Foreign Institutional Investors

Foreign Institutional Investors

Foreign institutional investor means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors.

Entry Options For FII

Entry Options For FII

Entry Options For FII A foreign company planning to set up business operations in India has the following options: Incorporated Entity Unincorporated Entity

Entry Options For FII

Incorporated Entity By incorporating a company under the Companies Act,1956 through Joint Ventures; or Wholly Owned Subsidiaries Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.

Entry Options For FII

Unincorporated Entity As a foreign Company through Liaison Office/Representative Office Project Office Branch Office Such offices can undertake activities permitted under the Foreign Exchange Management Regulations,2000.

Foreign Institutional Investor

One who propose to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporate and individuals and belong to any of the under given categories can be registered for FII. Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Endowment Funds University Funds

 Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

 An application for registration has to be made in Form A, the format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address within 10 to 12 days of receipt of application.

What is a sub-account?
Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.

What is a Designated Bank?

Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII.

Who is a Domestic Custodian?

Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities.

What are the parameters on which SEBI decides FII applicants eligibility? Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year) whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI Whether the applicant is a fit & proper person.

 Which form needs to be filled in when applying for FII registration? "Form A" as prescribed in SEBI (FII) Regulations, 1995.

Which documents need to be sent with "Form A"?

Certified copy of relevant clauses (clauses permitting the stated activities) of Memorandum of Association, Article of Association or Article of Incorporation. Audited financial statement and annual report for the last one year (period covered should not be less than twelve months

 How much is the fee for registration as FII? US $ 5,000. When is the registration fee payable? Ans. At the time of submitting the application for registration. What is the mode of payment? Demand Draft in favour of "Securities and Exchange Board of India"

How many days it takes to get registered as FII?

SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI. In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI.

What are P-notes?

P-Notes are instruments like contract notes issued by FIIs to overseas investors who cannot directly invest in equity market as they are not registered. Out of over 1,100 FIIs registered with SEBI, only 34 have been issuing PNs.

Some Investment Highlights

The Indian growth story has attracted global majors like CLSA, HSBC, Citigroup, Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price International, Capital International and ABN Amro among others to enter the Indian financial market. Goldman Sachs picked up an 8.16 per cent stake in New Delhi Television Ltd (NDTV) and a minority stake in Sterling & Wilson Pvt. Ltd. RREEF Alternative Investments, the global alternative investment management business of Deutsche Bank, plans to invest over US$ 1 billion in the country.

Some Investment Highlights

Goldman Sachs and Macquarie have acquired a 20 per cent stake each in PTC India Financial Services Ltd. They have both invested about US$ 16.06 million each. Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) have each picked a combined stake of 10 per cent in Bharti Infratel at US$ 1 billion.

Some Investment Highlights

Further, New York-based private equity firm, Kohlberg Kravis Roberts and Co. (KKR), has also invested US$ 250 million in Bharti Infratel. Private equity firm Blackstone has taken up a 26 per cent stake in MTAR Technologies for US$ 65 million. Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked up a combined stake of over seven per cent in Gitanjali Gems at US$ 23.51 million.

Some Investment Highlights

Fidelity Investments International has picked up close to seven per cent equity in Transport Corporation of India (TCI) for US$ 10.72 million. JP Morgan Chase has invested Rs 250 crore (US$ 51.37 million) in BPTP Ltd, a Delhi-based real estate company.

Depository Receipts

 Depository Receipts are a type of negotiable (transferable) financial security, representing a security, usually in the form of equity, issued by a foreign publiclylisted company. However, DRs are traded on a local stock exchange though the foreign public listed company is not traded on the local exchange

 Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other countries. This type of instruments first started in USA in late 1920s and are commonly known as American depository receipt (ADR). Later on these have become popular in other parts of the world also in the form of Global Depository Receipts (GDRs). Some other common type of DRs are European DRs and International DRs.

How do Depository Receipts Created?

How do Depository Receipts Created?

When a foreign company wants to list its securities on another countrys stock exchange, it can do so through Depository Receipts (DR) mode. To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR.

How do Depository Receipts Created?

On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

WHAT IS AMERICAN DEPOSITORY RECEIPT?

 American Depository Receipts are negotiable instruments issued by a depositary bank, representing ownership in non-US securities, usually referred to as the underlying ordinary shares. They enable investors to acquire and trade nonUS securities without concern for the differing settlement timetables and the problems sometimes associated with overseas markets

 Depository receipt issued by a company in the United State of America is known as American Depository Receipts which is govern by Securities and Exchange Commission of USA. An ADRs is generally created by the deposit of the securities of an non united states company with a custodian bank in the country of incorporation of the issuing company. The custodian bank informs the depository in the U.S. that the ADRs can be issued. ADRs are united states dollar denominated and are traded in the same way as are the securities of the U.S. companies.

 American Depository Receipts popularly known as ADRs were introduced in the American market in 1927. ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation

 Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or brokerage.

How It Works/Example:
Investors can purchase ADRs from broker/dealers. These broker/dealers in turn can obtain ADRs for their clients in one of two ways: they can purchase alreadyissued ADRs on a U.S. exchange, or they can create new ADRs. To create an ADR, a U.S.-based broker/dealer purchases shares of the issuer in question in the issuer's home market. The U.S. broker/dealer then deposits those shares in a bank in that market. The bank then issues ADRs representing those shares to the broker/dealer's custodian or the broker-dealer itself, which can then apply them to the client's account.

 A broker/dealer's decision to create new ADRs is largely based on its opinion of the availability of the shares, the pricing and market for the ADRs, and market conditions.

 Broker/dealers don't always start the ADR creation process, but when they do, it is referred to as an unsponsored ADR program (meaning the foreign company itself has no active role in the creation of the ADRs). By contrast, foreign companies that wish to make their shares available to U.S. investors can initiate what are called sponsored ADR programs. Most ADR programs are sponsored, as foreign firms often choose to actively create ADRs in an effort to gain access to American markets.

Which Indian companies have ADRs and / or GDRs?

Un-sponsored ADRs: These are issued without any formal agreement between the issuing company and the depository, although the issuing company must consent to the creation of the ADR facility. Under this, certain costs including those associated with disbursement of dividends are borne by the investor. They are exempted from most of reporting requirements of the securities and exchange commission.

 ii. Sponsored ADRs : These are created by a single depository which is appointed by the issuing company under rules provided in a deposits agreement. There are two broad types of sponsored ADRs, those that are restricted with respect to the types of buyer which is allowed and are therefore privately placed and those that are unrestricted with respect to buyer and are publicly placed and traded.

 Restricted ADRs are allowed to be placed only among selected investors and face restriction on their re-sale. As those are not issued to general public, they are exempted from reporting to the commission and are not even registered with them. Unrestricted ADRs are issued to and traded by the general investing public in US capital market. There are three classes of UR ADRs , each increasingly demanding in terms of reporting requirement to the commission as well as attractive in terms of degree of visibility provided.

Global Depository Receipt (GDR)

These are similar to the ADR but are usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990.

What are GDRs?

Global Depository Receipts means any instrument in the form of a depository receipt or certificate (by whatever name it is called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company. A GDR issued in America is an American Depository Receipt (ADR). Among the Indian Companies Reliance Industries Limited was the first company to raise funds through a GDR issue.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment in India. Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment.

 An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB

There is no restriction on the number of Euroissue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Restrictions
Investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India. GDR Issues by Indian Corporates are floated as per scheme approved and notified by the Finance Ministry titled "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993".