FOREIGN INSTITUTIONAL FOREIGN INSTITUTIONAL INVESTORS ( FIIs)INVESTORS ( FIIs)

bybyGroup 1BGroup 1B

Amit Soni (07927848) Amit Soni (07927848) Goldi Sharma (07927863Goldi Sharma (07927863))

OUTLINEOUTLINE

Introduction: Foreign InvestmentIntroduction: Foreign Investment FIIsFIIs FIIs in IndiaFIIs in India Participatory NotesParticipatory Notes Pros of FIIPros of FII ConclusionConclusion ReferencesReferences

INTRODUCTIONINTRODUCTION

Investments made by residents of a country inInvestments made by residents of a country in

financial assetsfinancial assets and and production processesproduction processes of of

another country another country

Foreign Investments

Foreign Entity wants to enter inthe Indian Market

Foreign Direct Investment (FDI)

Portfolio Investment Scheme( PIS)→FII

But HOW?

Foreign Investment in India

0

5,000

10,000

15,000

20,000

25,000

Year

US

$ m

n.

Direct InvestmentPortfolio Investment

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 INVESTMENT LIMITS FOR FIIFII

Ceiling for overall investment for Ceiling for overall investment for FIIs : 24 per cent of the paid up FIIs : 24 per cent of the paid up capital of the Indian company capital of the Indian company

Can be raised up to the sectoral Can be raised up to the sectoral cap/statutory ceiling, subject to the cap/statutory ceiling, subject to the approval of the board and the approval of the board and the general body of the company general body of the company

FIIs in INDIAFIIs in INDIA The Indian financial market was opened to the foreign The Indian financial market was opened to the foreign

institutional investors in 1992 to widen and broaden institutional investors in 1992 to widen and broaden the Indian capital market. the Indian capital market.

The net investment by FIIs in India has been positive The net investment by FIIs in India has been positive every year except in 1998-99. every year except in 1998-99.

During the last seven years, there has been a During the last seven years, there has been a phenomenal increase in the portfolio investment by phenomenal increase in the portfolio investment by FIIs in the Indian market FIIs in the Indian market

Several factors are responsible for increasing Several factors are responsible for increasing confidence of FIIs on the Indian stock market which confidence of FIIs on the Indian stock market which includeinclude

strong macro-economic fundamentals of the economystrong macro-economic fundamentals of the economy transparent regulatory systemtransparent regulatory system abolition of long-term capital gains tax abolition of long-term capital gains tax encouraging corporate results encouraging corporate results

Net Investment Trend

-50000

0

50000

100000

150000

200000

250000

300000

350000

400000

Year

Rs.

Cro

re

Gross PurchaseGross SaleNet Investment

Ref: SEBI, Annual Report 2005-2006

Trends in FII Investments

-2000

0

2000

4000

6000

8000

10000

12000

Year

Net

Inv

estm

ent (

US

$ m

n.)

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Cum

ulat

ive

Net

Inv

estm

ents

(U

S $

mn.

)

Net Investment

Cumulative NetInvestment

Ref: SEBI, Annual Report 2005-2006

FIIs Registered in India

0

100

200

300

400

500

600

700

800

900

Financial Year

No.

of

Reg

istr

atio

nsRegistration during that year

Total no. of registrations atthe end of year

Ref: SEBI, Annual Report 2005-2006

PROS of FIIPROS of FII

A.A. Enhanced flows of equity capitalEnhanced flows of equity capital A greater appetite for equity than debt A greater appetite for equity than debt

in their asset structure. in their asset structure. Opening up the economy to FIIs is in Opening up the economy to FIIs is in

line with the accepted preference for line with the accepted preference for non-debt creating foreign inflows over non-debt creating foreign inflows over foreign debtforeign debt

Improve corporate capital structures. Improve corporate capital structures. Contribute in bridging the investment Contribute in bridging the investment

gap. gap.

FII Investment in 2003-2004

87%

13%

Equity-87%

Debt-13%

Ref: SEBI, Annual Report 2005-2006

FII Investment in 2004-2005

96%

4%

Equity : 96%Debt: 4%

Ref: SEBI, Annual Report 2005-2006

FII Investment: Debt and Equity

-20000

-10000

0

10000

20000

30000

40000

50000

60000

2003-04 2004-05 2005-06

Year

Rs.

Cro

reEquity Debt Total

Ref: SEBI, Annual Report 2005-2006

PROS of FIIPROS of FII

B.B. Managing uncertainty and Managing uncertainty and controlling riskscontrolling risks

Promote financial innovation and Promote financial innovation and development of hedging instrumentsdevelopment of hedging instruments

Not only enhance competition in Not only enhance competition in financial markets, but also improve financial markets, but also improve the alignment of asset prices to the alignment of asset prices to fundamentals.fundamentals.

