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 $13 billion so far in 2009 from foreign
Total FII investment in 2012 (till July 13, 2012) stood at US$ 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
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
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Foreign Institutional InvestmentAs 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
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
Allowed foreign individuals and hedge funds to directly register as FII.
Investment in government securities was increased to US$5 billion.
Simplified registration norms.
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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.
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.
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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
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
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
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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.
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.
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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
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5. REVIEW OF LITRATURE
Stanley Morgan (2002) has examined that FIIs have played a very important role in
building up India’s forex reserves, which have enabled a host of economic reforms.
Secondly, FIIs are now important investors in the country’s economic growth
domestic sentiment. The Morgan Stanley report notes that FII strongly influence
short-term market movements during bear markets. However, the correlation between
returns and flows reduces during bull markets as other market participants raise their
involvement reducing the influence of FIIs. Research by Morgan Stanley shows that
the correlation between foreign inflows and market returns is high during bear and
weakens with strengthening equity prices due to increased participation by other
Agarwal, Chakrabarti et al (2003) have found in their research that the equity return
has a significant and positive impact on the FII. But given the huge volume of
investments, foreign investors could play a role of market makers and book their
profits, i.e., they can buy financial assets when the prices are declining thereby
jacking-up the asset prices and sell when the asset prices are increasing. Hence, there
is a possibility of bi-directional relationship between FII and the equity returns.
P. Krishna Prasanna (2008) has examined the contribution of foreign institutional
investment particularly among companies included in sensitivity index (Sensex) of
Bombay Stock Exchange. Also examined is the relationship between foreign
institutional investment and firm specific characteristics in terms of ownership
structure, financial performance and stock performance. It is observed that foreign
investors invested more in companies with a higher volume of shares owned by the
general public. The promoters’ holdings and the foreign investments are inversely
related. Foreign investors choose the companies where family shareholding of
promoters is not substantial. Among the financial performance variables the share
returns and earnings per share are significant factors influencing their investment
Gurucharan Singh (2004) highlighted that the securities market in India has come a
long way in terms of infrastructure, adoption of best international practices and
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introduction of competition. Today, there is a need to review stock exchanges and
improve the liquidity position of various scrips listed on them. A study conducted by
the World Bank (1997) reports that stock market liquidity improved in those emerging
economies that received higher foreign investments.
Anand Bansal and J.S. Pasricha (2009) studied the impact of market opening to FIIs
on Indian stock market behaviour. They empirically analyze the change of market
return and volatility after the entry of FIIs to Indian capital market and found that
while there is no significant change in the Indian stock market average returns;
volatility is significantly reduced after India unlocked its stock market to foreign
investors. In the next section we are discussing the data sources and methodology of
Kumar (2001) investigated the effects of FII inflows on the Indian stock marketer
presented by the Sensex using monthly data from January 1993 to December 1997.
Kumar (2001) inferred that FII investments are more driven by Fundamentals and
they do not respond to short-term changes or technical position of the market. In
testing whether Net FII Investment (NFI) has any impact on Sensex, a regression of
NFI was estimated on lagged values of the first difference of NFI, first difference of
Sensex and one lagged value of the error correction term (the residual obtained by
estimating the regression between NFI and Sensex). The study concluded that Sensex
causes NFI. Similarly, regression with Sensex as dependent variable showed that one
month lag of NFI is significant, meaning that there is causality from FII to Sensex.
This finding is in contradiction with the findings of Rai and Bhanumurthy (2003) who
did not find any causation from FII to return in BSE using similar data between 1994
and 2002. However, Rai and Bhanumurthy have also found significant impact of
return in BSE on NFI.
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6. INVESTMENTS BY FIIS
There are generally two ways to invest for FIIs.
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.
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.)
Dated government securities
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Other Debt Market Instruments.
It should be noted that foreign companies and individuals are not be eligible to invest
through the 100% debt route.
7. FOREIGN INSTITUTIONAL INVESTORS PROCEDURE
Following entities / funds are eligible to get registered as FII:
Insurance or reinsurance companies
The Procedure for registration of FII has been given by SEBI regulations. It states-
“no person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor
unless he holds a certificate granted by the Board under these regulations”. An application
for grant of registration has to be made in Form A, the format of which is provided in the
SEBI (FII) Regulations, 1995.
The eligibility criteria for applicant seeking fii registration is as follows:
Good track record, professional competence and financial soundness.
Regulated by appropriate foreign regulatory authority in the same capacity/category
where registration is sought from SEBI.
Permission under the provisions of the Foreign Exchange Management Act, 1999
(FEMA) from the RBI.
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Legally permitted to invest in securities outside country or its
The applicant must be a ‘fit and proper’ person.
Local custodian and designated bank to route its transactions.
