FDI AND FII

By,MON C BABU

NEERAJA N JAGADEESH

INVESTMENTSAn investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.

TYPES OF INVESTMENTS

Investments can be broken into three basic groups: ownership, lending and cash equivalents.

OWNERSHIP INVESTMENTS

Ownership investments are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. Eg. Stocks: they are literally certificates that say you own a portion of a company. Business(The money put into starting and running a business is an investment), real estate(Houses apartments or other dwellings that you buy to rent out or repair and resell are investments.), precious objects(Gold, Da Vinci paintings)

LENDING INVESTMENTSLending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result. A bond issued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying far more than a bond - or it can lose heavily and go bankrupt, in which case bondholders usually still get their money and the stockholder often gets nothing.

E.g Your Savings account

Bonds

Cash equivalentsThese are investments that are "as good as cash," which means they're easy to convert back into cash.

E.g. A money market fund: it is an investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV)of $1 per share. A money market fund’s portfolio is comprised of short-term, or less than one year, securities representing high-quality, liquid debt and monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms and banks.

INVESTMENT INSTRUMENTSPrimary InstrumentA financial investment whose price is based directly on its market value. Examples of primary instruments include stocks, bonds, certificates of deposit, bills and anything else that has its own value.Underlying Option SecurityAn underlying option security is the financial instrument on which a derivative's (i.e., an option's) value is based – it provides the price that is used to determine the value of the derivative. An option is classified as a derivative because its value is derived from the underlying security.The price of derivative instruments, such as options, swaps and futures, is based on the value of their underlying assets.

American Depositary Receipt -ADRAn American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE or Nasdaq but they are also sold OTC.

Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the New York Stock Exchange (NYSE), Toronto Stock Exchange or the NYSE MKT, formerly known as the American Stock Exchange (AMEX). The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments , such as derivatives, which are traded through a dealer network.

Global Depositary Receipt - GDRA global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares but are offered for sale globally through the various bank branches. A GDR is a financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

GDRs may be traded in multiple markets, generally referred to as capital markets, as they are considered to be negotiable certificates. Capital markets are used to facilitate the trade of long-term debt instruments, primarily for the purpose of generating capital. GDR transactions in the international market tend to have lower associated costs than some other mechanisms that can be used to trade in foreign securities.

Foreign Currency Convertible Bond - FCCB

A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

FOREIGN DIRECT INVESTMENT (FDI)Foreign direct investment is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Why countries seek FDI?

● Domestic capital is inadequate for purpose of economic growth;

● Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;

● Foreign capital usually brings it with other scarce productive factors like technical know how, business expertise and knowledge

FOREIGN DIRECT INVESTMENT POLICY

Foreign Direct Investment (‘FDI’) – cross border investment with an objective to

establish ‘lasting interest’.

Objective - to encourage FDI to promote industrial & socio-economic development;

supplement domestic capital/ technology

Foreign investment in India is regulated by Government of India’s FDI policy. The

FDI guidelines administered by the Ministry of Commerce and Industry.

Department of Industrial Policy & Promotion (‘DIPP’), Foreign Investment

Promotion Board (‘FIPB’) and Secretariat of Industrial Assistance (‘SIA’)

regulate the FDI Policy

GoI has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a one-window to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies

Administrative and compliance aspects of FDI monitored by RBI

Since 1991, policy has been liberalized substantially to facilitate foreign investment

By direction

○ Inward

○ Outward

By Target

Mergers and Acquisitions

Horizontal FDI

Vertical FDI

By motive

Resource seeking

Market seeking

Efficiency seeking

Modes of FDI

Factors affecting FDI

Financial incentives (Funds from local Government)

Fiscal incentives (Exemption from import duties)

Indirect incentives (Provides land)

Political stability

Market potential & accessibility

Large economy

Market size

ADVANTAGES INDIA HAS TO OFFER

Stable democratic environment over 60 years of independence

Large and growing market

World class scientific, technical and managerial manpower

Cost-effective and skilled labour

Abundance of natural resources

● Large English speaking population

● Well-established legal system with independent judiciary

● Developed banking system and vibrant capital market

● Well developed accountancy, legal, actuarial and consultancy

profession

FDI ALLOWED IN DIFFERENT SECTORS

ROUTES OF FDI

ROUTES OF FDI

The Automatic Route: under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment.

