fii report.docx sandeep

8/7/2019 fii report.docx sandeep

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Report

On

FOREIGN INSTITUTIONAL INVESTORS

Submitted To : Submitted By:

Bhawdeep singh kochar Sandeep Agarwal

RT 1903 A-59

Reg. No.: 10907223

LIM

(REPORTIER OF ADISH JAIN )


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FOREIGN INSTITUTIONAL INVESTORS

1) Content.y How FII started in India?y WHAT IS FII?y WHO CAN BE REGISTERED AS AN FII?y HOW TO APPLYy The eligibility criteria for applicanty Eligibilityy Where FII can invest?y Pull Factorsy Taxationy Why there is need of FII ?y Impact Of FIIs On Indian Marketsy FII vs FDI


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2) Data, Corporate examples.

How FII started in India?

FII (Foreign Institutional Investors) is used to denote an investor, it is mostly of the form of ainstitution or entity which invests money in the financial markets of a country. The term FII ismost commonly used in India to refer to companies that are established or incorporated outsideIndia, and is investing in the financial markets of India. These investors must register with theSecurities & Exchange Board of India (SEBI) to take part in the market.

History of FII

India opened its stock market to foreign investors in September 1992, and in 1993, receivedportfolio investment from foreigners in the form of foreign institutional investment in equities.This has become one of the main channels of FII in India for foreigners. Initially, there weremany terms and conditions which restricted many FIIs to invest in India.

But in the course of time, in order to attract more investors, SEBI has simplified many termssuch as: -

y The ceiling for overall investments of FIIs was increased 24% of the paid up capitalof Indian company.

y Allowed foreign individuals and hedge funds to directly register as FIIs.y Investment in government securities was increased to US $ 5 Billion.


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WHAT IS FII?

FII is nothing but Foreign Institutional Investors. Below entities are called FIIs.

One who propse to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates andindividuals and belong to any of the undergiven categories can be registered for FII.

y Pension Fundsy Mutual Fundsy Investment Trusty Insurance or reinsurance companiesy Endowment Fundsy University Fundsy Foundations or Charitable Trusts or Charitable Societies who propose to invest on their

own behalf, andy A

ssetM

anagement Companiesy Nominee Companiesy Institutional Portfolio Managersy Trusteesy Power ofAttorney Holdersy Bank


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WHO CAN BE REGISTERED AS AN FII?

An application for registration has to be made in FormA, the format of which is provided in theSEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicateaddressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address

within 10 to 12 days of receipt of application.

Address for applicationThe Division ChiefFII DivisionSecurities and Exchange Board of India,224, Mittal Court, 'B' Wing, 1st Floor,Nariman Point, Mumbai - 400 021.INDIA.

Supporting documents required are

y Application in Form A duly signed by the authorised signatory of the applicant.y Certified copy of the relevant clauses or articles of the Memorandum and Articles of

Association or the agreement authorizing the applicant to invest on behalf of its clientsy Audited financial statements and annual reports for the last one year , provided that the

period covered shall not be less than twelve months.y A declaration by the applicant with registration number and other particulars in support

of its registration or regulation by a Securities Commission or Self RegulatoryOrganisation or any other appropriate regulatory authority with whom the applicant isregistered in its home country.

y A declaration by the applicant that it has entered into a custodian agreement with adomestic custodian together with particulatrs of the domestic custodian.

y A signed declaration statement that appears at the end of the Form.y Declaration regarding fit & proper entity.

The eligibility criteria for applicant seeking FII registrationAs per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are requiredto fulfill the following conditions to qualify for grant of registration:

y Applicant should have track record, professional competence, financial soundness,experience, general reputation of fairness and integrity;

y The applicant should be regulated by an appropriate foreign regulatory authority in thesame capacity/category where registration is sought from SEBI. Registration withauthorities, which are responsible for incorporation, is not adequate to qualify as ForeignInstitutional Investor.

y The applicant is required to have the permission under the provisions of the ForeignExchange Management Act, 1999 from the Reserve Bank of India.

y Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment.


