Economics :: Spotlight :: FII

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What is FII?

FII is nothing but Foreign Institutional Investors. Below entities are called FIIs
1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Funds
7. Endowments
8. Foundations
9. Charitable Trusts
10. Asset Management Companies
11. Institutional Portfolio Managers
12. Trustees
13. Power of Attorney Holders

Advantages

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 nondebt 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

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 countrys 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

financial

rate

investment

repercussions

on

opportunities.

countries

and

Hot

banks.

money

When

can

money

have

is

economic

injected

and

into

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.
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What is the relation 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.
**The Economy high and low depends on the FDI's Investment where as the Stock mark
fluctuations are generally because of FII
****************************************************************
What is IPO ?
*Initial public offering ....jb koi compony pahli bar apne poduct ko public ko pahli
bar offer karti hai to usko IPO bolte hai .
*it can be used by small or big compony to increase their capital.
*many companies that request for initial public offering make their finance from the
lone by the bank ..

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WHICH IS BETTER FOR INDIA FDI or FII

?
The article looks like having a good discussion on FDI and
FII ,
even though old article( 2006 April).
India doesn't need FDI
It won't be an exaggeration to say Nimesh Kampani, Chairman, JM Morgan Stanley, knows the
Bombay Stock Exchange like the back of his hand.
Kampani was one of those who propelled the stock exchange boom in the early 1980s when
Reliance Industries founder Dhirubhai Ambani entered the world of equities.
Nimeshbhai, as he is popularly known, is media-shy and a man of few words. For a change, he
agreed to a rare and exclusive interview with Managing Editor (National Affairs) Sheela
Bhatt in New Delhi and discussed what can bring about changes in India.
The world is saying <st1:country-region w:st="on">India</st1:country-region> will
grow, <st1:country-region w:st="on">India</st1:country-region> will become a big power.
What are the hidden risk factors in this hype?
There is too much liquidity across the globe. Rich people all around have so much cash in hand
that they are looking for markets that are growing. How many places in the world are registering
growth? Europe doesn't have much of it. Only Asia is attractive.
The <st1:country-region w:st="on">US</st1:country-region> is showing one to three per cent
growth in most sectors. The <st1:country-region w:st="on">US</st1:country-region> economy
is developed. People there have cash in hand to spend. People in the <st1:country-region
w:st="on">US</st1:country-region> want to consume using credit cards.
Our risk factor lies in liquidity. Too much liquidity of those consumer economies is chasing
Indian stocks. Because there is an absence of growth in their domestic markets. Their
money is welcomed in <st1:country-region w:st="on">India</st1:country-region> but the
risk of withdrawal comes along with that.
If withdrawal of money happens it can very well bust Indian stocks.
In the last five years, $45 billion investment has come to the Indian markets from foreign
institutional investors. Today, the market value of their money should be around $120
billion.Who will buy when they will rush in to sell?

Right now, one lot is selling and the other lot is buying. Those who bought shares at much lower
price of say, Rs 80 are selling at Rs 800 and booking profit. The newcomers, on the other hand,
are buying at Rs 800 with confidence in market. The new buyers will like to wait for the next
five years for the stock prices to go further up.
We know <st1:country-region w:st="on">Japan</st1:country-region> has invested $5 billion in
the Indian market. Much of it is retail money. These days, as soon as new public issue opens, it
gets filled up within the first few hours.
Why is it so?
Because <st1:country-region w:st="on">Japan</st1:country-region> has saved money for years.
Investors there get zero or negligible interest. At some places, bank charges them for keeping
deposits. In our banks, on the contrary, we get four per cent, at least. The Japanese are tired of
dead investment. So they are looking out.
In the last one year, the Japanese have got return of 48 per cent in the Indian stock exchange.
They had started with $1 billion. Now it has reached $5 billion. Nomura Securities and others
invested in it. They take index stocks. When an investor does not know the country well, he
tends to buy index shares only.
The Japanese and the Koreans have invested. Recently I met 30 parliamentarians
from<st1:country-region w:st="on">Denmark</st1:country-region>. I made a presentation to
them on <st1:country-region w:st="on">India</st1:country-region>'s future. Thereafter, two of
them came and talked about investing in Indian stocks.

What can go wrong in realising your dreams of <st1:country-region

w:st="on">India</st1:country-region>?
Politics. If something happens to this government and there is instability at the Centre, it can
affect our growth.
In 2004, between May 13 and 18, the stock index plunged when Sonia Gandhi delayed her
decision to announce (Dr Manmohan) Singh's name as the prime minister. The market picked up
only when the announcement was made.
The investor does not like political uncertainty. They are afraid of power in the hands of Left
parties or the so-called Third Front because all they want is a stable government. These days
people say Dr Singh is the weakest prime minister but the stock market does not think so. Dr
Singh may be weak politically but he is the best prime minister as far as the country's economy is
concerned.
The prime minister along with Finance Minister P Chidambaram, Commerce and Industry
Minister Kamal Nath and Deputy Chairman of Planning Commission Montek Singh Ahluwalia
are too good for Indian markets.

<st1:country-region w:st="on">China</st1:country-region> has

not grown with the help of FII investment. Your comment.
Yes. <st1:country-region w:st="on">China</st1:country-region> has grown with the help
of bank money, or people's money. <st1:country-region w:st="on">China</st1:countryregion> has got four prime banks owned by the government. These banks' non-performing assets

is approximately above 30 per cent. Can you imagine about Rs 6 lakh crore (Rs 6 trillion) is
disappearing from the total deposits of Indian people kept in the Indian banks?
Indian banks have deposits worth around Rs 20 lakh crore (Rs 20 trillion).
Chinese banks have more than what Indian banks have. Out of that money, 30 per cent has
vanished. Its savings rate is around 40 per cent. The question is: Where has people's money
gone? It has gone into building infrastructure. They have issued loans to whoever came to the
bank. To build infrastructure, they were fast to disburse money. Now, they are writing off those
loans. In <st1:country-region w:st="on">India</st1:country-region>, bad debts of banking
industry stands at a meagre 1.75 per cent.
<st1:country-region w:st="on">China</st1:country-region> went ahead full steam without taking care of
the accounting and financial niceties. <st1:country-region w:st="on">India</st1:country-region> is a democratic
country. Here, journalists and Parliament would ask questions about fiscal management. About 30 per cent of bad
debts won't be allowed.

