Impact of Fdi and Fii on Indian Stock Market

Globalization is the free movement of goods, services and people across the world in a seamless and integrated manner. Globalization can be thought of to be the result of the opening up of the global economy and the concomitant increase in trade between nations. In other words, when countries that were hitherto closed to trade and foreign investment open up their economies and go global, the result is an increasing interconnectedness and integration of the economies of the world. This is a brief introduction to globalization. Globalization is grounded in the theory of comparative advantage which states that countries that are good at producing a particular good are better off exporting it to countries that are less efficient at producing that good. Conversely, the latter country can then export the goods that it produces in an efficient manner to the former country which might be deficient in the same.

Foreign Direct Investment

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign Institutional Investor – FII A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India and refers to outside companies investing in the financial markets of India. An FII is any type of large investor who does business in a country other than the one in which the investment instrument is being purchased. In addition to the types of investors above, others include banks, large corporate buyers or representatives of large institutions. All FIIs take a position in a foreign financial market on behalf of the home country in which they are registered.

Why Is Fdi Better Than Fii

Undoubtedly, FDI (foreign direct investment) as it is more durable and committed, if one may say so, than FII (foreign institutional investment) which is footloose and hot. China has been fortunate in attracting huge FDI. All these years, India has been fortunate in attracting FII, which made our stock exchanges popular, but not FDI in a big way. But, of late, there is a discernible trend in this changing and, in fact, last year FDI was marginally higher than FII.

Need For Fdi in India

The need for larger FDI exists because India is at a stage where it needs not only foreign investments, but also technology, and management policies to sustain and enhance its economic growth. In 2006, Foreign Direct Investment (FDI) in India amounted to US$37 billion, out of which only $5 billion was from the US. This was not a very encouraging figure in view of the goal of increasing the GDP by 34-36%. Therefore, there is a need for larger FDI. India still requires an FDI component equal to 4% of the GDP. The US needs to invest more in various sectors of the Indian economy. There is a potential to attract more FDIs in areas like infrastructure, IT hardware, automobiles, leather, textiles, gems, jewelry, and the financial sector. As such, India is rated as the 2nd best economy to invest in, after China. Surprisingly, the US is rated 3rd in this domain! The focus is on the insurance and banking sector, in context with Foreign Direct Investments. Only 10% of the insurance sector has been tapped for foreign investment. Foreign companies need to persuade the parliament for increasing Foreign Direct Investment capital. The banking sector is in the process of liberalization which will continue till 2009. The insurance sector is looking forward to increasing capital as more and more FDIs happen. So the insurance sector is also planning on liberalization, taking a cue from the banking sector. The need for larger FDI calls for major issues and areas to be taken into consideration, such as:

• Market potential and accessibility
• Political stability
• Market infrastructure
• Easy currency conversion.

India is the ideal country to make Foreign Direct investments in because of its features like:

• Developing economy
• Low salaried employees
• Low wage workers
• Abundant human resources
• Big private economy India is looking forward to a high growth rate of almost 16% – double that of the current 8%.

Hence, there is a distinct need for larger FDI. Further, FDI prospects are expected to be bright if liberalization is initiated in the telecom sector as well. Already, brands like Hutchison, Vodafone, and Singtel are in the Indian market and thanks to these investors, the FDI capital in this sector has been raised to 74%. There are others necessities which a larger FDI will cater to viz., employment generation, income generation, technology transfer, and economic stability. Hence, the need for larger FDI is a pressing situation these days in India. Foreign countries are well aware of this, and many of them are taking extra initiative to invest in the Indian economy.

Need For Fii in India

Economies like India, which offer relatively higher growth than the developed economies, have gained favour among investors as attractive investment destinations for foreign institutional investors (FIIs). Investors are optimistic on India and sentiments are favorable following government’s announcement of a series of reform measures in recent months. According to Ernst & Young's (EYs) Global Capital Confidence Barometer (CCB) - Technology report, India ranks third among the most attractive investment destinations for technology transactions in the world. India is the third largest start-up base in the world with more than 4,750 technology start-ups, and about 1,400 new start-ups being founded in 2016, according to a report by Nasscom.

Current Scenario of Fdi in India

Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment. The Indian government’s favorable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others. Market Size FII’s net investments in Indian equities and debt have touched record highs in the past financial year, backed by expectations of an economic recovery, falling interest rates and improving earnings outlook. FIIs net investments in Indian equities and debt stood at US$ 7.46 billion in 2016-17 (upto April 14, 2017). Private equity (PE) investments in the logistics industry grew at 9 per cent to US$ 501.71 million during 2016-17 and are expected to grow at 8.6 per cent annually from 2015-2020 on the back of increased opportunities resulting from low entry barriers and Goods and Services Tax (GST).

