“ROLE AND IMPACT OF FII‟s ON INDIAN CAPITAL MARKET”
SPECIALISATION : FINANCE
Submitted in partial fulfillment of the requirement for the award of Post
Graduate Diploma in Business Management under Bharati Vidyapeeth’s
Institute of Management & Information Technology
ROHAN. R. SHIRODKAR
Under the guidance of
PROF. VEENA CHAVAN
Bharati Vidyapeeth‘s Institute of Management & Information Technology
Sector 8, CBD-Belapur, Navi Mumbai –400614
I take this opportunity to thank my institute director Dr.D Y Patil for providing me with an
excellent infrastructure and conducive atmosphere for developing this project.
I express my deepest thanks to my mentor, Prof. Veena Chavan for her precious advice that
helped in selecting my study site in the initial but the most crucial stage of my project. Her
constructive comments and feedback have been very useful towards the completion of my
project. I am greatly indebted to for her invaluable advices on the quantitative research part of
my project. I would like to thank her for bearing with me very patiently in the process. I also
express my thanks to my friends and colleagues for their continuous help and support.
Finally, I thank my parents and all my close relatives who encouraged and supported my
decision to work on this project and dedicate this to them without their support and
encouragement this could have never been realized.
(ROHAN RAMDAS SHIRODKAR)
This is to certify Mr. Rohan R Shirodkar student of Post Graduation Diploma in
Business Management (Finance) batch of Bharati Vidyapeeth’s Institute Of
Management & Information Technology, Navi Mumbai has satisfactorily
completed final project on “Role And Impact Of Fii‘s On Indian Capital
Market” Under my supervision & guidance as partial fulfillment of requirement
of PGDBM 2010-2012.
(PROF. VEENA CHAVAN) (DR.D.Y.PATIL)
PROJECT GUIDE DIRECTOR
Since the beginning of liberalization FII flows to India have steadily grown in
importance. As a part of its initiative to liberalize its financial markets, India opened her doors to
Foreign Institutional Investors in September 1992. This event represents a landmark event since it
resulted in effectively globalizing its financial services industry.
The foreign institutional investors (FIIs) have emerged as important players in the Indian
equity market in the recent past. This study makes an attempt to develop an understanding of the
dynamics of the trading behavior of FIIs. Along with this the purpose of study is to find out the
impact of FII inflows on Indian stock market, do we need FII inflows? Do FII play an important
role in Indian equity market? And at last should we encourage FII inflows?
For this monthly, yearly data of FII inflow is taken into consideration. First, the
introduction about the Indian economy and FIIs is given followed by the conceptual framework,
guidelines, investing limits in Indian companies is observed. Second, trends in FII flows and FII
activities up to March 2012 are considered. This is followed by the role of FIIs in the Indian stock
As per the study done it is found out that the trading behavior of FII do not have a
destabilizing impact on the equity market. It can be said that we can encourage FII inflows into
India through appropriate regulation of PNs and sub-accounts and invent a series of check and
balances system so as to protect the economy and look over the fact that the economy works best
with such kind of filters system. Thus, it can be said that FII do play an important role in Indian
Table of Contents
PARTICULARS PAGE NO:
Executive Summary (iii)
Table of Contents (v)
Chapter 1: Introduction of the Project
1.1: Objective of the Study 1
1.2: Type of Research 1
1.3: Scope and Limitations 1
1.4: Literature Review 2
Chapter 2: Introduction to Topic
2.1: Indian Capital Market : An overview 4
2.2: Foreign Institutional Investments(FIIs) 5
2.3: Foreign Institutional Investors 7
2.4: Background of FIIs 8
2.5: Introduction of FIIs in India 9
2.6: Investment Limits 12
2.7: Eligibility criteria for entering as an FII in India 15
2.8: FIIs and their impact on Indian stock exchanges 22
2.9: FIIs and their impact on Indian economy 23
(Positive and Negative effects)
2.10: FII activity in India from 1992-2006 27
2.11: FII activity in India from 2006-2010 32
2.12: FII activity in India 2010-2011(present scenario) 37
2.13: FII activity in 2012 in India 47
Chapter 3: Research Methodology
3.1: Research Design 51
3.2: Data Collection Techniques and Tools 51
3.3: Sample Design 52
3.4: Research Analysis Tools 52
3.5 :Analysis and Interpretation 54
Chapter 4: Future Prospects
4.1: Reasons why FII will keep pumping in Indian Market 56
4.2: U.S ratings downgraded 64
Chapter 5: Conclusions and Suggestions 65
CHAPTER 1 : INRODUCTION TO THE PROJECT
FII inflow and outflow trends in Indian Capital Markets during the post liberalization
period that is 1991 to 2012
Influence of FII inflow and outflow trends on Indian Capital Markets
To study the importance of FII on Indian economy as a whole
Type of Research
Exploratory Research method applied for the study. As an exploratory study is conducted with
an objective to gain familiarity with the phenomenon or to achieve new insight into it, this study
aims to find the new insights in terms of finding the relationship between FII'S and Indian Stock
Rationale and Scope of the Study and Limitations
Foreign Institutional Investors are said to be the driver of the market. Those are the one cause
behind the rise and fall of Sensex and Nifty. FII investment trends tell us about many effects that
the Indian market is experiencing. The companies in which they invest are getting overvalued.
Whenever FII find any trouble they withdraw their investments.
Scope of the study is very broader and covers Capital Market Indices and its comparison with
foreign institutional investments. But, study is only going to cover foreign investments in form of
equity. The time period is from liberalization year 1992 to March 2012 as it will give exact
impact in both the bullish and bearish trend. The study will provide a very clear picture of the
impact of foreign institutional investors on Indian stock indices. It will also describe the market
trends due to FIIs inflow and outflow. The study would be helpful for further descriptive studies
and moreover, it would be beneficial to gain knowledge regarding foreign institutional
investments, their process of registration and their impact on Indian stock market.
The data on daily basis can give more positive results.In the study only FII equity investment and
sales were considered. Other economic variables of macro and micro environment such as
foreign exchange rate, speculative trading, interest rate prevailing in the market, political factors,
government policies related to specific sectors etc. which can affect the performance of Indian
capital market and FII inflow to the Indian capital market were not considered. Inclusion of these
factors can provide more accurate insight to the findings of the present study
According to India Report, Astaire Research
“A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for
an IMF bailout, gold was transferred to London as collateral, the rupee devalued and
economic reforms were forced upon India. That low point was the catalyst required to
transform the economy through badly needed reforms to unshackle the economy. Controls
started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies
broken, the economy was opened to trade and investment, private sector enterprise and
competition were encouraged and globalization was slowly embraced. The reforms process
continues today and is accepted by all political parties, but the speed is often held hostage by
coalition politics and vested interests.”
As a part of the reforms process, the Government under its New Industrial Policy
revamped its foreign investment policy recognizing the growing importance of foreign direct
investment as an instrument of technology transfer, augmentation of foreign exchange reserves
and globalization of the Indian economy. Simultaneously, the Government, for the first time,
permitted portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System. While recommending their entry, the
Committee, however did not elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened up to foreign portfolio
investments. In India, the purchase of domestic securities by FIIs was first allowed in September
1992 as part of the liberalization process that followed the balance of payment crisis in 1990-91.
From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the 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
India. The Indian market was integrated with the world economy and international investors
were invited to participate in India. Consequently, the committee on ―the reforms of the financial
system‖ under the chairmanship of Mr M. Narsimham Rao was made which sought for reforms
in the financial sector.
Now days, a significant portion of Indian corporate sector's securities are held by Foreign
Institutional Investors, such as pension funds, mutual funds and insurance companies. These
investors are often viewed as sophisticated investors as these institutional investors are better
informed and better equipped to process information than individual investors
The impact study of FIIs flows on domestic stock market is important from government
as well as investor point of view, for example, does the opening up of the market for FII increase
speculation in the market and thus make the market more volatile and more vulnerable to foreign
The Impact of FII in equity investment behavior in stock Market is studied in this project
and it‘s relative performance of Indian stock market. In this project the researcher has studied
about the idea, that financial liberalization increases the efficiency of financial market and
permission of FIIs equity investment are an important example of financial liberalization. Apart
from net investment of FII's the purchase and sale behavior of FIIs were also analyzed in the
study. The researcher has studied and analysed FII flows and examined if the overall experience
has been stabilizing or destabilizing for the Indian capital market.
CHAPTER 2: INTRODUCTION TO THE TOPIC
2.1 Indian Capital Markets: An Overview
It all started in India, when twenty-two agents started the Bombay Stock Exchange (BSE). That
was way back in 1875. From then on, Indian markets have evolved continuously. Transparency
is a buzzword in the Indian business finance scene. Characterized by operational excellence, and
conformity to rules and regulations, the Indian financial market is a beacon of the economy. The
Indian stock market is probably the oldest in Asia. In 1994, the National Stock Exchange (NSE)
was commenced. NSE‘s objectives are to provide for speedy transactions. It also encouraged
The Company Act of 1956 governs the securities market in India. Having the powers to regulate
companies, the central government and the company law board abide by the companies act of
1956. Powers such as auditing of accounting information, reviewing the business finance model
and looking into the other affairs of the company are given to the government. Investigators from
the directorate of investigation do the audits.
