Foreign Portfolio Investment Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial

l assets, none of which entails active management or control of the securities' issuer by the investor
Some examples of Portfolio investment are:

1. purchase of shares in a foreign company. 2. purchase of bonds issued by a foreign government. 3. acquisition of assets in a foreign country.

Factors affecting international portfolio investment:

tax rates on interest or dividends (investors will normally prefer countries where the tax rates are relatively low) interest rates (money tends to flow to countries with high interest rates) exchange rates (foreign investors may be attracted if the local currency is expended to strengthen)

Regulations in Portfolio Investments in India

FIIs , NRIs, PIOs are allowed to invest in primary & secondary capital markets in India through portfolio investment scheme [ PIS] & can acquire shares & debentures of Indian companies through stock exchanges in India.

Investment by SEBI registered FIIs and its sub accounts cannot exceed 10per cent of the paid up capital of the Indian company. However, in case of foreign corporates or High Net worth Individuals (HNIs) registered as sub accounts of an FII, their investment shall be restricted to 5 per cent of the paid up capital of the Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. An NRI or a PIO can purchase shares up to 5 per cent of the paid up capital of an Indian company. All NRIs/PIOs taken together cannot purchase more than 10 per cent of the paid up value of the company. This limit can be increased by the Indian company to 24 per cent by passing a General Body resolution. SEBI acts as the nodal point in the registration of FIIs.

 FIIs regulated by SEBI { FII} Regulations, 1995 & Regulation 5(2) of FEMA notification.
FIIs include Asset management companies, pension funds, mutual funds, investment trusts, institutional portfolio managers or their power of attorney holders, university funds, charitable trusts. FIIs should apply to designated authorized dealer [AD] for opening a foreign currency account or a Non-Resident Rupee Account. Generally in all nations, FIIs are required to allocate their investment between equity & debt in the ratio of 70:30 .

Investment limit for the FIIs as a group in Government securities currently is USD 10 billion and in Corporate debt is USD 20 billion in India

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:
i) Business of chit fund, or

ii) Nidhi Company , or iii) Agricultural or plantation activities or iv) Real estate business, or construction of farm houses v) Trading in Transferable Development Rights (TDRs).

"Real Estate Business" mentioned above, does not include development of townships, construction residential/commercial premises, roads or bridges.

BAN LIST
Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme.

A new class of foreign investors in the Indian equity market

Qualified Foreign Investors [ QFIs] are wealthy foreign individuals or high networth individuals (HNIs) with minimum net worth of $50 million (approx. R260 crore) and registered as a sub-account of a foreign institutional investor (FII) are allowed to invest directly in the Indian local equities. But w.e.f. 15th January 2012, QFIs will also be allowed to directly buy or sell Indian equities by opening a demat account with SEBI.

The individual and aggregate investment limit for QFIs shall be 5% and 10% respectively of the paid up capital of Indian company. These limits will be over and above the FII and NRI investment ceilings prescribed for foreign investment in India.

Foreign direct Investment

Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise).

The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise.

Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

Some countries may consider that the existence of elements of a direct investment relationship may be indicated by a combination of factors such as: a) representation on the board of directors; b) participation in policy-making processes; c) material inter-company transactions; d) interchange of managerial personnel; e) provision of technical information; f) provision of long-term loans at lower than existing market rates.

FDI forms
Greenfield investment or Merger & Acquisition. Horizontal or Vertical Foreign Direct Investment.

Flow of FDI or Stock of FDI.

Outflows or Inflow of FDI Sometimes inflows of FDI expressed as a percentage of gross fixed capital formation.

Why FDI takes place?

Market Imperfections [ Internalization Theory ] impediments to exports & sale of know-how Strategic Rivalry & interdependence in oligopolistic industries multipoint competition International Product Life Cycle theory -demand led & cost of production

Combining Location specific Advantages & Firms own unique assets [ Eclectic Paradigm] - spillovers

Investing in India Entry Routes

Investing in India

Automatic Route
General rule No prior permission required
Only information to the Reserve Bank of India within 30 days of inflow/ Issue of shares

Prior Permission (FIPB)

By exception Prior Government Approval needed Decision generally Within 4-6 weeks

A foreign company planning to set up business operations in India may: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

An Indian company may receive Foreign Direct Investment under the two routes as given under :

i. Automatic Route

FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the the Reserve Bank of India for receiving inward remittance and for the issue of shares to the nonresident investors.

The Indian company having received FDI either under the Automatic route or the Government route is required to Report in the Advance Reporting Form,
1. The details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category I Bank,

2. Together with copy/ ies of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances.

Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance. After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the required documents along with Form FC-GPR with the Regional Office concerned of the Reserve Bank of India within 30 days of issue of shares to the non-resident investors.

