Foreign Institutional investors are organizations which pool large sums of money

and invest those sums in securities, real property and other investment assets. They can also
include operating companies which decide to invest its profits to some degree in these types of
assets. Types of typical investors include banks, insurance companies, retirement or pension
funds, hedge funds, investment advisors and mutual funds

Foreign Institutional investors will have a lot of influence in the management of corporations
because they will be entitled to exercise the voting rights in a company.

Furthermore, because institutional investors have the freedom to buy and sell shares, they can
play a large part in which companies stay solvent, and which go under. Influencing the conduct
of listed companies, and providing them with capital are all part of the job of investment
management.

India, the second fastest growing economy after China, has recently seen positive
foreign institutional investor (FII) inflows driven by the sound fundamentals and growth
opportunities. According to analysts, the upward revision of economic growth from 5.8 per cent
to 6.1 per cent, better-than-expected performance of companies in the quarter ended-June 30,
the proposed new direct taxes code that might lead to savings in the tax payer’s money, and
the trade policy with an ambitious target of US$ 200 billion exports for 2010-11 have all revived
the confidence of FIIs investing in India. FIIs have made net investments of US$ 10 billion in the
first six months (April to September) of 2009-10.

The Government of India opened up the Indian capital market to global competition as a part of
the reform process and took measures to initiate structural reforms by putting in place the
requisite regulatory and supervisory structure in the form of SEBI. In a move towards current
account convertibility and to increase foreign exchange inflows, Foreign Institutional Investors
(FIIs) were permitted to invest in the tradable Indian securities such as shares, debentures, bonds,
mutual fund units etc. through primary and secondary markets as per guidelines issued by
Government of India

A study conducted by the World Ban reports that stock market liquidity improved in those
emerging economies that received higher foreign investments.

Apart from the impact they create on the market, their holdings will influence firm performance.
For instance, when foreign institutional investors reduced their holdings in Dr. Reddy’s Lab by
7%

Despite these observations, countries and firms are interested in attracting foreign capital
because it helps to create liquidity for both the firms stock and the stock market in general. This
leads to lower cost of capital for the firm and allows firm to compete more effectively in the
global market place. This directly benefits the economy and the country.
 As the Indian equity market is growing, the trend and future prospects in
foreign institutional investments has become a topic of great concern. A recent research survey
by Japan Bank for international operation (JBIC), shows that in the next 3 years, India will be the
third most favored investment destination for Japanese investors.

Based on the IMF’s 2008 estimates of worldwide GDP, India is today the world’s 12th largest
economy. India's diverse economy encompasses traditional village farming, modern agriculture,
handicrafts, a wide range of modern industries, and a multitude of services. Services are the
major source of economic growth, accounting for more than half of India's output with less than
one third of its labor force

Foreign Institutional Investors (FIIs) are allowed to invest in the primary

and secondary capital markets in India through the portfolio investment scheme (PIS)
administered by the Reserve Bank of India (RBI). Under this scheme, FIIs can acquire
shares/debentures of Indian companies through the stock exchanges in India.

The ceiling for overall investment by FIIs is 24 per cent of the paid up capital of the Indian
company (20 per cent in the case of public sector banks, including the State Bank of India). The
ceiling of 24 per cent for FII investment can be raised subject to (i) approval by the company’s
board and the passing of a special shareholder resolution to that effect (ii) certain sector caps
imposed by RBI and the Government of India. The RBI monitors the ceilings on FII investments
in Indian companies on a daily basis and publishes a list of companies allowed to attract
investments from FIIs with their respective ceilings.

Deutsche Bank AG has shown the most confidence in Indian firms during the difficult conditions
of 2008. The bank remained the top holder of Indian stocks among FIIs in 2008. Though the
value of its investment fell sharply due to the massive decline in stock prices, it actually invested
in more firms in 2008 than 2007. Deutsche Bank and its affiliates hold Rs 16,344.77 crore
(US$3.4 billion) in Indian equities. HSBC and Citigroup own the second and third largest
portfolios (Table below). Deutsche Bank is the only FII that has increased its number of firms in
its portfolio - from 84 in 2007 to 88 in 2008.
Need of the Foreign Capital

Development of basic infrastructure Roads, Railways, sea ports, warehouses banking services
and insurance services are the prominent players

. Rapid industrialization: the need for foreign capital arises due to the policy initiatives of the
government to intensify the process of industrialization

To undertake the initial risk: many developing countries suffer from severe scarcity of private
investors. The risk problem can be diverted to the foreign capitalists by allowing them to invest.

