FII – An Indian Perspective
Once again foreign institutional Investors (FIIs) are hyper active in Indian stock market. After withdrawing more than 50K crores from Indian stock market in 2008, which led BSE to fall around 50%, FII have turned net buyers in 2009. FII have pumped more than USD 3 billion till May pushing Sensex over 15000. The cumulative FII investment in India is more than USD 50 billion. Presently there are more than 1500 FIIs & about 5000 sub-accounts registered with SEBI.
Historical Overview:
Before liberalization in 1991, India was a self reliant economy with markets depending on Domestic institutions and investors. FIIs & OCBs were permitted to invest in Indian financial instruments in September 1992 with restrictions.
Entities which can invest under FII route are:
- As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10 per cent of the shares or units of the fund)
- As Sub-accounts: They are partnership firms, private company, public company, pension fund, investment trust, and individuals. FIIs invest on behalf of sub-accounts
- Earlier Indian Portfolio Managers & Asset Management companies were allowed to register as FII to trade on behalf of sub-accounts
FII can be of two types:
- Normal: investing in equity and non-equity instruments in ratio of 70:30
- Debt FII: investing 100% in debt securites
What SEBI considers (while registering a FII):
- applicant’s track record, professional competence, financial soundness, experience, reputation etc. (in case of fund, fund managers track record)
- applicant is regulated by an appropriate foreign regulatory authority
- applicant is permitted by RBI under FEMA, 1973
- applicant must fulfill eligibility criteria (mentioned above)
- grant of certificate to the applicant is in the interest of the development of the securities market
- applicant is a fit and proper person
Investment by FII is restricted to 24% of paid-up capital of the company which can be extended to sectoral cap by board resolution followed by special resolution. Single FII investment can’t exceed 10% of paid-up capital of the company and single sub-account investment can’t exceed 5% of the paid-up capital.
Participatory Notes: These are offshore derivatives instruments issued by FIIs to their clients who may not be eligible to invest in Indian stock markets. Beneficial ownership is not revealed in PNs and hence they have become point of concern for Indian regulators. PN route is cost effective for investors who have small quantum to invest and it is also hassle free mechanism.
Pros & Cons of FIIs:
FII and FDI augment domestic investment by supplementing domestic savings. They give boost to security markets, provide capital at lower cost and encourage investment by domestic firms. Overall this gives boost to economy and India achieving growth rate of 9% was a major outcome of foreign investment. The best part is that they don’t create foreign debt but on the flip side they are temporary and non-reliable.
FII Vs. FDI
As per definition of IMF, FDI reflects lasting interest i.e. long-term relationship with the investor. FDI investor looks for management & control of the organization which is not the case with FIIs. EU law defines FDI as more than 10% acquisition of stake while FII is less than 10%. SEBI emphasizes that FII should not participate in management and control of the enterprise and have put various restrictions to ensure the same.
FII are very important for development of securities market and hence should be encouraged. SEBI should have complete power to investigate any dubious or doubtful transaction of FII. As an age old Indian tradition of “Athithi Devo Bhavh”, we should welcome & treat FII as tourists and should create atmosphere where more and more FIIs come and invest in India.
