Difference benefits domestic private investors who may not

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Last updated: October 3, 2019

Differencebetween FDI and FII:  What is a ‘Foreign Institutional Investor – FII’A foreign institutional investor (FII) is an investor or investmentfund registered in a country outside of the one in which it is investing.Institutional investors most notably include hedge funds, insurancecompanies, pensi on funds and mutual funds. The term is used most commonlyin India and refers to outside companies investing in the financial markets of India.             In detail-  ‘Foreign InstitutionalInvestor – FII’  FII in IndiaCountries with the highest volume of FIIs are those that have developingeconomies.

These types of economies provide investors with higher growthpotential than in Mature economies. This is why these investors are mostcommonly found in India, all of which must register with Securities andExchange board of India to participate in the market.If, for example, a mutual fund in the United States sees an investmentopportunity in an Indian-based company, it can purchase the equity on theIndian public exchange and take a long position in a high-growth stock.This also benefits domestic private investors who may not be able to registerwith the Securities and Exchange Board of India. Instead, they can invest inthe mutual fund and take part in the high growth potential.Theinternationalization of India’s capital markets started with the opening of thecountry’s equity market to the direct participation of FIIs in 1992.The openingup of investment in Indian financial instruments albeit with suitablerestrictions in September 1992 heralded the initiation of capital accountconvertibility in India. FIIs are investors/institutions established orincorporated outside India and which propose to make investment in securitiesin India.

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FIIs include Asset Management Companies, Pension Funds, Mutual Funds,Investment Trusts as Nominee Companies, Incorporated / Institutional PortfolioManagers or their Power of Attorney holders, University Funds, EndowmentFoundations, Charitable Trusts and Charitable Societies. SEBI is the nodalagency for registration of FIIs. Investment by SEBI registered FIIs isregulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMANotification No.20 dated May 3, 2000, as amended from time to time. Investmentby FIIs in India is jointly regulated by Securities and Exchange Board ofIndia(SEBI) through the SEBI (Foreign Institutional Investors) Regulations,1995 and by the Reserve Bank of India through Regulation 5(2) of the ForeignExchange Management Act (FEMA), 1999. Thepower to regulate the capital account transactions vests with the RBI vide theForeign Exchange Management Act, 1999, specifically Section 6(3)(b). Regulation5(4) allows FIIs, QFIs and other non-resident investors to invest inrupee-denominated bonds. Prior to 2014, there are three broad investor classescurrently – FIIs, QFIs and long term investors, each subject to differentinvestment restrictions.

Schedule 5 to Regulation 5(4) of FEMA specifies theterms and conditions for foreign investment in rupee denominated bonds. Thissection was amended in March 2013 to create a unified framework for these threeinvestor classes. The Proviso to Regulation 15(2) of Securities and ExchangeBoard of India (Foreign Institutional Investors) Regulations, 1995 empowersSEBI to impose limits on the maximum amount which can be invested in debtsecurities by the foreign institutional investor on its own account or throughits sub accounts. Toharmonize the various avenues available for foreign portfolio investment inIndia, SEBI introduced a new class a foreign investors in January 2014 to theIndian market known as Registered Foreign Portfolio Investors (RFPI) by mergingthe existing class of investors the Foreign Institutional Investors (FIIs),Qualified Foreign Investors (“QFIs”) and sub-accounts of the FIIs. The variouslaws governing these three investor classed have been repealed under the SEBI(Foreign Portfolio Investors) Regulations (“FPI Regulations”) to govern FPIs.The new regime governing the FPIs came into effect from June 1, 2014 onwards.

 Currently the three categories of foreignportfolio investors are: CategoryI: Includes Government and Government related investors such as central banks,Governmental agencies, sovereign wealth funds and international or multilateralorganizations or agencies; Category II: Includesmutual funds, investment trusts, insurance/reinsurance companies,investment/portfolio managers, university/pension funds, broad based fund withappropriately regulated investment manager. CategoryIII: Includes other investors like endowments, charitable societies,charitable trusts, foundations, corporate bodies, trusts, individuals andfamily offices.   FII Investmentin the equity market :FIIsare allowed to invest in the primary and secondary capital markets in Indiathrough the portfolio investment scheme (PIS). FII investment in the equitymarket is restricted to 10% of the paid-up capital of an Indian Company, whichis again restricted to 5% in case of foreign corporates or High NetworthIndividuals (HNI) registered as sub accounts of an FII.