The Securities Contracts (Regulation) Act of 1956 and the Securities and Exchange Board of
India (SEBI) Act of 1992.are the other body of rules that govern the Indian capital markets.
Control of stocks, listings, contracts and a variety of other things are dealt by the former act.
SEBI is concerned with the growth of the securities and business finance market in India. It
looks into various other things like eligibility criteria for registration, developing the code of
conduct, and so on. One of SEBI‘s main activities is to protect the business finance interests of
investors, by providing the facilities to safeguard their wealth. In many ways, SEBI is
instrumental in attracting investments, due to the safe nature in the Indian business finance scene.
At a broad level, the Indian security market can be grouped into the savers and the spenders. The
savers are normal households, and the spenders are companies and the government. If the money
of the savers is put in financial securities, then spenders get money to operate, and in turn the
savers get interest or dividend to enjoy. Hence the security market is where the companies meet
The changes in economic scenario(after the liberalization) and the economic growth have raised
the interest of Indian as well as Foreign Institutional Investors(FII‘s) in the Indian capital
market. The recent massive structural reforms on the economic and industry front in the form of
de-licensing rupee convertibility, tapping of foreign funds, allowing foreign investors to come to
India, have resulted, on one hand, in the quantum leap in activities/volume in the Indian capital
market, and on the other hand and more importantly, that the Indian capital market has
undergone a metamorphosis in terms of institutions, instruments, etc. The capital market in India
is rightly termed as an emerging and promising capital market. During last 20 years or so, the
Indian capital market has witnessed growth in volume of funds raised as well as of.
The buoyancy in the capital market has appeared as a result of increasing industrialisation,
growing awareness globalisation of the capital market, etc. Several financial institutions,
financial instruments and financial services have emerged as a result of economic liberalisation
policy of the Government of India.
The capital market has two interdependent segments : the primary market and the secondary
market. The primary market is the channel for creation of new securities. These securities are
issued by public limited companies or by government agencies‘ In the primary market, the
resources are mobilized either through the public issue or through private placement route. It is a
public issue if anybody and everybody can subscribe for it, whereas if the issue is made available
to a selected group of persons it is termed as private placement. There are two major types of
issuers of securities, the corporate entities who issue mainly debt and equity instruments and the
Government (Central as well as State) who issue debt securities. These new securities issued in
the primary market are traded in the secondary market. The secondary market enables
participants who hold securities to adjust their holdings in response to changes in their
assessment of risks and returns.
2.2 Foreign Institutional Investments (FIIs)
In present era of globalization no country or economy has been left untouched from international
trade and commerce. More access to international capital markets and foreign investments has
helped developing countries surmount their less developed capital markets. During the past few
years, a flow of capital has been seen from the developed part of the world to the less developed
economies which has led to decrease in the vulnerability of developing countries to financial
crisis by reduction in their external debt burden from 39% of gross national income in 1995 to
26% in 2006 and increase in foreign exchange reserves to 92% of long term debt and 423% of
more volatile short term debt in 2006. Over the years same scenario has been witnessed in the
Indian economy also. And thus, today most of the market entities are interested in attracting
foreign capital as it not only helps in creating liquidity for the firms stock and the stock market
but also leads to lowering of the cost of the capital for the firms and allows them to compete
more effectively in the global market place.
It has been defined as ―a transfer of funds or materials from one country (called capital exporting
country) to another country (called host country) in return for a direct or indirect participation in
the earnings of that enterprise.‖ Foreign investments provide a channel through which one can
have access to foreign capital and after the opening up of the Indian economy; these have grown
in leaps and bounds.
Basically foreign investment can be made through following routes:
Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI).
Private Equity investments-Foreign venture capital investor(FVCI)
Firstly, foreign direct investment pertains to international investment in which the investor
obtains a lasting interest in an enterprise in another country. Mostly it takes the form of buying or
constructing a factory in a foreign country or adding improvements to such a facility in form of
property, plants or equipments and thus is generally long term in nature. On the other hand, a
private equity investment is one made by foreign investors in Indian Venture Capital
Undertakings (VCU) and Venture Capital Funds (VCF). Thirdly, a foreign portfolio investment
is a short-term to medium- term investment mostly in the financial markets and is commonly
made through foreign Institutional Investors (FIIs), non resident Indian (NRI) and persons of
Indian origin (PIO).
2.3 FOREIGN INSTITUTIONAL INVESTORS
The term ‗FII‘ is used to denote an investor, mostly in the form of an institution or entity which
invests money in the financial markets of a country different from the one where in the
institution or the entity is originally incorporated. According to Securities and Exchange Board
of India (SEBI) it is ―an institution that is a legal entity established or incorporated outside India
proposing to make investments in India only in securities‖. These can invest their own funds or
invest funds on behalf of their overseas clients registered with SEBI. The client accounts are
known as ‗sub-accounts‘. A domestic portfolio manager can also register as FII to manage the
funds of the sub-accounts. From the early 1990s, India has developed a framework through
which foreign investors participate in the Indian capital market. A foreign investor can either
come into India as a FII or as a sub-account. As on March 31, 2011, there were 1,722 FIIs
registered with SEBI and 5,686 sub-accounts registered with SEBI as on March 31, 2011
Basically FIIs have a huge financial strength and invest for the purpose of income and capital
appreciation. They are no interested in taking control of a company. Some of the big American
mutual funds are fidelity, vanguard, Merrill lynch, capital research etc. They are permitted to
trade in securities in primary as well as secondary markets and can trade also in dated
government securities, listed equity shares, listed non convertible debentures/bonds issued by
Indian company and schemes of mutual funds but the sale should be only through recognized
stock exchange. These also include domestic asset management companies or domestic portfolio
managers who manage funds raised or collected or bought from outside India for the purpose of
making investment in India on behalf of foreign corporate or foreign individuals. In the Indian
context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments
for facilitating the participation of their overseas clients, who are not interested in participating
directly in the Indian stock market.
FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions
and FDI are insufficient.
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.
In the late 1980s India suffered an acute financial crunch. At that time Indian foreign exchange
stood at mere US $1.2 bn which could barely finance 3 weeks‘ worth of imports. And India had
to pledge its gold reserve with IMF to secure a loan of just US $457 mn. The gross fiscal deficit
of the government rose from 9.0% of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7%
in 1990-91. Since these deficits had to be met by borrowings, the internal debt of the government
accumulated rapidly, rising from 35% of GDP at the end of 1980-81 to 53% of GDP at the end of
According to India Report, Astaire Research
“A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an
IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic
reforms were forced upon India. That low point was the catalyst required to transform the
economy through badly needed reforms to unshackle the economy. Controls started to be
dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment, private sector enterprise and competition were
encouraged and globalization was slowly embraced. The reforms process continues today and is
accepted by all political parties, but the speed is often held hostage by coalition politics and
Thus it was decided to open up the economy, the economic policies were liberalized and private
sector was given the freedom to participate in the Indian economy more effectively. The Indian
market was integrated with the world economy and international investors were invited to
participate in India. Consequently, the committee on ―the reforms of the financial system‖ under
the chairmanship of Mr M. Narsimham Rao was made which sought for reforms in the financial
sector. One of its recommendation included developing an active government securities market
and strengthening the open market operations as an instrument of monetary policy. And thus this
reform paved way for foreign investments which were at that time the need of the hour. As a
result of this, Indian stock market witnessed metamorphic changes and a transition-from a ―dull‖
to a highly ―buoyant‖ stock market. Improved market surveillance system, trading mechanism
and introduction of new financial instruments made it a center of attraction for the international
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:
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;
disintermediation of Government in the flow of external assistance.
2.5 Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic reforms with
a view of bringing about rapid and substantial economic growth and move towards globalization
of the economy. As a part of the reforms process, the Government under its New Industrial
Policy revamped its foreign investment policy recognizing the growing importance of foreign
direct investment as an instrument of technology transfer, augmentation of foreign exchange
reserves and globalization of the Indian economy. Simultaneously, the Government, for the first
time, permitted portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System. While recommending their entry, the
Committee, however did not elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened up to foreign portfolio
investments. From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in
all the 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
India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh
had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to
invest in Indian capital market. To operationalise this policy announcement, it had become
necessary to evolve guidelines for such investments by Foreign Institutional Investors (FIIs).
A major development in our country post 1991 has been liberalization of the financial sector,
especially that of capital markets. Our country today has one of the most prominent and followed
stock exchanges in the world. Further, India has also been consistently gaining prominence in
various international forums, though we still have a long way to go.
EVOLUTION OF FII POLICIES IN INDIA
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.
