deleted from the

Index if they are not amongst the top 20 FII holdings. According to the

Index, in March, FIIs have increased their investing activity and out of

the 15 components, 13 showed the discriminating interest of the FII’s.

 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 1 USD = 40.34 INR. As per SEBI, number of register

FII’s stand at 1626 and number of registered sub-accounts stood at 4972

as on March 17, 2009.

 As various as 330 FII’s have registered with SEBI ever since January 31,

2008, taking the total number of FII’s in India to 1,609 as on January 31

this year. Yet the FII sub-accounts have gone up over 30 per cent to 4,938

compared with 3,795 in January last year. In reality, this year, 45 new

76

FII’s have registered with SEBI, according to statistics given by the

regulator. FII’s are from the US and Europe, in addition to this there are

also FII’s based out of Mauritius. Registered FII’s includes from those

from other countries include Canada, the UAE, Japan, Australia, Taiwan

and Singapore. Various pension funds also feature in the list of the FII’s

that have registered in 2009. Amongst them are Llyods TSB Pension

Trust, Stagecoach Group Pension Scheme and Trustees of The Mine

Workers Pension Scheme from UK. 30 new FII’s and 104 new sub-

accounts had registered until February last week in 2009.

FII holdings in Indian markets almost hit a point to US$ 88 billion on

December 2008. Ever since then, foreign institutional investors (FII’s)

have started looking at India as an attractively-valued market in spite of

the Satyam scandal. Some of the FII’s such as Citi and Macquarie have

amplified the weightage for India. This weightage helps investors come

to a decision about the markets to invest. Normally, FII’s decide their

allocations for the year in January.

Debt instruments (government securities, commercial papers,

and corporate bonds) paying attention up to US$ 426.18 million in first

11 trading sessions of 2009 from FII’s. FII’s have been discovering

investment in debt a more attractive proposition than equity.78 private

equity players anticipated to raise US$ 24 billion in 2009 for investing in

India—thrice that of last year—when 30 private equity players raised

US$ 9.2 billion. It also includes real estate funds. In the intervening time,

117 Pan-Asian private equity (PE) players—with India as focus—aim to

raise funds worth US$ 59 billion.

 PEs together with Macquarie State Bank of India Infrastructure Fund

with US$ 1,500 million, Trump Organization India Fund and Walton

77

Street Capital India Fund I with US$ 1,000 million investment each in

real estate sector are some recent notable examples.

In 2008, PE investments in India was secure to US$10 billion, but the

total amount raised for 2008 would be 2-3 times of what has been

invested. Above and beyond, India is a growth story while everywhere

else, there is recession. Previously, cash as a percentage of total assets

under management (AUM) was just above 6 % in January 2008 and rose

to 18 per cent in November 2008.

On March 16, 2009, 24 bidders were allocated investments of US$ 5.8

billion, the maximum ever investment allocation by FII’s in India as

compared to the net investment of FII’s in 2008 of US$ 2.39 billion.

From the time of January 2009, FII's net investment in debt instrument

has declined by US$ 125.4 million due to impact of the global slowdown.

As per the Securities and Exchange Board of India (SEBI), US$ 8 billion

was accessible for allocation to FII’s and their sub-accounts in an open

bidding platform.

 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.

78

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 US and Europe. Funds are

also progressively buying more stakes in agro-based companies.

Mutual fund houses have been disposable sellers in February 2009.

Nevertheless, they were bullish on some select market heavyweights such

as HDFC, Reliance Industries (RIL), Larsen and Toubro (L&T) and

Infosys during the month. The funds are looking up once again at this

time.

Previously, as per data available with the Bombay Stock Exchange, on

December 4, 2010, FII’s invested US$ 61.83 million in equities screening

confidence in the Indian stock market. At the same time, the up gradation

of India's sovereign ratings combined with the enhancement in the macro-

economic situation and growth fundamentals has led to a significant

increase in FII investments in the debt market. Total investment in the

country's debt market till November 2008 summed up to US$ 6.38 billion

as against US$ 2.80 billion by the end of November 2007.

Sectored Praxis

79

Contrary to popular belief, foreign institutional investors (FII’s) are not

the prime driving force behind the recent stock market rally. FII’s have

preferred to buy equity stakes directly from promoters through Qualified

Institutional Placements (QIP) and primary market offerings, rather than

secondary market investing for most part of 2009.

Instead, it has been the domestic institutional investors (DII’’s), including

mutual funds, banks and insurance companies, which have been the

mainstay of the secondary market this year. Net investments made by the

DII’s since the beginning of this year has been almost twice the amount

invested by the FII’s.

Data disseminated by the market regulator, Securities and Exchanges

Board of India (SEBI), show overseas investors plugging in about Rs.47,

000 crore or $9.8 billion into Indian equities in 2009. This figure (that has

become synonymous with liquidity) is often cited driving stock prices

higher.

But it needs to be remembered that not all of these funds find their way to

the secondary market since SEBI’s data include investments made into

qualified institutional placements (QIP’s), initial public offerings (IPO’s),

rights issues and so on.

FII flows into the secondary market alone, captured in the category-wise

turnover data published by the BSE, were only one-fourth of the above

number reported by SEBI.

Specific Sectors

80

Moreover, monthly FII flows were negative in six out of nine months this

year. These investors presciently bought Indian equities in April and May

in the period preceding and just after the Lok Sabha elections. They

withdrew into a shell thereafter and were net sellers in June, July and

August. During this period, domestic institutions such as mutual funds

and insurance companies powered the rally. They bought over Rs 13,000

crore of stocks in the three months from June, even as foreign investors

were net sellers.

A large portion of FII funds has been routed to the QIP issues that have

flooded the market this year. The absence of lock-in period on such

investments, speed and the ability to corner a chunk of equity at a small

discount to the market price, seem to have made QIPs popular among

overseas investors.

That FII’s preferred such placements also shows that they took a positive

view on specific sectors such as construction, infrastructure, and power,

even while retaining a cautious outlook on Indian markets as a whole.

Interestingly, even in 2008, the FII’s had ploughed in over Rs.48,000

crore into Indian equity through IPO’s, rights issues and so on, even as

they pulled out over Rs.1,00,00 crore from the secondary market.

In fact, if the secondary market investments of FII’s appear promising at

all, that is mainly on account of inflows over the past two weeks. A net

inflow of Rs. 9, 000 crore which is about 70 per cent of the inflows

received since this January came in after September 7. Inflows into the

secondary market up to September 6 stood at less that $1 billion.

FII Investment Activity in February 2011

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FII Activity is a date wise list of Gross Buy ( in Crores) and Sell ( in

Crores) investments done by Foreign Institutional Investors, their Net

Investment Positions for those dates and Cumulative Investments as on

that date in Million $ with a break up of Investments made in Equity and

Debt instruments.

Equity

4.11- FII ACTIVITY FOR THE YEAR SO FAR

MonthGross

Purchase(Cr)

GrossSale(Cr)

NetInvestment

(Cr)

CummulativeInvestment

($Mn)

January 2011 57,949.90 64,280.10 -6,330.40 -1,387.15

February 2011 37,550.90 38,742.00 -1,190.90 -261.15

Debt

DateGross

Purchase(Cr)Gross

Sale(Cr)

Net Investment(Cr

)

Cummulative Investment($Mn

)

17-Feb-11 2,288.80 2,202.80 86.10 18.97

15-Feb-11 4,594.60 4,419.00 175.60 38.70

14-Feb-11 3,127.90 2,899.50 228.40 50.19

11-Feb-11 3,252.70 3,687.10 -434.40 -94.93

10-Feb-11 3,046.20 3,891.70 -845.50 -185.49

09-Feb-11 3,692.70 3,977.40 -284.60 -62.79

08-Feb-11 3,004.40 3,536.00 -531.60 -117.12

07-Feb-11 2,757.90 2,757.20 0.70 0.14

04-Feb-11 2,575.50 2,351.10 224.40 49.17

03-Feb-11 2,669.40 2,007.60 661.80 145.04

02-Feb-11 3,087.10 3,133.20 -46.10 -10.10

01-Feb-11 3,453.70 3,879.40 -425.70 -92.93

82

FII Activity for previous years

YearGross

Purchase(Cr)

GrossSale(Cr)

NetInvestment

(Cr)

CummulativeInvestment

($Mn)

2010 765,509.90 632,461.00 133,049.50 29,320.79

2009 626,428.60 542,158.10 84,269.80 17,639.21

2008 719,079.50 772,876.10 -53,796.90 -13,335.90

2007 816,430.50 739,495.93 71,952.30 17,360.40

2006 473,610.90 437,213.90 36,396.60 7,985.20

2005 287,183.10 239,582.40 47,602.13 10,966.30

2004 185,562.10 146,791.00 38,767.40 9,398.36

2003 94,393.70 64,060.40 30,924.70 6,666.49

2002 46,454.10 42,878.10 3,576.30 772.80

2001 51,315.50 38,513.90 12,820.30 7,766.40

2000 75,313.90 68,611.10 6,703.48 1,794.90

FII Net Investments - Equity (USD Mn)

Source: SEBI

After July’s big rally, the Indian market consolidated in August. While at

one end manufacturing data points were very healthy, monsoon worries

83

and volatility in global equity

markets kept markets in check. We

believe that the markets will

remain in a consolidation mode in

the near term. Large swings in

some of the emerging markets

particularly China is also playing

on the markets.  On earnings

upgrade, as the analysts digest

better than expected economic

recovery, the street continues to

upgrade the numbers. These table clearly shows that our country

maintains growth despite the recent upgrades, there remains an upside

risk to earnings estimates. At current levels the markets are trading at

16.2X FY10E and 13.6 X FY11E earnings.

Company%

Change

Bharat PetroleumHindustan PetroleumOil and Natural Gas CorporationHCL TechnologiesTata MotorsCanara BankGodrej Consumer ProductsAsian PaintsMphasis BFLReliance Industries

108.976.631.927.321.911.29.86.96.65.9

FY2011 Earning Upgrades (KIE) (1 Month)

Company%

Change

Bharat PetroleumHindustan PetroleumHCL TechnologiesMphasis BFLOil and Natural Gas CorporationTata MotorsBGR Enery SystemsGodrej Consumer ProductsBharat Heavy ElectricalsReliance Industries

55.651.734.226.126.120.614.59.78.86.8

FY2010 Earning Upgrades (KIE)

(1 Month)

FY2010 Earning Downgrades (KIE) (1 Month)

Company % Change

Tata SteelPunj LloydTata PowerIRB InfrastructureBharat Heavy Electricals

(6.0)(6.0)(6.0)(6.0)(6.0)

84

Source: Economic Times

4.12- IMPACT OF FII ON NATION

Well, that’s 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.

85

It is because 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 is precisely why the government has been so keen on 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 doesn’t

seem the party (Bombay Stock Exchange’s 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 (FII’s). This year, more than 170 FIIs participated in just two

86

conferences organized by DSP and Morgan Stanley that were held in

Mumbai 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 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 didn’t wish to be

identified.

