Who are Foreign Institutional Investors (FIIs)?

Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for
investments in India.
In order to act as a banker to the FIIs, the RBI has designated banks that are authorised to deal with them.
The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also
known as Offshore Derivatives.
Can FIIs invest in Indian companies?
Yes, FIIs can invest in the stocks and debentures of the Indian companies.
In order to invest in the primary and secondary capital markets in India, they have to venture through the portfolio
investment scheme (PIS).
Who all can get registered as FIIs?
There is a long list of entities that are eligible to get registered as FIIs such as pension funds, mutual funds, insurance
companies, investment trusts, banks, university funds, endowments, foundations, sovereign wealth funds, hedge funds
and charitable trusts.
In fact, asset management companies, investment managers, advisors or institutional portfolio managers set up and/or
owned by NRIs are also eligible to be registered as FIIs.
The nodal point for FII registrations is Sebi and hence all FIIs must register themselves with Sebi and should
also comply with the exchange control regulations of the central bank.
Apart from being allowed to invest in securities in primary and secondary markets, FIIs can also invest in mutual
funds, dated government securities, derivatives traded on a recognised stock exchange and commercial papers.
Why are FIIs important for Indian mkts?
FIIs are among the major sources of liquidity for the Indian markets.
If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy
investor sentiment for our markets.
The entry of FIIs in India has brought mixed consequences for our markets, on one hand they have improved the
breadth and depth of Indian markets and on the other hand they have also become the major sources of speculation in
testing times like these.
What are Participatory Notes (P Notes)?
Are instruments used by foreign funds and investors who are not registered with the Securities and Exchange Board of
India (Sebi) but are interested in taking exposure in Indian securities.
Participatory notes are issued where the underlying assets are securities listed on the Indian bourses.
Foreign institutional investors who do not wish to register with the Sebi but would like to take exposure in Indian
securities also use participatory notes.
Why are P-notes so much in the news these days?
Participatory notes have attracted significant market attention recently because of huge inflow of foreign funds into
Indian stock markets through this route.
Since the ultimate beneficiary of transactions carried out using participatory notes is not known to the market
regulator and the tax authorities, there is scope for misuse and tax avoidance.
How has the Sebi reacted to all this?
The Sebi is set to further tighten its foreign institutional investors regulations to ensure that participatory notes are not
misused by non-resident Indians, overseas corporate bodies controlled by Indians or by Indian promoters.
The Sebi board has taken an in-principle decision to restrict the issue of participatory notes by foreign institutional
investors to only regulated entities.