The policy framework for permitting FII investment was provided under the Government of
India guidelines, which enjoined upon FIIs to obtain an initial registration with SEBI and also
RBI‘s general permission under FERA. 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.With coming into force of the Foreign Exchange Management Act, (FEMA), 1999 foreign
exchange related transactions of FIIs were permitted by RBI. Right from 1992, 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 India and in schemes floated by domestic mutual funds. The holding of a single
FII, and of all FIIs, NRIs and OCBs together in any company were initially subject to the limit of
5 per cent and 24 per cent of the company‘s total issued capital, respectively. Furthermore, to
ensure a broad base and prevent such investment acting as a camouflage for individual
investment in the nature of FDI and requiring Government approval, funds invested by FIIs have
to have at least 50 participants (changed to 20 investors in August, 1999) with no single
participant holding more than 5 per cent (revised to 10 per cent in February, 2000).
However, this was allowed to be increased subject to passing of resolution by the Board of
Directors of the company followed by passing of a special resolution by the General Body of the
company. The ceiling limit under special procedure was enhanced in stages as follows:
to 30 per cent from April 4, 1997
to 40 per cent from March 1, 2000,
to 49 per cent from March 8, 2001,and
to sectoral cap/statutory ceiling from September 20,2001.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio managers
or their power of attorney holders (providing discretionary and non discretionary portfolio
management services) to be registered as FIIs. While the guidelines did not have a specific
provision regarding clients, in the application form the details of clients on whose behalf
investments were being made were sought. While granting registration to the FII, permission was
also granted for making investments in the names of such clients. Asset management
companies/portfolio managers are basically in the business of managing funds and investing
them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow these
categories of investors to invest funds in India on behalf of their ‗clients‘. These ‗clients' later
came to be known as sub-accounts. The broad strategy consisted of having a wide variety of
clients, including individuals, intermediated through institutional investors, who would be
registered as FIIs in India. A Working Group for Streamlining of the Procedures relating to FIIs,
constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure,
and suggested that dual approval process of SEBI and RBI be changed to a single approval
process of SEBI. This recommendation was implemented in December 2003.
Under eligibility conditions, the definition of broad based funds was relaxed in August, 1999 and
in February, 2000 and newer entities, such as foreign firms were allowed to invest as sub-
accounts. In order to have a level playing field in intermediation, domestic portfolio managers
were allowed in February, 2000 to manage the funds of sub-accounts, so as to give end-
customers a greater choice about the identity of their fund manager in India. FIIs were initially
allowed to only invest in listed securities of companies. Gradually, they were allowed to invest in
unlisted securities, rated government securities, commercial paper and derivatives traded on a
recognised stock exchange. From November 1996, any registered FII willing to make 100 per
cent investment in debt securities were permitted to do so subject to specific approval from SEBI
as a separate category of FIIs or sub-accounts as 100 per cent debt funds In order to increase
transparency, SEBI issued a circular on October 31, 2001 to all FIIs and their custodians
advising the FIIs to report as and when any derivative instruments with Indian underlying
securities are issued/renewed/redeemed by them, either on their own account or on behalf of sub-
accounts registered under them. In 2003 this circular was further revised to include disclosure of
more details about terms, nature and contracting parties.
The overall cap on investments in Government securities, both through the normal route and the
100 per cent debt fund route, was revised from US$1 billion to US$1.75 billion in November,
2004. Moreover, investments were allowed only in debt securities of companies listed or to be
listed in stock exchanges. Investments were free from maturity limitations. From April 1998, FII
investments were also allowed in dated Government securities. Treasury bills, being money
market instruments, were originally outside the ambit of such investments, but were included
subsequently from May, 1998.In April 2006 there was a rise in the cumulative debt investment
limits from US $1.75 billion to US $2 billion and US $0.5 billion to US $1.5 billion for FII/Sub
Account investments in Government securities and Corporate Debt, respectively.
2.6 Investments by FIIs
A FII may invest through 2 routes:
100% investments could be in equity related instruments or upto 30% could be invested
in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments)
100% investment has to be made in debt securities only
Equity Investment route: In case of Equity route the FIIs can invest in the following
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% Debt route: In case of Debt Route the FIIs can invest in the following instruments:
A. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)
C. Dated government securities
D. Treasury Bills
E. Other Debt Market Instruments
It should be noted that foreign companies and individuals are not be eligible to invest through the
100% debt route.
The evolution of FII policy in India has displayed a steady and cautious approach to
liberalisation of a system of quantitative restrictions (QRs). The policy liberalization has taken
the form of,
(i) relaxation of investment limits for FIIs;
(ii) relaxation of eligibility conditions;
(iii) liberalisation of investment instruments accessible for FIIs
Market design in India for foreign institutional investors
Foreign Institutional Investors means an institution established or incorporated outside India
which proposes to make investment in India in securities. A Working Group for Streamlining of
the Procedures relating to Foriegn Institutional Investors, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual approval
process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation
was implemented in December 2003.
Currently, entities eligible to invest under the FII route are as follows:
As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, 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 or with no single investor holding more than 10 per cent of the shares or
units of the fund.
As Sub-accounts: The sub account is generally the underlying fund on whose behalf the
FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust, and
FIIs registered with SEBI fall under the following categories:
Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio managers
or their power of attorney holders (providing discretionary and non-discretionary portfolio
management services) to be registered as Foreign Institutional Investors. While the guidelines
did not have a specific provision regarding clients, in the application form the details of clients
on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making investments in the
names of such clients. Asset management companies/portfolio managers are basically in the
business of managing funds and investing them on behalf of their funds/clients. Hence, the
intention of the guidelines was to allow these categories of investors to invest funds in India on
behalf of their ‗clients‘. These ‗clients‘ later came to be known as sub-accounts. The broad
strategy consisted of having a wide variety of clients, including individuals, intermediated
through institutional investors, who would be registered as FIIs in India. FIIs are eligible to
purchase shares and convertible debentures issued by Indian companies under the Portfolio
Prohibitions on Investments:
Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which is engaged
or proposes to engage in the following activities:
Business of chit fund
Agricultural or plantation activities
Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
Trading in Transferable Development Rights (TDRs).
Trends of Foreign Institutional Investments in India.
Portfolio investments in India include investments in American Depository Receipts (ADRs)/
Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in
offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies
were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets
were opened up for direct participation by FIIs. They were allowed to invest in all the securities
traded on the primary and the secondary market including the equity and other
securities/instruments of companies listed/to be listed on stock exchanges in India.
Procedure for Registration: 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.
2.7 Entities which can register as FII‟s in India- Eligibility
Entities who propose to invest their proprietary funds or on behalf of ―broad based‖ funds (fund
having more than twenty investors with no single investor holding more than 10 per cent of the
shares or units of the fund) or of foreign corporate and individuals and belong to any of the under
given categories can be registered for Foreign Institutional Investors (FII‘s)
Insurance or reinsurance companies
Foundations or Charitable Trusts or Charitable Societies who propose to invest on their
Asset Management Companies
Institutional Portfolio Managers
Power of Attorney Holders
Foreign Government Agency
Foreign Central Bank
International or Multilateral Organization
or an Agency thereof
Some of the above mentioned types are described below:
Pension funds: A pension fund is a pool of assets that form an independent legal entity that are
bought with the contributions to a pension plan for the exclusive purpose of financing pension
plan benefits. It manages pension and health benefits for employees, retirees, and their families.
FII activity in India gathered momentum mainly after the entry of CalPERS (California Public
Employees‘ Retirement System), a large US-based pension fund in 2004.
Mutual funds: A mutual fund is a professionally managed type of collective investment scheme
that pools money from many investors and invests it in stocks, bonds, short-term money market
instruments, or other such securities. The mutual fund will have a fund manager that trades the
pooled money on a regular basis. The net proceeds or losses are then distributed to the investors.
Investment trust: An Investment trust is a form of collective investment .Investment trusts are
closed-end funds and are constituted as public limited companies. A collective investment
scheme is a way of investing money with others to participate in a wider range of investments
than feasible for most individual investors, and to share the costs and benefits of doing so
Investment banks: An investment bank is a financial institution that raises capital, trades in
securities and manages corporate mergers and acquisitions. Investment banks profit from
companies and governments by raising money through issuing and selling securities in capital
markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as
providing advice on transactions such as mergers and acquisitions.
Hedge funds: A hedge fund is an investment fund open to a limited range of investors that is
permitted by regulators to undertake a wider range of investment and trading activities than other
investment funds, and that, in general, pays a performance fee to its investment manager. Every
hedge fund has its own investment strategy that determines the type of investments and the
methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of
investments including shares, debt and commodities. Many hedge funds investments in India
were facilitated by global investors borrowing at near zero interest rates in Japan and investing
the proceeds in High interest markets like India.
University Fund: The purpose of investments of these funds is to establish an asset mix for each
of the University funds according to the individual fund‘s spending obligations, objectives, and
liquidity requirements. It consists of the University‘s endowed trust funds or other funds of a
permanent or long-term nature. In addition, external funds may be invested including funds of
affiliated organizations and funds where the University is a beneficiary.
