A STUDY ON ROLE OF FDI & FII ON BANKING & INSURANCE SECTOR

TABLE OF CONTENTS

SR.NO.

CHAPTERIZATION.

PAGE NO.

EXECUTIVE SUMMARY. 1.1- RESEARCH METHODOLOGY 1.2-LITERATURE REVIEW 1.3-LIMITATIONS OF THE STUDY

6 11 14 17

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

FOREIGN DIRECT INVESTMENT.

35

3.1- INTRODUCTION 3.2- TYPES 3.3- METHODS FOR INVESTMENT

35 37 39

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

40 42 45 46 50 53

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

55 55 57 57 59 60 63 67 70 72

OPPORTUNITY 4.10- FII IN INDIAN STOCK MARKET 4.11- FII ACTIVITY FOR THE YEAR

75 77

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

87 94 100 103 105

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

108 108 110 117 118 119 122

123

127

128

5.9- THE IMF STUDY REPORT 129 5.10- RELATIONSHIP BETWEEN FDI AND FII 5.11 FIGURES FOR TRADING ACTIVITY 137

DATA INTERPRETATION AND ANALYSIS

141

CONCLUSION

162

BIBLIOGRAPGHY

165

ANNEXURE

LIST OF ABBREVIATIONS

ABBREVIATIONS ADR AUM BOA DIPP

FULL FORM American Depository Receipt Assets Under Management Board of Approval Department of Industrial Policy and Promotion Direct Tax Code Emerging Market Economics External Commercial Borrowing Foreign Investment Promotion Board Financial Sector Foreign Direct Investment Global Depository Receipt Non Resident Deposits Overseas Corporate Body Quantitative Easing Qualified Institutional Placements

DTC EME ECB FIPB FSFDI GDR NSD OCB QE QIP

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 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 FIIs 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 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. 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 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

10

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. 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.

11

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 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.

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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. Sampling Area The area of the research will be Mumbai and Navi Mumbai.

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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 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

14

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 daytrading market, which makes markets highly volatile. The situation calls for appropriate measures to reduce the influence of these investors in 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

15

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

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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.

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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

18

in the United States grew steadily during the 1970s, but experienced a 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.

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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

20

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) (ii)

Foreign Direct Investment 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.

21

 Approval Route 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 INVESTMENT

OF

TOTAL

FOREIGN

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

22

FDI; investment by FIIs; NRIs, ADRs; GDRs; foreign currency convertible bonds (FCCBs); 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

23

controlled by resident Indian citizens, have the power to appoint a majority of its directors. 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-cuminvesting/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.

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2.4- FOREIGN INVESTMENT POLICY

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.

25

 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.

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NEXT TOP ECONOMIC INDEX Direct Investment vs. Portfolio Investment (U.S $ million) Year Direct Investment 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2008-2009 (April- Dec) 2009-2010 (April- Dec) 1562 -682 880 129 315 586 1314 2133 2696 3197 2511 Portfolio Investment 4 224 3567 3824 2748 3312 1828 1748 Total Foreign Investment 133 559 4153 5138 4881 6008 5025 4253

Source: Economic Times

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Foreign Direct Investment: Actual Flows vs. Approvals (U.S million) Year Approvals Approvals in Rs (crores) in US $ million Actual Actual Actual

Inflows Inflows Inflows as in Rs in US $ % of

(crores) million Approvals (US $ million) 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL 739 5256 1189 13590 37489 39453 57149 25103 189968 325 1781 3559 4332 11245 11142 15752 6132 54268 351 675 1786 3009 6720 8431 12085 8433 41490 155 233 574 958 2100 2383 3330 2073 11806 47.7 13.1 16.1 22.1 18.7 21.4 21.1 33.8 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. Indias share of global FDI flows raised from 1.8 per cent in 2008 to 2.2 per cent in 2009. On the other hand, Indias 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.

28

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).

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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

30

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 INVESTMENTFIIs FIIs 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 FIIs in respect of their fresh equity investments in India. Moreover, transactions among FIIs 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 20072008. 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

31

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 RIBs) 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

32

features of Ribs 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 nonresident 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 nonresident deposits during April-November 2009 vis--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

33

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.

