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Priyank final fii

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    Priyank final fii Priyank final fii Document Transcript

    • 1. INTRODUCTION The less well known Foreign Institutional Investors (FIIs) have been a key part of India's growth story this decade. The term FIIs is most commonly used to refer the companies that are established or incorporated outside India and are investing in the financial markets of India by registering themselves with the Securities & Exchange Board of India (SEBI). FIIs include overseas pension funds, mutual International Research Journal of Finance and Economics - Issue 41 (2010) 213 funds, investment trusts, asset management companies, nominee companies, banks, institutional portfolio managers, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10% of the shares or units of the fund). Foreign Institutional Investment is basically short-term in nature and mostly made in the financial markets. Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital markets in India through the Portfolio Investment Scheme (PIS) administered by the Reserve Bank of India (RBI). The FIIs have been playing a significant role in the process of capital formation and economic growth of the country. There has been a dramatic increase in net FII flows to India over the period 2003-2007, and especially over the bull rally that climaxed in January 2008 when the Sensex reached a lifetime high of 21,206.77 points. FIIs invested US$17 billion in Indian stocks in 2007 only. However, the onset of the recent global financial crisis saw FIIs pulling out a record $13 billion (Rs 67,470) in 2008, the largest outflows since India opened its doors to FIIs 15 years ago. The Economic Times has just reported that FII investment is up, with the Indian Stock Market taking in $13 billion so far in 2009 from foreign institutions.  Total FII investment in 2012 (till July 13, 2012) stood at US$ 9.82 billion wherein US$ 1.3 billion were infused during the first two weeks of July itself, according to data released by capital market regulator, the Securities and Exchange Board of India (Sebi)  During July 3-13, 2012, FIIs were gross buyers of shares worth Rs 24,626 crore (US$ 4.47 billion), while they sold equities amounting to Rs 17,270 crore (US$ 3.14 billion), translating into a net investment of US$ 1.3 billion  The foreign fund houses also infused US$ 309 million in the debt market in July 2012 taking the overall net investments by FIIs into debt markets to US$ 4.32 billion in 2012 (till July)  As on July 13, the number of registered FIIs in the country stood at 1,754 while the total number of sub-accounts was 6,358 KES SHROFF COLLEGE Page 1
    • 2, DEFINATION Foreign Institutional Investment As defined by the European Union Foreign Institutional Investment is an investment in a foreign stock market by the specialized financial intermediaries managing savings collectively on behalf of investors, especially small investors, towards specific objectives in term of risk, return and maturity of claims. SEBI’s defination of fiis:- Presently includes foreign pension funds, mutual funds, charitable / endowment / university funds, asset management companies and other money managers operating on their behalf in a foreign stock market. Foreign institutional investment is liquid nature investment, which is motivated by international portfolio diversification benefits for individuals and institutional investors in industrial country History of fii India opened its stock market to foreign investors in September 1992, and in 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. Initially, there were terms and conditions which restricted many FIIs to invest in India. But in the course of time, in order to attract more investors, SEBI has simplified many terms such as:-  The ceiling for overall investment of FII was increased 24% of the paid up capital of Indian company.  Allowed foreign individuals and hedge funds to directly register as FII.  Investment in government securities was increased to US$5 billion.  Simplified registration norms. KES SHROFF COLLEGE Page 2
    • 3. WHY FIIS REQUIRED? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. Following are the some advantages of FIIs.  It lowers cost of capital, access to cheap global credit.  It supplements domestic savings and investments.  It leads to higher asset prices in the Indian market and has also led to considerable amount of reforms in capital market and financial sector. Objectives  To get the knowledge of stock market.  To find out the relationship between the FIIs investment and stock market.  To know the volatility of BSE Sensex due to FIIs.  To study the behavioral pattern of FII in India during 2000 to 2010. Important terms to know about fiis:  Sub-account: Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII.  Designated Bank: Designated Bank means 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. KES SHROFF COLLEGE Page 3
