Narasimha Project

A study on role of FDI & FII in banking & insurance sector INTRODUCTION
Foreign Investment (FI) Foreign Investment is an investment by citizens and government of one country in industries of another; also investment within a country by foreigners. The income tax treatment of foreign investment income is often governed by Tax Treaties between the country of the investment owner and the country where the investment is located. General Motors building a vehiclemanufacturing plant in Mexico is an example of Foreign Investment. Foreign Direct Investment (FDI) Foreign Direct Investments means when a foreign company having a stake in a public sector undertaking in India. E.g. FDI in telecom sector has been increased to 74%.So if Vodafone wants a share in Indian market. It can penetrate Indian market with max of 74% stake It is an Investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise
INDIAN ACADEMY DEGREE COLLEGE 1
A study on role of FDI & FII in banking & insurance sector

control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment. Foreign Institutional Investors (FII) Foreign Institutional Investors, i.e., foreign Investment Bankers like Goldman Sachs, Merill Lynch, Lehman brothers investing in Indian markets i.e. buying Indian Stocks. FII's generally buy in large volumes. This has an impact on the stock markets. Foreign Institutional Investor (FII) is used to denote an investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in. In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. A FEMA norm includes maintenance of highly rated bonds (collateral) with security exchange. Difference between FDI and FII FDI typically brings along with the financial investment, access to modern technologies and export market. The impact of the FDI in India is far more than that of FII largely because the former would generally involve setting up of production base - factories, power plant, telecom networks, etc. that generates direct employment. There is also multiplier effect on the back of the FDI because

of further domestic investment in downstream and upstream projects and a host of other services. The best example of FDI is Maruti Suzuki. India's experience in the automobile sector with Suzuki ushering in the modern car on Indian roads - that has been a force multiplier for the whole automobile sectors - can be seen as a typical example of the collateral benefit of FDI. However, the downside is that it puts an impact on local entrepreneur. Therefore it is advisable that the FDI should ensure minimum of local content, level
have export commitment and technology transfer to India.
FII too gives large chunks of capital by way of market. The indirect benefits of the market would include alignment of local practices to international standards in trading, risk management, new instruments and equities research thus facilitating market to become more deep, liquid, feeding in more information into prices resulting in a better allocation of capital to globally competitive sectors of the economy. While these portfolio flows can technically reverse at any time, given that the surfeits of international capital chase growth, as long as the host country follows sensible economic policies, this risk is not as high as it is frequently made out to be. India had experienced over the last decade and a half despite economic slowdown, war, droughts, floods, political uncertainties and a nuclear test - bears testimony to this. While both forms of capital involve financial inflows, the additional attribute of FDI is the feature of technology transfer, access to markets and management inputs. Apart from this distinction there is hardly any big difference between the two forms of capital.

A capital deficient country like India would need to balance the distribution of foreign There are lot of confusion between FII and FDI and which has created so many rules and regulations. For example investment by financial institutions under FII may sometime involve participation in management and in transfer of technology, in developing new export market and also in upgrading management capabilities. Thus merger proposal presently under consideration of the Government is worthy of support.
RESEARCH DESIGN
TITLE OF THE STUDY
INDIAN ACADEMY DEGREE COLLEGE

A Study on Role Of FDI & FII in Banking & Insurance Sector.
STATEMENT OF THE PROBLEM Problems arose only in the case of those entities in which single foreign entities held more than 10 per cent equity. This was, for example, true of the Development Credit Bank and the Catholic Syrian Bank . The problem faced by these entities is that of finding buyers willing to acquire small blocks of equity to ensure adequate dilution of lead stakeholder ownership in a bank being run by a dominant foreign shareholder. As a result they have been under pressure for not complying with the RBIs demand to dilute equity and faced with threats of penal action.
FDI will lead to job losses. Small retailers and other small Kirana store owners will suffer a large loss. Supermarkets will establish their monopoly in the Indian market. Because of supermarkets fine tuning, they will get goods on low price and they will sell it on low price than small retailers, it will decrease the sell of small retailers.
Jobs in the manufacturing sector will be lost because foreign giants will purchase their goods from the international market and not from domestic sources.
OBJECTIVES

To examine trends and patterns of FDI across different sectors and from different countries. To determine the growth and development in various sectors due to FDI. To understand the Global Investment Scenario through FII. To determine the important factors which motivates Insurance Sector to pursue FDI and FII. To Measure the role of FDI and FII in Banking and Insurance Sector If the FDI and FII increase or decrease what will be effect of it on Banking and Insurance Sector Banking and
Scope of the Study Overview of the FDI & FII in India. Regulatory framework of FDI in India. Participants in the Banking and Insurance Sector to pursue FDI and FII. Market Structure and Segmentation. Increase economic growth by dealing with different international products. Spread import and export business in different countries.
Research Methodology

Research methodology is a way to systematically solve the research problem. It may be understood as science of studying how research is done systematically. The scope of Research methodology is wider than that of research method.
Non Probability The non probability respondents have been researched by selecting the employees working in Bank, Insurance and Broking Firm Exploratory and Descriptive Research The research is primarily both exploratory and descriptive in nature. The sources of information are both primary and secondary. The objective of the exploratory research is to gain insights and ideas. The objective of the descriptive research study is typically concerned with determining the frequency with which something occurs.
SAMPLING METHODOLOGY Sampling Techniques Initially, a rough draft was prepared a pilot study was done to check the accuracy of the Questionnaire and certain changes were done to prepare the final questionnaire to make it more judgmental. Sampling Units

The respondents who will be asked to fill out the questionnaire in Bangalore and Bangalore are the sampling units. These respondents mostly will comprise of the employees working in Bank, Insurance and Broking Firm
Sample Size The sample size was restricted to only 100 respondents. Sampling Area The area of the research will be Bangalore
LIMITATIONS OF THE STUDY The various limitations of the study are: Employees may be not willing to fill the entire questionnaire due to the less time available to them or may be least bothered to fill the entire questionnaire. Some respondents might be hesitant to provide personal and financial information which can affect the validity of all responses. There can be lack of awareness among people about FDI and FII. So the people who are aware of such things may be found in specific areas for survey purposes. Some of the respondents who are not aware of FDI and FII concept may be able to respond to few questions.
LITERATURE REVIEW
Dr. patil Usha.N: The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. The unorganized retail sector as has been mentioned earlier occupies 98% of the retail sector and the rest 2% is contributed by the organized sector. Hence one reason why the government feared the surge of the Foreign Direct Investments in India was the displacement of labour. The unorganized retail sector contributes about 14% to the GDP and absorbs about 7% of our labour force. Hence the issue of displacement of labour consequent to FDI is of primal importance. There are different viewpoints on the impact of FDI in the retail sector in India, According to one viewpoint, the US evidence is empirical proof to the fact that FDI in the retail sector does not lead to any collapse in the existing employment opportunities. There are divergent views as well. According to the UK Competition Commission, there was mass scale job loss with entry of the hypermarkets brought about by FDI in the UK retail market. This paper highlight is Introduction & Definition of Retail, Division of Retail Industry, FDI Policy in India, FDI Policy with Regard to Retailing in India, Foreign Investors Concern Regarding FDI in Single and Multi Brand Retail. Uttama,Nathapornpan Piyaareekul: The paper examines the interaction on intra-industry trade (IIT) and foreign direct investment (FDI) with special attention to the Association of Southeast Asian

Nations (ASEAN). We introduce the 233 knowledge-capital model, recently proposed by Baltagi et al. (2007) and Uttama and Pridy (2009). The theoretical implications are suggested, not only how IIT is determined by country characteristics, such as similarity in market size and factor differentials, but also trade costs as well as regional economic integration. Moreover, it also empirically investigates the determinants of aggregated and disaggregated IIT in five ASEAN countries over the period 19952008, concerned with what extent complex FDIs boost IIT. Using spatial panel data model, we find the fact that the empirical results are consistent with the theoretical predictions. Vertical FDI tends to discourage ASEANs IIT, whereas complex horizontal FDI in neighbours tends to encourage its IIT in ASEAN.
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THEORITICAL BACKGROUND
Introduction Foreign Investment means flow of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature Direct foreign investment is investment in real assets, rather than financial assets such as securities. This investment may take the form of joint ventures with foreign firms, formation of foreign subsidiaries, or the acquisition of existing foreign firms. Although the investment is in real assets, this may be accomplished by a position in financial assets that is large enough to provide influence

over management (a 10 percent or greater position is sometimes considered sufficient). Foreign investment in the United States grew steadily during the 1970s, but experienced a surge during the middle and late 1980s. The high levels of foreign investment led to concerns about a loss of control over domestic economic activity, or "economic sovereignty," and the effect of foreign ownership on national security.
Studies of foreign investments in the United States indicate that the primary vehicle was acquisition, but the acquisitions were managed in basically the same way as domestic firms, and the overall impact of foreign investment is positive. Despite the large size and prominence of some investments, and their potentially large impact in specific areas, overall foreign investments are relatively insignificant relative to the size of the U.S. economy. With the economic slowdown of the early 1990s, and a drop-off in the rate of foreign investment, concerns about economic sovereignty became muted. Attitudes toward foreign investment also changed somewhat as localities vied to attract investment for economic stimulus. Another factor was a surge in foreign investment by U.S. firms during the late 1980s, and this trend continued into the 1990s. Finally, foreign investment may help offset decreases in domestic investment during periods of economic slowdown. Currently there is a trend toward globalization whereby large, multinational firms often have investments in a great variety of countries. Many see foreign investment in a country as a positive sign and as a source for future economic growth. The U.S. Commerce Department encourages foreign investment through its Invest in America initiative. BENEFITS AND COSTS- FOREIGN INVESTMENT

The benefits motivating foreign direct investment are complex and usually firm-specific. A primary motivation is the exploitation of oligopoly (or monopoly) power such as proprietary technology, brand names, or management know-how. Entry into more profitable markets is an obvious attraction, and new and possibly large markets may produce economies of scale. Foreign Investment has access to foreign factors of production or technologies, and reaction to trade restrictions or exchange rate movements, have also provided a motivation. An important benefit of direct investment is diversification. National economies are in different stages of their economic cycles, and move differently. Just as diversification of a security portfolio across firms that react differently to economic cycles will reduce the variability of portfolio returns, investment across national economies reduces the volatility of the firms' cash flow. This reduces the possibility of inadequate liquidity and should increase the value of the firm. These benefits must be weighed against the potential costs of foreign investment. National interests are involved and may lead to restrictions. Diversification may reduce variability over the longer run, but exposes the firm to potential short term variability, especially through exchange rate movements. International management is also more complex and difficult, involving not only a larger organization but also different laws, conditions, and customs. The uncertainty surrounding the likely outcomes, and the possibility of undesirable outcomes, is larger for foreign investment than for domestic investment. Especially for smaller or emerging economies, the concerns of national economic sovereignty may lead to protectionism and restrictions, such as limits on repatriation of profits. On a global basis, and over a long time, it is generally agreed that a free flow of capital is beneficial, since it promotes an efficient allocation of resources. For shorter periods, and within a given country or region, the impact is mixed. For

the individual firm the foreign direct investment decision requires consideration of factors beyond those encountered domestically. It appears that there is no overall answer to the desirability of foreign direct investment on either the national or firm level, and that individual analysis of each project is required. Entry Route for Foreign Investment As per the FDI policy in place foreign investors can invest in India through any of the different routes set forth below: (i) (ii) Foreign Direct Investment Foreign Portfolio Investment
An investor planning to invest in India has the following options: Automatic Route Investment without any prior approval from any regulatory authority and the only regulatory formality includes post-facto filings with the RBI. Approval Route Prior approval of Foreign Investment Promotion Board (FIPB) is required for (a) Activities not covered under the Automatic Route; (b) Conditions, if any, under the automatic route are not fulfilled; or (c) The investment is beyond the prescribed threshold limit. 100% FDI in almost all key sectors is permitted under automatic route except very few sectors where either FDI is allowed with Government approval or is totally prohibited like Atomic Energy, Lottery, gambling and

betting, retail trading (except single brand product retailing, Nidhi company etc. FOREIGN INVESTMENT POLICY The Ministry of Industry has expanded the list of industries eligible for automatic approval of foreign investments and, in certain cases, raised the upper level of foreign ownership from 51 percent to 74 percent and further in certain cases to 100 percent. In January 1998, the RBI announced simplified procedures for automatic FDI approvals. Further announcement had provided that Indian companies will no longer require prior clearances from the RBI for inward remittances of foreign exchange or for the issuance of shares to foreign investors. Facilitating Foreign Investment In the recent budget, the finance minister announced the government's commitment to a 90-day period for approving all foreign investments. Government officers will be assigned to larger foreign investment proposals and will facilitate Central and State clearances in a time-bound manner. Unlisted companies with a good 3 year track record, have been permitted to raise funds in international markets through the issue of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). A number of policy changes have reduced the discriminatory bias against foreign firms. The government has amended exchange control regulations previously applicable to companies with significant foreign participation. The ban against using foreign brand names/trademarks has been lifted.
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The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65 percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent. The long-term capital gains rate for foreign companies was lowered to 20 percent; a 30 percent rate applies to domestic companies. The Indian Income Tax Act exempts export earnings from corporate income tax for both Indian and foreign firms. Other policy changes have been introduced to encourage foreign direct and foreign institutional investment.
NEXT TOP ECONOMIC INDEX Direct Investment vs. Portfolio Investment (U.S $ million) Year 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 (AprilDec) 2012-2012 (April- Dec) Source: Economic Times PORTFOLIO INVESTMENT BY FOREIGN SOURCES
Direct Investment Portfolio 129 315 586 1314 2133 2696 3197 2511 1562 Investment 4 224 3567 3824 2748 3312 1828 1748 -682
Total
Foreign
Investment 133 559 4153 5138 4881 6008 5025 4253 880

