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FOREIGN INSTITUTIONAL

INVESTORS
Flow of presentation
How FII started in India?
 What does it mean?
 Who can be registered?
 How to apply?
 Eligibility criteria
 Registration process
 where FII can invest?
 taxation
 Need of FII
 Impact in Indian market
 Volatile in nature
 How they perform?
 FII vs FDI
 Stock market crash

How FII started in India?
 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).
WHAT IS FII?

 Foreign institutional investor means “an institution established


or incorporated outside India which proposes to make
investment in India in securities
 It is used most commonly in India to refer to outside
companies investing in the financial markets of India.
 International institutional investors must register with the
Securities and Exchange Board of India (SEBI) to participate
in the market
 No controlling interest in the companies they invest in
WHO CAN BE REGISTERED AS AN FII?

 One who propose to invest their proprietary funds or on behalf of "broad based"
funds or of foreign corporates and individuals and belong to any of the under
given categories can be registered for FII.

 Pension Funds
 Mutual Funds
 Investment Trust
 Insurance or reinsurance companies
 Endowment Funds
 University Funds
 Foundations or Charitable Trusts or Charitable Societies who propose to invest on
their own behalf, and
 Asset Management Companies
 Nominee Companies
 Institutional Portfolio Managers
 Trustees
 Power of Attorney Holders
 Bank
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 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
FII Division
Securities and Exchange Board of India,
224, Mittal Court, 'B' Wing, 1st Floor,
Nariman Point, Mumbai - 400 021.
INDIA.
The eligibility criteria for applicant
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 Institutional Investor
 permission under the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) by Reserve
Bank of India for making investments in India as a FII
Eligibility
 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
FII – Entry…contd

• Whether the applicant is


• bank or institutional portfolio manager, established or
incorporated outside India and proposing to make investments
in India on behalf of broad based funds and its proprietary
funds,
• a trustee of a trust established outside India and proposing to
make investments in India on behalf of broad based funds and
its proprietary funds
 Broad Based Funds:
 a fund, established or incorporated outside India
 At least twenty investors
 No single individual investor holding more than forty-nine
per cent of the shares or units of the fund
Registration process
Where FII can invest?

Current financial instruments are available for FII


investments
 Securities in primary and secondary markets including
shares, debentures and warrants of companies,
unlisted, listed or to be listed on a recognized stock
exchange in India;
 Units of mutual funds;
 Dated Government Securities;
 Derivatives traded on a recognized stock exchange ;
 Commercial papers
 security receipts
Pull Factors

 Domestic Pull factors - Reforms, strong


economic fundamentals, Higher Interest Rates,
good valuations, market liquidity, size, low
trading cost, information dissemination

 External Push factors : Global liquidity, lower


interest rates, higher risk appetite, lower relative
growth
Higher FII flows - Impact
Taxation

Nature of Income Tax Rate:


1. Short-term capital gains30%
2. Long-term capital gains10%.
3. Corporate dividend declared after June 01, 1997Nil
4. Interest Income20%

Short-term Capital Gain: Capital gain on sale of a security held for a


period of less than one year is termed as short-term capital gain
Long-term capital gain: Capital gain on sale of a security held for
period more than one year is termed as Long-term capital gain
Why there is need of FII ?

 FII flows supplements and augmented


domestic savings and domestic investment
without increasing the foreign debt of our
country
 Capital inflows to the equity market increase
stock prices, lower the cost of equity capital
and encourage the investment by Indian firms
 The expert group opines that FII inflows have
some savings like features
Impact Of FIIs On Indian Markets
 In the past four years there has been more than $41
trillion worth of FII funds invested in India.
 This has been one of the major reasons on the bull
market witnessing unprecedented growth with the
BSE Sensex rising 221% in absolute terms in this
span.
 The present downfall of the market too is influenced
as these FIIs are taking out some of their invested
money.
 For long-term value investors, there’s little because
for worry but short term traders are adversely getting
affected by the role of FIIs are playing at the present.
Why FII called good friend for good
time – volatile in nature
 In the Indian stock markets movement of the
stock depends on the limited no of stocks
 As FIIs purchase and sell these stocks there
is a high degree of volatility in the stock
market
 If any set of development encourages outflow
of capital that will increase the vulnerability of
the situation in the stock market
 In India there have been five such incidents in
the recent past
How they perform
The degree of volatility can be attributed to the
following reasons:
 The increase in investment by FIIs increases stock
indices the stock prices and encourages further
investment . In this event when any correction takes
place the stock prices decline and there will be pull out
by the FIIs in a large numbers as earning per share
declines
 The FIIs manipulate the situation of boom in such a
manner that they wait till the index rises up to a certain
height and exit at an appropriate time. This tendency
increases the volatility further
FII vs FDI
 Where FDI is a bit of a permanent nature, FII flies
away at the shortest political or economical
disturbance
 Entry and Exit is relatively very easy for an FII as
compared to FDI. Entry difficult for FDI because of
infrastructure problems. Exit more difficult because of
archaic labor laws
 have been blamed for exacerbating small economic
problems in a country by making large and concerted
withdrawals at the first sign of economic weakness.
FDI vs FII….
 FDI is more desirable than portfolio
investment because the investments there
under are made directly in the capital of the
company and not in the secondary market
 FDI helps in increasing production and
employment , FII does not affect production
and employment .
 FII investment is frequently referred to as hot
money for the reason that it can leave the
country at the same speed at which it comes
in, in case of FDI it does’nt
FIIs as major cause of market crash
( Jan 21 to Jan 29 2008)
 The Indian capital markets have been left
reeling under the impact of liquidity crunch
caused by multiple factors
 It began with two mega issues of reliance
power and future capital holdings, which drew
out huge amounts of money from the market
 FIIs bowed out from the capital market with
more than Rs 10000 crore
Crises continue….
 As result , the market came crashing down and in two
days Jan. 21 and 22 the market tumbled 2284 points
from the closing levels point of Friday (jan.18)
 The highlight of this fortnight was historic intra-day
shedding of more than 2300 points on BSE on
January 22 when trading was halted once at 10 %
lower
 The market again fell to 13 % during the trading
session
Total inflow and outflow of FII during Jan.
21 to 29
Date Investment
21 Jan. - 2425.7
22 Jan - 2256.2
23 Jan - 2499.
24 Jan - 1351.2
25 Jan - 669.1
28 Jan - 1513.4
29 Jan - 285.1
Total - - 9662
Last day Investment
Reporting Debt / Gross Gross Net NET
date equity purchase sales (Rs investme investme
( Rs crore) nt (Rs nt us
crore) crore) million $

3 April equity 2898.6 2918.7 -20.2 5.00


2008

debt 00 00 00 00