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y The applicant must be a "fit and proper" person.y The applicant has to appoint a local custodian and enter into an agreement with the

custodian. Besides it also has to appoint a designated bank to route its transactions.y Payment of registration fee of US $ 5,000.00

Annexure B of the Regulations duly filled and signed by the FII and Sub-Account has to be submitted by

FII on behalf of the proposed sub-account. With if DD of US$ 1000 favouring "Securities and Exchange

Board of India" as fees is to be submitted payable at New York.

For registered Foreign Institutional Investor, it has to inform SEBI promptly with the relevantdocuments supporting the name change. The relevant documents are :

y Request for change in name by the Foreign Institutional Investor mentioning reasons forname change of the FII and/or sub account.

y Certificate from the Registrar of Companies, and/or approval from home regulator.y Original Registration Certificate issued by SEBI to the Foreign Institutional Investor.

SEBI will issue a no-objection letter in this regard after recording the request of name change.

The information regarding name change should be submitted immediately after the change has

taken place in the home country and the requisite approval from the home regulator (if needed)

has to been taken.

The procedure for registration of FII/sub account under 100% debt route is similar to that of normal fundsbesides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100%

debt route. However, Government of India allocates the overall investment limit for 100% debt funds

annually. The grant of investment limit for individual 100% debt funds is within this overall limit. The

funds have to seek further investment limit in case the limit allotted to them is exhausted and they wish to

invest further.


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Where FII can invest?

FIIs can invest $10 billion more in bonds

now.

The government has raised the ceiling for investment in government and corporate bonds byforeign funds, which will ease pressure on banks to raise rates with rising demand for loans tobuild roads, ports and power plants.

The finance ministry revised the cap for investment by foreign portfolio investors in governmentsecurities from $5 billion to $10 billion, and in corporate bonds from $15 billion to $20 billion.

The announcement appears to have been timed well since it came on a day when the borrowingcalendar for the second half was unveiled, which led to yields easing.

FIIs can invest in debt papers of only select

infra cos

Sebi on Friday said overseas portfolio investors can invest in the debt instruments of only thoseinfrastructure companies as defined by the external commercial borrowing policy.

In September, the government increased the limit of FII investment in government debt as wellas corporate debt by $5 billion. Following this, FII investment limits stands at $10 billion ingovernment bonds and $20 billion in corporate bonds. The bidding process for the revised limitswill begin from December 2 on BSE.

FIIs can invest in corporate bonds of infrastructure companies with residual maturity of fiveyears. No single entity would be allowed to invest more than Rs 2,000 crore and the minimumamount, which can be invested, will be Rs 200 crore, with the minimum tick size being Rs 100crore, the Sebi circular said.

The time period for utilisation of corporate debt limits, allocated through bidding process, hasbeen fixed at 90 days and for the government debt at 45 days. But the time period for utilisationof corporate debt allocated on first-come-first serve basis, after the bidding process, has beenfixed at 22 days for corporate debt and 11 days for government securities.


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By Regulations

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin(PIOs) are allowed to invest in the primary and secondary capital markets in India through theportfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debenturesof Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indiancompany and 10 per cent forNRIs/PIOs. The limit is 20 per cent of the paid up capital in thecase of public sector banks, including the State Bank of India.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling,subject to the approval of the board and the general body of the company passing a specialresolution to that effect. And the ceiling of 10 per cent forNRIs/PIOs can be raised to 24 per centsubject to the approval of the general body of the company passing a resolution to that effect.

The ceiling for FIIs is independent of the ceiling of 10/24 per cent forNRIs/PIOs.