4. Global imperatives: Globalization is the order of the day. The international agreements
between countries are also the reason for the foreign capital. The multinational companies are
expanding their presence to many countries; while they are entering into the foreign countries
they will bring their capital

Comparative advantage: The variations in the cost of capital like interest rate are also one of
the important factors which resulting in approaching foreign capital. For example; Interest rates
are high in India compared with developed economies. To reduce the cost of capital,
companies/organizations are now looking for foreign capital.

To remove the technological gap: The developing countries have very low level of technology
compared to the developed countries. However, these developing countries posses a strong urge
for industrialization to develop their economies and to wriggle out of the low level equilibrium
trap in which they are caught.

FII’s in India

The Indian capital market opened its doors to foreign investors in 1991. The new industrial
policy of the government has initiated many measures to attract foreign capital. The following
table highlights the registered FIIs in India during the period from 2006 to 2010.

Registration of FII’s
 FIIs seeking to invest in Indian Companies are required to be registered with the
Securities and Exchange Board of India (the “SEBI”). Such FIIs would have to comply with the
provisions of the Guidelines for Foreign Institutional Investors2 and the Securities and Exchange
Board of India (Foreign Institutional Investors) Regulations, 1995

Fees

The SEBI charges a registration fee of US$ 10,000 (payable only by way of cheque or demand
draft payable at (“Mumbai, India”) for registering FIIs with it

Conclusion

Foreign Institutional Investors (FIIs) were permitted to invest in all the listed
securities traded in Indian capital market for the first time in September, 1992.

The Indian economy has been one of the fastest growing economies in the
world, next only to China. According to the strong growth rate of GDP, India now ranks 10th
among the largest economies in the world (World Bank Report). Indian economy has
experienced the problem of capital in many instances. While planning to start the steel
companies under government control, due to shortage of resources it has taken the aid of foreign
countries. Likewise we have received aid from Russia, Britain and Germany

The FIIs investment in Indian securities market has shown fluctuating trend
year after year. This may be due to changes in the global financial system. The global financial
crisis has resulted in negative inflow of FIIs

FDI

India has made tremendous progress in building a policy environment to encourage investment.
As a result, the country’s economy is growing more rapidly and FDI inflows have accelerated
impressively. However, investment remains insufficient to meet India’s needs, particularly in
infrastructure. Current efforts to strengthen and liberalise the regulatory framework for
investment need to be intensified and India’s well-developed economic legislation implemented
at an accelerated pace both at national level and right across India’s states and union territories.

India has made tremendous progress in promoting investment

India has made impressive strides in building a policy environment to encourage both domestic
and foreign investment, in particular to attract foreign direct investment (FDI) and facilitate
outward investment,

Restrictions on large-scale investment have been greatly relaxed. Many sectors formerly reserved
to the public sector have been opened up to private enterprise.

FDI inflows have grown from relatively insignificant levels in the early 1990s to magnitudes
now greater than most developing countries. These inflows have begun to play an important role
in providing employment, diversifying consumer choice and adding competitive stimulus to
domestic investment. India’s outward investment, which has grown apace with its inward
investment during the 2000s, is also contributing to India’s role as a major player in the world
economy. Indian companies are active in M&A

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It
can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign firm
which receives the investment, it can provide a source of new technologies, capital, processes,
products, organizational technologies and management skills, and as such can provide a strong
impetus to economic development.   Foreign direct investment, in its classic definition, is
defined as a company from one country making a physical investment into building a factory in
another country.

The most profound effect has been seen in developing countries, where yearly foreign direct
investment flows have increased from an average of less than $10 billion in the 1970’s to a
yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in
1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global
FDI.. Driven by mergers and acquisitions and internationalization of production in a range of
industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998

Any decision on investing is thus a combination of a number of key factors including:

assessment of internal resources,

competitiveness,
market analysis
market expectations.
International Business

 Technical Collaborations

 Acquisitions

 Take over

 Licensing

 Branding

 Merger

 Franchising

 Contract Manufacturing

 Contract Marketing

 Joint Ventures

Few of the Multinational Companies

 American Companies : Microsoft, IBM, Pepsi, Coke, Unilever brothers, Procter and
Gamble, General Motor, Ford, Chrysler, Pfizer, Hyatt, J.W.Marriot, Hilton, FedEx,
Accenture etc.

