Foreign Institutional Investment (FII

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A Presentation by: Apoorv Srivastav Alok Kavthankar Nishanth Joseph Pankaj Kumar Bothra Priyojeet Kumar 08 34 52 53 61

Road Map for Presentation

Background

What is FII

Distinction between FDI & FII

FII Guidelines

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Background: India Transformed !!
…Yesterday  Slow rate of growth  Bureaucratic  Protected and slow  Small consumer markets  Weak infrastructure …Today  Strong macro economic fundamentals  Encouraging foreign investment  Outsourcing destination  Growing consumerism

 Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the World!
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YESTERDAY’S INDIA
• A major development in our country post 1991 has been liberalization of the financial sector, especially that of capital markets.

Our country today has one of the most prominent and followed stock exchanges in the world. Further, India has also been consistently gaining prominence in various international forums.

legal. technical and managerial manpower Cost-effective and skilled labour Abundance of natural resources Large English speaking population Well-established legal system with independent judiciary Developed banking system and vibrant capital market Well developed accountancy.ADVANTAGES INDIA HAS TO OFFER • • Stable democratic environment over 60 years of independence Large and growing market • • • • • • • World class scientific. actuarial and consultancy profession 5 .

charitable/endowment/university funds etc. 2. 3. Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange makes investments on behalf of foreign investors.What is FII ? Foreign Institutional Investment (FII): 1. FII is Foreign Institutional Investment: It is investment made by foreign Mutual Funds in the Indian Market. FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. mutual funds. referred to as “subaccounts”.” 4. 6 . as well as asset management companies and other money managers operating on their behalf. “SEBI’s definition of FIIs presently includes foreign pension funds.

Entry and exist is relatively easy 7.Distinction between FDI and FII FDI FII 1. Entry and exit is relatively difficult 7. It is long-term investment 2. Direct impact on employment of labour and wages 10.Abiding interest in mgt. No direct impact on employment of labour and wages 10.Fleeting interest in mgt. FII is eligible for capital gain 8. Tends to be speculative 9. 7 6. Leads to technology transfer. FII flows into the secondary market 6. Aim is to increase capital availability 1. FDI is eligible for profits of the company 8. . Investment in financial assets 3. Does not tend be speculative 9. FDI flows into the primary market 4. access to markets and management inputs 5. FII results in only capital inflows 5. It is generally short-term investment 2. Aim is to increase enterprise capacity or productivity or change management control 4. Investment in physical assets 3.

Overview 8 .

What are Foreign Investors looking for? Factors affecting foreign investment •Rate of interest •Speculation •Profitability •Costs of production •Economic conditions •Government policies •Political factors • Good projects • Demand Potential • Revenue Potential • Stable Policy Environment/Political Commitment • Optimal Risk Allocation Framework 9 .

FIIs may invest in: securities in the primary and secondary markets (shares. debentures. warrants of listed and unlisted companies) units issued by domestic mutual funds dated Government securities derivatives traded on a recognized stock exchange commercial paper debt instruments – provided a 70/30 equity/debt ratio is maintained .

foreign individuals and foreign corporates can register as a sub.Foreign Institutional Investors • FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up share capital of an Indian company This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing a board resolution/shareholder resolution FIIs can purchase shares through open offers/private placement/stock exchange Shares purchased by FII through arrangement stock exchange cannot be sold through a private • • • • Proprietary funds. Separate limits of 10% / 5% is available for the sub-accounts FIIs can raise money through participatory notes or offshore derivative instruments for investment in the underlying Indian securities FIIs in addition to investment under the FII route can invest under FDI route • • 11 .account and invest through the FII.