A FII can make investments only in the following types of securities:
Securities in the primary and secondary markets including shares, debentures and
warrants of unlisted, to- be-listed companies or companies listed on a recognized
Units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed on a recognized stock exchange or not, and units of scheme floated by
a Collective Investment Scheme.
Derivatives traded on a recognized stock exchange – like futures and options. FIIs can
now invest in interest rate futures that were launched at the National Stock Exchange
(NSE) on 31st August, 2009.
Regulation relating to fii operation
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Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation
5(2) of FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in
the entire process of FII registration.
FIIs are required to apply to SEBI in a common application form in duplicate. A copy
of the application form is sent by SEBI to RBI along with their 'No Objection' so as to
enable RBI to grant necessary permission under FEMA.
RBI approval under FEMA enables a FII to buy/sell securities on stock exchanges and
open foreign currency and Indian Rupee accounts with a designated bank branch.
FIIs are required to allocate their investment between equity and debt instruments in
the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt
FII in which case it can make its entire investment in debt instruments.
All FIIs and their sub-accounts taken together cannot acquire more than 24% of the
paid up capital of an Indian Company. Indian Companies can raise the above
mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by
passing a resolution by its Board of Directors followed by passing a Special
Resolution to that effect by its General Body. Further, in 2008 amendments were
made to attract more foreign investors to register with SEBI, these amendments are:
The definition of “broad based fund” under the regulations was substantially widened
allowing several more sub accounts and FIIs to register with SEBI.
Several new categories of registration viz. sovereign wealth funds, foreign individual,
foreign corporate etc. were introduced,
Registration once granted to foreign investors was made permanent without a need to
apply for renewal from time to time thereby substantially reducing the administrative
Also the application fee for foreign investors applying for registration has recently
been reduced by 50% for FIIs and sub accounts Also, institutional investors including
FIIs and their sub-accounts have been allowed to undertake short-selling, lending and
borrowing of Indian securities from February 1, 2008.
Procedure for action in case of default
1. Cancellation or suspension of certificate
A Foreign Institutional Investor who -
fails to comply with any condition subject to which certificate has been
contravenes any of the provisions of the Act or these regulations, shall be
liable to the penalty of-
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• suspension of certificate for a specified period; or
• cancellation of certificate, after an enquiry as provided for in these
regulations has been held.
The provisions of these regulations shall be without prejudice to those of regulation
22 and regulation 23 .
2. Suspension of certificate
A penalty of suspension of certificate of a Foreign Institutional Investor may be
imposed if he -
indulges in fraudulent transactions in securities;
fails to furnish any information related to his transaction in securities as required by
the Board or the Reserve Bank of India;
furnishes false information to the Board; or does not co-operate in any enquiry
conducted by the Board.
3. Cancellation of certificate
A penalty of cancellation of certificate of a Foreign Institutional Investor may be
imposed if he -
indulges in deliberate manipulation or price rigging or cornering activities
prejudicially affecting the securities market or the investors' interest;
violates the provisions of the Securities and Exchange Board of India (Insider
Trading) Regulations, 1992 or of the Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets)
Regulations, 1995, made under the Act; or is guilty of repeated defaults of the nature
mentioned in regulation 22 .
In this regulation, "fraud" shall have the same meaning as is assigned to it in section
17 of the Indian Contract Act, 1872.
Manner of making order of suspension and cancellation of certificate
No order of penalty of suspension or cancellation of certificate shall be imposed on
the Foreign Institutional Investor except after holding an enquiry in accordance with the
procedure specified in regulations 25 and regulation 26 .
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Manner of holding enquiry
For the purpose of holding the enquiry referred to in regulation 24 , the Board may
appoint an enquiry officer.
The enquiry officer shall issue to the Foreign Institutional Investor a notice at the
principal place of business of the Foreign Institutional Investor setting out the default
alleged to have been committed by the Foreign Institutional Investor and calling upon
him to show cause why the penalties specified in regulation 21 should not be imposed
The Foreign Institutional Investor may, within thirty days from the date of receipt of
such notice, furnish to the enquiry officer a reply, together with copies of
documentary or other evidence relied on by him in support of its reply:Provided that
the enquiry officer may call upon him to supply further information.
The enquiry officer shall, give a reasonable opportunity of hearing to the Foreign
Institutional Investor to enable him to make submission in support of his reply under
sub- regulation (3) of this regulation.
Before the enquiry officer, the Foreign Institutional Investor may either appear in
person or through any person duly authorised by him in writing.
If it is considered necessary, the enquiry officer may ask the Board to appoint a
presenting officer to present its case.
5. Show cause notice and order
On receipt of the report from the enquiry officer, the Board shall consider the same
and issue a show-cause notice to the Foreign Institutional Investor as to why the
penalty, which it considers appropriate and which shall be specified in the notice
should not be imposed.
The Foreign Institutional Investor shall within twenty-one days of the date of the
receipt of the show-cause notice referred to in sub-regulation (1), of this regulation
send to the Board a reply to the notice.
