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. Before I actually begin with the crux of this article, let me give you a brief background. Developing countries like India are generally capital scarce. This is because levels of income are lower in comparison to other developed countries, which in turn means savings and investments are also lower. So how do developing nations get out of such a situation? Simple! They borrow money, like we all do when we need to buy a house or a car. Countries can thus invest this borrowed money in various social and physical infrastructure; earn a return on them which helps them pay off their debt, and simultaneously propel the country to a higher growth trajectory. However, there is another way in which a country can attract foreign money. This is by way of Foreign Direct Investment (FDI) of Portfolio Investment (better known as Institutional Investment). The difference between the two is subtle. Lets look into FDI first. FDI is defined as investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Examples of FDI would include POSCO setting up a steel plant in Orissa (inbound FDI), Tata buying Arcelor (out-bound FDI) and so on. On the other hand, FII is used to denote an investor, who invests money in the financial markets of a country different from the one in which that investor is incorporated. So, if you as an Indian decide to invest in the US stock markets, it is an out-bound foreign institutional investment. Similarly, suppose a rich American millionaire invests in the Indian stock markets, it would be termed as in-ward FII.

If you follow financial dailies, you are bound to see headlines such as FIIs remained net buyers. Net buyers implies that foreign investors poured more money into the stock market than they took out, which is generally seen as a positive development as far as our economy is concerned. But are we obsessed with FIIs? Do we give them more attention than they deserve? Well, this is a very contentious issue, and addressing this is beyond the scope of this article. But we can debate on some basic issues regarding FII flows. For instance, take a look at the chart. On the left axis, we have measured net FII flows (inflows minus outflows), in Rs. Crores. On the right axis, we have measured the Sensex. What does this show us? Well, for one, it shows the spectacular rise of the Sensex over the past few months! Secondly, we can see how volatile FII flows are. It is almost impossible to predict whether FIIs will be net sellers or net buyers tomorrow! What is more important is that there is no rigid relationship between the Sensex and FII flows. Statisticians use a measure known as the correlation coefficient, which is used to depict a relationship between two variables mathematically. This coefficient ranges from minus 1 to plus 1. So, if we consider two variables, and the coefficient is -1, it means that when one moves up, the other moves down in the same proportion. When it is 1, it means when one moves up or down, the other also moves in the same manner, and when it is zero, it means there is no correlation. So when one moves up (or down), theres no way to figure out how the other variable will behave.

So basically, one can compute the correlation coefficient between the Sensex and FII flows. I found it to be 0.13 over a 21 month period. This is a very weak correlation, though it cannot be ignored entirely. But if they are so weakly correlated, then why do they grab the headlines? Well, thats because we need to look beyond the numbers! In any kind of market, financial or real, investor sentiment and psychology play a crucial role. This is something that just cannot be captured in a few numbers. Now an in-depth explanation of investor psychology is not possible here, but I can give a few examples of it. For instance, when the stock markets rise, they just seem to be rising (as you may have observed recently)! Experts and academicians have studied the behavior of investors, and found that frenzy and greed drive investors during a bull run, and especially when a bull run is at its full momentum, investors tend to follow the band-wagon and overlook economic fundamentals while investing. In fact, stock market crashes too occur in similar ways. One major investor may begin selling his stocks suddenly. Looking at him, others may panic, and they too follow suit. Such panic spreads like wild fire in the markets, and ultimately leads to a major crash. This was similar to what happened during the times of Harshad Mehta and Ketan Parikh. It is because of the volatile nature of investors sentiments that FIIs are tracked so closely. It would not be prudent to drive away foreign investors from investing in our country. I had mentioned the importance of foreign capital in the context of a developing economy, and that is precisely why the government has been so keen on liberalizing the external financial sector since 1991. If one foreign investor has had a good experience investing in our country, it builds up our reputation in the international community, and encourages more foreign investors to invest in our economy. However, a crisis of any kind will create panic among foreign investors as well, and regaining their trust and confidence in our economy will entail another mammoth task!