When the rest of the investors invested in these scrips. They were the first ones to identify the potential of Indian technology stocks. . they exited the scrips and booked profits. • FIIs are the trendsetters in any market. • Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla system.• FII which based the pressure on the rupee from the balance of payments position and lowered the cost of capital to Indian business.

shall not invest in equity more than 10% of total issued capital of an Indian company. currently following limits are applicable: • • • 100 % Debt Route 70 : 30 Route Total Limit US $ 1.75 billion 13  For corporate debt the investment limit is fixed at US $ 500 million.  These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India.Investment limits on Equity & Debt investments by FII  FII.  Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. .  For the sub-account registered under Foreign Companies/Individual category. investment limits on debt investments by FII  For FII investments in Government debt. on its own behalf.55 billion US $ 200 million S $ 1. the investment limit is fixed at 5% of issued capital.

PARTICIPATORY NOTES What is P-Note: PNs are instruments issued by registered FIIs to overseas investors. Sebi decided that FIIs must report P-Notes details. rarely hold a stock for a long time. Reporting by FIIs P-Notes issued . The FII merely investing for themselves through P-Notes – Quarterly basis FIIs who do not issue PNs but have trades – File 'Nil' undertaking on a quarterly basis.7th day of the following month. 14 . Why is P-Note: More than 30% of foreign institutional money coming into India is from hedge funds. which thrive on arbitrage opportunities. P-Notes are issued to the real investors on the basis of stocks purchased by the FII. To monitoring investments through P Notes. Hedge funds. who wish to invest in the Indian stock markets without registering themselves with SEBI.

Advantages & Disadvantages .

• Improving capital markets. Also. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over foreign debt. but also improves the alignment of asset prices to fundamentals. it not only enhances competition in financial markets. • Managing uncertainty and controlling risks. • FII inflows help in financial innovation and development of hedging instruments. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap.Advantages • Enhanced flows of equity capital • FIIs have a greater appetite for equity than debt in their asset structure. .

who. and increasing firms’ incentives to provide more information about their operations.. Also. • By increasing the availability of riskier long term capital for projects.Advantages contd. and enhances productivity growth. Bad corporate governance makes equity finance a costly option. . • Improved corporate governance. FIIs can help in the process of economic development. institutionalization increases dividend payouts. • FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. • FIIs constitute professional bodies of asset managers and financial analysts. • Equity market development aids economic development. improve corporate governance. by contributing to better understanding of firms’ operations.

Disadvantages • Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee. . whose fortunes get driven by the actions of the large FIIs. 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. going up or down. 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. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor.

• 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. These investors scan the market for short-term. .. while the exchange rate for the country losing the money weakens. • Hot Money: “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. “Hot money” can have economic and financial repercussions on countries and banks. the exchange rate for the country gaining the money strengthens. When money is injected into a country. If money is withdrawn on short notice. high interest rate investment opportunities. the banking institution will experience a shortage of funds.Disadvantges contd.

Recent Developments 20 .

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compared to `324. 2011.102.56 percent recorded in 2009–2010.330.101.380 in 2009–2010. as the net FII investments in equities during the period amounted to `22.• After experiencing a record equity investment of `1. which marked a year-on-year growth of 12. • • .090. The total turnover of the FIIs in the equity market constituted 15.200 million in the first half of 2010–2011.30 percent of the total turnover on the BSE and the NSE in 2010–2011.39 percent. the net inflow of investments by FIIs remained flat at `1. an improvement from 11. during April–September. compared to the net investments of `637.207 million in 2010–2011. The impressive trend has come to a halt.190 million.091 million in 2010–2011.790 million in debts compared to `250.96 percent in 2010–2011 with a staggering all-time high of ` 363. Foreign Institutional Investments in Equity and Derivatives The gross turnover of FIIs in the equity market segment on the Indian stock exchanges (the NSE and the BSE) accounted for `14. The net investments by FIIs in the debt segment grew by 11.200 million in 2009–2010. The momentum seemed to be sluggish in the first half of 2011–2012. the FIIs made net investments worth ` 64.160 million attracted in the first half of 2010-2011.