Advantages of FII’s 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 (FII’s) 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

87

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.

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

the total foreign funds inflow into India over the last 9 years. This data

includes foreign direct investments (FDI) as well as portfolio investments

into India.

Source: Economic Times

FII: FOLLOWING THE BULL

The Instant exchange FII Index+ tracks the performance of the top 15

equities owned by the FIIs in India.

As of Dec 31, 2008, FIIs held investments valued at over Rs. 3.8 trillion

(close to US$81 billion).  A study of the Index over the last five years

reveals an appreciation of over 102% since 2003^. [The Index started on

88

30 September 2003, with a base of 100. In USD terms, this would equate

to a base of around 2.19.

Over the shorter-term, the last two months have seen positive inflows

from the FIIs again, largely riding on the news of a stable, popular party

being elected to the Indian government. Given the trend of liberalization

and reforms that this party is known to follow, the market has

expectations of many market friendly moves, like relaxation of FII

participation in a company’s stock, disinvestment in the best performing

PSUs, and deregulation of oil prices. However, on a cautionary note,

there are reports that FIIs may book profits since valuations of the Indian

stocks have become too expensive of late.

Source: Economic Times

FII INFLOW AND THE INDIAN EQUITY MARKET

Since the liberalization in 1992-93 FII’s have played an imperative role in

shaping our Indian economy. As we are growing, we now have a

symbiotic relationship with the FII’s. The FII’s invest in our equity

89

market because we are a second most fastest growing economy and our

equity market is outperforming because FII’s are the major investors

which are attracted.

After the setback of Sub-prime crisis, Lehman brothers’ bankruptcy, and

crash in the Indian market in January 2008, two and a half years from

then on 21st September 2010 Nifty has once again crossed the 6k level

and Sensex breached 20k level. Indian equity markets are again confident

as FII’s have invested heavily in the past few weeks, specifically in

September. There are many reasons why FII’s are investing heavily in

Indian equity markets. They do so because we have the ability to produce

goods and provide services at a lower cost also the Indian companies

have tremendous growth potential inside as well outside India. The

mergers and acquisitions of the MNC’s by the Indian companies in

recent, has proved our mettle to the world. The population of India

signifies that we have never ending demand unlike developed countries

where the demand is less than the supply. The purchasing power of

Indian consumers has also increased during the past few years. 

The FII’s are also betting on a second quantitative easing (QE-II) by the

US to create jobs. Since this will mean more liquidity, global investors

and overseas exchange-traded funds are taking positions before fresh

money starts chasing stocks. India is one of the best-performing markets

and they don't want their portfolios to underperforms so obviously we are

the first choice for the FII’s to put in their money. The month of

September has brought pleasure for all the investors as FII’s have already

started investing in our equity market. 

SITUATION DURING FALL IN STOCK MARKET

90

The market may fall because of sudden withdrawal of funds by the FIIs

and also the absence of big local investors is a worry. The DIIs are taking

money out of the economy for almost 3 months now because they don’t

want to repeat the same mistakes they did in 2008. It is the time to tread

cautiously as no one wants to fall for the rosy picture created by the stock

markets. Unlike 2007-08, MF’s and insurance companies are not big

buyers this time. If FII’s sell, there will be little local support. The long

IPO pipeline can trigger selling by investors who need the money to

invest. Anecdotal evidence suggests that retail investors have not yet

entered in a big way. Also, leveraged positions in single stock futures are

lower than what they were during the previous market peak. This could

be because there is still fear settled in the market after what happened in

January 2008. 

SUPPORT THAT CAN BE GET DURING MARKET

FALL

The Indian market has clearly done exceptionally well this year. The

index is up almost 14% in local currency terms, and in US dollar terms it

is almost up by 16%. There has been a huge surge of foreign fund inflows

in the Indian equities. We have had about close to $15 billion flowing

into the Indian equities market, which is about 60% more than what we

had last year. 

REASON FOR FII IMPORTANCE IN INDIAN STOCK

MARKET 

FII’s are among the major sources of liquidity for the Indian markets. If

FII’s are investing huge amounts in the Indian stock exchanges then it

reflects their high confidence and a healthy investor sentiment for our

91

markets. But with the current global financial turmoil and a liquidity and

credit freeze in the international markets, FII’s have become net sellers

(on a day to day basis). The entry of FII’s in India has brought mixed

consequences for our markets, on one hand they have improved the

breadth and depth of Indian markets and on the other hand they have also

become the major sources of speculation in testing times like these

Eg:

4.13-Latest FII Trends and Track their Investments in India.

   Daily FII Activity

Only one-fourth of FII investments were routed to the secondary market.

Monthly inflows from FIIs were negative in six out of nine months this

year.

Domestic institutional investors put in twice the amount invested by FIIs

in 2009.

92

DATE

Data pertains to trades conducted by FIIs on and upto the previous trading

day.PURCHASES(Rs m)

SALES(Rs m)

NET INV(Rs m)

Thu, 10 Feb 30,462 38,917 (8,455)

Fri, 11 Feb 32,527 36,871 (4,344)

Mon, 14 Feb 31,279 28,995 2,284

Tue, 15 Feb 45,946 44,190 1,756

Thu, 17 Feb 22,888 22,028 860

Total 163,102 171,001 (7,899)

Contrary to popular belief, foreign institutional investors (FIIs) are not

the prime driving force behind the recent stock market rally. FIIs have

preferred to buy equity stakes directly from promoters through qualified

institutional placements (QIP) and primary market offerings, rather than

secondary market investing for most part of 2009.

Instead, it has been the domestic institutional investors (DIIs), including

mutual funds, banks and insurance companies, which have been the

mainstay of the secondary market this year. Net investments made by the

DIIs since the beginning of this year has been almost twice the amount

invested by the FIIs.

Data disseminated by the market regulator, Securities and Exchanges

Board of India (SEBI), show overseas investors ploughing in about Rs

47,000 crore or $9.8 billion into Indian equities in 2009. This figure (that

has become synonymous with liquidity) is often cited driving stock prices

higher.

But it needs to be remembered that not all of these funds find their way to

the secondary market since SEBI’s data include investments made into

qualified institutional placements (QIPs), initial public offerings (IPOs),

rights issues and so on.

FII flows into the secondary market alone, captured in the category-wise

turnover data published by the BSE, were only one-fourth of the above

number reported by SEBI.

SPECIFIC SECTORS

93

Moreover, monthly FII flows were negative in six out of nine months this

year. These investors presciently bought Indian equities in April and May

in the period preceding and just after the Lok Sabha elections. They

withdrew into a shell thereafter and were net sellers in June, July and

August. During this period, domestic institutions such as mutual funds

and insurance companies powered the rally. They bought over Rs 13,000

crore of stocks in the three months from June, even as foreign investors

were net sellers.

A large portion of FII funds has been routed to the QIP issues that have

flooded the market this year. The absence of lock-in period on such

investments, speed and the ability to corner a chunk of equity at a small

discount to the market price, seem to have made QIPs popular among

overseas investors.

That FIIs preferred such placements also shows that they took a positive

view on specific sectors such as construction, infrastructure, and power,

even while retaining a cautious outlook on Indian markets as a whole.

Interestingly, even in 2008, the FIIs had ploughed in over Rs 48,000 crore

into Indian equity through IPOs, rights issues and so on, even as they

pulled out over Rs 1,00,000 crore from the secondary market.

In fact, if the secondary market investments of FIIs appear promising at

all, that is mainly on account of inflows over the past two weeks. A net

inflow of Rs 9,000 crore which is about 70 per cent of the inflows

received since this January, came in after September 7. Inflows into the

secondary market up to September 6 stood at less that $1 billion.

Some Important Facts about the Foreign Institutional

Investment:

94

The number of registered foreign institutional investors on June

2007 has reached 1042 from 813 in 2006

US $6 billion has been invested in equities by these investors

The total amount of these investments in the Indian financial

market till June 2007 has been estimated at US $53.06 billion

The foreign institutional investors are preferring the construction

sector, banking sector and the IT companies for the investments

Most active foreign institutional investors in India are HSBC,

Merrill Lynch, Citigroup, CLSA

Falling INR leading to FII pull-out 

Statistics show a negative correlation of over 90 per cent between

the INR and USD exchange rate and the Sensex. It further says that the

INR plunged to an all-time low to breach the 51 mark on February 27

(Friday), owing to a combination of factors, including the strengthening

USD in global currency markets, increased month-end USD demand from

importers and also a weakening local economy. The stock market reacted

nervously on the said day when the INR plunged to a new low against the

USD with indices tumbling over 2 per cent intra-day. Brokers worry that

a falling INR could deter foreign funds from investing in stocks, more so

at a time when the outlook on equities is bearish.

In 2009, FIIs have net sold INR 8,000 crore worth of shares. FII selling

puts further pressure on the already-weak INR prompting many existing

investors to dump shares and deterring new foreign investors from buying

Indian shares. In January 2008, when the Sensex was 20,869, the

USD/INR parity was 39.42. By November 2008, when the parity moved

to 50.52, the Sensex was down to 8,451.

95

The newspaper quotes market watchers as saying that the next big fall in

equity indices, if any, could coincide with the strengthening of the USD.

Another market watcher maintains that a weakening INR is a threat and

he expects that the next big fall in the market, if any, will coincide with

the strengthening of the USD further. When the USD peaks, it will be a

signal of the stock markets having bottomed out and the time to start

buying stocks. An India Infoline survey conducted in the Asia-Pacific

region reveals that 85 per cent of the fund managers expect the INR to

appreciate. The appreciation is expected to be driven by the positive

swing in the current account due to the sharp fall in the price of crude oil.

Yet another analyst says that if the global economic slump continues for a

long time, FII’s may back off, triggering the next round of sell-off in the

stock markets and put more pressure on the INR.

At the macro level, all these arguments might seem tenable but then in an empirical

sense, one has to take them in with a pinch of salt. The following Table furnishes the

annual average of Sensex and the USD-INR parity as also the foreign investment

inflows received between FY 1990-91 and FY 2007-08. The statistics have been

sourced from the website of the Reserve Bank of India (RBI).

Year

BSE Sensex

(1978-79 =100)

INR-USD parity

FII

(USD mn)

1991-92 1879.51 24.4737 133

1992-93 2895.67 30.6488 559

1993-94 2898.69 31.3655 4153

96

1994-95 3974.91 31.3986 5138

1995-96 3288.68 33.4498 4892

1996-97 3469.24 35.4999 6133

1997-98 3812.86 37.1648 5385

1998-99 3294.78 42.0706 2401

1999-00 4658.63 43.3327 5181

2000-01 4269.69 45.6844 6789

2001-02 3331.95 47.6919 8151

2002-03 3206.29 48.3953 6014

2003-04 4492.19 45.9516 15699

2004-05 5740.52 44.9315 15366

2005-06 8278.55 44.2735 21453

2006-07 12277.33 45.2849 29082

2007-08 16568.89 40.2410 61830

The Table conveys certain interesting facts. Sensex remained more or less

stationary during 1992-93 and 1993-94. During this period, INR fell by

72 paisa (31.36-30.64). But investment inflows rose from USD 559

million to USD 4,153 million! Between 1993-94 and 1994-95, Sensex

97

easily rose by 1,000 points, the USD-INR parity remained more or less

constant at 31.37 level but the investment inflows rose by USD 1,000 mn

or USD 1 bn, almost (5138-4153). The very next year, vis, 1995-96,

Sensex fell by almost 700 points (3974-3288); the Indian currency lost

over INR 2 and investment inflows came down by almost USD 300

million.

