FOREIGN INSTITUTIONAL INVESTORS

Flow of presentation
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How FII started in India? What does it mean? Who can be registered? How to apply? Eligibility criteria Registration process where FII can invest? taxation Need of FII Impact in Indian market Volatile in nature How they perform? FII vs FDI Stock market crash

How FII started in India?
 India opened its stock market to foreign investors in

September 1992  Since 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities.  This has become one of the main channels of FII in India for foreigners.  In order to trade in Indian equity market foreign corporations need to register with SEBI as Foreign Institutional Investor (FII).

WHAT IS FII?
 Foreign institutional investor means “an institution established

or incorporated outside India which proposes to make investment in India in securities  It is used most commonly in India to refer to outside companies investing in the financial markets of India.  International institutional investors must register with the Securities and Exchange Board of India (SEBI) to participate in the market  No controlling interest in the companies they invest in

WHO CAN BE REGISTERED AS AN FII?
 One who propose to invest their proprietary funds or on behalf of "broad based"

funds or of foreign corporates and individuals and belong to any of the under given categories can be registered for FII.

            

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, and Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

HOW TO APPLY
 An application for registration has to be made in Form A, the

format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address within 10 to 12 days of receipt of application. Address for application The Division Chief FII Division Securities and Exchange Board of India, 224, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai - 400 021. INDIA.

The eligibility criteria for applicant
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration
 Applicant should have track record, professional competence, financial

soundness, experience, general reputation of fairness and integrity;  The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor

 permission under the provisions of the Foreign

Exchange Regulation Act, 1973 (46 of 1973) by Reserve Bank of India for making investments in India as a FII

Eligibility
 The applicant is required to have the permission under the

  

provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00

FII – Entry…contd

Whether the applicant is

bank or institutional portfolio manager, established or incorporated outside India and proposing to make investments in India on behalf of broad based funds and its proprietary funds, 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

 Broad Based Funds:  a fund, established or incorporated outside India  At least twenty investors  No single individual investor holding more than forty-nine per cent of the shares or units of the fund

Registration process

Where FII can invest?
Current financial instruments are available for FII investments  Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India;  Units of mutual funds;  Dated Government Securities;  Derivatives traded on a recognized stock exchange ;  Commercial papers  security receipts

Pull Factors
 Domestic Pull factors - Reforms, strong

economic fundamentals, Higher Interest Rates, good valuations, market liquidity, size, low trading cost, information dissemination
 External Push factors : Global liquidity, lower

interest rates, higher risk appetite, lower relative growth

Higher FII flows - Impact

Taxation
Nature of Income Tax Rate:
1.
2. 3. 4.

Short-term capital gains30% Long-term capital gains10%. Corporate dividend declared after June 01, 1997Nil Interest Income20%

Short-term Capital Gain: Capital gain on sale of a security held for a period of less than one year is termed as short-term capital gain Long-term capital gain: Capital gain on sale of a security held for period more than one year is termed as Long-term capital gain

Why there is need of FII ?
 FII flows supplements and augmented

domestic savings and domestic investment without increasing the foreign debt of our country  Capital inflows to the equity market increase stock prices, lower the cost of equity capital and encourage the investment by Indian firms  The expert group opines that FII inflows have some savings like features

Impact Of FIIs On Indian Markets
 In the past four years there has been more than $41

trillion worth of FII funds invested in India.  This has been one of the major reasons on the bull market witnessing unprecedented growth with the BSE Sensex rising 221% in absolute terms in this span.  The present downfall of the market too is influenced as these FIIs are taking out some of their invested money.  For long-term value investors, there’s little because for worry but short term traders are adversely getting affected by the role of FIIs are playing at the present.

Why FII called good friend for good time – volatile in nature
 In the Indian stock markets movement of the

stock depends on the limited no of stocks  As FIIs purchase and sell these stocks there is a high degree of volatility in the stock market  If any set of development encourages outflow of capital that will increase the vulnerability of the situation in the stock market  In India there have been five such incidents in the recent past

How they perform
The degree of volatility can be attributed to the following reasons:  The increase in investment by FIIs increases stock indices the stock prices and encourages further investment . In this event when any correction takes place the stock prices decline and there will be pull out by the FIIs in a large numbers as earning per share declines  The FIIs manipulate the situation of boom in such a manner that they wait till the index rises up to a certain height and exit at an appropriate time. This tendency increases the volatility further

FII vs FDI
 Where FDI is a bit of a permanent nature, FII flies

away at the shortest political or economical disturbance  Entry and Exit is relatively very easy for an FII as compared to FDI. Entry difficult for FDI because of infrastructure problems. Exit more difficult because of archaic labor laws  have been blamed for exacerbating small economic problems in a country by making large and concerted withdrawals at the first sign of economic weakness.

FDI vs FII….
 FDI is more desirable than portfolio

investment because the investments there under are made directly in the capital of the company and not in the secondary market  FDI helps in increasing production and employment , FII does not affect production and employment .  FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in, in case of FDI it does’nt

FIIs as major cause of market crash ( Jan 21 to Jan 29 2008)
 The Indian capital markets have been left

reeling under the impact of liquidity crunch caused by multiple factors  It began with two mega issues of reliance power and future capital holdings, which drew out huge amounts of money from the market  FIIs bowed out from the capital market with more than Rs 10000 crore

Crises continue….
 As result , the market came crashing down and in two

days Jan. 21 and 22 the market tumbled 2284 points from the closing levels point of Friday (jan.18)  The highlight of this fortnight was historic intra-day shedding of more than 2300 points on BSE on January 22 when trading was halted once at 10 % lower  The market again fell to 13 % during the trading session

Total inflow and outflow of FII during Jan. 21 to 29
Date 21 Jan. 22 Jan 23 Jan 24 Jan 25 Jan 28 Jan 29 Jan Total Investment - 2425.7 - 2256.2 - 2499. - 1351.2 - 669.1 - 1513.4 - 285.1 - 9662

Last day Investment
Reporting Debt / date equity Gross Gross purchase sales (Rs ( Rs crore) crore) Net investme nt (Rs crore) NET investme nt us million $

3 April 2008

equity debt

2898.6 00

2918.7 00

-20.2 00

5.00 00

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