All FIIs and theirsub-accounts taken together cannot acquire more than 24% of the paid up capitalof an Indian Company, which can be increased through a Board resolution of theCompany. RBI monitors the investment position of FIIs in listed Indiancompanies on a daily basis.  FII Investmentsin the debt market :SEBIregistered FIIs can purchase on repatriation basis dated Government securities/treasury bills, listed non-convertible debentures/ bonds issued by an Indiancompany and units of domestic mutual funds either directly from the issuer orin the secondary market. The purchase of debt instruments are subject to limitsnotified by SEBI and the Reserve Bank from time to time. Currently the upper limitfor investment by RFPI/FII/QFI in corporate debt is $51 billion, with asub-limit upto $2 billion for Commercial Paper.

The current limit for theirinvestment in Government Securities is $ 30 billion. Investment of RFPI’s inPerpetual Debt Instruments (Tier 1) capital should not exceed 49% of each issueand investment by individual FIIs should not exceed 10% of each issue. Theirinvestment in Rupee denominated Debt Capital FII Investment in the EquityMarket FII Investment in the Debt Market (Tier II) and Upper Tier IIinstruments should be within their stipulated level for investment in corporatedebt.   FII flows inequity and debt market FII investmentsin G-Secs :Theadministration has been moderate in opening the Indian obligation markets tooutside financial specialists.

FIIs were permitted to put resources into thesebusiness sectors simply after 1995, while the market for value venture wasopened to remote speculators in 1992. India’s strategy has been mindful ofrespect to shortterm streams, particularly as to obligation showcase streams.The eventual outcomes of the Asian emergency which brought about a flight ofremote capital from their obligation markets brought about the adjusted passageof FIIs into the Indian market. Additionally fears of the effect of unnecessarystreams on the Indian obligation advertise and the hesitance to enableoutsiders to hold excessively of government paper underlined the commonspeculation arrangement for FIIs.

 Theadventure of outside players in the Indian security advertise has been acontrolled one driven by the arrangement wariness on the passage of “hotcash” into the Indian security showcase, push towards interest in India’sframework part and in the corporate security advertise and moreover, theexpanding hunger of FIIs towards rupee designated securities. India has step bystep legitimized interests in its obligation showcases through at first in 1995permitting just 30% of the FIIs interest in the obligation advertise that tooinside the pre-set general venture restrain. This was slowly facilitated to100% obligation speculation for particular FIIs, interest in Treasury Bills andunlisted obligation securities alongside augmenting of the aggregate obligationventure limits. Encourage progression took after with the expulsion of the70:30 refinement and a fast increment in as far as possible for corporatesecurities.

 Theinterest in the security showcase was administered by discrete sub-roofs forobligations of different developments and secure periods for different kinds ofbonds. In April 2013 as far as possible were excused by consolidating thecurrent sub-limits for interest in corporate and government securities with aview to support more outside capital streams to the nation in perspective ofthe broadening current record deficiency. In April 2014, RBI allowed new FIIinterest in dated securities with lingering development of one year or more,successfully debilitating here and now FII venture particularly in treasurybills.

This was additionally altered in July 2014, when RBI informed thatFIIs/FPIs need to make all future interest in G-Secs in securities of lingeringdevelopment of over 3 years.This calibrated access to FIIs has resulted intheir significantly lower share in the holding of government securities whencompared to their activity among India’s Asian peers. As of June 2014, FIIs hada share of 2.45% of the total outstanding stock of government securities. Incomparison, FIIs hold around 35.

66% and 32.03% of the outstanding stock incountries like Indonesia and Malaysia.However,there has been a gradual increase in the FII holding of dated securities. Thishas been an increase in their holding from 1.68% as of March 2014 to 2.45% byend-June 2014. This has been due to the increase in their investment limits,freeing of sub-limits and also the increased appetite for Indian bonds amongthe FIIs during 2014-15.

 FII Market Size inIndia:India received net investments of US$ 17.412 million from FIIsbetween April-October 2017. FII’s net investments in Indian equities and debthave touched record highs in the past financial year, backed by expectations ofan economic recovery, falling interest rates and improving earnings outlook.FIIs net investments in Indian equities and debt stood at US$ 7.

46 billion in2016-17 (upto April 14, 2017). Cumulative value of investments by FIIs duringApril 2000-December 2016 stood at US$ 183.69 billion.India-focused offshore funds and exchange traded funds(ETFs) witnessed net inflows of $565 million in November and helped the overalltally to reach nearly $6.5 billion in 2017.

Equitymutual funds recorded the 17th straight month of net inflows with record Rs20,362 crore (US$ 3.18 billion) inflows in August 2017 on account of rally inIndian stock markets. Equity funds received an inflow of Rs.