The fall of the INR continued until 2002-03, when it touched 48.39.

Sensex kept pace until 1997-98. In 1998-99, Sensex took a hit; so did the

INR (from 37.16 to 42.07) and so did the investment inflows too (from

USD 5.3 bn to USD 2.4 bn) but the very next year Sensex and the

investment inflows more than made up for the fall although the INR

could not. INR continued to weaken against the greenback until 2002-03.

The phase from 2003-04 began with a bang. Sensex gained almost 1,300

points, the Indian currency gained almost INR 2 and investment inflows

registered a rise of USD 10 bn, almost! Until 2009-10, Sensex rose

rapidly; INR remained range-bound until 2006-07 and in 2009-010, the

Indian currency dramatically rose vis-a-vis the USD – it rose to 40.24

from 45.28 in one single year! All along, the investment inflows kept

rising. If INR rose sharply in 2009-010, so did the investment inflows

from USD 29 billion to USD 61.8 billion.

So what is clear from the Table is that in spite of what the market-

watchers may want to say, a fits-and-starts behavior is discernible in the

movement of INR vis-a-vis the USD. This is partly because we practice

what is called a ‘dirty float’ (where the central bank of the country

intervenes in the forex market whenever necessary to ensure that the

parity between the two currencies is in the range acceptable to it; none

knows what the ‘acceptable’ range is, except the RBI of course).

98

What market-watchers say can hold good to a great extent only in a ‘free

float’ regime (where the central bank does not intervene). Even as the

equity index improved, the INR continued its decline vis-a-vis the USD

and foreign investment inflows improved, by and large, during the period

under review. Although market-watchers say that when the USD peaks it

will be a signal of the stock markets having bottomed out what exactly is

the peak level is the question that remains unanswered! If one knew it,

one would start buying the stocks from that point of time onwards. The

market-watchers say that FII’s may back off, if the global economic

slump continues. But the Osama Bin Laden-induced slump through 9/11

(although smaller in magnitude compared to the present one) affected

India’s investment inflows only during 2002-03 when they fell to USD

6.014 billion from the USD 8.151 billion an year earlier!

4.14-INVESTMENT SCENARIO OF FII IN INDIA

Most credit companies in India are quite gung-ho about the reversal in

economic downturn as several companies are either in the process or

already underway with new projects, opening up new avenues

for investment in India. Capex plans are getting fructified with

increasing interest in making investments for capacity expansion either in

domestic or overseas markets. Credit growth is in fact, currently growing

at 15 per cent from the lower 10 per cent in October 2010. Banking

companies and the non-banking finance companies (NBFC’s) with their

newly accorded permission of banking licenses are an even more excited

lot. 

Companies from varied sectors such as glass-making, pharmaceuticals

and hospitals are demanding credit from banks with some companies

wanting to diversify and others wanting funding for backward or forward

99

integration. 

There is a major difference in the approach by companies in gathering

funds before and after the recession. Before the recession, the companies

were accumulating funds to overcome recessionary debts and

rationalization of capacity while after the recession, they are in the

expansion mode and to cater to their capacity expansion plans, are going

in for other routes of capacity expenditure (Capex). Another key route has

been the foreign direct investment (FDI) route, by which proposals for

FDI worth over US$ 216.1 million have received government approval.

The proposals include that of Zee Entertainment, Walt Disney, Max India

and Hyderabad-based Soma Highways (Toll) Projects. 

There are about 17 initial public offerings on the anvil now, with

companies gathering funds from the markets for their capacity expansion

plans. Several global majors too feel that the growth of emerging

economies including India is remarkable and most of these countries will

prosper in 2010 and beyond. 

Siemens also has plans to make India a major centre for ‘value-priced’

engineering products and would set up six new hubs in India for design,

development, production and sales of such products. Shree Sakthi Paper

Mills Ltd has announced that its expansion project is expected to be

completed by August 2010 and is being funded partly through debt funds

and partly through internal accruals. VE Commercial Vehicles on March

8 has said it will double the production capacity of its Eicher branded

products to up to 8,000 units per month in the next three years to cater to

the rising demand for its products. The investment for enhancing the

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capacity would be a part of the Rs 500-crore Capex plan for the next three

years that the company had earlier announced. 

The government too has plans of escalating capex vide the divestment

route. All accruals through divestment are being intended to be pumped

back for capacity expansion in due course. The scenario is indeed very

encouraging with banks.

Fund-raising activity gained pace by almost 65 per cent in 2010 as

compared to 2009. In real terms, 27 funds were able to raise US$ 13

billion as PE as against US$ 8 billion by 22 funds in 2009. There has also

been a more than 80 per cent growth in PE and VC investments in India:

2010 witnessed 348 deals worth US$ 8 billion, against 317 deals worth

US$ 4.4 billion in 2009, according to VCC edge data.

Indian conglomerate GMR Infrastructure is in advanced talks with private

equity firms to raise about 15 billion rupees (US$ 322 million) for its

power unit, the Economic Times reported, citing the group's chairman.

The Indian-American IT services company Patni Computer Systems is

likely to be acquired by a consortium of Apax Partners and iGate in a deal

said to be worth nearly US$ 1 billion. Several media reports suggest that

the U.S.-based iGATE Corporation and private equity firm Apax Partners

are contemplating to buy 63 percent stake in Patni Computers which is

valued at around US$ 915 million.

4.15-Advantages of FII

Enhanced flows of equity capital

FIIs have a greater appetite for equity than debt in their asset

structure. The opening up the economy to FIIs has been in line with

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the accepted preference for non-debt creating foreign inflows over

foreign debt. Enhanced flow of equity capital helps improve capital

structures and contributes towards building the investment gap.

Managing uncertainty and controlling risks.

FII inflows help in financial innovation and development of

hedging instruments. Also, it not only enhances competition in

financial markets, but also improves the alignment of asset prices

to fundamentals.

Improving capital markets.

FIIs as professional bodies of asset managers and financial analysts

enhance competition and efficiency of financial markets.

Equity market development aids economic development.

By increasing the availability of riskier long term capital for

projects, and increasing firms’ incentives to provide more

information about their operations, FIIs can help in the process of

economic development.

Improved corporate governance.

FIIs constitute professional bodies of asset managers and financial

analysts, who, by contributing to better understanding of firms’

operations, improve corporate governance. Bad corporate

governance makes equity finance a costly option. Also,

institutionalization increases dividend payouts, and enhances

productivity growth.

Disadvantages of FII

Problems of Inflation

Huge amounts of FII fund inflow into the country creates a lot of

demand for rupee, and the RBI pumps the amount of Rupee in the

market as a result of demand created.

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Problems for small investor

The FIIs profit from investing in emerging financial stock markets.

If the cap on FII is high then they can bring in huge amounts of

funds in the country’s stock markets and thus have great influence

on the way the stock markets behaves, going up or down. The FII

buying pushes the stocks up and their selling shows the stock

market the downward path. This creates problems for the small

retail investor, whose fortunes get driven by the actions of the large

FIIs.

Adverse impact on Exports

FII flows leading to appreciation of the currency may lead to the

exports industry becoming uncompetitive due to the appreciation

of the rupee.

Hot Money

It refers to funds that are controlled by investors who actively seek

short-term returns. These investors scan the market for short-term,

high interest rate investment opportunities. “Hot money” can have

economic and financial repercussions on countries and banks.

When money is injected into a country, the exchange rate for the

country gaining the money strengthens, while the exchange rate for

the country losing the money weakens. If money is withdrawn on

short notice, the banking institution will experience a shortage of

funds.

4.16-Financial Stability and Better Capitalization

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Host countries may benefit immediately. From foreign entry, if the

foreign bank re-capitalize a struggling local institution. In the process

also provides needed balance of payment finance. In general; more

efficient allocation of credit in the financial sector, better capitalization

and wider diversification of foreign banks along with the access of local

operations to parent funding, may reduce the sensitivity of the host

country banking system and lead towards financial stability.

                                          Source : "Economic Review", RBI Annual Report 2005-06.

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So due to the aforesaid benefits economy has consistent flow of FDI over the

past few years. In addition to that, the govt. has also taken step to enhance

the FDI (e.g. Telecom, civil aviation) FDI up to 100% through the Reserve

Bank's automatic route was permitted for a no. of new sectors in 2005-06

such as Greenfield airport projects, export trading. All these measures have

been contributing towards increasing direct investment. 

                                          Source: "Economic Review", RBI Annual Report 2005-06.

FDI & FII have risen sharply during the 1990s reflecting the policies to

attract non-debt creating flows.

Cumulative foreign investment flows have amounted to US & 106 billion

since 1990-91 and almost evenly balanced between direct invest flows

(US & 49 billion) and portfolio flows (US & 57 billion). Since 1993-94,

FDI flows have exceeded portfolio flows in the 5 years while portfolio

flows have exceeded FDI in the remaining 8 years. As a proportion to

FDI flows to emerging market and developing countries, FDI flows to

India have shown a consistent rise from 1.6% in 1998 to 3.7% in 2005'1.

India's FDI growth of above 30% during past 2 years is encouraging.

Although the FDI inflows into India are small as compared to other

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emerging markets, their size is growing on the back of growing interest

by many of the world's leading multinationals.

5. BANKING AND INSURANCE SECTOR OF

INDIA

5.1-FDI in Banking Sector

Banking Sector plays a crucial role in the financial system, the FDI norms

have been relaxed to a considerable extent by raising FDI limit in private

sector banks to 74% (49% under automatic route and beyond 49% up to

74% under Government/Approval route).

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Notwithstanding investment of a higher limit being allowed, voting rights

of an investor are capped at 10% in terms of the Banking Regulation Act.

On the other hand, FDI and Portfolio investment in nationalized banks are

subject to overall statutory limit of 20%.

The arrival of new and existing models, easy availability of finance at

relatively low rate of interest are key catalysts of growth in the globalize

economy, particularly for emerging market economies.

The role of Foreign Direct Investment in the present world is noteworthy.

It acts as the lifeblood in the growth of the developing nations. Flow of

the FDI to the countries of the world truly reflects their respective

potentiality in the global scenario. Flow of FDI truly reflects the country's

both economic and political scenario.

Foreign Direct Investment as seen as an important source of non-debt

inflows, and is increasing being sought as a vehicle for technology flows

and as a means of attaining competitive efficiency by creating a

meaningful network of global interconnections.

FDI plays a vital role in the economy because it does not only provide

opportunities to host countries to enhance their economic development

but also open new vistas to home countries to optimize their earnings by

employing their ideal resources.

