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i. Short positions in index derivatives (short futures, short calls and lon
g puts) not exceeding (in notional value) the FII’s holding of stocks.
ii. Long positions in index derivatives (long futures, long calls and short
puts) not exceeding (in notional value) the FII’s holding of cash, government se
curities, T-Bills and similar instruments.
b. FII Position Limits in Interest rate derivative contracts
At the level of the FII
The notional value of gross open position of a FII in exchange traded interest r
ate derivative contracts shall be:
i. US $ 100 million.
ii. In addition to the above, the FII may take exposure in exchange traded i
n interest rate derivative contracts to the extent of the book value of their ca
sh market exposure in Government Securities.
At the level of the sub-account
The position limits for a Sub-account in near month exchange traded interest rat
e derivative contracts shall be higher of:
Rs. 100 Cr
or
15% of total open interest in the market in exchange traded interest rat
e derivative contracts.
OFFSHORE DERIVATIVES/PARTICIPATORY NOTES
Q44. Can FII/sub-account issue Offshore Derivatives / Participatory Notes?
Ans. Yes, FII/sub-account may issue, deal in or hold off-shore derivative instru
ments such as Participatory Notes, Equity Linked Notes or any other similar inst
ruments against underlying securities, listed or proposed to be listed on any st
ock exchange in India.
Q45. Who can subscribe to/invest in Participatory Notes?
Ans.
a. Any entity incorporated in a jurisdiction that requires filing of consti
tutional and/or other documents with a registrar of companies or comparable regu
latory agency or body under the applicable companies legislation in that jurisdi
ction;
b. Any entity that is regulated, authorised or supervised by a central bank
, such as the Bank of England, the Federal Reserve, the Hong Kong Monetary Autho
rity, the Monetary Authority of Singapore or any other similar body provided tha
t the entity must not only be authorised but also be regulated by the aforesaid
regulatory bodies;
c. Any entity that is regulated, authorised or supervised by a securities o
r futures commission, such as the Financial Services Authority (UK), the Securit
ies and Exchange Commission (Sub-account), the Commodities Futures Trading Commi
ssion (Sub-account), the Securities and Futures Commission (Hong Kong or Taiwan)
, Australian Securities and Investments Commission (Australia) or other securiti
es or futures authority or commission in any country , state or territory ;
d. Any entity that is a member of securities or futures exchanges such as t
he New York Stock Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stoc
k Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securiti
es or futures authority or commission within any country, state or territory pro
vided that the aforesaid mentioned organizations which are in the nature of self
regulatory organizations are ultimately accountable to the respective securitie
s / financial market regulators.
e. Any individual or entity (such as fund, trust, collective investment sch
eme, Investment Company or limited partnership) whose investment advisory functi
on is managed by an entity satisfying the criteria of (a), (b), (c) or (d) above
.
Q46. What are the reporting Requirements for the FII / Sub-account issuing
Participatory Notes?
Ans.
a. FII/sub-account who issue/renew/cancel/redeem PNs, require to report on
Monthly basis. The report should reach SEBI by the 7th day of the following mont
h.
b. The FII/sub-account merely investing/subscribing in/to the Participatory
Notes/Access Products/Offshore Derivative Instruments or any such type of instr
uments/securities with underlying Indian market securities are required to repor
t on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).
c. FIIs/sub-accounts who do not issue PNs but have trades/holds Indian secu
rities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) requ
ire to submit Nil undertaking on a quarterly basis.
d. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings
in Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep an
d Oct-Dec): No reports required for that reporting quarter.
Q47. How to send report on Participatory Notes?
Ans.
o The format for reporting on issuance/ renewal / redemption of the Partic
ipatory Notes is prescribed as per "Annexure B" in our Circular No. IMD/CUST/15/
2004 dated April 02, 2004 [
o The reports should be e-mailed only to SEBI
o In case of Nil-reports, ‘Annexure B’ is not required. Instead the FII on
behalf of its Sub-account should submit the undertaking prescribed in our circu
lar No. IMD/CUST/9/2003 dated November 20 , 2003
o The reporting should be done in MS Excel format only
.
SEBI ANNOUNCES NEW REGULATIONS FOR FII S
Market regulator Security Exchange Board of India recently announced new rules f
or foreign investments through financial instruments such as participatory notes
, asking FIIs to wind up P-Notes for investing in derivatives within 18 months.
SEBI also imposing curbs on P-Notes for investing in spot market.
In derivatives, foreign institutional investors (FIIs) and their sub-accounts ca
nnot issue fresh P-Notes and will have to wind up their current position in 18 m
onths.
In spot market, FIIs will not be allowed to issue P-Notes more than 40 per cent
of their assets under custody. The reference date for calculating such assets wi
ll be September 30.