The Board after considering the reply to the show-cause notice, if received in time,
shall as soon as possible but not later than thirty days from the receipt of the reply, if
any, pass such order as it deems fit.
Every order passed under sub- regulation (3) of this regulation shall be self-contained
and give reasons for the conclusions stated therein including the justification for the
penalty, if any, imposed by that order.
6. Effect of suspension and cancellation of certificate
On and from the date of the suspension of certificate, if ordered under this Chapter,
the Foreign Institutional Investor shall cease to buy, sell or otherwise deal in securities
in India during the period of suspension.
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On and from the date of cancellation of certificate, if ordered under this Chapter, the
Foreign Institutional Investor shall cease to buy, sell or otherwise deal in securities in
India, except for the purpose of liquidating the existing investments.
7. Publication of order of suspension and cancellation of certificate
The order of suspension or cancellation of certificate under this Chapter shall be
published by the Board in at least two daily newspapers.
Any Foreign Institutional Investor aggrieved by an order of the Board under the
regulations may prefer an appeal to the Central Government under the provisions of the
Securities and Exchange Board of India (Appeal to the Central Government) Rules, 1993.
8. FOREIGN INSTITUTIONAL INVESTORS IN INDIA
Evolution of policy framework
Until the 1980s, India’s development strategy was focused on self-reliance and
import-substitution. Current account deﬁcits were ﬁnanced largely through debt ﬂows and
ofﬁcial development assistance. There was a general disinclination towards foreign
investment or private commercial ﬂows. Since the initiation of the reform process in the early
1990s, however, India’s policy stance has changed substantially, with a focus on harnessing
the growing global foreign direct investment (FDI) and portfolio ﬂows.
The broad approach to reform in the external sector after the Gulf crisis was
delineated in the Report of the High Level Committee on Balance of Payments (Chairman: C.
Rangarajan). It recommended, inter alia, a compositional shift in capital ﬂows away from
debt to non-debt creating ﬂows; strict regulation of external commercial borrowings,
especially short-term debt; discouraging volatile elements of ﬂows from non-resident Indians
(NRIs); gradual liberalisation of outﬂows; and dis-intermediation of Government in the ﬂow
of external assistance. After the launch of the reforms in the early 1990s, there was a gradual
shift towards capital account convertibility.
From September 14, 1992, with suitable restrictions, FIIs and Overseas
Corporate Bodies (OCBs) were permitted to invest in ﬁnancial instruments.2 The policy
framework for permitting FII investment was provided under the Government of India
guidelines vide Press Note dated September 14, 1992, which enjoined upon FIIs to obtain an
initial registration with SEBI and also RBI’s general permission under FERA. Both SEBI’s
registration and RBI’s general permissions under FERA were to hold good for ﬁve years and
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were to be renewed after that period. RBI’s general permission under FERA could enable the
registered FII to buy, sell and realise capital gains on investments made through initial corpus
remitted to India, to invest on all recognised stock exchanges through a designated bank
branch, and to appoint domestic custodians for custody of investments held.
The Government guidelines of 1992 also provided for eligibility conditions for
registration, such as track record, professional competence, ﬁnancial soundness and other
relevant criteria, including registration with a regulatory organisation in the home country.
The guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These
regulations continue to maintain the link with the government guidelines by inserting a clause
to indicate that the investment by FIIs should also be subject to Government guidelines. This
linkage has allowed the Government to indicate various investment limits including in
speciﬁc sectors. With coming into force of the Foreign Exchange Management Act,
(FEMA), 1999 in 2000, the Foreign Exchange Management (Transfer or issue of Security by
a Person Resident Outside India) Regulations, 2000 were issued to provide the foreign
exchange control context where foreign exchange related transactions of FIIs were permitted
The historical evolution of the FII policy is summarized below:
September 1992 FIIs allowed to invest by the government guidelines in all securities in
primary and secondary markets as well as in schemes ﬂ oated by mutual funds. Single FIIs to
invest 5 percent and all FIIs allowed to invest 24 percent of a company’s issued capital.
Broad-based funds to have 50 investors with no one holding more than 5 percent.The
objective was to have reputed foreign investors, such as pension funds, mutual funds, or
investment trusts and other broad-based institutional investors in the capital market.
April 1997 Aggregated limit for all FIIs increased to 30 percent, subject to special procedure
and resolution. The objective was to increase the participation by FIIs.
April 1998 FIIs permitted to invest in dated government securities subject to a ceiling.
Consistent with the government policy to limit the short-term debt, a ceiling of US $ 1 billion
was assigned, which was increased to US $ 1.75 billion in 2004.
June 1998 Aggregate portfolio investment limit of FIIs and NRIs/PIOs/OCBs enhanced from
5 percent to 10 percent, and the ceilings made mutually exclusive. Common ceilings would
have negated the permission granted to FIIs. Therefore, separate ceilings were prescribed.