The decline in portfolio investment, from 2008-2009 onwards, has been contributed by a decline in flows of both foreign institutional investment and GDRs. Fresh inflow of funds by FIIs declined from U.S.$ 1,926 million in 20072008 to U.S.$ 979 million in 2008-2009. This trend intensified in 2009-2010 with an estimated outflow of U.S.$ 752 million during April-December, 2009 compared to inflows of U.S.$ 973 million during the corresponding period in the previous year. GDRs raised in 2008-2009 was U.S.$ 645 million, which was less than half the amount of U.S.$ 1,366 million raised in 2007-2008. The declining trend has continued during the first nine months of 2009-2010 with only U.S.$ 15 million raised compared to U.S.$ 612 million during the same period in 20082009. The poor performance of portfolio investment is a consequence of both enhanced emerging market risk-perception, and the depressed condition of the domestic capital market. Portfolio Investments NRIs A number of liberalization measures have been taken in 1998-99 to promote portfolio foreign investment. In order to avoid NRIs being crowded out by FIIs, the aggregate ceiling for investment in a company by all NRIs/PIOs/OCBs through stock exchanges has been made separate and exclusive of the investment ceiling available for FIIs. In addition, the aggregate investment ceiling for NRIs/PIOs/OCBs has been raised from 5 per cent to 10 per cent of the paid up capital of a company. In the case of listed Indian companies, the ceiling can be raised to 24 per cent of the paid up capital under a General Body Resolution. Also, the investment limit by a single NRI/PIO/OCB has been enhanced from 1 per cent to 5 per cent of the paid up capital. Policy pertaining to investment in unlisted companies has also been liberalized. NRIs/PIOs/OCBs are now permitted to invest in unlisted companies. However, while investing in unlisted

companies, the same norms and approval procedures applicable to portfolio investments in listed companies will apply, and it will be subject to the same investment ceilings as in the listed companies.
PORTFOLIO INVESTMENTFIIs FIIs can purchase and sell Government Securities and Treasury Bills within overall approved debt ceilings. To facilitate better risk management by investors, authorized dealers have been permitted to provide forward cover to FIIs in respect of their fresh equity investments in India. Moreover, transactions among FIIs with respect to Indian stocks will no longer require post-facto confirmation from the RBI. Also, 100 percent FII debt funds have been permitted to invest in unlisted debt securities of Indian companies.
EXTERNAL COMMERCIAL BORROWINGS (ECBs) The higher net inflows of U.S. $ 3,999 million of ECBs in 2008-2009 compared to U.S. $ 2,848 million in 2007-2008 reflected lower amortization. Disbursements in 2008-2009 stood at U.S. $ 7,371 million, which was marginally lower than U.S. $ 7,571 million recorded in 2007-2008. ECB approvals in 20082009 have been placed at U.S. $ 8,712 million, which is slightly higher than the level in 2007-2008. Regarding sectoral allocation, power accounted for the highest approvals of U.S. $ 3 billion, followed by telecom with U.S. $1.5 billion given in the table. In 2009-2010 up to 23.12.98, approvals have been placed at U.S.$ 3,804 million. The reduced attractiveness of ECB of the corporate sector has been underscored by a very steep decline in actual disbursements to U.S.$ 1.6 billion (excluding U.S $ 4.2 billion on account of RIBs) in the first two quarters of 20092010 compared to U.S.$ 4.3 billion in the same period last year. Increase in cost of

ECB funds has come about due to a general increase in the risk premium for emerging market borrowers, downgrades by international credit rating agencies and the rise in forward premium. After several years of unchanged or slightly improving ratings, major rating agencies started to re-examine our ratings in early 2008. Both the deteriorating external environment and persistent large fiscal deficits have been cited as the main reasons for downgrading. ECB is approved by the Government within an annual ceiling that is consistent with prudent debt management, keeping in view the balance of payments position. The existing ECB policy was reviewed in 2009-2010 in light of the financial needs of various sectors and the impact on international markets of both the East Asian crisis and economic sanctions. Regarding the sectoral requirements, infrastructure and exports continue to be accorded high priority in ECB allocation. NON RESIDENT DEPOSITS (NSD) The Resurgent India Bond (RIB) scheme, launched in the current financial year, was open to both NRIs/OCBs and the banks acting in fiduciary capacity on behalf of them. The scheme, that opened on August 5, 2009 and closed on August 24, 2009, mobilized U.S.$ 4.2 billion. The interest rates on these five year bonds were 7.75 per cent for U.S. dollar, 8 per cent for Pound Sterling, and 6.25 per cent for Deutsche Mark. Other features of Ribs include joint holding with Indian residents, allowing them to be gifted to Indian residents, easy transferability, loan ability, premature encashment facility, and tax benefits. 45. Net inflows under non-resident deposits declined from U.S.$ 3,314 million in 1996-97 to U.S.$ 1,119 million in 2008-2009. The outflow under FCNRA continued due to redemption payment. Also, the relative rates of return and the perceived risk premium on emerging market debt has influenced the flows into these accounts.
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Some of the domestic policy-related factors which seem to have contributed towards subdued net flows include imposition of incremental cash reserve ratio of 10 per cent on non-resident deposits and the linking of interest rates under FCNR (B) with LIBOR, which had the effect of lowering interest rates offered under this scheme, and thereby reducing its attractiveness. In order to encourage mobilization of long-term deposits, and concomitantly to discourage short-term deposits, the interest rate ceiling on FCNR(B) deposits of one year and above was raised and the ceiling on such deposits below one year was reduced in April, 2009. As at the end of March 1998, outstanding balances under various non-resident deposit schemes stood at U.S.$ 20,367 million.
Comparison of estimated net flows under non-resident deposits during April-November 2009 vis--vis the corresponding period in 1997 shows a compositional shift in favor of Rupee denominated accounts in response to policy initiatives undertaken in 2008-2009. Net inflows under non-residents deposits, (excluding redemption payments under FCNRA which had since been discontinued) at US $ 367 million during April-November, 1998 were substantially lower than those of US $ 2266 million in the same period of 2008. Positive flows have been recorded only in the NR (E) RA and NR (NR) RD schemes. The initiatives in terms of freeing of interest rates and removal of incremental CRR, may have acted as incentives to attract deposits in these accounts. For instance, the Securities and Exchange Board of India (SEBI) recently formulated guidelines to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional Investors (FII's). These brokers can now open foreign currency-denominated or rupee accounts for crediting inward remittances, commissions and brokerage fees.
FOREIGN DIRECT INVESTMENT (FDI)
Introduction to FDI An Overview
These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporations home country. The investing corporation must control 10 percent or more of the voting power of the new venture. The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country.
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The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment. FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy.
FDI has a stronger impact on Domestic Investment than do loans or Portfolio Investment (Source: Economic Times)
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Types of Foreign Direct Investment FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments.
An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.' Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
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Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called 'market-seeking FDIs.' 'Resource-seeking FDIs' are aimed at factors of production which have more operational efficiency than those available in the home country of the investor.
Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as 'efficiency-seeking.' Investment Group A foreign direct investor may be classified in any sector of the economy and could be any one of the following: An individual; A group of related individuals; An incorporated or unincorporated entity; A public company or private company; A group of related enterprises; A government body; An estate (law), trust or other social institution; or

Any combination of the above.
Methods for Investment The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:
By incorporating a wholly owned subsidiary or company
By acquiring shares in an associated enterprise Through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise
Foreign Direct Investment Incentives May Take The Following Forms: Low corporate tax and income tax rates
Tax holidays
Other types of tax concessions Preferential tariffs Special economic zones EPZ - Export Processing Zones Bonded Warehouses
Maquiladoras
Investment financial subsidies
Soft loan or loan guarantees
Free land or land subsidies
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Relocation & expatriation subsidies Job training & employment subsidies Infrastructure subsidies R&D support Derogation from regulations (usually for very large projects)
Procedure for an FDI License Foreign direct investment (FDI) for all items / activities can be brought in through the automatic route under powers delegated to the Reserve Bank of India (RBI). For the remaining items / activities, it can be obtained through government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB). Automatic Route
(a) New Ventures
In New Ventures all items / activities for FDI / Non Resident Indians (NRI) / Overseas Corporate Bodies (OCB) investment (up to 100 percent) fall under the automatic route, except where specified. Whenever any investor chooses to make an application to the FIPB and not avail of the automatic route, he or she may do so.
(b) Existing Companies
Besides new companies, the automatic route for FDI / NRI / OCB investment is also available to existing companies proposing to induct

foreign equity. For existing companies with an expansion program, the additional requirements are given below The increase in equity level must result from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/OCB/foreign investors, The money to be remitted should be in foreign currency, and The proposed expansion program should be in the sector(s) under the automatic route. Otherwise, the proposal would need government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company. Procedure for the Automatic Route The proposals for approval under the automatic route are to be made to the RBI in the FC (RBI) form. To simplify procedures for foreign direct investment under the automatic route, RBI has given permission to Indian companies to accept investment under this route without obtaining prior approval from the RBI.
However, investors are required to notify the concerned Regional Offices of RBI of receipt of the inward remittances within 30 days of such receipt. They will also have to file the required documents with the concerned Regional Office of the RBI within 30 days after issue of shares to foreign investors. This facility is available for NRI/OCB investment also.
PROCEDURE FOR GOVERNMENT APPROVAL
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Foreign Investment Promotion Board (FIPB) (a) All other proposals for foreign investment, including NRI / OCB investment and foreign investment in EOU / EPZ / STP/ EHTP units, which do not fulfill any or all of the parameters prescribed for automatic approval, are considered for approval by the FIPB. The FIPB also grants composite approvals involving foreign technical collaborations and the setting up of Export Oriented Units involving foreign investment / foreign technical collaboration. (b) Applications to FIPB for approval of foreign investment should be submitted in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. There is no charge for this. The following information should form a part of the proposal submitted to the FIPB: Whether the applicant has any previous financial / technical collaboration or trademark agreement in India in the same or allied field for which approval has been sought; and ii) If so, details thereof and the justification for proposing the new venture / technical collaboration (including trademarks). The application can be submitted to the FIPB unit of the Department of Economic Affairs, Ministry of Finance, North Block, New Delhi. Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing. Foreign investment proposals received in the Department of Economic Affairs (DEA) are placed before the Foreign Investment Promotion Board
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(FIPB) within 15 days of its receipt. The recommendations of FIPB in respect of project proposals involving a total investment of up to Rs. 6 billion are considered and approved by the Finance Minister. Projects with a total investment exceeding Rs.6 billion are submitted to the Cabinet Committee on Economic Affairs (CCEA) for decision. The decision of the Government in all cases is conveyed by the DEA, usually within 30 days. For inward remittance and issue of shares to NRI / OCB, even up to 100 percent equity, prior permission of the RBI is not required. These companies have to file the required documents with the concerned Regional Offices of the RBI within 30 days after the issue of shares to the NRI / OCB.
Procedure for Approval for EOUs Applications in the prescribed form for 100 percent EOUs should be submitted to the Development Commissioners (DCs) of the Export Processing Zones (EPZs) concerned for automatic approval and to the SIA for Government approval. The form is printed in the Handbook of Procedures for Export and Import, 2002-2007 published by the Ministry of Commerce & Industry and is also available at all outlets dealing in government publications. The application should be submitted along with a crossed demand draft of Rs. 5,000 drawn in favor of The Pay & Accounts Officer, Department of Industrial Development, Ministry of Commerce and Industry, payable at the State Bank of India, Nirman Bhavan Branch, New Delhi.
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Procedure for Automatic Approval for EOUs Applications in the prescribed form for 100 percent E0Us should be submitted to the DCs of the EPZs. Wherever the proposals meet the criteria for automatic approval, the DC of the EPZ would issue approval letters within two weeks. Procedure for Government Approval for EOUs Proposals not covered by the automatic route shall be forwarded by the DC to the Board of Approval (BOA) for consideration. On consideration of the proposal by the board, the decision is usually conveyed within six weeks. Government approval would be necessary for the following categories:

