FOREIGN PORTFOLIO INVESTMENT IN INDIA

Presented By Group 3 Akask Drall Bikash Rathi Gautam Shankar Keshu Dhankhar Malvika Upadhya Siddharth Shinde Vivek Chaudhary 11020241104 11020241076 11020241079 11020241113 11020241085 11020241131 11020241136

Introduction
FEMA defines Foreign Portfolio Investment as buying and selling of shares, convertible debentures of Indian companies, & units of domestic mutual funds ` Is the passive holding of securities such as foreign stocks, bonds, or other financial assets ` Doesnot entail active management ` Is usually a short term investment as opposed to the longer term Foreign Direct Investment
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HISTORY
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In 1992,India opened up its economy and allowed foreign portfolio investment in its domestic stock market. Since then FPI has emerged as a major source of private capital inflow in India. India is more dependent upon FPI than on FDI as a source of foreign investment. As on 31 March 2006, the SEBI had registered FIIs from 37 countries and for United states it was 342. The objective was to improve the BOP at sustainable levels by liberalising international trade,finance and capital inflows, and by instituting an appropriate exchange regime. IMF balance of payments data on capital flows, for the period 1991-1998, FDI and FPI represented about 90% (respectively 51% and 39%) of total capital flows to emerging markets.

Portfolio investment includes flows through

yIssuance

of ADRs or GDRs, yInvestment by FIIs, yOffshore funds and others

How Foreign Portfolio Flow can help an Economy

Inflow of FPI can provide a developing country a non debt creating source of foreign investment. FPI can induce financial resources to flow from capital abundant countries, where expected returns are low, to capital scarce countries where expected returns are high.
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FPI affects the economy through its various linkage effects via the domestic capital market.

How Foreign Portfolio Flow can help an Economy

Stimulating the development of the domestic stock market. y Catalyst for this development is competition from foreign financial institutions y Necessitates the importation of more sophisticated financial technology and greater investment in information processing and financial services. y This results in greater efficiencies in allocating capital, risk sharing and monitoring the issue of capital which leads to a lower cost of capital.
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Importance of FII in the Indian Context

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Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). In 1992, India opened up its economy and allowed Foreign Portfolio Investment (FPI) in its domestic stock markets. Helped India to mitigate its foreign exchange shortage and build high level of foreign exchange reserves. Since then, FPI has emerged as a major source of private capital inflow in this country. For the period 1992 to 2005, more than 50 percent of foreign investment in India came in the form of FPI.

Importance of FII in the Indian Context

Around 20% of the capital comes from foreign institutional investors on an average among Sensex companies. The promoters contribute around 30%, the financial institutions provide 17 % and public share is 30% (remaining from other sources). y Have invested more than Rs 145,000 crore rupees in the Indian stock market y (Sensex) went from 221 in 1982-83 to cross the 12,000 marks in 2006.
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Impact of FIIs on companys Share

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When foreign institutional investors reduced their holdings in Dr. Reddys Lab by 7% to less than 18%, the company dropped from a high of around US$30 to the current level of below US$15. This 50% drop is apparently because of concerns about shrinking profit margins and financial performance

Factors affecting Portfolio Investment

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Tax rates on interest or dividends Interest rates Exchange rates Government Policies

How FIIs choose on investment

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Depends on many firm specific factors other than economic development of the country. Some of the firm specific factors are: Governance of listed companies Management of businesses run by family groups share returns, earnings per share, price earnings ratio, book to market price and quarterly yield. Ownership structure Price to book value

The eligibility criteria for applicant seeking FII registration

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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 the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

The eligibility criteria for applicant seeking FII registration

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Applicant must be legally permitted to invest in securities outside the country 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

Regulations regarding Portfolio Investment by FIIs

Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians (NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS). ` FIIs should approach their designated AD Category - I bank (known as Custodian bank), for opening a foreign currency account and / or a Non Resident Special Rupee Account & NRIs should open NRE/NRO account.
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Regulations Regarding Portfolio Investments by FIIs