 European Company: VW,BMW,MERC, Bayer, RENAOULT, Fiat, Fashion

Technology, etc.

FDI Inflows: Advantages to the Host Countries

 Capital: Enhanced imports

 Management: modern and up to date advanced systems of Management

 Productivity: Better economic of scale/better technology

 International Trade

 Networking: Better opportunities to promote country’s brand

  Human Resource: Additional Employment and quality of human resources,
people get knowledge and training

 Exports Promotions

 Generating Employments

 Arguments against FDI

 Capital flows may not be Real

 FDI may not be as Long-term and stable

 FDI Inflow may occur at Wrong time

 Productivity may not increase with FDI

 There may actually be a loss of Competitions

 Benefits of FDI can be limited because of Leverage-The foreign investor can

repatriate funds borrowed in his domestic market

 Firms specific advantages: A firm may try to capture the abnormal returns
through its brand name or its skills in management.

 Restrictions on FDI

 Agricultural and Plantations

 Real Estate Business

 Lottery, betting and Gambling

 Security Services

 Atomic Energy

 Railways

 Post office

 Govt. administrations

 India not a favorable destinations

 Poor Infrastructure

 Political Instability
  High levels of Corruptions

 Bureaucratic red tape

 Interpretations of policies and their implementations are quite complex

 Heterogeneous society

 Inordinate delay in projects

 Comparative FDI in US$ Billion

 Countries: 2004 2005 2006 2007

 INDIA 3.20 5.50 15.70 24.57

 CHINA 60.60 72.40 70.00 82.70

 Brazil 18.20 15.10 14.80 37.40

 Russia 15.40 14.60 28.40 27.80

India’s overseas Investments

- Indian companies can make overseas investment by market purchase of foreign

exchange without prior approval of the RBI up to 100% of their net worth.

- The annual limit on investment abroad has been increased from US$50million to
US$100million.

- Overseas investments are allowed to be funded up to 100%by ADR/GDR

- Overseas investments are opened to registered partnership firms that provide

professional services.

- Overseas investments are permitted to invest abroad in areas unrelated to their

business at home.

Outward FDI

 To expand its market

 To service the International Customers

 To acquire an International Brand name

  To access larger distribution networks

 To access more efficient productions

 To access new technology

 To access raw material and natural resources

TYPES OF FDI

BY DIRECTION

 Inward
Inward foreign direct investment is when foreign capital is invested in local resources.
 Outward
Outward foreign direct investment, sometimes called "direct investment abroad", is when
local capital is invested in foreign resources.
 Horizontal FDI
Investment in the same industry abroad as a firm operates in at home.
 Vertical FDI

Backward Vertical FDI: Where an industry abroad provides inputs for a firm's domestic
production process.

Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's domestic
production.

BY TARGET

 Greenfield investment

Direct investment in new facilities or the expansion of existing facilities. Greenfield investments
are the primary target of a host nation’s promotional efforts because they create new production
capacity and jobs, transfer technology and know-how, and can lead to linkages to the global
marketplace.

 Mergers and Acquisitions

Transfers of existing assets from local firms to foreign firms takes place; the primary type of
FDI. Cross-border mergers occur when the assets and operation of firms from different countries
are combined to establish a new legal entity.

BY MOTIVE

FDI can also be categorized based on the motive behind the investment from the
perspective of the investing firm:

 Resource-Seeking

Investments which seek to acquire factors of production those are more efficient than those
obtainable in the home economy of the firm.

 Market-Seeking

Investments which aim at either penetrating new markets or maintaining existing ones.

 Efficiency-Seeking

Investments which firms hope will increase their efficiency by exploiting the benefits of
economies of scale and scope, and also those of common ownership

 Strategic-Asset-Seeking

A tactical investment to prevent the loss of resource to a competitor.

