FOREIGN INSTITUTIONAL

INVESTORS ( FIIs)

by
Group 1B

Amit Soni (07927848)

Goldi Sharma (07927863)
 OUTLINE
 Introduction: Foreign Investment
 FIIs
 FIIs in India
 Participatory Notes
 Pros of FII
 Conclusion
 References
 INTRODUCTION

Foreign Investments

Investments made by residents of a country in

financial assets and production processes of
another country
 Foreign Direct Investment
(FDI)

Foreign Entity
wants to enter in But HOW?
the Indian Market

Portfolio Investment Scheme

( PIS)→FII
 Foreign Investment in India

25,000

20,000
Direct Investment
Portfolio Investment
US $ mn.

15,000

10,000

5,000

Year

Ref: Handbook of Statistics of Indian Economy 2006,

RBI: www.rbi.org.in
 FIIs

Who are they ?

Institutions like pension funds ,mutual funds,

investment trusts, asset management companies,
nominees companies and incorporated portfolio
managers
 FIIs

Where they can invest?

Under securities such as shares, debentures

and warrants issued by Indian companies which are
listed /to be listed on the Stock exchange in India

The schemes floated by domestic mutual funds,

traded on the primary and secondary markets.
In government securities including treasury bills
and debt securities of Indian companies.
 INVESTMENT LIMITS FOR FII
 Ceiling for overall investment for FIIs : 24 per
cent of the paid up capital of the Indian
company

 Can be raised up to the sectoral cap/statutory

ceiling, subject to the approval of the board
and the general body of the company
 FIIs in INDIA
 The Indian financial market was opened to the foreign
institutional investors in 1992 to widen and broaden the Indian
capital market.
 The net investment by FIIs in India has been positive every year
except in 1998-99.
 During the last seven years, there has been a phenomenal
increase in the portfolio investment by FIIs in the Indian market
 Several factors are responsible for increasing confidence of FIIs
on the Indian stock market which include
 strong macro-economic fundamentals of the economy
 transparent regulatory system
 abolition of long-term capital gains tax
 encouraging corporate results
 Net Investment Trend

400000
Gross Purchase
350000
Gross Sale
300000 Net Investment

250000
Rs. Crore

200000

150000

100000

50000

-50000

Year

Ref: SEBI, Annual Report 2005-2006

 Trends in FII Investments
12000 50000

Net Investment 45000

10000
Cumulative Net

Cumulative Net Investments

40000
Net Investment (US $ mn.)

Investment
8000 35000

(US $ mn.)
30000
6000
25000
4000
20000

2000 15000

10000
0
5000

-2000 0
Year

Ref: SEBI, Annual Report 2005-2006

 FIIs Registered in India

900
Registration during that year
800
No. of Registrations

700
Total no. of registrations at
600 the end of year
500

400

300

200

100

Financial Year

Ref: SEBI, Annual Report 2005-2006

 PROS of FII
A. Enhanced flows of equity capital
 A greater appetite for equity than debt in
their asset structure.
 Opening up the economy to FIIs is in line
with the accepted preference for non-debt
creating foreign inflows over foreign debt
 Improve corporate capital structures.
 Contribute in bridging the investment gap.
 FII Investment in 2003-2004

13%

Equity-87%

Debt-13%

87%

Ref: SEBI, Annual Report 2005-2006

 FII Investment in 2004-2005

4%

Equity : 96%
Debt: 4%

96%

Ref: SEBI, Annual Report 2005-2006

 FII Investment: Debt and Equity

Equity Debt Total

60000

50000

40000

30000
Rs. Crore

20000

10000

0
2003-04 2004-05 2005-06
-10000
Year
-20000

Ref: SEBI, Annual Report 2005-2006

 PROS of FII
B. Managing uncertainty and controlling
risks
 Promote financial innovation and development
of hedging instruments
 Not only enhance competition in financial
markets, but also improve the alignment of
asset prices to fundamentals.
C. Improving capital markets
 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.
D. 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.
 Institutionalization increases dividend payouts, and
enhances productivity growth.
 PARTICIPATORY NOTES
 Simple derivative instruments that foreign investors
not registered with Securities & Exchange Board of
India (SEBI) use to trade in Indian markets
 These investors place their order through brokerage
houses
 The brokerage houses then repatriate the dividends
and capital gains back to these entities.
 In this case, the broker acts like an exchange: it
executes the trade and uses its internal accounts to
settle the trade.
 They keep the investor’s name anonymous.
 CONCLUSION
 Nowadays FIIs are the major contributors to the stock
markets. The pros of allowing FIIs to invest in the
Indian markets far outweigh the cons.
 Simply banning participatory notes cannot be a
solution.
 It is up to the policy makers of India to allow FIIs to
operate and provide them with more opportunities
and reasons to invest in Indian markets.
 REFERENCES
 Annual Report 2005-2006, SEBI, www.sebi.gov.in
 Handbook of Statistics of Indian Economy 2006, RBI,
www.rbi.org.in
 Indian Public Finance Statistics 2006-2007, Government of
India, Ministry of Finance, Department of Economic
Affairs, Economic Division, www.mospi.nic.in
 Investment commission Report, Government of India,
Ministry of Finance, Department of Economic Affairs,
February 2006
 Paper for Discussion on Offshore Derivatives, SEBI,
www.sebi.gov.in
 Report of the Committee of liberalization on Foreign
Institutional Investment, Government of India, Ministry of
Finance, Department of Economic Affairs, June 2004
 Report of the Expert on Encouraging FII flow, Government
of India, Ministry of finance, Department of Economic
Affairs, New Delhi, 2005
 Report on Issues in Participatory Notes, SEBI,
www.sebi.gov.in
 “Trades Dominates Foreign Policy in India”, Grant Thorton,
by Samuel Shah, www.Grant Thorton.ca
 Working paper No.19, “The Dynamics of Foreign portfolio
Inflows and Equity Returns in India”, Amit Batra, Indian
Council For Research on International Economic Affairs,
Sep 2003