Proposals attracting compulsory licensing Items of manufacture reserved for the small-scale sector Proposals involving any previous joint venture or technology transfer / trademark agreement in the same or allied field in India. The definition of same and allied would be as per the 4-digit NIC 1987 Code and 3digit NIC 1987 Code
Extension of foreign technology collaboration agreements (including those cases that may have received automatic approval in the first instance) Proposals not meeting any or all of the parameters for automatic approval under foreign technology collaboration agreements
ROLE OF FDI IN FINANCIAL SECTOR
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BANKING The Reserve Bank of India (RBI) governs the investment matters in the banking sector. Private Sector Bank 49% is under automatic route. 74% is with approval including FIIs, PIS. Individual FFI holding restricted to 10% voting right limited to 10%. Public Sector Bank FDI and portfolio investment is up to 20% with government approval. Subsidiaries by Foreign Banks Foreign Banks can have branches or subsidiary in India but not both with RBI permission INSURANCE FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA) NBFC
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Over the years, there has been a significant increase in the role of nonbanking financial company (NBFC) considering their crucial role in the Indian financial system by complementing banks in providing financial services. A NBFC is a company registered under the Companies Act, 1956 and could be a loan company or an investment company or an asset finance company (or a mutual benefit financial company. NBFCs registered with RBI have been reclassified as (i) Asset Finance Company
(ii) Investment Company (iii) Loan Company FDI in NBFC is allowed in 18 specified activities Merchant Banking Underwriting Portfolio Management services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Rating Agencies Leasing and Finance Housing Finance

Foreign Exchange Broking Credit Card Business Money Changing Business Micro Credit Rural Credit. As per the FDI Policy, certain categories such as merchant banking or investment advisory are also treated as NBFCs even though not under the RBI Act. NBFCs having FDI have to comply with the stipulated minimum capitalization norms indicated below. Fund Based Activities FDI Amount 51% More than 51% but not exceeding 75% more than 75% Upfront Investment Required USD 0.5 million USD 5 million USD 50 million of which USD 7.5 million would need to be brought upfront and the balance in 24 months Non-Fund Based Activities Under the existing norms for permitted non-fund based activities, the minimum capitalization norms have been fixed at USD 0.5 million. 100% foreign owned NBFCs bringing in at least USD 50 million are permitted to set up step down subsidiaries without any restriction on number of operating subsidiaries and without any additional capital requirement. Joint Venture operating NBFCs, having up to 75% foreign investment, are allowed to
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set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries complying with the minimum capitalization norms.
TYPES OF INSTRUMENTS FDI under a fresh issue is allowed only for equity shares and fully compulsorily and mandatorily convertible instruments viz. preference shares and debentures, subject to pricing guidelines/valuation norms prescribed under FEMA regulations. Non-convertible, optionally convertible or partially convertible instruments are considered as debt since 1 st May 2007 and therefore attract the provisions of External Commercial Borrowings (ECB). Other Modes of Foreign Direct Investment Global Depository Receipts (GDR) or American Deposit Receipts (ADR) or Foreign Currency Convertible Bonds (FCCB) Indian companies are allowed to raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993 and guidelines issued by the Central Government there under from time to time subject to meeting the eligibility criteria. There are no end-use restrictions on GDR/ADR issue proceeds, expect for an express ban on investment in real estate and stock markets.
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The Government of India has also provided for a limited two-way flexibility scheme for ADRs / GDRs. Indian companies are also permitted to sponsor an issue of ADR / GDR. The Importance of FDI to Developing Countries as a Means of Finance Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market. All other differences flow from this primary difference. FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrip. Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby puling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.
Impact of FDI on Nation Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets.
Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capitalintensive industries and advanced technology. The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and increased profits encourage large capital inflows. Ultimately this results in economic development of the nation. Advantage India (Growth Prospect) FDI Foreign Direct Investments are that the majority victorious domestic companies, particularly those with only one of its kind compensation, spend abroad. It is the direct investment that makes companies more victorious internally. Companies with Foreign investment generally tend to be most profitable as well as it is to have a more stable sales and earnings. It sells at 12% discount to net assets. Distribution rate is 5.6%. Has a long track record. It has been in existence since 1972.
Disadvantages of FDI
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Foreign direct investments are cost of travel and communications abroad. It also does not very much relate to local business tax laws, business atmosphere in particular and other government regulations. Language and culture differences. It invests in debt instruments which are subject to interest rate fluctuations. Income is mostly taxable at full tax rate. 5 year total return rate is only 4.95%.
Limits for FDI FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. Investment Scenario In the year 2012, India has assumed a notable position on the world canvas as a key international trading partner, majorly because of the implementation of its consolidated FDI policy. The consolidation, first undertaken in March 2012, pulls together in one document all previous acts, regulations, press notes, press releases and clarifications issued either by the DIPP or the Reserve Bank of India (RBI) where they relate to FDI into India. According to the modified policy, foreign investors can inject their funds though the automatic route in the Indian economy. Such investments do not
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mandate any prior government permission. However, the Indian company receiving such investment would be required to intimate the RBI of any such investment. An analysis of the FDI inflows to India over the last year shows that while there was an exit during the toughest time of the crisis, Oct-Dec 2008, positive flows started as early as December. The short-term outlook, however, is negative since the performance in 2009 so far is considerably lower when compared to the same period in the last two years. One notable point in the RBI data, though, is that even at the lowest point, the funds have not gone down to pre-2003-04 levels. 2003-04 was a noteworthy year for India since it jumped three ranks in the AT Kearny FDI Confidence Index to become the third most preferred destination for foreign investments, following only US and China. The AT Kearney FDI Confidence Index tracks the impact of likely political, economic and regulatory changes on the foreign direct investment intentions and preferences of the leaders of the worlds leading companies, which account for about 70 percent of the worlds FDI flows. In 2004-05, India overtook the US to rank second, and maintains this rank until the last report.
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Source: Economic Times The reasons for Indias rise in rankings are its highly-educated workforce, management talent, rule of law, transparency, cultural affinity and regulatory environment, apart from its expertise in IT, business processing and researchoriented activities.
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FOREIGN INSTITUTIONAL INVESTOR Introduction An Overview Foreign Institutional Investor (FII) is used to denote an investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in.In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. FEMA norms include maintenance of highly rated bonds (collateral) with security exchange. It is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Foreign injections amounted to US$ 6.4 billion in October 2010, which was almost 25 per cent of the total inflows in the stock market registered so far in 2010. The net foreign fund investment crossed the US$ 100 billion mark on November 8, 2010, since the liberalization policy was implemented in 1992. As per the data given by SEBI, the total figure stood at US$ 100.9 billion, wherein US$ 4.78 billion were infused in November itself. The humungous increase in investment mirrors the foreign investors faith in the Indian markets. FIIs have
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made investments worth US$ 4.11 billion in equities and poured US$ 667.71 million into the debt market. Data sourced from SEBI shows that the number of registered FIIs stood at 1,738 and number of registered sub-accounts rose to 5,592 as of November 10, 2010 According to research reports, India has received more FII funds as compared to its Asian peers. According to Bloomberg, Net FII inflow (till November 23 2010) stood at US$ 28.5 billion, far ahead of South Korea (US$ 16 billion) and Japan (US$ 13 billion). Net FII inflows as a percentage of the market capitalization are also the highest in India at 1.8 per cent in 2010, followed by South Korea at 1.6 per cent. Quenching its thirst for foreign assets, India Inc announced merger and acquisition (M&A) deals worth a record US$ 55 billion in 2010, including a record number of billion-dollar transactions. According to a global consultancy firm Ernst & Young (E&Y), India is expected to receive more than US$ 7 billion in private equity (PE) investments in 2010, up from US$ 3.5 billion in 2009. Sectors such as power and transportation, consumer and branded products, infrastructure ancillaries, education and financial services, and healthcare are likely to witness increased PE activity in 2012 Types of Financial Institutional Investor (FII) Pension Fund Mutual Fund Investment Trust Unit Trust And Unit Investment Trust

Investment Banking Hedge Fund Sovereign Wealth Fund Endowment Fund Private Equity Firms Insurance Companies Methods of Investment
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: By incorporating a wholly owned subsidiary or company By acquiring shares in an associated enterprise Through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise
Foreign Direct Investment Incentives May Take The Following Forms:
Low Corporate Tax And Income Tax Rates
Other Types Of Tax Concessions Preferential Tariffs Special Economic Zones EPZ - Export Processing Zones Bonded Warehouses
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Maquiladoras
Investment Financial Subsidies
Soft Loan Or Loan Guarantees
Free Land Or Land Subsidies Relocation & Expatriation Subsidies Job Training & Employment Subsidies Infrastructure Subsidies R&D Support Derogation From Regulations (Usually For Very Large Projects)
Important Concepts
Foreign Institutional Investor (FII) FII means an entity established or incorporated outside India which proposes to make investment in India. Sub-Account Sub-account includes those foreign corporate, 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 Designated Bank means 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 is any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. Broad Based Fund It is a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund. It is provided because if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors and if the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund. FII REGISTRATION PROCEDURE Eligible for FII Registration Following entities / funds are eligible to get registered as FII: 1.PensionFunds 2.MutualFunds 3.InsuranceCompanies 4.InvestmentTrusts 5.Banks 6.UniversityFunds 7.Endowments 8.Foundations 9.CharitableTrusts/CharitableSocieties
Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:

a. Asset Management Companies b. Institutional Portfolio Managers c. Trustees d. Power of Attorney Holders DERIVATIVES POSITION LIMITS Restrictions on Investment In Derivatives The FII position limits in a derivative contracts (Individual Stocks) in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position limit in such stock shall be 20% of the market wide limit. For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in such stock shall be Rs. 50 Cr. FII Position limits in Index options contracts FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index options, whichever is higher, per exchange. This limit would be applicable on open positions in all option contracts on a particular underlying index. FII Position limits in Index futures contracts FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index futures, whichever is higher, per exchange.
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FIIs shall take exposure in equity index derivatives subject to the following limits: Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FIIs holding of stocks. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FIIs holding of cash, government securities, T-Bills and similar instruments.
FII Position Limits in Interest rate derivative contracts
At the level of the FII The notional value of gross open position of a FII in exchange traded interest rate derivative contracts shall be US $ 100 million. FII may take exposure in exchange traded in interest rate derivative contracts to the extent of the book value of their cash market exposure in Government Securities.
At the level of the sub-account The position limits for a Sub-account in near month exchange traded interest rate derivative contracts shall be higher of: Rs. 100 Cr or

15% of total open interest in the market in exchange traded interest rate derivative contracts.
PARTICIPATORY NOTES a) FII/sub-account who issue/renew/cancel/redeem PNs, require to report on Monthly basis. The report should reach SEBI by the 7th day of the following month. b) The FII/sub-account merely investing/subscribing in/to the Participatory Notes/Access Products/Offshore Derivative Instruments or any such type of instruments/securities with underlying Indian market securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec). c) FIIs/sub-accounts who do not issue PNs but have trades/holds Indian securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and OctDec): No reports required for that reporting quarter
INDIA: TURNED CRISIS INTO OPPORTUNITY India's economic managers and particularly the Reserve Bank of India (RBI) take considerable pride in having protected India from Asia's financial crisis in 1997-98. Although India did experience a period of slow growth in the years that followed that crisis, the basic financial machinery of the country remained relatively robust, providing a solid foundation for the much more rapid growth that has taken place this decade.

