ASSIGNMENT ON MFS

ROLE OF FDI IN INDIA

Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in anet FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movement. Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI in 2010 was $24.2 billion, a significant decrease from both 2008 and 2009.[9] Foreign direct investment in August 2010 dipped by about 60% to aprox. $34 billion, the lowest in 2010 fiscal, industry department data released showed. [10] In the first two months of 201011 fiscal, FDI inflow into India was at an all-time high of $7.78 billion up 77% from $4.4 billion during the corresponding period in the previous year. The worlds largest retailer WalMart has termed Indias decision to allow 51% FDI in multi-brand retail as a first important step and said it will study the finer details of the new policy to determine the impact on its ability to do business in India.However this decision of the government is currently under suspension due to opposition from multiple political quarters.

FIIs

Investors worldwide tend to stay away from undertaking international investments. But the fact is, by avoiding cross country investment, investors are actually causing the rise in the risk of their portfolios. Crossborder investing develops asset classes with very low correlation to the domestic holdings, in turn, contributing to a lesser volatility for investments. This premise of investment theory has led to an increasing trend of FII investments across the globe. India being an emerging economy with a capital market at its peak, foreign investments have been a regular feature here. Such investments flood in a country with sound macro economic and operational procedures in place. Steps taken by India in these fronts have been commendable, but what is the key to attracting a substantial slice of the cake and how can we sustain the pace? The era of FIls investments in India originated in 1993 and the net investment during the year was $827.20 million. FIls of different countries, mainly the US, started operating in India. The number of FIls in India has grown over the year to nearly 500.The big names include Morgan Stanley, Templeton, Capital International, CDC, Warburg, and JFAM. As per the definition of RBI, a FIl is an institution established or incorporated outside India, which proposes to make investments in Indian securities. Such institutions have been permitted to invest in Indian securities markets starting from September 1992 when the then authorities issued suitable guidelines. The FIls are subject to stringent monitoring. They are required to register with RBI and the SEBI before they commence their operations. Foreign Institutional Investors (FIls) during the last one-decade have become an integral part of Indian equity markets. They have been an incredible source of money ever since. The clout of the FIls is such that the market players anticipate their arrival with breathless anxiety. This reputation of the FIls is a well-earned status. The authority of these institutions is evident from the very fact that by the mere news of their arrival it is sufficient for the market to supplement itself with a double-digit growth. Truly, the FIls have emerged as a masculine unit in recent times. FIls support the markets by unlocking their chests and rejuvenating the secondary markets. Performance of the secondary market brings cheer to the new issues market thus allowing companies to raise fresh capital. As evident, a healthy FII activity helps fund new projects and expansions, creating new jobs and triggering all positive things that come as a surprise gift. From the Central Bank's point of view, FIls, investments impart confidence to the economy by providing cushion in the form of forex reserves. This trend of Indian equity markets to that of FIIs investment though encouraging, has to be treated cautiously. Although the investments have provided with the much needed liquidity and depth in the markets, the role played by the fly-by-night operators in creating panic is some of the Asian economies do Indian markets face a risk. Portfolio flows are notoriously volatile compared to other forms of capital flows, as FIls usually pull back portfolio

investments at the slightest hint of trouble in the host country often leading to disastrous consequences to its economy. FIls have been blamed for exacerbating small economic problems in a country by making large and

concerted withdrawals at the first sign of economic weakness. However, RBI and SEBI has been prudent enough in enforcing strict guidelines for FIls entering India and controlling the repatriation of the investment.Ever since they entered India in 1993, the market has moved nowhere between 1993 and now. Despite an over burdened economy and infrastructure bottlenecks, companies like RIL, HLL, HDFC, Infosys, Ranbaxy, and Dr. Reddy's have given consistently excellent performance over the years and this has encouraged FIls to invest in the stocks of these companies which holds a major weightage in sensex. For global fund managers, top down is the preferred approach as their portfolios consist of securities across many markets, which make it too cumbersome to follow a bottom-up strategy in each market

CHALLENGES FACING FIIs IN INDIA

1. CONCENTRATION AND LIQUIDITY:The biggest concern plaguing Indian markets is that of concentration and liquidity. There are only a handful of stocks that have the kind of liquidity for foreign investors to take significant positions. Indian markets are concentrated in very few stocks in terms of volumes turnover. The share of top 10 most active index stocks in turnover is about 57% in India markets, while it is in the range of 11 to 27% for countries including China, Thailand, Taiwan and Korea. Also, promoters' holdings are high which hampers liquidity. 2. MARKET CAPITALIZATION TO GDP RATIO:The second major concern is market-cap to GDP ratio in India, which is quite low at 32%. This implies that only a small fraction of Indian business is captured in stock markets and some of the major businesses are not even available for investing. While in developed economies this ratio is to the extent of 120%, Asian countries like Hong Kong, China, Korea and Taiwan have a ratio of more than 50%. This is because of increased government ownership in various segments. For example, Indian Railways, India Posts, State Road Transport Corporations, with their size and business credentials can ignite a lot of investor interest. TJ>ere are major private players, which are closely held and unless all these come into the stock market fold, opportunities will be limited. 3. CORPORATE GOVERNANCE AND DISCLOSURE NORMS:There are concerns on the corporate governance standards as well. Despite accounting scandals in the US, global investors have more faith in the US regulatory system and corporate governance standards. Unlike domestic fund managers who feel reasonably confident because of their regular interaction with the management, foreign investors do feel quite insecure. For a fund manager managing funds from his headquarters in the US, the quantum of investment in Indian companies may not really justify the costs of monitoring them on a regular basis. Stocks trading at PE multiple of 2 or 3 in spite of their steady financial performance raises suspicion about the quality of management and in this respect global investors look at emerging markets like Korea and Taiwan, much more favorably. 4. MACRO-ECONOMIC PARAMETERS:Selection of the right country is the main objective for FIls investments rather than stitching together sector themes. FIIs are paying more attention than ever to country-specific factors like reform momentum, local

political situation and macro-economic ratios. Macro-economic stability and fiscal stability are basic hygiene factors to attract foreign investors. The cost of rescuing government-owned financial institutions such asUTI and IFCI will effect the fiscal situation. The global rating agency Standard & Poor downgraded India's local currency rating to junk grade from investment grade 1S definitely worrying global investors, though local fund managers are more bothered about ground realities such as corporate profitability and growth prospects.