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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 corporations 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

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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 worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developingcountry 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.

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FDI has a stronger impact on Domestic Investment than do loans or Portfolio Investment (Source: Economic Times)

3.2- Types of Foreign Direct Investment

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. 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 FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs

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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;

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 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

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 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

40

induct foreign equity. For existing companies with an expansion program, the additional requirements are given below The increase in equity level must result from the expansion of the equity acquisition 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. of base of the existing company without the existing shares by NRI/OCB/foreign

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.

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3.5-PROCEDURE FOR GOVERNMENT APPROVAL

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

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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 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 EOUs Applications in the prescribed form for 100 percent EOUs should be submitted to the Development Commissioners (DCs) of the Export Processing Zones (EPZs) 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.

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Procedure for Automatic Approval for EOUs Applications in the prescribed form for 100 percent E0Us should be submitted to the DCs of the EPZs. Wherever the proposals meet the criteria for automatic approval, the DC of the EPZ would issue approval letters within two weeks. Procedure for Government Approval for EOUs 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

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3.6-FACT SHEET ON FOREIGN DIRECT INVESTMENT

A. CUMULATIVE FDI EQUITY INFLOWS 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 %

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3.7- ROLE OF FDI IN FINANCIAL SECTOR

BANKING
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

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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 (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.

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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

FDI Amount 51% Upfront Investment Required USD 0.5 million

More than 51% but not exceeding USD 5 million 75% 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.

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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 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.

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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.

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.

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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.

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.

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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 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 paidup capital of the bank.

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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 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

53

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 worlds leading companies, which account for about 70 percent of the worlds FDI flows. In 2004-05, India overtook the US to rank second, and maintains this rank until the last report.

Source: Economic Times

The reasons for Indias 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.

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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 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

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November itself. The humungous increase in investment mirrors the foreign investors faith in the Indian markets. FIIs 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 FIIs 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 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

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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 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

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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 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.

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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 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.

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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 9.CharitableTrusts/CharitableSocieties

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 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 York Days taken for FII Registration SEBI generally takes seven working days in granting FII registration. and Exchange Board of India payable at New

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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 FIIs/sub-accounts, and the process for their registration 100 % debt FIIs are debt dedicated FIIs 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 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/subaccount For not renewing FII sub-accounts 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.

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 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. 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/SubAccount 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

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 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. 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.

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 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 FIIs holding of stocks. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FIIs 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.

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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 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

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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 (Subaccount), 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

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 PNs, 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, JulSep and Oct-Dec). c) FIIs/sub-accounts who do not issue PNs 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. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in Indian securities during the reporting quarter. (Jan-Mar, AprJun, Jul-Sep and Oct-Dec): No reports required for that reporting quarter

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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.

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
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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.

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.

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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 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.

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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. 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.

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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. 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.

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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. 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.

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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. 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

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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, 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.

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4.10-FIIs 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 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

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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. 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.

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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 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.

FIIs 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 FIIs.

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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 FIIs stand at 1626 and number of registered sub-accounts stood at 4972 as on March 17, 2009. As various as 330 FIIs have registered with SEBI ever since January 31, 2008, taking the total number of FIIs 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 FIIs have registered with SEBI, according to statistics given by the regulator. FIIs are from the US and Europe, in addition to this there are also FIIs based out of Mauritius. Registered FIIs 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 FIIs 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 FIIs and 104 new subaccounts 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 (FIIs) have started looking at India as an attractively-valued market in spite of the Satyam scandal. Some of the FIIs 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, FIIs decide their allocations for the year in January.

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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 FIIs. FIIs 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 Indiathrice that of last yearwhen 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) playerswith India as focusaim 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 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 FIIs in India as compared to the net investment of FIIs 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 FIIs and their sub-accounts in an open bidding platform.

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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.

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 exportoriented 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.

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Previously, as per data available with the Bombay Stock Exchange, on December 4, 2010, FIIs 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 macroeconomic 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
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 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.

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But it needs to be remembered that not all of these funds find their way to the secondary market since SEBIs 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
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

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crore into Indian equity through IPOs, 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 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.