In common with its East Asian neighbors, India is grappling once again with many of the same challenges that the region faced a decade ago, creating difficult choices for economic and financial policy. The broad goal of India's policy is to try to ensure that any reduction in India's growth is temporary, so that the economy can return quickly to a nine per cent growth rate. In charting its course, the Government is juggling multiple considerations: the state of the domestic business cycle; ensuring financing for the balance of payments deficit; the sharp shift in the availability of global risk capital for financing Indian investment; and the slowdown in growth in the world's rich economies. After three years of buoyant, investment-led growth, the Indian economy started to slow late last year (2007). This growth slowdown was initially welcomed by the RBI, which had been gradually tightening monetary policy (since 2004) in a fight against inflation.
Price pressures were further exacerbated by the sharp rise in commodity prices late last year and early this year. The net effect has been partially to reverse the measured (but inadequate) progress toward fiscal consolidation, as well as to increase the current account deficit in the balance of payments. The political cycle is at an awkward point. Parliamentary elections are due by next summer, and there is considerable uncertainty as to the government that is to follow. India continues to suffer a series of terrorist incidents in its larger cities, and the political and economic instability in Pakistan adds another layer of uncertainty.
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Taking economic and political pressures together, it is perhaps not surprising that, for many Indians the present moment is compared less with 1997 than with 1990-91. That was the year when India suffered a major external payments crisis and was obliged to apply to the IMF for assistance. Thanks, however, to inspired political and economic leadership at that time, that payments crisis was turned into an opportunity for major structural reform from which India continues to benefit till this day. The interesting question is whether a similar opportunity can be created again. Policy until late August operated on a business-as-usual basis. Even though the financial crisis had been underway for almost a year, policy action was based on the assumption that India could remain largely unscathed. Government attitudes changed sharply in September. Notwithstanding the generally sound domestic financial position of India's commercial banks, bank liquidity came under strain as banks' overseas subsidiaries found their sources of wholesale finance withdrawn. This effect was compounded by the intensified sell-off by foreign investors in domestic equity markets and the repatriation of funds to meet liquidity calls abroad. Over the course of October, the RBI has sharply reversed course on the two key instruments at its disposal: the cash-reserve ratio (that is, reserve requirements) that banks are required to hold in their accounts with the RBI; and the overnight secured lending rate at which the RBI lends to banks. India's policymakers have both the experience and the tools to ride out the present storm. They will be helped by India's lower integration with world trade and finance, and by a variety of institutional features.
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Yet by itself this is not enough: the larger challenge will be, as in 1991, to use this crisis also to resume the momentum of reforms that have largely stalled. Of this there is as yet little sign.
FIIs INDIAN STOCK MARKET 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, though we still have a long way to go. Developing countries like India are generally capital scarce. This is because levels of income are lower in comparison to other developed countries, which in turn means savings and investments are also lower. So how do developing nations get out of such a situation? Simple! They borrow money, like we all do when we need to buy a house or a car. Countries can thus invest this borrowed money in various social and physical infrastructures; earn a return on them which helps them pay off their debt, and simultaneously propel the country to a higher growth trajectory. However, there is another way in which a country can attract foreign money. This is by way of Foreign Direct Investment (FDI) of Portfolio Investment (better known as Institutional Investment). The difference between the two is subtle.FDI is investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI); Tata buying Arcelor (out-bound FDI) and so on.
On the other hand, FII is used to denote an investor, who invests money in the financial markets of a country different from the one in which that investor is incorporated. So, if you as an Indian decide to invest in the US stock markets, it is an out-bound foreign institutional investment. Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII. FIIs remained net buyers which implies that foreign investors poured more money into the stock market than they took out, which is generally seen as a positive development as far as our economy is concerned. The Sensex soared 408 points reaching a 32-month high, as foreign
institutions poured in more than Rs. 2,500 crore, according to provisional data. The benchmark index closed at 19,208.33, up 2.1 per cent from its previous close. The Nifty closed at 5,760, up 2.13 per cent. The strong performance was led by RIL and the entire banking sector. Bank stocks were at their all-time high with SBI, India's largest bank, hitting a peak of Rs. 3,148.55 on the NSE. According to analysts, the gains made by stocks over the last few trading sessions have been primarily liquidity driven as is evident from the heavy FII inflows. Domestic institutions, which were net sellers for Rs 960 crore, and retail investors, who sold for a net of Rs 219 crore (on the BSE), took advantage of the highs and booked profits. It was fantastic opportunity for retail investors like us to sell and especially for those who had bought at April 2009 levels.

Technical analysts said the Nifty was moving in the 4300-5600 range for a long time and Monday's "break-out" could prompt an up-move equal to the width of the channel, that is, 1,200-1,300 points. The so-called laggards in the benchmark indices seem to have started to move. RIL has moved from Rs 920 to Rs 990 over the last couple of weeks and being an index heavyweight, this gave a lot of momentum Experts also suggested that investors should be cautious while entering at these levels as they expect a 10-15 per cent "correction". If investor takes away the 10 underperforming stocks of the Nifty-50, we can see that the remaining 40 are already at all-time highs. With next year's valuations also factored in, these stocks don't come cheap, and have little scope for gains. FIIs Importance in Stock Market India's outstanding growth story and its booming economy have made the country a favorite destination with foreign institutional investors (FIIs). It has sustained to attract investment despite the Satyam non-governance issue and the global economic infectivity impact on Indian markets. The INSTANEX FII INDEX in India launched by Instanex Capital Consultants Pvt. Ltd., Bangalore, tracks the price presentation of the portfolio of listed Indian equity shares owned by FIIs. The Index comprises of the top 15 companies by significance of FII holdings. Reviews are conducted quarterly and companies are deleted from the Index if they are not amongst the top 20 FII holdings. According to the Index, in March, FIIs have increased their investing activity and out of the 15 components, 13 showed the discriminating interest of the FIIs.
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According to the data certain by the Securities and Exchange Board of India (SEBI), the FII investments in equities as on March 17, 2009 stood at US$ 50950.20 million and in debts, equaled US$ 6541.50 million at exchange rate of 1 USD = 40.34 INR. As per SEBI, number of register FIIs stand at 1626 and number of registered sub-accounts stood at 4972 as on March 17, 2009.
Standard Chartered Bank got the highest bids of US$ 1.05 billion, followed by Barclays Bank US$ 998.81 million, Kotak Mahindra UK US$ 818.86 million and Deutsche Bank International Asia US$ 700.14 million, and JP Morgan Chase Bank, US$ 532.5 million. The bids had to be executed in the next 45 days. This bidding should beginning a sound FII investment trend in the near future, as the US markets continue to weaken and yields of Indian public sector units (PSU) and corporate debt papers remain eye-catching. FIIs will invest in eye-catching PSU bonds floated by quasi-government entities like Power Finance Corporation and Rural Electrification Corporation. Investment banks (I-banks) are now looking at minor venture capital deals in the US$ 2 million US$ 7 million range. I-banks are now willing to work on poorer margins. Venture capital firms say the number of deals they are getting from i-bankers currently has gone up considerably. The mutual fund industry consists of 35 fund houses. To a certain extent unlike in 2007 and 2008, when real estate and IT and ITES sectors enjoyed most of the concentration, 2009 is witnessing a broad-basing of sectors on the PE radar. Investments in sectors such as healthcare, education, consumer goods and infrastructure are expected to be more attractive, given their relatively strong domestic demand, even as export-oriented businesses look blow of recession in

US and Europe. Funds are also progressively buying more stakes in agro-based companies. IMPACT OF FII ON NATION Well, thats because we need to look beyond the numbers! In any kind of market, financial or real, investor sentiment and psychology play a crucial role. This is something that just cannot be captured in a few numbers. Now an in-depth explanation of investor psychology is not possible here, but I can give a few examples of it. For instance, when the stock markets rise, they just seem to be rising (as you may have observed recently)! Experts and academicians have studied the behavior of investors, and found that frenzy and greed drive investors during a bull run, and especially when a bull run is at its full momentum, investors tend to follow the band-wagon and overlook economic fundamentals while investing. In fact, stock market crashes too occur in similar ways. One major investor may begin selling his stocks suddenly. Looking at him, others may panic, and they too follow suit. Such panic spreads like wild fire in the markets, and ultimately leads to a major crash.
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It is because of the volatile nature of investors sentiments that FIIs are tracked so closely. It would not be prudent to drive away foreign investors from investing in our country. I had mentioned the importance of foreign capital in the context of a developing economy, and that is precisely why the government has been so keen on liberalizing the external financial sector since 1991. If one foreign investor has had a good experience investing in our country, it builds up our reputation in the international community, and encourages more foreign investors to invest in our economy. However, a crisis of any kind will create panic among foreign investors as well, and regaining their trust and confidence in our economy will entail another mammoth task!
FII Growth Prospect in India More and more foreign institutional investors (FIIs) are coming to India. Almost everyday you have a new FII setting up shop in India. It doesnt seem the party (Bombay Stock Exchanges Sensitive Index) is going to stop at 14,000 levels Head of Investor Relations with an FMCG firm. Four years back if you had attended an investment conference organized by leading brokerage firms like DSP Merrill Lynch, JM Morgan Stanley or Kotak Securities, you would be lucky to find 20 foreign institutional investors (FIIs). This year, more than 170 FIIs participated in just two conferences organized by DSP and Morgan Stanley that were held in Bangalore and Goa in the second week of February.
In fact, JM Morgan Stanley saw participation from foreign investors double to 320 this year, with 200 people coming from overseas. "Every year, we see new

investor, which explains how seriously people are looking at India. Earlier, investors came largely from Asia and the US. Now, they also come from places like Hong Kong, London and Japan," said a senior manager with a brokerage firm, who didnt wish to be identified. Advantages of FIIs in Indian Markets FIIs are contributing to the foreign exchange inflow as the funds from multilateral finance institutions and FDI are insufficient, says Abhijit Roy THE RECENT spat over the tax authorities issuing notices to foreign institutional investors (FIIs) which take advantage under the Indo-Mauritius Bouble Taxation Avoidance Agreement, has once again drawn attention to the role that FII investment is playing in the capital markets in India. It endeavors to place the overall picture in perspective. The Union Government allowed the entry of FIIs in order to encourage the capital market and attract foreign funds to India. Today, FIIs are permitted to invest in all securities traded on the primary and secondary markets, including equity shares and other securities listed or to be listed on the stock exchanges. The original guidelines were issued in September 1992. Subsequently, the Securities and Exchange Board of India (SEBI) notified the SEBI (Foreign Institutional Investors) Regulations.
FII INFLOW Institutional and corporate investment in any market is usually a good sign for retail investors to follow when looking for investment opportunities abroad. Especially now, with stories of resurgent markets and strengthening indicators doing the rounds along with cautionary lists of risk factors. India is a good case in point. We examine the flow of foreign funds into India for a better idea of which way the winds are blowing.
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Data from Indias central bank, the Reserve Bank of India (RBI), shows the total foreign funds inflow into India over the last 9 years. This data includes foreign direct investments (FDI) as well as portfolio investments into India.
Source: Economic Times FII: FOLLOWING THE BULL The Instant exchange FII Index+ tracks the performance of the top 15 equities owned by the FIIs in India. As of Dec 31, 2008, FIIs held investments valued at over Rs. 3.8 trillion (close to US$81 billion). A study of the Index over the last five years reveals an appreciation of over 102% since 2003^. [The Index started on 30 September 2003, with a base of 100. In USD terms, this would equate to a base of around 2.19. Over the shorter-term, the last two months have seen positive inflows from the FIIs again, largely riding on the news of a stable, popular party being elected to the Indian government. Given the trend of liberalization and reforms that this party is known to follow, the market has expectations of many market friendly moves, like relaxation of FII participation in a companys stock, disinvestment in the best performing PSUs, and deregulation of oil prices. However, on a cautionary note,
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there are reports that FIIs may book profits since valuations of the Indian stocks have become too expensive of late.
Source: Economic Times FII INFLOW AND THE INDIAN EQUITY MARKET Since the liberalization in 1992-93 FIIs have played an imperative role in shaping our Indian economy. As we are growing, we now have a symbiotic relationship with the FIIs. The FIIs invest in our equity market because we are a second most fastest growing economy and our equity market is outperforming because FIIs are the major investors which are attracted. After the setback of Sub-prime crisis, Lehman brothers bankruptcy, and crash in the Indian market in January 2008, two and a half years from then on 21st September 2010 Nifty has once again crossed the 6k level and Sensex breached 20k level. Indian equity markets are again confident as FIIs have invested heavily in the past few weeks, specifically in September. There are many reasons why FIIs are investing heavily in Indian equity markets. They do so because we have

the ability to produce goods and provide services at a lower cost also the Indian companies have tremendous growth potential inside as well outside India. The mergers and acquisitions of the MNCs by the Indian companies in recent, has proved our mettle to the world. The population of India signifies that we have never ending demand unlike developed countries where the demand is less than the supply. The purchasing power of Indian consumers has also increased during the past few years. The FIIs are also betting on a second quantitative easing (QE-II) by the US to create jobs. Since this will mean more liquidity, global investors and overseas exchange-traded funds are taking positions before fresh money starts chasing stocks. India is one of the best-performing markets and they don't want their portfolios to underperforms so obviously we are the first choice for the FIIs to put in their money. The month of September has brought pleasure for all the investors as FIIs have already started investing in our equity market. SITUATION DURING FALL IN STOCK MARKET The market may fall because of sudden withdrawal of funds by the FIIs and also the absence of big local investors is a worry. The DIIs are taking money out of the economy for almost 3 months now because they dont want to repeat the same mistakes they did in 2008. It is the time to tread cautiously as no one wants to fall for the rosy picture created by the stock markets. Unlike 2007-08, MFs and insurance companies are not big buyers this time. If FIIs sell, there will be little local support. The long IPO pipeline can trigger selling by investors who need the money to invest. Anecdotal evidence suggests that retail investors have not yet entered in a big way. Also, leveraged positions in single stock futures are lower than what they were during the previous market peak. This could be because there is still fear settled in the market after what happened in January 2008.
SUPPORT THAT CAN BE GET DURING MARKET FALL The Indian market has clearly done exceptionally well this year. The index is up almost 14% in local currency terms, and in US dollar terms it is almost up by 16%. There has been a huge surge of foreign fund inflows in the Indian equities. We have had about close to $15 billion flowing into the Indian equities market, which is about 60% more than what we had last year. REASON FOR FII IMPORTANCE IN INDIAN STOCK MARKET Some Important Facts about the Foreign Institutional Investment: The number of registered foreign institutional investors on June 2007 has reached 1042 from 813 in 2006 US $6 billion has been invested in equities by these investors The total amount of these investments in the Indian financial market till June 2007 has been estimated at US $53.06 billion The foreign institutional investors are preferring the construction sector, banking sector and the IT companies for the investments Most active foreign institutional investors in India are HSBC, Merrill Lynch, Citigroup, CLSA INVESTMENT SCENARIO OF FII IN INDIA Most credit companies in India are quite gung-ho about the reversal in economic downturn as several companies are either in the process or already underway with new projects, opening up new avenues for investment in India. Capex plans are getting fructified with increasing interest in making investments for capacity expansion either in domestic or overseas markets. Credit growth is in fact,

