FII impact on Indian capital market

Information about FII impact on Indian capital market

Published on October 5, 2010

Author: swapnil2605



ROLE OF FIIs IN DEVELOPMENT OF INDIAN ECONOMY : ROLE OF FIIs IN DEVELOPMENT OF INDIAN ECONOMY By: Deepika Chandwani Shraddha Chapekar Swapnil Gangele Evolution of Indian Capital Market : Evolution of Indian Capital Market Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. The 1850's witnessed a rapid development of commercial enterprise and brokerage business In 1860-61 -, the 'Share Mania' in India begun Evolution of Indian Capital Market : Evolution of Indian Capital Market 1874 – Dalal street 1940 – Uttar Pradesh stock exchange ltd. 1944 - Hyderabad Stock Exchange Limited 1947 - Delhi Stock Exchnage Association Ltd. 1963 - Bangalore Stock Exchange Limited 1992- National stock exchange ltd. Post 1991.. : Post 1991.. 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. How to meet capital scarcity : How to meet capital scarcity Borrowed money – from other countries Foreign Direct Investment –investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. EX -POSCO and TATA Foreign Institutional Investor - who invests money in the financial markets of a country different from the one in which that investor is incorporated Foreign Institutional Investors : Foreign Institutional Investors The Indian capital market was opened up for foreign institutional investors (FIIs) in 1992 Tap international capital markets through ADRs, GDRs, FCCBs, ECBs and NRIs FII investment with it averaging around $9599 million a year during 2003-05. This figure is around 5 times the average annual inflows witnessed from 1993-94 to 1997-98 and from 1999 to 2002 and more than 20 times the average annual inflows during 1997-99 and 2002-03 FIIs…. : FIIs…. while cumulative net FII inflows into India from early 1990s to end of March 2003 amounted to $15,804 million, in the period thereafter till about December 2005, the addition to this value was of $25,267 million. At the same time the Sensex had fallen to about 3000 crossed 4000 and 5000 respectively by August and November 2003. It broke through the 6000 level by January 2004 before crossing the 7000 mark in June 2005, crossing 10,000 in February 2006 and 15,000 in July 2007. FIIs have a compounding effect on the size and nature of the firm in that the firm becomes in a position to acquire other firms and hence grow even more To Attract FIIs : To Attract FIIs The ceiling for overall investments of FIIs was increased 24% of the paid up capital of Indian company. Allowed foreign individuals and hedge funds to directly register as FIIs. Investment in government securities was increased to US $ 5 Billion. Simplified registration norms. Encouraged FIIs because.. : Encouraged FIIs because.. Global liquidity into the equity markets Raised the price-earning ratio Built our reputation in the international community Instrumental in capital formation Terms related to FII : Terms related to FII Sub-account Includes those foreign corporations, 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 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 means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. Entities which can register as FIIs in India : Entities which can register as FIIs in India As FII: Overseas pension funds, mutual funds,investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund. As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals. Regulations : Regulations The SEBI is the nodal agency for dealing with FIIs, and they have to obtain initial registration with SEBI. The SEBI's initial registration is valid for five years. The Reserve Bank of India's general permission to FIIs will also hold good for five years. Both will be renewable. FIIs can invest in all securities traded on the primary and secondary markets. FIIs can repatriate capital gains, dividends, incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares. Investment regulations : Investment regulations The total investments in equity and equity related instruments should be at least seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in India. The cumulative debt investment limit for FII investments in Corporate Debt is USD 15 billion. The debt investment limit for FIIs in government debt in G-secs currently capped at $5 billion and cumulative investments under 2% of the outstanding stock of G-secs. Slide 14: The Foreign Institutional Investor is allowed to transact business only on the basis of taking and giving deliveries of securities bought and sold. A Foreign institutional Investor or a sub-account having an aggregate of securities worth rupees ten crore or more, as on the latest balance sheet date, can settle their only through dematerialised securities. Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital Role of FIIs : Role of FIIs The Indian stock market has come of age and has substantially aligned itself with the international order. Market has also witnessed a growing trend of 'institutionalization' that may be considered as a consequence of globalization. It is influence of the FIIs which changed the face of the Indian stock markets. Screen based trading and depository are realities today largely because of FIIs. Slide 16: FII which based the pressure on the rupee from the balance of payments position and lowered the cost of capital to Indian business. FIIs are the trendsetters in any market. They were the first ones to identify the potential of Indian technology stocks. When the rest of the investors invested in these scrips, they exited the scrips and booked profits. Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla system. Slide 17: FIIs have started playing a critical role in the movement of stock prices. The assets under management of domestic mutual funds have crossed Rs. 100,000 crores. A positive contribution of the FIIs has been their role in improving the stock market infrastructure. The FIIs are playing an important role in bringing in funds needed by the equity market. The increase in the volume of activity on stock exchanges with the advent of on screen trading coupled with operational inefficiencies of the former settlement and clearing system led to the emergence of a new system called the depository System. Slide 18: Net Investment by FII (USD Mn) in India Advantages & Disadvantages : Advantages & Disadvantages 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. Advantages Advantages contd.. : 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. Advantages contd.. 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. Disadvantages Disadvantges contd.. : 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. ..\Downloads\education mba\fii indian economy\fii.xlsx Disadvantges contd.. Sources : Sources Google Images Slide 25: Thank You !

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