Endowment fund: It is a transfer of money or property donated to an institution, usually with
the stipulation that it be invested, and the principal remain intact in perpetuity or for a defined
time period. This allows for the donation to have an impact over a longer period of time than if it
were spent all at once.
Insurance Funds: An insurance company‘s contract may offer a choice of unit-linked funds to
invest in. All types of life assurance and insurers pension plans, both single premium and regular
premium policies offer these funds. They facilitate access to wide range and types of assets for
different types of investors.
Asset Management Company: An asset management company is an investment management
firm that invests the pooled funds of retail investors in securities in line with the stated
investment objectives. For a fee, the investment company provides more diversification,
liquidity, and professional management consulting service than is normally available to
individual investors. The diversification of portfolio is done by investing in such securities which
are inversely correlated to each other. They collect money from investors by way of floating
various mutual fund schemes.
Nominee Company: Company formed by a bank or other fiduciary organization to hold and
administer securities or other assets as a custodian (registered owner) on behalf of an actual
owner (beneficial owner) under a custodial agreement.
Charitable Trusts or Charitable Societies: A trust created for advancement of education,
promotion of public health and comfort, relief of poverty, furtherance of religion, or any other
purpose regarded as charitable in law. Benevolent and philanthropic purposes are not necessarily
charitable unless they are solely and exclusively for the benefit of public or a class or section of
it. Charitable trusts (unlike private or non-charitable trust) can have perpetual existence and are
not subject to laws against perpetuity. They are wholly or partially exempt from almost all taxes.
An application for registration has to be made in Form A, the format of which is provided in the
SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate
addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address
within 10 to 12 days of receipt of application.
Address for application
The Division Chief
Securities and Exchange Board of India,
224, Mittal Court, 'B' Wing, 1st Floor,
Nariman Point, Mumbai - 400 021.
Supporting documents required are
Application in Form A duly signed by the authorised signatory of the applicant.
Certified copy of the relevant clauses or articles of the Memorandum and Articles of
Association or the agreement authorizing the applicant to invest on behalf of its clients
Audited financial statements and annual reports for the last one year , provided that the
period covered shall not be less than twelve months.
A declaration by the applicant with registration number and other particulars in support
of its registration or regulation by a Securities Commission or Self Regulatory
Organisation or any other appropriate regulatory authority with whom the applicant is
registered in its home country.
A declaration by the applicant that it has entered into a custodian agreement with a
domestic custodian together with particulatrs of the domestic custodian.
A signed declaration statement that appears at the end of the Form.
Declaration regarding fit & proper entity.
The eligibility criteria for applicant seeking FII registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required
to fulfill the following conditions to qualify for grant of registration:
Applicant should have track record, professional competence, financial soundness,
experience, general reputation of fairness and integrity;
The applicant should be regulated by an appropriate foreign regulatory authority in the
same capacity/category where registration is sought from SEBI. Registration with
authorities, which are responsible for incorporation, is not adequate to qualify as Foreign
The applicant is required to have the permission under the provisions of the Foreign
Exchange Management Act, 1999 from the Reserve Bank of India.
Applicant must be legally permitted to invest in securities outside the country or its in-
corporation / establishment.
The applicant must be a "fit and proper" person.
The applicant has to appoint a local custodian and enter into an agreement with the
custodian. Besides it also has to appoint a designated bank to route its transactions.
Payment of registration fee of US $ 5,000.00
a) Institution or funds or portfolios established outside India, whether incorporated or not.
b) Proprietary fund of FII.
c) Foreign Corporates
d) Foreign Individuals.
The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are
required to sign the Sub-account application form.
"Annexure B" to "Form A" (FII application form) needs to be filled when applying for sub-
account registration. No document is needed to be sent with annexure B. The fee for sub-account
registration is US$ 1,000. The fee is to be submitted at the time of submitting the application.
The mode of payment is Demand Draft in the name of "Securities and Exchange Board of India"
payable at New York. SEBI generally takes three working days in granting FII registration.
However, in cases where the information furnished by the applicants is incomplete, three days
shall be counted from the days when all necessary information sought, reaches SEBI. The
validity of sub-account registration is co-terminus with the FII registration under which it is
registered. The process of renewal of sub-account is same as initial registration. Renewal fee in
this case is US $ 1,000. OCBs / NRIs are not permitted to get registered as FII/sub-account.
Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of
important regulations by SEBI and RBI:
1. A Foreign Institutional Investor may invest only in the instruments mentioned earlier.
2. The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants) made
by a FII in India, whether on his own account or on account of his sub- accounts, should be at
least 70% of the aggregate of all the investments of the FII in India, made on his own account
and through his sub-accounts.
3. The cumulative debt investment limit for FII investments in Corporate Debt is US $15 billion.
The amount was increased from US $6 billion to USD 15 billion in March 2009.
4. US $8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform
while the remaining amount is allocated on a ‗first come first served‘ basis subject to a ceiling of
Rs.249 cr. per registered entity.
5. The debt investment limit for FIIs in government debt is currently capped at $5 billion and
cumulative investments under 2% of the outstanding stock and no single entity can be allocated
more than Rs. 1000 crores of the government debt limits.
Further, in 2008 amendments were made to attract more foreign investors to register with
SEBI, these amendments are:
1. The definition of ―broad based fund‖ under the regulations was substantially widened allowing
several more sub accounts and FIIs to register with SEBI.
2. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign
corporate etc. were introduced,
3. 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 burden,
4. Also the application fee for foreign investors applying for registration has recently been
reduced by 50% for FIIs and sub accounts
5. 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.
6. Also the rigid criteria of requiring FIIs and sub-account to register as a 70:30 FII/ sub-account
or 100% debt FII/sub-account has recently been done away with(as has been discussed above in
With regard to investments in the secondary market, SEBI states that:
The Foreign Institutional Investor is allowed to transact business only on the basis of
taking and giving deliveries of securities bought and sold.
Short selling in securities is not allowed. However, in December 2007, abroad regulatory
framework enabling short selling by FIIs was put in place. Which stipulated that naked
short selling was not permitted and settlement of securities sold short would be through a
mechanism for borrowing of securities.
FIIs are not permitted to short sell equity shares which are in the caution list of RBI.
Equity shares can be borrowed by FIIs only for the purpose of delivery into short sale.
No transactions on the stock exchange can be carried forward.
Transaction of business in securities can be carried out only through stock brokers who
has been granted a certificate by the Board.
A Foreign institutional Investor or a sub-account having an aggregate of securities worth
rupees ten crore or more, as on the latest balance sheet date, can settle their only through
Securities have to be registered in the name of the Foreign Institutional Investor, if he is
making investments on his own behalf or in his name on account of his sub-account, or in
the name of the sub-account, in case he is investing on behalf of the sub-account.
The purchase of equity shares of each company by a Foreign Institutional Investor
investing on his own account cannot exceed ten percent of the total issued capital of that
Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by
foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. All FIIs
and their subaccounts taken together cannot acquire more than 24% of the paid up capital
of an Indian Company. An Indian Company can raise the 24% ceiling to the Sectoral Cap
/ Statutory Ceiling by passing a resolution by its Board of Directors followed by passing
a Special Resolution to that effect by their General Body.
For FIIs investing in the equity shares of a company on behalf of his sub-accounts, the
investment on behalf of each such sub-account cannot exceed ten percent of the total
issued capital of that company.
The FII position limits in a derivative contracts (Individual Stocks)
The FII position limits in a derivative contract on a particular underlying stock i.e. stock
option contracts and single stock futures contracts are:
For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the
FII position limit in such stock is 20% of the market wide limit.
For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII
position limit in such stock is Rs. 50 Cr.
FII Position limits in Index options contracts
FII position limit in all index options contracts on a particular underlying index is Rs. 250 Crore
or 15 % of the total open interest of the market in index options, whichever is higher, per
exchange. This limit is applicable on open positions in all option contracts on any underlying
FII Position limits in Index futures contracts
FII position limit in all index futures contracts on a particular underlying index is Rs. 250 Crore
or 15 % of the total open interest of the market in index futures, whichever is higher, per
This limit is applicable on open positions in all futures contracts on a particular underlying index.
In addition to the above, FIIs can take exposure in equity index derivatives subject to the
conditions that :
Short positions in index derivatives (short futures, short calls and long puts) cannot
exceed (in notional value) the FII‘s holding of stocks.
Long positions in index derivatives (long futures, long calls and short puts) can not
exceed (in notional value) the FII‘s holding of cash, government securities, TBills and
FII Position Limits in Interest rate derivative contracts
At the level of the FII – The notional value of gross open position of a FII in exchange
traded interest rate derivative contracts is US $ 100 million.
In addition to the above, FIIs can take exposure in exchange traded in interest rate
derivative contracts to the extent of the book value of their cash market exposure in
At the level of the sub-account – The position limits for a Sub-account in near month
exchange traded interest rate derivative contracts is the higher of: Rs. 100 Cr Or 15% of
total open interest in the market in exchange traded interest rate derivative contracts.