The Government Route: under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance

ADVANTAGES OF FDI

★ Improves forex position of the country;

★ Employment generation and increase in production ;

★ Help in capital formation by bringing fresh capital;

★ Helps in transfer of new technologies, management skills, intellectual

property

★ Increases competition within the local market and this brings higher

efficiencies

★ Helps in increasing exports;

★ Increases tax revenues

DISADVANTAGES OF FDI

★ Domestic companies fear that they may lose their ownership to overseas company

★ Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;

★ Large giants of the world try to monopolise and take over the highly profitable sectors;

★ Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

★ Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company

Recent developments★49% FDI under automatic route permitted in Insurance and Pension sectors

★Foreign investment up to 49% in defence sector permitted under automatic route. The foreign investment in access of 49% has been allowed on case to case basis with Government approval in cases resulting in access to modern technology in the country or for other reasons to be recorded

★FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959

★FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks, Mobile TV, Headend-in- the Sky Broadcasting Service

★FDI up to 100% under automatic route permitted in Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels

★ In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products, sourcing norms can be relaxed up to three years and sourcing regime can be relaxed for another 5 years subject to Government approval

★ Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services increased from 74% to 100% under the automatic route

★ 100% FDI under automatic route permitted in Brownfield Airport projects

★ FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval

★ Foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and nonscheduled airtransport services up to the limit of 49% of their paid up capital

★ In order to provide clarity to the e-commerce sector, the Government has issued guidelines for foreign investment in the sector. 100% FDI under automatic route permitted in the marketplace model of e-commerce

★ 100% FDI under Government route for retail trading, including through e-commerce, has been permitted in respect of food products manufactured and/or produced in India

★ 100% FDI allowed in Asset Reconstruction Companies under the automatic route

★ 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond 74% will be allowed through government approval route

★ FDI limit for Private Security Agencies raised to 74% (49% under automatic route, beyond 49% and upto 74% under government route)

★ For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

★ Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture has been waived off

TOP INVESTING COUNTRIES

SECTORWISE DISTRIBUTION

FOREIGN INSTITUTIONAL INVESTMENTS (FII)A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include insurance companies, pension funds and mutual funds. The term is used most commonly in India and refers to outside companies investing in the financial markets of India.

An FII is any type of large investor who does business in a country other than the one in which the investment instrument is being purchased. In addition to the types of investors above, others include banks, large corporate buyers or representatives of large institutions. All FIIs take a position in a foreign financial market on behalf of the home country in which they are registered.

FIIAn institution established outside India, which invests in securities traded on the markets in India e.g.

Pension Funds Endowment Funds

Mutual Funds Foundations or Charitable Trusts

Investment Trust Asset Management Companies

Insurance companies Power of Attorney Holders

University Funds Bank

FII IN INDIACountries with the highest volume of foreign institutional investments are those that have developing economies. These types of economies provide investors with higher growth potential than in mature economies. This is why these investors are most commonly found in India, all of which must register with the Securities and Exchange Board of India to participate in the market.

If, for example, a mutual fund in the United States sees an investment opportunity in an Indian-based company, it can purchase the equity on the Indian public exchange and take a long position in a high-growth stock. This also benefits domestic private investors who may not be able to register with the Securities and Exchange Board of India. Instead, they can invest in the mutual fund and take part in the high growth potential.

Regulations for Investing in Indian CompaniesAll FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme (PIS). This scheme allows FIIs to purchase shares and debentures of Indian companies on the normal public exchanges in India.However, there are many regulations included in the scheme. There is a ceiling for all FIIs that states the max investment amount can only be 24% of the paid-up capital of the Indian company receiving the investment. The max investment can be increased above 24% through board approval and the passing of a special resolution. The ceiling is reduced to 20% of the paid-up capital for investments in public sector banks.

The Reserve Bank of India monitors daily compliance with these ceilings for all foreign institutional investments. It checks compliance by implementing cutoff points2% below the max investment amounts. This gives it a chance to caution the Indian company receiving the investment before allowing the final 2% to be invested.

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 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.

★Equity market development aids economic development:

○ By increasing the availability of riskier long term capital for projects, and increasing firm’s 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 firm’s 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.

★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:

○ “Hot money” 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.

Areas Affected by FIIStock market

The FII’s profit from investing in emerging financial stock markets, say the Indian stock Exchange. If the cap on FII is high then they can bring in lot of funds in the countries 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. So this is how influencing FII can be, as is seen in the present downtrend of the stock markets in India courtesy heavy FII selling.

Exchange Rates

The simple way of understanding is through Demand and Supply. If say US imports from India it is creating a demand for Rupee thus the Indian rupee appreciates w.r.t the dollar. If India imports then the dollar appreciates w.r.t the Indian rupee.

Exports & Imports:

The FII lead to appreciation of the currency, they lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. For e.g. if 1 USD = Rs.40 and a soap costs 1 USD. Now when the rupee appreciates 1 USD = Rs. 20, I will have to sell the same soap to the US for 2 US Dollars in order to sustain the same income that I have been making i.e. Rs.40. Thus excess FII fund inflow in the country can also make a negative impact on the economy of the country.