FII Investment Activity in February 2011

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

Month
January 2011 February 2011

Gross Purchase (Cr)

57,949.90 37,550.90

Gross Sale (Cr)

64,280.10 38,742.00

Net Investment (Cr)

-6,330.40 -1,190.90

Cummulative Investment ($Mn)

-1,387.15 -261.15

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Debt
Date
17-Feb-11 15-Feb-11 14-Feb-11 11-Feb-11 10-Feb-11 09-Feb-11 08-Feb-11 07-Feb-11 04-Feb-11 03-Feb-11 02-Feb-11 01-Feb-11

Gross Purchase(Cr)
2,288.80 4,594.60 3,127.90 3,252.70 3,046.20 3,692.70 3,004.40 2,757.90 2,575.50 2,669.40 3,087.10 3,453.70

Gross Net Cummulative Sale(Cr) Investment(Cr) Investment($Mn)

2,202.80 4,419.00 2,899.50 3,687.10 3,891.70 3,977.40 3,536.00 2,757.20 2,351.10 2,007.60 3,133.20 3,879.40 86.10 175.60 228.40 -434.40 -845.50 -284.60 -531.60 0.70 224.40 661.80 -46.10 -425.70 18.97 38.70 50.19 -94.93 -185.49 -62.79 -117.12 0.14 49.17 145.04 -10.10 -92.93

FII Activity for previous years

Year
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Gross Purchase (Cr)

765,509.90 626,428.60 719,079.50 816,430.50 473,610.90 287,183.10 185,562.10 94,393.70 46,454.10 51,315.50 75,313.90

Gross Sale (Cr)

632,461.00 542,158.10 772,876.10 739,495.93 437,213.90 239,582.40 146,791.00 64,060.40 42,878.10 38,513.90 68,611.10

Net Investment (Cr)

133,049.50 84,269.80 -53,796.90 71,952.30 36,396.60 47,602.13 38,767.40 30,924.70 3,576.30 12,820.30 6,703.48

Cummulative Investment ($Mn)

29,320.79 17,639.21 -13,335.90 17,360.40 7,985.20 10,966.30 9,398.36 6,666.49 772.80 7,766.40 1,794.90

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FII Net Investments - Equity (USD Mn)

Source: SEBI

After Julys big rally, the Indian market consolidated in August. While at one end manufacturing data points were very healthy, monsoon worries 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.

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Company Bharat Petroleum Hindustan Petroleum Oil and Natural Gas Corporation HCL Technologies Tata Motors Canara Bank Godrej Consumer Products Asian Paints Mphasis BFL Reliance Industries

% Change 108.9 76.6 31.9 27.3 21.9 11.2 9.8 6.9 6.6 5.9

FY2011 Earning Upgrades (KIE) (1 Month) Company Bharat Petroleum Hindustan Petroleum HCL Technologies Mphasis BFL Oil and Natural Gas Corporation Tata Motors BGR Enery Systems Godrej Consumer Products Bharat Heavy Electricals Reliance Industries % Change 55.6 51.7 34.2 26.1 26.1 20.6 14.5 9.7 8.8 6.8

FY2010 Earning Upgrades (KIE) (1 Month)

FY2010 Earning Downgrades (KIE) (1 Month) Company Tata Steel Punj Lloyd Tata Power IRB Infrastructure Bharat Heavy Electricals % Change (6.0) (6.0) (6.0) (6.0) (6.0)

Source: Economic Times

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4.12- IMPACT OF FII ON NATION

Well, thats 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.

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

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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 doesnt seem the party (Bombay Stock Exchanges 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 (FIIs). This year, more than 170 FIIs participated in just two 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 didnt wish to be identified.

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Advantages of FIIs 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 (FIIs) which take advantage under the IndoMauritius 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
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 Indias central bank, the Reserve Bank of India (RBI), shows the total foreign funds inflow into India over the last 9 years. This data

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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 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 companys stock, disinvestment in the best performing PSUs, and deregulation of oil prices. However, on a cautionary note,

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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 FIIs have played an imperative role in shaping our Indian economy. As we are growing, we now have a symbiotic relationship with the FIIs. The FIIs invest in our equity market because we are a second most fastest growing economy and our equity market is outperforming because FIIs 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 FIIs have invested heavily in the past few weeks, specifically in September. There are many reasons why FIIs are investing heavily in

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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 MNCs 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 FIIs 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 FIIs to put in their money. The month of September has brought pleasure for all the investors as FIIs have already started investing in our equity market.

