Foreign Instituitional Investors (FII’s) India

Name: Parag Rohatgi (2006 – 2008)

Title: Foreign Instituitional Investors (FII’s) India

Summary

Foreign Investment refers to investments made by residents of a country in financial Assets and

production process of another country. It can affect the factor productivity of the recipient

country and can also affect the balance of payments. In developing countries there was a great

need of foreign capital, not only to increase their productivity of labor but also helps to build

the foreign exchange reserves to meet the trade deficit.

It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment

(FPI).Foreign direct investment involves in the direct production activity and also of medium to

long-term nature. But the foreign portfolio investment is a short-term investment mostly in the

financial markets and it consists of Foreign Institutional Investment (FII).

India, being a capital scarce country, has taken lot of measures to attract foreign investment

since the beginning of reforms in 1991. Till the end of January 2003 it could attract a total

foreign investment of around US$ 48 billions out of which US$ 23 billions is in the form of FPI.

FII consists of around US$ 12 billions in the total foreign investments. This shows the

importance of FII in the overall foreign investment programme.

As India is in the process of liberalizing the capital account, it would have significant impact on

the foreign investments and particularly on the FII, as this would affect short-term stability in

the financial markets. Hence, there is a need to determine the push and pull factors behind any

change in the FII, so that we can frame our policies to influence the variables which drive-in

foreign investment. Also FII has been subject of intense discussion, as it is held responsible for

intensifying currency crisis in 1990’s elsewhere. India opened its stock markets to foreign

investors in September 1992 and has, since 1993, received considerable amount of portfolio

investment from foreigners in the form of Foreign Institutional Investments (FII) in equities. In

order to trade in Indian equity markets, foreign corporations need to register with the SEBI as

Foreign Institutional Investors (FII).

“SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds,

charitable/endowment/university funds etc. as well as asset management companies and other

money managers operating on their behalf.”

The FIIs registered with SEBI come from as many as 28 countries (including money management

companies operating in India on behalf of foreign investors). It is, however, instructive to bear

in mind that these national affiliations do not necessarily mean that the actual investor funds

come from these particular countries. Given the significant financial flows among the industrial

countries, national affiliations are very rough indicators of the ‘home’ of the FII investments. In

particular institutions operating from Luxembourg, Cayman Islands or Channel Islands or even

those based at Singapore or Hong Kong are likely to be investing funds largely on behalf of

residents in other countries. Nevertheless, the regional breakdown of the FIIs does provide an

idea of the relative importance of Different regions of the world in the FII flows.

Conclusion

Foreign Institutional Investments are very much needed for India. They are necessary for the

continuous development of our country. The economy of our country has shown a better

performance and has led to the economic growth due to the FIIs. Though there are threats

from the Foreign Institutional Investments we should be positive and see the future of our

country. In last 50 years, India has developed a strong and professionally competent technical,

marketing and business manpower in Livestock production and Information Technology.

This is an added advantage over many developing countries of Asia and Africa. Availability of

competent and comparatively low-cost manpower in India is a great asset which is attracting

foreign investors. As a result of stagnancy or in some cases reduction in agricultural production,

demand for several inputs like machinery and equipment, feeds, pharmaceuticals etc. has

reduced in some countries of America and Europe.

It is therefore not surprising that these business enterprises have focused their attention to

emerging Asian markets, particularly India and China. India is in a better position as it has a

strong technical manpower base and large number of English speaking population.

India’s Future

The future of the India is bright and moreover due to FIIs the economy will gain a swing in the

future in short run as well as long run. India is a pool of various resources; their effective

utilization is possible only with the investments and in large sum. The prosperity of India will

soon be visible in the near future. By evolving the strategy to improve the competitive position

in these areas, overall level of competitiveness can be raised thereby enhancing the export

potential of the country.

Thus, India could take a proactive initiative in seeking an international discipline on investment

incentives with a built in exception based on the level of industrialization. Soon India will be

leading country.

Recommendations

Foreign investment is a valuable non-debt creating, external resource supplement inadequate

savings and has a major role in transforming technology, improving managerial skills and

facilitating market development. In our economic system, capital is the fuel that generates

profits.

India must extend a hospitable environment for foreign investors by providing essential

guarantees for investors for

1) Enter and exit.

2) Operate on equal terms alongside local operators.

3) Repatriate their investments when needed

India has a pool of human resource and this can attract the Foreign Institutional Investors to

invest their money into our country there by increasing the output with the help of tapping the

human resource.

The ready availability of the required infrastructure in the form of serviceable roads, ports,

telecommunications, airports and water and power facilities is a pre-requisite for attracting

large volume of foreign investments.

Continued export and careful management of India’s imports will also be crucial in maintaining

India’s ability to maintain and continue to build international equity and debt Institutional

Investors confidence.

An environment should be created in India whereby investors would be confident in remitting

funds into India, instead of just obtaining approval and waiting for the time to invest.

The above article was extracted from dissertations by the students of Skyline College. Skyline

College is amongst the top MBA and BBA institutes in Delhi, Gurgaon (NCR)