2.8 FIIs and their impact on Indian Stock market
It is influence of the FIIs which changed the face of the Indian stock markets. Screen based
trading and depository are realities today largely because of FIIs. Equity research was something
unheard of in the Indian market a decade ago. It was FII which based the pressure on the rupee
from the balance of payments position and lowered the cost of capital to Indian business. It is
due to the FIIs that a concept like corporate governance is being increasingly adopted by Indian
companies; this is benefiting domestic investors also. FIIs are the trendsetters in any market.
They were the first ones to identify the potential of Indian technology stocks. When the rest of
the investors invested in these scrips, they exited the scrips and booked profits. Before the arrival
of FIIs, the activity in stocks used to be evenly attributed with little differences between volumes
in specified and cash groups. However since FIIs concentrate on the top 200 companies against
the 6,000 listed companies on BSE, the stock trading activity has concentrated to these liquid
scrips making them less liquid scrips totally illiquid. Thus, FIIs have become the driving force
behind the movements of the stock indices on the Indian stock markets.
Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the
badla system. The major beneficiaries of the rolling settlement system are FIIs as short
settlement cycles offer them quick exit from the market.
With their massive financial muscle FIIs have almost replaced conventional market of the Indian
bourse. Today financial institutions and mutual funds including UTI can do little to help the
stock markets at a time of crisis. Even UTI, which used to be counter force for FIIs has ceased to
play that role in the Indian stock markets.
It is expected that with the adoption of international practices such as rolling settlement and
derivatives FII participation will increase and more money will flow into the Indian capital
2.9 EFFECTS ON INDIAN ECONOMY
The various reforms introduced by Indian government to encourage FIIs to invest in Indian
market have been effective to such an extent that in November 2010 FIIs stood at 5426 whereas
it stood at 1713 in early 1990s. The changes have led to increase in liquidity, reduce risk,
improve disclosure and thus FIIs have become the corner stone in the phenomenal rise of the
Indian stock market. From the table below it becomes apparent that from just Rs 4 crores of net
investment in 1992-93, the investment rose to Rs 5445 the next financial year when the
economic changes were introduced and further today in 2010-11 it stands at Rs 133,049.
YEAR Net Investments by FIIs (rs cr.)
In 1993 the first and only FII to invest in India was Pictet Umbrella Trust Emerging Markets‘
Fund, an institutional investor from Switzerland but today Indian growth story has attracted
global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman
Sachs and Morgan Stanley, among others to enter the Indian financial market. Goldman Sachs
and Macquarie have acquired a 20% stake each in PTC India Financial services Ltd. Temasek
Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup
and India Equity Partners (IEP) have picked a combined stake of 10% in Bharti Infratel. Also an
entity of Merrill Lynch has picked up 49% stake in seven residential projects of real estate major,
This boost, though good for Indian economy has led to a number of negative consequences. Let
us study the positive and the negative side of this rise of investments by FIIs one by one.
Positive impact: It has been emphasized upon the fact that the capital market reforms like
improved market transparency, automation, dematerialization and regulations 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 capital market reforms. The market reforms
were initiated because of the presence of them and this in turn has led to increased flows.
A. Enhanced flows of equity capital: FIIs are well known for a greater appetite for equity than
debt in their asset structure. For example, pension funds 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.
B. Managing uncertainty and controlling risks: FIIs promote financial innovation and
development of hedging instruments. These because of their interest in hedging risks, are known
to have contributed to the development of zero-coupon bonds and index futures. 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.
C. 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.
D. Improved corporate governance: Good corporate governance is essential to overcome the
principal-agent problem between share-holders and management. Information asymmetries and
incomplete contracts between share-holders and management are at the root of the agency costs.
Bad corporate governance makes equity finance a costly option. With boards often captured by
managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed
efficiently in any economy. Incentives for shareholders to monitor firms and enforce their legal
rights are limited and individuals with small share-holdings often do not address the issue since
others can free-ride on their endeavor. FIIs constitute professional bodies of asset managers and
financial analysts, who, by contributing to better understanding of firms‘ operations, improve
corporate governance. Among the four models of corporate control - takeover or market control
via equity, leveraged control or market control via debt, direct control via equity, and direct
control via debt or relationship banking-the third model, which is known as corporate
governance movement, has institutional investors at its core. In this third model, board
representation is supplemented by direct contacts by institutional investors.
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
A. 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.
B. 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
C. 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.
D. 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.
E. Issue related to participatory notes: When Indian-based brokerages buy India-based
securities and then issue participatory notes to foreign investors. Any dividends or capital gains
collected from the underlying securities go back to the investors. Any entity investing in
participatory notes is not required to register with SEBI (Securities and Exchange Board of
India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes
is easy because participatory notes are like contract notes transferable by endorsement and
delivery. Secondly, some of the entities route their investment through participatory notes to take
advantage of the tax laws of certain preferred countries. Thirdly, participatory notes are popular
because they provide a high degree of anonymity, which enables large hedge funds to carry out
their operations without disclosing their identity. The hedge funds borrow money cheaply from
western markets and invest these funds into stocks in emerging economies. It is also feared that
the hedge funds, acting through participatory notes, will cause economic volatility in Indian
exchange and generally these are blamed for the sudden fall in indices. These unlike FIIs are not
directly registered under SEBI, but they operate through sub accounts with FIIs and according to
a number of studies it has been found that more than 50% of the funds are flowing through this
anonymous route, which can lead to a great loss to the Indian economy.
Further, FIIs have contributed a lot in making Indian economy one of the fastest growing
economy in the world today. Foreign institutional investment can play a useful role in
development by adding to the savings of low and middle income developing countries. And
India among the world inventors is believed to be a good investment destination inspite of all the
political uncertainty and infrastructural inefficiencies. After the liberalization of financial
policies India has been able to attract a lot of FII from rest of the world and which in turn has
played its part very well by helping in development of Indian economy from what it was in early
1990s to a would be super power that it is today. But still the harsh consequences of FIIs should
not be ignored by the government and further reforms should be introduced in the economic
sector to counter the tendency of the FIIs to destabilize the emerging equity market. And also
attempts should be made to encourage small domestic investors to participate in the equity
2.10 FII activity in India from 1992-2006
The Indian financial market was opened to the foreign institutional investors in 1992 to
widen and broaden the Indian capital market. Since then, the net investment by FIIs in India has
been positive every year except in 1998-99. During the last few years, there has been a
phenomenal increase in the portfolio investment by FIIs in the Indian market. (Table 1 & Chart
1). The gross purchases of debt and equity together by FIIs increased by 59.9 per cent to
Rs.3,46,978 crore in 2005-06 from Rs.2,16,953 crore in 2004-05. The gross sales by FIIs also
rose by 78.6 per cent to Rs.3,05,512 crore from Rs. 1,71,072 crore during the same period.
However, the net investment by FIIs in 2005-06 declined by 9.6 per cent to Rs.41,467 crore in
2005-06 from Rs.45,881 crore in 2004-05 mainly due to large net outflows from the debt
segment. The cumulative net investment by FIIs at acquisition cost, which was US$15.8 billion
at the end of March 2003, rose to US$ 45.3 billion at the end of March 2006. (Chart 2) The
provisional net investment figure as of March 2007 was US $ 3225 million as per RBI
Source : SEBI Annual Report 2005-06
Chart 1 : FII Investments in India
Source : SEBI Annual Report 2005-06
Chart 2: Trends in FII Investment
The FII investment in equity increased significantly since 2003-04. During 2005-06, FIIs
increased their net investment in equities, but reduced their commitments in debt Securities
(Table 2). The net FII investment in equity during 2005-06 was Rs.48,801 crore, the highest ever
in a single year. Buoyancy in the markets was sustained in 2005-06 on account of surge in net
investment by the institutional investors with FIIs playing a major role. Month-wise, FII
investment was negative in the months of April, May and October 2005. However, during the
remaining months of the financial year, there was large net equity investment by FIIs,
particularly in the second half of 2005-06, which drove the benchmark indices to surpass the
earlier record highs on several occasions. The net FII investment in December 2005 was the
highest for 2005-06, followed by July 2005 and February 2006. However, month-wise, the FII
investment in the debt segment was negative in all the months in 2005-06. The total net
investment in the debt segment in 2005-06 declined by Rs.7,334 crore mainly due to firming up
of the yield rate of G-sec across the entire maturity spectrum.
Table 2: Investments by MFs & FIIs
Source : SEBI Annual Report 2005-06
Several factors are responsible for increasing confidence of FIIs on the Indian stock
market which include, inter alia, strong macro-economic fundamentals of the economy,
transparent regulatory system, abolition of long-term capital gains tax and encouraging corporate
results. Reflecting the congenial investment climate, the total number of FIIs registered with
SEBI increased to 882 as on March 31, 2006 compared to 685 a year ago, an increase of 197
over the year ( Table 3). The diversity of FIIs has been increasing with the number of registered
FIIs in India steadily rising over the years.