Investment in Indian Companies by FIIs/NRIs/PIOs 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 centfor 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 firstcome-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. The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings is:

What Does Foreign Institutional Investor - FII Mean? An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

The term 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 to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies

Do you know the difference between FDI and FII?

What is foreign investment? Any investment flowing from one country into another is foreign investment. A simple and commonly-used definition says financial investment by which a person or an entity acquires a lasting interest in, and a degree of influence over, the management of a business enterprise in a foreign country is foreign investment. Globally, various types of technical definitions including those from IMF and OECD are used to define foreign investment. How does the Indian government classify foreign investment? The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) and person of Indian origin (PIO) investment. Inflow of investment from other countries is encouraged since it complements domestic investments in capital-scarce economies of developing countries, India opened up to investments from abroad gradually over the past two decades, especially since the landmark economic liberalisation of 1991. Apart from helping in creating additional economic activity and generating employment, foreign investment also facilitates flow of technology into the country and helps the industry to become more competitive. Why does the government differentiate between various forms of foreign investment? FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of increasing its capacity/productivity or changing its management control. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. In the case of FII investment that flows into the secondary market, the effect is to increase capital availability in general, rather than availability of capital to a particular enterprise. Translating an FII inflow into additional production depends on production decisions by someone other than the foreign investor some local investor has to draw upon the additional capital made available via FII inflows to augment production. In the case of FDI that flows in for the purpose of acquiring an existing asset, no addition to production capacity takes place as a direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition to production capacity does not result from the action of the foreign investor the domestic seller has to invest the proceeds of the sale in a manner that augments capacity or productivity for the foreign capital inflow to boost domestic production. There is a widespread notion that FII inflows are hot money that it comes and goes, creating volatility in the stock market and exchange rates. While this might be true of individual funds, cumulatively, FII inflows have only provided net inflows of capital. FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but also better management and governance practices and, often, technology transfer. The know-how thus transferred along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII inflows, although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies.

According to the Prime Ministers Economic Advisory Committee, net FDI inflows amounted to $8.5 billion in 2006-07 and is estimated to have gone up to $15.5 billion in 07-08. The panel feels FDI inflows would increase to $19.7 billion during the current financial year. FDI up to 100% is allowed in sectors like textiles or automobiles while the government has put in place foreign investment ceilings in the case of sectors like telecom (74%). In some areas like gambling or lottery, no foreign investment is allowed. According to the governments definition, FIIs include asset management companies, pension funds, mutual funds, investment trusts as nominee companies, incorporated/institutional portfolio managers or their power of attorney holders, university funds, endowment foundations, charitable trusts and charitable societies. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. The government allows greater freedom to FDI in various sectors as compared to FII investments. However, there are peculiar cases like airlines where foreign investment, including FII investment, is allowed to the extent of 49%, but FDI from foreign airlines is not allowed. What are the restrictions that FIIs face in India? FIIs can buy/sell securities on Indian stock exchanges, but they have to get registered with stock market regulator Sebi. They can also invest in listed and unlisted securities outside stock exchanges if the price at which stake is sold has been approved by RBI. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company, unless the Indian Company raises the 24% ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution and a special resolution to that effect by its general body in terms of RBI press release of September 20, 2001 and FEMA Notification No.45 of the same date. In addition, the government also introduces new regulations from time to time to ensure that FII investments are in order. For example, investment through participatory notes (PNs) was curbed by Sebi recently.

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 thats 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. For... 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. Its 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....

How is relation between FDI and FII?

FII generally means portfolio investment by foreign institutions in a market which is not their home country. These institutions are generally Mutual Funds, Investment Companies, Pension Funds, Insurance House's is a short term benefit to the country and the rules and regulations to enter the Indian Market are not much, the fluctuations in the stock market is generally due to the FII Investments , cause the rules are eased the investor can leave the market at Any point of time. There investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity. Therefore we could see Lehman investing 15% in say Unitech, now that would be FDI. However if Lehman has bought shares of Unitech though secondary markets (stock trading market) it would have been an FII. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. FDI also have to follow a high rules and regulations to enter the market and the subs. given to such players are huge in term of taxes .FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs. The Economy high and low depends on the FDI's Investment where as the Stock mark fluctuations are generally because of FII

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Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market. All other differences flow from this primary difference. FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrips. Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby puling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.

