Foreign Institutional Investors

By M.Ramesh Chandra Y8IB20032

Foreign Institutional Investors

Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest its profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage incorporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct

of listed companies, and providing them with capital are all part of the job of investment management. History Ancient Rome and medieval Islam Roman law ignored the concept of juristic person, yet at the time the practice of private evergetism sometimes led to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the citys entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor. [1] In the South of Gaul, aqueducts were sometimes financed in a similar fashion. [2] The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. The waqf (charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments. [3] Alongside some Christian monasteries [4] the waqfs created in the 10th century CE are amongst the longest standing charities in the world (see for instance the Imam Reza shrine). Pre-industrial Europe Following the spread of monasteries, almhouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over

the centuries those institutions acquired sizable estates and large fortunes in bullion. Following the collapse of the agrarian revenues, many of these institution moved away from rural real estate to concentrate on bonds emitted by the local sovereign (the shift dates back to the 15th century for Venice, [5] and the 17th century for France[6] and the Dutch Republic [7]). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, they commonly possessed 10 to 30% of a given region arable land. In the 18th century, private investors pool their resources to pursue lottery tickets and tontine shares allowing them to spread risk and become some of the earliest speculative institutions known in the West. Before 1980 Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed; by 1800, institutions solely owned 2% of the arable land in England and Wales. [8] New types of institutions emerged (banks, insurance companies), yet despite some success stories, they failed to attract a large share of the publics savings and, for instance, by 1950, they owned only 7% of US equities and certainly even less in other countries

Financial market

participants

Collective

investment schemes

Credit unions Insurance Investment Pension funds Prime brokers Trusts

companies

banks

Finance series

Financial Participants Corporate

market

finance

Personal Public finance Banks and

finance

banking

Financial

regulation vde

Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placement under Rule 506 of Regulation D may be made to an "accredited investor" without registering the offering of securities with the Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as:

a bank, insurance company, registered investment company

(generally speaking, a mutual fund), business development company, or small business investment company;

an employee benefit plan, within the meaning of the Employee

Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

a charitable organization, corporation, or partnership with assets a director, executive officer, or general partner of the company a business in which all the equity owners are accredited a natural person who has individual net worth, or joint net worth

exceeding $5 million;

selling the securities;

investors;

with the persons spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the

two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

a trust with assets in excess of $5 million, not formed to acquire

the securities offered, whose purchases a sophisticated person makes. Economic theory By definition, institutional investors are opposed to individual actors on the financial markets. This specificity has majors consequences in the eyes of economic theory. \ Institutional investors as financial intermediaries Numerous institutional investors act as intermediaries between lenders and borrowers. As such, they have a critical importance in the

functioning of the financial markets. Economies of scale imply that they increase returns on investments and diminish the cost of capital for entrepreneurs. Acting as savings pools, they also play a critical role in guaranteeing a sufficient diversification of the investors portfolios. Their greater ability to monitor corporate behaviour as well to select investors profiles implies that they help diminish agency costs. Doing Gods work The expression doing Gods work, commonly used by employees of institutional investors to describe their job, refers to the fact that their professionalism and greater computing abilities allow them to detect early and benefit from information affecting the markets. By doing so, institutional investors make the markets more efficient.

Life cycle Institutional investors differ among each other but they all have in common the fact of not sharing the same life cycle as human beings. Unlike individuals, they do not have a phase of accumulation (active work life) followed by one of consumption (retirement), and they do not die. Here insurance companies differ from the rest of the institutional investors, as they cannot guess when they will have to repay their clients, they need highly liquid assets which reduces their investment opportunities. Others like pension funds can predict long ahead when they will have to repay their investors allowing them to

invest in much less liquid assets such as private equities, hedge funds or commodities. Finally, other institutions have an investment horizon extremely vast allowing them to invest in highly illiquid assets since they are unlikely to be forced to sell them before term. A famous example of this type of investors are US universities endowment funds.

Institutional investor types

Pension fund Mutual fund Investment trust Unit trust and Unit Investment Trust Investment banking Hedge fund Sovereign wealth fund Endowment fund Private equity firms Insurance companies

Globalisation of financial markets

When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors (FIIs). This expression is mostly used in emerging marketssuch as Malaysia and India. In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category, with an estimated US$ 751.14 billion.

