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
18
18
20
22
25
30
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
39
40
42
45
46
50
53
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
55
55
57
57
59
60
63
67
70
72
75
2
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
77
87
94
100
103
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
108
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.
10
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
11
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.
12
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
14
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
15
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.
16
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
17
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.
18
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
19
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
20
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
21
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.
22
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
23
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.
24
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.
25
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
26
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.
27
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).
28
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
29
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
56
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.
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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
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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.
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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
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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
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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
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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.
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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
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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
81
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
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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)
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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
100
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
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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
152
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.
153
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
154
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.
160
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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163
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
_____________________________________________________________
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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
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