Sunday, May 13, 2012 - , , 1 comments

Foreign Institutional Investors (FII)



( Swapnil Patil & IAS OUR DREAM to be credited for this great work... )


What is FII?




FII is nothing but Foreign Institutional Investors. Below entities are called FIIs
1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Funds
7. Endowments
8. Foundations
9. Charitable Trusts
10. Asset Management Companies
11. Institutional Portfolio Managers
12. Trustees
13. Power of Attorney Holders



Advantages
  • 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.




Disadvantages
  • 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 country’s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.

  • Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee.

  • Hot Money: “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. “Hot money” can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.
*****************************************************************





What is the relation between FDI and FII?



**FII generally means portfolio investment by foreign institutions in a market which is not their home country. These institutions are generally Mutual Funds, Investment Companies, Pension Funds, Insurance House's is a short term benefit to the country and the rules and regulations to enter the Indian Market are not much, the fluctuations in the stock market is generally due to the FII Investments , cause the rules are eased the investor can leave the market at Any point of time. 
**There investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity.







** Therefore we could see Lehman investing 15% in say Unitech, now that would be FDI. However if Lehman has bought shares of Unitech though secondary markets (stock trading market) it would have been an FII. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. FDI also have to follow a high rules and regulations to enter the market and the subs. given to such players are huge in term of taxes .FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs. 
**The Economy high and low depends on the FDI's Investment where as the Stock mark fluctuations are generally because of FII



****************************************************************


What is IPO ?




*Initial public offering ....jb koi compony pahli bar apne poduct ko public ko pahli bar offer karti hai to usko IPO bolte hai .


*it can be used by small or big compony to increase their capital.


*many companies that request for initial public offering make their finance from the lone by the bank ..



*****************************************************************
WHICH IS BETTER FOR INDIA FDI or FII ?

The article looks like having a good discussion on FDI and FII ,
 even though old article( 2006 April).


India doesn't need FDI

 It won't be an exaggeration to say Nimesh Kampani, Chairman, JM Morgan Stanley, knows the Bombay Stock Exchange like the back of his hand.


Kampani was one of those who propelled the stock exchange boom in the early 1980s when Reliance Industries founder Dhirubhai Ambani entered the world of equities.


Nimeshbhai, as he is popularly known, is media-shy and a man of few words. For a change, he agreed to a rare and exclusive interview with Managing Editor (National Affairs) Sheela Bhatt in New Delhi and discussed what can bring about changes in India.

The world is saying India will grow, India will become a big power. What are the hidden risk factors in this hype?
There is too much liquidity across the globe. Rich people all around have so much cash in hand that they are looking for markets that are growing. How many places in the world are registering growth? Europe doesn't have much of it. Only Asia is attractive.
The US is showing one to three per cent growth in most sectors. The US economy is developed. People there have cash in hand to spend. People in the US want to consume using credit cards.
Our risk factor lies in liquidity. Too much liquidity of those consumer economies is chasing Indian stocks. Because there is an absence of growth in their domestic markets. Their money is welcomed in India but the risk of withdrawal comes along with that.
If withdrawal of money happens it can very well bust Indian stocks.
In the last five years, $45 billion investment has come to the Indian markets from foreign institutional investors. Today, the market value of their money should be around $120 billion.Who will buy when they will rush in to sell?
Right now, one lot is selling and the other lot is buying. Those who bought shares at much lower price of say, Rs 80 are selling at Rs 800 and booking profit. The newcomers, on the other hand, are buying at Rs 800 with confidence in market. The new buyers will like to wait for the next five years for the stock prices to go further up.
We know Japan has invested $5 billion in the Indian market. Much of it is retail money. These days, as soon as new public issue opens, it gets filled up within the first few hours.


Why is it so?
Because Japan has saved money for years. Investors there get zero or negligible interest. At some places, bank charges them for keeping deposits. In our banks, on the contrary, we get four per cent, at least. The Japanese are tired of dead investment. So they are looking out.
In the last one year, the Japanese have got return of 48 per cent in the Indian stock exchange. They had started with $1 billion. Now it has reached $5 billion. Nomura Securities and others invested in it. They take index stocks. When an investor does not know the country well, he tends to buy index shares only.
The Japanese and the Koreans have invested. Recently I met 30 parliamentarians fromDenmark. I made a presentation to them on India's future. Thereafter, two of them came and talked about investing in Indian stocks.



What can go wrong in realising your dreams of India?
Politics. If something happens to this government and there is instability at the Centre, it can affect our growth.
In 2004, between May 13 and 18, the stock index plunged when Sonia Gandhi delayed her decision to announce (Dr Manmohan) Singh's name as the prime minister. The market picked up only when the announcement was made.
The investor does not like political uncertainty. They are afraid of power in the hands of Left parties or the so-called Third Front because all they want is a stable government. These days people say Dr Singh is the weakest prime minister but the stock market does not think so. Dr Singh may be weak politically but he is the best prime minister as far as the country's economy is concerned.
The prime minister along with Finance Minister P Chidambaram, Commerce and Industry Minister Kamal Nath and Deputy Chairman of Planning Commission Montek Singh Ahluwalia are too good for Indian markets.

