Foreign Institutional Investor (FII) is used to denote an investor - mostly of t he form of an institution or entity, which invests money in the
financial market s of a country different from the one where in the institution or entity was ori ginally incorporated. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in. In countries like India, statutory agencies like SEBI have prescribed norms to r egister FIIs and also to regulate such investments flowing in through FIIs. In 2 008, FIIs represented the largest institution investment category, with an estim ated US$ 751.14 billion. FEMA norms includes maintenance of highly rated bonds(collateral) with security exchange Q1. Who is a Foreign Institutional Investor (FII)? Ans. FII means an entity established or incorporated outside India which propose s to make investment in India. Q2. What is a sub-account? Ans. Sub-account includes those foreign corporations, foreign individuals, and i nstitutions, funds or portfolios established or incorporated outside India on wh ose behalf investments are proposed to be made in India by a FII. Q3. What is a Designated Bank? Ans. Designated Bank means any bank in India which has been authorized by the Re serve Bank of India to act as a banker to FII. Q4. Who is a Domestic Custodian? Ans. Domestic Custodian means any entity registered with SEBI to carry on the ac tivity of providing custodial services in respect of securities. Q5. What is a Broad Based Fund? Ans. Broad Based Fund means a fund established or incorporated outside India, wh ich has at least twenty investors with no single individual investor holding mor e than 10% shares or units of the fund. Provided that if the fund has institutional investor(s) it shall not be necessar y for the fund to have twenty investors. Provided further that if the fund has an institutional investor holding more tha n 10% of shares or units in the fund, then the institutional investor must itsel f be broad based fund. FII REGISTRATION Q6. Who can get registered as FII? Ans. Following entities / funds are eligible to get registered as FII: 1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Funds 7. Endowments 8. Foundations 9. Charitable Trusts / Charitable Societies Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 1. Asset Management Companies 2. Institutional Portfolio Managers 3. Trustees 4. Power of Attorney Holders Q7. What are the parameters on which SEBI decides FII applicants’ eligibility? Ans. a. Applicant’s 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)
b. whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is f iled with SEBI c. Whether the applicant is a fit & proper person. Q8. Which form needs to be filled in when applying for FII registration? Ans. "Form A" as prescribed in SEBI (FII) Regulations, 1995. Q9. Which documents need to be sent with "Form A"? Ans. a. Certified copy of relevant clauses (clauses permitting the stated activi ties) of Memorandum of Association, Article of Association or Article of Incorpo ration. b. Audited financial statement and annual report for the last one year (per iod covered should not be less than twelve months Q10. How much is the fee for registration as FII? Ans. US $ 5,000. Q11. When is the registration fee payable? Ans. At the time of submitting the application for registration. Q12. What is the mode of payment? Ans. Demand Draft in favour of "Securities and Exchange Board of India" payable at New York Q13. How many days it takes to get registered as FII? Ans. SEBI generally takes seven working days in granting FII registration. Howev er, in cases where the information furnished by the applicants is incomplete, se ven days shall be counted from the days when all necessary information sought, r eaches SEBI. In cases where the applicant is bank and subsidiary of a bank, SEBI seeks commen ts 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. Q14. What is the registration process for FII? Ans. Please contact us for registration. Q15. What is the validity period of FII registration? Ans. The FII registration is valid for 5 years. After expiry of 5 years, the reg istration needs to be renewed. Q16. What is the process of renewal? Ans. Same as initial registration. Along with "Form A" and all the relevant docu ments, the applicants are required to fill in additional form (Annexure 1) while applying for renewal. Q17. Is there any renewal fee? Ans. Yes, US $ 5,000 needs to be paid for renewal of FII registration. Q18. When the application for renewal should be submitted Ans. Three months before expiry of the FII registration. Q19. What are 100 % debt FIIs/sub-accounts, and what is the process for their re gistration? Ans. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities onl y. The procedure for registration of FII/sub-account, under 100% debt route is s imilar to that of normal funds besides a clear statement by the applicant that i t wishes to be registered as FII/sub-account under 100% debt route. Q20. Where the application for FII registration should be sent? Ans. The FII registration application should be sent to: Securities and Exchange Board of India Division of FII & Custodian Mittal Court "B" Wing, First Floor 224, Nariman Point Mumbai 400 021 India Note: In case the applicant is a ‘Bank’ or "Subsidiary of a Bank" then the appli cation form and relevant documents need to be submitted in duplicates. SUB-ACCOUNT REGISTRATION
