Report

On
“FOREIGN INSTITUTIONAL INVESTORS”

Submitted To : Submitted By:

Bhawdeep singh kochar Sandeep Agarwal

RT 1903 A-59

Reg. No.: 10907223

LIM

(REPORTIER OF ADISH JAIN )

FOREIGN INSTITUTIONAL INVESTORS

1) Content.
 How FII started in India?
 WHAT IS FII?
 WHO CAN BE REGISTERED AS AN FII?
 HOW TO APPLY
 The eligibility criteria for applicant
 Eligibility
 Where FII can invest?
 Pull Factors
 Taxation
 Why there is need of FII ?
 Impact Of FIIs On Indian Markets
 FII vs FDI
 2) Data, Corporate examples.
How FII started in India?

FII (Foreign Institutional Investors) is used to denote an investor, it is mostly of the form of a
institution or entity which invests money in the financial markets of a country. The term FII is
most commonly used in India to refer to companies that are established or incorporated outside
India, and is investing in the financial markets of India. These investors must register with the
Securities & Exchange Board of India (SEBI) to take part in the market.

History of FII

India opened its stock market to foreign investors in September 1992, and in 1993, received
portfolio investment from foreigners in the form of foreign institutional investment in equities.
This has become one of the main channels of FII in India for foreigners. Initially, there were
many terms and conditions which restricted many FIIs to invest in India.

But in the course of time, in order to attract more investors, SEBI has simplified many terms
such as: -

 The ceiling for overall investments of FIIs was increased 24% of the paid up capital
of Indian company.

 Allowed foreign individuals and hedge funds to directly register as FIIs.

 Investment in government securities was increased to US $ 5 Billion.

 WHAT IS FII?

FII is nothing but Foreign Institutional Investors. Below entities are called FIIs.

One who propse to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates and
individuals and belong to any of the undergiven 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
 WHO CAN BE REGISTERED AS AN FII?
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.

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
Institutional Investor.
 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

Annexure B of the Regulations duly filled and signed by the FII and Sub-Account has to be submitted by
FII on behalf of the proposed sub-account. With if DD of US$ 1000 favouring "Securities and Exchange
Board of India" as fees is to be submitted payable at New York.

For registered Foreign Institutional Investor, it has to inform SEBI promptly with the relevant
documents supporting the name change. The relevant documents are :

 Request for change in name by the Foreign Institutional Investor mentioning reasons for
name change of the FII and/or sub account.
 Certificate from the Registrar of Companies, and/or approval from home regulator.
 Original Registration Certificate issued by SEBI to the Foreign Institutional Investor.

SEBI will issue a no-objection letter in this regard after recording the request of name change.
The information regarding name change should be submitted immediately after the change has
taken place in the home country and the requisite approval from the home regulator (if needed)
has to been taken.

The procedure for registration of FII/sub account under 100% debt route is similar to that of normal funds
besides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100%
debt route. However, Government of India allocates the overall investment limit for 100% debt funds
annually. The grant of investment limit for individual 100% debt funds is within this overall limit. The
funds have to seek further investment limit in case the limit allotted to them is exhausted and they wish to
invest further.
 Where FII can invest?

FIIs can invest $10 billion more in bonds

now.

The government has raised the ceiling for investment in government and corporate bonds by
foreign funds, which will ease pressure on banks to raise rates with rising demand for loans to
build roads, ports and power plants.

The finance ministry revised the cap for investment by foreign portfolio investors in government
securities from $5 billion to $10 billion, and in corporate bonds from $15 billion to $20 billion.
The announcement appears to have been timed well since it came on a day when the borrowing
calendar for the second half was unveiled, which led to yields easing.

FIIs can invest in debt papers of only select

infra cos

Sebi on Friday said overseas portfolio investors can invest in the debt instruments of only those
infrastructure companies as defined by the external commercial borrowing policy.

In September, the government increased the limit of FII investment in government debt as well
as corporate debt by $5 billion. Following this, FII investment limits stands at $10 billion in
government bonds and $20 billion in corporate bonds. The bidding process for the revised limits
will begin from December 2 on BSE.

FIIs can invest in corporate bonds of infrastructure companies with residual maturity of five
years. No single entity would be allowed to invest more than Rs 2,000 crore and the minimum
amount, which can be invested, will be Rs 200 crore, with the minimum tick size being Rs 100
crore, the Sebi circular said.

