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Enhanced flows of equity capital FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap.
Managing uncertainty and controlling risks. FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals.
Improving capital markets. FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets.
Equity market development aids economic development. By increasing the availability of riskier long term capital for projects, and increasing firms¶ incentives to provide more information about their operations, FIIs can help in the process of economic development.
Improved corporate governance. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms¶ operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth. Disadvantages
Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created.
Problems for small investor: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the country¶s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the
downward path. the exchange rate for the country gaining the money strengthens. These investors scan the market for short-term. ³Hot money´ can have economic and financial repercussions on countries and banks. Entities: Share Entities who propose to invest their proprietary funds or on behalf of ³broad based´ funds (fund having more than twenty investors with no single investor holding more than 10 per cent of the shares or units of the fund) or of foreign corporate and individuals and belong to any of the under given categories can be registered for Foreign Institutional Investors (FII¶s). y Hot Money: ³Hot money´ refers to funds that are controlled by investors who actively seek short-term returns. This creates problems for the small retail investor. If money is withdrawn on short notice. while the exchange rate for the country losing the money weakens. high interest rate investment opportunities. the banking institution will experience a shortage of funds. When money is injected into a country. whose fortunes get driven by the actions of the large FIIs. y y y y y y y 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 y Asset Management Companies . y Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee.
Investment trusts are closed-endfunds and are constituted as public limited companies. debt) and insuring bonds (e. bonds. or other such securities. selling credit default swaps). Mutual funds: A mutual fund is a professionally managed type of collective investment scheme that poolsmoney from many investors and invests it in stocks. The net proceeds or losses are then distributed to the investors. FII activity in India gathered momentum mainly after the entry of CalPERS (California Public Employees¶ Retirement System). debt and commodities. A collective investment scheme is a way of investing money with others to participate in a wider range of investments than feasible for most individual investors. It manages pension and health benefits for employees.g. Every hedge fund has its own investment strategy that determines the type of investments and the methods of investment it undertakes. trades in securities and manages corporate mergers and acquisitions. in general.y y y y y y y y y Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Banks Foreign Government Agency Foreign Central Bank International or Multilateral Organization or an Agency thereof Some of the above mentioned types are described below: Pension funds: A pension fund is a pool of assets that form an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits. Many hedge funds . and to share the costs and benefits of doing so Investment banks: An investment bank is a financial institution that raises capital. retirees. The mutual fund will have a fund manager that trades the pooled money on a regular basis. a large US-based pension fund in 2004. and their families. short-term money market instruments. as well as providing advice on transactions such as mergers and acquisitions. Hedge funds. invest in a broad range of investments including shares. and that. Hedge funds: A hedge fund is an investment fund open to a limited range of investors that is permitted byregulators to undertake a wider range of investment and trading activities than other investment funds. Investment trust: An Investment trust is a form of collective investment . Investment banks profit from companies andgovernments by raising money through issuing and selling securities in capital markets (both equity. pays a performance fee to its investment manager. as a class.
external funds may be invested including funds of affiliated organizations and funds where the University is a beneficiary.investments in India were facilitated by global investors borrowing at near zero interest rates in Japan and investing the proceeds in High interest markets like India. University Fund: The purpose of investments of these funds is to establish an asset mix for each of the University funds according to the individual fund¶s spending obligations. This allows for the donation to have an impact over a longer period of time than if it were spent all at once. and liquidity requirements. liquidity. All types of life assurance and insurers pension plans. . They collect money from investors by way of floating various mutual fund schemes. Benevolent and philanthropic purposes are not necessarily charitable unless they are solely and exclusively for the benefit of public or a class or section of it. Endowment fund: It is a transfer of money or property donated to an institution. or any other purpose regarded as charitable in law. Asset Management Company: An asset management company is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. the investment company provides more diversification. and the principal remain intact in perpetuity or for a defined time period. They facilitate access to wide range and types of assets for different types of investors. objectives. and professional management consulting service than is normally available to individual investors. It consists of the University¶s endowed trust funds or other funds of a permanent or long-term nature. furtherance of religion. relief of poverty. They are wholly or partially exempt from almost all taxes. The diversification of portfolio is done by investing in such securities which are inversely correlated to each other. Charitable Trusts or Charitable Societies: A trust created for advancement of education. For a fee. promotion of public health and comfort. In addition. Insurance Funds: An insurance company¶s contract may offer a choice of unit-linked funds to invest in. Charitable trusts (unlike private or non-charitable trust) can have perpetual existence and are not subject to laws against perpetuity. Nominee Company: Company formed by a bank or other fiduciary organization to hold and administer securities or other assets as a custodian (registered owner) on behalf of an actual owner (beneficial owner) under a custodial agreement. usually with the stipulation that it be invested. both single premium and regular premium policies offer these funds.