FII's Influence in Indian Stock Market

Institutional Investor is any investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include
hedge funds, insurance companies, pension funds and mutual funds. The growing Indian market had attracted the foreign investors, which are calledForeign Institutional Investors (FII) to Indian equity market, and in this paper, we are trying a simple attempt to explain the impact and extent of foreign institutional investors in Indian stock market. What does the name FII means? It is the abbreviation of Foreign Institutional Investors. The term 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 & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio. The major source (almost 50%) of money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore Derivatives. As on September 5, there are over 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India (SEBI). We are also examining whether market movement can be explained by these investors. We often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawl of money from FIIs. After 1991, due to our liberalization process, there was large flow of foreign funds from abroad. Current investments by FII is Rs. 2,55,464.40 Crores as compared to Rs. 2,83,468.40 Crores by the end of 31 December 2007. That implies that they had withdrawn almost 9% of money they had deposited till

December 2007. The amount was much in the months of 2008 as compared to corresponding months of 2007, and that is a reason for the volatility of the stock market. In 2008, the net buying is only Rs. 5,603 Crores compared to Rs. 36,869 Crores in 2007. From all this, we can analyze prime facia that the FII's influence market. A more investments by FIIs indicate that they are confident in Indian market. Usually, the mode of operations of FIIs was taking loans from countries where interest is low (like Japan) and invest in booming markets like India. include hedge funds, insurance companies, pension funds and mutual funds. The growing Indian market had attracted the foreign investors, which are calledForeign Institutional Investors (FII) to Indian equity market, and in this paper, we are trying a simple attempt to explain the impact and extent of foreign institutional investors in Indian stock market. What does the name FII means? It is the abbreviation of Foreign Institutional Investors. The term 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 & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. They actually evaluate the shares and deposits in a portfolio. The major source (almost 50%) of money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore Derivatives. As on September 5, there are over 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India (SEBI). We are also examining whether market movement can be explained by these investors. We often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawl of money from FIIs. After 1991, due to our liberalization process, there was large flow of foreign funds from abroad. Current investments by FII is Rs. 2,55,464.40 Crores as compared to Rs. 2,83,468.40 Crores by the end of 31 December 2007. That implies that they had withdrawn almost 9% of money they had deposited till December 2007. The amount was much in the months of 2008 as compared to corresponding months of 2007, and that is a reason for the volatility of the stock market. In 2008, the net buying is only Rs. 5,603 Crores compared to Rs. 36,869 Crores in 2007. From all this, we can analyze prime facia that the FII's influence market. A more investments by FIIs indicate that they are confident in Indian market. Usually, the mode of operations of FIIs was taking loans from countries where interest is low (like Japan) and invest in booming markets like India.

But the sub-prime crisis and other economic conditions had caused a liquidity crunch for these institutions. So they are forced to withdraw money from Indian market so as to repay loans they had taken. These withdrawals had caused panic in market, and even domesticinvestors are making them sell their shares.
But one aspect we should agree on is that the FII's increased role had changed the face of Indian stock market. It had brought both quantitative and qualitataive change. It had also increased the market depth and breadth. The emphasize on fundamentals had caused efficient pricing of shares. Since there is no condition on FIIs that they should disclose in which company they are investing, those figures are not available. Many qualitative tests like regression tests had proved that there is direct relation between market movements and fund flows of FIIs. In this, we will analyze the investments in different months and years, and tries to find the impact of FIIs in stock market.

Introduction 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. Simplified registration norms.