SITUATION DURING FALL IN STOCK MARKET

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 dont 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, MFs and insurance companies are not big buyers this time. If FIIs 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
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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

FIIs are among the major sources of liquidity for the Indian markets. If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy investor sentiment for our markets. But with the current global financial turmoil and a liquidity and credit freeze in the international markets, FIIs have become net sellers (on a day to day basis). The entry of FIIs 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

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Eg:

4.13-Latest FII Trends and Track their Investments in India.

Daily FII Activity
DATE PURCHASES (Rs m) SALES (Rs m) NET INV (Rs m)

Thu, 10 Feb Fri, 11 Feb Mon, 14 Feb Tue, 15 Feb Thu, 17 Feb Total

30,462 32,527 31,279 45,946 22,888 163,102

38,917 36,871 28,995 44,190 22,028 171,001

(8,455) (4,344) 2,284 1,756 860 (7,899)

Data pertains to trades conducted by FIIs on and upto the previous trading day.

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.

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.

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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 SEBIs 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
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.
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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:

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

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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. 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, FIIs may back off, triggering the next round of sell-off in the stock markets and put more pressure on the INR.

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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 USDINR 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). BSE Sensex (197879 =100)
1879.51 2895.67 2898.69 3974.91 3288.68 3469.24 3812.86 3294.78 4658.63 4269.69 3331.95 3206.29 4492.19 5740.52 8278.55 12277.33 16568.89

Year

INR-USD parity

FII (USD mn)

133 559 4153 5138 4892 6133 5385 2401 5181 6789 8151 6014 15699 15366 21453 29082 61830

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

24.4737 30.6488 31.3655 31.3986 33.4498 35.4999 37.1648 42.0706 43.3327 45.6844 47.6919 48.3953 45.9516 44.9315 44.2735 45.2849 40.2410

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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 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 marketwatchers 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

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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). 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 FIIs 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 Indias 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 (NBFCs) with their

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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 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

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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 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.

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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 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.

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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. Problems for small investor The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. Adverse impact on Exports FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Hot Money 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

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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

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.

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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 emerging markets, their size is growing on the back of growing interest by many of the world's leading multinationals.

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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).

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

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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 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.

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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 in such an environment, said the head of equity of a leading domestic broking firm. Institutional investors are deleveraging and going into riskfree 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.

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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 Management, which had a 1.53% have exited. FIIs 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 Consumer financing Venture banking 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

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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 (FIIs) have been allowed to invest in the stocks and securities markets with rights of full repatriation 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.

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 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 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.

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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 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

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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. 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.

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Sensex crosses 19,000 on FII flows, Banking Sector Charge

Benchmark at 32-month high aided also by strong Reliance Ind showing.

Source: Reserve Bank of India

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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 foreign expertise, competition in this sector has increased with companys 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 shortterm 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 payout, 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

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to review the comprehensive insurance legislation. The group will look at increasing the FII cap in the sector by amending the Insurance Act, 1999.

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

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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 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 (EMEs) 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 EMEs and given greater emphasis on risk-adjusted profitability. These include expansion

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into local retail banking and securities markets, where elements such as client relationships and reputation are important components of the 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 EMEs. The liberalization of the capital account

and financial 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 EMEs 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

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sector as a whole. Foreign banks presence helps to achieve greater financial stability in host countries. Host countries benefit immediately 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

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5.5-PRESENT

SCENARIO

OF

BANKING

AND

INSURANCE SECTOR

In recent times economy is been pushing to increase the role of multinational 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

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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. 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

123

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. 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
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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, 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.

125

Due from Branches: Subject to limitations, banks may conduct domestic and foreign branches which thus represent a certain amount of invested capital. 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 payroll 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.

126

Redemption Fund with the Treasurer of the United States: A national bank which issues notes for circulation (national-bank notes) must 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

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5.8-The IMF Study Report

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.

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So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Compared with FII always FDI has a greater and longterm 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

129

and hence we see flight of capital in terms of FII outflows but not generally in FDIs. 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. Lets 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.