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FII Investments & Market Reaction While strong inflow of funds from foreign institutional investors (FIIs) has been a reason to . it could turn into a nightmare and if the global investors make a sudden exit can send the bourses cheer crashing. 29 .

2010 120000 100000 80000 60000 40000 20000 0 -20000 -40000 -60000 -80000 2005 2006 2007 2008 2009 2010 Rs. in (Crores) FII Investment Vs Sensex FII average holding in BSE 500 30 . in (Crores) BSE Sensex Rs.FII Inflows Vs Sensex FII Investment from 2005 .

100. • A positive contribution of the FIIs has been their role in improving the stock market infrastructure.• FIIs have started playing a critical role in the movement of stock prices.000 crores. The assets under management of domestic mutual funds have crossed Rs. . • The increase in the volume of activity on stock exchanges with the advent of on screen trading coupled with operational inefficiencies of the former settlement and clearing system led to the emergence of a new system called the depository System. • The FIIs are playing an important role in bringing in funds needed by the equity market.

10000 15000 20000 35000 5000 -5000 0 -15000 -10000 25000 30000 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Net Investment by FII (USD Mn) in India 2007-08 2008-09 NET INVESTMENT(USD MN) 2009-10 .

FCCBs. GDRs. • This figure is around 5 times the average annual inflows witnessed from 1993-94 to 1997-98 and from 1999 to 2002 and more than 20 times the average annual inflows during 1997-99 and 2002-03 .Foreign Institutional Investors • The Indian capital market was opened up for foreign institutional investors (FIIs) in 1992 • Tap international capital markets through ADRs. ECBs and NRIs • FII investment with it averaging around $9599 million a year during 2003-05.

crossing 10.000 in February 2006 and 15.FIIs…. .000 in July 2007.267 million. in the period thereafter till about December 2005. • FIIs have a compounding effect on the size and nature of the firm in that the firm becomes in a position to acquire other firms and hence grow even more. the addition to this value was of $25. It broke through the 6000 level by January 2004 before crossing the 7000 mark in June 2005. • While cumulative net FII inflows into India from early 1990s to end of March 2003 amounted to $15.804 million. • At the same time the Sensex had fallen to about 3000 crossed 4000 and 5000 respectively by August and November 2003.

• Simplified registration norms.To Attract FIIs • The ceiling for overall investments of FIIs was increased 24% of the paid up capital of Indian company. • Investment in government securities was increased to US $ 5 Billion. . • Allowed foreign individuals and hedge funds to directly register as FIIs.

• Global liquidity into the equity markets • Raised the price-earning ratio • Built our reputation in the international community • Instrumental in capital formation .Encouraged FIIs because..

and institutions. funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.Terms related to FII • Sub-account Includes those foreign corporations. • Designated bank Any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII. . • Domestic custodian Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. foreign individuals.

The Reserve Bank of India's general permission to FIIs will also hold good for five years. . • FIIs can invest in all securities traded on the primary and secondary markets.Regulations • The SEBI is the nodal agency for dealing with FIIs. and they have to obtain initial registration with SEBI. • FIIs can repatriate capital gains. • The SEBI's initial registration is valid for five years. Both will be renewable. dividends. incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares.

• 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. • The cumulative debt investment limit for FII investments in Corporate Debt is USD 15 billion.Investment Regulations • The total investments in equity and equity related instruments should be at least seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in India. .

• A Foreign institutional Investor or a sub-account having an aggregate of securities worth rupees ten crore or more. can settle their only through dematerialised securities. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital .• The Foreign Institutional Investor is allowed to transact business only on the basis of taking and giving deliveries of securities bought and sold. as on the latest balance sheet date. • Investment by individual FIIs cannot exceed 10% of paid up capital.

kpmg.com • www.indiastudychannel.com • Google Images .nseindia.Sources • www.com • www.

it is India". French philosopher 42 . Romain Rolland."If there is one place on the face of this Earth where all the dreams of living men have found a home when man began the dream of existence.

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