A friend of mine was in <st1:country-region w:st="on">China</st1:country-region> recently. He

was travelling along a road lined with houses on both sides. After 15 days, when he returned
along the same road, he saw those homes had disappeared and a bigger road was being built.
That is <st1:country-region w:st="on">China</st1:country-region>. There the government can
evacuate you in no time.
Many of us feel the Sensex boom helps only a few people. Indian slums are growing as ever.
Slums will not go away in the next two decades. You need wealth to distribute it. We need to
create wealth in private hands.In <st1:country-region w:st="on">China</st1:countryregion>,
government
created
wealth.
In <st1:country-region
w:st="on">India</st1:country-region>, we are following a different route. The Indian
process will be a slow one.
Recently we at Morgan Stanley, handled the issue of China Construction Bank. It is the first
government-owned bank in <st1:country-region w:st="on">China</st1:country-region> to go
public. It was heavily subscribed. Meaning, <st1:country-region w:st="on">China</st1:countryregion> is now adopting discipline in fiscal management.
Recently, <st1:country-region w:st="on">China</st1:country-region> collected around $8 billion
from the <st1:country-region w:st="on">US</st1:country-region> and Hong Kong and other
places and wrote off old bad debts. Now, it has begun repairing its balancesheet.
Therefore, we need huge investment in infrastructure before we can even think of removing
slums. We cannot tackle poverty until we raise money to finance infrastructure. I always believe
that more roads, more construction and development of tourism are sure-shot ways to create
huge employment.
Do you find deficit financing a big issue for Indian fiscal management?
I don't think it's an issue. <st1:country-region w:st="on">India</st1:country-region>'s deficit is
under control. The problem lies with the states and not with the Centre. <st1:country-region
w:st="on">India</st1:country-region>'s combined deficit is 10 per cent. States should improve
financial management. Gujarat and Tamil Nadu are the best managed states as the governments
there are excellent in financial management. They are developing their states' resources
impressively.
If you are asked to take one creative decision as finance minister, what will that be?
I will go to Parliament and ask for permission to create fiscal deficit. I want to spend $50 billion
on infrastructure! Here deficit financing is justified because I am not spending on people. Rather,

I am creating assets. People will get employment and that should justify deficit planning. You
need political guts and courage to do it.
Planners would fear that if tax does not rise, inflation will increase and savings would pump in
more money. This, in turn, will increase liquidity. But all depends on the management of
spending on infrastructure.
Spending on infrastructure will increase internal mobility of our people. I feel tourism and
infrastructure are the areas where the Indian government should be involved. All other areas can
be developed with private money.
Does <st1:country-region w:st="on">India</st1:country-region> need more foreign direct
investment?
<st1:country-region w:st="on">India</st1:country-region> doesn't need FDI. To get FDI, you have to
install infrastructure first. <st1:country-region w:st="on">China</st1:country-region> is getting 10 times more FDI
than <st1:country-region w:st="on">India</st1:country-region> because they have invested in roads and bridges and
airports.

Why do you say <st1:country-region w:st="on">India</st1:country-region> doesn't need

FDI?
You need infrastructure to manage incoming FDI. You need clear policy.
FDI is not needed in <st1:country-region w:st="on">India</st1:country-region> because
we are getting more money from the FIIs. We are getting around $12 billion from them.
They are buying in secondary markets and that money gets into the Indian economy.
While <st1:country-region w:st="on">India</st1:country-region> gets around FDI worth
$5 billion, <st1:country-region w:st="on">China</st1:country-region> gets around $50
billion. They don't have our types of stockmarkets. So FIIs are absent there.
In <st1:country-region w:st="on">India</st1:country-region>, when FIIs pump in $12
billion, it means a few Indians have sold their shares to them (the FIIs), so that free cash
gets invested somewhere within <st1:country-region w:st="on">India</st1:countryregion> by Indians.

That money goes into land, buying of new stocks and into banks.
The fundamentals of money are that it goes where it gets sound returns. Therefore, if you keep
up our policies and make them fair, <st1:country-region w:st="on">India</st1:countryregion> should not worry which way it gets money. Mittal Steel, Reliance, Tata, Vedanta and
other Indian companies are going to invest more than Rs 2 lakh crore (Rs 2 trillion) in the
coming years.
FDI is not a big issue because Indians are in now a position to raise big money and invest
in<st1:country-region w:st="on">India</st1:country-region>. The government should see that
people get returns.
Source : http://www.rediff.com/money/2006/apr/03minter.htm

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*********

FII players pull out their money from stock-market even for
slightest good/bad rumors and invest in in different country.
That's why it's called 'Hot money' -was responsible for 1997
Asian financial crisis {2 marker in GS Mains Paper-I, 2007}
In 2007, the 2 marker appeared because that year SEBI
made some regulation in FII investment via participatory
notes to control the hot-money.
Also, there were allegations that Pakistan might use it for
'financial-terrorism' using FII via Participatory notes.
Although there are tools such as Tobin Tax, to control the
flight of hot-money. But still, For development, Governments
want and prefer FDI and not FII. Because It's hard to pull out
FDI once invested.