India has sought to increase inflows of FDI with a much liberal policy

since 1991 after decade's cautious attitude. The 1990's have witnessed a

sustained rise in annual inflows to India. Basically, opening of the

economy after 1991 does not live much choice but to attract the foreign

investment, as an engine of dynamic growth especially in view of fast

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paced movement of the world forward Liberalization, Privatization and

Globalization

The Reserve Bank of India (RBI), has allowed foreign players to set up

branches in rural India and take over weak banks with an investment of

up to 74 per cent, and further relaxations are on the anvil by 2010, with

the second phase of opening expected to commence in April 2009.

Some of the biggest names in global financial services and banks like

Credit Suisse, RABO Group and ANZ are seeking a banking license in

India. The RBI has, in recent months, given fresh banking licenses to

UBS - Switzerland's largest bank, Dresdner Bank and United Overseas

Bank.

ANZ and RABO bank Group, the Dutch Group, is now in the process

acquiring a banking license. The RABO bank Group already holds 18.2

per cent stake in another local private bank YES Bank. Some of the

existing players such as Standard Chartered Bank , Citi Bank and HSBC,

hold India as one of their top markets.

5.2-FII in Banking Sector

Emerging markets, especially India have come under FII hammer over

the past few months as reflected in the manner in which they have been

trimming their holdings in India Inc. In the banking sector in particular,

banks like Development Credit Bank, Axis Bank, Syndicate Bank, ICICI

Bank and ING Vysya have seen erosion in FII holdings between March

and September quarter this year. The reason: Tight global liquidity

environment transmitting into the local market and slowing economic

growth, which would impact the growth prospects of the banking sector. 

“It is a trading market and typically a buy and hold strategy will not work

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in such an environment,” said the head of equity of a leading domestic

broking firm. Institutional investors are deleveraging and going into risk-

free assets, according to market participants. They attribute the paring of

investments in some of these banks to a complete lack of confidence in

the market. While the shareholding pattern of the entire banking universe

is yet to be uploaded on BSE (the deadline for which is October 30) of

the data available on 21 banks, 16 banks have shown a decline in FII

holding. Of the remaining four, HDFC Bank, Kotak Mahindra Bank,

Federal Bank and Bank of India show a marginal increase in FII holding.

“The small and mid-size banks at one time had been potential takeover

candidates for any overseas investor seeking a foothold in this space.

However, given the steep erosion in share prices, that attraction is no

longer there,” said the fund manager of one of the better performing

banking funds. According to a senior official from an overseas brokearge,

“The GDP growth is likely to be lower this year. This, in turn, would

impact the growth of the banking system. The system is also likely to see

a rise in non-performing assets.” 

Institutional investors with over 1% holding who exited DCB in Toto,

included ABN Amro Bank (1.37% stake), Goldman Sachs Investments

(Mauritius) — 2.19% stake, Morgan Stanley Investments Mauritius

(2.98%), Merrill Lynch Capital Markets Espuma (1.59%) and Citigroup

Global Markets Mauritius, which had a 2.2% stake. 

In ICICI Bank, Growth Fund of America Inc, which had a 1.26% stake

has cut its investment or exited, while Euro pacific Growth Fund, which

had a 1.51% stake exited and CLSA Mauritius, which had a 1.13% stake

sold its stake. In Axis Bank — Goldman Sachs Investments Mauritius I,

which had a 1.01% and Dali, which had a 1.22% stake, JP Morgan Asset

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Management, which had a 1.53% have exited. FII’s have been net sellers

of more than Rs 42,000 crore, year to date. FII selling peaked in June (-

Rs 10,577 crore) and September(close to Rs 8,000 crore) while they were

net buyers in February (Rs 4,883 crore) and April (Rs 280 crore).

Interestingly, FII selling in June was a record of sorts for second-highest

FII selling in a month since January 2008 (-Rs 17,226 crore).

Financial services (Banking and Non-Banking)

Promising sub-sectors

Capital markets Venture banking

Consumer financing Mutual funds

Infrastructure financing

India has one of the most developed financial markets in the

developing world. Tremendous scope exists for both banking and

non-banking financial institutions from other countries. The

insurance sector, nationalized since 1971, has been opened up

according to an announcement made in November 1998.

Legislation to this effect is expected by early 1999.

Top companies from the United Kingdom and the United States

among others are already active in India's financial markets.

Markets. Some of the big names are: Merrill Lynch,

Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard

Chartered, Hong Kong and Shanghai Banking Corporation among

others.

Foreign institutional investors (FII’s) have been allowed to invest

in the stocks and securities markets with rights of full repatriation

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and withdrawal. Their presence has added a new dynamism to the

market

India already has foreign exchange reserves of US$27 billion

which is considered very comfortable, but the country needs to

use foreign skills and networks to be able to manage the huge

sums for its development needs.

Local financial Institutions such as the Industrial Development

Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), Industrial Finance Corporation of

India, Unit Trust of India and the Shipping Credit and Investment

Corporation of India have raised billions through the most

sophisticated financial instruments including Deep Discount

Bonds.

Indian firms are showing increasing liking for Global Depository

Receipts (GDR) listed in London. American institutions are trying

to promote American Depository Receipts (ADR) listed in New

York.

After much dithering, India has finally opened up the insurance

sector to private and foreign investors. 

EXPOSURE OF BANKS:

A second route through which the global financial crisis could affect

India is through the exposure of Indian banks or banks operating in India

to the impaired assets resulting from the sub-prime crisis. Unfortunately,

there were no clear estimates of the extent of that exposure, giving room

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for rumour in determining market trends. Thus, ICICI Bank was found to

be the victim of a run for a short period because of rumors that sub-prime

exposure had badly damaged its balance sheet, although these rumors

have been strongly denied by the bank.

So far the RBI has claimed that the exposure of Indian banks to assets

impaired by the financial crisis was small. According to reports, the RBI

had estimated that as a result of exposure to collateralized debt

obligations and credit default swaps, the combined mark-to-market losses

of Indian banks at the end of July was around $450 million.

Given the aggressive strategies adopted by the private sector banks, the

MTM losses incurred by public sector banks were estimated at $90

million, while that for private banks was around $360 million. As yet

these losses are on paper, but the RBI believes that even if they are to be

provided for, these banks are well capitalized and can easily take the hit.

Such assurances have neither reduced fears of those exposed to these

banks or to investors holding shares in these banks.

These fears were compounded by those of the minority in metropolitan

areas dealing with foreign banks that have expanded their presence in

India, whose global exposure to toxic assets must be substantial.

A third indirect fallout of the global crisis and its ripples in India is in the

form of the losses sustained by non-bank financial institutions (especially

mutual funds) and corporate, as a result of their exposure to domestic

stock and currency markets.

Such losses were expected to be large, as signaled by the decision of the

RBI to allow banks to provide loans to mutual funds against certificates

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of deposit (CDs) or buyback their own CDs before maturity. These losses

are bound to render some institutions fragile, with implications that

would become clear only in the coming months

A fourth effect is that, in this uncertain environment, banks and financial

institutions concerned about their balance sheets, have been cutting back

on credit, especially the huge volume of housing, automobile and retail

credit provided to individuals. According to RBI figures, the rate of

growth of auto loans fell from close to 30 per cent over the year ending

June 30, 2008, to as low as 1.2 per cent.

Loans to finance consumer durables purchases fell from around Rs 6,000

crore in the year to June 2007, to a little over Rs 4,000 crore up to June

this year. Direct housing loans, which had increased by 25 per cent during

2006-07, decelerated to 11 per cent growth in 2007-08 and 12 per cent

over the year ending June 2008.

It is only in an area like credit-card receivables, where banks are unable

to control the growth of credit, which expansion was, at 43 per cent, quite

high over the year ending June 2008, even though it was lower than the

50 per cent recorded over the previous year.

It is known that credit-financed housing investment and credit-financed

consumption have been important drivers of growth in recent years, and

underpin the 9 per cent growth trajectory India has been experiencing.

The reticence of lenders to increase their exposure in markets to which

they are already overexposed and the fears of increasing payment

commitments in an uncertain economic environment on the part of

potential borrowers are bound to curtail debt-financed consumption and

investment. This could slow growth significantly.

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Finally, the recession generated by the financial crisis in the advanced

economies as a group and the US in particular, will adversely affect

India's exports, especially its exports of software and IT-enabled services,

more than 60 per cent of which are directed to the US.

International banks and financial institutions in the US and EU are

important sources of demand for such services, and the difficulties they

face will result in some curtailment of their demand. Further, the

nationalization of many of these banks is likely to increase the pressure to

reduce outsourcing in order to keep jobs in the developed countries.

And the slowing of growth outside of the financial sector too will have

implications for both merchandise and services exports. The net result

would be a smaller export stimulus and a widening trade deficit.

Sensex crosses 19,000 on FII flows, Banking Sector Charge

Benchmark at 32-month high aided also by strong Reliance Ind showing.

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Source: Reserve Bank of India

5.3-FDI IN INSURANCE SECTOR

Insurance Sector is one of the booming sectors in India, taking into

account several driving factors including the huge population and

growing per capita income. Since the advent of private players backed by

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foreign expertise, competition in this sector has increased with company’s

taking new and innovative steps to attract consumers including offering

new products.

The FDI limit in insurance sector is capped at 26% under the automatic

route subject to license from IRDA. There is a proposal to raise the FDI

cap to 49%.

It is FDI, not FII, which foreign insurers are excited about. FDI spells

long-term capital that can help sustain solvency. Insurers feel the short-

term nature of FII flows is inappropriate for the insurance sector. To

encourage long-term investment in the sector, the government is planning

to hike the FDI limit to 49%. 

At present, there is a 26% composite cap on FDI and FIIs in the sector.

The government feels the increase in foreign holding to 49% should be

exclusively for FDI. 

FDI will ensure meaningful ownership. In times of adverse claims pay-

out, it is only through the FDI route that the foreign stakeholder will

infuse capital to tide over the adverse situation. On the other hand, FII

will take a positions based on the situation, and may decide to pull out if

it is unfavorable

It is estimated that for every unit of capital infused, the velocity of

generation of new premium is 10 times the amount. Artificial constraints

will hamper the sector. A group of ministers (GOM) has been constituted

to review the comprehensive insurance legislation. The group will look at

increasing the FII cap in the sector by amending the Insurance Act, 1999. 

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If additional FII and FDI make sense, it allows investors to be a part of

the insurance industry. It also means more access to capital — both long

and short-term.

Any SEBI -registered entity can operate as an FII. The funds that FIIs

bring in are short-term. While the FII route may be preferred by the

Indian stakeholders, foreign stakeholders will build on long-term capital

through FDI. 

Aviva India, however, recommend a separate cap on FII in addition to the

higher FDI limit of 49%. “If a foreign investor buys shares of a

multinational company, the stake held by the existing foreign partner

should not be divested,” 

Conversely, if the government decides to increase foreign holding,

including FIIs and FDI, beyond 49%, the Indian partner will have to

dilute its stake below 51%. Indian companies have been apprehensive

that their stake in the companies may fall below that of the foreign

partners once the FDI cap is hiked to 49%. 