The time period for utilisation of corporate debt limits, allocated through bidding process, has
been fixed at 90 days and for the government debt at 45 days. But the time period for utilisation
of corporate debt allocated on first-come-first serve basis, after the bidding process, has been
fixed at 22 days for corporate debt and 11 days for government securities.
 By Regulations
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin
(PIOs) are allowed to invest in the primary and secondary capital markets in India through the
portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures
of Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian
company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up capital in the
case of public sector banks, including the State Bank of India.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling,
subject to the approval of the board and the general body of the company passing a special
resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent
subject to the approval of the general body of the company passing a resolution to that effect.

The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.

The equity shares and convertible debentures of the companies within the prescribed ceilings are
available for purchase under PIS subject to:

- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being
within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and
(b) 24 per cent of the total paid up value of each series of convertible debenture; and

- the investment made on repatriation basis by any single NRI/PIO in the equity shares and
convertible debentures not exceeding five per cent of the paid up equity capital of the company
or five per cent of the total paid up value of each series of convertible debentures issued by the
company.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian
companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the
Reserve Bank has fixed cut-off points that are two percentage points lower than the actual
ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs
can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies
with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent
and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is
18 per cent.

Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the
cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated
bank branches so as not to purchase any more equity shares of the respective company on behalf
of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required
to intimate the Reserve Bank about the total number and value of equity shares/convertible
debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such
proposals, the Reserve Bank gives clearances on a first-come-first served basis till such
investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory
ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all
designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The
Reserve Bank also informs the general public about the `caution’ and the `stop purchase’ in these
companies through a press release.

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
 FII Taxation:
The liberalisation of the Indian economy and the opening up of the capital markets to foreign
investors in 1992 created a new class of investors – foreign institutional investors (FIIs).
 
A special and concessional tax regime was introduced for the taxation of income earned by FIIs
to make the markets lucrative for such investors.
 
With the increasing number of FIIs dominating the capital markets and a sizeable portion of
foreign investment coming in through FIIs, their taxation in India has assumed considerable
significance.
 
This article discusses the FII tax regime and some tax issues confronting FIIs.
 
Special Tax Regime
Gains made from investments in Indian securities are the primary and most significant item of
income for FIIs.
 
Historically, FIIs have offered their income from transactions in Indian securities to tax as capital
gains under the tax regime prescribed for FIIs under section 115AD of the Income-tax Act, 1961
(Act). Under the special tax regime, capital gains made by FIIs were taxed at the base tax rates
mentioned below:
 Long-term capital gains - 10%
 Short-term capital gains - 30%
 Gains characterised as business profits - 40% for corporate entities (30% for non-corporate
entities)

Current tax regime

A new regime of taxing capital gains was introduced in October 2004. Under this regime,
transactions in equity shares and derivatives (both stock and index-linked) effected on a
recognised stock exchange and redemption of units of equity-oriented mutual funds are subject
to a securities transaction tax (STT) at prescribed rates.
 
Under the new tax regime, capital gains earned from transactions in equity shares and units of
equity- oriented funds chargeable to STT are taxed as under:
 Long-term capital gains - Exempt (earlier taxed at 10% for FIIs)
 Short-term capital gains - 10 % (earlier taxed at 30% for FIIs)
 
Gains, if any, in respect of transactions in equity shares (which are not effected on a recognised
stock exchange), debt securities, non-equity oriented funds and derivatives (though transactions
in derivatives are subject to STT) continue to be subject to tax at the rates mentioned in the
Special tax regime (see above).
 
The above capital gains tax rates are subject to relief that may be available to an FII under tax
treaties that India has entered into with other countries where the FII is a tax resident.
 
 Characterisation of gains earned from investments
 
There has always been ambiguity in respect of characterisation of income earned by FIIs on
transfer of securities as capital gains or business income.
 
The Central Board of Direct Taxes (CBDT), in an instruction issued in 1989, laid down certain
tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT
now proposes to issue supplementary instructions (though not specifically in the context of FIIs)
to provide further guidelines to assist the revenue authorities determine whether a tax-payer is a
trader in shares or an investor in shares. The instructions reiterate the principles laid down in
several judicial cases dealing with the characterisation of income.
 
The instructions, which apply to all categories of tax-payers (including FIIs unless specifically
excluded by the CBDT while issuing the final instructions), could have far reaching implications.
 
Historically, most FIIs have been offering gains from transfer of securities to tax as capital gains
- a position that has also been accepted by the revenue authorities. However, several rulings by
the Indian Authority for Advance Ruling (AAR) examined the characterisation of income arising
on transfer of securities in the case of FIIs.
 