    •  Broad Based Fund: Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors. If the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund. 4. EFFECT OF FII ON INDIAN ECONOMY Let us study the positive and the negative side of this rise of investment by FII one by one Positive impact It has been emphasized upon the fac that the stock market reform like improved market transparency, automation, dematerialization and regulation on reporting and disclosure standards were initiated because of the presence of the FIIs. But FII flows can be considered both as the cause and the effect of the stock market reforms. The market reforms were intiated because of presence of them and this in turn has led to increased flows.  Enhanced flows of equity capital FII are well known for a greater appetite for equity than debt in their asset structure. For example, pension fund in the united kingdom and united states had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Not only it can help in supplementing the domestic savings for the purpose of development projects like building economic and social infrastructure but can also help in growth of rate of investment, it boosts the production, employment and income of the host country.  Managing uncertainty and controlling risks FIIS promote financial innovation and development of hedging instrument. These because of their interest in hedging risls, are known to have contributed to the development of zero- coupon bonds and index future.FIIs not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals. FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of FIIs with a variety of risk-return preferences also help in dampening volatility.  Improving capital markets FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the availability of riskier long term capital for projects, and increasing firms’ incentives to supply more information about them, the FIIs can help in the process of economic development KES SHROFF COLLEGE Page 4
    • Negative impact If we see the market trends of past few recent years it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the factors are:  Potential capital outflows “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. “Hot money” can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.  inflation Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods.  Problem to small investors The FIIs profit from investing in emerging financial stock markets. 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, going up or down. 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, whose fortunes get driven by the actions of the large FIIs. KES SHROFF COLLEGE Page 5
    •  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.  Influence of fii on indian market Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). Portfolio investments brought in by FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the volatility in foreign institutional investment flows and its impact on the stock market and the Indian economy. Apart from the impact they create on the market, their holdings will influence firm performance. For instance, when foreign institutional investors reduced their holdings in Dr.Reddy’s Lab by 7% to less than 18%, the company dropped from a high of around US$30 to the current level of below US$15. This 50% drop is apparently because of concerns about shrinking profit margins and financial performance. These instances made analysts to generally claim that foreign portfolio investment has a short term investment horizon. Growth is the only inclination for their investment. Some major impact of FII on stock market:  They increased depth and breadth of the market.  They played major role in expanding securities business.  Their policy on focusing on fundamentals of share had caused efficient pricing of share KES SHROFF COLLEGE Page 6
    • 5. INVESTMENTS BY FIIS There are generally two ways to invest for FIIs. Equity investment 100% investments could be in equity related instruments or up to 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments) Equity investment route: In case of Equity route the FIIs can invest in the following instruments: A. Securities in the primary and secondary market including shares which are unlisted, listed or to be listed on a recognized stock exchange in India. B. Units of schemes floated by the Unit Trust of India and other domestic mutual funds,whether listed or not. C. Warrants Debt investment 100% investment has to be made in debt securities only 100% debt route: In case of Debt Route the FIIs can invest in the following instruments:  Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)  Bonds  Dated government securities KES SHROFF COLLEGE Page 7