Investments

• Flipkart, India's largest e-commerce marketplace has raised US$ 1 billion in a funding round led by Chinese internet giant, Tencent and Microsoft.
• Paytm’s e-commerce unit raised US$ 200 million in a funding round led by Chinese e-commerce giant, Alibaba and existing investor, SAIF Partners.
• Caisse de Dépôt et Placement du Québec (CDPQ), Canada’s second largest pension fund, plans to invest around US$ 155 million to acquire a minority stake in TVS Logistics Services Limited, a privately held subsidiary of the TVS Group.
• International Finance Corp (IFC), along with IFC Global Infrastructure Fund, the PE fund of IFC Asset Management Company, has announced investment of US$ 125 million equity in Hero Future Energies.
• The World Bank Group has committed to provide US$ 1 billion for India’s solar energy projects and plans to work with other multilateral development banks and financial institutions to develop financing instruments to support future solar energy development in the country.
• Goldman Sachs' PE fund plans to invest US$ 200-250 million in Essel Highways, the road infrastructure arm of Essel Group, which could make it one of the biggest PE transactions in the sector.
• ReNew Power Ventures Pvt Ltd, a renewable energy producer, has signed a debt financing agreement of US$ 250 million with Overseas Private Investment Corporation (OPIC), the US government's development finance institution, which will be used to construct up to 400 megawatts (MW) of new solar power projects in India across multiple states.
• Godrej Fund Management (GFM), the real estate fund management arm of Godrej Properties, has raised US$ 275 million from Netherlands-based APG Asset Management NV, which will be used to invest in residential projects in India.
• Global investment banking major Goldman Sachs has invested Rs 441 crore (US$ 65.37 million) to acquire an equity stake in Gurgaon-based hotel development and investment start-up SAMHI Hotels which will help fund SAMHI's expansion plans.
• Singapore-based investment firm, Temasek Holding, has acquired 73 per cent stake in Hyderabad-based Care Hospitals, India's fifth largest private healthcare network, for Rs 1,800 crore (US$ 266.83 million).

Government Initiatives

• The Government of India plans to work on increasing India’s weight in the MSCI Emerging Markets Index, in order to boost foreign portfolio investors (FPIs) inflow into the economy.
• The Government of India and The World Bank have signed a US$ 650 million loan agreement for the Eastern Dedicated Freight Corridor-III (EDFC-III) project, which is expected to enhance railway transport capacity, service quality and freight carriage on the Ludhiana-Khurja section of the EDFC, along with developing institutional capacity of Dedicated Freight Corridor Corporation of India Ltd (DFCCIL).
• The RBI has allowed start-ups to borrow up to US$ 3 million per financial year through external commercial borrowings (ECBs).
• The Securities and Exchange Board of India (SEBI) has relaxed norms for registered FPIs in India, allowing them to operate through the International Financial Services Centre (IFSC) without any additional documentation or prior approval process.
• The Maritime India Summit 2016, which was held in Mumbai between 14th-16th April, has attracted investments worth Rs 82,905 crores (US$ 12.29 billion) across 141 memoranda of understanding (MOU) and business agreements, which were signed by various players in the maritime sector.
• The government of India has accepted the recommendation of A.P. Shah Committee to not impose Minimum Alternate Tax (MAT) on overseas portfolio investors retrospectively for the years prior to April 01, 2015, thereby providing significant relief to FPIs.
• SEBI has allowed FPIs to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), category III Alternative Investment Funds (AIFs), and also permitted them to acquire corporate bonds under default.
• The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India. The investment should be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with SEBI will also be deemed as eligible investors.
• The People’s Bank of China (PBoC) has invested US$ 500 million in Indian bonds for the first time since the Indian government eased restrictions on foreign investors. Road Ahead India is being viewed as a potential opportunity by investors, with the economy having the capacity to grow tremendously. Buoyed by strong support from the government, FII investments have been strong and are expected to continue to improve going forward.
• Mr Mark Machin, Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB), has expressed confidence in the Indian equity market and stated that the country is one of the best investment destination based on its demographic growth, increased productivity, and long-term economic growth potential.
• "The FII participation has been very consistent as far as India is concerned and we see the trend continuing. We have been overweight India in the context of Asia and emerging markets since November 2013 and that stance very much continues," said Mr Bharat Iyer, MD, Global Research, JP Morgan India.
• Impact investments in India are expected to grow at a compound annual growth rate (CAGR) of 20-24 per cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015, according to McKinsey & Co.
• A PricewaterhouseCoopers India report based on a survey of 40 PE firm partners has projected that the country has the potential to get PE funding of US$ 40 billion by 2025. Future PE investments would be driven by India’s consumption story, realistic valuations, competitive businesses, growing private entrepreneurship, among other factors, as per the report.

Conclusion

After conducting the study it was established that Foreign Capital inflow plays quite an important role in the growth and development of Indian Stock Markets. These foreign inflows are occurring in two ways i.e. FII and FDI. As far as FDI is concerned it does not have a direct connection with the stock markets but helps in providing opportunities to industries like technological advancement and also providing managerial skills and employee abilities with greater efficiency. On the other hand, FII is directly in connection with stock markets. Both these inflows however contribute to a great extent in increasing the size of the stock markets, enhancing the transparency, technology, informational standards, investor protection, operational standards; making these at par with the International Stock Markets.