Based on the facts of specific cases, AAR ruled that the securities held by FIIs constituted their
business assets and the resultant gains constituted business profits. In arriving at the said
conclusion, the AAR was guided, inter alia, by:
 the enormity and frequency of transactions
 the motive of the FII to earn profits (rather than earn dividend income) from purchase and
sale of shares.
 
Further, on the basis that FIIs did not have a permanent establishment (PE) in India, the income
of FIIs were held to be not taxable in India under the provisions of the applicable tax treaty.
 
A similar issue would arise in case of gains from transactions in derivatives in India given that
there has always been an ambiguity on whether the income from derivatives would constitute
business income or capital gains in the absence of a specific code of taxation.
 
In a recent ruling, AAR held in the case of a UK-based FII that income from purchase and sale of
derivative contracts constitutes business income and is not taxable in India in the absence of a PE
in India.
 
It is possible that the revenue authorities, relying on the principles laid out in the proposed
CBDT instructions and the judicial precedents, may seek to treat income earned from the sale of
securities as business profits.
 
While this would have a positive impact for FIIs investing from a jurisdiction with which India
has a tax treaty (since gains would be exempt from tax in the absence of a PE), it would have a
significant negative impact for FIIs that do not have recourse to tax treaty protection.
 
This is due to the fact that under domestic tax law, business profits earned by a non-resident are
presently taxable at a rate of 40% (30% in case of non-corporate entities) on net profits (revenues
less permissible expenses).
 
However, the above basis of taxation could particularly trigger a host of compliance and
documentation-related issues for FIIs (such as tax withholding, maintenance of books of
accounts, requirement to furnish a tax audit report to name a few), resulting in increased cost of
investment for the FIIs.
 
Developments under the India-Mauritius tax treaty
 
Given the beneficial provisions for taxation of capital gains under the India-Mauritius tax treaty
and the favourable regime for regulation and taxation of offshore funds in Mauritius, many FIIs
investing in India have structured their investments into India involving an investment vehicle
domiciled in Mauritius.
 
For many years, the revenue authorities accepted the tax return filings made by such FIIs without
examining the substance of the formation of such investment vehicles.
 
However, the revenue authorities, while auditing tax returns filed by various Mauritius-based
FIIs in 2000, denied some FIIs the benefits gained under the India-Mauritius tax treaty on the
basis that such FIIs were neither tax residents of Mauritius nor the beneficial owner of the
income earned from Indian investments.
 
Subsequently, CBDT (the apex Indian tax administrative body), issued a notice clarifying that
FIIs holding a tax residence certificate issued by the Mauritius revenue authorities would be
regarded as tax residents of Mauritius and the beneficial owner of income earned from India.
 
A non-governmental organisation (Azadi Bachao Andolan) filed a public interest litigation
petition in the Delhi High Court challenging the validity of the above notice. The Delhi HC
quashed the notice, holding, inter alia, that the notice breached the powers conferred on the
revenue authorities by the domestic tax law.
 
The central government appealed against the decision of the Delhi HC before the Supreme Court
(SC). The SC, in October 2003, passed an order setting aside the decision of the Delhi HC and
declared the notice to be valid and efficacious.
 
Thus, based on the current tax provisions, FIIs that are tax residents in Mauritius are entitled to
the beneficial provisions of the India-Mauritius tax treaty where a tax residence certificate is
issued by the Mauritius revenue authorities.
 
With the reduction in tax rates of capital gains (see Current tax regime), the efficacy of
structuring investments in India by involving an investment vehicle domiciled in Mauritius has
significantly reduced though it continues to be employed by several foreign investors investing
in the Indian capital markets.
 
 Manner of set-off of capital losses
Another issue faced by FIIs is the manner of set-off of capital losses incurred prior to April 1,
2002.
 
Up to (and including) financial year ended March 31, 2002, the Act permitted a tax payer to set-
off losses from one source against income from another source under the same head of income
(the Act was amended effective April 1, 2002 restricting the manner of set-off of long-term
capital losses).
 
Therefore, a tax payer was required to set-off the capital losses incurred during the year (on
transfer of short-term and long-term capital assets) against capital gains earned during the year in
the manner prescribed under the Act.
 
Where the net result of the above set-off was a capital loss, the tax payer was permitted to carry
forward this loss to be set-off against capital gains earned in eight subsequent years.
 
However, where the net result of the set-off resulted in a capital gain, the tax payer could utilise
the capital losses for past years brought forward, if any, to set-off the net capital gains of that
year.
 