Regional In various countries different types of institutional investors may be more important. In oil-exporting countries sovereign wealth funds are very important, while in developed countries,pension funds may be more important. Canada The most important Canadian institutional investors are:

Caisse de dpt et placement du Qubec (C$237.3 billion Canada Pension Plan (C$116.6 Billion [2007]) Ontario Teachers' Pension Plan (C$106 billion [2006]) British Columbia Investment Management (C$83.4 billion Alberta Investment Management (C$73.3 billion [2007])

[2007])

[2007])

United Kingdom In the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in the City of London's square mile. Their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have be able to muster over half of the votes The major investor associations are:

Investment Management Association[ Association of British Insurers National Association of Pension Funds The Association of Investment Trust Companies

The IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.

Foreign Institutional Investors: Investment Preferences in India Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. In this context this paper examines the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also

examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision.

In this age of transnational capitalism, significant amounts of capital are flowing fromdeveloped world to emerging economies. Positive fundamentals combined with fastgrowing markets have made India an attractive destination for foreign institutional investors(FIIs). Portfolio investments brought in by FIIs have been the most dynamic source ofcapital to emerging markets in 1990s. At the same time there is unease over the volatilityin foreign institutional investment flows and its impact on the stock market and the Indianeconomy. The stock markets in India had to put up the burden in terms of being thesecond largest loser of foreign money in Asia accounting for 22% of the total net sales -April-May 2006.

One of the reasons for the attack of Black Monday is claimed to be FIIs.Statistical records provided by Securities and Exchange Board of India (SEBI) indicated thatboth FIIs and domestic institutional investors together influenced market sentiment. As perthe information provided in BSE India.com during the fortnight from May 16th to May31st 2006, the withdrawals by FIIs were to the extent of US$2.061 billion. This explainsthe fact that sales of FIIs had a major impact on the market and this impact led to thecrash.Apart from the impact they create on the market, their holdings will influence firmperformance. For instance, when foreign institutional investors reduced their holdings in Dr.Reddys Lab by 7% to less than 18%, the company dropped from a high of aroundUS$30 to the current level of below US$15. This 50% drop is apparently because ofconcerns about shrinking profit margins and financial performance. These instances madeanalysts to generally claim that foreign portfolio investment has a short term investmenthorizon. Growth is the only inclination for their investment. Their strategy is Why takerisk when you are not in profit-exit. According to the industry experts, hedge funds playeda very active role in Indian stock market since 2003 by entering both Indian cash andderivative market. The upward trend in the domestic market is due to hedge funds and notdue to regular long-term FIIs. Thus the foreign portfolio

investments are found to be veryvolatile in nature.Despite these observations, countries and firms are interested in attracting foreign capitalbecause it helps to create liquidity for both the firms stock and the stock market in general. This leads to lower cost of capital for the firm and allows firm to compete more effectivelyin the global market place. This directly benefits the economy and the country. Availabilityof foreign capital depends on many firm specific factors other than economic developmentof the country.Contemporary research has investigated only the portfolio preferences of FIIs from theviewpoint of fund management companies. This paper attempts to examine the specific characteristics of the firms included in sensitivity index (Sensex) of Bombay Stock Exchangeand their influence in attracting more foreign institutional investment. Defining foreign institutional investors is rather simple, but describing what they do requires more detail. The key to understanding this position/job/person is to clarify each of the three words used. Foreign means, of course, that the individual or entity doing the investing is not a resident of the country in which the investment is made. The company or person doing business is registered and lives in another country. The second word, institutional means that the

business or company doing the investing is not a single, private individual who chooses to put money into a project or scheme.

