FII IN INDIA

Emerging economies benefit from FIIs since they provide finances and capital to enterprises in
developing countries. Citigroup (C), HSBC (ADR -HSBC), and Merrill Lynch (MER) are major
international corporations engaging in foreign institutional investment.

Who are Foreign Institutional Investors?

Foreign Institutional Investor (FII) means an institution established or incorporated outside India
which proposes to make investment in India. Hedge funds, mutual funds, pension funds, insurance
bonds, high-value debentures, and investment banks are examples of institutional investors.

SEBI (FPI) REGULATION 2019 – 2 (j) “foreign portfolio investor” means a person who has been
registered under Chapter II of these regulations and shall be deemed to be an intermediary in terms of
the provisions of the Act.

In 1996-97, several changes have been made to the SEBI (Foreign Institutional Investors)
Regulations, 1995 to diversify the FIIr base and to further facilitate inflow of FPI. The changes are as
follows:

i. The eligible categories of FIIs have been expanded to include university funds, endowments,
foundations, charitable trusts and charitable societies which have a track record of 5 years and
which are registered with a statutory authority in their country of incorporation or
establishment.
ii. Each FII or sub-account of an FII has been permitted to invest upto 10% of the equity of any
one company, subject to the overall limit of 24% on investments by all FIIs, NRIs and OCBs
iii. The 24% limit may be raised to 30% in the case of individual companies who have obtained
shareholder approval for the same
iv. FIIs have been permitted to invest in unlisted securities
v. FIIs have been allowed to invest their proprietary funds
vi. FIIs who obtain specific approval from SEBI have been permitted to invest 100% of their
portfolios in debt securities. Such investment may be in listed or to be listed corporate debt
securities or in dated government securities.

As a result, when FIIs acquire stocks and assets, the market becomes bullish and moves upward.
When people remove their funds from the markets, the opposite may occur. As a result, they wield
significant power over the market.

Regulation of FIIs
In exercise of the powers conferred under S. 46 (2) of FEMA, 1999 and in suppression of FEM
(TISPRO), Regulations, 2017 and FEMA (Acquisition and Transfer of Immovable Property in India)
2018, CG has made the FEM (Non-Debt Instruments) Rules, 2019. The RBI is vested with the
authority to administer this rules. SEBI acts as the nodal point in the registration of FIIs. Subsequent
to FEM (Non-debt Instruments) Rules, 2019 SEBI has repealed earlier regulation and formulated,
the SEBI (FPI) Regulations 2019.
Advantages of FII

 FIIs will boost capital inflows into the country.

 These investors prefer stock to debt in general. As a result, they will be able to sustain and
even improve the capital structures of the enterprises in which they participate.
 They have a favourable impact on financial market competition.
 FII contributes to capital market financial innovation.
 Asset managers and analysts professionally handle these entities. They generally boost the
country's capital markets and enhance the governance of the company to which they are
appointed by FII.

Disadvantages of FII

 A great inflow of Foreign Institutional Investment gives rise to high demand for local
currency. Hence, the Central Bank has to release more money into the market which causes
greater money flow and paves the way for inflation.
 These FIIs are responsible for the fortunes of the large corporations in which they invest.
However, their securities purchases and sales have a significant impact on the stock market.
Smaller businesses are dragged along for the ride.
 These FIIs are sometimes merely looking for short-term gains. Banks may experience a cash
crisis if they sell their investments.
 Because of its proclivity to escape at the first hint of economic difficulty, FPI is often referred
to as "hot money."

FDI & FII – DIFFERENCES

1. Foreign direct investment (FDI) occurs when a foreign company invests funds in a country or
economy to establish production or other facilities. FDI allows a foreign business some
authority over the company's activities.
When a foreign business acquires stock in a company on the stock exchanges, this is known
as foreign direct investment (FDI). As a result, FII would not grant the foreign business any
control over the corporation in this circumstance.
2. FDI is involved in direct production and is of a medium- to long-term nature. FII is a short-
term investment that is primarily made in the financial markets, and it is made up of FII.
3. FDI enables a degree of control in the company. FII does not involve obtaining a degree of
control in a company.
4. Long-term capital is brought in by FDI. Short-term capital is brought in through FII.

