Foreign Institutional Investment (FII)

A Presentation by: Apoorv Srivastav Alok Kavthankar Nishanth Joseph Pankaj Kumar Bothra Priyojeet Kumar 08 34 52 53 61

Road Map for Presentation

Background

What is FII

Distinction between FDI & FII

FII Guidelines

Background: India Transformed !!

Yesterday Slow rate of growth Bureaucratic Protected and slow Small consumer markets Weak infrastructure Today Strong macro economic fundamentals Encouraging foreign investment Outsourcing destination Growing consumerism

Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the World!
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YESTERDAYS INDIA
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.

ADVANTAGES INDIA HAS TO OFFER

Stable democratic environment over 60 years of independence Large and growing market

World class scientific, technical and managerial manpower

Cost-effective and skilled labour Abundance of natural resources Large English speaking population Well-established legal system with independent judiciary Developed banking system and vibrant capital market Well developed accountancy, legal, actuarial and consultancy profession

What is FII ?
Foreign Institutional Investment (FII): 1. FII is Foreign Institutional Investment: It is investment made by foreign Mutual Funds in the Indian Market. 2. FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. 3. SEBIs definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.

4.

Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange makes investments on behalf of foreign investors, referred to as subaccounts.
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Distinction between FDI and FII

FDI FII 1. It is generally short-term investment 2. Investment in financial assets 3. Aim is to increase capital availability

1. It is long-term investment
2. Investment in physical assets 3. Aim is to increase enterprise capacity or productivity or change management control 4. Leads to technology transfer, access to markets and management inputs 5. FDI flows into the primary market

4. FII results in only capital inflows

5. FII flows into the secondary market

6. Entry and exist is relatively easy 7. FII is eligible for capital gain 8. Tends to be speculative 9. No direct impact on employment of labour and wages 10.Fleeting interest in mgt.
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6. Entry and exit is relatively difficult

7. FDI is eligible for profits of the company 8. Does not tend be speculative 9. Direct impact on employment of labour and wages 10.Abiding interest in mgt.

Overview

What are Foreign Investors looking for?

Factors affecting foreign investment

Rate of interest Speculation Profitability Costs of production Economic conditions Government policies Political factors

Good projects
Demand Potential Revenue Potential Stable Policy Environment/Political Commitment

Optimal Risk Allocation Framework

FIIs may invest in:

securities in the primary and secondary markets (shares,

debentures, warrants of listed and unlisted companies) units issued by domestic mutual funds dated Government securities derivatives traded on a recognized stock exchange commercial paper debt instruments provided a 70/30 equity/debt ratio is maintained

Foreign Institutional Investors

FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up share capital of an Indian company
This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing a board resolution/shareholder resolution FIIs can purchase shares through open offers/private placement/stock exchange Shares purchased by FII through arrangement stock exchange cannot be sold through a private

Proprietary funds, foreign individuals and foreign corporates can register as a sub- account and invest through the FII. Separate limits of 10% / 5% is available for the sub-accounts FIIs can raise money through participatory notes or offshore derivative instruments for investment in the underlying Indian securities FIIs in addition to investment under the FII route can invest under FDI route

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FII which based the pressure on the rupee from the balance of payments position and lowered the cost of capital to Indian business.

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.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the badla system.

Investment limits on Equity & Debt investments by FII

FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an

Indian company. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. 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.

investment limits on debt investments by FII

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 S $ 1.75 billion
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For corporate debt the investment limit is fixed at US $ 500 million.

PARTICIPATORY NOTES
What is P-Note: PNs are instruments issued by registered FIIs to overseas investors, who wish to invest in the Indian stock markets without registering themselves with SEBI. Why is P-Note: More than 30% of foreign institutional money coming into India is from hedge funds. Hedge funds, which thrive on arbitrage opportunities, rarely hold a stock for a long time. P-Notes are issued to the real investors on the basis of stocks purchased by the FII. To monitoring investments through P Notes, Sebi decided that FIIs must report P-Notes details. Reporting by FIIs P-Notes issued - 7th day of the following month. The FII merely investing for themselves through P-Notes Quarterly basis FIIs who do not issue PNs but have trades File 'Nil' undertaking on a quarterly basis.
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Advantages & Disadvantages

Advantages
Enhanced flows of equity capital FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap. Managing uncertainty and controlling risks. FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals. Improving capital markets.

Advantages contd..
FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Equity market development aids economic development.

By increasing the availability of riskier long term capital for projects, and increasing firms incentives to provide more information about their operations, FIIs can help in the process of economic development.
Improved corporate governance. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth.

Disadvantages
Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. Problems for small investor: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down.

The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.

