FII refers
to the Foreign Institutional Investors that are allowed to invest in
the Indian financial sector. Since the opening up of India’s capital
markets, the FII activity has been on a constant rise. FII are extremely keen to invest in the BRIC countries or Brazil, Russia, India and China.
- In the past year, 2010 India received US$30 billion net foreign inflows
- From
April 2000 – April 2011, cumulative inflow of FDI is US$ 197,935
million. The FDI inflow has increased in 2011 by as much as 43% as
compared to 2010 according to the Department of Industrial Policy and
Promotion, Ministry of Commerce and Industry
- From January – July 2011, about US$3.82 billion has been invested in the Indian Stock market in shares and bonds
- According to SEBI, the FII’s have also invested in equities and debt securities for about US$5.84 billion
- As of July, the number of FIIs that has been registered is 1730 according to SEBI. This figure continues to grow each year.
FDI investments and the hurdles in India
As the statistics show, the FII investment
in India is extremely bullish and shows a positive trend. In 2007,
India receivedUS$34 billion as FDI, but this was nothing as compared to
the FDI that was received by China and stood at US$134. Even though
India has the largest pool of highly educated people, China scores due
to the fact that it has huge infrastructure that is missing from India.
Another problem that plagues the setting up is bureaucratic hurdles. The
paperwork system is still bounded by the red tape system of the earlier
years. Even though infrastructure work is being carried, its slow
development is a matter of concern.
Caveat for FII investment in India and how it affects the Indian markets
However, the FII activities
come with a caveat. When the FII find that the markets are performing
badly, they will quickly cash out to save their positions. In August as
the stock markets fell on the news of the problems with Greece financial
situation and the down rating of US credit rating, the FII’s have been
selling heavily. This means that the investment will be sent out of the
country.
FII and FDI connection
The relationship between FII and FDI
(Foreign Direct Investment) is intertwined. In 1998 – 1999 a number of
reforms were initiated, that were designed specifically for attracting
FDI. In India FDI is allowed through FII’s. This is done through private
equity, preferential allotment, joint ventures and capital market
operations. The only industries in which FDI isn’t allowed are arms,
railways, coal, nuclear and mining. 100% financing by FDI is allowed in
infrastructural projects such as construction of the bridges and the
tunnels. In the financial sector, insurance and banking operations can
have foreign investors.
Even though the current financial crisis is affecting the markets, it will be some time before the markets will rise again.