P-Notes (Participatory Notes) are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. For example, 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. That is why they are also called Offshore Derivative Instruments. 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 first question that we need to ask is the necessity of FIIs as an instrument for investment into India. This is not a common place of markets; if, for example, a non-resident of the US or of England chooses to invest in an American or an English or a German stock, he does not have to hold his investment indirectly through an FII, but can hold it directly in his own name. An FII in India is a superfluous addition created simply to suit the regulatory requirements of SEBI. FIIs serve no economic purpose but they exist in order to provide SEBI with a bureaucratic layer between a foreign investor and the regulator. It enables SEBI to pretend that it controls foreign investors when in fact SEBI has no control on the ultimate investor. It is a good example of obscuring the true character of foreign investment in India through a non-transparent and expensive set-up. The P-Note is an additional twist in this indirect investment as it enables those who wish to invest in the Indian market to do so without disclosing their identity. Influence of FIIs on Indian Stock Market The current investments of FIIs is Rs. 2,55,464.40 Crores. This is almost 9% of the total market capitialisation. If we explain the things in simple terms, market pundits often attribute the rally of stock

market and fall of stock market to the flow of funds by FIIs. We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the major impacts are:

They increased depth and breadth of the market. They played major role in expanding securities business. Their policy on focusing on fundamentals of the shares had caused efficient pricing of shares.

These impacts made the Indian stock market more attractive to FIIs and also domestic investors, which involves the other major player MF (Mutual Funds). The impact of FIIs is so high that whenever FIIs tend to withdraw the money from market, the domestic investors become fearful and they also withdraw from market. Just to show the impact, we analyze below the 10 biggest falls of stock market: Day (Points Loss in Sensex) 21/01/2008 (1408) 22/01/2008 (875) 18/05/2006 (856) 17/12/2007 (826) 18/10/2007 (717) 18/01/2008 (687) 21/11/2007 (678) 16/08/2007 (643) 02/08/2007 (617) 01/08/2007 (615) Gross Purchases (Rs. Crores) 3062.00 2813.30 761.80 670.00 1107.00 1077.20 640.70 989.50 534.50 809.40 Gross Sales (Rs. Crores) 1060.30 1618.20 527.40 869.00 1372.50 1348.40 791.80 750.30 542.00 956.90 Net Investments (Rs. Crores) 2001.80 1195.10 234.40 -199.00 -265.50 -271.20 -151.10 239.20 -7.50 -147.50

Major Intra Day Collapses in BSE Sensex From this table, we can see that the major falls are accompanied by the withdrawal of investments by FIIs. Take the case on January 18, 2008, the Sensex lost almost 687 points. Here, the net sales by FIIs was Rs. 1348.40 Crores. This is a major contributor to the fall on that day. But contrary to that day, take the case on January 21, 2008, the Sensex lost 1408 points and the gross sales was Rs. 1060.30 Crores and the purchases were Rs. 3062.00 Crores. So this can be concluded that after the fall of market, FIIs had invested again into the market. From this, we can see the effect of FIIs. Net Investments of FII from 2003-08 Year 2003 2004 2005 2006 2007 2008 (10/08/08) Net Investment 30458.7 38965.1 47181.2 36539.7 71486.5 -29169

Now we analyze the net investments' graph from 2003 to 2008. From this, we can see that there is an increase in net investments till 2005 and there was small decrease in investments in the year 2006. But there was a steep increase in the year 2007-08. This was the best period in Indian stock market where stock prices were increased and the market was in good mood.
When we take the investments in 2008, the net investments is negative. And we know the market is volatile in this year. So we find that there is direct relation between net investments and movement of stock market. FIIs Gross Purchases & Sales from 2003-08 Year 2003 2004 2005 2006 2007 2008 (10/08/08) Gross Purchases 94410.5 185671.5 286020.5 475622.5 814877 560480.9 Gross Sales 63951.8 146706.4 238839.4 439082.8 743390.7 589650