June 1998 Forward cover allowed in equity.
February 2000 Foreign ﬁ rms and high networth individuals permitted to invest as sub-
accounts of FIIs. Domestic portfolio manager allowed to be registered as FIIs to manage the
funds of subaccounts. The objective was to allow operational ﬂ exibility, and also to give
access to domestic asset management capability.
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March 2001 FII ceiling under special procedure enhanced to 49 percent. The objective was
to increase FII participation.
September 2001 FII ceiling under special procedure raised to sectoral cap.
December 2003 The FII dual approval process of the SEBI and the RBI changed to a single
approval process of the SEBI. The objective was to streamline the registration process and
reduce the time taken for registration.
November 2004 Outstanding corporate debt limit of US $ 0.5 billion prescribed. The
objective was to limit short-term debt ﬂ ows.
April 2006 Outstanding corporate debt limit increased to US $ 1.5 billion. The limit on
investment in government securities was enhanced to US $ 2 billion. This was announced in
the Budget of 2006–2007.
November, 2006 FII investment upto 23percent permitted in market infrastructure
institutions in the securities markets, such as stock exchanges, depositories, and clearing
corporations. This was a decision taken by the government following the mandating of
demutualization and corporatization of stock exchanges.
January and October, 2007 FIIs allowed to invest US $ 3.2 billion in government securities
(limits were raised from US $ 2 billion in two phases of US $ 0.6 billion each in January and
June, 2008 While reviewing the External Commercial Borrowing policy, the government
increased the cumulative debt investment limits from US $ 3.2 billion to US $ 5 billion and
from US $ 1.5 billion to US $ 3 billion for FII investments in government securities and
corporate debt, respectively.
October 2008 While reviewing the External Commercial Borrowing policy, the government
increased the cumulative debt investment limits from US $ 3 billion to US $ 6 billion for FII
investments in corporate debt.
October 2008 Removal of regulation for FIIs pertaining to the restriction of a 70:30 ratio of
investment in equity and debt, respectively.
October 2008 Removal of restrictions on Overseas Derivatives Instruments (ODIs).
March 2009 Disapproval of FIIs lending shares abroad.E-bids platform for FIIs.
August 2009 FIIs allowed to participate in interest rate futures.
April 2010 FIIs allowed to offer domestic government securities and foreign sovereign
securities with AAA rating as collateral (in addition to cash) to recognized stock exchanges in
India for their transactions in the cash segment of the market.
November 2010 Investment cap for FIIs increased by US $ 5 billion each in government
securities and corporate bonds to US $ 10 billion and US $ 20 billion, respectively.
March 2011 The limit of US $ 5 billion in corporate bonds issued by companies in the
infrastructure sector with a residual maturity of over ﬁ ve years increased by an additional
limit of US $ 20 billion, taking the total limit to US $ 25 billion
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Allocation of government debt & corporate debt investment limits to
The SEBI (vide its circular dated November 26, 2010) made the following
• Increased investment limit for FIIs in government and corporate debt: In an attempt to
enhance FII investment in debt securities, the government has increased the current
limit of Fll investment in government securities by US $ 5 billion, raising the cap to
US $ 10 billion. Similarly, the current limit of Fll investment in corporate bonds has
also been increased by US $ 5 billion, raising the cap to US $ 20 billion. This
incremental limit shall be invested in corporate bonds with a residual maturity of over
ﬁ ve years issued by companies in the infrastructure sector. The market regulator
SEBI announced this vide its circular dated November 26, 2010.
• The time period for the utilization of the debt limits: In July 2008, some changes
pertaining to the methodology for the allocation of the debt limit had been speciﬁed.
In continuation of the same, the SEBI has decided that the time period for the
utilization of the corporate debt limits allocated through the bidding process (for both
old and long-term infra limit) shall be 90 days. However, the time period for the
utilization of the government debt limits allocated through the bidding process shall
remain 45 days. Moreover, the time period for the utilization of the corporate debt
limits allocated through the ﬁrst-come, ﬁrst-served process shall be 22 working days,
while that for the government debt limits shall remain unchanged at 11 working days.
Further, it was decided to grant a period of up to 15 working days for the replacement
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of the disposed off/matured debt instruments/positions for corporate debt, while the
period for government debt will continue to be ﬁve working days.
• Government debt long terms: The SEBI, vide its circular dated February 2009, had
decided that no single entity shall be allocated more than ` 10,000 crore of the
investment limit. In a partial amendment to this, the SEBI (vide its circular dated
November 26, 2010) has decided that no single entity shall be allocated more than `
2000 crore of the investment limit. Where a singly entity bids on behalf of multiple
entities, such bids would be limited to ` 2,000 crore for every such single entity.
Further, the minimum amount that can be bid for shall be ` 200 crore, and the
minimum tick size has been made ` 100 crore.