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Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII.

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 tenyear 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
131

and FDI. Sectors like stock and commodity exchanges also have subceiling for FII and FDI investments. 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 ministrys 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.

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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 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.

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In the US, inflation is not high, interest rates are low and growth outlook 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 Indias 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

134

will be about $10 billion versus $13 billion in FY10, a part of which 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 Chinas 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

135

biggest

drops

in

investment,

the

data

show.

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. Chinas economy, about the same size as Indias $183 billion in 1980, has swelled close to $5 trillion, almost four times its hot money neighbor. inflows.

India

is

vulnerable

to

so-called

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.

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5.10- Figures for the Trading Activity

FII & DII Trading Activity (Provisional Figures)

FII & DII Trading activity during Feb '11 DATES FII (Rs. Crore) Gross Purchase Gross Sales DII (Rs. Crore) Gross Sales Net Purchase/Sales

Net Gross Purchase Purchase/Sales

21-Feb-2011 18-Feb-2011 17-Feb-2011 16-Feb-2011 15-Feb-2011 14-Feb-2011 11-Feb-2011 10-Feb-2011 09-Feb-2011 08-Feb-2011 07-Feb-2011 04-Feb-2011 03-Feb-2011 02-Feb-2011 01-Feb-2011 TOTAL

2006.78 2844.58 2305.25 1960.55 2605.97 3133.11 3206.61 3032.29 3680.57 2966.06 2544.42 2544.42 2602.43 3112.79 2853.09 41,398.92

2252.20 2636.91 2267.26 2190.61 2372.92 2985.47 3744.32 3987.16 4289.57 3692.60 2400.38 2400.38 2063.72 3194.52 3889.89 44,367.91

-245.42 207.67 37.99 -230.06 233.05 147.64 -537.71 -954.87 -609.00 -726.54 144.04 144.04 538.71 -81.73 -1,036.80 -2,968.99

800.36 1266.67 1153.73 578.83 881.30 989.01 1343.41 1660.73 1385.40 1318.56 1621.58 1621.58 1155.20 1958.92 1779.34 19,514.62

827.97 1455.81 909.33 647.32 1049.15 879.99 823.74 1023.43 1270.40 869.59 1384.13 1384.13 1200.65 1278.54 1148.94 16,153.12

-27.61 -189.14 244.40 -68.49 -167.85 109.02 519.67 637.30 115.00 448.97 237.45 237.45 -45.45 680.38 630.40 3,361.50

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Previous FII & DII Trading Activities

DATES Gross Purchase FII (Rs. Crore) Gross Sales Net Purchase/Sales DII (Rs. Crore) Gross Gross Net Purchase Sales Purchase/Sales

January2011 December2010 November2010 October2010 September2010 August2010 July-2010 June-2010 May-2010

57,526.07

66,429.67

-8,903.60

29,176.33

23,939.19

5,237.14

52,683.49

53,405.68

-722.19

24,798.87

24,163.88

634.99

79,726.26

74,375.39

5,350.87

32,674.49

30,205.67

2,468.82

77,706.10

63,318.04

14,388.06

28,069.00

39,881.90

-11,812.90

74,920.16

52,444.52

22,475.64

24,046.54

35,913.17

-11,866.63

56,120.24

48,582.94

7,537.30

24,770.34

29,323.02

-4,552.68

52,571.21 51,878.01 49,588.04

44,030.15 44,164.06 61,659.16

8,541.06 7,713.95 12,071.12 2,667.37 14,792.33 -1,943.47

24,776.03 23,549.21 29,971.71

31,047.95 28,326.26 23,610.52

-6,271.92 -4,777.05 6,361.19

April-2010 March-2010 February2010 January2010 December2009 November2009 October2009 September2009 August2009 July-2009

