FOREIGN INSTITUTIONAL INVESTOR IN

INDIA
FIIs -
• India opened its stock market to foreign investors in 1993
• FIIs are those institutional investors which invest in the assets
belonging to a different country.
• FIIs are allowed to invest in primary and secondary capital market
in through portfolio investment scheme i.e. acquire
shares/debentures of Indian company through the stock exchanges
in India
• Plays a very important role in any economy.
• These are usually big companies such as investment banks, mutual
funds, insurance companies etc. 
• They are the largest non-promoters share holders in the Indian
market.
Source: economictimes
WHO CAN BE REGISTERED AS AN FIIs?
Broad based" funds or of foreign corporate 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

Source: economictimes
IS FIIS & FDI SIMILAR ? (1/2)
A lot of ambiguity surrounds around FIIs & FDI
FII
• FIIs refer to outside companies
investing in the financial markets
of India.
• International institutional
investors must register with the
Securities and Exchange Board of
India to participate in the market
FDI
• FDI refers to an investment made by
a company in one country, into a
company based in another country.
• The investing company may make its
overseas investment in a number of
ways - either by setting up a
subsidiary or associate company in
the foreign country, by acquiring
shares of an overseas company, or
through a merger or joint venture
Source: IIFL
IS FIIS & FDI SIMILAR ? (2/2)

• In the Budget 2013-14, Mr Chidambaram said that foreign

investors with less than 10% stake in a particular stock will be
considered as FII, and more than 10% stake as FDI.

“To remove the ambiguity that prevails on

what is FDI and what is FII, I propose to follow
the international practice and lay down a
broad principle that, where an investor has a
stake of 10% or less in a company, it will be
treated as FII and, where an investor has a
stake of more than 10%, it will be treated as
FDI,”

Source: IIFL
FII & FDI ARE PART OF FOREIGN INVESTMENT

Foreign Investment in India

Investment in
Institutional
listed/unlisted Investment by NRIs/
investment in listed
companies (except ADR & GDR person of Indian
companies through
through route of stock origin
stock exchanges
exchanges)

FIIs
PE/ Foreign
FDI
Venture
WHY THERE IS NEED OF FII ?

• 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

• Provide access to cheap Global Credit

EFFECT OF FII ON INDIAN ECONOMY

• Enhanced flows of equity • Potential capital outflows

capital inflation
• Managing uncertainty and • Problem to small investors
controlling risks
• Adverse impact on exports
• Improving capital markets
• Create Asset Bubbles
• Enhance trade volume and
market capitalization • FII’s may increase Inflation
• Access to cheap global credit
REGULATIONS

24% Of paid up capital –ceiling for overall investment for

FIIs

20% In case of PSUs On march 7,2014 – RBI RBI

raises FII purchase limit in
Manappuram Finance to 49%

The ceiling can be raised upto sectoral cap/statutory ceiling, subject to

approval of board, passing special revolutionary

Source: RBI
MONITORING FIIs
• RBI monitors the ceiling of FIIs on daily basis
• For effective monitoring, RBI has fixed cut-off points that are 2%
less than actual ceiling
• Once the aggregate purchase of equity shares of FIIs reach the cut
off mark, the RBI cautions all banks as not to purchase any more
equity shares on behalf of FIIs without approval of RBI
• Details are sent to RBI by banks
• On receipt of proposal, RBI gives clearance till investment reach to
its stated limit

Source: RBI
FII INVESTMENT IN INDIA
200000
Investment in Rs. Cr.
150000

100000

50000

0
9 9 3 9 9 4 9 9 5 9 9 6 9 9 7 9 9 8 9 9 9 0 0 0 0 0 1 00 2 00 3 0 0 4 0 0 5 0 0 6 0 0 7 0 0 8 0 0 9 0 1 0 0 1 1 0 1 2 0 1 3
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2
-50000

-100000 • Exponential growth of 6000% from 1993 to 2013

• Maximum outflow in 2008, as market was all time high during this year
when investor realized the maximum return on investment

Source: SEBI
INVESTMENT BY FIIs
Generally two ways to invest for FIIs – Equity & Debt
Equity investment route:
• Securities in the primary and secondary market including shares which are unlisted,
listed or to be listed on a recognized stock exchange in India.
• Units of schemes floated by the Unit Trust of India and other domestic mutual
funds,whether listed or not.
• Warrants

Debt investment route:

• Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)
• Bonds
• Dated government securities
• Treasury Bills
• Other Debt Market Instruments
INVESTMENT BY FIIs – EQUITY & DEBT
SEBI released regulations for FII investment in Indian debt markets. The debt limit was kept
at $1-1.5 bn. FIIs were allowed to invest in debt markets via the 70: 30 route equity
1995 investments shall not be less than 70% of total funds and maximum 30% of investment was
allowed in debt.