Now this graph represents the relation between gross purchases and gross sales. We can see from the graph that gross purchases are increasing from 2003 to 2007 and gross sales are lower than gross purchases. So we conclude that this caused the market to reach the magical figure of 21,000 in Sensex. But when we look at the year of 2008, the involvement of FIIs is reduced, and we can also find in this year the gross sales is higher than gross purchases. This

analysis also indicates the impact of FIIs in markets

FII's Percentage Change in Investment (Here we are taking 2003 as the base year and calculating the percentage change for remaining years.) Year 2003 2004 2005 2006 2007 2008 (10/08/08) Gross Purchases 94410.5 185671.5 286020.5 475622.5 814877 560480.9 Gross Sales 63951.8 146706.4 238839.4 439082.8 743390.7 589650 Net Investment 30458.7 38965.1 47181.2 36539.7 71486.5 -29169 % Change 0 27.92765 54.90221 19.96474 134.6998 -195.766

In this graph, we took the base year as 2003 and the trends of the investments by FIIs are plotted. We can see from the graph that till 2007, the investment is more than that of 2003, and the most interesting thing is that when we look at 2008, the percentage change in investments is much lower than 2003, even

going to the negative side. This finding also leads to our conclusion that the FII's impact on stock market is high. Conclusion From all the above discussions and data analysis, we conclude that FII has a major impact in Indian stock market. Particularly, the fall on October 17, 2007, in which just a speculation about governments plan to control P-Notes had caused the biggest fall in Indian stock market, even market had to be closed for one hour without trade. The impact is that even the domestic players and MFs also follow a close look on FIIs. So if FIIs are confident in Indian markets, there is a general perception that market is on a song. We had also found that the major (almost 50%) of FIIs' investments are from P-Notes. So it implies that major forces behind the FII investments are anonymous. This has a negative impact on stock market. Because money launders and even terrorists use this facility to pump money to Indian market and their sudden withdrawal causes volatility in markets. From the graphs drawn in the above parts, we can see that the major falls in stock market is accompanied by the withdrawal of money by FIIs. So there is a direct relation between the FII's money flow and the movement of sensex. The biggest fall in stock markets occurred in 2007 and 2008. This means the volatility of market is more because during this period there was an increase in registration of FIIs and the investments reached almost Rs. 283468.40 Crores by the end of 2007. The present condition is that the investments had reduced by 9% to 255464.40 Crores as on September 5. So this reduction is one cause of volatailty. This can be. In 2008, the net buying is only Rs. 5603 Crores compared to Rs. 36,869 Crores in 2007. From all this, we can analyze prime facia that the FIIs influence market.

Q1. Who is a Foreign Institutional Investor (FII)? Ans. FII means an entity established or incorporated outside India which proposes to make investment in India. Q2. What is a sub-account? Ans. Sub-account includes those foreign corporates, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII. Q3. What is a Designated Bank? Ans. Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII. Q4. Who is a Domestic Custodian? Ans. Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities.

Q5. What is a Broad Based Fund? Ans. Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors. Provided further that if the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund.

FII REGISTRATION Q6. Who can get registered as FII? Ans. Following entities / funds are eligible to get registered as FII: 1. 2. 3. 4. 5. 6. 7. 8. 9. Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks University Funds Endowments Foundations Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 1. 2. 3. 4. Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders

Q7. What are the parameters on which SEBI decides FII applicants eligibility?

Ans. a. Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year) b. whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI c. Whether the applicant is a fit & proper person. Q8. Which form needs to be filled in when applying for FII registration? Ans. "Form A" as prescribed in SEBI (FII) Regulations, 1995. Q9. Which documents need to be sent with "Form A"? Ans. a. Certified copy of relevant clauses (clauses permitting the stated activities) of Memorandum of Association, Article of Association or Article of Incorporation. b. Audited financial statement and annual report for the last one year (period covered should not be less than twelve months Q10. How much is the fee for registration as FII? Ans. US $ 5,000. Q11. When is the registration fee payable? Ans. At the time of submitting the application for registration. Q12. What is the mode of payment? Ans. Demand Draft in favour of "Securities and Exchange Board of India" payable at New York Q13. How many days it takes to get registered as FII?