Q21. Who can get registered as sub-account? Ans. a. Institution or funds or portfolios established outside India, whether in corporated or not. b. Proprietary fund of FII. c. Foreign Corporates d. Foreign Individuals Q22. Who need to apply for sub-account registration? Ans. The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign the Sub-account application form. Q23. Which form needs to be filled when applying for sub-account registration? Ans. "Annexure B" to "Form A" (FII application form). Q24. What documents need to be sent with Annexure A? Ans. None Q25. How much is the fee for sub-account registration? Ans. US $ 1,000 Q26. When is the registration fee payable? Ans. At the time of submitting the application. Q27. What is the mode of payment? Ans. Demand Draft in the name of "Securities and Exchange Board of India" payabl e at New York Q28. How many days it takes to get a sub-account registered? Ans. SEBI generally takes three working days in granting FII registration. Howev er, in cases where the information furnished by the applicants is incomplete, th ree days shall be counted from the days when all necessary information sought, r eaches SEBI. Q29. What is the validity period of sub-account registration? Ans. The validity of sub-account registration is co-terminus with the FII regist ration under which it is registered. Q30. What is the process of renewal of sub-account? Ans. Same as initial registration. Q31. Is there renewal fee? Ans. Yes, US $ 1,000 Q32. Can OCBs / NRIs permitted to get registered as FII/sub-account? Ans. No, they are not permitted. POST-REGISTRATION PROCESSES Q33. What is the procedure in case the FII/sub-account changes its name? Ans. If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the change. It should also mention the reasons for t he name change and give an undertaking that there has been no change in benefici ary ownership. In case of name change of FII, the request should be accompanied with documents from home regulator and registrar of the company evidencing approval of name cha nge, and the original FII registration certificate issued by SEBI should be sent back for necessary amendment. Q34. What is the procedure for transferring a sub-account from one FII to anothe r? Ans. The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration that it is authorized to invest on behalf of t he Sub-account. The transferor FII should also submit a No-objection certificate . Q35. What is the procedure for change of domestic custodian? Ans. The FII should send a request, along with no-objection certificate from exi sting domestic custodian, for change in domestic custodian. Q36. Can FII/sub-account registration be cancelled on request? Ans. Yes, the FII would be required to send a request for cancellation of its re gistration or registration of its Sub-account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it / Sub-account h as nil cash / securities holdings.
Q37. What if the FII does not renew its/sub-account’s registration? Ans. The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in Indian securities markets. If it is not int erested in renewal but has certain residual assets, it can apply for disinvestme nt in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines specified in this regard. INVESTMENT OPPORTUNITIES Q38. Which financial instruments are available for FII investments? Ans. a. Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized sto ck exchange in India; b. Units of mutual funds; c. Dated Government Securities; d. Derivatives traded on a recognized stock exchange; e. Commercial papers. Q39. What are the investment limits on equity investments by FII/sub-account? Ans. a. FII, on its own behalf, shall not invest in equity more than 10% of tota l issued capital of an Indian company. b. Investment on behalf of each sub-account shall not exceed 10% of total i ssued capital of an India company. c. For the sub-account registered under Foreign Companies/Individual catego ry, the investment limit is fixed at 5% of issued capital. These limits are within overall limit of 24% / 49 % / or the sectoral caps a pre scribed by Government of India / Reserve Bank of India. Q40. What are the investment limits on debt investments by FII/sub-account? Ans. The FII investments in debt securities are governed by the policy if the Go vernment of India. Currently following limits are in effect: o For FII investments in Government debt, currently following limits are a pplicable: 100 % Debt Route US $ 1.55 billion 70 : 30 Route US $ 200 million Total Limit US $ 1.75 billion o For corporate debt the investment limit is fixed at US $ 500 million. Q41. What other investment limits are there? Ans. Normal FII (70:30 Route) 100% Debt FII Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all investments. 100% investment shall be made in debt se curity only. Q42. In whose name should the securities be registered? Ans. a. In the name of FII when making investments on its own behalf b. In the name of sub-account when making investments on behalf of Sub-acco unt c. In the name of "FII a/c sub-account" when making investments on behalf o f Sub-account. DERIVATIVES POSITION LIMITS Q43. What are the restrictions on investment in derivatives? Ans. b. The FII position limits in a derivative contracts (Individual Stocks) The FII position limits in a derivative contract on a particular underlying stoc k i.e. stock option contracts and single stock futures contracts are: o For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position limit in such stock shall be 20% of the market wide limit. o For stocks in which the market wide position limit is greater than Rs. 2 50 Cr, the FII position limit in such stock shall be Rs. 50 Cr. b. FII Position limits in Index options contracts
FII position limit in all index options contracts on a particular underlying ind ex shall be Rs. 250 Crore or 15 % of the total open interest of the market in in dex options, whichever is higher, per exchange. This limit would be applicable on open positions in all option contracts on a pa rticular underlying index. c. FII Position limits in Index futures contracts: FII position limit in all index futures contracts on a particular underlying ind ex shall be Rs. 250 Crore or 15 % of the total open interest of the market in in dex futures, whichever is higher, per exchange. This limit would be applicable on open positions in all futures contracts on a p articular underlying index. In addition to the above, FIIs shall take exposure in equity index derivatives s ubject to the following limits: 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 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.