The equity shares and convertible debentures of the companies within the prescribed ceilings areavailable for purchase underPIS subject to:

- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, beingwithin an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and(b) 24 per cent of the total paid up value of each series of convertible debenture; and

- the investment made on repatriation basis by any single NRI/PIO in the equity shares andconvertible debentures not exceeding five per cent of the paid up equity capital of the companyor five per cent of the total paid up value of each series of convertible debentures issued by thecompany.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indiancompanies on a daily basis. For effective monitoring of foreign investment ceiling limits, theReserve Bank has fixed cut-off points that are two percentage points lower than the actualceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOscan invest up to 10 per cent of the company's paid up capital. The cut-off limit for companieswith 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per centand so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is18 per cent.

Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach thecut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designatedbank branches so as not to purchase any more equity shares of the respective company on behalfof FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required


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to intimate the Reserve Bank about the total number and value of equity shares/convertibledebentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of suchproposals, the Reserve Bank gives clearances on a first-come-first served basis till suchinvestments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutoryceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all

designated bank branches to stop purchases on behalf of their FIIs/N

RIs/P

IOs clients. TheReserve Bank also informs the general public about the `caution and the `stop purchase in thesecompanies through a press release.

Pull Factors

Domestic Pull factors - Reforms, strong economic fundamentals, Higher Interest Rates, good

valuations, market liquidity, size, low trading cost, information dissemination

External Push factors : Global liquidity, lower interest rates, higher risk appetite, lower relative

growth


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FII Taxation:

The liberalisation of the Indian economy and the opening up of the capital markets to foreigninvestors in 1992 created a new class of investors foreign institutional investors (FIIs).

A special and concessional tax regime was introduced for the taxation of income earned by FIIsto make the markets lucrative for such investors.

With the increasing number of FIIs dominating the capital markets and a sizeable portion offoreign investment coming in through FIIs, their taxation in India has assumed considerablesignificance.

This article discusses the FII tax regime and some tax issues confronting FIIs.

Special Tax RegimeGains made from investments in Indian securities are the primary and most significant item of

income for FIIs.

Historically, FIIs have offered their income from transactions in Indian securities to tax as capitalgains under the tax regime prescribed for FIIs under section 115AD of the Income-tax Act, 1961(Act). Under the special tax regime, capital gains made by FIIs were taxed at the base tax ratesmentioned below: Long-term capital gains - 10% Short-term capital gains - 30% Gains characterised as business profits - 40% for corporate entities (30% for non-corporateentities)

Current tax regimeA new regime of taxing capital gains was introduced in October 2004. Under this regime,transactions in equity shares and derivatives (both stock and index-linked) effected on arecognised stock exchange and redemption of units of equity-oriented mutual funds are subjectto a securities transaction tax (STT) at prescribed rates.

Under the new tax regime, capital gains earned from transactions in equity shares and units ofequity- oriented funds chargeable to STT are taxed as under: Long-term capital gains - Exempt (earlier taxed at 10% for FIIs) Short-term capital gains - 10 % (earlier taxed at 30% for FIIs)

Gains, if any, in respect of transactions in equity shares (which are not effected on a recognisedstock exchange), debt securities, non-equity oriented funds and derivatives (though transactionsin derivatives are subject to STT) continue to be subject to tax at the rates mentioned in theSpecial tax regime (see above).

The above capital gains tax rates are subject to relief that may be available to an FII under taxtreaties that India has entered into with other countries where the FII is a tax resident.


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Characterisation of gains earned from investments

There has always been ambiguity in respect of characterisation of income earned by FIIs ontransfer of securities as capital gains or business income.

The Central Board of Direct Taxes (CBDT), in an instruction issued in 1989, laid down certaintests to distinguish between shares held as stock-in-trade and shares held as investment. CBDTnow proposes to issue supplementary instructions (though not specifically in the context of FIIs)to provide further guidelines to assist the revenue authorities determine whether a tax-payer is atrader in shares or an investor in shares. The instructions reiterate the principles laid down inseveral judicial cases dealing with the characterisation of income.

The instructions, which apply to all categories of tax-payers (including FIIs unless specificallyexcluded by the CBDT while issuing the final instructions), could have far reaching implications.