5.4-FII – INSURANCE SECTOR

No proposal to allow foreign portfolio investment by Foreign Institutional

Investors beyond the sect oral cap of 26 per cent in the insurance sector.

Currently, foreign players including FIIs are allowed a maximum 26 per

cent stake in an insurance company as per the Insurance Regulatory and

Development Act. It has been asked about a possible hike in the FII limit

on telecom, other things are under discussion. These announcements

would be made at an appropriate time." The FII sect oral cap on telecom

services is currently at 49 per cent. In his Budget, Sinha has proposed that

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FII portfolio investment will not be subject to the sect oral limits for

Foreign Direct Investment except in specified sectors.

The Flow Of FDI Over The Globe Are As Follows:

Opening up of doors by many countries of the world has resulted foreign

participation in the financial sectors of emerging market economies

(EME’s) during the 1990s. It has continued to expand so far in this

decade, on balance - although its pace fell somewhat following problems

in Argentina in 2002 and the global slowdown

in mergers   and   acquisitions . It is seen that banks accounted for the

majority of financial sector foreign direct investment (FSFDI). In a

number of countries in Latin America and central and eastern Europe

(CEE), foreign   banks  now account for a major share of total banking

assets. In Asia, the share of foreign banks is, overall, much lower, but still

substantial

The integration of EME financial firms into the global market has

resulted a wider diversity of institutions operating in EME’s and given

greater emphasis on risk-adjusted profitability. These include expansion

into local retail banking and securities markets, where elements such as

client relationships and reputation are important components of the

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franchise value of operations. Such factors have tended to raise

the costs of exiting a country and hence increased the permanence of

FSFDI.

FSFDI was fostered by financial liberalization and market-based reforms

in many EME’s. The liberalization of the capital account

and financia l  deregulation paved the way for foreign acquisitions and the

integration of EME financial firms into an expanding global market for

corporate control. This is the character of FSFDI as part of a broader

trend towards consolidation and globalization in the financial industry. In

some cases competition in traditional markets increased pressure on

major international banks to find new areas for growth. Financial

institutions in advanced economies increasingly searching for profit

opportunities at the customer and product level, FSFDI offered a means

of access to EME markets with attractive strategic opportunities to

expand.

Local financial infrastructure is growing which reduces the risks of

conducting business in EME’s but events such as the Russian default in

1998 and Argentine actions in 2002 also made financial institutions more

sensitive. Thus, financial institutions in industrial countries now tend to

evaluate country risk separately.

An important benefit of FSFDI is its effect on financial sector efficiency

that arises from local banks' exposure to global competition.

Host countries benefit from the technology transfers and innovations in

products and processes commonly associated with foreign bank entry.

Foreign banks exert competitive pressures and demonstration effects on

local institutions. It result better risk management, more competitive

pricing and in general a more efficient allocation of credit in the financial

sector as a whole. Foreign banks presence helps to achieve greater

financial stability in host countries. Host countries benefit immediately

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from foreign entry. The better capitalization and wider diversification of

foreign banks, along with the access of local operations to parent funding,

may reduce the sensitivity of the host country banking system to local

business cycles and changing financial market conditions. Their use of

risk-based credit evaluation tends to reduce concentration in lending and

in times of financial distress, fosters prompter recognition of losses and

more timely resolution of problems.

The growing involvement of foreign firms in the financial systems of

EMEs has given rise to a situation where majorities of EME banking

assets have become foreign owned.

The growing involvement of foreign firms in the financial systems of

EMEs has given rise to a situation where majorities of EME banking

assets have become foreign owned.

Accordingly, developing pertinent technical skills is considered be an

important area of cooperation between authorities in advanced and EME

countries. In some markets, foreign-owned banks have been prominent in

the rapid expansion of consumer lending and foreign currency lending to

both households and businesses.

At present, it is mandatory for Indian partners, who are majority

stakeholders in insurance companies, to scale down their stake from 74%

to 26% before the completion of 10 years of operations of the company.

Prescribing a separate

5.5-PRESENT SCENARIO OF BANKING AND

INSURANCE SECTOR

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In recent times economy is been pushing to increase the role of multi-

national banks in the banking and insurance sector, despite, the concern

expressed by the left communist parties are opposing the finance minister

move to raise overseas investment limits in the insurance business. The

government wants to fulfill a pledge to allow companies like New York

Life Insurance, Met Life Insurance to raise investment in local companies

to 49 per cent from 26 per cent. 

But it is opposed on the front that it will lead to state run insurers loosing

business and workers their job. Left do not want foreign investors to have

greater voting rights in private banks and oppose the privatization of state

run pension fund. 

There are several reasons why such move is fraught with dangers. When

domestic or foreign investors acquire a large share holding in any bank

and exercise proportionate voting rights, it creates potential problems not

only of excursive concentration in the banking sector but also can expose

the economy to more intensive financial crises at the slightest hint of

panic.

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Opposition is not considering the need of present situation. FDI in

banking sector can solve various problems of the overall banking sector.

Such as –

i) Innovative Financial Products

ii) Technical Developments in the Foreign Markets

iii) Problem of Inefficient Management 

iv) Non-Performing Assets

v) Financial Instability

vi) Poor Capitalization

vii) Changing Financial Market Conditions

If we consider the root cause of these problems, the reason is low-capital

base and all the problems is the outcome of the transactions carried over

in a bank without a substantial capital base. In a nutshell, we can say that,

as the FDI is a non-debt inflow, which will directly solve the problem of

capital base.

5.6-ASSET MANAGEMENT IN BANKING SECTOR

The assets or resources are composed of all the items which are in

possession of or due to the bank, and it relies upon these assets to meet

the liabilities which it owes to others.

Loans and Discounts:. These include the amount of credit extended by

the bank to its customers. These obligations are in the form of promissory

notes or accepted drafts. They may be secured by stocks, bonds, and other

collateral, or based merely on the credit standing of the makers,

acceptors, or endorsers. Some of these advances are payable on demand

and so may be called for payment whenever the bank is in need of funds.

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In addition to loans extended to customers, the bank also grants credit to

outside firms in buying their commercial paper on the open market. These

claims are sometimes entered separately as "bills purchased."

Overdrafts: These may be regarded as loans obtained from the bank,

usually without security, interest, or consent. An overdraft occurs when a

customer writes a check to an amount which exceeds the sum credited to

his account. The amount paid by the bank in excess of the customer's

balance is known as an overdraft. It is evidenced merely by an entry in

the books of the bank, but not in a note or other formal instrument.

National banks are prohibited from voluntarily allowing overdrafts to

their customers.

Customers' Liability under Letters of Credit and on Account of

Acceptances: Foreign trade is financed largely through drafts drawn on

banks which accept them in behalf of their customers. They in turn assure

their bank that it will be fully reimbursed before the acceptances fall due.

The obligation to reimburse is expressed either in the form of contracts

for letters of credit or acceptance agreements which clearly define the

liability of the customers to the bank. This account is therefore an offset

to the item "letters of credit and acceptances outstanding" of the bank's

liabilities.

United States Bonds and Certificates of Indebtedness: The bank

required to invest in certain classes of United States bonds if it wishes to

issue its notes for circulation. It is also compelled to hold either of these

classes of obligations as security for deposits which the United States

government carries with the bank. States and municipalities also require

banks acting as depositories to hold government issues as security. In

addition, banks voluntarily invested in Liberty Bonds and Victory Notes,

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during the war, because of patriotic motives, and have continued to hold

these obligations because of their ready marketability

Bonds, Securities, etc., Other Than United States: These items are held

by a bank as outright investments or as acquisitions resulting from

nonpayment of loans for which these securities have served as collateral.

Stocks, Other Than Federal Reserve Bank Stock: These stocks have

also been obtained from borrowers defaulting in their obligations.

National banks are forbidden directly to purchase stocks because of the

instability of their value. National banks may, however, purchase a

certain amount of stock of corporations engaged in foreign banking.

Stock of the Federal Reserve Bank.: Each member of the Federal

Reserve system must subscribe to the stock of the Reserve bank of its

district to an amount equaling 6 per cent of its own capital and surplus,

but only one-half of this sum has been called by the Federal Reserve

Board.

Banking House, Furniture and Fixtures: These items represent the

general equipment of the bank.

Real Estate Owned Other Than Banking House. As a commercial

bank is obliged to pay most of its deposits on demand, its investments, in

turn, must have short maturity. A national bank is therefore hot allowed

to purchase real estate for any other purpose than actual use in conducting

its business. At times it is forced to accept real estate pledged for loans on

which the borrowers have defaulted.

Due from Branches: Subject to limitations, banks may conduct domestic

and foreign branches which thus represent a certain amount of invested

capital.

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Lawful Reserve with the Federal Reserve Bank.: This represents the

balance which the bank carries with the district Federal Reserve bank for

the purpose of maintaining the required reserve against deposits.

Items with Federal Reserve Bank in Process of Collection: This

account includes checks, drafts, and other items which have been remitted

to the district Federal Reserve Bank for collection. From one to eight

days are allowed for the collection and payment of items drawn on any

locality in the United States, and in accordance with this time schedule

each Federal Reserve Bank credits the account of its members with the

amount of items left for collection. Thus all items in process of collection

are really deferred credits with the Federal Reserve Bank, and only when

paid become cash credits or lawful reserve.

Cash in Vault. A bank needs a certain amount of till money to cash the

checks of customers and to meet their current demands, such as for pay-

roll purposes.

Net Amount Due from Other Banks, Bankers, and Trust Companies:

These institutions are correspondents collecting out-of-town items not

forwarded through the agency of the Federal Reserve system. A bank

usually carries a deposit balance with each correspondent, which credits

the account when collection items are actually paid.

Exchanges for the Clearing House: These will be presented for

payment to the other members of the clearing house on the following

morning.

Cheque on Other Banks in the Same City: As not all banks belong to

the clearing house, checks drawn on these institutions must be presented

through messengers.

Redemption Fund with the Treasurer of the United States: A national

bank which issues notes for circulation (national-bank notes) must

125

contribute a fund amounting to 5 per cent of these notes in order that the

Treasury Department can redeem them when presented by the holders.

Due from the Treasurer of the United States: In the course of its daily

business, a bank receives government paper money which has been

mutilated while in circulation. Such bills are forwarded to the Treasury,

which in exchange returns new ones.

Interest Earned but Not Collected. When a bank grants loans to its

customers, they pay the interest usually at maturity, although it gradually

accumulates or accrues during the entire period for which the loan runs.

Thus interest returns on loans and also on investments are regarded as

accrued assets, although payment has not actually been made.

