Foreign Institutional Investments in India

FII is an entity (individual or a foreign corporation) established or incorporated

outside India and which proposes to make investment in Indian securities. An FII has to be registered with the SEBI.
FII can invest in securities in primary and secondary markets in India through

Portfolio investment scheme. Which means FII can invest in equity shares and debentures through stock exchange on repatriation and non-repatriation basis. In case of making investments on repatriation basis they have to make payment either by way of inward remittance or by debit to the NRE/FCNR accounts. [repatriation: to return capital from foreign country to country of origin. Inward remittance: sending money from abroad either in foreign currency or by debit to NRE/NRO accounts. NRE A/c: Non Resident External Savings Account. It is maintained in Indian rupees. Both Principal and interest earned thereon are repatriable. FCNR A/c: Foreign Currency Non-Resident Account. It is maintained in foreign currency (Dollars) NRO A/c: Non-Resident Ordinary Account. Maintained in Indian rupees. Principal amount is not repatriable however, interest earned thereon is repatriable, after payment of applicable taxes.] FII includes: an institution established outside India as (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) a pension fund; mutual fund investment trust; insurance company or re-insurance company; an International or Multilateral Organisation or an agency thereof; an asset management company; investment manager or advisor; bank or institutional portfolio manager incorporated outside India and proposing to make investments in India on behalf of broad-based funds and its proprietary funds, if any; a trustee of a trust established outside India and proposing to make investments in India on behalf of broad-based funds and its proprietary funds, if any;

(ix)

(x)

university fund, endowments, foundations or charitable trusts or charitable societies. registered with SEBI. (Sub-account is any person (individual or a foreign corporation) resident outside India registered as a sub-account under the Regulations with SEBI and on whose behalf investments are made in India by an FII. )

FII can make investment in Indian Securities on behalf of Sub-account which are

For the purpose of granting certificate of registration, the SEBI takes into account the

following relevant matters: Applicants Track record, professional competence, financial soundness, experience, general reputation of fairness and integrity, whether or not the applicant is eligible/legally permissible to invest in Indian securities as per the parameters set out under the Regulations, whether the applicant has been in existence for a period of at least 5 years, etc.

Once the SEBI grants certificate of registration it shall be permanent unless suspended or cancelled.

Meaning of the terms Mutual Fund: Mutual fund is a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Pension Funds: Pension fund is a fund or scheme which provides retirement income. A pension fund is set up to collect monies from employer(s) and workers, invest the proceeds in securities and other assets, and pay benefits to retirees from the fund's accumulated resources. Reinsurance Company: Reinsurance is insurance that is purchased by an insurance company (insurer) from another insurance company (reinsurer) as a means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer. For example, assume an insurer sells one thousand policies, each with a $1 million policy limit. Theoretically, the insurer could lose $1 million on each policy totalling up to $1 billion. It may be better to pass some risk to a reinsurance company (reinsurer) as this will minimize the insurer's risk. Multilateral Organisations: Multilateralism is a term in international relations that refers to multiple countries working in concert on a given issue. International organizations, such as the United Nations (UN) and the World Trade Organization (WTO) are multilateral in nature.

Asset Management Company: A company that invests its clients' pooled fund into securities that match its declared financial objectives. Mutual funds, hedge funds and pension plans are all run by asset management companies. Broad-Based Funds: Broad-based funds means a fund established or incorporated outside India, which has at least 20 investors, with no single investor holding more than 49% of the shares or units of the fund. Provided that if the broad-based fund has an institutional investor (s), it shall not be necessary for the fund to have 20 investors and provided further that if the broad-based fund has an institutional investor who holds more than 49% of the shares in the fund, then such institutional investor must itself be a broad-based fund. Investment conditions: FIIs are allowed to invest in primary and secondary capital markets in India through the Portfolio Investment Scheme. Under this scheme An FII may invest only the following: Equity shares, debentures and warrants; Units of scheme floated by domestic mutual funds; Dated government securities (G-Sec); Derivative instruments; Commercial papers; and Security receipts. To give flexibility to FII, the restriction on FII investments (70:30) has been removed by SEBI in Oct 2008 and now therefore, FII may invest in equity or debt instruments as it may desire. However, there is one condition, according to which a single FII cannot invest more than 10% of the total paid up value of single tranche of the scheme of security receipts. And all the FIIs taken together cannot invest more than 49% of the total paid up value of single tranche of the scheme of security receipts. Rest all the conditions are now lifted giving more freedom to the FIIs to invest their funds in Indian securities. Meaning of the terms
in the securities in primary and secondary markets including shares, debentures

and warrants of the company, unlisted, listed or to be listed on a recognised stock exchange in India; [Debenture simply means a document acknowledging a loan made to the company and providing the payment of fixed rate interest on the sum borrowed until the debenture is redeemed i.e, until the payment of the principal sum to the debenture holder. Debentures are Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the

debentures. Debentures are normally secured / charged against the asset of the company in favour of debenture holder].
Units of Scheme floated by domestic mutual funds including Unit Trust of India,

whether listed on a stock exchange or not;

Dated Government securities, [Government securities (G-Secs): These are

sovereign (credit risk-free) coupon bearing instruments which are issued by the RBI on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon (interest rate) that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (up to twenty years). Note*: Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). The default events include a delay in repayments, restructuring of borrower repayments, and bankruptcy.
Derivatives traded on a recognised stock exchange [a derivative is a financial

instrument that has a value, based on the expected future price movements of the asset to which it is linkedcalled the underlying asset such as a share or a currency. There are many kinds of derivatives, with the most common being swaps, futures, and options.
Commercial paper, [Commercial Paper: an unsecured promissory note with a

fixed maturity of 1 to 270 days. Commercial Paper is a moneymarket security issued/sold by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay.
Security receipts.[Security receipt means a receipt or other security, issued by a

securitisation company or reconstruction company to any qualified institutional buyer (QIB) pursuant to a scheme. Procedure, Time frame and Charges for Registration An Application in Form A for the grant of certificate of registration has to be made to the SEBI and within three (3) months from the date of submission of such application the SEBI on being satisfied that the application is complete in all respects and the applicant is eligible for the grant of certificate shall grant a certificate to the applicant subject to the payment of fees.

An applicant shall pay to the Board a registration fee of US$ 5,000 for application of its own account accompanied by a registration fee of US$ 1,000 for registration of a sub-account (if any), at the time of initial registration as well as at the time of each renewal, within 15 days from the date of intimation from the Board.