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MULTINATIONAL COMPANIES AND FOREIGN DIRECT INVESTMENTS IN INDIA

Multinational companies are the organizations or enterprises that manage production or offer services in more than one country. And India has been the home to a number of multinational companies. In fact, since the financial liberalization in the country in 1991, the number of multinational companies in India has increased noticeably. The multinational companies in India represent a diversified portfolio of companies from different countries. Though the American companies - the majority of the MNC in India, account for about 37% of the turnover of the top 20 firms operating in India, but the scenario has changed a lot off late.

Why are Multinational Companies setting up their businesses in India?


There are a number of reasons why the multinational companies are coming down to India. India has got a huge market. It has also got one of the fastest growing economies in the world. Besides, the policy of the government towards FDI has also played a major role in attracting the multinational companies in India. For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a result, there was lesser number of companies that showed interest in investing in Indian market. However, the scenario changed during the financial liberalization of the country, especially after 1991. Government, nowadays, makes continuous efforts to attract foreign investments by relaxing many of its policies. As a result, a number of multinational companies have shown interest in Indian market.

Following are the reasons why multinational companies consider India as a preferred destination for business:

Huge market potential of the country FDI attractiveness Labor competitiveness Macro-economic stability

List of Multinational Companies in India


The list of multinational companies in India is ever-growing as a number of MNCs are coming down to this country now and then. Following are some of the major multinational companies operating their businesses in India:

Vodafone Ford Motors LG Samsung Hyundai Reebok

Multinational Companies In India Whether Favourable Or Unfavourable FAVOURABLE


MNC's has made entire world a Global Village. Inter connectivity increased amongst nations. New technology and know-how

Quality products at nominal rates Monopoly reduction. Employment generation Healthy competition Generation of Foreign exchange reserves

UNFAVOURABLE
Indigenous (local) product & small organizations suffer. Domestic companies collapse under the competition of MNCs Security threat No profit except taxes remain in home country Global warming evolved due to MNC's H.R. practices are not good (cheap labour, extra hrs working, hire and fire policy) Exploit resources

UNIT 5: FOREIGN PORTFOLIO INVESTMENT (FPI).


MEANING OF FOREIGN PORTFOLIO INVESTMENT:

The purchase of stocks, bonds, and money market instruments by Foreign Institutional Investors such as mutual funds, pension funds, insurance companies, banks, asset management companies, charitable trusts etc for the purpose of realizing a financial return through interest, dividends, and capital appreciation, which does not result in foreign management, ownership, or legal control. Some examples of portfolio investment are:

Purchase of shares in a foreign company. Purchase of bonds issued by a foreign government. Acquisition of assets in a foreign country.

FOREIGN INSTITUTIONAL INVESTORS:

India decided to permit FDI into India as part of the structural reforms process initiated in 1991. In the early years, the approach towards the vehicles of FDI, viz. the Foreign Institutional Investors, was extremely cautious, but of late, the Govt. of India has liberalized the norms applicable to these entities.
WHO IS A FOREIGN INSTITUTIONAL INVESTOR (FII)?

An FII is an investor or investment fund that is from or registered in a country outside of the one in which it is currently investing.

Thus in the Indian context, an FII is an entity established or incorporated outside India which proposes to make investments in India. The term is used most commonly in India to refer to outside companies investing in Indias financial markets. Any institution/organization which proposes to invest its own funds or make investments on behalf of foreign corporate and individuals and belongs to any of the following categories can be FII.

Pension Funds Mutual Funds/Investment Trusts. Insurance or Reinsurance companies Charitable Trusts or Charitable Societies Asset Management Companies Institutional Portfolio Managers Trustees Banks

In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic stock market. Since then, FPI has emerged as a major source of private capital inflow in this country. India is more dependent upon FPI than FDI as a source of foreign investment. During 1992 -2005 more than 50 percent of foreign investment in India came from FPI.

Difference between FDI and FII FDI 1. FDI is when a foreign company brings capital into a country or an economy to set up a production or some other facility. FDI gives the foreign company some control in the operations of the company FII FII is when a foreign company buys equity in a company through the stock markets. Therefore, in this case, FII would not give the foreign company any control in the company.

2. FDI involves in the direct FDI is a short-term investment production activity and also of mostly in the financial markets medium to long-term nature and it consists of FII. 3. It enables a degree of control in It does not involve obtaining a the company. degree of control in a company. 4. FDI brings long-term capital The FII brings a short-term one.

Composition of Foreign Portfolio Investment in India.


F o r e ig n P o rtfo lio In v e s tm e n ts ( in U S $ m n )
30000 20000 Investments ( in US $ mn) 10000 0
200 0-01 200 1-02 2002 -03 2003-04 2 004-05 20 05-0 6 200 6-07 200 7-08 2008 -09

-1 0 0 0 0 -2 0 0 0 0

Y e ars G D R /A D R s IIs O ff-s h o re fu n d s a n d F

Foreign Portfolio investments in India come in the form of investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), foreign institutional investments and investments in Offshore funds. However, foreign institutional investments constitute a major proportion of such portfolio ows. The share of FIIs in total portfolio ows was as high as 95.97% in 2003-04 and 93.25% in 2004-05. It declined to 46.05% in 2006-07. This decline in FII investment in 2006-07 can be attributed to global developments like meltdown in global commodities markets and equity market during the three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its spill over effects.

Trends in FII Investment in India:


Net FII Investment (US $ mn.)
20000

Net Investment (US $ mn.)

15000 10000 5000 0 2000-01 -5000 -10000 -15000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Years
Net Investment (US $ mn.)

During 2008-09, FIIs have been net sellers to the tune of US $ 11,456 million. This can be attributed to the weak sentiments of investors, following the global credit crisis which engulfed the developed countries and is seen to be affecting the developing countries as well. Number of Foreign Institutional Investors (FIIs) in India:
SEBI Registered FIIs in India
1800 1600 1400 1200 1000 800 600 400 200 0
19 92 -9 19 3 93 -9 19 4 94 -9 19 5 95 -9 19 6 96 -9 19 7 97 -9 19 8 98 -9 19 9 99 -0 20 0 00 -0 20 1 01 -0 20 2 02 -0 20 3 03 -0 20 4 04 -0 20 5 05 -0 20 6 06 -0 20 7 07 -0 20 8 08 -0 9

No. of FIIs

FII at Years March end of

As of March 2009, there were 1,626 FIIs registered with SEBI

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