SEBI allowed a new category of FIIs – 100% debt FII The overall debt limit was maintained at
1996
$1-1.5 bn for FII investments routed through both kinds of categories

Finance Minister in his Budget Speech for 1998-99 announced FII investment to be allowed
1998
in unlisted securities. Thereby, SEBI permitted FII investment in unlisted debt securities.

the Government debt limit was increased from $1 bn to $1.75 bn. The debt limit for 70:30
2004 was raised from $100 mn to $200 mn. a separate debt ceiling was kept for corporate bonds
of $ 500 mn. This was over the $1.75 billion ceiling for government bonds

-
2012 GoI increased the FII debt limit from $5 bn to $ 10 bn in the Government Bond (long term)
category and also raised corporate bond limit

Current FII limit: G-Sec: US$25bn, corporate debt: US $51bn

INVESTMENT BY FIIs – EQUITY & DEBT
15

10 Investment in Rs. Cr.

0
199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201

-5
Equi
ty
Debt
-10
• FIIs still prefer equity over debt, due to high return on investment

Source: SEBI
STAKE OF FIIS – SECTOR WISE BREAKUP

3.42
Service (financial & non financial)
4.93
Computer
9.49
29.23
Telecommunication

Housing & Real estate

10.75
Automobile

Power & Oil

6.73
11.43 Metallurgical Industries

Petroleum & Natural gas

9.68 14.3
Chemicals
IMPACT OF FIIs ON INDIAN MARKETS
• 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

• FIIs was major cause of market crash from Jan 21 to Jan 29 2008, when
they pulled more than Rs. 10,000 Cr, from capital market

• 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)
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
MAJOR AREAS AFFECTED BY FII’S
Stock Market:
They wield a great influence on Indian Markets due to their
sheer capacity to purchase and sell in huge numbers.

Exchange Rate:
Investing in India will bring dollars into the country thus
strengthening rupee in terms of dollar

Exports and Imports :

As FII lead to strengthening of currency our Exports become
uncompetitive.

Inflation:
Huge FII in country leads to demand for Rupee resulting in RBI pumping
in more Rupee in the market. This leads to excess liquidity in the market
causing Inflation.
FII EFFECTS
• There have been significant FII outflows of about US$ 14.6 billion during May 27
to August 9, 2013 which extended sharp downwards pressure on exchange rate.

• FIIs on a net basis disinvested US$ 8.3 billion of their bond portfolio and US$ 2.1
billion of their equity portfolio in cash markets in India. The resultant net outflow
brought the rupee under immense pressure.

• As part of the global bond sell-off, FIIs also pulled out money from Indian
government bonds, which contributed to the hardening of yields. As a result, the
10-year G-sec generic yield hardened from 7.12% on May 24, 2013 to 7.45%

• The withdrawal of FIIs, especially from the debt market, due to currency
depreciation and narrowing yield differential affected CAD.
FII’S IN INDIA TODAY
• Since 12 Feb 2014 FII’s invested Rs 7000 Crore ($1.1 billion dollar) in Indian
stocks.

• In DEBT markets(so far) FII’s have purchased fixed income paper worth nearly
$5billion.

• Flows into equities muted at $820 million (Rs 4850 crore).

• After investing $1.1billion in Indian stocks(since 12 Feb 2014) .Benchmark

equities have rallied nearly 6%.i.e It pushed SENSEX to 21525.14 (all time high)
on March 6. Nifty to 6401.

• Rupee strengthened from 62.21 to a dollar on Feb 11 to 61.11 currently(march

7).

• In calendar year 2013, the Indian markets had seen FII inflow of nearly $20 Bn
 FUTURE OF FII’S IN INDIA
• Macro economic prospects are improving , i.e CAD narrowing and
fiscal deficit expected to stay in control.
• Better policies and improved earnings are leading to more +ve
outlook for Indian equities. (eg BNP Paribas)
• Easing of Geographical tensions has helped improve sentiment of
global investor.
• Episodic volatility may provide attractive entry points for global
investors in coming months.
• Equity Inflows should pick up once the INR stabilises.
• Recent pick up in government spending should also revive growth
and market liquidity.
THANK YOU