    •  Treasury Bills  Other Debt Market Instruments. It should be noted that foreign companies and individuals are not be eligible to invest through the 100% debt route. 6. FOREIGN INVESTMENTS IN INDIA Introduction From 1992, foreign institutional investors (FIIs) have been allowed to invest in all securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the stock exchanges in in India and in schemes floated by domestic mutual funds. Foreign Institutional Investors (FIIs) registered with SEBI are eligible to purchase shares and convertible debentures issued by Indian companies under the portfolio investment scheme (PIS). In the Budget 2011-I2, the Government of India, for the first time, permitted qualified foreign investors (QFIs), who meet the KYC norms, to directly invest in Indian equity mutual fund (MF) schemes and in MF debt schemes that invest in infrastructure. It was for the first time that this new class of investors was allowed to directly participate in the Indian capital market. In January 2012, the Government expanded this scheme to allow QFIs to directly invest in Indian equity markets. In the budget 2012-13, Government announced its intention to permit QFIs to invest Foreign Institutional Investors (FIIs) The monthly trend in FII investments in 2011–2012 (depicted in Table 7-1) shows that the net FII investments were negative for certain months such as May 2011, August 2011, September 2011 and November 2011. In February 2012, the net investment of ` 352,280 million (US $ 7,164) by FIIs was the highest monthly net investment in 2011-12. The total net investment by FIIs in 2011-12 stood at US $ 18,923 million, and it dried up in the first half of 2012-13 at US $ 8,020 million. Period Gross Purchases (` mn) Gross Sales (` mn) Net Investment (` mn) Net Investment (US $ mn) Cumulative Net Investment (US $ mn) 2011-12 9,212,850 8,275,620 937,250 18,923 140,482 APR-12 504,250 553,220 -48,970 -927 139,555 KES SHROFF COLLEGE Page 8
    • MAY-12 598,000 565,780 32,220 597 140,152 JUN-12 634,750 622,950 11,800 209 140,361 JUL-12 675,200 538,560 136,640 2,463 142,824 AUG-12 599,510 488,820 110,690 1,996 144,820 SEP-12 829,694 630,857 198,840 3,682 148,502 AUG-SEP ‘12 3,841,397 3,400,172 441,234 8,020 148,502 Number of Foreign Institutional Investors (FIIs) The net addition in the SEBI-registered FIIs failed to keep up the momentum that was seen in 2007–2008 and 2008–2009, where 322 and 316 FIIs, respectively, were added. There was a net addition of 43 SEBI-registered FIIs in 2011–2012, which took their total number to 1,765 at the end of March 2012, compared to that of 1,722 at the end of March 2011. Foreign Institutional Investments—Equity and Debt In 2011–2012; the net FII investments in equity fell by 60.3 percent from last year to ` 437,380 million. The net investments by FIIs in the debt segment grew by 37.6 percent in 2011–2012 with a staggering all-time high of ` 217,750 million, compared to ` 363,190 in 2010–2011. During April–September, 2012, the FIIs made net investments worth ` 57,428 million in debt while net investments of ` 383,806 million were made in equity in the first half of 2012–2013. Year FIIs Net Investment in Equity (` mn) Net Investment in Debt (` mn) Net Investment in Equity (US $ mn) Net Investment in Debt (US $ mn) 2011-12 437,380 499,880 8,550 9,772 Apr-12 -11,091 -37,875 -203 -694 KES SHROFF COLLEGE Page 9
    • May-12 -3,471 35,691 -64 654 Jun-12 -5,013 16,818 -92 308 Jul-12 102,727 33,917 1,881 621 Aug-12 108,039 2,652 1,979 49 Sep-12 192,615 6,225 3,528 114 Apr-Sep '12 383,806 57,428 7,029 1,052 FII Turnover – Equity and Derivatives Equity Market The gross turnover of FIIs in the equity market segment on the Indian stock exchanges (the NSE and the BSE) accounted for ` 12,324,747 million in 2011–2012, which marked a year- on-year fall of 14 percent. The total turnover of the FIIs in the equity market constituted 17.7 percent of the total turnover on the BSE and the NSE in 2011–2012, an improvement from 15.3 percent recorded in 2010–2011. Table 7-3: Gross Turnover of FIIs in Equity Market Segment of NSE and BSE Year Buy Value (` mn) Buy Value (US $ mn) Sell Value (` mn) Sell Value (US $ mn) Gross Turnover of FIIs (` mn) Gross Turnover of FIIs (US $ mn) Total Turnover on Exchange s (` mn) Total Turnover on Exchange s (US $ mn) Percent of FII turnover to total turnover on Exchange s 2006-07 4,550,232 104,387 4,595,466 105,425 9,145,698 209,812 57,946,24 0 1,329,347 15.8 2007-08 8,329,655 208,398 8,705,790 217,808 17,035,44 5 390,811 102,515,3 40 2,564,807 16.6 2008-09 5,396,976 105,927 6,129,276 120,300 11,526,25 2 226,227 77,037,88 0 1,512,029 15.0 2009-10 6,568,931 145,524 6,181,265 136,935 12,750,19 7 282,459 110,336,6 40 2,444,321 11.6 2010-11 7,715,649 172,803 6,614,442 148,140 14,330,09 1 320,943 93,648,74 0 2,097,396 15.3 2011-12 6,269,806 122,561 6,054,941 118,361 12,324,74 7 240,922 69,558,31 3 1,359,716 17.7 Apr-Sep '12 2,878,897 52,727 2,555,099 46,797 5,433,995 99,524 30,669,35 8 561,710 17.7 KES SHROFF COLLEGE Page 10