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Shareholding

(a) Total shareholding of each FII/sub-account under this Scheme shall not exceed 10 per cent of the total paid-up capital. (b) Total holdings of all FIIs /sub-accounts put together shall not exceed 24 per cent of the paid-up capital y A domestic asset management company or portfolio manager managing the fund of a sub-account can make investments under the Scheme on behalf of: i. a person resident outside India who is a citizen of a foreign state, or ii. a body corporate registered outside India;

Prohibition on investments (a) Not permitted to invest in equity shares issued by an Asset Reconstruction Company. (b) FIIs are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: i) Business of chit fund, or ii) Nidhi company, or iii) Agricultural or plantation activities, or iv) Real estate business, or construction of farm houses,** or v) Trading in Transferable Development Rights (TDRs). **"Real estate business" does not include construction of housing / commercial premises, educational institutions, recreational facilities, city and regional level infrastructure, townships.
Short Selling by FIIs - subject to conditions as may be prescribed by the Reserve Bank and the SEBI

Government Initiatives
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Indias foreign investment policies allow FDI up to 26 per cent and FII of (an additional) 23 per cent in stock exchange FIIs and the NRIs are allowed to invest in Indian Depository Receipts (IDRs) FPI have been allowed to trade in IRFs, but limits have been put in place to keep their influence under check long-term capital gains tax on equities have been abolished

Composition of FP Flow

The Downside
FIIs are currently the most dominant nonpromoter shareholder in most of the Sensex companies y Less active in the primary segment of the stock market in India. y Secondary markets open up prospects for speculation y Securities markets are more prone to the problem of adverse selection, because asymmetries of information
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The Downside
Uncertainty and volatility associated with FPI have forced the policy-makers to take some measures which impose significant fiscal cost on the economy A recent study by Chandrasekhar and Pal (2006) has estimated that tax exemption on capital gainshas cost the government Rs 7,857 crores for the year 2004-05 A route for channeling illegal and allegedly terrorist money in India Empirical studies suggests that FPI is one of the least beneficial forms of foreign investment

Conclusion
Foreign portfolio investors earn their returns in rupees, devaluation of the rupee can erode the earnings of foreign portfolio investors. y Devaluation or even an expectation of devaluation of the rupee can create negative sentiments among portfolio investors y Trigger a sudden capital flight from that country.
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RBI also tries to avoid nominal appreciation of the rupee, because otherwise it could seriously affect the competitiveness of the countrys exports y The dual threat of capital flight and exchange rate appreciation forces the RBI to closely monitor and intervene in the foreign exchange market, to maintain the value of rupee y Limits the policy options available to the RBI, but it also forces the central bank to maintain high foreign exchange reserves
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Empirical studies that suggests that FPI is one of the least beneficial forms of foreign investment and one of the most risky types of foreign investment y The East Asian crisis has shown that together with the volatility of FPI, the presence of a huge amount of international speculative capital has the potential to seriously disrupt a countrys economy.
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Bibliography
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http://www.bis.org/ifc/publ/ifcb28zj.pdf http://www.policyinnovations.org/ideas/policy_library/data/01 408/_res/id=sa_File1/Partha_ACDC_Paper.pdf http://joaag.com/uploads/4_PrasannaFinal3_2_.pdf http://www.business-standard.com/india/news/foreignportfolio-investment-norms-likely-to-be-discussed/456476/ http://economictimes.indiatimes.com/opinion/columnists/t-tram-mohan/foreign-capital-still-finds-india-an-attractiveinvestment-destination/articleshow/11370315.cms http://economictimes.indiatimes.com/news/economy/finance/ allowing-foreign-retail-investors-to-directly-buy-indianstocks/articleshow/11371081.cms http://articles.economictimes.indiatimes.com/2012-0101/news/30579016_1_qfis-portfolio-investment-schemeindian-equity-market

Thank You!!!!