Brief discussion about FII

1. Foreign Institutional
Investment In India
Presented By
Anant Berar
Debarun Dey
Jayesh Ghosh

2. AGENDA
 Introduction, Definition, History
 India as a FII Destination
 Growth of FII and Determinants
 FII Regulations
 Working of Mechanisms of FII
 Features of FII
 Comparative analysis of FDI and FII
 Sector wise discussions of FII Investment
 Effect of FII on Indian Economy
 Analysis of Stock Market in context of FII
 Scope and Issue Analysis2

3. FOREIGN INVESTMENT
3

4. Introduction
 Foreign investment refers to the
investments made by the residents of a
country in the financial assets and
production process of another country
 Necessary for all developing nations as
well as developed nations but it may differ
from country to country. The developing
economies are in a most need of these
foreign investments for boosting up the
entire development of the nation in
productivity of the labour, machinery etc4

5. Significances of Foreign
Investment
 Expansion In Employment
 Consumer Benefit
 Technological Improvement
 Cultural Improvement
 Import Export
 Growth In Economy
 Government Benefits
 Competition
 Managerial Revolution
 Global Exposer
 Global Relationship
5

6. Foreign
Investment
Direct
Investment
(FDI)
Wholly Owned
Subsidiary
Joint Venture
Acquisition
Portfolio
Investment (FPI)
Investment by
FII’s
Investment In
GDRs, ADRs,
FCCBs6

7. India before LPG
 Economic policies under Nehru-Gandhis were greatly
influenced by Soviet-style policies
 This Licence Raj was a result of Nehru’s socialist
ideology. He wanted to build a soviet-like economic
system in which state controls everything
 The low annual growth rate of the economy of India
before 1980, which stagnated around 3.5% from 1950s
to 1980s, while per capita income averaged 1.3%
 Only four or five licences would be given for steel,
electrical power and communications. Licence owners
built up huge powerful empires
7

8.  License Raj established the irresponsible, self-
perpetuating bureaucracy
 Private players could manufacture goods only
with official licenses.
 Up to 80’s government agencies had to be
satisfied before private companies could produce
something and, if granted, the government would
regulate production .
8

9. After LPG-1991 reforms
 Private sector literally didn’t exist before 1991
 Main aim of 1991 economic reforms was to
terminate this licence raj
 The following were the market based reforms :
Reduction of import duties , income taxes and
corporate taxes , custom duties
Introduction of FDI in many sectors . India opened its
doors of its markets to the world
9

10.  India opened its stock market to foreign investors
in September 1992
 Since 1993, received portfolio investment from
foreigners in the form of foreign institutional
investment in equities
 This has become one of the main channels of FII
in India for foreigners
 In order to trade in Indian equity market foreign
corporations need to register with SEBI as
Foreign Institutional Investor (FII)
10

11. What is
FII?
11

12.  An institution established or incorporated outside
India which proposes to make investment in India
in securities
 Used most commonly in India to refer to outside
companies investing in the financial markets of
India
12

13. Why India is a hot destination for
flow
 Fastest growing Economy
 Strong forex reserves
 Economic Reforms
 Corporate Restructuring
 Information Technology-the
growth engine
13

14.  According to a poll conducted by Bank of America
Merrill Lynch (BofA-ML) recently, India was the most
favourite equity market for the global investors for
the year 2015 at 43 per cent, followed by China at 26
per cent. The global investment bank is of the view
that India remains to be in a structural bull market.
 According to Ernst & Young's (EYs) Global Capital
Confidence Barometer (CCB) - Technology report,
India ranks third among the most attractive
investment destinations for technology transactions
in the world.
14

15. FII Investment Details
Financial Year
INR crores
Equity Debt Total
1992-93 13 0 13
1993-94 5127 0 5127
1994-95 4796 0 4796
2000-01 10207 -273 9933
2001-02 8072 690 8763
2002-03 2527 162 2689
2006-07 25236 5605 30840
2007-08 53404 12775 66179
2008-09 -47706 1895 -45811
2009-10 110221 32438 142658
2012-13 140033 28334 168367
2013-14 79709 -28060 51649
2014-15 111333 166127 277461
2015-16 -14172 -4004 -18176
2016-17 ** 48243 6109 54352
Total 853494 308639 1162130
** upto 09-Oct-2016
15

