FDI Vs FII Sunday, September 19, 2010

Difference between FDI and FII

Before looking at what’s the difference between Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII). We must acknowledge the fact that both deals with investment inflows in a foreign country.

Definition

FDI: - refers to the participation in another countries, company ownership or stake in companies stock with intent of investment, management control, joint-venture or transfer of technology.

FII: - refers to firms which investment in financial markets of another country and in India under portfolio investment scheme (PIS).

Now the Face-off

FDI	FII
FDI is primarily for long term investment	FII is always looking to make quick bucks in short -term
It is not possible to exit @ its own choice	FII’s can exit easily whenever they want
Primarily invests in companies there is a target enterprise	Invests in financial markets in general.
FDI brings in more stability when compared to FII in terms of production  and tax revenue	brings more volatility and fluctuation in markets with their exit and entry into market.

Indian Scenario

The Investments in Indian markets and companies is regulated by Govt org. like Securities Exchange and Board of India(SEBI) and Reserve Bank of India (RBI).

India is ranked third in terms of FDI inflows as Indian economy is one of the fastest growing economy and investors find it attractive here. There are various sectors where FDI is fueling there money in like the Infrastructure, financial Institutions, aviation, defense, retail, pharmaceuticals, auto-industry, telecom, power, media etc..

But there is a cap on the limit to which FDI is allowed in a particular sector taking into consideration the sectors domestic competition and factors like nation security, domestic employment and economic stability. And to certain extent Govt. regulators like SEBI and RBI had played a vital role which allowed India to be least affected by the recession. 

Facts & Figures

India has seen FDI equity inflow of US $2,214 million in April 2010.

According to information from DIPP (Department of industrial policy and promotion) The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million,

 Of which service sector including financial and non-financial services share was 21%.

Second was construction, US $2.9 billion

 third real estate, US $2.8 billion

 followed by telecommunication, US $2.5 billion

Auto Industry, US $1.2 billion

Power US $1.4 billion

For the financial year 2009-2010.

Cap in FDI

The cap on FDI for different sectors this is the decision taken by govt. in consultation with RBI,SEBI as per policies in FEMA(Foreign exchange management Act).

Below are some of the FDI limits on certain sectors by Indian Govt.

Private airlines  74%

Petroleum refining 100%

Private banking 49%

NBFC’s 49 %

Telecom 49%

Drugs & pharmaceuticals 100%

Airports 74%

Defense 26 %

Power 100%

Road& Highways 100% 

From the sectoral caps we see govt shift towards sectors which needs most attention and the limits on certain sectors due to some genuine constraints it sees.

Below chart shows the country wise FDI inflows in India.

Ranks	Country	2006-07 (April- March)	2007-08 (April- March)	2008-09 (April- March)	2009-10 (April- Aug. ‘09)	Cumulative Inflows (April ‘00 to Aug. ‘09)	%age to total Inflows (in terms of rupees)
1.	MAURITIUS	28,759 (6,363)	44,483 (11,096)	50,794 (11,208)	30,591 (6,279)	191,863 (43,143)	44 %
2.	SINGAPORE	2,662 (578)	12,319 (3,073)	15,727 (3,454)	4,162 (856)	38,014 (8,667)	9 %
3.	U.S.A.	3,861 (856)	4,377 (1,089)	8,002 (1,802)	5,334 (1,108)	33,294 (7,443)	8 %
4.	U.K.	8,389 (1,878)	4,690 (1,176)	3,840 (864)	1,193 (246)	24,097 (5,473)	6 %
5.	NETHERLANDS	2,905 (644)	2,780 (695)	3,922 (883)	1,962 (406)	17,814 (3,996)	4 %
6.	JAPAN	382 (85)	3,336 (815)	1,889 (405)	3,788 (779)	15,013 (3,310)	3 %
7.	CYPRUS	266 (58)	3,385 (834)	5,983 (1,287)	3,195 (655)	13,245 (2,927)	3 %
8.	GERMANY	540 (120)	2,075 (514)	2,750 (629)	1,736 (359)	11,224 (2,531)	3 %
9.	FRANCE	528 (117)	583 (145)	2,098 (467)	687 (143)	6,169 (1,370)	1 %
10.	U.A.E.	1,174 (260)	1,039 (258)	1,133 (257)	1,085 (224)	5,092 (1,145)	1 %
TOTAL FDI INFLOWS *		70,630 (15,726)	98,664 (24,579)	122,919 (27,329)	67,052 (13,800)	460,178 (103,640)	-

Source:DIPP

Indian growth story has not just been through FDI’s but FII’s plays a major part too, though being known for its more volatility, a fair share of growth pie is through FII.

As per SEBI, FIIs invested US$ 2055.74 million in equities in July 2010. And more than 1/5^th of PE investment of US in emerging markets goes towards India. And the total share of FII and VC investment is projected to reach US $17 billion in 2010. Through share markets, mutual Funds and bonds.

Challenges Ahead

The challenges ahead for the govt. regulators across the world after the economic recession are how to insulate themselves from any global debacle. That is near to impossible as we see that emerging markets are dependent on the FII’s and FDI for fueling their economy and any downturn in one part of globe affects the other. The key to this jinx lies with the regulators on how their policies will affect the domestic market and extent to which they are open to FII’s and FDI’s.

Also from the FDI it is seen from the fact that Major chunk of FDI inflow is through Mauritius due to tax concessions which is also a case for concerns as many hawala transactions takes place through those route.

With the confusion in caps on FDI’s and FII’s the Indian govt. is looking at clubbing FII and FDI in a way to make FII to take FDI path for investment into the Indian economy.

Some cases where in Indian market we have seen there is need for cap on are like telecom equipments which is evident from the objection of Indian home ministry towards RIM (Research in Motion) and Chinese telecom equipment. Hostile take-over’s and FDI’s in defense sectors which are sensitive areas which govt. must keep in mind before opening their doors to foreign players.