FOREIGN DIRECT INVESTMEMT (FDI)

&FOREIGN INSTITUTIONAL

INVESTMENT(FII)

Most countries in the world which are the road to economic development, depend on foreign capital in some or the other way. Foreign investments has contributed to the process of industrialisation and economic growth of recipient economies. Foreign capital or investment is inflow of capital from abroad in form of private investment.

CONCEPT OF FOREIGN CAPITAL AND INVESTMENT

COMPONENTS

FDI FII

WHAT IS FDI??? FDI is "investment made by a company

or an entity based in one country, into a company or entity based in some other country."

ORIn other words, FDI is "controlling ownership in a business

enterprise in one country by an entity based in another country."

WHAT IS FII??? FII is "An investor or investment

fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds."

Example:-FII/FPI & DII trading activity on NSE, BSE and MSEI

Items 2007-08 2008-09 2009-10 2010-11 2011-12Capital a/c

of BOP

Foreign Investment

43.3 5.8 50.4 29.0 33.0

a) FDI 15.9 19.8 18.0 11.8 22.1b) Portfolio Investment

27.4 (-) 14.0 32.4 31.5 17.4

i) FII's 20.3 (-) 15.0 29.0 29.4 16.9ii)ADR's/GDR's

6.6 1.2 3.3 2.0 _

ADVANTAGES OF FOREIGN CAPITAL

RAISES INVESTMENT LEVELUTILISATION OF NATURAL

RESOURCESFILLS TECHNOLOGICAL GAPSCREATE EMPLOYMENT OPPORTUNITIESFAVORABLE EFFECT ON BOPREDUCE INEQUALITY AMONG NATIONS

DISADVANTAGESAGGRAVATION OF MONOPOLISTIC

TEDENCIESOLD OR OBSOLETE TECHNOLOGYSTIMULATE WRONG COMPETITIONMAY NOT REINVEST PROFITSHARM LOCAL PRODUCERSREGIONAL DISPARITIES

INDIAN GOVT.’S POLICY TOWARDS FOREIGN CAPITAL

Pre- 1999 Policy:-In pre 1991 period, there was a wide resentment towards foreign capital in India. The foreign investment policy maintained that foreign capital should not be allowed to enter India, and where it existed, to expand.

Since 1956,there was inflow of foreign capital into industries such as drugs, tyres, automobiles etc.,due to high expected growth rate in 2nd 5 year plan and lack of adequate technology.

Three acts- MRTP Act 1969, Indian parents Act 1970 and FERA 1973 were against foreign investment. FERA 1973 controlled FDI in India. Larger shareholding industries where foreign technology was needed were permitted but under strict control. Most of the firms were compelled to dilute foreign equity and foreign branch companies were obliged to indianise there shareholdings. Two big companies, Coca-Cola and IBM were ordered to wind up their business in 1977, in auto industry govt. refused to allow the US gaint. General motors were ordered to acquire 1/3rd of the equity in the Birla-owned Hindustan motors so that there was no foreign equity in car manufacturing units.

By 1980,due to foreign exchange crisis, new govt, took a loan from IMF. Its conditions lead to liberalisation in FI policies. FI was welcomed. Only Suzuki was welcomed in car industry. Telecom industry was protected. But there was a major opening in July 1991.

Reforms of 1991:-

FDI and FII were initiated in the country.FERA was amended:- restriction on foreign investment and technology were abolished.In 1998-99 projects for electricity ,roads and highways,ports and harbours, tunnels and bridges were permitted foreign equity participation.Govt. Allowed FII to invest in Indian Capital markets by registering with SEBI and getting RBI’s approval.Foreign Investment Implementation Authority (FIIA) was established to ensure approval of foreign investment including NRI investment.Outflows by residents are highly controlled. India has joined hands with many other developing nations to form MULTILATERAL INVESTMENT GARUNTEE AGENCY (MIGA) with aim to improve foreign investment.

CONCLUSION- 11TH 5 YEAR PLAN

India is now regarded as one of the best performing emerging markets. This has created a favourable impression among foreign investors. Most of international companies are now operating in India and many have announced expansion plans.

There has been liberalisation of FDI policy as well. Although some service sub sectors are still subject to FDI, yet there is a continuous progress.Country remains on its policy of encouraging capital flows but in a cautious manner.

The National Common Minimum Programme argues that the country needs and can absorb three times the amount of FDI that it gets.This is a reasonable target and can be achieved in the 11th plan.