16. FII Investment in 2016
16

17. 10 countries) data December,
2015
Sr. No. Country
AUC (INR Cr.)
Equity Debt Total
1
UNITED
STATES OF
AMERICA
672,933 43,454 716,388
2 MAURITIUS 415,001 63,922 478,923
3 SINGAPORE 161,451 101,578 263,029
4 LUXEMBOURG 152,293 42,642 194,934
5
UNITED
KINGDOM
98,949 1,579 100,528
6 NORWAY 41,393 23,918 65,311
7
UNITED ARAB
EMIRATES
61,026 826 61,852
8 IRELAND 50,438 3,723 54,161
9 JAPAN 38,794 9,684 48,478
10 CANADA 46,306 1,714 48,020
11 Other 236,746 52,170 288,916
Total 1,975,329 345,210 2,320,53917

18. No. of FIIs In India
 The No. of SEBI registered FIIs declined to 1444
in 2014-15 from 1710 from previous year.
 Trend is same as last 3 years
 Since 2011-2012 to 2015 the no. fell by almost
16%
18

19. Big Players of Indian FII market
 Euro-pacific is the biggest investor having with
holding of 42530 crore in equities
 Govt. Of Singapore is the largest Govt.
institutional player with total investment amount of
worth 24192 crore
19

20. Determinants of FII Inflow in
India
 Risk
 Inflation
 Interest rate
 Good News/Bad News
 Equity Returns
 GDP of India
20

21. How to Apply
An application for
registration has to be
made in Form A, the
format of which is
provided in the SEBI(FII)
Regulations, 1995 and
submitted with the
required documents in
duplicate addressed to
SEBI as well as to
Reserve Bank of India
(RBI) and sent to SEBI
within 10 to 12 days of
receipt of application.
21

22. Documents to be sent to
SEBI
Certified copy of relevant
clauses of Memorandum
of Association, Articles of
Association or Article of
Incorporation.
Audited financial
statement and annual
report for the last one
year
22

23. 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.
The applicant is required to have permission from the Reserve Bank of India, under
the provisions of the Foreign Exchange Management Act, 1999.
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 $ 10,000
As per Regulation 6 of SEBI (FII) Regulations, 1995, FII’s are
required to fulfill the following conditions to qualify for grant of
registration:
23

24. Registration Process
24

25. Entities which can register as FII’s in
India:
Entities who propose to invest their
proprietary funds or on behalf of “broad
based” funds or of foreign corporate and
individuals and belong to any of the
categories mentioned below can be
registered as FII’s in India.
The categories are, Pension Funds, Mutual
Funds, Investment Trust, Insurance or
reinsurance companies, Endowment Funds,
University Funds, Asset Management
Companies, Nominee Companies,
Institutional Portfolio Managers, Trustees,
Power of Attorney Holders, Banks, Foreign
Government Agency, Foreign Central Bank
or an Agency thereof.25

26.  A few conditions under Regulations 6 of SEBI
Regulations, 1995, need to be fulfilled. For example:
 Permission under the provision of the Foreign Exchange
Regulation Act, 1973 from RBI
 Satisfaction of the “Fit and Proper” guidelines issued by
SEBI
 SEBI would also consider whether the grant of
registration is in the interest of the development of
the securities market
26

27. Investment Conditions and Restrictions:
An FII can only invest in the following:
Securities in the primary and secondary markets
including shares, debentures and warrants of
companies, unlisted, listed or to be listed on a
recognized stock exchange in India.
Units domestic mutual funds including Unit Trust of
India, whether listed or not listed on a recognized
stock exchange.
Dated Government securities.
Derivatives traded on a recognized stock
exchange.
Commercial paper.
Security receipts.
27

28. Foreign Institutional Investors may invest in Indian
through two routes:
• Equity Investment route: 100% investment could be
in the equity related instruments or up to 30% could
be invested in debt instruments
• 100% Debt route: 100% investments have to be
made in debt securities only.
28

29. Prohibitions on
Investments:
FII’s 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
 Nidhi Company
 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
bridges).
 Trading in Transferable Development Rights (TDRs).
29

30. Channels of FII Investments in India
 Portfolio investments in India include ADRs/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.
 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.

31. TAXATION FOR FIIs
31

32. INCOME COMPANY DEFINED UNDER
SEC 2(17)
NON
COMPANY
Aggregate
Income > 1
Crore
Aggregate
Income < 1
Crore
DIVIDENDS Exempt under Income Tax Act of 1961
INCOME IN
RESPECT TO
SECURITIES
21.012% 20.60% 20.60%
SHORT
TERM
CAPITAL
GAINS
31.518% 30.90% 30.90%
LONG TERM
CAPITAL
10.506% 10.30% 10.30%32

33. Salient features of FIIs
 Investment in all securities traded on the primary and
secondary markets permitted.
 FIIs would be required to obtain an initial registration with
SEBI to enter the market nominee companies.
 Affiliated and subsidiary companies will be treated as
separate FIIs for registration.
 Shall seek various permissions under FERA from the
RBI, both SEBI and RBI registration will be under a single
window approach.
 SEBI’s initial registration would be valid for 5 years.
Renewable for 5 years.
 FIIs shall be required to hold a registration from the
securities commission in their country of
domicile/incorporation.