5.7-ASSET MANAGEMENT IN INSURANCE SECTOR

Insurance companies derive income mainly from two sources:

1) Income derived from policy sales -- insurance policy and annuity sales

2) Income derived from their investment portfolios. An insurer collects

funds from policy holders, invests those funds, and then over time pays

claims to policy holders from its received funds. And, as usually over

time competition drives the sum of payments for claims to equal

or exceed the total amount of funds received from policy

payments (i.e. the "Combined Ratio" tends to trend

towards 100), the rate of return on the funds is a key

driver of the overall earnings for an insurance company

5.8-The IMF Study Report

126

The IMF's study is in supportive to the above-discussed features of FDI.

This study talks about the optimism over India emanates from a

contribution of following factors. 

* India contributed nearly one fifth of Asian domestic demand growth

over 2000-09. Looking forward, India slated to be the second largest

demand driver in the region, after China.

* India accounts for almost one quarter of the global portfolio flows

to emerging market economies, nearly $ 12 bn in 2009.

* India is the world's leading recipient of remittances, accounting for

about 20% of the global flows.

Even though above discussed factors are fair enough for the development

of economy. But it is a noted fact that, economy drivers are reluctant

towards more liberalization for FDI in the banking sector. As the ceiling

rates are not increased, FDI in Financial Sector is not getting a

wholesome environment. But the foreign investment is finding its own

way to come in the economy. may be the way of FII. It is evident from

the diagram.

Now a day, foreign commercial and investment banks have quietly begun

picking up public sector bank's bond issues. Bankers said that the funds

were coming into these bonds; some of the foreign banks were also using

the banks' bonds as an arbitrage opportunity in view of the increasing

liquidity.

So, therefore from last 2 years FII’s have exceeded the FDI and in

portfolio investment into India since 2003-04 reflects both domestic and

127

global factors. Compared with FII always FDI has a greater and long-

term effect on the Indian market due to the whimsical nature of FII. (As it

is considered as hot money).The present scenario looks more closely at

the paradigm of exponential growth and laments that India's role as an

engine for global growth has been limited by the still relatively closed

nature of its economy.

5.9- RELATIONSHIP BETWEEN FDI AND FII

FII generally means portfolio investment by foreign institutions in a

market which is not their home country. These institutions are generally

Mutual Funds, Investment Companies, Pension Funds, Insurance House's

is a short term benefit to the country and the rules and regulations to enter

the Indian Market are not much, the fluctuations in the stock market is

generally due to the FII Investments, cause the rules are eased the

investor can leave the market at Any point of time. There investments are

in the stock market whereas FDI is generally a long term commitment to

a particular company in a sector in terms of equity investment by some

foreign entity. Therefore we could see Lehman investing 15% in say

Unitech now that would be FDI. However if Lehman has bought shares

of Unitech though secondary markets (stock trading market) it would

have been an FII. FII funding is a paramount maker of stock markets and

there selling or buying moves the stock in a day. FDI also have to follow

a high rules and regulations to enter the market and the subs. given to

such players are huge in term of taxes .FDI have long term commitment

and hence we see flight of capital in terms of FII outflows but not

generally in FDIs. 

128

Liberalization of the financial sector especially that of capital markets is

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.

Before I actually begin with the crux of this article, let me give you a

brief background. 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. 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.

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. Let’s look into FDI first. FDI is defined as

“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.

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

stock markets, 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.

129

Foreign Institutional Investment (FII)

The finance ministry has turned down a demand from the insurance

regulator IRDA to distinguish between portfolio and direct equity

investments through a sub-ceiling for investments by foreign institutional

investors (FII) and has instead recommended a composite cap for foreign

investments in private life insurance companies, a top finance ministry

official. 

This is likely to boost the valuation of shares of insurance companies

when they come out with initial public offers (IPOs). All the three

regulators SEBI, IRDA and finance ministry are open to relaxing the ten-

year norm and allowing insurance companies that have been operating for

five years only to raise equity from the public.

IRDA had wanted a differentiation between the FIIs and FDIs, as the

regulator believes that adequate due diligence should be done while

allowing foreign investment in insurance companies. A sub-ceiling on FII

investment, which is seen fickle as opposed to stable foreign direct

investment (FDI), would have placed a limit on such investment. 

As per the current norms, insurance companies need a ten-year record

before raising capital through IPOs. If the eligibility is reduced to five

years, ten insurance companies may be eligible to float IPO at the end

2009-10 fiscal. Certain sectors such as information and broadcasting,

commodity and stock exchanges, civil aviation differentiate between FII

and FDI. Sectors like stock and commodity exchanges also have sub-

ceiling for FII and FDI investments. 

130

The government will not make any distinction between FIIs and FDIs

within the stipulated limit nor will there be sub-ceilings for FIIs and FDIs

in the sector. The insurance amendment bill, which hikes the cap on

foreign holdings in insurance sector to 49%, will also not distinguish

between FII and FDI,. 

This follows Law ministry’s clarification to the finance ministry that

section 27 A of the insurance act does not distinguish between FIIs and

FDIs in respect of foreign holdings and, hence, FIIs can be allowed to

subscribe to the IPO. The draft of the insurance amendment bill that

proposes to hike the limit for foreign investment in insurance companies

to 49% also does not distinguish between FIIs and FDIs. 

The valuation of the insurance companies and the price at time of IPO is

expected to be higher if FIIs are allowed to participate in them without

any sub-ceiling. In cases where foreign investors already hold 26% equity

in an insurance venture, the issue of fresh equity through an IPO would

bring down the foreign investment to less then 26% and thereby create

more space for foreign investments. 

This could become even more important if the foreign investment limit in

insurance is hiked to 49% as the entire additional amount could be taken

up by FII flows. However, there is some clarity needed on this as the

regulations do not allow the foreign partner to dilute their stake while the

domestic partner has to bring it down to 26% after 10 years of operations

in a phased manner. 

While the insurance act does not allow dilution of the stake by the foreign

partner, it remains to be seen how the new regulations will ensure that the

131

foreign partners stake remains unchanged when fresh equity is issued and

the foreign partner does not bring in more money, 

The move will help to get better valuation at the time of IPOs. But they

also shared their apprehensions about having no sub-ceiling for the

holdings as it might have undermined the stability of the company. 

The insurance amendment bill, which was introduced in Rajya Sabah in

December last year, was referred to parliamentary standing committee.

The standing committee is expected to table the report in the winter

session. 

Nineteen out of twenty-one private life insurers in the country are in

partnership with foreign companies with the maximum permitted foreign

holding of 26%. Reliance and Sahara are the two insurance companies

with no foreign partners.

Insurance Sector Preview

Insurance better macro prospects in the developed markets are seeing FIIs

direct their flows away from Indian markets. Markets are vulnerable as

FIIs will take money off the table on every rise and insurance companies

cannot combat FII outflows as the flows into the insurance sector are

getting more skewed towards traditional (non-equity) products.

Outlook for the equity market in 2011

Indian equities have been a clear outperformer over the last two years.

This year is going to be very challenging due to domestic macroeconomic

headwinds. In some developed markets, the situation is in stark contrast.

In the US, inflation is not high, interest rates are low and growth outlook

132

is improving. These coupled with attractive valuations may see FIIs

directing their flows to developed market equities as seen in January.

STRATEGY

In the last couple of months, India increased exposure to defensive

sectors. Also, we had increased cash levels to about 15% and booked

some profits in expectation of market correction going forward. Since

India’s long-term story is very much intact and we have a long-term

investment horizon, we are using this opportunity to reassess the stocks

and are gradually redeploying funds in stocks which are looking

promising after the recent correction.

After the recent fall, markets are trading at their long-term average;

will this be a good support for the markets

Given the macro concerns, valuations may not be able to drive the

markets alone, but will surely cap the downside. Ultimately, it will

depend on the investor sentiment. In 2008, when the Sensex fell to 8,000

levels, the valuations were at 9x one-year forward earnings. However,

due to looming global worries, markets did not rally immediately.

Luckily, the global conditions have improved. But due to near-term

uncertainty, we may see FIIs booking profit at every market rise.

Flows from the insurance sector can combat FII outflows

In the last couple of years, our dependence on FII flows has risen. With

the new Irda regulations, flows into the insurance sector have slowed

down a bit and are more skewed towards traditional products, which have

a lower equity allocation. In FY11, the equity flows by insurance sector

will be about $10 billion versus $13 billion in FY10, a part of which

133

flows to primary market offerings. In FY12 the flows can be to the tune

of $12-15 billion. However, due to a huge pipeline of primary offerings

the flows may be little lower.

Expectations from the Budget

At this juncture, the economy does not require new big-bang reforms.

Having laid down structural framework in the earlier budgets, the focus

will now be on their timely execution in terms of implementation of DTC

and transition to GST regime.

Foreign Direct Investment (FDI)

India's foreign direct investment is headed for the first drop since the year

ending March 2003, hindering a bid to match China’s surging economy,

even as overseas money poured into Indian stock and bonds at a record

pace. 

Data show FDI fell 24% to $19 billion between April and November

compared with the same period a year earlier. Inflows into equities and

bonds jumped 48% to $32.8 billion during the same period, according to

the latest data from the Reserve Bank of India. The government says it

needs to spend $1 trillion on roads, ports and other utilities over five

years to close in on China. 

The RBI said the fall in direct investment was caused by companies

facing hurdles obtaining land, gaining environmental clearance and poor

infrastructure. Construction, mining and business services recorded the

biggest drops in investment, the data show. 

134

All economies want to avoid fly-by-night investors who invest, reap the

benefits and move on to other countries, based in the southern city of

Kochi. “A growing economy needs both strong domestic and foreign

direct investment.” 

By contrast, most Asian nations reported a rise in FDI in calendar year

2010, according to data and forecasts compiled by the United Nations.

Investment surged 163% in Indonesia, 123% in Singapore, 29% in Hong

Kong and 6% in China, the data show. China’s economy, about the same

size as India’s $183 billion in 1980, has swelled close to $5 trillion,

almost four times its neighbor. 

India is vulnerable to so-called “hot money” inflows.

RBI has raised interest rates seven times in the past year to stem inflation,

making it an attractive destination for the so-called carry trade, where

investors take funds in a country with low borrowing costs and put them

in one with higher rates.