This means that a mutual fund, which gets its operating money from various individual investors, might be an institutional investor. An insurance company or a pension fund could also qualify under this definition. Then there is the investor. This is any entity person or business that puts money into a project or plan for the purpose of making money. With this summary, a foreign institutional investor (FII) is a legal entity such as an investment fund or mutual fund that puts money into a business venture or project in a country other than the one in which the investor lives or is based. In a country such as India, for example, a corporation or mutual fund from the United States or Europe might put money into the markets of India for the purpose of making a profit. In most cases, this means that this entity from the U.S. or Europe must be registered with the Securities and Exchange Board so that it can participate in the financial system of India. In a similar manner, a European fund or

business entity looking to invest might put money into the financial market in the U.S. Under the usual circumstances, this European fund must be registered with the Securities and Exchange Commission of the U.S. One specific situation involves Indias financial market, which needed a flow of investment capital into the country in the early 1990s. At the time, this was carefully considered, though there was some sense of urgency because of the need for the stability that new, foreign money could provide. Countries generally encourage sound institutional investment from other nations so that it wont be necessary for the government or corporations wont have to increase their debt by borrowing money. Indias encouragement of foreign institutional investors brought millions of new dollars into the country in a matter of one or two years. Some university studies of the influence of FII capital show that the massive inflow of money made strict regulation and limits necessary. The government and the financial institutions of the receiving country were fearful of opening up the markets to quickly or allowing too much foreign capital at one time. The United States has seen a significant increase in the number of foreign institutional investors in the last decade or two. China and Japan have made serious inroads into the financial markets of the U.S. during this time.

Foreign institutional investors (FIIs) have invested US$ 1.16 billion in equities and bonds, taking total net inflows in 2011 so far (till March 16, 2011) to US$ 1.63 billion, as per the data available with the Securities and Exchange Board of India (SEBI). In 2010, foreign investors bought stocks and bonds valued at nearly US$ 221.34 billion, a record number in a year. Net FII investments as on March 29, 2011 were recorded at US$ 1.13 billion. India witnessed high mergers & acquisitions (M&A) activity during February 2011. The month witnessed Indian corporates seal deals worth over US$ 8 billion in February 2011, three times what was recorded in January 2011 about US$ 2.6 billion, according to the data put out by Thomson One Banker and E&Y analysis. In terms of volume (deal count), domestic deals dominated the space. Of the total 71 deals struck during the month, 42 were domestic deals, while inbound and outbound made up 17 and 12 deals respectively. India is expected to have received more than US$ 7 billion in private equity (PE) investments in 2010, up from US$ 3.5 billion in 2009, according to a global consultancy firm Ernst & Young (E&Y). Sectors such as power and transportation, consumer and branded products, infrastructure ancillaries, education and financial services, and healthcare are likely to witness increased PE activity in 2011.

Investment Scenario

As much as 75 per cent of global businesses already present in the country are looking to considerably expand their operations going forward, according to Ernst & Young (E&Y)s first Indian Attractiveness Survey Sri Biotech Laboratories India Limited, a Hyderabad-based multi-disciplinary agri biotechnology company, is in the process of setting up an integrated discovery centre at Genome Valley on the outskirts of the city with an investment of US$ 6.7 million. The project will be funded through the US$10 million private equity (PE) money that was infused into the company by Rabo Equity Advisors through its US$ 100 million India Agri Business Fund in 2009. Sri Bio raised the PE fund to focus on seed research and development of new molecules for crop protection besides putting up infrastructure for the same Housing Development Finance Corporation (HDFC), the countrys leading home mortgage provider, will invest in Kaizen asset Management Company, the manager for Indias first education-focused PE fund, Kaizen Private Equity. HDFC will invest in the education sector through its wholly owned subsidiary, HDFC Holdings Ltd, said a press release Car rental company, Carzonrent India is close to raising US$ 22.19 million from two PE firms including BTS India Private Equity Fund in lieu of a minority stake. This would be the third

round of capital infusion for the Delhi-based company which is promoted by Rajiv K Vij

Karur Vysya Bank (KVB) plans to increase the ceiling of holding by FIIs, non resident Indians (NRIs) and foreign direct investments (FDI) in the equity share capital of the bank to 35 per cent from the current 24 per cent. The move comes in the wake of a recent approval the bank got from Foreign Investment Promotion Board to issue shares worth US$ 23.86 million to foreign investors Value-added service firm, One97 Communications has entered into an agreement with Mauritius-based PE firm SAIF Partners to launch a US$ 107.9 million fund to provide seed capital to start-up technology companies, according to a company executive. Both partners have ventured into a fund referred as One97 Mobility Fund to invest between US$ 431,600 and US$ 6.32 million in startups in the mobile value-added services (VAS) space Olympus Capital, the Asia-focussed PE fund will invest about US$ 600 million in India in big and established companies in infrastructure supply chain management, within the next twothree years