currently growing at 15 per cent from the lower 10 per cent in October 2010. Banking companies and the non-banking finance companies (NBFCs) with their newly accorded permission of banking licenses are an even more excited lot. Companies from varied sectors such as glass-making, pharmaceuticals and hospitals are demanding credit from banks with some companies wanting to diversify and others wanting funding for backward or forward integration. There is a major difference in the approach by companies in gathering funds before and after the recession. Before the recession, the companies were accumulating funds to overcome recessionary debts and rationalization of capacity while after the recession, they are in the expansion mode and to cater to their capacity expansion plans, are going in for other routes of capacity expenditure (Capex). Another key route has been the foreign direct investment (FDI) route, by which proposals for FDI worth over US$ 216.1 million have received government approval. The proposals include that of Zee Entertainment, Walt Disney, Max India and Hyderabad-based Soma Highways (Toll) Projects. There are about 17 initial public offerings on the anvil now, with companies gathering funds from the markets for their capacity expansion plans. Several global majors too feel that the growth of emerging economies including India is remarkable and most of these countries will prosper in 2010 and beyond. Siemens also has plans to make India a major centre for value-priced engineering products and would set up six new hubs in India for design, development, production and sales of such products. Shree Sakthi Paper Mills Ltd has announced that its expansion project is expected to be completed by August 2010 and is being funded partly through debt funds and partly through internal accruals. VE Commercial Vehicles on March 8 has said it will double the production

capacity of its Eicher branded products to up to 8,000 units per month in the next three years to cater to the rising demand for its products. The investment for enhancing the capacity would be a part of the Rs 500-crore Capex plan for the next three years that the company had earlier announced. The government too has plans of escalating capex vide the divestment route. All accruals through divestment are being intended to be pumped back for capacity expansion in due course. The scenario is indeed very encouraging with banks. Fund-raising activity gained pace by almost 65 per cent in 2010 as compared to 2009. In real terms, 27 funds were able to raise US$ 13 billion as PE as against US$ 8 billion by 22 funds in 2009. There has also been a more than 80 per cent growth in PE and VC investments in India: 2010 witnessed 348 deals worth US$ 8 billion, against 317 deals worth US$ 4.4 billion in 2009, according to VCC edge data. Indian conglomerate GMR Infrastructure is in advanced talks with private equity firms to raise about 15 billion rupees (US$ 322 million) for its power unit, the Economic Times reported, citing the group's chairman. The Indian-American IT services company Patni Computer Systems is likely to be acquired by a consortium of Apax Partners and I Gate in a deal said to be worth nearly US$ 1 billion. Several media reports suggest that the U.S.-based iGATE Corporation and private equity firm Apax Partners are contemplating to buy 63 percent stake in Patni Computers which is valued at around US$ 915 million.
Advantages of FII
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 of FII
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 countrys 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 It refers to funds that are controlled by investors who actively seek shortterm 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.
So due to the aforesaid benefits economy has consistent flow of FDI over the past few years. In addition to that, the govt. has also taken step to enhance the FDI (e.g. Telecom, civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. of new sectors in 2005-06 such as Greenfield airport projects, export trading. All these measures have been contributing towards increasing direct investment.
Source: "Economic Review", RBI Annual Report 2012-12.
India's FDI growth of above 30% during past 2 years is encouraging. Although the FDI inflows into India are small as compared to other emerging markets, their size
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is growing on the back of growing interest by many of the world's leading multinational
BANKING AND INSURANCE SECTOR OF INDIA FDI in Banking Sector Banking Sector plays a crucial role in the financial system, the FDI norms have been relaxed to a considerable extent by raising FDI limit in private sector banks to 74% (49% under automatic route and beyond 49% up to 74% under Government/Approval route). Notwithstanding investment of a higher limit being allowed, voting rights of an investor are capped at 10% in terms of the Banking Regulation Act. On the other hand, FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20%. The arrival of new and existing models, easy availability of finance at relatively low rate of interest are key catalysts of growth in the globalize economy, particularly for emerging market economies. The role of Foreign Direct Investment in the present world is noteworthy. It acts as the lifeblood in the growth of the developing nations. Flow of the FDI to the countries of the world truly reflects their respective potentiality in the global scenario. Flow of FDI truly reflects the country's both economic and political scenario.
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Foreign Direct Investment as seen as an important source of non-debt inflows, and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections. FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also open new vistas to home countries to optimize their earnings by employing their ideal resources. India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade's cautious attitude. The 1990's have witnessed a sustained rise in annual inflows to India. Basically, opening of the economy after 1991 does not live much choice but to attract the foreign investment, as an engine of dynamic growth especially in view of fast paced movement of the world forward Liberalization, Privatization and Globalization The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil by 2010, with the second phase of opening expected to commence in April 2009. Some of the biggest names in global financial services and banks like Credit Suisse, RABO Group and ANZ are seeking a banking license in India. The RBI has, in recent months, given fresh banking licenses to UBS - Switzerland's largest bank, Dresdner Bank and United Overseas Bank. ANZ and RABO bank Group, the Dutch Group, is now in the process acquiring a banking license. The RABO bank Group already holds 18.2 per cent stake in another local private bank YES Bank. Some of the existing players such as

Standard Chartered Bank , Citi Bank and HSBC, hold India as one of their top markets. FII in Banking Sector Emerging markets, especially India have come under FII hammer over the past few months as reflected in the manner in which they have been trimming their holdings in India Inc. In the banking sector in particular, banks like Development Credit Bank, Axis Bank, Syndicate Bank, ICICI Bank and ING Vysya have seen erosion in FII holdings between March and September quarter this year. The reason: Tight global liquidity environment transmitting into the local market and slowing economic growth, which would impact the growth prospects of the banking sector.
It is a trading market and typically a buy and hold strategy will not work in such an environment, said the head of equity of a leading domestic broking firm. Institutional investors are deleveraging and going into risk-free assets, according to market participants. They attribute the paring of investments in some of these banks to a complete lack of confidence in the market. While the shareholding pattern of the entire banking universe is yet to be uploaded on BSE (the deadline for which is October 30) of the data available on 21 banks, 16 banks have shown a decline in FII holding. Of the remaining four, HDFC Bank, Kotak Mahindra Bank, Federal Bank and Bank of India show a marginal increase in FII holding. The small and mid-size banks at one time had been potential takeover candidates for any overseas investor seeking a foothold in this space. However, given the steep erosion in share prices, that attraction is no longer there, said the fund manager of one of the better performing banking funds. According to a senior official from an overseas brokearge, The GDP growth is likely to be lower this

year. This, in turn, would impact the growth of the banking system. The system is also likely to see a rise in non-performing assets. Institutional investors with over 1% holding who exited DCB in Toto, included ABN Amro Bank (1.37% stake), Goldman Sachs Investments (Mauritius) 2.19% stake, Morgan Stanley Investments Mauritius (2.98%), Merrill Lynch Capital Markets Espuma (1.59%) and Citigroup Global Markets Mauritius, which had a 2.2% stake. In ICICI Bank, Growth Fund of America Inc, which had a 1.26% stake has cut its investment or exited, while Euro pacific Growth Fund, which had a 1.51% stake exited and CLSA Mauritius, which had a 1.13% stake sold its stake. In Axis Bank Goldman Sachs Investments Mauritius I, which had a 1.01% and Dali, which had a 1.22% stake, JP Morgan Asset Management, which had a 1.53% have exited. FIIs have been net sellers of more than Rs 42,000 crore, year to date. FII selling peaked in June (-Rs 10,577 crore) and September(close to Rs 8,000 crore) while they were net buyers in February (Rs 4,883 crore) and April (Rs 280 crore). Interestingly, FII selling in June was a record of sorts for second-highest FII selling in a month since January 2008 (-Rs 17,226 crore). Financial services (Banking and Non-Banking) Promising sub-sectors Capital markets Consumer financing Venture banking Mutual funds
Infrastructure financing
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India has one of the most developed financial markets in the developing world. Tremendous scope exists for both banking and non-banking financial institutions from other countries. The insurance sector, nationalized since 1971, has been opened up according to an announcement made in November 1998. Legislation to this effect is expected by early 1999. Top companies from the United Kingdom and the United States among others are already active in India's financial markets. Markets. Some of the big names are: Merrill Lynch, Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong and Shanghai Banking Corporation among others. Foreign institutional investors (FIIs) have been allowed to invest in the stocks and securities markets with rights of full repatriation and withdrawal. Their presence has added a new dynamism to the market India already has foreign exchange reserves of US$27 billion which is considered very comfortable, but the country needs to use foreign skills and networks to be able to manage the huge sums for its development needs.
Local financial Institutions such as the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India, Unit Trust of India and the Shipping Credit and Investment Corporation of India have raised billions through the most sophisticated financial instruments including Deep Discount Bonds.
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Indian firms are showing increasing liking for Global Depository Receipts (GDR) listed in London. American institutions are trying to promote American Depository Receipts (ADR) listed in New York. After much dithering, India has finally opened up the insurance sector to private and foreign investors.
EXPOSURE OF BANKS: A second route through which the global financial crisis could affect India is through the exposure of Indian banks or banks operating in India to the impaired assets resulting from the sub-prime crisis. Unfortunately, there were no clear estimates of the extent of that exposure, giving room for rum our in determining market trends. Thus, ICICI Bank was found to be the victim of a run for a short period because of rumors that sub-prime exposure had badly damaged its balance sheet, although these rumors have been strongly denied by the bank. So far the RBI has claimed that the exposure of Indian banks to assets impaired by the financial crisis was small. According to reports, the RBI had estimated that as a result of exposure to collateralized debt obligations and credit default swaps, the combined mark-to-market losses of Indian banks at the end of July was around $450 million. Given the aggressive strategies adopted by the private sector banks, the MTM losses incurred by public sector banks were estimated at $90 million, while that for private banks was around $360 million. As yet these losses are on paper, but the RBI believes that even if they are to be provided for, these banks are well capitalized and can easily take the hit.
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Such assurances have neither reduced fears of those exposed to these banks or to investors holding shares in these banks. These fears were compounded by those of the minority in metropolitan areas dealing with foreign banks that have expanded their presence in India, whose global exposure to toxic assets must be substantial. A third indirect fallout of the global crisis and its ripples in India is in the form of the losses sustained by non-bank financial institutions (especially mutual funds) and corporate, as a result of their exposure to domestic stock and currency markets. Such losses were expected to be large, as signaled by the decision of the RBI to allow banks to provide loans to mutual funds against certificates of deposit (CDs) or buyback their own CDs before maturity. These losses are bound to render some institutions fragile, with implications that would become clear only in the coming months A fourth effect is that, in this uncertain environment, banks and financial institutions concerned about their balance sheets, have been cutting back on credit, especially the huge volume of housing, automobile and retail credit provided to individuals. According to RBI figures, the rate of growth of auto loans fell from close to 30 per cent over the year ending June 30, 2008, to as low as 1.2 per cent. Loans to finance consumer durables purchases fell from around Rs 6,000 crore in the year to June 2007, to a little over Rs 4,000 crore up to June this year. Direct housing loans, which had increased by 25 per cent during 2006-07, decelerated to 11 per cent growth in 2007-08 and 12 per cent over the year ending June 2008. It is only in an area like credit-card receivables, where banks are unable to control the growth of credit, which expansion was, at 43 per cent, quite high over the year

ending June 2008, even though it was lower than the 50 per cent recorded over the previous year. It is known that credit-financed housing investment and credit-financed consumption have been important drivers of growth in recent years, and underpin the 9 per cent growth trajectory India has been experiencing. The reticence of lenders to increase their exposure in markets to which they are already overexposed and the fears of increasing payment commitments in an uncertain economic environment on the part of potential borrowers are bound to curtail debt-financed consumption and investment. This could slow growth significantly. Finally, the recession generated by the financial crisis in the advanced economies as a group and the US in particular, will adversely affect India's exports, especially its exports of software and IT-enabled services, more than 60 per cent of which are directed to the US. International banks and financial institutions in the US and EU are important sources of demand for such services, and the difficulties they face will result in some curtailment of their demand. Further, the nationalization of many of these banks is likely to increase the pressure to reduce outsourcing in order to keep jobs in the developed countries. And the slowing of growth outside of the financial sector too will have implications for both merchandise and services exports. The net result would be a smaller export stimulus and a widening trade deficit. Sensex crosses 19,000 on FII flows, Banking Sector Charge Benchmark at 32-month high aided also by strong Reliance Ind showing.
Source: Reserve Bank of India