Those FIIs who have issued P-Notes of more than 40 per cent of their assets coul
d issue such instruments only if they cancel, redeem, or close their existing PN
s. Those FIIs who have issued P-Notes less than 40 per cent of their assets unde
r custody can issue additional instruments at the rate of 5 per cent of their as
sets.
Highlights of New Rules
• New norms to come into effect from tomorrow
• Unregulated pension fund, university fund, charitable fund, endowments e
tc to be treated as FIIs
• No dilution of know-your-customers norms for registration of FIIs to pre
vent money laundering
• FIIs to be registered on a permanent basis instead of earlier practice o
f renewing registration every three years
What explains the greater attraction of the Indian market for portfolio investor
s as compared to foreign direct investment (FDI)? In his column ‘Bullish FII ver
sus cautious FDI’ in these pages (FE, February 14), Senthil Chengalvarayan has c
ompared the Indian scenario, characterised by strong portfolio inflows and much
weaker foreign direct investment (FDI), with China, where the situation is the r
everse. He attributes the difference to the opening of the capital market. Open
up the real sector and investments will flow, he argues. While his broad thrust
is correct, there is another factor that’s just as critical, if not more. Ease o
f entry and exit.
Today, it is relatively effortless for a foreign institutional investor (FII) to
enter the capital market. A Sebi registration, preceded by a fairly perfunctory
due diligence, is all it takes before an FII can enter the Indian stock market
and commence trading. Exit is equally simple. For FDI, however, both entry and e
xit are far more difficult. Even in sectors opened to FDI on paper, problems rem
ain at the grassroots. There are innumerable clearances that need to be obtained
at the state and district levels. There are also a number of practical hurdles,
such as infrastructure bottlenecks, all of which make entry difficult. Exit is
more complicated. Archaic labour laws, such as the Industrial Disputes Act, proh
ibit the closure of any company employing more than 100 workers without obtainin
g prior state government permission. Bankruptcy laws are convoluted and legal pr
ocesses costly and long-winded.
No wonder portfolio inflows into India far exceed direct investment flows. FII f
lows topped $8.5 billion last year and have already exceeded $1 billion in the c
urrent year to date. In contrast, FDI flows have remained stuck in the $3-4 bill
ion groove for the past many years. It’s just the reverse in China. FDI is in th
e range of $50 billion, while portfolio flows are much lower, in the range of $4
-5 billion. Part of the reason is that equity markets are far less open than in
India. The market is segregated between resident and non-resident investors and
there are strict controls.
Given that FDI is far more beneficial to the recipient country than FII, the big
question troubling Indian policymakers is how do we replicate the Chinese examp
le. We would say open up and, equally, make exit easier as well.
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FII generally means portfolio investment by foreign institutions in a market whi
ch is not their home country. These institutions are generally Mutual Funds, Inv
estment Companies, Pension Funds, Insurance Houses. There investments are in the
stock market whereas FDI is generally a long term commitment to a particular co
mpany in a sector in terms of equity investment by some foreign entity. Therefor
e we could see Lehman investing 15% in say Unitech, now that would be FDI. Howev
er if Lehman has bought shares of Unitech though secondary markets (stock tradin
g market) it would have been an FII. FII funding is a paramount maker of stock m
arkets and there selling or buying moves the stock in a day. FDI have long term
commitment and hence we see flight of capital in terms of FII outflows but not g
enerally in FDIs.
Foreign Direct Investors can be defined as Investors who invest in any productiv
e assets of India i.e. securities which shall include companies incorporated in
foreign countries, individuals such as foreign citizens and non resident Indians
and other legal entities of foreign origin.
Foreign institutional investors are defined under SEBI Regulations as an institu
tion that is a legal entity established or incorporated outside India proposing
to make investments in India only in securities.Such FII have to get registered
with SEBi to commence operations.
Foreign institutional investors shall also include domestic asset management com
pany or domestic portfolio manager who manage funds raised or collected or bough
t from outside India for the purpose of making investment in India on behalf of
foreign corporates or foreign individuals.
The term foreign direct investors and foreign institutional investors are not sy
nonyms. There is a slight mark of demarcation between the two being that foreign
direct investors tends to include also individuals such as foreign citizens and
non resident Indians in addition to entities incorporated in foreign countries
whereas foreign institutional investors are defined to be incorporated foreign e
ntities.
Foreign Direct Investors can be defined as Investors who invest in any productiv
e assets of India i.e. securities which shall include companies incorporated in
foreign countries, individuals such as foreign citizens and non resident Indians
and other legal entities of foreign origin.
Foreign institutional investors are defined under SEBI Regulations as an institu
tion that is a legal entity established or incorporated outside India proposing
to make investments in India only in securities.Such FII have to get registered
with SEBi to commence operations.
Foreign institutional investors shall also include domestic asset management com
pany or domestic portfolio manager who manage funds raised or collected or bough
t from outside India for the purpose of making investment in India on behalf of
foreign corporates or foreign individuals.
.
.