FOREIGN PORTFOLIO INVESTMENTS IN INDIACAUSES AND IMPACT

Reema D’Souza- PG14069Sneha Singh- PG14083

Akanksha Gandhi- PG14091Shweta Ghag- PG14097

Chaitra Mhatre- PG14101

Foreign Portfolio Investment

• FPI is securities and other financial assets passively held by foreign investors

• Origin of FPI

• After the Second World War, developing countries made efforts to achieve rapid economic growth and to alleviate problems of poverty and unemployment

• Rapid growth of international trade.

• The developing countries faced shortage of capital.

• Capital flows in the form of foreign aid

• Developing countries faced difficulty in implementing the conditionality’s of undertaking from IMF and World Bank

Foreign Portfolio Investment

Foreign Investment in IndiaForeign Capital Investment

in India

Foreign Direct Investment Foreign Portfolio Investment

• The foreign direct investment (FDI) is the investment in the construction of physical capital in the capital- importing country.

• FPI is securities and other financial assets passively held by foreign investors

Foreign Portfolio Investment• FPI does not provide the investor with direct ownership of financial

assets, and thus no direct management of a company.

• It is relatively liquid, depending on the volatility of the market invested

in.  

• Involves short-term positions in financial assets of international markets, and is similar to investing in domestic securities.  

Foreign Portfolio InvestmentCategories of FPI

• Category I (Low Risk) which would include Government and entities like Foreign Central banks, Sovereign wealth Funds, Multilateral Organizations, etc.

• Category II (Moderate Risk) which would include Regulated entities such as banks, Pension Funds, Insurance Companies, Mutual Funds, Investment Trusts, Asset Management Companies, University related endowments (already registered with SEBI)

• Category III (High Risk) which would include all other FPIs not eligible to be included in the above two categories

Foreign Portfolio InvestmentForeign

Portfolio Investment

FII GDRs/ADRs Offshore Funds

• FII: Investments made by foreign institutions like pension funds, foreign mutual funds etc. in the financial markets.

• GDRs and ADRs: They are instruments which signify the purchase of share of Indian companies by foreign investors or American investors respectively

• Off-shore funds: The schemes of mutual funds that are launched in the foreign country

Composition of FPI

Depository Receipts:

• A Depository Receipt (DR) is a financial instrument representing certain securities (e.g. shares, bonds etc.)

• Securities are deposited with the domestic custodian bank and DR’s are issued by depository bank in targeted country.

• Depository receipts are negotiable security.

ADR’s & GDR’s

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

240

15202082

6831366

645270

768 831477 600 459 613

2552

3776

8769

GDR/ ADR in India

Year

US

$ M

illi

on

Financial Institution Investment:

• A foreign institutional investor (FII) is a person or a group of people operating or registered in a country that’s not their domicile.

• Foreign institutional investor groups often operate as hedge funds, pension funds, insurance companies, and mutual funds.

• FII’s in India are regulated by SEBI.

• India has changed its foreign investor laws to allow FIIs to own up to 100% of Indian companies in certain industries.

Financial Institutional Investment

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

-5000

0

5000

10000

15000

20000

25000

11665 1503 2009 1926

979

-390

2135 1847 1505377

10918

86869926

3225

20328

Financial Institutional Investment - India

Year

US

$ M

illi

on

Offshore Funds & Others:

• An offshore fund refers to a mutual fund that invests its assets abroad and not in domicile country.

• Offshore funds offer investors access to international markets and major exchanges.

• In India a few companies that have offshore mutual funds are Reliance, Kotak and TATA.

Offshore Funds & Others

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

0

50

100

150

200

250

300

350

400

450

6 4 3

382

239

56

20

204

59

123

82

39

2 016 14 2

298

Offshore Funds & Others

Year

US

$ M

illio

n

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08-5000

0

5000

10000

15000

20000

25000

30000

35000

Composition of FPI - India

FII GDR/ ADR Offshore funds and OthersFPI Moving average (FPI)

Year

US

$ M

illio

n

Benefits of FPI

• Portfolio Diversification

• International Credit

• Benefit from Exchange Rate

• Access to bigger market

• 1992-Indian government allowed the foreign investors to invest in the financial marketsSEBI regulations-encourage FIIs to invest in IndiaADR/GDRs helps to overcome limitations Indian companies like Reliance, Kotak and TATA started having offshore mutual funds

• In 1993-94 FII investment has increased consistently from 1.6 billion dollars to approximately 127.8 billion dollars till December 2011

• In 1996-97 the share of ADR/GDR flows was 41 % and that of FII flows was 58%.

• In 1997-98 and 1998-99 there was a reversal in FII investment due to the impact of the Asian crisis.

• In1999-2000 FII flows to the Indian economy revived but again dipped to 2.77 billion dollars in 2002-03.

TRENDS IN FPI

• In 2001-02 international financial markets were also taking measures to attract firms in the emerging markets to list on their stock exchanges-resulted investment flowing into India through the ADR/GDR route

• In 2003-04 FIIs flows were up to 10.9 billion dollars increase in the limit of investment by FIIs in the securities of the Indian companies increase in the number of sectors in which the investment could be made

• In 2007-08 the share of ADR/GDR flows was 24% and that of FII flows was 75%.

• In 2009-10 FII flows accounted for 89% of the total flows while ADR/GDR flows were 10% of the total flows but no investment on account of offshore funds.

FII/FPI INVESTMENTS

1998-1999

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

-100000

-50000

0

50000

100000

150000

200000

FII/FPI Investments

equity debt

NET PORTFOLIO INVESTMENTS

2000-01 2008-09 2009-10 2010-11

-100000

-50000

0

50000

100000

150000

200000

Net portfolio investments(in crores)

SECTOR WISE FPI/FII INVESTMENTS

Automobiles & Auto Components

Total Financial Services

Banks

Other Financial Services1

Capital Goods

Chemicals & Petrochemicals

Construction Materials

Food, Beverages & Tobacco

Household & Personal Products

Pharmaceuticals & Biotechnology

Telecom Services

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

Sector wise FPI/FII investments( IN CRORES)

Debt Equity

FPI Impacts on Indian Economy

• Stock Market •Currency Rate • Inflation

FPI Investments (INR Crore)19

92-9

3

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

**

-100000

-50000

0

50000

100000

150000

200000

45,765

66,179

-45,811

142,658

51,649Series1

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

-15% -10% -5% 0% 5% 10% 15% 20% 25%

4%

5%

7%

19%

-1%

-4%

12%

6%

-10%

3%

0%

Change in the Indian Currency Rate

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

5.57%6.53%

5.51%

9.70%

14.97%

9.47%

6.49%

11.17%

9.13%

5.86%

Historic Inflation India (CPI) – by year

2004 2006 2008 2010 2012 2014 2016

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0%

53%

28%

5%

-2%

21%

1%-2%

12%

28%

Change in Closing Stock Price (NSE)