Table 3: FIIs Registered in India
FINANCIAL YEAR DURING THE YEAR TOTAL REGISTERED AT
THE END OF THE YEAR
1992-93 0 0
1993-94 3 3
1994-95 153 156
1995-96 197 353
1996-97 99 439
1997-98 59 496
1998-99 59 450
1999-00 56 506
2000-01 84 528
2001-02 48 490
2002-03 51 502
2003-04 83 540
2004-05 145 685
2005-06 210 882
Source : Expert Group Report, GOI 2005
SOURCES OF FIIS
As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest number of FIIs,
as on March 31, 2006, was from the USA (342), followed by the UK (148). About 90 per cent
FIIs come from the top 13 countries. There has been increase in the number of FII registrations
from non-traditional countries like Malaysia, Australia, Saudi Arabia, Trinidad and Tobago,
Denmark, Italy, Belgium, Canada, Sweden, Ireland etc. (chart 3). These developments have
helped improve the diversity of the set of FIIs operating in India.
Chart 3: Country-wise FIIs Registered with SEBI as on 31st
Several factors were responsible for increasing confidence of FIIs on the Indian stock market
Strong economic fundamentals and attractive valuations of companies.
Improved regulatory standards, high quality of disclosure and corporate governance
requirement, accounting standards, shortening of settlement cycles, efficiency of clearing
and settlement systems and risk management mechanisms.
Product diversification and introduction of derivatives.
Strengthening of the rupee dollar exchange rate and low interest rates in the US.
2.11 FII ACTIVITY FOM 2006-2010
2008 FII sell-off the largest ever
The Indian equity market kept on sliding in September 2008 with the S&P CNX NIFTY,
showing the second sharpest fall since January 2008, with a decline of around 10%. With all
courtesy to the US financial markets and its crisis bug, an estimated amount of Rs 2.3 trillion of
shareholders' wealth were eroded in the Indian stock markets.
We hear a lot about sales and purchases made by foreign institutional investors (FIIs) in
Indian equity markets, with these numbers often making headlines. Why are we so obsessed with
FIIs? The answer, is "Indian markets are primarily driven by FII fund flows."
The market slide can be attributed to lower FII inflows in 2011. A look at stock indices since
2006 shows that the markets peak when FII inflows are the highest and fall when FIIs are
missing in action. For instance, in 2008, the BSE Sensex fell almost 50% due to the global
financial meltdown, wiping out the gains of 2007. The year 2008 has seen the biggest ever FIIs
sell-off for the Indian markets. FIIs were allowed to invest since 1991 when the economy opened
up. FIIs sell-off of USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the
total FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3 lakh
The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in 2008, while
the number of registered sub-accounts have increased from 3644 in 2007 to 4872 in 2008. In
2008, there were negative FIIs' flows seen for 10 months, and the longest selling streak was seen
from May to November. Since 1999, there have been 32 months of negative FIIs flows as against
88 months of positive flows. Since 2003, there have been 19 months of negative FIIs' flows as
against 53 months of positive flows. October and January were two carnage months, where USD
3.8 billion and UDS 3.2 billion, respectively, were sold.
The depreciation by 23% in rupee and the 51% sell-off in the markets has resulted in the
Defty falling 61%, making India one of the worst emerging market performers for 2008. The
biggest sell-off was seen in March, when the FIIs sold Rs 1,881 crore. In January, a correction
bought the most at Rs 7,702 crore follwed by Rs 3,179 crore in June.
"What hurt in 2008 was not the performance of companies but rapid outflow of $13
billion (Rs 55,000 crore) as investors fled risky assets," says Nick Paulson-Ellis, India head,
Espirito Santo Securities.The markets were flat during the first three months of 2009 as FIIs
stayed away. After that, governments across the globe implemented plans to boost their
economies. India, helped by robust economic growth, became a preferred destination for
85% was the surge in the Sensex in 2009 with FIIs investing a net Rs 84,000 cr, crossing the
With FIIs investing a net $19 billion (Rs 93,100 crore) in 2009, crossing the 2007 level, the
Sensex surged 85%. In 2010, the trend continued and FIIs pumped in $30 billion(Rs 1.3 lakh
crore) into Indian equities, helping the Sensex gain 25%. Between December 2006 and July
2011, the number of FIIs registered in India rose from 1,024 to 1,730.
Table 1: Net FIIs Investment in Equity (2007-10)
MONTH 2007 2008 2009 2010
JAN 94.45 -17326.30 -3009.50 5902.40
FEB 6065 5419.90 -2690.50 2113.50
MARCH 1403.30 124.40 269 18833.60
APRIL 5431.80 979.00 7384.20 9764.50
MAY 4574.50 -4917.30 20606.90 -8629.90
JUNE 7939.60 -10577.70 3224.90 10244.60
JULY 18132.80 -1012.90 11625.30 17120.60
AUG -7526.80 -2065.80 4028.70 11185.30
SEPT 18948.50 -7937.00 19939.50 29195.80
OCT 15577.60 -14248.60 8304.10 24770.80
NOV -4597.40 -2820.30 5317.80 18519.90
DEC 4896.70 1330.90 10367.20 1476.10
Table shows the position of FIIs investment in equity from 2006-10. It is clear from the
above table that during 2007, apart from August 2007, FII‟s showed keen interest in purchasing
the equity in the Indian market. But so far as the month of August was concerned, FII‟s turned
towards net selling in equity for profit booking and seeing the massive sell out of shares in global
markets including India especially on August 16 & 17 when there was massive equity selling.
Consequently the SENSEX broke down to even 4 to 5% of its previous levels. Moreover, the
bears took command of the market and some brokers also started off-loading their positions
anticipating a further fall and stop loss button was pressed by many investors. So far as the
month of October was concerned, the impact of supportive level was pulling the FII‟s money in
India. As a result positive impact in the net position was seen. Again a bearing trend could be
noticed during November due to the fact that new norms about PNs were announced which
ordered the winding up of PNs within next 18 months.
The analysis of the above table depicts a negative view of the FII‟s investment in India
during 2008. The main reason could be tremendous selling at the beginning of the year. The next
three months i.e. February, March & April showed a consistent pattern in the trading activities.
But from the month of May to November, FII‟s again showed the exit mode from the stock
market. This was due to the fact that impact of international recession had started affecting
Indian markets also. Further the famous subprime crisis of USA e.g. the crash of Banks and
investment firms like Lehman Brother had also started impacting global economy. Market
analysts feel that the foreign fund managers were trying to play safe and therefore rushed
towards risk aversion and taking off their money. Due to this reason a negative impact of FII‟s
was reflected showing immense selling and taking back their money from the Indian stock
During the year 2009, FII‟s investment in equity showed an initial sell off in the first two
months, may be the impact of 2008 was still continuing. This year market sentiments seemed to
improve from March onwards as the foreign investors starting returning with their investments.
India emerged out as one of the better performing markets since October crash and the growth
potential was seen. The trend turned positive with the sign of revival of economies. The trend of
FII‟s inflows witnessed during quarter from April to June continued further and FII‟s proved to
be the prime investors in the month of September. The reasons for such huge investments by
FII‟s in this month could be attributed to number of positive news about Indian economy.
During the year 2010, the same trend of revival of economic activity could be observed. As a
result, FIIs went on to purchase more equity during this year with the exception of the month of
May. This showed positive view of FIIs about Indian market. FII‟s started pumping funds into
emerging markets like India because of its growth potential and stability of Indian Stock Market.
Table No: 2 FII Inflows in Equity (2006-10)
YEARS NET PURCHASE/ SALES
RS. (IN CRORES)
2006 32254.08 100.00
2007 70940.05 226.978
2008 -530517.70 -169.743
2009 85367.2 264.494
2010 140497.2 436.949
It is evident from this table that apart from the year 2008, in all other years, there has
been a positive trend in FII inflows in India. The year 2008, as we all know, was the year of
worldwide recession. The value of the trend is higher during last two years of this study i.e. 2009
and 2010 because of the fact that Indian economy could recover well from the shocks of
worldwide recession due to its strong fundamentals and rules and regulations.
Table 3: FII Investments in Debt (2006-10)
YEARS NET PURCHASE/
RS. (IN CRORES) DEBT
2006 3629.18 100.00
2007 8356.13 230.248
2008 12340.40 147.68
2009 3458.40 28.025
2010 54442.80 1574.219
The analysis of the above table depicts the positive trend of FII‟s investment in debt
market. The sharp rise in the FII inflows into the debt market came after a sharp rise in the
interest rates over the past couple of years which attracted the foreign investors towards the
Indian market. Besides that market observers believed that the huge inflow into the Indian equity
market also led to FIIs parking a portion of their capital into the debt market as a hedge against
any potential downslide in the stocks. The sharp rally in rupee against the US dollar also led to
an increase in the FII interest in the debt market.