FDI IN INSURANCE SECTOR Insurance Sector is one of the booming sectors in India, taking into account several driving factors including the huge population and growing per capita income. Since the advent of private players backed by foreign expertise, competition in this sector has increased with companys taking new and innovative steps to attract consumers including offering new products. The FDI limit in insurance sector is capped at 26% under the automatic route subject to license from IRDA. There is a proposal to raise the FDI cap to 49%.
It is FDI, not FII, which foreign insurers are excited about. FDI spells long-term capital that can help sustain solvency. Insurers feel the short-term nature of FII flows is inappropriate for the insurance sector. To encourage long-term investment in the sector, the government is planning to hike the FDI limit to 49%.
At present, there is a 26% composite cap on FDI and FIIs in the sector. The government feels the increase in foreign holding to 49% should be exclusively for FDI. FDI will ensure meaningful ownership. In times of adverse claims pay-out, it is only through the FDI route that the foreign stakeholder will infuse capital to tide over the adverse situation. On the other hand, FII will take a positions based on the situation, and may decide to pull out if it is unfavorable. It is estimated that for every unit of capital infused, the velocity of generation of
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new premium is 10 times the amount. Artificial constraints will hamper the sector. A group of ministers (GOM) has been constituted to review the comprehensive insurance legislation. The group will look at increasing the FII cap in the sector by amending the Insurance Act, 1999. If additional FII and FDI make sense, it allows investors to be a part of the insurance industry. It also means more access to capital both long and shortterm. Any SEBI -registered entity can operate as an FII. The funds that FIIs bring in are short-term. While the FII route may be preferred by the Indian stakeholders, foreign stakeholders will build on long-term capital through FDI. Aviva India, however, recommend a separate cap on FII in addition to the higher FDI limit of 49%. If a foreign investor buys shares of a multinational company, the stake held by the existing foreign partner should not be divested, Conversely, if the government decides to increase foreign holding, including FIIs and FDI, beyond 49%, the Indian partner will have to dilute its stake below 51%. Indian companies have been apprehensive that their stake in the companies may fall below that of the foreign partners once the FDI cap is hiked to 49%.
FII INSURANCE SECTOR No proposal to allow foreign portfolio investment by Foreign Institutional Investors beyond the sect oral cap of 26 per cent in the insurance sector. Currently, foreign players including FIIs are allowed a maximum 26 per cent stake in an insurance company as per the Insurance Regulatory and Development Act. It has been asked about a possible hike in the FII limit on telecom, other things are under
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discussion. These announcements would be made at an appropriate time." The FII sect oral cap on telecom services is currently at 49 per cent. In his Budget, Sinha has proposed that FII portfolio investment will not be subject to the sect oral limits for Foreign Direct Investment except in specified sectors.
The Flow Of FDI Over The Globe Are As Follows: Opening up of doors by many countries of the world has resulted foreign participation in the financial sectors of emerging market economies (EMEs) during the 1990s. It has continued to expand so far in this decade, on balance although its pace fell somewhat following problems in Argentina in 2002 and the global slowdown in mergers and acquisitions. It is seen that banks accounted for the majority of financial sector foreign direct investment (FSFDI). In a number of countries in Latin America and central and eastern Europe (CEE), foreign banks now account for a major share of total banking assets. In Asia, the share of foreign banks is, overall, much lower, but still substantial
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The integration of EME financial firms into the global market has resulted a wider diversity of institutions operating in EMEs and given greater emphasis on riskadjusted profitability. These include expansion into local retail banking and securities markets, where elements such as client relationships and reputation are important components of the franchise value of operations. Such factors have tended to raise the costs of exiting a country and hence increased the permanence of FSFDI. FSFDI was fostered by financial liberalization and market-based reforms in many EMEs. The liberalization of the capital account and financial deregulation paved the way for foreign acquisitions and the integration of EME financial firms into an expanding global market for corporate control. This is the character of FSFDI as part of a broader trend towards consolidation and globalization in the financial industry. In some cases competition in traditional markets increased pressure on major international banks to find new areas for growth. Financial institutions in advanced economies increasingly searching for profit opportunities at the customer and product level, FSFDI offered a means of access to EME markets with attractive strategic opportunities to expand. Local financial infrastructure is growing which reduces the risks of conducting business in EMEs but events such as the Russian default in 1998 and Argentine actions in 2002 also made financial institutions more sensitive. Thus, financial institutions in industrial countries now tend to evaluate country risk separately. An important benefit of FSFDI is its effect on financial sector efficiency that arises from local banks' exposure to global competition. Host countries benefit from the technology transfers and innovations in products and processes commonly associated with foreign bank entry. Foreign banks exert

competitive pressures and demonstration effects on local institutions. It result better risk management, more competitive pricing and in general a more efficient allocation of credit in the financial sector as a whole. Foreign banks presence helps to achieve greater financial stability in host countries. Host countries benefit immediately from foreign entry. The better capitalization and wider diversification of foreign banks, along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system to local business cycles and changing financial market conditions. Their use of risk-based credit evaluation tends to reduce concentration in lending and in times of financial distress, fosters prompter recognition of losses and more timely resolution of problems. The growing involvement of foreign firms in the financial systems of EMEs has given rise to a situation where majorities of EME banking assets have become foreign owned. The growing involvement of foreign firms in the financial systems of EMEs has given rise to a situation where majorities of EME banking assets have become foreign owned. Accordingly, developing pertinent technical skills is considered be an important area of cooperation between authorities in advanced and EME countries. In some markets, foreign-owned banks have been prominent in the rapid expansion of consumer lending and foreign currency lending to both households and businesses. At present, it is mandatory for Indian partners, who are majority stakeholders in insurance companies, to scale down their stake from 74% to 26% before the completion of 10 years of operations of the company. Prescribing a separate
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PRESENT SCENARIO OF BANKING AND INSURANCE SECTOR In recent times economy is been pushing to increase the role of multi-national banks in the banking and insurance sector, despite, the concern expressed by the left communist parties are opposing the finance minister move to raise overseas investment limits in the insurance business. The government wants to fulfill a pledge to allow companies like New York Life Insurance, Met Life Insurance to raise investment in local companies to 49 per cent from 26 per cent.
But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. Left do not want foreign investors to have greater voting rights in private banks and oppose the privatization of state run pension fund.
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There are several reasons why such move is fraught with dangers. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights, it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic. Opposition is not considering the need of present situation. FDI in banking sector can solve various problems of the overall banking sector. Such as i) Innovative Financial Products ii) Technical Developments in the Foreign Markets iii) Problem of Inefficient Management iv) Non-Performing Assets v) Financial Instability vi) Poor Capitalization vii) Changing Financial Market Conditions If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. ASSET MANAGEMENT IN BANKING SECTOR The assets or resources are composed of all the items which are in possession of or due to the bank, and it relies upon these assets to meet the liabilities which it owes to others. Loans and Discounts:.
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These include the amount of credit extended by the bank to its customers. These obligations are in the form of promissory notes or accepted drafts. They may be secured by stocks, bonds, and other collateral, or based merely on the credit standing of the makers, acceptors, or endorsers. Some of these advances are payable on demand and so may be called for payment whenever the bank is in need of funds. In addition to loans extended to customers, the bank also grants credit to outside firms in buying their commercial paper on the open market. These claims are sometimes entered separately as "bills purchased."
Overdrafts: These may be regarded as loans obtained from the bank, usually without security, interest, or consent. An overdraft occurs when a customer writes a check to an amount which exceeds the sum credited to his account. The amount paid by the bank in excess of the customer's balance is known as an overdraft. It is evidenced merely by an entry in the books of the bank, but not in a note or other formal instrument. National banks are prohibited from voluntarily allowing overdrafts to their customers. Customers' Liability under Letters of Credit and on Account of Acceptances : Foreign trade is financed largely through drafts drawn on banks which accept them in behalf of their customers. They in turn assure their bank that it will be fully reimbursed before the acceptances fall due. The obligation to reimburse is expressed either in the form of contracts for letters of credit or acceptance agreements which clearly define the liability of the customers to the bank. This account is therefore an offset to the item "letters of credit and acceptances outstanding" of the bank's liabilities.
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United States Bonds and Certificates of Indebtedness: The bank required to invest in certain classes of United States bonds if it wishes to issue its notes for circulation. It is also compelled to hold either of these classes of obligations as security for deposits which the United States government carries with the bank. States and municipalities also require banks acting as depositories to hold government issues as security. In addition, banks voluntarily invested in Liberty Bonds and Victory Notes, during the war, because of patriotic motives, and have continued to hold these obligations because of their ready marketability
Bonds, Securities, etc., Other Than United States: These items are held by a bank as outright investments or as acquisitions resulting from nonpayment of loans for which these securities have served as collateral. Stocks, Other Than Federal Reserve Bank Stock: These stocks have also been obtained from borrowers defaulting in their obligations. National banks are forbidden directly to purchase stocks because of the instability of their value. National banks may, however, purchase a certain amount of stock of corporations engaged in foreign banking. Stock of the Federal Reserve Bank.: Each member of the Federal Reserve system must subscribe to the stock of the Reserve bank of its district to an amount equaling 6 per cent of its own capital and surplus, but only one-half of this sum has been called by the Federal Reserve Board. Banking House, Furniture and Fixtures:

These items represent the general equipment of the bank. Real Estate Owned Other Than Banking House. As a commercial bank is obliged to pay most of its deposits on demand, its investments, in turn, must have short maturity. A national bank is therefore hot allowed to purchase real estate for any other purpose than actual use in conducting its business. At times it is forced to accept real estate pledged for loans on which the borrowers have defaulted. Due from Branches: Subject to limitations, banks may conduct domestic and foreign branches which thus represent a certain amount of invested capital. Lawful Reserve with the Federal Reserve Bank.: This represents the balance which the bank carries with the district Federal Reserve bank for the purpose of maintaining the required reserve against deposits. Items with Federal Reserve Bank in Process of Collection: This account includes checks, drafts, and other items which have been remitted to the district Federal Reserve Bank for collection. From one to eight days are allowed for the collection and payment of items drawn on any locality in the United States, and in accordance with this time schedule each Federal Reserve Bank credits the account of its members with the amount of items left for collection. Thus all items in process of collection are really deferred credits with the Federal Reserve Bank, and only when paid become cash credits or lawful reserve. Cash in Vault.

A bank needs a certain amount of till money to cash the checks of customers and to meet their current demands, such as for pay-roll purposes. Net Amount Due from Other Banks, Bankers, and Trust Companies: These institutions are correspondents collecting out-of-town items not forwarded through the agency of the Federal Reserve system. A bank usually carries a deposit balance with each correspondent, which credits the account when collection items are actually paid. Exchanges for the Clearing House: These will be presented for payment to the other members of the clearing house on the following morning. Cheque on Other Banks in the Same City: As not all banks belong to the clearing house, checks drawn on these institutions must be presented through messengers. Redemption Fund with the Treasurer of the United States: A national bank which issues notes for circulation (national-bank notes) must contribute a fund amounting to 5 per cent of these notes in order that the Treasury Department can redeem them when presented by the holders. Due from the Treasurer of the United States: In the course of its daily business, a bank receives government paper money which has been mutilated while in circulation. Such bills are forwarded to the Treasury, which in exchange returns new ones. Interest Earned but Not Collected.