Best Answer - Chosen by Voters Foreign direct investment (FDI) is defined as a long-term investment by a foreig n direct investor in an enterprise resident in an economy other than that in whi ch the foreign direct investor is based. The FDI relationship, consists of a par ent enterprise and a foreign affiliate which together form a transnational corpo ration (TNC). In order to qualify as FDI the investment must afford the parent e nterprise control over its foreign affiliate. The UN defines control in this cas e as owning 10% or more of the ordinary shares or voting power of an incorporate d firm or its equivalent for an unincorporated firm. Types of FDI based on the motives of the investing firm FDI can also be categorized based on the motive behind the investment from the p erspective of the investing firm: * Resource Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In so me cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap l abor in Southeast Asia and Eastern Europe. * Market Seeking: Investments which aim at either penetrating new markets or mai ntaining existing ones. FDI of this kind may also be employed as defensive strat egy; it is argued that businesses are more likely to be pushed towards this t ype of investment out of fear of losing a market rather than discovering a new o ne. This type of FDI can be characterized by the foreign Mergers and Acquisit ions in the 1980’s by Accounting, Advertising and Law firms. * Efficiency Seeking: Investments which firms hope will increase their efficienc y by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resou rce or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Typically, this type of F DI is mostly widely practiced between developed economies; especially those with in closely integrated markets (e.g. the EU).
Foreign Investments in Indian Capital Markets Foreign companies/Individuals are permitted to invest in equity shares traded in Indian Stock markets if they are registered as a Foreign Institutional Investor (FII) or if they have a sub account in India. Investment in Indian securities is also possible through the purchase of Global Depository Receipts (GDR), American Depository Receipts (ADR), Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers, which are listed, traded and settled overseas and mainly denominated in US dollars. Foreign Investors (whether registered as a FII or not) can also invest in Indian securities outside the FII route. Such investments require case-by-case approva l from the Foreign Investment Promotion Board in the Ministry of Industry and Re serve Bank of India (RBI), or only by the RBI depending on the size of the inves tment and the industry in which this investment is to be made. A FII investment in Indian capital market is more than US $ 11,000 million. Indi an Stock market with a market capitalization of over US $ 165,000 million has be en a major attraction for investors all over the world, thanks to the new econom y boom and excellent functioning of Stock Exchanges in the Country. The combined daily turnover of National Stock Exchange (NSE) and The Stock Exchange, Mumbai (BSE) is in excess of US $ 30,000 million. The screen base trading of NSE and BS E provides transparency in execution of orders, settlement & trade guarantees an d elimination of risk of bad deliveries (in case of dematerialized shares, which constitute over 90% of trade). Terms & Conditions for grant of registration as FII: FII Registration is a cumbersome process, which involves registration with Secur ities and Exchange Board of India (SEBI) and approval from RBI. The terms and co nditions for grant of registration is as below: * The applicant is required to have a track record for a period of atleast 5 years with professional competence, financial soundness, experience, general reputati on of fairness and integrity. * The applicant should be regulated by an appropriate Foreign Regulatory Authority such as a securities regulator, Central Bank or Government Ministry, Agency or Department. Registration with authorities, which are responsible for incorporati on, is not adequate to qualify as FII. * The applicant is required to have the permission under the provisions of Foreign Exchange Regulation Act, 1973 (FERA) from RBI. * The applicant has to satisfy the “fit and proper” guidelines issued by SEBI. * The applicant’s activities and its registration with their regulatory authority should enable it to be categorized in the eligible categories as mentioned above . * The applicant has to appoint a local custodian and enter into an agreement with
a custodian. Besides it also has to appoint a designated bank to route its trans actions. * In addition to the above, SEBI would also consider whether the grant of registra tion is in the interest of the development of the securities market.