Ans. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI. In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI. Q14. What is the registration process for FII? Ans.

Q15. What is the validity period of FII registration? Ans. The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed.

Q16. What is the process of renewal? Ans. Same as initial registration. Along with "Form A" and all the relevant documents, the applicants are required to fill in additional form (Annexure 1) while applying for renewal. Q17. Is there any renewal fee? Ans. Yes, US $ 5,000 needs to be paid for renewal of FII registration. Q18. When the application for renewal should be submitted Ans. Three months before expiry of the FII registration. Q19. What are 100 % debt FIIs/sub-accounts, and what is the process for their registration? Ans. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. 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. Q20. Where the application for FII registration should be sent? Ans. The FII registration application should be sent to: Securities and Exchange Board of India Division of FII & Custodian Mittal Court "B" Wing, First Floor 224, Nariman Point Mumbai 400 021 India Note: In case the applicant is a Bank or "Subsidiary of a Bank" then the application form and relevant documents need to be submitted in duplicates.

SUB-ACCOUNT REGISTRATION

Q21. Who can get registered as sub-account? Ans. a. Institution or funds or portfolios established outside India, whether incorporated or not. b. Proprietary fund of FII. c. Foreign Corporates d. Foreign Individuals Q22. Who need to apply for sub-account registration? Ans. The FII should apply on the behalf of the Sub-account. Both the FII and the Subaccount are required to sign the Sub-account application form. Q23. Which form needs to be filled when applying for sub-account registration? Ans. "Annexure B" to "Form A" (FII application form). Q24. What documents need to be sent with Annexure A? Ans. None Q25. How much is the fee for sub-account registration? Ans. US $ 1,000 Q26. When is the registration fee payable? Ans. At the time of submitting the application. Q27. What is the mode of payment? Ans. Demand Draft in the name of "Securities and Exchange Board of India" payable at New York Q28. How many days it takes to get a sub-account registered? Ans. 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.

Q29. What is the validity period of sub-account registration? Ans. The validity of sub-account registration is co-terminus with the FII registration under which it is registered. Q30. What is the process of renewal of sub-account? Ans. Same as initial registration. Q31. Is there renewal fee? Ans. Yes, US $ 1,000 Q32. Can OCBs / NRIs permitted to get registered as FII/sub-account? Ans. No, they are not permitted. POST-REGISTRATION PROCESSES Q33. What is the procedure in case the FII/sub-account changes its name? Ans. If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the change. It should also mention the reasons for the name change and give an undertaking that there has been no change in beneficiary ownership. In case of name change of FII, the request should be accompanied with documents from home regulator and registrar of the company evidencing approval of name change, and the original FII registration certificate issued by SEBI should be sent back for necessary amendment. Q34. What is the procedure for transferring a sub-account from one FII to another? Ans. The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration that it is authorized to invest on behalf of the Subaccount. The transferor FII should also submit a No-objection certificate. Q35. What is the procedure for change of domestic custodian? Ans. The FII should send a request, along with no-objection certificate from existing domestic custodian, for change in domestic custodian.

Q36. Can FII/sub-account registration be cancelled on request? Ans. Yes, the FII would be required to send a request for cancellation of its registration or registration of its Sub-account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings. Q37. What if the FII does not renew its/sub-accounts registration? Ans. The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines specified in this regard. INVESTMENT OPPORTUNITIES Q38. Which financial instruments are available for FII investments? Ans. a. 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; b. Units of mutual funds; c. Dated Government Securities; d. Derivatives traded on a recognized stock exchange; e. Commercial papers. Q39. What are the investment limits on equity investments by FII/sub-account? Ans. a. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company. b. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. c. For the sub-account registered under Foreign Companies/Individual category, the investment limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India. Q40. What are the investment limits on debt investments by FII/sub-account? Ans. The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect:
o

For FII investments in Government debt, currently following limits are applicable:
100 % Debt Route 70 : 30 Route Total Limit US $ 1.55 billion

US $ 200 million US $ 1.75 billion

For corporate debt the investment limit is fixed at US $ 500 million.