34.  Open foreign currency account(s) in a designated bank.
 Open a special non-resident rupee account to which all
receipts from the capital inflows, sale proceeds of
shares dividends and interest could be credited.
 Transfer sums from the foreign currency accounts to the
rupee accounts and vice-versa, at the market rates of
exchange.
 Make investment in securities in India out of the
balances in the rupee accounts.
 Transfer repatriable (after tax) proceeds from the rupee
account to the foreign currency accounts.
 Register FII’s holding without any further clearance
The general permission from the RBI will enable the FIIS to:

35. RBI may at any time
request a registered FII to
submit information
regarding records of the
utilization of the inward
remittances of investment
capital and the statement
of its securities
transactions.
RBI and /or SEBI may
also any time conduct a
direct inspection of the
records and accounting

36. FOREIGN DIRECT INVESTMENT
(FDI)
 Key component in Global Economic Integration
 Investment of foreign assets into domestic structures,
equipments and organizations
 More useful to a country than investments in equity
because equity investments are potentially "hot
money" which can leave at the first sign of trouble,
whereas FDI is durable and useful whether things go
well or badly
 Investment by non-resident entity, resident outside
India in the capital of an Indian company under
schedule 1 of foreign exchange management
(transfer or issue of security by a person resident

37. STRATEGIES TO ACHIEVE FDIs
 Greenfield Investment:
 Company to set up new factories and plants
from the ground up
 Example: McDonalds, Starbucks
 Brownfield Investment:
 Cross border Mergers and Acquisitions that
involve acquiring an existing foreign enterprise
in the country of interest
 Example: Tata Motors acquisition of Land Rover
and Jaguar from Ford in 2008

38. RECENT SIGNIFICANT FDIs IN
INDIA
 Rosneft, partners buy Essar Oil for $13 billion in
largest FDI deal(Rosneft bought a 49 per cent
stake in Essar Oil, while Netherlands-based
Trafigura Group Pte and Russian investment fund
United Capital Partners split another 49 per cent
equity equally)
 Honeywell International Inc, the US-based
technology and manufacturing solutions provider,
has unveiled a new refining technology in Gurgaon
 Apple Inc has started its first development centre
outside the US in Hyderabad
 E-commerce giant Amazon plans to set up its
second largest global delivery centre outside the

39. FDI VS FII

40. FDI FII
It is a long term investment It is generally a short term
investment
Investment in physical assets Investment in financial assets
Aims to increase enterprise
capacity or productivity or
change management control
Aim is to increase capital
availability
Leads to technology transfer,
access to markets and
management inputs
Results in only capital inflows
Flows into the primary market Flows into the secondary
market
Entry and exit is relatively
difficult
Entry and exit is relatively easy
Eligible for profits of the
company
Eligible for capital gain

41. TREND OF FII INVESTMENT ON
THE STOCK MARKET

42. MAJOR AREAS AFFECTED BY
FIIs
 Stock Market: Movers and shakers of the Indian
market. They wield a great influence on Indian
markets due to their sheer capacity to purchase
and sell in huge numbers
 Exchange Rate: Investing in India will bring
dollars into the country thus strengthening the
rupee in terms of dollar
 Exports and Imports: As FII lead to strengthening
of currency our Exports become uncompetitive
 Inflation: Huge FII in country leads to demand for
Rupee resulting in RBI pumping in more Rupee in
the market. This leads to excess liquidity in the
market causing Inflation

43. ADVANTAGES OF FII
INVESTMENT
 Enhanced flow of equity capital
 Improving capital markets
 Improved corporate governance
 Managing uncertainty and controlling risks
 Reduced cost of equity capital
 Imparting stability of India’s BOP
 Knowledge Flows
 Improvement to market efficiency

44. DISADVANTAGES OF FII
INVESTMENT
 Volatility and capital outflows
 Price rigging
 Herding and positive feedback trading
 BOP vulnerability
 Possibility of taking over companies or
backdoor control
 Money laundering
 Management control
 Inflation

45. FUTURE OF FIIs IN INDIA
 Macro economic prospects are improving i.e.
CAD narrowing and fiscal deficit expected to stay
in control
 Better policies and improved earnings are leading
to more +ve outlook for Indian equities
 Easing of Geographical tensions has helped
improve sentiment of Global investor
 Episodic volatility may provide attractive entry
points for global investors in coming months
 Equity Inflows should pick up once the INR
stabilises
 Recent pick up in government spending should

46. THANK
YOU