The above manner of set-off was not accepted by the revenue authorities. It was the revenue
authorities’ contention that since the short-term and long-term capital gains were taxed at
differential tax rates (30% and 10%, respectively), they are to be regarded as distinct sources of
income.
When the matter came up for hearing before the special bench of the Income Tax Appellate
Tribunal, Mumbai (ITAT) [a 3-member bench constituted to decide on the matter], the bench
held that since the Act had not prescribed any order of precedence according to which the loss
arising from one source has to be set-off against income from any other source, it is the
legitimate right of the tax payer to choose the option that is more favourable to it so that it could
avail the benefit of the concessional rate of tax on long-term capital gains.
 
The above judgment comes as a great relief to FIIs that have been keenly awaiting the outcome
of this case before the special bench. With the matter now having been settled, a number of cases
pending with ITAT and at lower levels with taxes running into millions of rupees locked in as a
result of the litigation on this issue are expected to be favourably decided.
 
The reduction in tax rates, coupled with the India growth story, has given the much-needed
impetus to FII investments in the Indian capital markets.
 
However, certainty and clarity in tax matters is critical to retain the attractiveness of India as an
investment destination. Proactive clarifications in the future from CBDT on contentious issues,
including characterisation of income, would certainly be very welcome.
Why there is need of FII ?
 Need Of FIIs On Indian Markets

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
market.

Depositories:

The increase in the volume of activity on stock exchanges with the advent of on screen trading
coupled with operational inefficiencies of the former settlement and clearing system led to the
emergence of a new system called the depository System. SEBI mandated compulsory adding
and settlement of select securities in dematerialized form. All securities are held, traded and
settled in demat form. Two depositories have come into existence – NSDL and CSDL. Demat
settlements have eliminated bad deliveries and other related problems associated with physical.
Buy Back of shares:

Buy back of shares means that a company purchases or buys back its own shares, which it had
issued previously to the shareholders. The company has the option to either cancel them or hold
them as treasury – frozen stock. The differences, though technical is significant. For example a
company buys back one crore equity shares of the face value of Rs 10 at Rs 100 each. If the
shares are cancelled the equity base of the company will be reduced by Rs10 crore, while the
reserves will be depleted by Rs 90 crore. If the repurchased shares are held as treasury stock, the
shares will not be extinguish, but will be held neither as an investments nor as equity. They can
be revived by reissuing them at a later date or for employee option.

A company may be motivated to buy back its own shares for any of the following reasons:

1. A company with surplus cash to invest and buy may consider it to be a worthwhile invest
proposition as it carries minimum risk compared with other avenues of investment such as
investment in new projects, development of new products, acquisitions and takeovers/
2. For a company facing a threat of hostile takeover share buy back would help its promoters to
increase their proportional share holding in the company.
3. A company may think of altering its capital structure if its equity is disproportionately large.
Buy back may help the company to achieve a target capital structure.
4. A panic driven fall in share prices can be arrested through buy back of shares.
5. A company intending to improve market quotes of its scrips may choose buy back rather than
pay higher dividends as buy back signals management confidence. Moreover, buy back provides
an exit route to investors in case of illiquid scrips
 FII Vs FDI

FIIs can purchase and sell Government Securities and Treasury Bills within overall approved
debt ceilings. To facilitate better risk management by investors, authorised dealers have been
permitted to provide forward cover to FIIs in respect of their fresh equity investments in India.
Moreover, transactions among FIIs with respect to Indian stocks will no longer require post-facto
confirmation from the RBI. Also, 100 percent FII debt funds have been permitted to invest in
unlisted debt securities of Indian companies.

What explains the greater attraction of the Indian market for portfolio investors as compared to
foreign direct investment (FDI)? In his column ‘Bullish FII versus cautious FDI’ in these pages
(FE, February 14), Senthil Chengalvarayan has compared the Indian scenario, characterised by
strong portfolio inflows and much weaker foreign direct investment (FDI), with China, where the
situation is the reverse. He attributes the difference to the opening of the capital market. Open up
the real sector and investments will flow, he argues. While his broad thrust is correct, there is
another factor that’s just as critical, if not more. Ease of entry and exit.

Today, it is relatively effortless for a foreign institutional investor (FII) to enter the capital
market. A Sebi registration, preceded by a fairly perfunctory due diligence, is all it takes before
an FII can enter the Indian stock market and commence trading. Exit is equally simple

FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper,
problems remain at the grassroots. There are innumerable clearances that need to be obtained at
the state and district levels. There are also a number of practical hurdles, such as infrastructure
bottlenecks, all of which make entry difficult. Exit is more complicated. Archaic labour laws,
such as the Industrial Disputes Act, prohibit the closure of any company employing more than
100 workers without obtaining prior state government permission. Bankruptcy laws are
convoluted and legal processes costly and long-winded.