Historically, most FIIs have been offering gains from transfer of securities to tax as capital gains

- a position that has also been accepted by the revenue authorities. However, several rulings bythe Indian Authority forAdvance Ruling (AAR) examined the characterisation of income arisingon transfer of securities in the case of FIIs.

Based on the facts of specific cases,AAR ruled that the securities held by FIIs constituted theirbusiness assets and the resultant gains constituted business profits. In arriving at the saidconclusion, the AAR was guided, inter alia, by: the enormity and frequency of transactions the motive of the FII to earn profits (rather than earn dividend income) from purchase andsale of shares.

Further, on the basis that FIIs did not have a permanent establishment (PE) in India, the incomeof FIIs were held to be not taxable in India under the provisions of the applicable tax treaty.

A similar issue would arise in case of gains from transactions in derivatives in India given thatthere has always been an ambiguity on whether the income from derivatives would constitutebusiness income or capital gains in the absence of a specific code of taxation.

In a recent ruling, AAR held in the case of a UK-based FII that income from purchase and sale ofderivative contracts constitutes business income and is not taxable in India in the absence of a PEin India.

It is possible that the revenue authorities, relying on the principles laid out in the proposedCBDT instructions and the judicial precedents, may seek to treat income earned from the sale ofsecurities as business profits.

While this would have a positive impact for FIIs investing from a jurisdiction with which Indiahas a tax treaty (since gains would be exempt from tax in the absence of a PE), it would have asignificant negative impact for FIIs that do not have recourse to tax treaty protection.


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This is due to the fact that under domestic tax law, business profits earned by a non-resident arepresently taxable at a rate of 40% (30% in case of non-corporate entities) on net profits (revenuesless permissible expenses).

However, the above basis of taxation could particularly trigger a host of compliance and

documentation-related issues for FIIs (such as tax withholding, maintenance of books ofaccounts, requirement to furnish a tax audit report to name a few), resulting in increased cost ofinvestment for the FIIs.

Developments under the India-Mauritius tax treaty

Given the beneficial provisions for taxation of capital gains under the India-Mauritius tax treatyand the favourable regime for regulation and taxation of offshore funds in Mauritius, many FIIsinvesting in India have structured their investments into India involving an investment vehicledomiciled inMauritius.

For many years, the revenue authorities accepted the tax return filings made by such FIIs withoutexamining the substance of the formation of such investment vehicles.

However, the revenue authorities, while auditing tax returns filed by various Mauritius-basedFIIs in 2000, denied some FIIs the benefits gained under the India-Mauritius tax treaty on thebasis that such FIIs were neither tax residents ofMauritius nor the beneficial owner of theincome earned from Indian investments.

Subsequently, CBDT (the apex Indian tax administrative body), issued a notice clarifying thatFIIs holding a tax residence certificate issued by theMauritius revenue authorities would beregarded as tax residents ofMauritius and the beneficial owner of income earned from India.

A non-governmental organisation (Azadi Bachao Andolan) filed a public interest litigationpetition in the Delhi High Court challenging the validity of the above notice. The Delhi HCquashed the notice, holding, inter alia, that the notice breached the powers conferred on therevenue authorities by the domestic tax law.

The central government appealed against the decision of the Delhi HC before the Supreme Court(SC). The SC, in October 2003, passed an order setting aside the decision of the Delhi HC anddeclared the notice to be valid and efficacious.

Thus, based on the current tax provisions, FIIs that are tax residents in Mauritius are entitled tothe beneficial provisions of the India-Mauritius tax treaty where a tax residence certificate isissued by the Mauritius revenue authorities.

With the reduction in tax rates of capital gains (see Current tax regime), the efficacy ofstructuring investments in India by involving an investment vehicle domiciled inMauritius hassignificantly reduced though it continues to be employed by several foreign investors investingin the Indian capital markets.


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Manner of set-off of capital losses

Another issue faced by FIIs is the manner of set-off of capital losses incurred prior to April 1,2002.