When a bank grants loans to its customers, they pay the interest usually at maturity, although it gradually accumulates or accrues during the entire period for which the loan runs. Thus interest returns on loans and also on investments are regarded as accrued assets, although payment has not actually been made.
ASSET MANAGEMENT IN INSURANCE SECTOR

Insurance companies derive income mainly from two sources: 1) Income derived from policy sales -- insurance policy and annuity sales 2) Income derived from their investment portfolios. An insurer collects funds from policy holders, invests those funds, and then over time pays claims to policy holders from its received funds. And, as usually over time competition drives the sum of payments for claims to equal or exceed the total amount of funds received from policy payments (i.e. the "Combined Ratio" tends to trend towards 100), the rate of return on the funds is a key driver of the overall earnings for an insurance company
The IMF Study Report The IMF's study is in supportive to the above-discussed features of FDI. This study talks about the optimism over India emanates from a contribution of following factors.
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* India contributed nearly one fifth of Asian domestic demand growth over 200009. Looking forward, India slated to be the second largest demand driver in the region, after China. * India accounts for almost one quarter of the global portfolio flows to emerging market economies, nearly $ 12 bn in 2009. * India is the world's leading recipient of remittances, accounting for about 20% of the global flows. Even though above discussed factors are fair enough for the development of economy. But it is a noted fact that, economy drivers are reluctant towards more liberalization for FDI in the banking sector. As the ceiling rates are not increased, FDI in Financial Sector is not getting a wholesome environment. But the foreign investment is finding its own way to come in the economy. may be the way of FII. It is evident from the diagram. Now a day, foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues. Bankers said that the funds were coming into these bonds; some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity. So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII. (As it is considered as hot money).The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy.
5.9- RELATIONSHIP 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. Liberalization of the financial sector especially that of capital markets is 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, though we still have a long way to go. Before I actually begin with the crux of this article, let me give you a brief background. Developing countries like India are generally capital scarce.

This is because levels of income are lower in comparison to other developed countries, which in turn means savings and investments are also lower. They borrow money, like we all do when we need to buy a house or a car. Countries can thus invest this borrowed money in various social and physical infrastructures. However, there is another way in which a country can attract foreign money. This is by way of Foreign Direct Investment (FDI) of Portfolio Investment (better known as Institutional Investment). The difference between the two is subtle. Lets look into FDI first. FDI is defined as investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI); Tata buying Arcelor (out-bound FDI) and so on. On the other hand, FII is used to denote an investor, who invests money in the financial markets of a country different from the one in which that investor is incorporated. So, if you as an Indian decide to invest in the US stock markets, it is an out-bound foreign institutional investment. Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII. Foreign Institutional Investment (FII) The finance ministry has turned down a demand from the insurance regulator IRDA to distinguish between portfolio and direct equity investments through a sub-ceiling for investments by foreign institutional investors (FII) and has instead recommended a composite cap for foreign investments in private life insurance companies, a top finance ministry official. This is likely to boost the valuation of shares of insurance companies when they

come out with initial public offers (IPOs). All the three regulators SEBI, IRDA and finance ministry are open to relaxing the ten-year norm and allowing insurance companies that have been operating for five years only to raise equity from the public. IRDA had wanted a differentiation between the FIIs and FDIs, as the regulator believes that adequate due diligence should be done while allowing foreign investment in insurance companies. A sub-ceiling on FII investment, which is seen fickle as opposed to stable foreign direct investment (FDI), would have placed a limit on such investment. As per the current norms, insurance companies need a ten-year record before raising capital through IPOs. If the eligibility is reduced to five years, ten insurance companies may be eligible to float IPO at the end 2009-10 fiscal. Certain sectors such as information and broadcasting, commodity and stock exchanges, civil aviation differentiate between FII and FDI. Sectors like stock and commodity exchanges also have sub-ceiling for FII and FDI investments. The government will not make any distinction between FIIs and FDIs within the stipulated limit nor will there be sub-ceilings for FIIs and FDIs in the sector. The insurance amendment bill, which hikes the cap on foreign holdings in insurance sector to 49%, will also not distinguish between FII and FDI,. This follows Law ministrys clarification to the finance ministry that section 27 A of the insurance act does not distinguish between FIIs and FDIs in respect of foreign holdings and, hence, FIIs can be allowed to subscribe to the IPO. The draft of the insurance amendment bill that proposes to hike the limit for foreign investment in insurance companies to 49% also does not distinguish between FIIs and FDIs.
The valuation of the insurance companies and the price at time of IPO is expected to be higher if FIIs are allowed to participate in them without any sub-ceiling. In cases where foreign investors already hold 26% equity in an insurance venture, the issue of fresh equity through an IPO would bring down the foreign investment to less then 26% and thereby create more space for foreign investments.
This could become even more important if the foreign investment limit in insurance is hiked to 49% as the entire additional amount could be taken up by FII flows. However, there is some clarity needed on this as the regulations do not allow the foreign partner to dilute their stake while the domestic partner has to bring it down to 26% after 10 years of operations in a phased manner. While the insurance act does not allow dilution of the stake by the foreign partner, it remains to be seen how the new regulations will ensure that the foreign partners stake remains unchanged when fresh equity is issued and the foreign partner does not bring in more money, The move will help to get better valuation at the time of IPOs. But they also shared their apprehensions about having no sub-ceiling for the holdings as it might have undermined the stability of the company. The insurance amendment bill, which was introduced in Raja Sabah in December last year, was referred to parliamentary standing committee. The standing committee is expected to table the report in the winter session. Nineteen out of twenty-one private life insurers in the country are in partnership
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with foreign companies with the maximum permitted foreign holding of 26%. Reliance and Sahara are the two insurance companies with no foreign partners. Insurance Sector Preview Insurance better macro prospects in the developed markets are seeing FIIs direct their flows away from Indian markets. Markets are vulnerable as FIIs will take money off the table on every rise and insurance companies cannot combat FII outflows as the flows into the insurance sector are getting more skewed towards traditional (non-equity) products. Outlook for the equity market in 2012 Indian equities have been a clear outperformer over the last two years. This year is going to be very challenging due to domestic macroeconomic headwinds. In some developed markets, the situation is in stark contrast. In the US, inflation is not high, interest rates are low and growth outlook is improving. These coupled with attractive valuations may see FIIs directing their flows to developed market equities as seen in January. STRATEGY In the last couple of months, India increased exposure to defensive sectors. Also, we had increased cash levels to about 15% and booked some profits in expectation of market correction going forward. Since Indias long-term story is very much intact and we have a long-term investment horizon, we are using this opportunity to reassess the stocks and are gradually redeploying funds in stocks which are looking promising after the recent correction.
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After the recent fall, markets are trading at their long-term average; will this be a good support for the markets Given the macro concerns, valuations may not be able to drive the markets alone, but will surely cap the downside. Ultimately, it will depend on the investor sentiment. In 2008, when the Sensex fell to 8,000 levels, the valuations were at 9x one-year forward earnings. However, due to looming global worries, markets did not rally immediately. Luckily, the global conditions have improved. But due to near-term uncertainty, we may see FIIs booking profit at every market rise. Flows from the insurance sector can combat FII outflows In the last couple of years, our dependence on FII flows has risen. With the new Irda regulations, flows into the insurance sector have slowed down a bit and are more skewed towards traditional products, which have a lower equity allocation. In FY11, the equity flows by insurance sector will be about $10 billion versus $13 billion in FY10, a part of which flows to primary market offerings. In FY12 the flows can be to the tune of $12-15 billion. However, due to a huge pipeline of primary offerings the flows may be little lower. Expectations from the Budget At this juncture, the economy does not require new big-bang reforms. Having laid down structural framework in the earlier budgets, the focus will now be on their timely execution in terms of implementation of DTC and transition to GST regime.
Foreign Direct Investment (FDI)
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India's foreign direct investment is headed for the first drop since the year ending March 2003, hindering a bid to match Chinas surging economy, even as overseas money poured into Indian stock and bonds at a record pace. Data show FDI fell 24% to $19 billion between April and November compared with the same period a year earlier. Inflows into equities and bonds jumped 48% to $32.8 billion during the same period, according to the latest data from the Reserve Bank of India. The government says it needs to spend $1 trillion on roads, ports and other utilities over five years to close in on China.
Figures for the Trading Activity
FII & DII Trading Activity (Provisional Figures)
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FII & DII Trading activity during Feb '11 DATES FII (Rs. Crore) Gross Gross Purchase 21-Feb2012 18-Feb-20122844.58 17-Feb-2012 2305.25 16-Feb-2012 1960.55 15-Feb-2012 2605.97 14-Feb-2012 3133.11 11-Feb-2012 3206.61 10-Feb-20123032.29 09-Feb-20123680.57 08-Feb-2012 2966.06 07-Feb-20122544.42 04-Feb-20122544.42 03-Feb-2012 2602.43 02-Feb-2012 3112.79 01-Feb2012 TOTAL 41,398.92 44,367.91 -2,968.99 19,514.62 16,153.12 3,361.50 2853.09 2636.91 2267.26 2190.61 2372.92 2985.47 3744.32 3987.16 4289.57 3692.60 2400.38 2400.38 2063.72 3194.52 3889.89 207.67 37.99 -230.06 233.05 147.64 -537.71 -954.87 -609.00 -726.54 144.04 144.04 538.71 -81.73 -1,036.80 1266.67 1153.73 578.83 881.30 989.01 1343.41 1660.73 1385.40 1318.56 1621.58 1621.58 1155.20 1958.92 1779.34 1455.81 909.33 647.32 1049.15 879.99 823.74 1023.43 1270.40 869.59 1384.13 1384.13 1200.65 1278.54 1148.94 -189.14 244.40 -68.49 -167.85 109.02 519.67 637.30 115.00 448.97 237.45 237.45 -45.45 680.38 630.40 2006.78 Sales 2252.20 Net DII (Rs. Crore) Gross Gross Sales 827.97 Net Purchase/Sales -27.61
Purchase/Sales Purchase -245.42 800.36
Previous FII & DII Trading Activities DATES FII (Rs. Crore) DII (Rs. Crore)
95
DATA INTERPRETATION AND ANALYSIS

Questionnaire Samples filled by various financial sector employees in the survey are as follows
Financial Sector a) Banks b) Insurance

Percentage(%) and Frequency 40 40

96

c) Broking Firm Total 20 100
40%
40%
20%
INTERPRETATION 40 questionnaires were filled by Bank employees and the banks covered in the survey were Foreign Banks, Private Banks and Public Sector Banks namely HSBC, Standard Chartered, Citi Bank, HDFC, ICICI, Overseas, ING Vysya, Kotak Mahindra, SBI, AXIS and YES Bank etc. 40 questionnaires were filled by Insurance Company employees and Companies covered in the survey are LIC, Birla Sun life, ICICI Prudential Life, Tata AIG Life, Max New York Life, HDFC Standard Life, Met life, Reliance Life, ICICI Lombard etc.
20 questionnaires were filled by Broking Firms employees and firms covered are Share Khan, Edelweiss, Angel, India Info line Broking Firm.
Table: 1 Shows Investor In Stock Market

Investor in Stock Market a) Yes b) No Total Percentage(%) and Frequency 67 33 100
Analysis : The table represents 67 respondents are employees invest in Stock Market while the remaining were as 33 respondents are were not intersted in Stock Market as they find it very risky
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INTERPRETATION In the survey it was found that 67 % of employees invest in Stock Market while the remaining 33% of employees were not intersted in Stock Market as they find it very risky.
Table: 2 Shows the way of investment (Direct Or Indirect Investor)

Choice of Investment a) Capital Market b) Mutual Fund c) Both a and b Percentage(%) and Frequency 40 32 28
TOTAL
Analysis :
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40 responeds are employees interested in Direct Investment i.e. through Capital Market and stated the following 32 responeds are interested in Indirect Investment i.e. through Mutual Funds and stated the following 28 responeds are the employees are interested in Diect Investment i.e. through Capital Market as well as in Indirect GRAPH:-
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INTERPRETATION 40% employees interested in Direct Investment i.e. through Capital Market and stated the following reasons, while 32% are interested in Indirect Investment 28% of the employees are interested in Diect Investment i.e. through Capital Market as well as in Indirect Investment .
Table: 3 Shows Factors that make India an Attractive Destination for FII Investment
Factors a) Attractive Market b) Strong Rupee c) Outsourcing d) All of the Above e) Any other
Percentage(%) and Frequency 48 3 3 34 12