Table 4: Comparison between FII inflows & Industrial Growth Rate
YEARS NET FII INFLOWS INDUSTRIAL
GROWTH RATE (%)
2006 32254.08 7.4
2007 70940.05 7.6
2008 -530517.70 9.8
2009 85367.2 6.3
2010 140497.2 5.8
The analysis of above table shows that there is a Low Degree of Correlation between FII
inflows & Industrial Growth Rate. It means that during the period under study, with the increase
of FII inflows, the industrial growth of India also rose up. Industrial growth plays a pivotal role
in increasing the GDP. In the year 2008, in spite of major outflows, the industrial growth rate
still increased. During the next two years, a fall in industrial growth can be observed. Thus it can
be safely said that industrial growth rate has not been much influenced by the FII inflows.
Table 5: Relationship between FII Inflows & SENSEX
YEAR SENSEX FII INFLOWS
2006 13786 31254.08
2007 20826 70940.05
2008 9647 -53051.70
2009 17464 85367.20
2010 20509 140497.20
Table 5 shows the impact of FII‟s on SENSEX. In 2006 the foreign institutional
investors (FII) inflows were a bit slow, but they once again proved that they were the drivers of
the Indian equity market. Interestingly, the dependence of the Indian equity markets on the
foreign investors was further proved by the fact that in the period between May 10, 2006 to June
14, 2006, when the SENSEX moved from a high of 12,612.38 to a low of 8,928.44.
In the year 2007 when FIIs were pumping money in stock market and were Net Buyers of Equity
worth Rs. 70940.05 Crores; the SENSEX was moving upwards on the weekly basis. It took
nearly two months for the SENSEX to move from the level of 15000 to 17000. But from 17000
to 20000 it moved in a span of few weeks i.e. from 26th September 2007 to 29th October 2007.
As the Indian markets move from one peak to another this year, foreign institutional investors
(FIIs) have pumped top dollar into stocks. Investments during 2007 by foreign funds were the
most influential group of investors in the market. In September, FIIs injected $2.7 billion into the
markets, sending the benchmark indices to record peaks. The bulk of this amount came in after
the US Fed cut interest rates on September 18 which ultimately led to increasing liquidity in
In January 2008 the SENSEX touched the new height of 21000. This rally of 1000 points
of SENSEX infused Rs. 2403 Crores during a period of just 49 trading days. But in the later part
of 2008 the SENSEX crashed affecting large number of investors. The major cause of this crash
was attributed to the recession in the global economies, especially with the US dollar losing its
strength to the Indian rupee. A large amount of equity in the form of shares was floated in the
Indian economy as an impact of Foreign Institutional Investors (FII‟s) withdrawing their money
from the Indian markets. This has disturbed the demand and supply ratio to a great extent
resulting in easy availability of shares of well-performing companies, thus leading to a dip in the
selling price of these shares.
However, in 2009 with the sign of revival of economies, the trend turned positive and overseas
investors started betting big on the domestic bourses as the liquidity conditions started
improving. In 2010 most of the stocks which have shown an increase in prices were driven by
huge FII buying. India continued to be a favored destination for FIIs and would continue to be so
because of its strong fundamentals. This could well be reflected in the FII inflows towards the
country, which had already reached all-time highs. Thus it can be observed that there is a
positive correlation between FII inflows and SENSEX.
PROPPING UP STOCKS
Investing in stocks with high FII interest can give good returns. For instance, the FII holding in
HDFC has been 58-60% since 2008. Similarly, the FII holding in ICICI Bank has been 38-40%
for years. Between March 2008 and 29 September 2011, HDFC Bank and ICICI Bank have risen
35% and 20%, respectively.
2.12 PRESENT SCENARIO (2010-2011)
Recent Trends in Foreign Institutional Investment
Foreign Institutional Investors play an important role in Indian securities markets.Since 1992-93,
when FIIs were allowed entry into Indian financial markets, foreign institutional investment has
increased over the years except in 2008-09. In tandem with the boom in stock markets and a
better global scenario, investments by FIIs into India were quite high in last few years,
particularly since 2003-04. FIIs made a record investment in the Indian equity market in
2010-11, surpassing the 2009-10 inflows.
Chart: Trends in Foreign Institutional Investment
The gross purchases of debt and equity by FIIs increased by 17.3 percent to 9,92,599 crore in
2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The combined gross sales by FIIs also
increased by 20.2 percent to 8,46,161 crore from ` 7,03,780 crore during the same period in
previous year. The total net investment of FII was 1,46,438 crore as compared to of 1,42,658
crore in 2009-10. This was the highest net FII investments into Indian securities market in
any financial year so far.
Table : Investment by Foreign Institutional lnvestors
Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of
March, 2010, increased to US$ 1,21,561 million at the end of March, 2011. During 2010-11, FIIs
invested 1,10,121 crore in equity and 36,317 crore in debt as compared to an investment of
1,10,220 crore in equity and 32,438 crore in debt during 2009-10 respectively (Table 2.51 and
Chart 2.12). Month-wise, the net FII investment was the highest in equity segment in October,
2010 (28,563 crore) followed by September,2010 ( 24,979 crore) and November,2010 (18,293
crore). In debt segment, FII investment was the highest in January, 2011 (10,177 crore) followed
by July, 2010 (8,107 crore) and September, 2010(7,690 crore).
The FIIs have been permitted to trade in the derivatives market since February, 2002. The
cumulative FIIs trading in derivatives was 5,34,748 crore as on March 31, 2011 as compared to
3,88,310 crore as on March 31,2010. Open interest position of FIIs in index options was the
highest at 11,33,838 crore by end-March 2011, followed by stock futures( 6,22,875 crore), index
futures (2,83,890 crore) and stock options ( 22,547 crore) (Table 2.52).
Table 2.51: Investments by Mutual Funds and Foreign Institutional lnvestors
Chart: Net Institutional Investment (crore) and Monthly Average Nifty
Registration of Foreign Institutional Investors and Custodians of Securities
There was a small increase in the number of Foreign Institutional Investors (FIIs) registered with
SEBI. As on March 31, 2011, there were 1,722 FIIs registered with SEBI as compared to 1,713 a
year ago, showing an increase of 0.53 percent during the year. There were 5,686 sub-accounts
registered with SEBI as on March 31, 2011 as compared to 5,378 as on March 31, 2010, an
increase of 5.73 percent The number of custodians registered with SEBI under the SEBI
(Custodian of Securities) Regulations, 1996 was 19, as on March 31, 2011, as compared to 17 a
year ago. Status of registration of FIIs, sub-accounts and custodians during 2010-11 is provided
in below Table
Table : Number of Registered FIIs, Subaccounts and Custodians
The Indian economy has successfully proved its mettle time and again in terms of financial
stability and economic sustainability as it has resiliently weathered global financial turmoil.
Where majority of emerging economies are experiencing huge capital outflows by foreign
institutional investors (FIIs), Indian markets have managed to hold their confidence as well as
investments during such times. A report titled 'Doing Business in India' by Ernst & Young
(E&Y) further supports the fact by highlighting India as the second most preferred destination
for foreign investors, next only to China.
Overseas entities are among the important drivers for Indian stock markets. FII flows account for
about 45 per cent of the market free-float.
The overview further discusses recent developments, investments, facts & figures and
Government initiatives pertaining to foreign investments in India.
FII – Recent Developments
According to the data released by Securities and Exchange Board of India (SEBI), FIIs
purchased stocks worth Rs 600,000 crore (US$ 113.81 billion) during 2011. FIIs were
also seen attracted to the debt market in 2011 wherein they infused Rs 42,067 crore (US$
7.98 billion). This intense interest in debt markets helped India get a net FII inflow of Rs
39,353 crore (US$ 7.46 billion) for the year (taking both- debt and stocks- into account).
Global rating agency Moody's has uplifted Indian bond market by upgrading credit rating
of the Indian government's bonds from the speculative to investment grade. The move is
expected to attract higher investments from FIIs and help companies raise funds at
competitive rates abroad.
India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011.
According to the data available with the Bombay Stock Exchange (BSE), FIIs have
consolidated their holdings in 11 out of the 30-Sensex firms during the July-September
quarter of 2011. They majorly enhanced their holdings in auto stocks such as Mahindra &
Mahindra, Maruti Suzuki, Hero MotorCorp and Bajaj Auto.
The number of FIIs registered with SEBI stood at 1,749 as of October 2011, while the
number of FII sub-accounts was 6,058 during the month. The statistics revealed that there
were 1,743 FII accounts and 6, 028 sub-accounts at the end of September 2011
FII- Key Investments
FIIs have bought stakes in BSE and National Stock Exchange of India (NSE) recently.
Argonaut Ventures (a US-based private equity firm) increased its stake in BSE from 2.54
per cent at the end of May 2010 to 4.75 per cent at the end of June 2011, while couple of
SEBI-registered FIIs and sub-accounts bought stakes in NSE.
India-based micro-lender SKS Microfinance has raised investment limit for foreign
institutional investors in the company to 74 per cent from 24 per cent and the company
plans to raise funds of up to Rs 5 billion (US$ 94.84 million) through a share sale to
institutional investors by March 2012.