55,061.05 59,692.57 39,001.43

52,393.68 44,900.24 40,944.90

26,283.22 25,818.47 21,547.80

24,092.56 30,954.32 20,235.85

2,190.66 -5,135.85 1,311.95

56,109.18

63,325.85

-7,216.67

39,004.29

26,782.26

12,222.03

45,029.99

40,789.13

4,240.86

26,326.09

26,276.42

49.67

48,761.93

47,053.86

1,708.07

28,355.29

25,964.25

2,391.04

63,964.86

63,964.73

0.13

30,578.81

30,626.32

-47.51

62,872.65

49,541.22

13,331.43

27,261.52

26,565.48

696.04

45,722.53

49,489.56

-3,767.03

28,621.60

23,636.89

4,984.71

58,990.29

60,354.89

-1,364.60

34,970.99

29,152.01

5,818.98

138

June-2009 May-2009 April-2009 March-2009 February2009 January2009 December2008 November2008 October2008 September2008 August2008 July-2008 June-2008

61,767.47 73,016.96 38,871.53 31,646.90 22,066.26

61,852.61 59,130.87 33,311.43 32,330.47 24,899.69

-85.14 13,886.09 5,560.10 -683.57 -2,833.43

35,173.50 27,344.70 17,871.64 19,256.22 13,438.92

32,539.72 27,427.15 18,653.97 15,304.69 10,664.36

2,633.78 -82.45 -782.33 3,951.53 2,774.56

28,447.81

33,620.63

-5,172.82

18,644.12

14,925.98

3,718.14

29,362.68

28,327.87

1,034.81

16,472.77

14,566.49

1,906.28

28,093.92

33,552.88

-5,458.96

15,196.15

12,322.00

2,874.15

48,413.60

64,067.10

15,653.50 12,502.74 -5,456.12

26,254.38

15,458.08

10,796.30

65,932.27

78,435.01

25,415.62

16,202.66

9,212.96

44,460.52

49,916.64

17,813.52

14,841.14

2,972.38

62,050.69 60,693.06

66,654.69 73,360.22

-4,604.00 12,667.16 -6,695.59 -2,536.88 -3,763.80 -4,051.12

23,217.26 23,754.33

21,690.07 15,126.36

1,527.19 8,627.97

May-2008 April-2008 March-2008 February2008 January2008 December2007 November2007 October2007 September-

58,982.92 59,546.97 68,472.59 64,267.47

65,678.51 62,083.85 72,236.39 68,318.59

26,254.47 21,678.24 23,606.43 24,064.99

17,976.44 18,277.26 20,658.92 20,056.65

8,278.03 3,400.98 2,947.51 4,008.34

97,579.50

127,027.01

29,447.51 -6,819.80

44,638.58

28,223.89

16,414.69

71,453.70

78,273.50

29,495.28

24,543.14

4,952.14

83,268.52

96,957.78

13,689.26 8,016.24

31,937.20

23,383.79

8,553.41

122,384.57

114,368.33

34,703.35

36,055.53

-1,352.18

67,664.52

51,306.56

16,357.96

21,424.73

26,188.40

-4,763.67

139

2007 August2007 July-2007 June-2007 May-2007 April-2007 March-2007 February2007 January2007 December2006 November2006 October2006 September2006 August2006 July-2006 June-2006 May-2006 52,479.43 64,817.90 12,338.47 7,868.85 -1,361.25 -119.97 1,734.54 -534.62 -262.52 26,496.41 17,347.14 9,149.27

69,757.41 45,673.87 46,316.28 43,647.59 46,767.61 46,048.78

61,888.56 47,035.12 46,436.25 41,913.05 47,302.23 46,311.30

23,643.81 19,374.66 21,959.33 10,137.73 N.A. N.A.

24,231.23 14,814.40 18,974.43 9,280.07 N.A. N.A.

-587.42 4,560.26 2,957.10 857.66 N.A. N.A.

45,676.03

46,109.29

-433.26

N.A.

N.A.

N.A.

34,057.68

34,968.79

-911.11

N.A.

N.A.

N.A.

48,988.23

45,944.90

3,043.33

N.A.

N.A.

N.A.

35,041.05

31,913.91

3,127.14

N.A.

N.A.

N.A.

29,856.31

26,723.78

3,132.53

N.A.

N.A.

N.A.

25,413.72

23,374.54

2,039.18

N.A.

N.A.

N.A.

24,188.43 37,864.81 43,817.67

24,802.60 37,073.19 55,376.28

-614.17 791.62 11,558.61 -2,342.95 0.00

N.A. N.A. N.A.

N.A. N.A. N.A.