Q41. What other investment limits are there? Ans.

Normal FII (70:30 Route) Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all investments. 100% Debt FII 100% investment shall be made in debt security only.

Q42. In whose name should the securities be registered? Ans. a. In the name of FII when making investments on its own behalf

b. In the name of sub-account when making investments on behalf of Sub-account c. In the name of "FII a/c sub-account" when making investments on behalf of Sub-account. DERIVATIVES POSITION LIMITS Q43. What are the restrictions on investment in derivatives? Ans. b. 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 shall be 20% of the market wide limit. o For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in such stock shall be Rs. 50 Cr.
o

b. FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index options, whichever is higher, per exchange.

This limit would be applicable on open positions in all option contracts on a particular underlying index.

0. FII Position limits in Index futures contracts: FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index futures, whichever is higher, per exchange. This limit would be applicable on open positions in all futures contracts on a particular underlying index.

In addition to the above, FIIs shall take exposure in equity index derivatives subject to the following limits:

Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FIIs holding of stocks. ii. Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FIIs holding of cash, government securities, T-Bills and similar instruments. b. 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 shall be:

i.

i.

US $ 100 million.

ii.

In addition to the above, the FII may take exposure in exchange traded in interest rate derivative contracts to the extent of the book value of their cash market exposure in Government Securities.

At the level of the sub-account The position limits for a Sub-account in near month exchange traded interest rate derivative contracts shall be higher of:

Rs. 100 Cr or

15% of total open interest in the market in exchange traded interest rate derivative contracts.

OFFSHORE DERIVATIVES/PARTICIPATORY NOTES Q44. Can FII/sub-account issue Offshore Derivatives / Participatory Notes? Ans. Yes, FII/sub-account may issue, deal in or hold off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments against underlying securities, listed or proposed to be listed on any stock exchange in India. Q45. Who can subscribe to/invest in Participatory Notes? Ans. a. Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction; b. Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England, the Federal Reserve, the Hong Kong Monetary Authority, the Monetary Authority of Singapore or any other similar body

provided that the entity must not only be authorised but also be regulated by the aforesaid regulatory bodies; c. Any entity that is regulated, authorised or supervised by a securities or futures commission, such as the Financial Services Authority (UK), the Securities and Exchange Commission (Sub-account), the Commodities Futures Trading Commission (Sub-account), the Securities and Futures Commission (Hong Kong or Taiwan), Australian Securities and Investments Commission (Australia) or other securities or futures authority or commission in any country , state or territory ; d. Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange (Subaccount), London Stock Exchange (UK), Tokyo Stock Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self regulatory organizations are ultimately accountable to the respective securities / financial market regulators. e. Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by an entity satisfying the criteria of (a), (b), (c) or (d) above. Q46. What are the reporting Requirements for the FII / Subaccount issuing Participatory Notes? Ans. a. FII/sub-account who issue/renew/cancel/redeem PNs, require to report on Monthly basis. The report should reach SEBI by the 7th day of the following month. b. The FII/sub-account merely investing/subscribing in/to the Participatory Notes/Access Products/Offshore Derivative Instruments or any such type of instruments/securities with underlying Indian market securities are required to

report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec). c. FIIs/sub-accounts who do not issue PNs but have trades/holds Indian securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis. d. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec): No reports required for that reporting quarter. Q47. How to send report on Participatory Notes? Ans.
o

o o

The format for reporting on issuance/ renewal / redemption of the Participatory Notes is prescribed as per "Annexure B" in our Circular No. IMD/CUST/15/2004 dated April 02, 2004 [The reporting format is downloadable from our website www.sebi.gov.in ] The reports should be e-mailed only to [email protected] In case of Nil-reports, Annexure B is not required. Instead the FII on behalf of its Sub-account should submit the undertaking prescribed in our circular No. IMD/CUST/9/2003 dated November 20 , 2003 The reporting should be done in MS Excel format only