Government Initiatives In line with its focus on infrastructure development and also deepening the corporate debt market, the Centre has increased the FII investment limit in corporate bonds to US$ 40 billion from the prior limit of US$ 20 billion. The additional limit of US$ 20 billion will be available to FIIs only for investments in corporate bonds issued by companies in the infrastructure sector, as highlighted by Mr Pranab Mukherjee, the Finance Minister in his Budget speech. Prior to this announcement, the total FII investment limit in corporate bonds was pegged at US$ 20 billion, including a US$ 5 billion sub-limit for bonds with a residual maturity of over five years and issued by companies in the infrastructure sector. SEBI has announced revised reporting formats for FIIs on their offshore derivatives instruments (ODIs), which include participatory notes (PNs). ODIs have Indian equity or debt as underlying securities and are issued by registered FIIs or sub-accounts to clients abroad. Starting April 2011, reports providing details of ODI/ PN activity for the month should be filed before October 10. This is apart from the monthly summary report FIIs have to file on the seventh of every month, for the previous month.

SEBI ANNOUNCES NEW REGULATIONS FOR FII'S Market regulator Security Exchange Board of India recently announced new rules for foreign investments through financial instruments such as participatory notes, asking FIIs to wind up PNotes for investing 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 subaccounts cannot issue fresh P-Notes and will have to wind up their current position in 18 months.

In spot market, FIIs will not be allowed to issue P-Notes more than 40 per cent of their assets under custody. The reference date for calculating such assets will be September 30. Those FIIs who have issued P-Notes of more than 40 per cent of their assets could issue such instruments only if they cancel, redeem, or close their existing PNs. Those FIIs who have issued P-Notes less than 40 per cent of their assets under custody can issue additional instruments at the rate of 5 per cent of their assets.

Highlights of New Rules

New norms to come into effect from tomorrow Unregulated pension fund, university fund, charitable fund, endowments etc to be treated as FIIs No dilution of know-your-customers norms for registration of FIIs to prevent money laundering FIIs to be registered on a permanent basis instead of earlier practice of renewing registration every three years

FAQs on FII Q1. Who is a Foreign Institutional Investor (FII)? Ans. FII means an entity established or incorporated outside India which proposes to make investment in India. Q2. What is a sub-account? Ans. Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII. Q3. What is a Designated Bank? Ans. Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII. Q4. Who is a Domestic Custodian? Ans. Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. Q5. What is a Broad Based Fund? Ans. Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund.

Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors. Provided further that if the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund.

FII REGISTRATION

Q6. Who can get registered as FII? Ans. Following entities / funds are eligible to get registered as FII: 1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Funds 7. Endowments 8. Foundations 9. Charitable Trusts / Charitable Societies Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:

1. Asset Management Companies 2. Institutional Portfolio Managers 3. Trustees 4. Power of Attorney Holders Q7. What are the parameters on which SEBI decides FII applicants eligibility? Ans. a. Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year) b. whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI c. Whether the applicant is a fit & proper person. Q8. Which form needs to be filled in when applying for FII registration? Ans. "Form A" as prescribed in SEBI (FII) Regulations, 1995.

Q9. Which documents need to be sent with "Form A"? Ans. a. Certified copy of relevant clauses (clauses permitting the stated activities) of Memorandum of Association, Article of Association or Article of Incorporation. b. Audited financial statement and annual report for the last one year (period covered should not be less than twelve months Q10. How much is the fee for registration as FII? Ans. US $ 5,000. Q11. When is the registration fee payable? Ans. At the time of submitting the application for registration. Q12. What is the mode of payment? Ans. Demand Draft in favour of "Securities and Exchange Board of India" payable at New York Q13. How many days it takes to get registered as FII? Ans. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI.

In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI. Q14. What is the registration process for FII? Ans. Please contact us for registration.

Q15. What is the validity period of FII registration? Ans. The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed. Q16. What is the process of renewal? Ans. Same as initial registration. Along with "Form A" and all the relevant documents, the applicants are required to fill in additional form (Annexure 1) while applying for renewal. Q17. Is there any renewal fee? Ans. Yes, US $ 5,000 needs to be paid for renewal of FII registration. Q18. When the application for renewal should be submitted Ans. Three months before expiry of the FII registration.