5.10- Figures for the Trading Activity

135

FII & DII Trading Activity (Provisional Figures)

FII & DII Trading activity during Feb '11

DATES FII (Rs. Crore) DII (Rs. Crore)

 Gross Purchase

Gross Sales

Net Purchase/Sales Gross Purchase

Gross Sales

Net Purchase/Sale

s

21-Feb-2011 2006.78 2252.20 -245.42 800.36 827.97 -27.61

18-Feb-2011 2844.58 2636.91 207.67 1266.67 1455.81 -189.14

17-Feb-2011 2305.25 2267.26 37.99 1153.73 909.33 244.40

16-Feb-2011 1960.55 2190.61 -230.06 578.83 647.32 -68.49

15-Feb-2011 2605.97 2372.92 233.05 881.30 1049.15 -167.85

14-Feb-2011 3133.11 2985.47 147.64 989.01 879.99 109.02

11-Feb-2011 3206.61 3744.32 -537.71 1343.41 823.74 519.67

10-Feb-2011 3032.29 3987.16 -954.87 1660.73 1023.43 637.30

09-Feb-2011 3680.57 4289.57 -609.00 1385.40 1270.40 115.00

08-Feb-2011 2966.06 3692.60 -726.54 1318.56 869.59 448.97

07-Feb-2011 2544.42 2400.38 144.04 1621.58 1384.13 237.45

04-Feb-2011 2544.42 2400.38 144.04 1621.58 1384.13 237.45

03-Feb-2011 2602.43 2063.72 538.71 1155.20 1200.65 -45.45

02-Feb-2011 3112.79 3194.52 -81.73 1958.92 1278.54 680.38

01-Feb-2011 2853.09 3889.89 -1,036.80 1779.34 1148.94 630.40

TOTAL 41,398.92 44,367.91 -2,968.99 19,514.62 16,153.12 3,361.50

136

Previous FII & DII Trading Activities

DATES FII (Rs. Crore) DII (Rs. Crore)

 Gross Purchase Gross Sales Net Purchase/Sales

Gross Purchase

Gross Sales

Net Purchase/Sale

s

January-2011

57,526.07 66,429.67 -8,903.60 29,176.33 23,939.19 5,237.14

December-2010

52,683.49 53,405.68 -722.19 24,798.87 24,163.88 634.99

November-2010

79,726.26 74,375.39 5,350.87 32,674.49 30,205.67 2,468.82

October-2010

77,706.10 63,318.04 14,388.06 28,069.00 39,881.90 -11,812.90

September-2010

74,920.16 52,444.52 22,475.64 24,046.54 35,913.17 -11,866.63

August-2010

56,120.24 48,582.94 7,537.30 24,770.34 29,323.02 -4,552.68

July-2010 52,571.21 44,030.15 8,541.06 24,776.03 31,047.95 -6,271.92

June-2010 51,878.01 44,164.06 7,713.95 23,549.21 28,326.26 -4,777.05

May-2010 49,588.04 61,659.16 -12,071.12

29,971.71 23,610.52 6,361.19

April-2010 55,061.05 52,393.68 2,667.37 26,283.22 24,092.56 2,190.66

March-2010 59,692.57 44,900.24 14,792.33 25,818.47 30,954.32 -5,135.85

February-2010

39,001.43 40,944.90 -1,943.47 21,547.80 20,235.85 1,311.95

January-2010

56,109.18 63,325.85 -7,216.67 39,004.29 26,782.26 12,222.03

December-2009

45,029.99 40,789.13 4,240.86 26,326.09 26,276.42 49.67

November-2009

48,761.93 47,053.86 1,708.07 28,355.29 25,964.25 2,391.04

October-2009

63,964.86 63,964.73 0.13 30,578.81 30,626.32 -47.51

September-2009

62,872.65 49,541.22 13,331.43 27,261.52 26,565.48 696.04

August-2009

45,722.53 49,489.56 -3,767.03 28,621.60 23,636.89 4,984.71

137

July-2009 58,990.29 60,354.89 -1,364.60 34,970.99 29,152.01 5,818.98

June-2009 61,767.47 61,852.61 -85.14 35,173.50 32,539.72 2,633.78

May-2009 73,016.96 59,130.87 13,886.09 27,344.70 27,427.15 -82.45

April-2009 38,871.53 33,311.43 5,560.10 17,871.64 18,653.97 -782.33

March-2009 31,646.90 32,330.47 -683.57 19,256.22 15,304.69 3,951.53

February-2009

22,066.26 24,899.69 -2,833.43 13,438.92 10,664.36 2,774.56

January-2009

28,447.81 33,620.63 -5,172.82 18,644.12 14,925.98 3,718.14

December-2008

29,362.68 28,327.87 1,034.81 16,472.77 14,566.49 1,906.28

November-2008

28,093.92 33,552.88 -5,458.96 15,196.15 12,322.00 2,874.15

October-2008

48,413.60 64,067.10 -15,653.50

26,254.38 15,458.08 10,796.30

September-2008

65,932.27 78,435.01 -12,502.74

25,415.62 16,202.66 9,212.96

August-2008

44,460.52 49,916.64 -5,456.12 17,813.52 14,841.14 2,972.38

July-2008 62,050.69 66,654.69 -4,604.00 23,217.26 21,690.07 1,527.19

June-2008 60,693.06 73,360.22 -12,667.16

23,754.33 15,126.36 8,627.97

May-2008 58,982.92 65,678.51 -6,695.59 26,254.47 17,976.44 8,278.03

April-2008 59,546.97 62,083.85 -2,536.88 21,678.24 18,277.26 3,400.98

March-2008 68,472.59 72,236.39 -3,763.80 23,606.43 20,658.92 2,947.51

February-2008

64,267.47 68,318.59 -4,051.12 24,064.99 20,056.65 4,008.34

January-2008

97,579.50 127,027.01 -29,447.51

44,638.58 28,223.89 16,414.69

December-2007

71,453.70 78,273.50 -6,819.80 29,495.28 24,543.14 4,952.14

November-2007

83,268.52 96,957.78 -13,689.26

31,937.20 23,383.79 8,553.41

138

October-2007

122,384.57 114,368.33 8,016.24 34,703.35 36,055.53 -1,352.18

September-2007

67,664.52 51,306.56 16,357.96 21,424.73 26,188.40 -4,763.67

August-2007

52,479.43 64,817.90 -12,338.47

26,496.41 17,347.14 9,149.27

July-2007 69,757.41 61,888.56 7,868.85 23,643.81 24,231.23 -587.42

June-2007 45,673.87 47,035.12 -1,361.25 19,374.66 14,814.40 4,560.26

May-2007 46,316.28 46,436.25 -119.97 21,959.33 18,974.43 2,957.10

April-2007 43,647.59 41,913.05 1,734.54 10,137.73 9,280.07 857.66

March-2007 46,767.61 47,302.23 -534.62 N.A. N.A. N.A.

February-2007

46,048.78 46,311.30 -262.52 N.A. N.A. N.A.

January-2007

45,676.03 46,109.29 -433.26 N.A. N.A. N.A.

December-2006

34,057.68 34,968.79 -911.11 N.A. N.A. N.A.

November-2006

48,988.23 45,944.90 3,043.33 N.A. N.A. N.A.

October-2006

35,041.05 31,913.91 3,127.14 N.A. N.A. N.A.

September-2006

29,856.31 26,723.78 3,132.53 N.A. N.A. N.A.

August-2006

25,413.72 23,374.54 2,039.18 N.A. N.A. N.A.

July-2006 24,188.43 24,802.60 -614.17 N.A. N.A. N.A.

June-2006 37,864.81 37,073.19 791.62 N.A. N.A. N.A.

May-2006 43,817.67 55,376.28 -11,558.61

N.A. N.A. N.A.

April-2006 37,302.88 39,645.83 -2,342.95 N.A. N.A. N.A.

0.00 0.00 0.00 0.00 0.00 0.00

TOTAL 3,089,268.273,118,515.8

2-

29,247.551,169,868.94 1,060,431.88 109,409.26

139

7. DATA INTERPRETATION AND ANALYSIS

Questionnaire Samples filled by various financial sector employees in the survey are as follows

Financial Sector Percentage(%) and Frequency

a) Banks 40

b) Insurance 40

c) Broking Firm 20

140

INTERPRETATION

40 questionnaires were filled by Bank employees and the banks covered

in the survey were Foreign Banks, Private Banks and Public Sector Banks

namely HSBC, Standard Chartered, Citi Bank, HDFC, ICICI, Overseas,

ING Vysya, Kotak Mahindra, SBI, AXIS and YES Bank etc.

40 questionnaires were filled by Insurance Company employees and

Companies covered in the survey are LIC, Birla Sun life, ICICI

Prudential Life, Tata AIG Life, Max New York Life, HDFC Standard

Life, Met life, Reliance Life, ICICI Lombard etc.

20 questionnaires were filled by Broking Firms employees and firms

covered are Share Khan, Edelweiss, Angel, India Info line Broking Firm.

141

1) Are You An Investor In Stock Market/s ?

Investor in Stock Market Percentage(%) and Frequency

a) Yes 67

b) No 33

INTERPRETATION

In the survey it was found that 67 % of employees invest in Stock

Market while the remaining 33% of employees were not intersted in

Stock Market as they find it very risky.

142

2) Are You A Direct Or Indirect Investor i.e ?

Please indicate 2 reasons for your choice

Choice of Investment Percentage(%) and Frequency

a) Capital Market 40

b) Mutual Fund 32

c) Both a and b 28

143

INTERPRETATION

40% employees interested in Direct Investment i.e. through Capital

Market and stated the following reasons i.e. better growth and flexibility

with prospective return,small and smart returns in short term plus risk

appetite by monitoring day to day capital market transaction while 32%

are interested in Indirect Investment i.e. through Mutual Funds and stated

the following reasons i.e. better returns with diversification,low risk with

better returns.

28% of the employees are interested in Diect Investment i.e. through

Capital Market as well as in Indirect Investment i.e. through Mutual

Funds and stated the following reasons are to get more Internal Rate of

Return,Capital Market gives better returns but with huge risk and Mutual

Funds diversify their portfolio.

144

3) Factors that make India an Attractive Destination for FII Investment ?

Factors Percentage(%) and Frequency

a) Attractive Market 48

b) Strong Rupee 3

c) Outsourcing 3

d) All of the Above 34

e) Any other 12

145

INTERPRETATION

48% employees in the survey believe that India is an Attractive Market

for the investors , 3% employees on Strong Rupee and 3% on

Outsourcing

34% believe that a combination of an Attractive Market, Strong Rupee

and Outsourcing together make India an attractive destination for FII

investment while 12% employees have specified other factors like

developing country with cheap labor, interest rate in developed country is

very less due to which developing countries will give more returns in

long term,Strong fundamentals are the micro and macro factors offered in

the economy

146

4) Which Investor can easily enter and exit from the Market ?

Investor Percentage(%) and Frequency

a) FDI 36

b) FII 64

INTERPRETATION

36% employees were found in the survey that FDI investor can easily

enter and exit from the Market while majority of the employees i.e. 64%

are aware of the fact that FII investor can easily enter and enter from the

Market as there are not much restrictions in FII investment

147

5) Are you aware of the percentage of Investment allowed through

FDI route in Banking and Insurance Sector ?

Percentage

Awareness

Percentage(%) Frequency

a) Yes 61 61

If “Yes” then how

much

a) 49% and 26%

b) 26% and 49%

c) 100% and 49%

d) 51% and 40%

63

31

3

3

38

19

2

2

b) No 39 39

INTERPRETATION

148

61% of the employees in the survey agreed that they are of the FDI

percentage in Banking and Insurance Sector while 39% of the employees

were found to be not aware of FDI percentage in Banking and Insurance

Sector

If “Yes” then how much ?