    • Derivative Market The FII gross turnover in the F&O Segment of the NSE in 2011–2012 was ` 90,607,826 million, which was 14.5 percent of the turnover of the derivatives market (` 313,492,317 million) at the NSE. The share of the FIIs’ gross turnover increased to 16.2 percent of the derivatives turnover on the NSE during the first half of 2012–2013 KES SHROFF COLLEGE Page 11
    • Share of FIIs in NSE-Listed Companies The FII ownership of shares in the various sectors of NSE-listed companies is depicted in Table 7-6. At the end of March 2012, FIIs held the highest stake of 15.9 percent in the banking sector, followed by FMCG and finance (9.4 percent and 8.4 percent, respectively). The total percentage of shares held by FIIs across different sectors was 6 percent of the total shares of the companies listed on the NSE as at the end of March 2012. FII Share in Different Sectors of Companies Listed on NSE (in percent) Sectors Mar-12 Banks 15.9 Engineering 5.1 Finance 8.4 FMCG 9.4 Information Technology 7.3 Infrastructure 5.9 Manufacturing 4.8 Media & Entertainment 5.8 Petrochemicals 4.5 Pharmaceuticals 6.2 Services 5.4 Telecommunication 5.7 Miscellaneous 6.1 Total stake of FIIs in all the Sectors 6.0 KES SHROFF COLLEGE Page 12
    • Private Equity (PE) Investments in India Growth in PE deals in India The PE investments gained momentum in the late nineties with the growth of Indian IT companies and with the simultaneous global dot-com boom. Following the global IT boom, the Indian IT sector was viewed as a prominent funding opportunity, and consequently, saw a lot of venture capital coming into the country. According to the Grant Thornton Report, 2011, there were 373 PE deals worth US $ 5 billion (Chart 7-3) in 2012. However, in value terms, the PE deals showed a year-on-year decline of 18.1 percent. According to Emerging Market Private Equity Association (EMPEA), in India, the PE investment as a percent to GDP fell to 0.3 percent in 2011 from 0.4 percent in 2010. KES SHROFF COLLEGE Page 13
    • PE Fundraising / Investments in BRIC Countries According to the data reported by the Emerging Markets Private Equity Association (EMPEA) in August 2012, among the BRIC economies, China and Brazil were seen to be the most preferred destination for private equity players in 2011 compared to last year when India was a preferred destination. In 2011, fundraising by private equity in China and Brazil was US $ 16,619 million and US $ 7,079 million, respectively. However, Russia saw a decline in the PE fundraising by around 83.5 percent in 2010. Other than India, all countries saw a significant spurt in the PE fundraising in 2010 Private Equity Fund Raising in BRIC Countries (in US $ mn) Year Brazil Russia India China 2001 323 375 259 152 2002 270 100 142 105 2003 230 175 236 213 2004 480 200 706 311 2005 158 1,254 2,741 2,243 2006 2,098 222 2,884 4,279 2007 2,510 1,790 4,569 3,890 2008 3,589 880 7,710 14,461 2009 401 455 3,999 6,617 2010 1,078 75 3,268 7,509 2011 7,079 135 2,737 16,616 2012 (Jan - Jun) 675 82 1,225 3,977 KES SHROFF COLLEGE Page 14
    • In 2011, China saw an increase of 14.6 percent in PE investments, followed by Russia where PE investments rose by 4.2 percent. In contrast to the fundraising scenario in Brazil, the PE investments fell by 46.5 percent, while India saw a minor fall of 0.8 percent in investments. Private Equity Investments in BRIC Countries (in US $ mn) Year Brazil Russia India China 2001 281 77 320 1,575 2002 261 127 40 126 2003 321 113 456 1,667 2004 120 240 1,272 1,389 2005 474 240 1,377 2,991 2006 1,342 402 5,687 8,200 2007 5,285 805 9,905 9,458 2008 3,020 2,647 7,483 8,994 2009 989 217 4,011 6,288 2010 4,604 1,516 6,222 9,190 2011 2,461 1,579 6,172 10,529 2012 (Jan - Jun) 1,271 639 1,571 3,962 NRI Investments KES SHROFF COLLEGE Page 15
    • The NRI turnover data at the NSE is depicted in Table 7-9. The NRI turnover at the cash market of the NSE registered a year-on-year decline of 8.3 percent in 2011-2012,and stood at ` 97,386 million. In the derivatives market of the NSE, the total NRI turnover stood at ` 159,005 million in 2011-2012, a year-on-year growth of 43.2 percent over 2010–2011. NRI Turnover at NSE Year Cash Market Gross Turnover (` mn) Cash Market Gross Turnover (US $ mn) Derivatives Market Gross Turnover (` mn) Derivatives Market Gross Turnover (US $ mn) 2007-08 85,443 2,138 39,464 987 2008-09 50,161 985 30,190 593 2009-10 103,546 2,294 42,646 945 2010-11 106,180 2,378 111,052 2,487 2011-12 97,386 1,904 159,005 3,108 7. TOP FIIS IN INDIA KES SHROFF COLLEGE Page 16
    • Top 10 FIIs in india based on m-cap as on september 2005. KES SHROFF COLLEGE Page 17
    • KES SHROFF COLLEGE Page 18 Top 10 Flls In India Based On M-Cap As On Sept '05 Market Capitalization of Investments as in December 2005 in US $ Billion* HSBC 3.12 Morgan Stanley 2.42 Merrill Lynch 2.31 Goldman Sachs 2.26 CLSA 2.10 Aberdeen 1.96 Copthall 1.85 Citi 1.81 Genesis 1.80 Capital 1.71 *Based on holdings of more then 1% and above in Individual companies. Sources Exchanges and company web sites.