Up to (and including) financial year ended March 31, 2002, the Act permitted a tax payer to set-off losses from one source against income from another source under the same head of income(the Act was amended effective April 1, 2002 restricting the manner of set-off of long-termcapital losses).

Therefore, a tax payer was required to set-off the capital losses incurred during the year (ontransfer of short-term and long-term capital assets) against capital gains earned during the year inthe manner prescribed under the Act.

Where the net result of the above set-off was a capital loss, the tax payer was permitted to carryforward this loss to be set-off against capital gains earned in eight subsequent years.

However, where the net result of the set-off resulted in a capital gain, the tax payer could utilisethe capital losses for past years brought forward, if any, to set-off the net capital gains of thatyear.

The above manner of set-off was not accepted by the revenue authorities. It was the revenueauthorities contention that since the short-term and long-term capital gains were taxed atdifferential tax rates (30% and 10%, respectively), they are to be regarded as distinct sources ofincome.When the matter came up for hearing before the special bench of the Income Tax AppellateTribunal, Mumbai (ITAT) [a 3-member bench constituted to decide on the matter], the bench

held that since the Act had not prescribed any order of precedence according to which the lossarising from one source has to be set-off against income from any other source, it is thelegitimate right of the tax payer to choose the option that is more favourable to it so that it couldavail the benefit of the concessional rate of tax on long-term capital gains.

The above judgment comes as a great relief to FIIs that have been keenly awaiting the outcomeof this case before the special bench. With the matter now having been settled, a number of casespending with ITAT and at lower levels with taxes running into millions of rupees locked in as aresult of the litigation on this issue are expected to be favourably decided.

The reduction in tax rates, coupled with the India growth story, has given the much-needed

impetus to FII investments in the Indian capital markets.

However, certainty and clarity in tax matters is critical to retain the attractiveness of India as aninvestment destination. Proactive clarifications in the future from CBDT on contentious issues,including characterisation of income, would certainly be very welcome.


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Why there is need of FII ?


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Need Of FIIs On Indian Markets

It is influence of the FIIs which changed the face of the Indian stock markets. Screen basedtrading and depository are realities today largely because of FIIs. Equity research was somethingunheard of in the Indian market a decade ago. It was FII which based the pressure on the rupeefrom the balance of payments position and lowered the cost of capital to Indian business. It isdue to the FIIs that a concept like corporate governance is being increasingly adopted by Indiancompanies; this is benefiting domestic investors also. FIIs are the trendsetters in any market.They were the first ones to identify the potential of Indian technology stocks. When the rest ofthe investors invested in these scrips, they exited the scrips and booked profits. Before the arrivalof FIIs, the activity in stocks used to be evenly attributed with little differences between volumesin specified and cash groups. However since FIIs concentrate on the top 200 companies against

the 6,000 listed companies on BSE, the stock trading activity has concentrated to these liquidscrips making them less liquid scrips totally illiquid. Thus, FIIs have become the driving forcebehind the movements of the stock indices on the Indian stock markets.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with thebadla system. The major beneficiaries of the rolling settlement system are FIIs as shortsettlement cycles offer them quick exit from the market.

With their massive financial muscle FIIs have almost replaced conventional market of the Indianbourse. Today financial institutions and mutual funds including UTI can do little to help thestock markets at a time of crisis. Even UTI, which used to be counter force for FIIs has ceased to

play that role in the Indian stock markets.

It is expected that with the adoption of international practices such as rolling settlement andderivatives FII participation will increase and more money will flow into the Indian capitalmarket.

Depositories:

The increase in the volume of activity on stock exchanges with the advent of on screen tradingcoupled with operational inefficiencies of the former settlement and clearing system led to theemergence of a new system called the depository System. SEBI mandated compulsory adding

and settlement of select securities in dematerialized form. All securities are held, traded andsettled in demat form. Two depositories have come into existence NSDL and CSDL. Dematsettlements have eliminated bad deliveries and other related problems associated with physical.