N.A. N.A. N.A.

April-2006

37,302.88 0.00

39,645.83 0.00

N.A. 0.00

N.A. 0.00 1,060,431.88

N.A. 0.00 109,409.26

TOTAL

3,089,268.27 3,118,515.82

1,169,868.94 29,247.55

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7. DATA INTERPRETATION AND ANALYSIS

Questionnaire Samples filled by various financial sector employees in the survey are as follows Financial Sector a) Banks b) Insurance c) Broking Firm Percentage(%) and Frequency 40 40 20

141

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.

142

1) Are You An Investor In Stock Market/s ?

Investor in Stock Market a) Yes b) No

Percentage(%) and Frequency 67 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.

143

2) Are You A Direct Or Indirect Investor i.e ? Please indicate 2 reasons for your choice

Choice of Investment a) Capital Market b) Mutual Fund c) Both a and b

Percentage(%) and Frequency 40 32 28

144

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.

145

3) Factors that make India an Attractive Destination for FII Investment ? Factors a) Attractive Market b) Strong Rupee c) Outsourcing d) All of the Above e) Any other Percentage(%) and Frequency 48 3 3 34 12

146

INTERPRETATION

48% employees in the survey believe that India is an Attractive Market for the investors , 3% employees 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 on Strong Rupee and 3% on

147

4) Which Investor can easily enter and exit from the Market ?

Investor a) FDI b) FII

Percentage(%) and Frequency 36 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

148

5) Are you aware of the percentage of Investment allowed through FDI route in Banking and Insurance Sector ?

Percentage Awareness a) Yes If Yes then how much a) 49% and 26% b) 26% and 49% c) 100% and 49% d) 51% and 40% b) No

Percentage(%)

Frequency

61

61

63 31 3 3

38 19 2 2

39

39

INTERPRETATION 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
149

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 doesnt come under their job profile.

150

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 a) Yes b) No c) May be / No opinion

Percentage(%) and Frequency

61 12 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 volatile stock market and the the remaining employees i.e. 27% did not give any opinion regarding this statement.

151

7) According to you are sufficient players available in the Banking and Insurance Sector ? If Yes then give 2 reasons

Sufficient Players a) Yes b) No

Percentage(%) and Frequency 79 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 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.

152

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 a) Yes b) No

Percentage and Frequency 79 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 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.
153

9) Which is a better route for Sector wise Growth ( Banking and Insurance ) ?

Sector wise Growth Route a) FDI b) FII

Percentage(%) and Frequency 70 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.

154

10) Your experience as a Client of Bank/ Insurance Company post liberalization

Experience as Bank/ Insurance Company Client a) Excellent b) Very Good c) Good d) Average

Percentage(%) and Frequency

22 36 36 6

155

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.

156

11) Does FDI in Banking / Insurance Sector helps to perform better ?

Better Performance a) Yes b) No c) May be / No Opinion

Percentage(%) and Frequency 88 9 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

157

12) Do you feel that the Banks and Insurance Companies can offer products which are more customer centric ?

Variation in Products a) Yes b) No

Percentage(%) and Frequency 88 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

158

13) Do you think by increasing FDI limits in Banking / Insurance Sector will help their Performance ?

Increase in FDI limits for better Performance a) Agree b) Disagree c) May be / No Opinion

Percentage(%) and Frequency

66 9 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 it might effect among which some didnt gave any opinion to this statement in the survey.

159

14) Do you think Asset Management Department plays an important role in Banking and Insurance Sector ?

Asset Management Importance a) Yes b) No

Percentage(%) and Frequency 97 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.

160

15) According to you Asset Management Department of Banking and Insurance Sector are affected by FDI Inflows and FII Outflows ?

Effect on Asset Management a) Strongly Agree b) Agree c) Strongly Disagree d) Disagree

Percentag(%) and Frequency 18 73 6 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. 6% of the employees were found to be strongly disagree to this statementwhile remaining i.e. 3% of the employees disagreed to this statement

161

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 countrys 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 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

162

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.

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.

164

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

165

ANNEXURE
NAME: BANK / INSURACE / BROKING FIRM: AGE:

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 b) FII

166

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

_____________________________________________________________

167

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

168

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

169