C.C. Improving capital markets Improving capital markets FIIs as professional bodies of asset FIIs as professional bodies of asset

managers and financial analysts enhance managers and financial analysts enhance competition and efficiency of financial competition and efficiency of financial marketsmarkets

Equity market development aids economic Equity market development aids economic development. By increasing the availability development. By increasing the availability of riskier long term capital for projects, and of riskier long term capital for projects, and increasing firms’ incentives to provide more increasing firms’ incentives to provide more information about their operations, FIIs can information about their operations, FIIs can help in the process of economic help in the process of economic development.development.

D.D. Improved corporate governance Improved corporate governance FIIs constitute professional bodies of FIIs constitute professional bodies of

asset managers and financial analysts, asset managers and financial analysts, who, by contributing to better who, by contributing to better understanding of firms’ operations, understanding of firms’ operations, improve corporate governance. improve corporate governance.

Bad corporate governance makes equity Bad corporate governance makes equity finance a costly option. finance a costly option.

Institutionalization increases dividend Institutionalization increases dividend payouts, and enhances productivity payouts, and enhances productivity growth.growth.

PARTICIPATORY NOTESPARTICIPATORY NOTES Simple derivative instruments that foreign Simple derivative instruments that foreign

investors not registered with Securities & investors not registered with Securities & Exchange Board of India (SEBI) use to trade Exchange Board of India (SEBI) use to trade in Indian markets in Indian markets

These investors place their order through These investors place their order through brokerage houses brokerage houses

The brokerage houses then repatriate the The brokerage houses then repatriate the dividends and capital gains back to these dividends and capital gains back to these entities. entities.

In this case, the broker acts like an In this case, the broker acts like an exchange: it executes the trade and uses its exchange: it executes the trade and uses its internal accounts to settle the trade.internal accounts to settle the trade.

They keep the investor’s name anonymous. They keep the investor’s name anonymous.

CONCLUSIONCONCLUSION

Nowadays FIIs are the major contributors Nowadays FIIs are the major contributors to the stock markets. The pros of allowing to the stock markets. The pros of allowing FIIs to invest in the Indian markets far FIIs to invest in the Indian markets far outweigh the cons.outweigh the cons.

Simply banning participatory notes cannot Simply banning participatory notes cannot be a solution. be a solution.

It is up to the policy makers of India to It is up to the policy makers of India to allow FIIs to operate and provide them allow FIIs to operate and provide them with more opportunities and reasons to with more opportunities and reasons to invest in Indian markets. invest in Indian markets.

REFERENCESREFERENCES Annual Report 2005-2006, SEBI, Annual Report 2005-2006, SEBI,

www.sebi.gov.inwww.sebi.gov.in Handbook of Statistics of Indian Economy Handbook of Statistics of Indian Economy

2006, RBI, www.rbi.org.in2006, RBI, www.rbi.org.in Indian Public Finance Statistics 2006-2007, Indian Public Finance Statistics 2006-2007,

Government of India, Ministry of Finance, Government of India, Ministry of Finance, Department of Economic Affairs, Economic Department of Economic Affairs, Economic Division, www.mospi.nic.inDivision, www.mospi.nic.in

Investment commission Report, Government of Investment commission Report, Government of India, Ministry of Finance, Department of India, Ministry of Finance, Department of Economic Affairs, February 2006Economic Affairs, February 2006

Paper for Discussion on Offshore Derivatives, Paper for Discussion on Offshore Derivatives, SEBI, www.sebi.gov.inSEBI, www.sebi.gov.in

Report of the Committee of liberalization on Report of the Committee of liberalization on Foreign Institutional Investment, Government of Foreign Institutional Investment, Government of India, Ministry of Finance, Department of India, Ministry of Finance, Department of Economic Affairs, June 2004Economic Affairs, June 2004

Report of the Expert on Encouraging FII flow, Report of the Expert on Encouraging FII flow, Government of India, Ministry of finance, Government of India, Ministry of finance, Department of Economic Affairs, New Delhi, 2005Department of Economic Affairs, New Delhi, 2005

Report on Issues in Participatory Notes, SEBI, Report on Issues in Participatory Notes, SEBI, www.sebi.gov.inwww.sebi.gov.in

““Trades Dominates Foreign Policy in India”, Grant Trades Dominates Foreign Policy in India”, Grant Thorton, by Samuel Shah, www.Grant Thorton.caThorton, by Samuel Shah, www.Grant Thorton.ca

Working paper No.19, “The Dynamics of Foreign Working paper No.19, “The Dynamics of Foreign portfolio Inflows and Equity Returns in India”, portfolio Inflows and Equity Returns in India”, Amit Batra, Indian Council For Research on Amit Batra, Indian Council For Research on International Economic Affairs, Sep 2003International Economic Affairs, Sep 2003