1995. y The debt investment limit for FIIs in government debt in G-secs currently capped at $5 billion and cumulative investments under 2% of the outstanding stock of G-secs and no single entity can be allocated more than Rs. convertible portion of partially convertible debentures and tradable warrants) made by a Foreign Institutional Investor in India. per registered entity. Following are some of important regulations by SEBI and RBI: y The total investments in equity and equity related instruments (including fully convertible debentures. made on his own account and through his subaccounts.accounts. whether on his own account or on account of his sub. y USD 8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform while the remaining amount is allocated on a µfirst come first served¶ basis subject to a ceiling of Rs.249 cr.REGULATION:-FII Regulations in India: Investment by Foreign Institutional Investors (FII¶s) is regulated under SEBI (FII) Regulations. The amount was increased from USD 6 billion to USD 15 billion in March 2009. With regard to investments in the secondary market. 1000 cr of the government debt limits. SEBI states that: . y The cumulative debt investment limit for FII investments in Corporate Debt is USD 15 billion. should be at least seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in India.
Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. if he is making investments on his own behalf or in his name on account of his sub-account. in December 2007. y A Foreign institutional Investor or a sub-account having an aggregate of securities worth rupees ten crore or more. y The purchase of equity shares of each company by a Foreign Institutional Investor investing on his own account cannot exceed ten percent of the total issued capital of that company. or in the name of the sub-account. the investment on behalf of each such sub-account cannot exceed ten percent of the total issued capital of that company. However. Which stipulated that naked short selling was not permitted and settlement of securities sold short would be through a mechanism for borrowing of securities. y Securities have to be registered in the name of the Foreign Institutional Investor. All FIIs and their subaccounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. as on the latest balance sheet date. y y y y FIIs are not permitted to short sell equity shares which are in the caution list of RBI. An Indian Company can raise the 24% ceiling to the Sectoral Cap / Statutory Ceiling by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by their General Body. y Investment by individual FIIs cannot exceed 10% of paid up capital. y Short selling in securities is not allowed. abroad regulatory framework enabling short selling by FIIs was put in place. No transactions on the stock exchange can be carried forward.e.y The Foreign Institutional Investor is allowed to transact business only on the basis of taking and giving deliveries of securities bought and sold. stock option contracts and single stock futures contracts are: . can settle their only through dematerialised securities. Equity shares can be borrowed by FIIs only for the purpose of delivery into short sale. The FII position limits in a derivative contracts (Individual Stocks) y The FII position limits in a derivative contract on a particular underlying stock i. in case he is investing on behalf of the sub-account. Transaction of business in securities can be carried out only through stock brokers who has been granted a certificate by the Board. y For FIIs investing in the equity shares of a company on behalf of his sub-accounts.
