MBA

Education
&
Careers
36 August 2010
Eco Fundas for you
I
n todays fast-globalising world, foreign
investment is crucial to a countrys economic
growth. There is increasing competition
among nations to attract foreign investment to
spur economic growth. Foreign investment comes
in two major ways: foreign direct investment
(FDI) and foreign institutional investment (FII).
F FF FFor or or or oreign Dir eign Dir eign Dir eign Dir eign Direct Inv ect Inv ect Inv ect Inv ect Investment estment estment estment estment
F
DI is defined as an investment made to
acquire lasting (business) interest in
enterprises operating outside of the investors
economy. For instance, if a company registered
in United States of America buys a stake in an
Indian company, such an investment is termed
FDI.
The FDI relationship consists of a parent
enterprise and a foreign affiliate, which together
Foreign Direct Investment
and
Foreign Institutional Investment
PROMOD JOSEPH
MBA, VIRGINIA TECH.
form a multinational corporation. In order to
qualify as FDI, the investment must afford the
parent enterprise control over its foreign affiliate.
FDI is permitted through financial collaborations,
joint ventures & technical collaborations, capital
markets, and private placements.
Adv Adv Adv Adv Advantag antag antag antag antages of FDI es of FDI es of FDI es of FDI es of FDI
FDI is usually preferred over other forms of
external finance because it is non-debt creating,
non-volatile, and its returns depend on the
performance of the projects financed by the
investors.
FDI facilitates international trade by promoting
transfer of knowledge, skills, & technology. In a
world of cut-throat competition and rapid
technological change, FDIs complimentary and
catalytic role can be very valuable.
Is FDI allow Is FDI allow Is FDI allow Is FDI allow Is FDI allowed in all sectors? ed in all sectors? ed in all sectors? ed in all sectors? ed in all sectors?
Though FDI is welcome in India, it is not
permitted in sectors like arms & ammunition,
MBA
Education
&
Careers
August 2010 37
ECO FUNDAS FOR YOU: FDI AND FII
atomic energy, railway transport, coal & lignite
and mining of iron. Also in place are some
restrictions on the percentage of FDI allowed in
sectors. For example, the ceiling on FDI in
insurance companies is 26 per cent.
Some of the sectors that attract high FDI are
computer science and hardware,
telecommunications, construction activities,
automobile industry, housing & real estate, power,
chemicals, and drugs & pharmaceuticals.
How m How m How m How m How much FDI does India attract? uch FDI does India attract? uch FDI does India attract? uch FDI does India attract? uch FDI does India attract?
According to Ernst and Youngs 2010 European
Attractiveness Survey, India is ranked as the
fourth most attractive foreign direct investment
destination in 2010. However, it is ranked the
second most attractive destination following
China in the next three years.
India attracted FDI equity inflows of U.S.$1.2
billion during March 2010. The cumulative
amount of FDI equity inflows from August 1991
to March 2010 stood at U.S.$132.4 billion,
according to the latest data released by the
Department of Industrial Policy and Promotion
(DIPP).
FDI equity inflows during financial year
2009-10 were U.S.$ 26 billion.
F FF FFor or or or oreign Institutional Inv eign Institutional Inv eign Institutional Inv eign Institutional Inv eign Institutional Investor estor estor estor estor
A
Foreign Institutional Investor (FII) is an
institute (or an investor) that is registered
in a country outside of the one in which it is
currently investing. Such investors include
insurance / reinsurance companies, pension funds,
mutual funds, hedge funds, banks, charitable
trusts, foundations, and endowments.
Wher Wher Wher Wher Where can an FII inv e can an FII inv e can an FII inv e can an FII inv e can an FII invest? est? est? est? est?
The term is used in India to refer to foreign
companies that invest in the Indian financial
markets. All FIIs are required to obtain an initial
registration with Securities and Exchange Board
of India (SEBI). For granting registration, SEBI
takes into account the track record of the FII, its
professional competence, financial soundness,
and market experience.
All registered FIIs can participate in Indian equity
markets by investing in shares, debentures,
warrants, and even in schemes floated by domestic
mutual funds.
One of the major market regulations pertaining
to FIIs involves placing limits on FII ownership
in Indian companies. Any single FII cannot hold
more than 10 per cent of the total issued capital.
SEBI also regulates that one company should not
contribute more than 30 per cent share in the
portfolio of FII.
The following terms are commonly
associated with FIIs:
Sub Account: This includes all foreign corporates
and affiliates, established outside India on whose
behalf investments are proposed to be made in India.
Designated Bank: Refers to a bank in India that
has been authorised by the RBI to act as the banker
to the FII.
Domestic Custodian: Refers to an entity
registered with SEBI that provides custodial
service for securities.
MBA
Education
&
Careers
38 August 2010
Broad-based Fund: This is a fund established
outside India, which has at least 20 investors with
no single investor holding more than a 10 per cent
share.
How much FII inflow did India generate
in recent times?
Foreign institutional investors (FIIs) poured
inflows heavily to bet on the India growth story.
As per data released by the Securities and
Exchange board of India (SEBI), FIIs invested
U.S.$2.1 billion in equities in April 2010, and
U.S.$684.18 million in debt in April 2010.
During January to April 2010, FIIs invested
U.S.$6.6 billion in equity and U.S.$5.94 billion in
debt, of which U.S.$ 4.4 billion in equity and
U.S.$2.1 billion in debt was invested in March 2010.
M E &
C
The author is Centre Director, T.I.M.E. Madurai
ECO FUNDAS FOR YOU: FDI AND FII
According to SEBI, FIIs transferred a record
U.S.$17.5 billion in domestic equities during the
calendar year 2009. FIIs infused a net U.S.$1.1
billion in debt instruments during the said period.
Data sourced from SEBI shows that the number
of registered FIIs stood at 1711 and number of
registered sub-accounts rose to 5,382 as of
April 30, 2010.