No wonder portfolio inflows into India far exceed direct investment flows. FII flows topped $8.5
billion last year and have already exceeded $1 billion in the current year to date. In contrast, FDI
flows have remained stuck in the $3-4 billion groove for the past many years. It’s just the reverse
in China.

FDI is in the range of $50 billion, while portfolio flows are much lower, in the range of $4-5
billion. Part of the reason is that equity markets are far less open than in India. The market is
segregated between resident and non-resident investors and there are strict controls.

Given that FDI is far more beneficial to the recipient country than FII, the big question troubling
Indian policymakers is how do we replicate the Chinese example. We would say open up and,
equally, make exit easier as well.

Several measures to boost FDI have been announced in 1998-99. Projects for electricity
generation, transmission and distribution as also roads and highways, ports and harbours, and
vehicular tunnels and bridges have been permitted foreign equity participation up to 100 per cent
under the automatic route, provided foreign equity does not exceed Rs. 1500 crore. FDI
permissible under Non-Banking Financial Services now includes "Credit Card Business" and
"Money Changing Business". Regarding equity participation in private sector banks, multilateral
financial institutions have been allowed to contribute equity to the extent of the shortfall in NRI
holdings within the overall permissible limit of 40 per cent. The Government has also decided to
permit FDI up to 49 per cent of the total equity, subject to license, in companies providing
Global Mobile Personal Communication by Satellite (GMPCS) services. Also, minimum
capitalisation norms earlier required for pure financial consultancy services have been relaxed.

GDR/ADR guidelines have been further liberalised in 1998-99. Unlisted companies are now
permitted to float Euro issues under certain conditions. All end-use restrictions on GDR/ADR
issue proceeds have been removed, except the prevailing restrictions on investment in stock
markets and real estate. The 90-day validity period for final approvals of GDR/ADR issues has
been withdrawn and final approval will continue to be valid, thereby imparting greater flexibility
to issuing companies regarding the timing of issues. Indian companies are now permitted to issue
GDRs/ADRs in the case of Bonus or Rights issue of shares, or on genuine business
reorganisations duly approved by the High Court. The companies, however, in all such cases,
will be required to get approval from the Department of Economic Affairs for the issue of
GDRs/ADRs.

Foreign Direct Investment (FDI) inflows to developing countries are estimated to have gone up
to U.S.$ 149 billion in 1997 from U.S.$ 130 billion in 1996. India’s share of global FDI flows
rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. On the other hand, India’s share in net
portfolio investment flows to the developing countries declined to 5.1 per cent in 1997 after
increasing to 8.7 per cent in 1996.

FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in
1996-97 because of a decline in portfolio investment (Table 6.9). Although foreign direct
investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197
million in 1997- 98, portfolio investment declined from U.S.$ 3,312 million in 1996-97 to U.S.$
1,828 million in 1997- 98. This decline in portfolio investment is mainly attributable to the
contagion from the East Asian crisis, which adversely affected capital flows to all emerging
markets.

International developments continue to affect capital flows into India in 1998-99 as well. The
provisional estimate of total foreign investment at U.S.$ 880 million during April-December,
1998 was sharply lower compared to the inflow of U.S.$ 4253 million during the corresponding
period in the previous year. Although FDI flows were weaker, this overall decline in capital
flows was mainly attributable to a net outflow in portfolio investment of U.S.$ 682 million
during April-December, 1998 as against an inflow of U.S.$ 1742 million during the same period
in 1997. Trends in approvals and actual inflows of foreign direct investment are shown in Table
1 below.

Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997- 98.
U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI. The striking
feature was that S. Korea increased its flow of investment in India from a meagre U.S.$ 6.3
million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per cent
share).
 Review of literature.
1).FII INFLOWS IN INDIA “PREFERENTIAL ALLOTMENT OF SHARES”

By Pankaj Kumar Posted: Sep 17, 2009

ABSTRACT: The FII inflows into the primary market in India comes mainly through the
conversion of foreign currency convertible bonds (FCCBs), private placement to qualified
institutions placements (QIPs), initial public offers (IPOs), follow-on overseas offers, conversion
of warrants and preferential offers.

2).Why are Foreign Institutional Investors (FII) investing in India.