per exchange. 100 Cr Or 15% of total open interest in the market in exchange traded interest rate derivative contracts. TBills and similar instruments. 50 Cr. This limit is applicable on open positions in all option contracts on any underlying index. 250 Crore or 15 % of the total open interest of the market in index futures. 250 Cr. FII Position Limits in Interest rate derivative contracts y At the level of the FII ± The notional value of gross open position of a FII in exchange traded interest rate derivative contracts is US $ 100 million.y For stocks in which the market wide position limit is less than or equal to Rs. FII Position limits in Index futures contracts FII position limit in all index futures contracts on a particular underlying index is Rs. FIIs can take exposure in equity index derivatives subject to the conditions that : Short positions in index derivatives (short futures. the FII position limit in such stock is 20% of the market wide limit. long calls and short puts) can not exceed (in notional value) the FII¶s holding of cash. whichever is higher. y For stocks in which the market wide position limit is greater than Rs. y In addition to the above. This limit is applicable on open positions in all futures contracts on a particular underlying index. 250 Crore or 15 % of the total open interest of the market in index options. whichever is higher. FII Position limits in Index options contracts FII position limit in all index options contracts on a particular underlying index is Rs. government securities. per exchange. . y At the level of the sub-account ± The position limits for a Sub-account in near month exchange traded interest rate derivative contracts is the higher of: Rs. In addition to the above. short calls and long puts) cannot exceed (in notional value) the FII¶s holding of stocks. the FII position limit in such stock is Rs. FIIs can take exposure in exchange traded in interest rate derivative contracts to the extent of the book value of their cash market exposure in Government Securities. 250 Cr. y y Long positions in index derivatives (long futures.
Introduction to Foreign Institutional Investors (FII¶s) and Indian economy: Since 1990-91. a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund.. . investment trust. and individuals. the Committee. viz. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. As a part of the reforms process. asset management company. Currently. such as Pension Funds etc. including shares. foundations. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments. charitable trusts. partnership firms. endowments. the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. institutional portfolio manager. 1992 with suitable restrictions. A Working Group for Streamlining of the Procedures relating to Foriegn Institutional Investors. recommended streamlining of SEBI registration procedure. constituted in April. While recommending their entry. the Government. investment trust. however did not elaborate on the objectives of the suggested policy. the then Finance Minister Dr. and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. Simultaneously. This recommendation was implemented in December 2003. entities eligible to invest under the FII route are as follows: y As FII: Overseas pension funds. inter alia. permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. charitable societies. public company. Manmohan Singh had announced a proposal to allow reputed foreign investors. private company. pension fund. While presenting the Budget for 1992-93. Market design in India for foreign institutional investors Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. The following entities are eligible to be registered as sub-accounts. 2003. the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer. nominee company. mutual funds. augmentation of foreign exchange reserves and globalization of the Indian economy. university funds. debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. Foreign Institutional Investors were permitted to invest in all the securities traded on the primary and secondary markets. bank. to invest in Indian capital market. for the first time. y As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. From September 14.
Before 1992. permission was also granted for making investments in the names of such clients. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs). They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: Business of chit fund Nidhi Company Agricultural or plantation activities Real estate business or construction of farm houses (real estate business does not include development of townships. Thereafter. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme. the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their µclients¶.FIIs registered with SEBI fall under the following categories: y Regular FIIs. inter-alia. y y y y y Trading in Transferable Development Rights (TDRs). These µclients¶ later came to be known as sub-accounts.those who are required to invest not less than 70 % of their investment in equityrelated instruments and 30 % in non-equity instruments. including individuals. Foreign Institutional Investments and investments in offshore funds.those who are permitted to invest only in debt instruments. While the guidelines did not have a specific provision regarding clients. Prohibitions on Investments: Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. who would be registered as FIIs in India. y 100 % debt-fund FIIs. intermediated through institutional investors. the Indian stock markets were opened up for direct participation by FIIs. only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. roads or bridges). The broad strategy consisted of having a wide variety of clients. They were allowed to invest in all the securities . construction of residential/commercial premises. While granting registration to the FII. Trends of Foreign Institutional Investments in India. The Government guidelines for FII of 1992 allowed. in the application form the details of clients on whose behalf investments were being made were sought. Hence. nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) to be registered as Foreign Institutional Investors. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. entities such as asset management companies.
traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. .