Disadvantges contd..
Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Hot Money: Hot money refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. Hot money can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

Recent Developments

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After experiencing a record equity investment of `1,102,200 million in 20092010, the net inflow of investments by FIIs remained flat at `1,101,207 million in 20102011. The momentum seemed to be sluggish in the first half of 20112012; as the net FII investments in equities during the period amounted to `22,090, compared to the net investments of `637,160 million attracted in the first half of 2010-2011. The net investments by FIIs in the debt segment grew by 11.96 percent in 20102011 with a staggering all-time high of ` 363,190 million, compared to `324,380 in 20092010. The impressive trend has come to a halt; during AprilSeptember, 2011, the FIIs made net investments worth ` 64,790 million in debts compared to `250,200 million in the first half of 20102011. Foreign Institutional Investments in Equity and Derivatives The gross turnover of FIIs in the equity market segment on the Indian stock exchanges (the NSE and the BSE) accounted for `14,330,091 million in 20102011, which marked a year-on-year growth of 12.39 percent. The total turnover of the FIIs in the equity market constituted 15.30 percent of the total turnover on the BSE and the NSE in 20102011, an improvement from 11.56 percent recorded in 20092010.

FII Investments & Market Reaction

While strong inflow of funds from foreign institutional investors (FIIs) has been a

reason to , it could turn into a nightmare and if the global investors make a sudden exit can send the bourses

cheer

crashing.

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FII Inflows Vs Sensex

FII Investment from 2005 - 2010
120000 100000 80000 60000 40000 20000 0 -20000 -40000 -60000 -80000 2005 2006 2007 2008 2009 2010 Rs. in (Crores)

BSE Sensex

Rs. in (Crores)

FII Investment Vs Sensex

FII average holding in BSE 500

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 FIIs have started playing a critical role in the movement of stock prices. The assets under management of domestic mutual funds have crossed Rs. 100,000 crores. A positive contribution of the FIIs has been their role in improving the stock market infrastructure. The FIIs are playing an important role in bringing in funds needed by the equity market. 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.

10000

15000

20000

35000

5000

-5000 0

-15000

-10000

25000

30000

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Net Investment by FII (USD Mn) in India

2007-08
2008-09

NET INVESTMENT(USD MN)

2009-10

Foreign Institutional Investors

The Indian capital market was opened up for foreign institutional investors (FIIs) in 1992
Tap international capital markets through ADRs, GDRs, FCCBs, ECBs and NRIs FII investment with it averaging around $9599 million a year during 2003-05. This figure is around 5 times the average annual inflows witnessed from 1993-94 to 1997-98 and from 1999 to 2002 and more than 20 times the average annual inflows during 1997-99 and 2002-03

FIIs.
While cumulative net FII inflows into India from early 1990s to end of March 2003 amounted to $15,804 million, in the period thereafter till about December 2005, the addition to this value was of $25,267 million.

At the same time the Sensex had fallen to about 3000 crossed 4000 and 5000 respectively by August and November 2003. It broke through the 6000 level by January 2004 before crossing the 7000 mark in June 2005, crossing 10,000 in February 2006 and 15,000 in July 2007.

FIIs have a compounding effect on the size and nature of the firm in that the firm becomes in a position to acquire other firms and hence grow even more.

To Attract FIIs

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.

Encouraged FIIs because..

Global liquidity into the equity markets

Raised the price-earning ratio

Built our reputation in the international community

Instrumental in capital formation

Terms related to FII

Sub-account Includes those foreign corporations, 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.

Designated bank Any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII.

Domestic custodian Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities.

Regulations
The SEBI is the nodal agency for dealing with FIIs, and they have to obtain initial registration with SEBI.

The SEBI's initial registration is valid for five years. The Reserve Bank of India's general permission to FIIs will also hold good for five years. Both will be renewable.

FIIs can invest in all securities traded on the primary and secondary markets.

FIIs can repatriate capital gains, dividends, incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares.

Investment Regulations
The total investments in equity and equity related instruments should be at least seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in India.

The cumulative debt investment limit for FII investments in Corporate Debt is USD 15 billion.

The debt investment limit for FIIs in government debt in G-secs currently capped at $5 billion and cumulative investments under 2% of the outstanding stock of G-secs.

 The Foreign Institutional Investor is allowed to transact business only on the basis of taking and giving deliveries of securities bought and sold.

A Foreign institutional Investor or a sub-account having an aggregate of securities worth rupees ten crore or more, as on the latest balance sheet date, can settle their only through dematerialised securities.

Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital

Sources
www.indiastudychannel.com www.kpmg.com www.nseindia.com

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"If there is one place on the face of this Earth where all the dreams of living men have found a home when man began the dream of existence, it is India". Romain Rolland, French philosopher

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