2.86 trillion(US$44.6 billion) from November 2016 to October 2017.  Thetotal market capitalization (M-cap) of all the companies listed on Bombay StockExchange (BSE) rose to a record high level of Rs 146 trillion (US$ 2.

27trillion) on November 19, 2017 backed by positive sentiment in the broadermarket. Indiahas emerged as one of the strongest performers in terms of deals related tomergers and acquisitions (M). M activity in India more than doubledyear-on-year to reach US$ 61.26 billion in 2016-17.

The business-to-business(B2B) start-ups in India raised around US$ 98 million across 30 deals in 2016,as against funding of US$ 16 million across 14 deals in 2015, according to datafrom start-up tracker Tracxn. During2017, India witnessed record private equity investments worth US$ 24.4 billion.

Private equity (PE) investments in the logistics industry grew at 9 per cent toUS$ 501.71 million during 2016-17 and are expected to grow at 8.6 per centannually from 2015-2020 on the back of increased opportunities resulting fromlow entry barriers and Goods and Services Tax (GST).

 Trends in FIIflows: Charts below shows FII flows in equity anddebt and registered FII numbers with total investment (equity +debt) fromfinancial year 1993 to 2013.        REGULATORYFRAMEWORK FOR FII The following entities,established or incorporated abroad, are eligible to be registered as FIIs: ·? Pension Funds.·  Mutual Funds.· Investment Trusts.

· Asset Management Companies.· Nominee Companies.· Banks.· Institutional PortfolioManagers.· Trustees.· Power of Attorney holders.

· University funds, endowments,foundations or charitable trusts or charitable societies. Besides the above, a domesticportfolio manager or domestic asset management company is also eligible to be registeredas an FII to manage the funds of sub-accounts. The FIIs can also invest onbehalf of sub-accounts. The following entities are entitled to be registered assub-accounts: · An institution or fund orportfolio established or incorporated outside India.· A foreign corporate or aforeign individual. Thegeneral permission from the RBI will enable the FIIS to: · Open foreign currencyaccount(s) in a designated bank (there can be more than one account in the samebank branch, in different currencies, if so required by the FII for itsoperational purpose).

· Open a special non-residentrupee account in which all receipts from the capital inflows, sale proceeds ofshares, dividends and interest credited.· Transfer sums from the foreigncurrency accounts to the rupee accounts and vice-versa, at the market rates of exchange. Regulations for Investing in Indian CompaniesAll FIIs are allowed to invest in India’s primary and secondary capitalmarkets only through the country’s portfolio investment scheme (PIS).This scheme allows FIIs to purchase shares and debentures of Indiancompanies on the normal public exchanges in India.However, there are many regulations included in the scheme. There is aceiling for all FIIs that states the max investment amount can only be 24% ofthe paid-up capital of the Indian company receiving the investment. Themax investment can be increased above 24% through board approval and thepassing of a special resolution. The ceiling is reduced to 20% of the paid-upcapital for investments in public sector banks.

The RBI monitors daily compliance with these ceilings for all foreigninstitutional investments. It checks compliance by implementing cutoffpoints 2% below the max investment amounts. This gives it a chance tocaution the Indian company receiving the investment before allowing the final2% to be invested.       SEBI Regulation forFII      FII Regulationchanges since 1995:There have been many changes in the FII regulations since 1995. Thesechanges have been indicated in chronological order.  FII Regulationchanges in 2017:Market regulator Security Exchange Board ofIndia recently announced new rules for foreign investments through financialinstruments such as participatory notes, asking FIIs to wind up P-Notes forinvesting in derivatives within 18 months.SEBI also imposing curbs on P-Notes for investing in spot market.

 In derivatives, foreign institutional investors (FIIs) and their sub-accountscannot issue fresh P-Notes and will have to wind up their current position in18 months.In spot market, FIIs will not be allowed to issue P-Notes more than 40 per centof their assets under custody. The reference date for calculating such assetswill be September 30.Those FIIs who have issued P-Notes of more than 40 per cent of their assetscould issue such instruments only if they cancel, redeem, or close theirexisting PNs.

Those FIIs who have issued P-Notes less than 40 per cent of theirassets under custody can issue additional instruments at the rate of 5 per centof their assets. ConclusionSince the start of FII in India it has been evidentthat it has always helped India in it’s growth. Since FII have been allowed incertain sectors the sectors are growing exponentially. As indicated earlierGovernment is becoming more lenient towards the FII as this is very helpful.FII being the leader in the investment segment it has been observed that theFII investments are directly proportional to the Growth of the economy.For example during the Demonetization the FII flowsreduced drastically and as a result the growth of Indian economy also slowed-down.

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