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Foreign Portfolio Investments

IndianMoney.com Research Team | Posted On Sunday, April 12,2009, 03:17 PM

Foreign Portfolio Investments

 

 

Foreign Portfolio Investments

While foreign portfolio investments are not latest to the Indian corporate sector, the importance of portfolio investments received special movement towards the end of 1992 when the Foreign Institutional Investors (FIIs) such as

  • Pension Funds
  • Mutual Funds
  • Investment
  • Trusts,
  • Asset Management
  • Companies
  • Nominee Companies and
  • Incorporated /institutional Portfolio Managers were allowed to invest directly in the Indian stock markets. The entrance of FIIs seems to be a follow up of the suggestion of the Narasimham Committee Report on Financial System. At the same time as recommending their entry, the Committee, though, did not elaborate on the objectives of the suggested policy. The Committee only stated that:The Committee would also propose that the capital market should be steadily opened up to foreign portfolio investments and simultaneously efforts should be initiated to improve the depth of the market by facilitating issue of new types of equities and innovative debt instruments.

Press reports of early 1993 indicate that the Asian Department Bank (ADB) inclined the Committee's recommendations. The then ADB President's statement on India's Request for a Financial Sector Program Loan stated that:The Bank (ADB) had also called for capital market reforms together with allowing private mutual funds to operate, allowing investment in Indian firms by foreign investors and allowing increased access to world capital markets for Indians.

Attracting foreign capital appears to be the major cause for opening up of the stock markets for FIIs. The Government of India issued the applicable Guidelines for FII investment on September 14, 1992. Only little days prior to this, a statement attributed to IFC suggested that India would have to wait for a few years before the expected large foreign investment materializes. Concerning the entry of FIIs the then Finance Minister stated at a meeting organized by the Royal Institute of International Affairs (London) that the decision to open up the stock market to investments by foreign companies would be fine for the country as India needed international capital. He additional stated that a non-debt creating instrument such as FII was superior to raising loans of the classical type so that an on shaky ground debt burden was not piled up. The Finance Minister also stated that the liberalization of the economy would bring in international capital of about $10 bn a year rising to $12-13 bn. Over the subsequent 2-3 years. It might also not be a simple coincidence that India decided to open its stock markets to FII investments in the consequences of the stock scam. The Sensex, BSE Sensitive Index, fell down to 2,529 on August 6, 1992 from the exceptional high level of 4,467 reached on April 22, 1992. As an incentive, FIIs were allowed lower rates for capital gains tax. This was justified on the basis that, this will guard against instability in fund flows.

During the period 1992-93 to 1998-99 out of the total capital inflow to India of will amount up to  US$ 28.6 billion, a little more than US$ 15 billion or nearly 54 % of the total, was on account of foreign portfolio investments. These aggregate capital flows were a slightly less than the foreign currency assets at the end of 1998-99. During the time, external debt did increase from US$ 85 bn. to 98 bn. Much of the increase, nevertheless, took place by 1995. Thus, the approach of relying on non- debt creating instruments seems to have yielded outcome. The flows, though, did not match the initial expectation that capital flows will aggregate US$ 12-13 bn. a year, i.e., nearly US$ 50-60 bn. for the 5 year period 1993 to 1997. Within portfolio investments, FIIs was having a share of nearly 50 % and GDRs 44 % (Table 2). From the point of capital flows and managing balance of payments, it does show that an active pursuance of GDRs (Global/ American Depository Receipts) could be a viable alternative to FII investments. Contrasting portfolio investments, GDRs are generally project specific and hence the benefits from such issues are more tangible.

Table 2. Inflow of Foreign Investments in the Post-liberalization Period

(Amount in US$ mn), in the year 1999-2000

Year     

 

 

Of which Portfolio investments

 

 

 

Total inflows

 

 

 

 

(Direct+ Portfolio)

 

Total

Of which FIIs#

 

[email protected]

 

1992-93

559

244

1

240

1993-94

4,153

3,567

1,665

1,520

1994-95

5,138

3,824

1,503

2,082

1995-96

4,892

2,748

2,009

683

1996-97

6,133

3,312

1,926

1,366

1997-98

5,385

1,828

979

645

1998-99

2,401

-61

-390

270

Total

28,661

15,462

7,693

6,806

# Represent fresh inflow/outflow of funds by FIIs.

@ Figures represent GDR amounts raised abroad by the Indian companies.

Source: India, Ministry of Finance, Economic Survey.

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