• Corporate debt (Old limit): The SEBI has decided that no single entity shall be
allocated more than ` 600 crore of the investment limit. Where a singly entity bids on
behalf of multiple entities, such bids would be limited to ` 600 crore for every such
single entity. Further, the minimum amount that can be bid for has been made ` 100
crore, and the minimum tick size has been made ` 50 crore.
Multiple bid orders from a single entity: The SEBI has allowed bidders to bid
for more than one entity in the bidding process provided: It provides due
authorization from those entities to act in that capacity;
It provides the stock exchanges with the allocation of the limits interse for the
entities it has bid for to exchange within 15 minutes of the close of the bidding
• FII investment into debt securities that are to be listed: The market regulator has
decided that FIIs will be allowed to invest in primary debt issues only if the listing is
committed to be done within 15 days. If the debt issue could not be listed within 15
days of issue, then the holding of the FIIs/sub-accounts—if disposed off—shall be
sold only to domestic participants/investors until the securities are listed. This is in
contrast to the earlier regulations issued in April 2006, wherein FII investments were
restricted to the listed debt securities of companies.
Maintenance of Collateral by FIIs for Transactions in the Cash Segment
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The RBI in consultation with the Government of India and the SEBI has decided (vide
its circular dated April 12, 2010) to permit FIIs to offer domestic government securities and
foreign sovereign securities with AAA rating as collateral to
Reporting of Lending of Securities bought in the Indian Market
The SEBI (vide its circular dated June 29, 2010) has decided that the FIIs’ reporting of
the lending of securities bought in the Indian market will be done on a weekly basis instead
of the former practice of daily submissions. In accordance with this change in the periodicity
of the reports, FIIs are required to submit the reports every Friday, with effect from July 02,
2010. Further, in view of the change in the periodicity of the reporting, the PN issuing the
FIIs are required to submit the undertaking along with the weekly report.
FII participation in Interest Rate Futures
The FIIs have been allowed to participate in the interest rate futures that were
introduced for trading at the NSE on August 31, 2009.
FII Investment in Corporate Bonds Infra Long-term Category
This policy development has been discussed in Chapter 5 in the context of debt
Permission for Short selling of Equity Shares by SEBI registered FIIs
SEBI registered FIIs / subaccounts of FIIs were permitted to buy / sell equity
shares / debentures of Indian companies. However, they were not allowed to engage in
short selling and were required to take delivery of securities purchased and give delivery
of securities sold.
After a due consultation process, it was decided to permit FIIs registered with
SEBI and sub-accounts of FIIs to short sell, lend and borrow equity shares of Indian
companies, subject to such conditions as may be prescribed in that behalf by the Reserve
Bank and the SEBI / other regulatory agencies from time to time.
Accordingly, RBI, through a circular dated 31st December, 2007, permitted the
above subject to the following
The FII participation in short selling as well as borrowing / lending of equity shares
will be subject to the current FDI policy and short selling of equity shares by FIIs
would not be permitted for equity shares which are in the ban list and / or caution list
of Reserve Bank.
Borrowing of equity shares by FIIs would only be for the purpose of delivery into
The margin / collateral would be maintained by FIIs only in the form of cash. No
interest would be paid to the FII on such margin/collateral.
KES SHROFF COLLEGE Page 20
RBI further provided that the designated custodian banks should separately report
all transactions pertaining to short selling of equity shares and lending and borrowing of
equity shares by FIIs in their daily reporting with a suitable remark (short sold / lent /
borrowed equity shares) for the purpose of monitoring by the Reserve Bank.
SEBI also issued an amendment to the FII Regulations permitting FIIs to short sell
and lend and borrow securities.
FII investments in Debt Securities
SEBI vide its circular dated January 19, 2007 announced the increase in the
cumulative debt investment limit available for investment by FIIs/ Sub Accounts in
Government Securities/ T-Bills from US $2 billion to US $2.6 billion. This limits was
further enhanced to US $3.2 billion vide SEBI circular dated January 31, 2008.
It was noticed that there was no uniformity among custodians with respect to
considering investments by FIIs in debt oriented mutual fund units either as debt or
equity. In consultation wit RBI, SEBI decided that investments by FIIs/ Sub Accounts in
debt oriented mutual fund units (including units of money market and liquid funds)
should henceforth be considered as corporate debt investments and reckoned within the
stipulated limit of US $1.5 billion, earmarked for FII/ Sub Account investments in
In view of the above, the following was made applicable with immediate effect:
Henceforth, there would be no demarcation between 100% debt and normal 70:30
FIIs/ Sub Accounts for the purposes of allocation of debt investment limits. The
individual limits allocated to the 100% debt FIIs/ Sub Accounts stand cancelled.
The allocation of unutilized/ unallocated limits for investments in Government
Securities/ T-Bills would be on ﬁ rstcome-ﬁ rst-serve basis. The allocation would be
valid for a period of 15 days from the date of the allocation letter, on the expiry of
which the unutilized limits would lapse.