2019 REGULATION

Foreign Portfolio Investors (“FPI”) are now subject to a revised regulatory framework (the “2019
Regulations”). These regulations were introduced with a primary aim of easing the registration
process, liberalising the regulatory conditions, relaxing the compliance requirements and giving a
boost to foreign investment in India.

Registration as FPI

SEBI (Foreign Portfolio Investors) Regulations 2014 (“2014 Regulations”) gave certain exemptions
from registration to foreign institutional investors. 2019 Regulations have eliminated these
exemptions and require every person dealing in securities as FPI to mandatorily acquire a registration
certificate from the Designated Depository Participant (“DDP”).

Eligibility for registration as FPI

The 2019 Regulations have made substantial changes to the eligibility criteria to attract more
investors and to ease the process of investment. Some of the key changes made to the eligibility
criteria are:

Central Banks of Foreign Countries to be eligible to register as FPIs:

The 2014 Regulations granted eligibility to only those central banks which are members of Bank of
International Settlement (“BIS”). Through the 2019 Regulations, SEBI has recognised non-BIS
registered central banks as eligible entities for an FPI license.

Broad-Based Criteria:

Under the 2014 Regulations, a fund could not be registered as an FPI if it did not qualify the broad-
based criteria. The 2019 Regulations have done away with this requirement. Eliminating this
requirement will attract more investors which will eventually yield higher investments.

IFSC deemed to meet jurisdiction criteria

The 2019 Regulations provide that FPIs set up in the International Financial Services Centre (“IFSC”)
shall be deemed to satisfy the jurisdiction criteria under Regulation 4 for registering as an FPI. An
entity set up in an IFSC now qualifies to be registered as a FPI even though such an entity would be a
domestic entity.

Investment limit

The FPI regulations provide for a threshold on the total investment in each company by the FPI
including its investor group. Under the 2019 Regulations, the threshold has now been changed to 10
percent of the ‘fully diluted paid-up equity capital of a company. This increases the scope for
investments by FPIs in the equity of companies.

FEM(Non-debt Instruments) Rules, 2019

CHAPTER IV- INVESTMENT BY FOREIGN PORTFOLIO INVESTOR (FPI)

10. Investment by FPI - A FPI may make investments as under:- (1) A FPI may purchase or sell
equity instruments of an Indian company which is listed or to be listed on a recognised stock
exchange in India, and/or may purchase or sell securities other than equity instruments, in the manner
and subject to the terms and conditions specified in Schedule II.

SCHEDULE II - Investments by Foreign Portfolio Investors

a. Purchase or sale of equity instruments by Foreign Portfolio Investors

Purchase and sale of equity instruments.- A FPI may purchase or sell equity instruments of an Indian
company listed or to be listed on a recognised stock exchange in India subject to the following
conditions, namely:-
 (i) The total holding by each FPI or an investor group, shall be less than 10 percent of the
total paid-up equity capital on a fully diluted basis or less than 10 percent of the paid-up
value of each series of debentures or preference shares or share warrants issued by an
Indian company and the total holdings of all FPIs put together, including any other direct
and indirect foreign investments in the Indian company permitted under these rules, shall
not exceed 24 per cent of paid-up equity capital on a fully diluted basis or paid up value
of each series of debentures or preference shares or share warrants. The said limit of 10
percent and 24 percent shall be called the individual and aggregate limit, respectively.

(b) Purchase or sale of securities other than equity instruments by FPIs.-

(i) A FPI may purchase units of domestic mutual funds or Category III Alternative Investment Fund
or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund)
Regulations, 1996, which in turn invest more than 50 percent in equity instruments on repatriation
basis subject to the terms and conditions specified by the Securities and Exchange Board of India and
the Reserve Bank.

(ii) An FPI may purchase units of REITs and InVITs on repatriation basis subject to the terms and
conditions specified by the Securities and Exchange Board of India.

Conclusion
The Securities and Exchange Board of India (SEBI) has issued new FPI Regulations for 2019, which
replace the 2014 FPI Regulations. Because of its proclivity to escape at the first hint of economic
difficulty, FPI is often referred to as "hot money." FPI is less hazardous and more liquid than FDI.
However, slight economic turbulence will cause a downfall in the markets due to FIIs pulling out of
investments.