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Buy Back of shares:

Buy back of shares means that a company purchases or buys back its own shares, which it hadissued previously to the shareholders. The company has the option to either cancel them or holdthem as treasury frozen stock. The differences, though technical is significant. For example a

company buys back one crore equity shares of the face value of Rs 10 at Rs 100 each. If theshares are cancelled the equity base of the company will be reduced by Rs10 crore, while thereserves will be depleted by Rs 90 crore. If the repurchased shares are held as treasury stock, theshares will not be extinguish, but will be held neither as an investments nor as equity. They canbe revived by reissuing them at a later date or for employee option.

A company may be motivated to buy back its own shares for any of the following reasons:

1. A company with surplus cash to invest and buy may consider it to be a worthwhile investproposition as it carries minimum risk compared with other avenues of investment such asinvestment in new projects, development of new products, acquisitions and takeovers/

2. For a company facing a threat of hostile takeover share buy back would help its promoters toincrease their proportional share holding in the company.3. A company may think of altering its capital structure if its equity is disproportionately large.Buy back may help the company to achieve a target capital structure.4. A panic driven fall in share prices can be arrested through buy back of shares.5. A company intending to improve market quotes of its scrips may choose buy back rather thanpay higher dividends as buy back signals management confidence. Moreover, buy back providesan exit route to investors in case of illiquid scrips


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FII Vs FDI

FIIs can purchase and sell Government Securities and Treasury Bills within overall approved

debt ceilings. To facilitate better risk management by investors, authorised dealers have beenpermitted to provide forward cover to FIIs in respect of their fresh equity investments in India.Moreover, transactions among FIIs with respect to Indian stocks will no longer require post-factoconfirmation from the RBI. Also, 100 percent FII debt funds have been permitted to invest inunlisted debt securities of Indian companies.

What explains the greater attraction of the Indian market for portfolio investors as compared toforeign direct investment (FDI)? In his column Bullish FII versus cautious FDI in these pages(FE, February 14), Senthil Chengalvarayan has compared the Indian scenario, characterised bystrong portfolio inflows and much weaker foreign direct investment (FDI), with China, where thesituation is the reverse. He attributes the difference to the opening of the capital market. Open up

the real sector and investments will flow, he argues. While his broad thrust is correct, there isanother factor thats just as critical, if not more. Ease of entry and exit.

Today, it is relatively effortless for a foreign institutional investor (FII) to enter the capitalmarket. A Sebi registration, preceded by a fairly perfunctory due diligence, is all it takes beforean FII can enter the Indian stock market and commence trading. Exit is equally simple

FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper,problems remain at the grassroots. There are innumerable clearances that need to be obtained atthe state and district levels. There are also a number of practical hurdles, such as infrastructurebottlenecks, all of which make entry difficult. Exit is more complicated. Archaic labour laws,

such as the Industrial Disputes Act, prohibit the closure of any company employing more than100 workers without obtaining prior state government permission. Bankruptcy laws areconvoluted and legal processes costly and long-winded.

No wonder portfolio inflows into India far exceed direct investment flows. FII flows topped $8.5billion last year and have already exceeded $1 billion in the current year to date. In contrast, FDIflows have remained stuck in the $3-4 billion groove for the past many years. Its just the reversein China.

FDI is in the range of $50 billion, while portfolio flows are much lower, in the range of $4-5billion. Part of the reason is that equity markets are far less open than in India. The market is

segregated between resident and non-resident investors and there are strict controls.

Given that FDI is far more beneficial to the recipient country than FII, the big question troublingIndian policymakers is how do we replicate the Chinese example. We would say open up and,equally, make exit easier as well.

Several measures to boost FDI have been announced in 1998-99. Projects for electricity

generation, transmission and distribution as also roads and highways, ports and harbours, and


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vehicular tunnels and bridges have been permitted foreign equity participation up to 100 per cent

under the automatic route, provided foreign equity does not exceed Rs. 1500 crore. FDI

permissible underNon-Banking Financial Services now includes "Credit Card Business" and

"Money Changing Business". Regarding equity participation in private sector banks, multilateral

financial institutions have been allowed to contribute equity to the extent of the shortfall in NRI

holdings within the overall permissible limit of 40 per cent. The Government has also decided to

permit FDI up to 49 per cent of the total equity, subject to license, in companies providing

Global Mobile Personal Communication by Satellite (GMPCS) services. Also, minimum

capitalisation norms earlier required for pure financial consultancy services have been relaxed.