As mentioned above, the investments by FIIs/ Sub Accounts in debt oriented mutual
fund schemes should now be reckoned as investments in corporate debt. On re-
calculating the investment ﬁ gures for investments by FIIs/ Sub Accounts in corporate
debt, by including their investments in units of debt oriented mutual funds, it is seen
that the corporate debt investments exceed the permissible limit of US $1.5 billion.
Thus, in order to conform to the stated limit, there should be no further investment, or
rollover, of existing position in corporate debt, by both 100% debt and normal 70:30
FIIs, till the holdings fall within the stipulated limit of US $1.5 billion.
Foreign investment in Commodity Exchanges
Government of India decided to allow foreign investment in Commodity
Exchanges subject to the following.
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• There would be a composite ceiling of 49% Foreign Investment, with a FDI limit of
26% and an FII limit of 23%.
• FDI will be allowed with speciﬁ c approval of the Government.
• The FII purchases in equity of Commodity Exchanges will be restricted only to the
• Foreign Investment in Commodity Exchanges would also be subject to compliance
with the regulations issued, in this regard, by the Forward Market Commission.
Accordingly, a necessary circular was issued by RBI on 28th April, 2008.
Foreign investment in Credit Information Companies
The Government decided to allow foreign investment in Credit Information
Companies in compliance with the Credit Information Companies (Regulations) Act 2005
and subject to the following:
The aggregate Foreign Investment in Credit Information Companies would be 49%.
Foreign Investment upto 49% would be allowed only with the prior approval of FIPB
and regulatory clearance from RBI.
Investment by SEBI Registered FIIs would be permitted only through purchases in the
secondary market to an extent of 24%.
Investment by SEBI Registered FIIs would be within the overall limit of 49% for
Accordingly, a necessary circular was issued by RBI on 28th April, 2008.
FII investments in Debt Securities
The Government reviewed the External Commercial Borrowing policy and increased
the cumulative debt investment limits from US $3.2 billion to US $5 billion and US $1.5
billion to US $3 billion for FII investments in Government Securities and Corporate Debt,
KES SHROFF COLLEGE Page 22
respectively. Accordingly, SEBI issued a necessary circular giving effect to this decision on
June 6, 2008.
It was further provided that the enhanced limits should be allocated among the FIIs on
a ‘ﬁrst come ﬁrst served’ basis in terms of SEBI’s earlier circular dated January 31, 2008,
subject to a ceiling of US $200 million per registered entity.
9. TOP FIIS IN INDIA
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Top 10 FIIs in india based on m-cap as on september 2005.
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Top 10 Flls In India Based On M-Cap As
On Sept '05
Market Capitalization of Investments as in
December 2005 in US $ Billion*
Morgan Stanley 2.42
Merrill Lynch 2.31
Goldman Sachs 2.26
*Based on holdings of more then 1% and above in Individual companies.
Sources Exchanges and company web sites.
KES SHROFF COLLEGE Page 26
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
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
10. MARKET DESIGN IN INDIA FOR FOREIGN
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
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
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
KES SHROFF COLLEGE Page 27
of not less than US $ 50 million during the three ﬁ anancial years preceding the date
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.
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
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
KES SHROFF COLLEGE Page 28
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
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
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.
11. GENERAL OBLIGATIONS AND RESPONSIBILITIES
KES SHROFF COLLEGE Page 29
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
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 30
communication from and to the domestic custodian regarding investments
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
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
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
KES SHROFF COLLEGE Page 31
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).
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.
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
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
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).
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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.
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12. 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.
Total Value of Participatory Notes (PNs) vs. Assets Under Management of FIIs
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13. FII INVESTMENT ACTIVITY IN AUGUST 2012
FII Activity is a date wise list of Gross Buy ( in Crores) and Sell ( in Crores)
investments done by Foreign Institutional Investors, their Net Investment Positions for those
dates and Cummulative Investments as on that date in Million $ with a break up of
Investments made in Equity and Debt instruments.