BY: Muhammed Haris | Category: Business and Finance | Post Date: 2009-09-05

 Huge investments are being done by FII (Foreign Institutional Investors) in Indian
companies. But the question is - If India is a developing country, why do they rely on our
services and invest in India. Do they lack the knowledge about poverty and social issues in
India? Does India has a false image in International market?

3).No Restrictions Imposed on FII Investments in India - Indian Stock Market Going
Strong posted on 28th Oct 2010

ABSTRACT: Inaugurating the two-day Economic Editors' Conference in New Delhi, India's
finance minister Mr. Pranab Mukherjee said that no restrictions will be imposed on FII
investments in India. Honourable minister stated At this time, I am not thinking of putting a cap
on FIIs (investment in the equity market) . It's worth noting the fact that India is the only country
to enhance FII investment limits in debt this year while other developing economies like while
Brazil and Japan have moved to limit inflows. The main reason to have enforced this stand out
decision seems to be the record $24.48 billion in Indian stocks this year.

4). 4 Ways To Trade India

By Stephen Edge
: The Securities and Exchange Board of India (SEBI) is one of two regulators of India's
derivatives market. The other, the Forward Markets Commission (FMC) oversees futures on
physical commodities where SEBI administers financial products. SEBI is an independent
agency created in 1992 and is a department in the Ministry of Consumer Affairs Food and Public
Distribution. As of 03 April, 2007, there were 996 Foreign Institutional Investors (FII) directly
registered with SEBI. FIIs, in most cases, must receive approval from SEBI before they can
commence trading in India. There are 4 ways for an FII to access the India market.
5). FIIs suck out record $600 m in a day [India Business] Times of India, The, Feb 26, 2011 .

ABSTRACT: Foreign fund managers are on a "Quit India" mission this year. After pumping in
over $29 billion into the Indian stock market last year, so far in 2011, the same group of
investors has taken out over $3.5 billion from the secondary market.

On Thursday alone, FIIs pulled out $600 million (Rs 2,700 crore). And going by what
institutional dealers say about the current mindset of FII fund managers, this figure is expected to
rise. As a result, the benchmark indices could slide further from the current levels, reaching
multi-year lows, they said.

6). FIIs inflow reduce in India December 7th, 2010 BY.Malvika Sampat .

ABSTRACT: It is reported in the Financial Express that the investments form the foreign institutional
investors (FIIs) have reduced in India.
As a result of this the, the FII inflow in India has been reduced to 35 percent from 50 percent in the year-
till-date to 35 per cent in the week-till-date, Bloomberg data show. South Korea, Taiwan and Thailand
have gained at India’s expense. The share of FII inflows for the week-till-date for these countries has
increased to 34 per cent, 20 per cent and 11 per cent from 29 per cent, 12 per cent and 3 per cent,
respectively.
 Findings.
Most of the under developed countries suffer from low level of income and capital
accumulation. Though, despite this shortage of investment, these countries have developed a
strong urge for industrialization and economic development. As we know the need for Foreign
capital arises due to shortage from domestic side and other reasons. Indian economy has
experienced the problem of capital in many instances. While planning to start the steel
companies under government control, due to shortage of resources it has taken the aid of foreign
countries. Likewise we have received aid from Russia, Britain and Germany for establishing
Bhiloy, Rourkela and Durgapur steel plants. The present paper is a modest attempt to study the
trends in Foreign Institutional Investment into India. It is observed that the FIIs investment has
shown significant improvement in the liquidity of stock prices of both BSE and NSE. However,
there is a high degree of positive co-efficient of correlation between FIIs investment and market
capitalization, FIIs investment and BSE & NSE indices, revealing that the liquidity and
volatility was highly influenced by FIIs flows.
Further, it is also proved that FIIs investment was a significant factor for high liquidity and
volatility in the capital market prices. The present study is a modest attempt to know the status
of FIIs in Indian capital market.

The Indian economy has been one of the fastest growing economies in the world, next only to
China.

According to the strong growth rate of GDP, India now ranks 10th among the largest economies
in the world (World Bank Report). Indian economy has experienced the problem of capital in
many instances. While planning to start the steel companies under government control, due to
shortage of resources it has taken the aid of foreign countries. Likewise we have received aid
from Russia, Britain and Germany for establishing Bhiloy, Rourkela and Durgapur steel plants.
The foreign institutional investment was increased during the years 2009 and 2010. Later on,
due to global financial crisis the investments by FIIs were reduced.
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 www.business-standard.com

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 articles.timesofindia.indiatimes.com