GDR/ADR guidelines have been further liberalised in 1998-99. Unlisted companies are now

permitted to float Euro issues under certain conditions. All end-use restrictions on GDR/ADR

issue proceeds have been removed, except the prevailing restrictions on investment in stock

markets and real estate. The 90-day validity period for final approvals of GDR/ADR issues has

been withdrawn and final approval will continue to be valid, thereby imparting greater flexibility

to issuing companies regarding the timing of issues. Indian companies are now permitted to issue

GDRs/ADRs in the case of Bonus or Rights issue of shares, or on genuine business

reorganisations duly approved by the High Court. The companies, however, in all such cases,

will be required to get approval from the Department of Economic Affairs for the issue of

GDRs/ADRs.

Foreign Direct Investment (FDI) inflows to developing countries are estimated to have gone upto U.S.$ 149 billion in 1997 from U.S.$ 130 billion in 1996. Indias share of global FDI flows

rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. On the other hand, Indias share in netportfolio investment flows to the developing countries declined to 5.1 per cent in 1997 afterincreasing to 8.7 per cent in 1996.

FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in1996-97 because of a decline in portfolio investment (Table 6.9). Although foreign directinvestment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197million in 1997- 98, portfolio investment declined from U.S.$ 3,312 million in 1996-97 to U.S.$1,828 million in 1997- 98. This decline in portfolio investment is mainly attributable to thecontagion from the East Asian crisis, which adversely affected capital flows to all emergingmarkets.

International developments continue to affect capital flows into India in 1998-99 as well. Theprovisional estimate of total foreign investment at U.S.$ 880 million during April-December,1998 was sharply lower compared to the inflow of U.S.$ 4253 million during the correspondingperiod in the previous year. Although FDI flows were weaker, this overall decline in capitalflows was mainly attributable to a net outflow in portfolio investment of U.S.$ 682 millionduring April-December, 1998 as against an inflow of U.S.$ 1742 million during the same period


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in 1997. Trends in approvals and actual inflows of foreign direct investment are shown in Table1 below.

Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997- 98.U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI. The striking

feature was that S. Korea increased its flow of investment in India from a meagre U.S.$ 6.3million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per centshare).


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Review of literature.

1).FII INFLOWS IN INDIA PREFERENTIAL ALLOTMENT OF SHARES

By Pankaj KumarP

osted: Sep 17, 2009

ABSTRACT: The FII inflows into the primary market in India comes mainly through the

conversion of foreign currency convertible bonds (FCCBs), private placement to qualified

institutions placements (QIPs), initial public offers (IPOs), follow-on overseas offers, conversion

of warrants and preferential offers.

2).Why are Foreign Institutional Investors (FII) investing in India.

BY:Muhammed Haris | Category: Business and Finance | Post Date: 2009-09-05

Huge investments are being done by FII (Foreign Institutional Investors) in Indian

companies. But the question is - If India is a developing country, why do they rely on our

services and invest in India. Do they lack the knowledge about poverty and social issues in

India? Does India has a false image in International market?

3).No Restrictions Imposed on FII Investments in India - Indian Stock Market Going

Strong posted on 28th Oct 2010

ABSTRACT: Inaugurating the two-day Economic Editors' Conference in New Delhi, India's

finance ministerM

r.P

ranabM

ukherjee said that no restrictions will be imposed on FIIinvestments in India. Honourable minister stated At this time, I am not thinking of putting a cap

on FIIs (investment in the equity market) . It's worth noting the fact that India is the only country

to enhance FII investment limits in debt this year while other developing economies like while

Brazil and Japan have moved to limit inflows. The main reason to have enforced this stand out

decision seems to be the record $24.48 billion in Indian stocks this year.