China has not grown with the help of FII investment. Your comment.
Yes. China has grown with the help of bank money, or people's money. China has got four prime banks owned by the government. These banks' non-performing assets is approximately above 30 per cent. Can you imagine about Rs 6 lakh crore (Rs 6 trillion) is disappearing from the total deposits of Indian people kept in the Indian banks?
Indian banks have deposits worth around Rs 20 lakh crore (Rs 20 trillion).
Chinese banks have more than what Indian banks have. Out of that money, 30 per cent has vanished. Its savings rate is around 40 per cent. The question is: Where has people's money gone? It has gone into building infrastructure. They have issued loans to whoever came to the bank. To build infrastructure, they were fast to disburse money. Now, they are writing off those loans. In India, bad debts of banking industry stands at a meagre 1.75 per cent.
China went ahead full steam without taking care of the accounting and financial niceties. India is a democratic country. Here, journalists and Parliament would ask questions about fiscal management. About 30 per cent of bad debts won't be allowed.
A friend of mine was in China recently. He was travelling along a road lined with houses on both sides. After 15 days, when he returned along the same road, he saw those homes had disappeared and a bigger road was being built. That is China. There the government can evacuate you in no time.


Many of us feel the Sensex boom helps only a few people. Indian slums are growing as ever.
Slums will not go away in the next two decades. You need wealth to distribute it. We need to create wealth in private hands. In China, government created wealth. In India, we are following a different route. The Indian process will be a slow one.
Recently we at Morgan Stanley, handled the issue of China Construction Bank. It is the first government-owned bank in China to go public. It was heavily subscribed. MeaningChina is now adopting discipline in fiscal management.
Recently, China collected around $8 billion from the US and Hong Kong and other places and wrote off old bad debts. Now, it has begun repairing its balancesheet.
Therefore, we need huge investment in infrastructure before we can even think of removing slums. We cannot tackle poverty until we raise money to finance infrastructure. I always believe that more roads, more construction and development of tourism are sure-shot ways to create huge employment.
Do you find deficit financing a big issue for Indian fiscal management?
I don't think it's an issue. India's deficit is under control. The problem lies with the states and not with the Centre. India's combined deficit is 10 per cent. States should improve financial management. Gujarat and Tamil Nadu are the best managed states as the governments there are excellent in financial management. They are developing their states' resources impressively.
If you are asked to take one creative decision as finance minister, what will that be?
I will go to Parliament and ask for permission to create fiscal deficit. I want to spend $50 billion on infrastructure! Here deficit financing is justified because I am not spending on people. Rather, I am creating assets. People will get employment and that should justify deficit planning. You need political guts and courage to do it.
Planners would fear that if tax does not rise, inflation will increase and savings would pump in more money. This, in turn, will increase liquidity. But all depends on the management of spending on infrastructure.
Spending on infrastructure will increase internal mobility of our people. I feel tourism and infrastructure are the areas where the Indian government should be involved. All other areas can be developed with private money.
Does India need more foreign direct investment?
India doesn't need FDI. To get FDI, you have to install infrastructure first. China is getting 10 times more FDI than India because they have invested in roads and bridges and airports.

Why do you say India doesn't need FDI?
You need infrastructure to manage incoming FDI. You need clear policy.
FDI is not needed in India because we are getting more money from the FIIs. We are getting around $12 billion from them.
They are buying in secondary markets and that money gets into the Indian economy. While India gets around FDI worth $5 billion, China gets around $50 billion. They don't have our types of stockmarkets. So FIIs are absent there. In India, when FIIs pump in $12 billion, it means a few Indians have sold their shares to them (the FIIs), so that free cash gets invested somewhere within India by Indians.









That money goes into land, buying of new stocks and into banks.
The fundamentals of money are that it goes where it gets sound returns. Therefore, if you keep up our policies and make them fair, India should not worry which way it gets money. Mittal Steel, Reliance, Tata, Vedanta and other Indian companies are going to invest more than Rs 2 lakh crore (Rs 2 trillion) in the coming years.
FDI is not a big issue because Indians are in now a position to raise big money and invest inIndia. The government should see that people get returns.

  Source : http://www.rediff.com/money/2006/apr/03minter.htm

*********************************************************************************************************************************
  • FII players pull out their money from stock-market even for slightest good/bad rumors and invest in in different country. 
  • That's why it's called 'Hot money' -was responsible for 1997 Asian financial crisis {2 marker in GS Mains Paper-I, 2007}
  • In 2007, the 2 marker appeared because that year SEBI made some regulation in FII investment via participatory notes to control the hot-money. 
  • Also, there were allegations that Pakistan might use it for 'financial-terrorism' using FII via Participatory notes.
  • Although there are tools such as Tobin Tax, to control the flight of hot-money. But still, For development, Governments want and prefer FDI and not FII. Because It's hard to pull out FDI once invested.

1 comments:

Kartikeya May 13, 2012 at 5:56 PM

Well the comments by JPMC chairam was in the year 2006. Our trade deficit for 2011-12 was $185 billion our CAD is also in red. Its high time we expect reforms and further liberalization particularly in regard to FDI in some sectors that includes insurance, retail, education, etc.

The comments would have been appropriate had our investors been happy in investing in India. With FDI should come a strong regulatory authority for each of these verticals.

Post a Comment