FII Activity for the Year so far
January 2012 50,467.40 40,109.90 10,357.70 2,037.22
February 2012 79,898.60 54,686.60 25,212.10 5,127.67
March 2012 63,795.10 55,413.80 8,381.10 1,684.82
April 2012 41,091.90 42,200.50 -1,109.10 -205.53
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Month * Total
value of PNs
on Equity &
* Total value
of PNs on
of PNs on
as % of B
Total value of
PNs on Equity
% of B
A1 A2 B C1 C2
Jan - 12 151,956 108,350 1,043,130 14.6 10.4
feb - 12 183,151 128,606 1,115,648 16.4 11.5
mar - 12 165,832 115,332 1,107,399 15.0 10.4
apr- 12 130,012 86,785 1,093,955 11.9 7.9
May - 12 128,895 65,472 1,040,547 12.4 6.3
June - 12 129,851 69,523 1,090,359 11.9 6.4
July - 12 129,586 68,677 1,096,492 11.8 6.3
May 2012 42,443.30 42,790.70 -347.10 -57.99
June 2012 44,751.20 45,252.40 -501.30 -86.16
July 2012 49,557.40 39,284.80 10,272.70 1,852.81
August 2012 48,136.50 37,332.50 10,803.90 1,945.35
FII Activity for previous years
2011 611,055.60 613,770.80 -2,714.20 -357.83
2010 766,283.20 633,017.10 133,266.80 29,361.83
2009 624,239.70 540,814.70 83,424.20 17,458.14
2008 721,607.00 774,594.30 -52,987.40 -11,974.30
2007 814,877.90 743,392.00 71,486.30 17,655.80
2006 475,624.90 439,084.10 36,540.20 8,107.00
FII Activity for the Year so far
January 2012 26,080.80 10,109.80 15,971.20 3,049.48
February 2012 23,735.30 13,719.60 10,015.80 2,036.73
March 2012 12,502.50 19,090.90 -6,588.60 -1,297.78
April 2012 9,333.40 13,121.10 -3,787.50 -721.24
May 2012 17,356.50 13,787.20 3,569.10 655.38
June 2012 18,723.80 14,757.40 3,966.70 709.65
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14. FII TRADING ACTIVITY
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15. INVESTMENT IN INDIAN COMPANIES BY FIIS
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Equity (Rs.crore) Debt (Rs.crore)
July 2012 50,840.10 40,493.70 10,346.40 21,796.80 19,946.10 1,850.70
June 2012 38,425.80 38,292.30 133.50 15,888.00 16,727.70 (839.70 )
May 2012 46,654.80 48,177.60 (1,522.80 ) 19,726.60 13,871.50 5,855.10
April 2012 36,145.30 38,010.90 (1,865.60 ) 8,620.80 10,894.80 (2,274.00 )
March 2012 65,055.20 56,222.30 8,832.90 12,167.80 20,164.00 (7,996.20 )
80,118.20 54,900.80 25,217.40 24,621.20 13,675.80 10,945.40
60,780.30 47,813.10 12,967.20 27,629.00 10,565.40 17,063.60
38,865.80 38,994.30 (128.50) 46,988.20 26,593.70 20,394.50
44,026.60 47,973.20 (3,946.60) 23,793.50 22,192.70 1,600.80
43,325.20 40,856.40 2,468.80 16,904.50 15,715.10 1,189.40
50,951.50 52,098.50 (1,147.00) 17,931.20 19,183.00 (1,251.80 )
46,148.50 56,363.10 -10,214.60 20,151.10 17,262.30 2,888.80
Total 601,337.30 560,196.2
41,141.10 256,218.70 206,792.1
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of
Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets
in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can
acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the
Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up
capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory
ceiling, subject to the approval of the board and the general body of the company passing
a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be
raised to 24 per cent subject to the approval of the general body of the company passing a
resolution to that effect.
The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.
The equity shares and convertible debentures of the companies within the prescribed
ceilings are available for purchase under PIS subject to:
the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis,
being within an overall ceiling limit of (a) 24 per cent of the company's total paid up
equity capital and (b) 24 per cent of the total paid up value of each series of
convertible debenture; and
the investment made on repatriation basis by any single NRI/PIO in the equity shares
and convertible debentures not exceeding five per cent of the paid up equity capital of
the company or five per cent of the total paid up value of each series of convertible
debentures issued by the company.
Monitoring Foreign Investments
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian
companies on a daily basis. For effective monitoring of foreign investment ceiling limits,
the Reserve Bank has fixed cut-off points that are two percentage points lower than the
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actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in
which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-
off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30
per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector
banks (including State Bank of India) is 18 per cent.
Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs
reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all
designated bank branches so as not to purchase any more equity shares of the respective
company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The
link offices are then required to intimate the Reserve Bank about the total number and
value of equity shares/convertible debentures of the company they propose to buy on
behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives
clearances on a first-come-first served basis till such investments in companies reach 10 /
24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On
reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank
branches tostop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank
also informs the general public about the `caution’ and the `stop purchase’ in these
companies through a press release.
The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with
their respective ceilings is
List of companies which have raised the ceiling from 10% in respect of nris
investments under pis (w.e.f. november 29, 2010)
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List of companies in which fii investment is allowed upto 49% of their paid
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1 Alok Industries 26 Mahindra & Mahindra Ltd.