INTERPRETATION

38 employees from 61 employees believe that FDI percentage is 49% in

Banking Sector and 26% in Insurance Sector, 19 employees on 26% and

49%, 2 employees on 100% and 49% but the fact is 100% FDI is allowed

for Non Banking Financial Sector ( NBFC), 2 employees on 51% and

49%

This shows that inspite of working in Banks, Insurance and Broking Firm

many employees are not much aware of the FDI percntage as it doesn’t

come under their job profile.

149

6) In view of the Volatile Stock Market, do you feel that the FII

Investments in Indian Stock Markets would increase/ decrease ?

Increase/Decrease in FII

Investments

Percentage(%) and Frequency

a) Yes 61

b) No 12

c) May be / No opinion 27

INTERPRETATION

61% employees in the survey feel that when there is volatility in Stock

Market, FII Investment in Indian Stock Market would either increase or

decrease ,12% employees feel that it should remain the same even during

150

volatile stock market and the the remaining employees i.e. 27% did not

give any opinion regarding this statement.

7) According to you are sufficient players available in the Banking

and Insurance Sector ?

If “Yes” then give 2 reasons

Sufficient Players Percentage(%) and Frequency

a) Yes 79

b) No 21

INTERPRETATION

79% employees in the survey agreed that there are sufficient players in

the Banking and Insurance Sector and gave the following reasons i.e to

increase their reach to the rural areas, to increase their branches so that

customers can get choice in product and services

151

21% employees disagree to this statement as they want more Banks and

Insurance Companies to enter Indian Market because India is a growing

market after China so due to competiton Insurance and Bank players will

make improvement in their products and services.

8) Do you think that more Foreign Banks and Insurance Companies

would increase the competition that would benefit the Indian Clients

Whichever is your choice please briefly explain

Increase in Competition Percentage and Frequency

a) Yes 79

b) No 21

INTERPRETATION

79% employees agreed to this statement in the survey and gave the

following reasons ie it will increase economic growth and will be

beneficial for the economy, service quality will improve by introducing

new products in the market, Customer will get large number of options

with better products and services

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21% of the employees in the survey disagree to this statement and gave

the following reasons i.e. there is no monopoly in the market, Foreign

players plays a good role in metropolitan city so its good only for people

staying in metropolitan city or abroad.

9) Which is a better route for Sector wise Growth ( Banking and

Insurance ) ?

Sector wise Growth Route Percentage(%) and Frequency

a) FDI 70

b) FII 30

INTERPRETATION

70% employees in the survey believe that FDI is a better route for sector

wise growth as there are restrictions due to which new player cannot

easily enter and exit from the market while 30% employees agreed that

FII is a better route for sector wise growth.

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10) Your experience as a Client of Bank/ Insurance Company post

liberalization

Experience as Bank/ Insurance

Company Client

Percentage(%) and Frequency

a) Excellent 22

b) Very Good 36

c) Good 36

d) Average 6

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INTERPRETATION

22% employees in the survey has a excellent experience for being a client

of Bank/ Insurance Company post liberalization. Many new Banks and

Insurance Companies had entered in Indian Market so there is no

monopoly in post liberalization. At present clients have more chioce for

products and services provided by banks and Insurance Company.

36% employees has a very good experience, 36% employees has a good

experience, 6% employees has a good experience for being a client of

Bank/ Insurance Company post liberazation.

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11) Does FDI in Banking / Insurance Sector helps to perform better ?

Better Performance Percentage(%) and Frequency

a) Yes 88

b) No 9

c) May be / No Opinion 3

INTERPRETATION

88% employees in the survey think that FDI helps Banking / Insurance to

perform better , 9% employees disagreed to this statement, 3%

employees agreed that it may help among which which some gave no

opinion

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12) Do you feel that the Banks and Insurance Companies can offer

products which are more customer centric ?

Variation in Products Percentage(%) and Frequency

a) Yes 88

b) No 12

INTERPRETATION

88% i.e majority of the employees in the survey feel that the Banks and

Insurance Companies can offer products which are customer centric i.e

creating a positive consumer experience at the point of sale and post-sale

while remaining i.e.12% employees disagree to this statement

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13) Do you think by increasing FDI limits in Banking / Insurance

Sector will help their Performance ?

Increase in FDI limits for better

Performance

Percentage(%) and Frequency

a) Agree 66

b) Disagree 9

c) May be / No Opinion 25

INTERPRETATION

66% employees in the survey agreed that increase in FDI limit can help

Banks and Insurance Sector to perform better, 9% employees disagreed to

this statement because if FDI limit increases than the present limit so

foreign country financial crisis will have more effect on our country E.g.

2008 U.S Financial crisis while remaining i.e. 25% employees think that

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it might effect among which some didn’t gave any opinion to this

statement in the survey.

14) Do you think Asset Management Department plays an important

role in Banking and Insurance Sector ?

Asset Management Importance Percentage(%) and Frequency

a) Yes 97

b) No 3

INTERPRETATION

97% i.e. majority of the employees in the survey agreed to this statement

which is a fact because Deposits are the important assets in Banking

Sector due to which interest rate increases when there is dificit in bank

deposits while remaing i.e.3% employees disagree to this statement.

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15) According to you Asset Management Department of Banking and

Insurance Sector are affected by FDI Inflows and FII Outflows ?

Effect on Asset Management Percentag(%) and Frequency

a) Strongly Agree 18

b) Agree 73

c) Strongly Disagree 6

d) Disagree 3

INTERPRETATION

18% of the employees in the survey strongly agree that Asset

Management Depatment get effected by FDI inflow and FII outflows in

Banking and Insurance Sector, 73% i.e. majority of the employees in the

survey agreed to this statement and this is a fact.

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6% of the employees were found to be strongly disagree to this

statementwhile remaining i.e. 3% of the employees disagreed to this

statement

8. CONCLUSION

The process of economic reforms which was initiated in July 1991 to

liberalize and globalize the economy had gradually opened up many

sectors of its economy for its foreign investors. A large number of

changes that were introduced in the country’s regulatory economic

policies heralded the liberalization era of the FDI policy regime in India

and brought about a structural breakthrough in the volume of the FDI

inflows in the economy maintained a fluctuating and unsteady trend

during the study period. It might be of interest to note that more than 50%

of the FDI inflows received by India from Mauritius during the period

from 1991-2009 came from Mauritius and U.S.A. The main reason for

high level of investment from Mauritius was that the fact that India

entered into a double taxation avoidance agreement (DTAA) with

Mauritius were protected from taxation in India. Among the different

sectors, the electrical and equipment had received the larger proportion

followed by service sector and telecommunication sector.

The Indian Stock Markets have really come of age there were so many

developments in the last 15 years that make the markets on par with the

developed markets. The Foreign Capital is free and unpredictable and is

always on the lookout of profits FIIs frequently move investments, and

those swings can be expected to bring severe price fluctuations resulting

in increasing volatility.

The face of banking is changing rapidly. Competition is going to be tough

and with financial liberalization under the WTO, banks in India have to

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benchmark themselves against the best in the world. For a strong and

resilient banking and financial system, therefore banks needs to go

beyond peripheral issues and tackle significant issues like improvement

in profitability, efficiency and technology, while achieving economies of

scale through consolidation and exploring available cost effective

solutions.

On the Insurance regulatory side, there are outstanding issues concerning

solvency regulations, further liberalizing investment rules, caps on

foreign equity shareholding as well as the enforcement of price tariffs in

the non life insurance sector. The proliferation of bancassurance is

rapidly changing the way insurance products are distributed in India.

There will also have strong implications on the process of financial

convergence and capital market development in India. With the majority

of the population is still residing in rural areas, the development of rural

insurance will be critical in driving overall insurance market development

over the longer term.

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SUGGESTIONS

Banking sector should grow in size to meet the needs of the economy.

There is a need to extend the geographic coverage of banks and

improve access to banking services.

India needs to further liberalize investment regulations on insurers to

strike a proper balance between insurance solvency and investment

flexibility.

Both the life and non life insurance sectors would benefit from less

invasive regulations

Price structures need to reflect product risk. Obsolete regulations on

insurance prices will have to be replaced by risk differentiated pricing

structures.

There is huge untapped, for example, in the largely undeveloped

private pension market. At the moment, less than 11% of the working

population in India is eligible for participation in any formal old age

retirement scheme. Private insurers will have a key role to play in

serving the large number of informal sector workers.

Price liberalization will be needed to improve underwriting efficiency

and risk management.

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9. BIBLIOGRAPHY

BOOKS

Indian Financial System by M Y Khan

Research Methodology by C R Kothari

Wealth Management by Arindam Banerjee

Foreign direct investment in India by Lata Chakravarthy

Foreign Institutional Investor by G Gopal Krishna Murthy

INTERNET SITES

www.rbi.org.in/ home.aspx

www.insurance.com

www.banks.com

www.bseindia.com

www. on-line trading.com

www.nseindia.com

www.livemint.com

NEWSPAPER

Economic Times

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ANNEXURE

NAME: AGE:BANK / INSURACE / BROKING FIRM:

1) Are you an investor in Stock Market/ s?

a) Yes

b) No

2) Are you a direct or indirect investor i.e?

a) Capital Market

b) Mutual Fund

Please indicate two reasons for your choice

_____________________________________________________________

_____________________________________________________________

3) Factors that make India an attractive destination for FII Investment

a) Attractive Market

b) Strong Rupee

c) Outsourcing

d) All of the above

e) Any other please specify ____________________________________

4) Which investor can easily enter and exit from the market?

a) FDI

166

b) FII

5) Are you aware of the percentage of investment allowed through FDI

route in

Banking and Insurance Sector?

a) Yes

b) No

If “Yes” then how much

a) 49 % and 26%

b) 26% and 49%

c) 100% and 49%

d) 51% and 49%

6) In view of the volatile stock markets, do you feel that the FII investments

in Indian Stock Markets would increase/ decrease?

a) Yes

b) No

c) May be / no opinion

7) According to you are there sufficient players available in the Banking

and Insurance Sector?

a) Yes

b) No

If “Yes” please give 2 reasons

_____________________________________________________________

167

8) Do you expect that more foreign banks and insurance companies would

increase the competition that would benefit the Indian clients?

a) Yes

b) No

Whichever is your choice please briefly explain

_____________________________________________________________

9) Which is a better route for sector wise growth (Banking and Insurance)?

a) FDI (Foreign Direct Investment)

b) FII (Foreign Institutional Investment)

10) Your experience as a client of Bank/Insurance Company post

liberalization?

a) Excellent

b) Very Good

c) Good

d) Average

11) .Does FDI in banking/insurance sector helps bank perform better?

a) Yes

b) No,

c) May be/ No opinion

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12) Do you feel that the banks and insurance companies can offer products

which are more customers centric?

a) Yes

b) No

13) Do you think by increasing FDI limits in Banking/Insurance sector will

help their performance.

a) Agree

b) Disagree

c) May be / No opinion

14) Do you think Asset Management Department plays an important role in

Banking and Insurance Sector?

a) Yes

b) No

15) Asset Management Department of Banking and Insurance Sector are

affected by FDI Inflows and FII outflows

a) Strongly Agree

b) Agree

c) Strongly Disagree

d) Disagree

169