    • KES SHROFF COLLEGE Page 19 The top 10 investments by Foreign Institutional Investors (FII) in India Companies Investment value in Billion$ - December 05 Market cap* as on Jan 04 2006 Trailing PE as on January 04, 2006* Infosys 7.90 83790 38.6 Reliance Industries 6.30 129541 14.1 Bharti Tele 2.60 65198 29.7 HDFC 3.20 30962 27.4 ONGC 2.80 169108 11.5 Satyam 2.00 24752 29.3 HDFC Bank 2.30 22889 30.3 SBI 1.60 48322 10.5 BHEL 1.60 35086 30.3
    • 8. MARKET DESIGN IN INDIA FOR FOREIGN INSTITUTIONAL INVESTORS Entities eligible to invest under FII route: 1) As FII  an institution established or incorporated outside India as a pension fund, mutual fund, investment trust, insurance company or reinsurance company;  an International or Multilateral Organization or an agency thereof or a Foreign Governmental Agency, Sovereign Wealth Fund or a Foreign Central Bank;  an asset management company, investment manager or advisor, 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, 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  university fund, endowments, foundations or charitable trusts or charitable societies‘broad based fund” means a fund established or incorporated outside India, which has at least twenty investor with no single individual investor holding more hat fort-nine per cet of the shares or units of the fund . 2) As Sub-accounts: Sub-account refers to any person who is resident outside India on whose behalf investments are proposed to be made in India by a foreign institutional investor, and who is registered as a sub-account under the SEBI (FII) Regulations, 1995. The applicant for a sub-account can fall into any of the following categories:  Broad-based fund or portfolio that is broad-based, incorporated, or established outside India.  Proprietary fund of a registered foreign institutional investor.  Foreign individual who has a networth of not less than US $ 50 million, holds a valid passport of a foreign country for a period of at least fi ve years, holds a certifi cate of good standing from a bank, and is the client of the FII for a period of at least three years  Foreign corporate that has its securities listed on a stock exchange outside India, having an asset base of not less than US $ 2 billion and having an average net profi t of not less than US $ 50 million during the three fi anancial years preceding the date of application. KES SHROFF COLLEGE Page 20
    • A non-resident Indian shall not be eligible to invest as a sub-account. 3) Domestic Entities A domestic portfolio manager or a domestic asset management company shall also be eligible to be registered as FII to manage the funds of sub-accounts. Investment Restrictions An FII can invest only in the following:  Securities in the 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 schemes fl oated by domestic mutual funds including the Unit Trust of India, whether listed or not listed on a recognized stock exchange, or units of schemes fl oated by a Collective Investment Scheme  Dated government securities  Derivatives traded on a recognized stock exchange  Commercial papers  Security receipts  Indian Depository Receipts In case a foreign institutional investor or a sub-account holds equity shares in a company whose shares are not listed on any recognized stock exchange, and continues to hold the shares after the initial public offering and the listing thereof, such shares would be subject to a lock-in for the same period, if any is applicable to the shares held by a foreign direct investor placed in a similar position, under the policy of the central government relating to foreign direct investment that is currently in force.The total investments in equity and equity-related instruments (including fully convertible debentures, convertible portion of partially convertible debentures, and tradable warrants) made by an FII in India, whether on its own account or on account of its sub-accounts, should not be less than 70 percent of the aggregate of all the investments of the FII in India, made on its own account and on account of its sub-accounts. However, this is not applicable to any investment of the FII either on its own account or on behalf of its sub-accounts in debt securities that are unlisted or listed or to be listed on any stock exchange, if the prior approval of the SEBI has been obtained for such investments. Further, the SEBI, while granting approval for the investments, may impose such conditions as are necessary with respect to the maximum amount that can be invested in the debt securities by the FII on its own account or through its sub-accounts. A foreign corporate or individual shall not be eligible to invest through the 100 percent debt route. Investments made by FIIs in security receipts issued by securitization companies or asset reconstruction companies under the Securitization and Reconstruction of Financial KES SHROFF COLLEGE Page 21
    • Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above. No FII can invest in security receipts on behalf of its sub-accounts. FII Investment in secondary markets:  The SEBI regulations provide that a foreign institutional investor or sub-account can transact in the Indian securities market only on the basis of taking and giving delivery of securities purchased or sold. However, this does not apply to any transactions in derivatives on a recognized stock exchange.  Further, in December 2007, the SEBI permitted FIIs and sub-accounts to enter into short selling transactions only in accordance with the framework specified by SEBI.  No transaction on the stock exchange can be carried forward and the transaction in securities would be only through a stock broker who has been granted a certificate by SEBI.  They have also been allowed to lend or borrow securities in accordance with the framework specified by the SEBI in this regard.  The purchase of equity shares of each company by a, FII investing on its own account should not exceed 10 percent of the total issued capital of that company. For an FII investing in equity shares of a company on behalf of its sub-accounts, the investment on behalf of each such sub-account should not exceed 10 percent of the total issued capital of that company. In the case of foreign corporates or individuals, each of such sub-accounts should not invest more than five percent of the total issued capital of the company in which such investments are made.  A foreign institutional investor can issue or otherwise deal in offshore derivative instruments, directly or indirectly, wherein the offshore derivative instruments are issued only to those persons who are regulated by an appropriate foreign regulatory authority, and the ODIs are issued after compliance with ‘know your client’ norms. KES SHROFF COLLEGE Page 22
    • 9. GENERAL OBLIGATIONS AND RESPONSIBILITIES Certain general obligations and responsibilities relating to appointment of domestic custodians, designated bank, investment advice in publicly accessible media etc. have been laid down on the FIIs operating in the country in the SEBI, FII Regulations 1995. Appointment of domestic custodian  A Foreign Institutional Investor or a global custodian acting on behalf of the Foreign Institutional Investor, shall enter into an agreement with a domestic custodian to act as custodian of securities for the Foreign Institutional Investor.  The Foreign Institutional Investor shall ensure that the domestic custodian takes steps for  monitoring of investments of the Foreign Institutional Investor in India;  reporting to the Board on a daily basis the transactions entered into by the Foreign Institutional Investor;  preservation for five years of records relating to his activities as a Foreign Institutional Investor; and  furnishing such information to the Board as may be called for by the Board with regard to the activities of the Foreign Institutional Investor and as may be relevant for the purpose of this regulation  A Foreign Institutional Investor may appoint more than one domestic custodian with prior approval of the Board, but only one custodian may be appointed for a single sub- account of a Foreign Institutional Investor. Appointment of designated bank A Foreign Institutional Investor shall appoint a branch of a bank approved by the Reserve Bank of India for opening of foreign currency denominated accounts and special non-resident rupee accounts. Maintenance of proper books of accounts, records, etc.  Every Foreign Institutional Investor shall keep or maintain, as the case may be, the following books of accounts, records and documents, namely:  true and fair accounts relating to remittance of initial corpus for buying, selling and realising capital gains of investment made from the corpus;  accounts of remittances to India for investments in India and realising capital gains on investments made from such remittances;  bank statement of accounts;  contract notes relating to purchase and sale of securities; and KES SHROFF COLLEGE Page 23
    •  communication from and to the domestic custodian regarding investments in securities.  The Foreign Institutional Investor shall intimate to the Board in writing the place where such books, records and documents will be kept or maintained. Preservation of books of accounts, records, etc. Subject to the provisions of any other law, for the time being in force, every Foreign Institutional Investor shall preserve the books of accounts, records and documents specified in regulation 18 for a minimum Information to the Board period of five years. Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or documents in relation to his activities as a Foreign Institutional Investor as the Board or as the Reserve Bank of India may require. Allocation of Funds: The SEBI registered FII should restrict allocation of its investment between equities and debt in the Indian Capital Market in the ratio 70:30. The FII may form a 100 % debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits if any stipulated by SEBI in this regard. Private Placement with FIIs SEBI registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer/private placement subject to the ceiling of 10% of the paid up capital of the Indian company for individual FII/sub account and 24% for all FIIs/sub accounts put together. Indian company is permitted to issue such shares provided that:  In the case of public offer, the price of shares to be issued is not less than the price at which shares are issued to residents and  In the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines issued by the erstwhile Controller of Capital issues as applicable. Purchases can also be made of Partially Convertible debentures, Fully Convertible debentures, Rights/Renunciations/Warrants/Units of Domestic Mutual Fund Schemes Risk management forward cover & Cancellation and Rebooking Authorized Dealer Banks can offer forward cover to FIIs to the extent of total inward remittance of liquidated investment. Rebooking of cancelled forward contracts is allowed up KES SHROFF COLLEGE Page 24
    • to a limit of 2 % of the market value of the entire investment of FIIs in equity and/or debt in India. The limit for calculating the eligibility for rebooking will be based upon market value of the portfolio as at the beginning of the fi nancial year (April-March). The outstanding contracts have to be duly supported by underlying exposure at all times. The AD Category –I bank has to ensure that (i) that total forward contracts outstanding doesn’t exceed the market value of portfolio and (ii) forward contracts permitted to be rebooked doesn’t exceed 2 % of the market value as determined at the beginning of the fi nancial year. The monitoring of forward cover is to be done on a fortnightly basis. FII Position Limits In Derivatives Contracts The SEBI-registered FIIs are allowed to trade in all exchange-traded derivative contracts on the stock exchanges in India, subject to the position limits as prescribed by the SEBI from time to time. The clearing corporation monitors the open positions of the FII/sub- accounts of the FII for each underlying security and index, against the position limits specifi ed at the level of the FII/sub-accounts of the FII, respectively, at the end of each trading day. Monitoring of investment position by RBI The Reserve Bank of India (RBI) monitors the investment position of FIIs in listed Indian Companies, reported by Custodian Banks on a daily basis in Form LEC(FII).  Caution List When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2 % below the applicable limit. Reserve Bank issues a notice to all the designated branches of an Authorised Dealer banks stating that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. (For companies with paid-up capital of Rs.1,000 crore and above, the trigger limit is 0.5 % below the applicable limit). RBI gives case-by case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on fi rst-come-fi rst served basis.  Ban List Once the shareholding by FIIs/NRIs reaches the overall ceiling/sectoral cap/statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FIor NRI can purchase the shares of the company under the Portfolio Investment Scheme. Margin Requirements SEBI registered FIIs/sub-accounts are allowed to keep with the trading member/clearing member amount suffi cient to cover the margins prescribed by the exchange/Clearing House and such amounts as may be considered to meet the immediate needs. Reporting of FII Investments An FII may invest in a particular share issue of an Indian company under either the FDI scheme or the Portfolio Investment Scheme. The AD Category-I banks have to ensure that KES SHROFF COLLEGE Page 25
    • the FIIs who are purchasing the shares by debit to the Special Non-Resident Rupee Account report these details separately in the Form LEC (FII). Investment by FIIs under Portfolio Investment Scheme The RBI has given general permission to SEBI-registered FIIs/sub-accounts to invest under the Portfolio Investment Scheme (PIS). i. The total holding of each FII/sub-account under this scheme should not exceed 10 percent of the total paidup capital or 10 percent of the paid-up value of each series of convertible debentures issued by the Indian company. ii. The total holding of all the FIIs/sub-accounts put together should not exceed 24 percent of the paid-up capital or the paid-up value of each series of convertible debentures. This limit of 24 percent can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned, by passing a resolution of its Board of Directors, followed by a special resolution to that effect by its General Body. iii. A domestic asset management company or portfolio manager who is registered with the SEBI as an FII for managing the funds of a sub-account can make investments under the scheme on behalf of:  A person resident outside India who is a citizen of a foreign state; or  A corporate body registered outside India. iv. However, such investment should be made out of the funds raised, collected, or brought from outside through a normal banking channel. The investments by such entities should not exceed 5 percent of the total paid-up equity capital or 5 percent of the paid-up value of each series of convertible debentures issued by an Indian company, and should also not exceed the overall ceiling specifi ed for FIIs. KES SHROFF COLLEGE Page 26