Various Routes of FDI Approval in India

The proposals for foreign direct investment in India get their approval through two routes that
are the Reserve Bank of India and the Foreign Investment Promotion Board. Automatic approval
is given by the Reserve Bank of India to the proposals for foreign direct investment in India

FDI Approval in India is also done by the Foreign Investment Promotion Board (FIPB), which
processes cases of non- automatic approval.

Foreign Investment through GDRs

Global Depository Receipt (GDRs) enables the elevation of equity capital of Indian companies in
the global market. GDRs are usually calculated in foreign dollars and not subjected to any other
currency or ceilings in terms of investments.

BENEFITS OF FOREIGN DIRECT INVESTMENT

One of the advantages of foreign direct investment is that it helps in the economic development
of the particular country where the investment is being made.
This is especially applicable for the economically developing countries.

Foreign direct investment also permits the transfer of technologies.

The profits that are generated by the foreign direct investments that are made in that country can
be used for the purpose of making contributions to the revenues of corporate taxes of the
recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in
increasing the salaries of the workers. This enables them to get access to a better lifestyle and
more facilities in life. It has normally been observed that foreign direct investment allows for the
development of the manufacturing sector of the recipient country. Foreign direct investment can
also bring in advanced technology and skill set in a country. There is also some scope for new
research activities being undertaken.

Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to
operation, distribution of the profits made on the investment and the personnel. One of the most
indirect disadvantages of foreign direct investment is that the economically backward section of
the host country is always inconvenienced when the stream of foreign direct investment is
negatively affected.

FDI IN INDIA

Why FDI in India?

 Second largest Economy (Purchasing Power Parity)-A safe place to do business

 Largest reservoir of skilled manpower

 Largest democracy –political stability and consensus on reforms

 Long –term sustainable competitive advantage – high growth rate economy

 Liberal and transparent investment plans

 Second largest emerging market

 India attracted FDI equity inflows of US$ 2,014 million in December 2010.

The country's outward FDI showed a bigger decline of 52.7 per cent for the January-March
quarter of FY10 at $1.9 billion, as against $4.1 billion over the same period of 2008-09.

Sector/Activity FDI Cap/Equity Entry Route

Airports 100% Automatic

Construction Development 100% Automatic
Petroleum & Natural Gas
26% (For PSUs) FIPB
(b) Refining
100% ( Private companies) Automatic
Other than Refining 100% Automatic
Telecommunication
Basic and cellular;STD/ISD 74% Automatic up to 49%
Manufacture of telecom
100% Automatic
equipment
Power ( Except Atomic
energy); regulations
transmission, distribution and
Power Trading
Ports 100% Automatic
Roads & Highways 100% Automatic
Shipping 100% Automatic

CHALLENGES FACING LARGER FDI

The challenges facing larger FDI in India are in spite of the fact that more than 100 of Fortune
500 companies are already investing in India. These FDIs are already generating employment
opportunities, income, technology transfer and economic stability.

1. Resource challenge: India is known to have huge amounts of resources. There is

manpower and significant availability of fixed and working capital. At the same time,
there are some underexploited or unexploited resources. The resources are well available
in the rural as well as the urban areas. The focus is to increase infrastructure 10 years
 down the line, for which the requirement will be an amount of about US$ 150 billion.
This is the first step to overcome challenges facing larger FDI.
2. Equity challenge: India is definitely developing in a much faster pace now than before
but in spite of that it can be identified that developments have taken place unevenly. This
means that while the more urban areas have been tapped, the poorer sections are
inadequately exploited
3. Political Challenge: The support of the political structure has to be there towards the
investing countries abroad.
4. Federal Challenge: Very important among the major challenges facing larger FDI, is the
need to speed up the implementation of policies, rules, and regulations.
5. India must also focus on areas of poverty reduction, trade liberalization, and banking and
insurance liberalization. Challenges facing larger FDI are not just restricted to the ones
mentioned above, because trade relations with foreign investors will always bring in new
challenges in investments.

FDI - opportunities and challenges for India

1. MERGERS and acquisitions are a major source of FDI inflows. This could mean that the
net addition to total physical production capabilities annually is less than that implied by
the value of annual FDI flows as most of the additions may well be created b y simply
changing ownership.

FUTURE OF FOREIGN DIRECT INVESTMENT

1. India has been ranked at the second place in global foreign direct investments in 2010
and will continue to remain among the top five attractive destinations for international
investors