4).4Ways To Trade IndiaBy Stephen Edge

: The Securities and Exchange Board of India (SEBI) is one of two regulators of India'sderivatives market. The other, the Forward Markets Commission (FMC) oversees futures on

physical commodities where SEBI administers financial products. SEBI is an independent

agency created in 1992 and is a department in the Ministry of ConsumerAffairs Food and Public

Distribution. As of 03 April, 2007, there were 996 Foreign Institutional Investors (FII) directly

registered with SEBI. FIIs, in most cases, must receive approval from SEBI before they can

commence trading in India. There are 4 ways for an FII to access the India market.


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5).FIIs suck out record $600 m in a day [India Business] Times of India, The, Feb 26, 2011 .

ABSTRACT: Foreign fund managers are on a "Quit India" mission this year. After pumping inover $29 billion into the Indian stock market last year, so far in 2011, the same group ofinvestors has taken out over $3.5 billion from the secondary market.

On Thursday alone, FIIs pulled out $600 million (Rs 2,700 crore). And going by whatinstitutional dealers say about the current mindset of FII fund managers, this figure is expected torise. As a result, the benchmark indices could slide further from the current levels, reachingmulti-year lows, they said.

6). FIIs inflow reduce in India December 7th, 2010 BY.Malvika Sampat .

ABSTRACT: It is reported in the Financial Express that the investments form the foreign institutional

investors (FIIs) have reduced in India.

As a result of this the, the FII inflow in India has been reduced to 35 percent from 50 percent in the year-

till-date to 35 per cent in the week-till-date, Bloomberg data show. South Korea, Taiwan and Thailand

have gained at Indias expense. The share of FII inflows for the week-till-date for these countries has

increased to 34 per cent, 20 per cent and 11 per cent from 29 per cent, 12 per cent and 3 per cent,

respectively.


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Findings.Most of the under developed countries suffer from low level of income and capitalaccumulation. Though, despite this shortage of investment, these countries have developed a

strong urge for industrialization and economic development.A

s we know the need for Foreigncapital arises due to shortage from domestic side and other reasons. Indian economy hasexperienced the problem of capital in many instances. While planning to start the steelcompanies under government control, due to shortage of resources it has taken the aid of foreigncountries. Likewise we have received aid from Russia, Britain and Germany for establishingBhiloy, Rourkela and Durgapur steel plants. The present paper is a modest attempt to study thetrends in Foreign Institutional Investment into India. It is observed that the FIIs investment hasshown significant improvement in the liquidity of stock prices of both BSE and NSE. However,there is a high degree of positive co-efficient of correlation between FIIs investment and marketcapitalization, FIIs investment and BSE & NSE indices, revealing that the liquidity andvolatility was highly influenced by FIIs flows.

Further, it is also proved that FIIs investment was a significant factor for high liquidity andvolatility in the capital market prices. The present study is a modest attempt to know the statusof FIIs in Indian capital market.

The Indian economy has been one of the fastest growing economies in the world, next only to

China.

According to the strong growth rate of GDP, India now ranks 10th among the largest economies

in the world (World Bank Report). Indian economy has experienced the problem of capital inmany instances. While planning to start the steel companies under government control, due to

shortage of resources it has taken the aid of foreign countries. Likewise we have received aid

from Russia, Britain and Germany for establishing Bhiloy, Rourkela and Durgapur steel plants.

The foreign institutional investment was increased during the years 2009 and 2010. Later on,

due to global financial crisis the investments by FIIs were reduced.


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BIBLIOGRAPHY

http://www.articlesbase.com/regulatory-compliance-articles/fii-inflows-in-india-1242465.html#ixzz1HaXw0OGB

www.ibef.org www.business-standard.com www.rbi.org.in www.moneycontrol.com articles.timesofindia.indiatimes.com

Documents

fii report.docx sandeep