    • 9. PARTICIPATORY NOTES Participatory notes are instruments used by foreign funds / investors who are not registered with the SEBI but are interested in taking exposure in Indian securities Participatory notes are generally issued overseas by the associates of India-based foreign brokerages.3 FIIs that do not wish to register with the SEBI but would like to take exposure in Indian securities also use the participatory notes. Brokers buy or sell securities on behalf of their clients on their proprietary account and issue such notes in favour of such foreign investors. Participatory Notes are simple derivative instruments that investors not registered in India or Mauritius use to trade in Indian markets. These investors place their order through brokerage houses that have Mauritius-based FII accounts. The brokerage houses then repatriate the dividends and capital gains back to these entities. In this case, the broker acts like an exchange: it executes the trade and uses its internal accounts to settle the trade. They keep the investor’s name anonymous. That is why capital market regulators dislike P-notes. KES SHROFF COLLEGE Page 27
    • 10. SURVEY REPORT 1) Are u aware of FII activity? Frequency Percent Yes 35 70.0 No 15 30.0 Total 50 1000.0 KES SHROFF COLLEGE Page 28
    • Conclusion: Above graph indicates that 35 person say Yes and 15 person say No out of 50 person. 2) To what extend does FII investment affect buying decision of stocks? Frequency Percent Large extend 28 10.0 Moderate has 7 36.0 Total 35 70.0 missing 15 30.0 Total 50 100.0 KES SHROFF COLLEGE Page 29
    • KES SHROFF COLLEGE Page 31 3) What according to you are the benefit of fii investment? Frequency Percent Improved liquidity 24 48.0 Economic growth 8 16.0 Stability of the markets 1 2.0 Influencecing decesion s of domestic investors 2 4.0 Total 35 70.0 missing 15 30.0 Total 50 100.0
    • 4. What in your opinion are the problems associated with FII investment in India? Frequency Percent Increase in stock price 5 10.0 Volatility 18 36.0 Inflation 3 6.0 KES SHROFF COLLEGE Page 32
    • Change in interest rate 3 6.0 increase in paricipatory notes 6 12.0 total 35 70.0 missing 15 30.0 Total 50 100.0 5) The framework for regulation of fii must modified? KES SHROFF COLLEGE Page 33
    • KES SHROFF COLLEGE Page 34 Frequency Percent Strongly agree 7 14.0 Agree 14 28.0 Neutral 10 20.0 Disagree 2 4.0 Strongly disagree 2 4.0 Missing 15 30.0 Total 50 100.0
    • 6) Which form of foreign inflow is better for the country? Frequency Percent FDI 12 24.0 FII 9 18.0 export 14 28.0 Missing 35 70.0 Total 50 100.0 KES SHROFF COLLEGE Page 35
    • 7) Is indian stock market affected by fii investment? Frequency Percent Yes 35 70.0 No - - Total 35 70.0 Missing 15 30.0 Total 50 1000.0 KES SHROFF COLLEGE Page 36
    • 8) Do u think that govt reform need to be support domestic retailer so that they face foreign competition? Frequency Percent Yes 31 62.0 No 4 8.0 total 35 70.0 Missing 15 30.0 Total 50 1000.0 11. CONCLUSION Foreign Institutional Investors are very much needed for India. They are necessary for the continuous development of our country. The economy of our country has shown a better performance and has led to the economic growth due to the FIIs. Though there are threats from the Foreign Institutional Investments we should be positive and see the future of our country. In last 50 years, India has developed a strong and professionally competent technical, marketing and business manpower in Livestock production and Information Technology. This is an added advantage over many developing countries of Asia and Africa. Availability of competent and comparatively low-cost manpower in India is a great asset which is attracting foreign investors. As a result of stagnancy or in some cases reduction in agricultural production, demand for several inputs like machinery and equipment, feeds, pharmaceuticals etc. has reduced in some countries of America and Europe. It is therefore not surprising that these business enterprises have focused their attention to emerging Asian markets, particularly India and China. India is in a better position as it has a strong technical manpower base and large number of English speaking population KES SHROFF COLLEGE Page 37
    • 13. BIBLIOGRAPHY  www.sebi.gov.in  www.nse-india.com  www.indianindustry.com  www.rbi.org.in  www.indiainfoline.com  www.bseindia.com KES SHROFF COLLEGE Page 38