Essay-20 : Difference between FDI and FII

There has been a unending debate on FDI and FII. The Prime Minister Modi and Chief Ministers of states are going behind FDIs and FIIs. Why India needs FDIs and FIIs. Why can’t we print our own money and start developing our own infrastructure? Why are we behind developed countries to come and invest here? Let us observe some points.. Candidates writing competitive exams have a good understanding on these concepts.  Read on…

Essay-20 : Difference between FDI and FII

FDIs & FIIs

Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market.

All other differences flow from this primary difference. FDI is perceived to be more beneficial because it increases production brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrips. (Scrips are substitute forms of cash, or a form of proxy currency.)
Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby pulling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.

 

Difference between FDI and FII

FDI

1. It is long-term investment
2. Investment in physical assets
3. Aim is to increase enterprise capacity or productivity chain management.
4. Leads to technology transfer, access to markets and management inputs.
5. FDI flows into the primary market
6. Entry and exit is relatively difficult
7. FDI is eligible for profits of the company
8. Does not tend be speculative
9. Direct impact on employment of labour and wages
10.Long- term interest in management.

 

FII

1.It is generally short-term investment
2.Investment in financial assets
3.Aim is to increase capital availability
4.FII results in only capital inflows
5.FII flows into the secondary market
6.Entry and exist is relatively easy
7.FII is eligible for capital gain
8.Tends to be speculative
9.No direct impact on employment of labour and wages
10.Short-term interest in management.

The central government has proposed to enhance foreign direct investment (FDI) in insurance to 49% in its second wave of reforms announced recently. At present foreign investment in private insurance companies is restricted to 26% of their capital, which is now proposed to be increased to 49% by passing an amendment to the Insurance.

 

At present there are 44 private insurance companies authorized by the Insurance Regulatory and Development Authority (IRDA) operating in the country. These comprise of 23 life insurance, 17 general insurance and four health insurance companies, since the insurance sector was opened for private sector in the year 2000. These are all joint ventures between the Indian promoters who hold up to 76% and foreign insurance companies who hold up to 26% as mandated by the law.

The insurance business requires additional capital as it grows and this has to come from the promoters. If the Indian promoters are unable to contribute their share of the capital, they will not be able to grow. Foreign companies with deep pockets will be able to fill this gap, if they are allowed to invest up to 49% of the capital. It is estimated that the private insurers need about Rs60, 000 crore of additional capital during the next five years. Therefore, the raising of FDI cap to 49% will come handy for the foreign partner to increase their stake in the company, without the local partner having to put matching capital in to the company. The foreign partner will be more than happy to increase its stake, as it will help it get a bigger share of the pie, and will also give it a larger role in running the company according to its ways, by virtue of a higher shareholding in the company. This will, therefore, be a boon to the foreign insurers to come to India in a big way.

Our country has a low insurance density and every company selling the insurance feels that there is abundant scope to expand its operations and hence this proposal to increase FDI in insurance has been received with great applause by the industry.

If and when this proposal becomes a law there is bound to be a great demand from foreign companies to enter our country because of the abundant opportunity provided by the large population and the growing per capita income of our people. During the last twelve years, if over 40 foreign companies have entered our country as joint venture partners, with the increased FDI cap, we may expect another 100 companies to come within the next twelve years. Unfortunately, some of our people are carried away by the foreign names and brands, and that there is a perception among our people that foreign companies are better than the home-grown companies. But some analysts say that people in India trust local brands better than other brands.

 

Impact of FDI on Indian economy

1. Creates employment opportunity for domestic country and creates good relation between two countries.
2. Facilitates modern technology.
3. Inflow of foreign funds in Indian economy.
4. Enables to provide goods and services at best suitable price.
5. It creates the competition among the domestic company and MNC in this way domestic company can increase its efficiency.
6. Indian company gets a chance to work with a professional body.Indian company gets a chance to work with a world market leader Company.
7. Backward area can be developed.
8. Creates good capital market in India.
9. Government gets revenues in the form of licenses fees, registration fees, taxes which is spent for public expenditure.

 

There is little doubt that FII inflows have significantly grown in importance over the last few years. In the absence of any other substantial form of capital inflows, the potential ill effects of a reduction in the FII flows into the Indian economy can be severe. Thus, while it does not indicate that FII inflows are bad, there is possibly a need to gear up macro-economic policies to target other form of foreign investments into the economy and reduce the over-reliance on the domestic markets.

 

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