2 Auribindo Pharma Ltd. 27 Mastek Ltd
3 Arvind Mills Ltd 28 Max India Ltd
4 Balakrishna Industries Ltd 29 McDowell & Co Ltd
5 Blue Dart Express Ltd 30 NIIT Ltd.
6 CRISIL 31 NIIT Technologies Ltd.
7 Digital GlobalSoft Ltd. 32 Panacea Biotec Ltd.
8 Dr. Reddy’s Laboratories Ltd. 33 Reliance Capital Ltd.
9 D. S. Kulkarni Developers Ltd. 34 Reliance Energy Ltd.
10 Federal Bank Ltd. 35 Reliance Industries Ltd.
11 Financial Technologies (I) Ltd 36 Reliance Petroleum Ltd.
12 HDFC Bank Ltd 37 SB & T International Ltd.
13 Himachal Futuristic Communications Ltd. 38 Sadbhav Engineering Limited
14 Hindustan Lever Ltd. 39 S. Kumars Nationwide Ltd
15 Hughes Software Ltd. 40 Soffia Software Ltd
16 ICICI Bank Ltd. 41 Strides Arcolabs Ltd
17 Ind-Swift Laboratories Ltd. 42 Sun Pharmaceutical Industries Ltd.
18 Karnataka Bank Ltd. 43 Swaraj Mazda Ltd
19 LIC Housing Finance Ltd. 44 The South Indian Bank Ltd
20 Marksans Pharma Ltd. 45
The Dhanalakshmi Bank Limited
21 Vimta Labs Ltd. 46
22 Wockhardt Ltd. 47 United Breweries Ltd
23 Yes Bank Ltd. 48 United Phosphorus Ltd
24 Zeefilms Ltd. 49 UTI Bank Ltd.
25 Welspun India Ltd (w.e.f. 10.02.2010)
List of companies in which fii investment is allowed upto sectoral
cap/statutory ceiling of their paid up capital
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16. BSE SENSEX AND FII INVESTMENT CORRELATION
Sensex is the commonly used name for the Bombay Stock Exchange Sensitive Index – an
index Composed of 30 of the largest and most actively traded stocks on the Bombay Stock
Exchange (BSE). The term FII is used most commonly in India to refer to outside companies
investing in the financial markets of India. FII investment is frequently referred to as hot
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1 AZTEC Software and Technology Services
Ltd - (100%)
21 Orbit Corporation Limited (100%)
2 Dynamatic Technologies Limited -(100%) 22 Pentamedia Graphics Ltd.- (100%)
3 Educomp Solutions Limited. –(100%) 23 Pentasoft Technologies Ltd. – (100%)
4 Gateway Distriparks Ltd - (100%) 24 Prajay Engineers Syndicate Limited – (100%)
5 Geodesic Information Systems Ltd- (100%) 25 Punj Lioyd Limited (100%)
6 Geometric Software Solutions Ltd – (100%) 26 IFCI Limited. (74%)
7 Gujarat NRE Coke Limited -(74%) 27 Reliance Communications Ltd – (74%)
8 HCL Infosystems Ltd. – (100%) 28 Sujana Metal Products Ltd - (100%)
9 Hexaware Technologies Ltd – (100%) 29 Sujana Towers Limited-(100%)
10 Housing Development and Infrastructure
Limited – (100%)
30 Sujana Universal Industries Ltd - (100%)
11 Indiabulls Real Estate Limited –(100%) 31 Shrenuj & Company Limited- (100%)
12 Indiabulls Financial Services Ltd – (100%) 32 Unitech Limited – (100%)
13 Indiabulls Securities Limited - (100%) 33 Interworld Digital Limited (100%)
14 Indiabulls Power Limited (100%)
(formerly Sophia Power Company Limited)
34 Shobha Developers Limited (100% - Feb 3, 2010)
15 Infotech Enterprises Limited (100%) 35 Everonn Education Ltd. (100% w.e.f.June 4, 2010)
16 Infosys Technologies Ltd. – (100%) 36 Redington (India) Limited (100% w.e.f. November 29,
17 IVRCL Infrastructures & Projects Ltd (100%) 37 Indiabulls Wholesale Services Ltd (100% w.e.f August
18 India Infoline Ltd. (100%) 38 eClerx Services Limited ( 100% wef December 20,
19 Mascon Global Ltd. – (100%) 39 Indiabulls Infrastructure and Power Ltd (100% w.e.f Jan
20 Mphasis BFL Ltd – (100%) 40 Housing Development Finance Corporation Limited
money for the reason that it can leave the country at the same speed at which it comes in. In
country like India; statutory agencies like SEBI have prescribed norms to register FIIs and
also to regulate such investments flowing in through FIIs.
Net Investment of
2000 3,972 6,510.9
2001 3,262 12,494.8
2002 3,377 3,677.9
2003 5,838 35,153.8
2004 6,602 42,049.1
2005 9,397 41,663.5
2006 13,786 40,589.2
2007 20,286 80,914.8
2008 9,647 -41,215.5
2009 17,464 87,987.6
2010 20,509 179,674.6
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
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technical, marketing and business manpower in Livestock production and Information
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
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