Inflation:

The huge amount 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 by the FII’s. This situation could lead to excess liquidity

Thus there should be a limit to the FII inflow in the country.

RECENT DEVELOPMENTS IN FIIReNew Power Ventures Pvt Ltd, a renewable energy producer, has signed a debt

financing agreement of US$ 250 million with Overseas Private Investment Corporation (OPIC), the US government's development finance institution, which will be used to construct up to 400 megawatts (MW) of new solar power projects in India across multiple states.

Godrej Fund Management (GFM), the real estate fund management arm of Godrej Properties, has raised US$ 275 million from Netherlands-based APG Asset Management NV, which will be used to invest in residential projects in India.

DriveU, an on-demand driver provider operated by Humble Mobile Solutions Private Limited, has raised about US$ 1 million from Unitus Seed Fund and Silicon Valley-based angel investors.

● Canada Pension Plan Investment Board (CPPIB), an investment management company, has bought a large stake in Kotak Mahindra Bank Ltd from Japan-based Sumitomo Mitsui Banking Corporation, which earlier held a 3.58 per cent stake in the private-sector lender.

● 500 Startups, US based venture capital seed fund, has launched a US$ 25 million fund called 500 Kulfi, which aims at making 25-50 investment deals per year in India, Bangladesh, and Sri Lanka, with a focus on financial technology, education, health and wellness, data analytics, content, Software-as-a-Service (SaaS), and small and medium businesses.

● Abraaj Group, a Dubai based PE investor, is set to buy a majority stake in an Indian firm Quality CARE India Ltd, which runs CARE Hospitals.

● Global investment banking major Goldman Sachs has invested Rs 441 crore (US$ 64.703 million) to acquire an equity stake in Gurgaon-based hotel development and investment start-up SAMHI Hotels which will help fund SAMHI's expansion plans.

● Singapore-based investment firm, Temasek Holding, has acquired 73 per cent stake in Hyderabad-based Care Hospitals, India's fifth largest private healthcare network, for Rs 1,800 crore (US$ 264.09 million).

● Japanese conglomerate SoftBank has led a group of investors to invest Rs 630 crore (US$ 100 million) in Gurgaon-based OYO Rooms, which helps local hotels and select set of vendors to spruce up room amenities.

● Acumen, a not-for-profit global venture fund, has invested US$ 1.8 million in Sahayog Dairy, an integrated company that sources milk from 272 centres across five districts adjoining Harda district in Madhya Pradesh.

● Global infrastructure investment manager I Squared Capital, has decided to invest US$ 150 million in Amplus Energy Solutions Private Ltd, which sets up distributed solar power generation projects in India.

● Zomato, a restaurant search and discovery platform, has raised US$ 60 million from Singapore government-owned investment company Temasek, along with existing investor Vy Capital, in order to explore new business verticals.

ROLE OF FIIs★ The Indian stock market has come of age and has substantially

aligned itself with the international order.

★ Market has also witnessed a growing trend of ‘institutionalization’ that may be considered as a consequence of globalization.

★ It is influence of the FIIs which changed the face of the Indian stock markets. Screen based trading and depository are realities today largely because of FIIs

★ FIIs are the trendsetters in any market. They were the first ones to identify the potential of Indian technology stocks. When the rest of the investors in these scrips, they exited the scripts and booked profits.

★ Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the changed system.

★ The FIIs are playing an important role in bringing in funds needed by the equity market.

★ A positive contribution of the FIIs has been their role in improving the stock market infrastructure.

★ Led to emergence of new system called the depository system.

WHY ENCOURAGE FIIs???

★ To enhance the Global liquidity into the equity markets.

★ Raise the price earning ratio.

★ Built our reputation in the international community.

★ Instrumental in capital formation.

DIFFERENCE BETWEEN FDI AND FIIFDI FII

It is long-term investment is generally short-term investment

Investment in physical assets Investment in financial assets

Aim is to increase enterprise capacity or productivity or change management control

Aim is to increase capital availability

Leads to technology transfer, access to markets and management inputs

FII results in only capital inflows

FDI FII

FDI flows into the primary market.Entry and exit is relatively difficult

FII flows into the secondary market.Entry and exit is relatively easy

FDI is eligible for profits of the company FII is eligible for capital gain

Does not tend be speculative Tends to be speculative

Direct impact on employment of labour and wages

No direct impact on employment of labour and wages

Abiding interest in mgt. Fleeting interest in mgt.

THANK YOU