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Total Analysis : 48 employees in the survey believe that India is an Attractive Market for the investors , 3 employees on Strong Rupee and 3 on Outsourcing 34 believe that a combination of an Attractive Market, Strong Rupee and Outsourcing together make India an attractive destination for FII investment while 12 employees have specified other factors like developing country with cheap labour. GRAPH:100
INTERPRETATION 48% employees in the survey believe that India is an Attractive Market for the investors , 3% employees offered in the economy on Strong Rupee and 3% on Outsourcing factors
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A study on role of FDI & FII in banking & insurance sector Table: 4 Shows Investor can easily enter and exit from the Market
Investor a) FDI b) FII Total Analysis : 36 employees were found in the survey that FDI investor can easily enter and exit from the Market while majority of the employees i.e. 64 are aware of the fact that FII investor can easily enter and enter from the Market as there are not much restrictions in FII investment GRAPH:Percentage(%) Frequency 36 64 100 and
INTERPRETATION
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64% are aware of the fact that FII investor can easily enter and enter from the Market as there are not much restrictions in FII investment i.e.36% employees were found in the survey that FDI investor can easily enter and exit from the Market while majority of the employees
Table : 5 Shows percentage of Investment allowed through FDI route in Banking and Insurance Sector
Percentage Awareness a) Yes If Yes then how 63 31 3 3 39 38 19 2 2 39 much a) 49% and 26% b) 26% and 49% c) 100% and 49% d) 51% and 40% b) No Analysis : 38 employees from 61 employees believe that FDI percentage is 49% in Banking Sector and 26% in Insurance Sector, 19 employees on 26% and 49%, 2 employees Percentage(%) 61 Frequency 61
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on 100% and 49% but the fact is 100% FDI is allowed for Non Banking Financial Sector ( NBFC), 2 employees on 51% and 49% This shows that inspite of working in Banks, Insurance and Broking Firm many employees are not much aware of the FDI percntage as it doesnt come under their job profile.
GRAPH:-
INTERPRETATION 61% of the employees in the survey agreed that they are of the FDI percentage in Banking and Insurance Sector while 39% of the employees were found to be not aware of FDI percentage in Banking and Insurance Sector
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Table: 6 Shows the Volatile Stock Market, increase/ decrease Of FII Investments in Indian Stock Market
Increase/Decrease in FII Investments a) Yes b) No c) May be / No opinion Total Analysis : 61 employees in the survey feel that when there is volatility in Stock Market, FII Investment in Indian Stock Market would either increase or decrease,12 employees feel that it should remain the same even during volatile stock market and the the remaining employees i.e. 27 did not give any opinion regarding this statement. GRAPH:Percentage(%) and Frequency 61 12 27 100
105
INTERPRETATION 12% employees feel that it should remain the same even during volatile stock market and the the remaining employees . 61% employees in the survey feel that when there is volatility in Stock Market, FII Investment in Indian Stock Market would either increase or decrease.
Table: 7 Shows sufficient players available in the Banking and Insurance Sector
Sufficient Players a) Yes b) No Total Percentage(%) and Frequency 79 21 100
Analysis : 79 employees in the survey agreed that there are sufficient players in the Banking and Insurance Sector and gave the following reasons 21 employees disagree to this statement as they want more Banks and Insurance Companies to enter Indian . GRAPH:-
106
INTERPRETATION 21% employees disagree to this statement as they want more Banks and Insurance Companies to enter Indian Market. 79% employees in the survey agreed that there are sufficient players in the Banking and Insurance Sector
Table: 8 Shows more Foreign Banks and Insurance Companies would increase the competition that would benefit the Indian Clients
Increase in Competition a) Yes b) No Total Analysis :
Percentage(%) and Frequency 79 21 100
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79 employees agreed that increase economic growth and will be beneficial for the economy, service quality will improve by introducing new products in the market, 21 of the employees in the survey disagree to this statement .
GRAPH:-
INTERPRETATION 79% employees agreed that increase economic growth and will be
beneficial for the economy, service quality will improve by introducing new
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products in the market, 21% of the employees in the survey disagree that there is no monopoly in the market.
Table: 9 Shows better route for Sector wise Growth ( Banking and Insurance )
Sector wise Growth Route a) FDI b) FII Total Analysis : 70 employees in the survey believe that FDI is a better route for sector wise growth as there are restrictions due to which new player cannot easily enter and exit from the market while 30 employees agreed that FII is a better route for sector wise growth. GRAPH:Percentage(%) and Frequency 70 30 100
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INTERPRETATION 30% employees agreed that FII is a better route for sector wise growth, while 70% employees argeed that FDI is a better route for sector wise growth
Table 10) Showing experience of Client of Bank/ Insurance Company post liberalization
Experience as Bank/ Insurance Percentage(%) and Frequency 22 36 36 6 100
Company Client a) Excellent b) Very Good c) Good d) Average Total Analysis :
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22 employees in the survey has a excellent experience for being a client of Bank/ Insurance Company post liberalization. 36 employees has a very good experience, 36 employees has a good experience, 6 employees has a good experience for being a client of Bank/ Insurance Company post liberazation.
GRAPH:-
INTERPRETATION 36% employees has a very good experience, 36% employees has a good experience, 6% employees has a good experience for being a client of Bank/ Insurance Company post liberazation.
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A study on role of FDI & FII in banking & insurance sector Table :11 Showing Performance Of FDI In Banking / Insurance Sector
Better Performance a) Yes b) No c) May be / No Opinion Total Analysis : 88 employees in the survey think that FDI helps Banking / Insurance to perform better , 9 employees disagreed to this statement, 3 employees agreed that it may help among which which some gave no opinion GRAPH:Percentage(%) and Frequency 88 9 3 100
INTERPRETATION
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9% employees disagreed to this statement, that FDI helps Banking / Insurance to perform better, were 3% employees agreed that it may help among which which some gave no opinion
Table: 12 shows that the Banks and Insurance Companies can offer products which are more customer centric
Percentage(%) and Frequency 88 12 100
Variation in Products a) Yes b) No Total Analysis :
88 i.e majority of the employees in the survey feel that the Banks and Insurance Companies can offer products which are customer centric i.e creating a positive consumer experience at the point of sale and post-sale while remaining i.e.12 employees disagree to this statement GRAPH:-
113
INTERPRETATION 88% of the employees in the survey feel that the Banks and Insurance Companies can offer products which are customer centric , while remaining i.e.12% employees disagree to this statement
Table: 13 shows increasing FDI limits in Banking / Insurance Sector will help their Performance
Increase in FDI limits Performance a) Agree b) Disagree c) May be / No Opinion Total for better Percentage(%) and Frequency 66 9 25 100
114

Analysis : 66% employees in the survey agreed that increase in FDI limit can help Banks and Insurance Sector to perform better, 9% employees disagreed to this statement because if FDI limit increases than the present limit so foreign country financial crisis will have more effect on our country while remaining 25% employees think that it might effect among which some didnt gave any opinion to this statement in the survey.
GRAPH:-
INTERPRETATION 9% employees disagreed to this statement because if FDI limit increases than the present limit so foreign country financial crisis will have more effect on our
115

country.66% employees in the survey agreed that increase in FDI limit can help Banks and Insurance Sector to perform better.
Table :14 Showsrole of Asset Management Department is important in Banking and Insurance Sector
Asset Management Importance a) Yes b) No Total Analysis : 97 i.e. majority of the employees in the survey agreed to this statement which is a fact because Deposits are the important assets in Banking Sector due to which interest rate increases when there is dificit in bank deposits while remaing i.e.3%employees disagree to this statement. GRAPH:Percentage(%) and Frequency 97 3 100
116
INTERPRETATION 97% of employees in the survey agreed to this statement which is a fact because Deposits are the important assets in Banking Sector due to which interest rate increases when there is dificit in bank deposits while remaing i.e.3% employees disagree to this statement.
Table: 15 Shows Asset Management Department of Banking and Insurance Sector are affected by FDI Inflows and FII Outflows
Effect on Asset Management a) Strongly Agree b) Agree c) Strongly Disagree d) Disagree
Percentag(%) and Frequency 18 73 6 3

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Analysis : 18 of the employees in the survey strongly agree that Asset Management Depatment get effected by FDI inflow and FII outflows in Banking and Insurance Sector, 73 i.e. majority of the employees in the survey agreed to this statement and this is a fact.
GRAPH:-
INTERPRETATION 73% i.e. majority of the employees in the survey agreed to this statement and this is a fact. that Asset Management Depatment get effected by FDI inflow and FII outflows in Banking and Insurance Sector, while remaining i.e. 3% of the employees disagreed to this statement
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FINDINGS
FDI comes with a promise of quality assurance at a reasonable price which is a reason for delight for consumers in our country which is otherwise a quality starved country. Our country farmers are selling their produced crops directly to the companies. That too the company agents/appointed persons will collect the crops produced by the farmers. Which in turn saves the money from carrying the crops to the market and the uncertainty of prices for selling in the market. As the company pays fixed prices for the crops.
A section of the people called middleman who makes money from buying the crops at a very lower prices and selling at higher prices is bypassed. Thus the larger section of people (farmers) welfare is secured. Government should come forward to sign MOUs with the investors to make cold storage facilities at the places of their operation, by way of
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which thousands of tonnes of crops can be saved which is otherwise wasted every year.
The investors interact with the local farmers and they encourage crop diversification and also take positive steps by supplying fertilizers to them.
SUGGESTIONS
Banking sector should grow in size to meet the needs of the economy. There is a need to extend the geographic coverage of banks and improve access to banking services. India needs to further liberalize investment regulations on insurers to strike a proper balance between insurance solvency and investment flexibility. Both the life and non life insurance sectors would benefit from less invasive regulations Price structures need to reflect product risk. Obsolete regulations on insurance prices will have to be replaced by risk differentiated pricing structures. There is huge untapped, for example, in the largely undeveloped private pension market. At the moment, less than 11% of the working population in India is eligible for participation in any formal old age retirement scheme.
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Private insurers will have a key role to play in serving the large number of informal sector workers. Price liberalization will be needed to improve underwriting efficiency and risk management.
CONCLUSION
The process of economic reforms which was initiated in July 1991 to liberalize and globalize the economy had gradually opened up many sectors of its economy for its foreign investors. A large number of changes that were introduced in the countrys regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows in the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the FDI inflows received by India from Mauritius during the period from 1991-2009 came from Mauritius and U.S.A. The main reason for high level of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the electrical and equipment had received the larger proportion followed by service sector and telecommunication sector.
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The Indian Stock Markets have really come of age there were so many developments in the last 15 years that make the markets on par with the developed markets. The Foreign Capital is free and unpredictable and is always on the lookout of profits FIIs frequently move investments, and those swings can be expected to bring severe price fluctuations resulting in increasing volatility.
BIBLIOGRAPHY
BOOKS Indian Financial System by M Y Khan Research Methodology by C R Kothari Wealth Management by Arindam Banerjee Foreign direct investment in India by Lata Chakravarthy Foreign Institutional Investor by G Gopal Krishna Murthy INTERNET SITES www.rbi.org.in/ home.aspx www.insurance.com www.banks.com
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www.bseindia.com
www. on-line trading.com www.nseindia.com www.livemint.com NEWSPAPER Economic Times
ANNEXURE
NAME: BANK / INSURACE / BROKING FIRM: 1) Are you an investor in Stock Market/ s? a) Yes b) No 2) Are you a direct or indirect investor i.e? a) Capital Market
AGE:
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b) Mutual Fund Please indicate two reasons for your choice __________________________________________________________________ ________________________________________________________ 3) Factors that make India an attractive destination for FII Investment a) Attractive Market b) Strong Rupee c) Outsourcing d) All of the above e) Any other please specify ____________________________________
4) Which investor can easily enter and exit from the market? a) FDI b) FII 5) Are you aware of the percentage of investment allowed through FDI route in Banking and Insurance Sector? a) Yes b) No If Yes then how much a) 49 % and 26% b) 26% and 49% c) 100% and 49% d) 51% and 49% 6) In view of the volatile stock markets, do you feel that the FII investments in Indian Stock Markets would increase/ decrease?

a) Yes b) No c) May be / no opinion 7) According to you are there sufficient players available in the Banking and Insurance Sector? a) Yes b) No If Yes please give 2 reasons
_____________________________________________________________ 8) Do you expect that more foreign banks and insurance companies would increase the competition that would benefit the Indian clients? a) Yes b) No Whichever is your choice please briefly explain ___________________________________________________________ 9) Which is a better route for sector wise growth (Banking and Insurance)? a) FDI (Foreign Direct Investment) b) FII (Foreign Institutional Investment) 10) Your experience as a client of Bank/Insurance Company post liberalization? a) Excellent b) Very Good c) Good
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d) Average 11) .Does FDI in banking/insurance sector helps bank perform better? a) Yes b) No, c) May be/ No opinion 12) Do you feel that the banks and insurance companies can offer products which are more customers centric? a) Yes b) No 13) Do you think by increasing FDI limits in Banking/Insurance sector will help their performance. a) Agree b) Disagree c) May be / No opinion
14) Do you think Asset Management Department plays an important role in Banking and Insurance Sector? a) Yes b) No 15) Asset Management Department of Banking and Insurance Sector are affected by FDI Inflows and FII outflows a) Strongly Agree b) Agree c) Strongly Disagree

d) Disagree
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A study on role of FDI & FII in banking & insurance sector INTRODUCTION

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

have export commitment and technology transfer to India.

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

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A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

FOREIGN DIRECT INVESTMENT (FDI)

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A study on role of FDI & FII in banking & insurance sector

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A study on role of FDI & FII in banking & insurance sector

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A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

By incorporating a wholly owned subsidiary or company

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A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

ROLE OF FDI IN FINANCIAL SECTOR

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE

A study on role of FDI & FII in banking & insurance sector

INDIAN ACADEMY DEGREE COLLEGE