Q19. What are 100 % debt FIIs/sub-accounts, and what is the process for their registration? Ans. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debt route. Q20. Where the application for FII registration should be sent? Ans. The FII registration application should be sent to: Securities and Exchange Board of India Division of FII & Custodian Mittal Court "B" Wing, First Floor 224, Nariman Point Mumbai 400 021 India Note: In case the applicant is a Bank or "Subsidiary of a Bank" then the application form and relevant documents need to be submitted in duplicates.

SUB-ACCOUNT REGISTRATION

Q21. Who can get registered as sub-account? Ans. a. Institution or funds or portfolios established outside India, whether incorporated or not. b. Proprietary fund of FII. c. Foreign Corporates d. Foreign Individuals Q22. Who need to apply for sub-account registration? Ans. The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account are required to sign the Sub-account application form. Q23. Which form needs to be filled when applying for subaccount registration? Ans. "Annexure B" to "Form A" (FII application form). Q24. What documents need to be sent with Annexure A? Ans. None

Q25. How much is the fee for sub-account registration? Ans. US $ 1,000 Q26. When is the registration fee payable? Ans. At the time of submitting the application. Q27. What is the mode of payment? Ans. Demand Draft in the name of "Securities and Exchange Board of India" payable at New York Q28. How many days it takes to get a sub-account registered? Ans. SEBI generally takes three working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, three days shall be counted from the days when all necessary information sought, reaches SEBI. Q29. What is the validity period of sub-account registration? Ans. The validity of sub-account registration is co-terminus with the FII registration under which it is registered. Q30. What is the process of renewal of sub-account? Ans. Same as initial registration. Q31. Is there renewal fee? Ans. Yes, US $ 1,000

Q32. Can OCBs / NRIs permitted to get registered as FII/subaccount? Ans. No, they are not permitted. POST-REGISTRATION PROCESSES Q33. What is the procedure in case the FII/sub-account changes its name? Ans. If a registered FII/sub-account undergoes name change, then the FII need to promptly inform SEBI about the change. It should also mention the reasons for the name change and give an undertaking that there has been no change in beneficiary ownership. In case of name change of FII, the request should be accompanied with documents from home regulator and registrar of the company evidencing approval of name change, and the original FII registration certificate issued by SEBI should be sent back for necessary amendment. Q34. What is the procedure for transferring a sub-account from one FII to another? Ans. The FII to whom the Sub-account is proposed to be transferred has to send a request along with a declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII should also submit a No-objection certificate.

Q35. What is the procedure for change of domestic custodian? Ans. The FII should send a request, along with no-objection certificate from existing domestic custodian, for change in domestic custodian. Q36. Can FII/sub-account registration be cancelled on request? Ans. Yes, the FII would be required to send a request for cancellation of its registration or registration of its Sub-account/s clearly mentioning the name and registration number of the entity. The FII should ensure that it / Sub-account has nil cash / securities holdings. Q37. What if the FII does not renew its/sub-accounts registration? Ans. The registration of the FII / Sub-account would get expired at due date and it would not be allowed to trade in Indian securities markets. If it is not interested in renewal but has certain residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines specified in this regard.

INVESTMENT OPPORTUNITIES Q38. Which financial instruments are available for FII investments? Ans. a. Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; b. Units of mutual funds; c. Dated Government Securities; d. Derivatives traded on a recognized stock exchange; e. Commercial papers. Q39. What are the investment limits on equity investments by FII/sub-account? Ans. a. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company. b. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. c. For the sub-account registered under Foreign Companies/Individual category, the investment limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by Government of India / Reserve Bank of India. Q40. What are the investment limits on debt investments by FII/sub-account? Ans. The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect:
o

For FII investments in Government debt, currently following limits are applicable: 100 % Debt Route US $ 1.55 billion

70 : 30 Route US $ 200 million Total Limit US $ 1.75 billion

o

For corporate debt the investment limit is fixed at US $ 500 million.

Q41. What other investment limits are there?