The form can also be downloaded from the Reserve Bank's website at the following address :
http://www.rbi.org.in/Scripts/BSViewFemaForms.aspx

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: i) Retail Trading (except single brand product retailing) ii) Atomic Energy iii) Lottery Business iv) Gambling and Betting

v) Business of Chit Fund

vi) Nidhi Company vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).

viii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005RB dated July 19, 2005).

ix) Trading in Transferable Development Rights (TDRs). x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

Changes in FDI policy [ 30th Jan, 2008]

Real Estate Sector Investments by Registered FIIs have been kept out of the purview of 3 yr. lock-in period under press note 2 (2005) applicable for FDI investments. Civil Aviation sector - FDI up to 100% via the automatic route for repair & maintenance firms, flying training institutes, technical training, helicopter services/ sea plane services. Commodity Exchanges FDI upto 26% & FII upto 23% in such exchanges with a 5% cap on single entity.

Credit Information companies [ CIC] 49% FDI cap subject to govt. & RBI approval. [ sub cap of 24% on FII investment within this 49% proposed]

 Petroleum Refining by PSUs FDI cap increased from 26% to 49% with prior permission from FIPB .

100% FDI allowed in the mining & mineral separation of titanium bearing minerals & ores. However the FDI permission will be allowed only if the mineral separation activity by a foreign company is accompanied by investment in local value addition units & transfer of technology.
Provisions of Press note 2( 2005) will not apply to industrial parks

Changes in the FDI Policy [ 2010]

Revised FDI policy would now permit 100 per cent foreign investment in maintenance, repair and overhauling (MRO) facilities for aircraft as also aviation training units

The new FDI policy has also done away with the norms of 26 per cent compulsory equity divestment in fuel and gas trading ventures the Cabinet also decided to exempt foreign investors from certain regulatory norms such as minimum capitalization and the three-year lock-in period.

 The new press note 6 follows enactment of the micro, small and medium enterprises development act, 2006, stipulating that foreign direct investment in micro and small enterprises (MSE) will be governed by sectoral caps and other regulations instead of the earlier 24 per cent ceiling on the foreign equity holding. Earlier, press note 18 of 1997 had stipulated that for foreign collaboration, maximum equity participation for small scale units was 24 per cent. As such, proposals for inducting foreign equity of more than 24 per cent was subject to the condition that the company would get itself de-registered as small-scale unit. Any foreign investment in excess of 24 per cent in an industrial unit, which manufactures items reserved for micro and small enterprises, will however require prior approval of the Foreign Investment Promotion Board. They will also require an industrial license subject to some general conditions, including export of at least 50 per cent of new or additional production over a period of three years

Changes in FDI policy in 2011

Exemption of construction-development activities in the education sector and in old-age homes, from the general conditionalities in the construction-development sector Inclusion of apiculture, under controlled conditions, under the agricultural activities permitted for FDI

Inclusion of basic and applied R&D on bio-technology pharmaceutical sciences/life sciences, as an industrial activity, under industrial parks
Notification of the revised limit of 26% for foreign investment in Terrestrial Broadcasting/ FM radio

Outward FDI
The 1992 policy removed the restriction on ownership participation and the Indian entity is free to decide on the exact level of ownership it wants to hold in overseas ventures. For a speedy and transparent approval system, the automatic clearance route under RBI was put in place for a specified investment limit. Under this route no prior approval from the regulatory authority such as the RBI or Government of India is required for setting up a JV/WOS abroad.

 The amount of direct investment under automatic approval was raised continuously from $2 million in 1992, $15 million in 1995, $100 million in 1999 and any amount up to 200 per cent of their net worth in 2005. Indian firms operating in the Special Economic Zone are allowed to make overseas investments up to any amount under the automatic route. Investments under the automatic route have been allowed in unrelated business from the investing firm and in new sectors such as agricultural activities.

Foreign Venture capital Investment

SEBI registered Foreign Venture Capital Investor has general permission from the Reserve Bank of India to invest in a Venture Capital Fund (VCF) or an Indian Venture Capital Undertaking (IVCU), in the manner and subject to the terms and conditions specified in Schedule 6 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. These investments by SEBI registered FVCI, would be subject to the SEBI regulation and sector specific caps of FDI.

FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, the Reserve Bank permits the FVCI to open a Foreign Currency Account and/ or a Rupee Account with a designated branch of an AD Category I bank.

The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.

AD Category I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered.

Foreign Venture Capital Investors typically choose to route their investments through a base in Mauritius because of a bilateral treaty known as the IndoMauritius Double Taxation Avoidance Agreement (DTAA) which India has with Mauritius. As per the treaty, capital gains arising from selling shares are exempted from taxation in case of a Mauritius tax resident. This exemption will apply irrespective of the sector in which the FVCI invests.

A Foreign Venture Capital Investor can invest all of its funds in a venture capital undertaking. However, if it is a domestic Venture Capital Fund, it cannot invest more than twenty five percent of its aggregate commitments in any one undertaking.