Do you know the difference between FDI and FII?
What is foreign investment? Any investment flowing from one country into another is foreign investment. A simple and commonly-used definition says financial investment by which a p erson or an entity acquires a lasting interest in, and a degree of influence ove r, the management of a business enterprise in a foreign country is foreign inves tment. Globally, various types of technical definitions –– including those from IMF and OECD –– are used to define foreign investment. How does the Indian government classify foreign investment? The Indian government differentiates cross-border capital inflows into vario us categories like foreign direct investment (FDI), foreign institutional invest ment (FII), non-resident Indian (NRI) and person of Indian origin (PIO) investme nt. Inflow of investment from other countries is encouraged since it complements domestic investments in capital-scarce economies of developing countries, India opened up to investments from abroad gradually over the past two decades, espec ially since the landmark economic liberalisation of 1991. Apart from helping in creating additional economic activity and generating employment, foreign investm ent also facilitates flow of technology into the country and helps the industry to become more competitive. Why does the government differentiate between various forms of foreign inves tment? FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. 1. Direct investment targets a specific enterprise, with the aim of increas ing its capacity/productivity or changing its management control. Direct investm ent to create or augment capacity ensures that the capital inflow translates int o additional production. In the case of FII investment that flows into the secon dary market, the effect is to increase capital availability in general, rather t han availability of capital to a particular enterprise. 2. Translating an FII inflow into additional production depends on producti on decisions by someone other than the foreign investor — some local investor ha s to draw upon the additional capital made available via FII inflows to augment production. 3. In the case of FDI that flows in for the purpose of acquiring an existin g asset, no addition to production capacity takes place as a direct result of th e FDI inflow. Just like in the case of FII inflows, in this case too, addition t o production capacity does not result from the action of the foreign investor – the domestic seller has to invest the proceeds of the sale in a manner that augm ents capacity or productivity for the foreign capital inflow to boost domestic p roduction. 4. There is a widespread notion that FII inflows are hot money — that it co mes and goes, creating volatility in the stock market and exchange rates. While
this might be true of individual funds, cumulatively, FII inflows have only prov ided net inflows of capital. FDI tends to be much more stable than FII inflows. 5. Moreover, FDI brings not just capital but also better management and gov ernance practices and, often, technology transfer. The know-how thus transferred along with FDI is often more crucial than the capital per se. No such benefit a ccrues in the case of FII inflows, although the search by FIIs for credible inve stment options has tended to improve accounting and governance practices among l isted Indian companies. According to the Prime Minister’s Economic Advisory Committee, net FDI inflo ws amounted to $8.5 billion in 2006-07 and is estimated to have gone up to $15.5 billion in 07-08. The panel feels FDI inflows would increase to $19.7 billion d uring the current financial year. FDI up to 100% is allowed in sectors like text iles or automobiles while the government has put in place foreign investment cei lings in the case of sectors like telecom (74%). In some areas like gambling or lottery, no foreign investment is allowed. According to the government’s definition, FIIs include asset management comp anies, pension funds, mutual funds, investment trusts as nominee companies, inco rporated/institutional portfolio managers or their power of attorney holders, un iversity funds, endowment foundations, charitable trusts and charitable societie s. FIIs are required to allocate their investment between equity and debt instru ments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt i nstruments. The government allows greater freedom to FDI in various sectors as c ompared to FII investments. However, there are peculiar cases like airlines wher e foreign investment, including FII investment, is allowed to the extent of 49%, but FDI from foreign airlines is not allowed. What are the restrictions that FIIs face in India? FIIs can buy/sell securities on Indian stock exchanges, but they have to get registered with stock market regulator Sebi. They can also invest in listed and unlisted securities outside stock exchanges if the price at which stake is sold has been approved by RBI. No individual FII/sub-account can acquire more than 1 0% of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company, unless the Indian Company raises the 24% ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution and a special res olution to that effect by its general body in terms of RBI press release of Sept ember 20, 2001 and FEMA Notification No.45 of the same date. In addition, the go vernment also introduces new regulations from time to time to ensure that FII in vestments are in order. For example, investment through participatory notes (PNs ) was curbed by Sebi recently. 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. More from Edits & Columns Power efficiency and energy security Using artificial neural networks Power effi ciency and energy security Using artificial neural networks Russia’s military-in dustrial complex How is relation between FDI and FII? In: Business, Personal Finance [Edit categories] [Improve] 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. . .