Ans. Normal FII (70:30 Route) Total investment in equity and equity related instruments shall not be less than 70% of aggregate of all investments. Q42. In whose name should the securities be registered? Ans. a. In the name of FII when making investments on its own behalf b. In the name of sub-account when making investments on behalf of Sub-account c. In the name of "FII a/c sub-account" when making investments on behalf of Sub-account. 100% Debt FII 100% investment shall be made in debt security only.

DERIVATIVES POSITION LIMITS Q43. What are the restrictions on investment in derivatives?

Ans. b. The FII position limits in a derivative contracts (Individual Stocks) The FII position limits in a derivative contract on a particular underlying stock i.e. stock option contracts and single stock futures contracts are:
o

For stocks in which the market wide

position limit is less than or equal to Rs. 250 Cr, the FII position limit in such stock shall be 20% of the market wide limit.
o

For stocks in which the market wide

position limit is greater than Rs. 250 Cr, the FII position limit in such stock shall be Rs. 50 Cr. b. FII Position limits in Index options contracts FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index options, whichever is higher, per exchange. This limit would be applicable on open positions in all option contracts on a particular underlying index.

c. FII Position limits in Index futures contracts:

FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 % of the total open interest of the market in index futures, whichever is higher, per exchange. This limit would be applicable on open positions in all futures contracts on a particular underlying index.

In addition to the above, FIIs shall take exposure in equity index derivatives subject to the following limits:

i.

Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FIIs holding of stocks.

ii.

Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FIIs holding of cash, government securities, T-Bills and similar instruments.

b. FII Position Limits in Interest rate derivative contracts At the level of the FII

The notional value of gross open position of a FII in exchange traded interest rate derivative contracts shall be:

i. ii.

US $ 100 million. In addition to the above, the FII may take exposure in exchange traded in interest rate derivative contracts to the extent of the book value of their cash market exposure in Government Securities.

At the level of the sub-account

The position limits for a Sub-account in near month exchange traded interest rate derivative contracts shall be higher of:

Rs. 100 Cr or

15% of total open interest in the market in exchange traded interest rate derivative contracts.

OFFSHORE DERIVATIVES/PARTICIPATORY NOTES Q44. Can FII/sub-account issue Offshore Derivatives / Participatory Notes?

Ans. Yes, FII/sub-account may issue, deal in or hold off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments against underlying securities, listed or proposed to be listed on any stock exchange in India. Q45. Who can subscribe to/invest in Participatory Notes? Ans. a. Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction; b. Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England, the Federal Reserve, the Hong Kong Monetary Authority, the Monetary Authority of Singapore or any other similar body provided that the entity must not only be authorised but also be regulated by the aforesaid regulatory bodies; c. Any entity that is regulated, authorised or supervised by a securities or futures commission, such as the Financial Services Authority (UK), the Securities and Exchange Commission (Sub-account), the Commodities Futures Trading Commission (Sub-account), the Securities and Futures Commission (Hong Kong or Taiwan), Australian Securities and Investments Commission (Australia) or

other securities or futures authority or commission in any country , state or territory ; d. Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange (Subaccount), London Stock Exchange (UK), Tokyo Stock Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self regulatory organizations are ultimately accountable to the respective securities / financial market regulators. e. Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by an entity satisfying the criteria of (a), (b), (c) or (d) above.

Q46. What are the reporting Requirements for the FII / Subaccount issuing Participatory Notes? Ans. a. FII/sub-account who issue/renew/cancel/redeem PNs, require to report on Monthly basis. The report should reach SEBI by the 7th day of the following month. b. The FII/sub-account merely investing/subscribing in/to the Participatory Notes/Access Products/Offshore Derivative Instruments or any such type of instruments/securities with underlying Indian market securities are required to report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and OctDec). c. FIIs/sub-accounts who do not issue PNs but have trades/holds Indian securities during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly basis. d. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec): No reports required for that reporting quarter. Q47. How to send report on Participatory Notes? Ans.

The format for reporting on issuance/ renewal / redemption of the Participatory Notes is prescribed as per "Annexure B" in our Circular No. IMD/CUST/15/2004 dated April 02, 2004 [ The reports should be e-mailed only to SEBI In case of Nil-reports, Annexure B is not required. Instead the FII on behalf of its Sub-account should submit the undertaking prescribed in our circular No. IMD/CUST/9/2003 dated November 20 , 2003 The reporting should be done in MS Excel format only

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