World Bank's private equity arm IFC has made its single-largest country exposure to
India at 8.8 per cent of total committed portfolio in fiscal 2011. Also, India is expected to
take the lead during the fund allocation for the current fiscal (year ending June 2012),
when IFC's approved funding is estimated at US$ 10 billion. According to market
insiders, IFC plans to scale up equity investments over debt funding in private firms in
According to data released by auditing and consultancy firm KPMG, first three quarters
of 2011 witnessed a 31 per cent increment in private-equity (PE) investment to US$ 7.89
billion. Private equity firms like Blackstone India and Kohlberg Kravis Roberts & Co
(KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported
to have said that he intends to close 5-6 deals a year in India whose financial valuations
would revolve around roughly US$ 100 million to US$ 120 million each.
As on October 31, 2011, FIIs injected Rs 41,253 crore (US$ 7.82 billion) in Government
securities (G-secs) and Rs 68,289 crore (US$ 12.95 billion) in corporate bonds.
Government of India keeps taking different initiatives in order to attract FII investments. For
instance, investment limit in infrastructure bonds was raised from US$ 5 billion to US$ 25
billion in March 2011. Similarly, in November 2011, the Ministry of Finance enhanced
investment limit for FIIs in G-secs and corporate bonds by US$ 5 billion each, increasing the cap
to US$ 15 billion and US$ 20 billion respectively. The Government intends to increase capital
flows in Indian markets through such measures that would eventually increase the availability of
resources for Indian corporate.
Also, along with the debt instruments issued by infrastructure companies, FIIs can now also
invest in debt instruments issued by non-banking financial companies (NBFCs) categorised as
'Infrastructure Finance Companies' by the Reserve Bank of India (RBI).
In a bid to attract more FII funds into the Indian infrastructure sector, the Government is
considering a trim on the lock-in-period in the corresponding bonds to one year from three years.
The Government's top priority seems to be the enhancement of investor base for the Indian
markets. That is why the Ministry of Finance started 2012 with a happy announcement by
allowing foreign nationals, trusts and pension funds to invest directly in the country's listed
companies from mid-January 2012.
EPISODES OF VULNERABILITY IN INDIA
There have been some episodes of vulnerability in India, which are negative shocks affecting the
economy, and influencing the behavior of investors. These are: the East Asian crisis in 1997, the
Pokhran Nuclear explosion (May 1998) and the attendant sanctions, the stock market scam of
early 2001, and the Black Monday of May 17, 2004. The investment behavior of the FIIs vis-à-
vis the movements of the stock market indices during these episodes
FII investment behavior during these four specific events indicates that these events did affect
the behaviour of the foreign portfolio investors. But, these events did affect domestic investors‘
behaviour as well. The critical question to ask is: whether there was any perceptible difference,
particularly with a bias towards destabilization, in the behaviour of the FIIs vis-à-vis that of
Table 7: India: FII Behaviour During East Asian Crisis
Table 8: India : FII Behaviour in the aftermath of Pokhran Nuclear Explosion
Table 9: India : FII Behaviour during the Stock Market Scam 2001
Table 10: India: FII Behaviour around Black Monday, May 17, 2004
These experiences show that FII outflow of as much as a billion dollars in a month which
corresponds to an average of $40 million or Rs.170 crore per day – has never been observed.
These values – Rs.170 crore per day – are small when compared with equity turnover in India. In
calendar 2004, gross turnover on the equity market of Rs.88 lakh crore contained Rs.5 lakh crore
of gross turnover by FIIs. This suggests that as yet, FIIs are a small part of the Indian equity
market. Transactions by FIIs of Rs.5 lakh crore in a year might have been large in 1993, but the
success of a radical new market design in the Indian equity market have led to enormous growth
of liquidity and market efficiency on the equity market. Through this, India‘s ability to absorb
substantial transactions on the equity market appears to be in place.
FII investment limit in government securities, bonds hiked
The finance ministry on Nov 18, 2011 decided to increase investment limit of Foreign
Institutional Investor (FIIs) in government securities and corporate bonds by $5 billion as the
current limit for this year has almost been exhausted. Now, an FII can invest up to $15 billion in
government securities , and for the corporate bonds the cap has been enhanced to $20 billion.
The changes will be effective in the next few days after the Securities and Exchange Board of
India issues a circular and notifies it.
FII investment in India has reached its current limit for both government papers and corporate
bonds, reflecting confidence of foreign investors in Indian economy. As on October 31, 2011,
FIIs have invested more than Rs 41,000 crore in government papers and Rs 68,000 crore in
corporate bonds. The present ceiling for government securities is Rs 43,650 crore and for the
corporate bonds it is 74,000 crore. The changes are likely to enhance capital flows and
investments at lower cost. Indian corporates also have enough room to borrow through the
External Commercial Borrowing route where the cap is $30 billion, of which, so far, this year's
borrowings have touched $21 billion.
In September, the government had relaxed norms for FIIs investment in long-term infrastructure
bonds, reducing the residual maturity period to one year for investments of up to $5 billion.
Though the government had raised investment limit of FIIs in long-term infrastructure bonds
from $5 billion to $25 billion in the 2011-12 Budget, investments under this scheme had a
minimum residual maturity of five years and were subject to a minimum lock-in period of three
From the table below, we can see that as on October 31, 2011, FIIs have nearly exhausted the
investment limit in government securities and corporate bonds. This move will further give an
investment opportunity of approximately Rs 25000 cr in each, government security and
corporate bond (assuming a conversion rate of Rs 50). However, the investment in long term
infrastructure bonds is merely Rs 2837 cr (in the first 7 months of FY12 ) versus the limit of Rs
Since infrastructure is a key area where India is still lacking, the government should bring in
reforms and attract investments in infrastructure, which can further boost the country's economic
growth. The move will help in cooling the 10-year government bond yields, and will reduce the
borrowing cost for the government. Further, this will also help in developing our bond market.
We further feel that this move will attract a lot of FIIs, as the interest rate cycle in India is almost
at its peak. Going forward, there could be a rise in the prices of the bonds, leading to better
capital gains. It will also ease some pressure from the government with respect to the rupee,
which has depreciated in the past couple of quarters.
Overall, the move has multiple purposes. such as moving a step ahead for developing the bond
market, helping the rupee stabilise, a cool off in the 10-year bond yield to some extent and
attracting foreign investment in the country.
Particulars New Cap
(In USD bn)
Old Cap for
(In USD bn)
into INR Cr)
made by FII
into INR Cr)
rate of Rs
50) in INR
15 10 43650 41253 25000
Corporate Debt 20 15 74416 68289 25000
- Long Term
25 25 112095 2837 -
2.13 FII activity in 2012
The investment by overseas investors into Indian stock market since the beginning of 2012 has
crossed $7 billion level, out of which more than $5 billion were pumped in the month of
February. Foreign Institutional Investors (FIIs) purchased equities and debt securities worth a
gross amount of Rs 76,548 crore in January 2012, while their gross sales for the month were
worth Rs 50,219 crore, translating into a net inflow of Rs 26,329 crore, as per data compiled by
the market regulator Sebi.
Overseas investors poured in over Rs 26,000 crore ($5.08 billion) in Indian markets in January
2012, the highest one-month net inflow in 16 months, as
sentiments got a boost from easing inflation concerns and
The Foreign Institutional Investors (FIIs) infused a net amount
of $ 5.12 billion (about Rs 25,212 crore) during February, taking
the total for 2012 so far to $7.16 billion for the Indian stocks.
Market analysts attributed strong FII inflows to signs of a
reversal in RBI‘s monetary policy and the subsequent impact of improved liquidity position.
They expect the positive trend to continue further, given that the liquidity conditions remain
strong.Market analysts attributed strong FII inflows to signs of a reversal in RBI's monetary
policy and the subsequent impact of improved liquidity position.
During February, FIIs were gross buyers of shares worth Rs 79,898.6 crore, while they sold
equities amounting to Rs 54,686.6 crore, translating into a net investment of Rs 25,212 crore ($
5.12 billion), as per data available with market regulator Sebi. This is the highest monthly net
investment by FIIs in equities since October 2010, where they had infused Rs 28,563 crore.
The foreign fund houses also infused Rs 1,0016 crore ($2.03 billion) in the debt market last
month. This takes the overall net investments by FIIs into debt markets to Rs 25,987 crore ($5.08
billion) so far this year. ―FIIs have been infusing money into the Indian market due to change in
RBI‘s monetary policy that have added liquidity to the system. This liquidity will help in growth
of the country,‖ Wellindia Executive Director Hemant Mamtani said. ―Indian market will
continue to witness inflows in the whole year, if the liquidity conditions remain strong,‖ he
added. Strong surge in FII inflows in 2012 so far has helped boost the equity markets, as also
The stock market barometer Sensex has gained 15 per cent in 2012, despite a fall of about 3.25
percent last month. The index finished at 17,752.68 on February 29. FIIs had mostly stayed away