FOREIGN INSTITUTIONAL INVESTORS ( FIIs)

Diwakar Chugh Rahul Yadav MBF 2012-14

OUTLINE
Introduction: Foreign Investment FIIs FIIs in India Participatory Notes Pros of FII Conclusion References

INTRODUCTION
Foreign Investments

Investments made by residents of a country in financial assets and production processes of another country

Foreign Direct Investment (FDI) Foreign Entity wants to enter in the Indian Market

But HOW? Portfolio Investment Scheme ( PIS)FII

FIIs

Who are they ?

Institutions like pension funds ,mutual funds, investment trusts, asset management companies, nominees companies and incorporated portfolio managers

FIIs
Where they can invest? Under securities such as shares, debentures and warrants issued by Indian companies which are listed /to be listed on the Stock exchange in India The schemes floated by domestic mutual funds, traded on the primary and secondary markets. In government securities including treasury bills and debt securities of Indian companies.

INVESTMENT LIMITS FOR FII

Ceiling for overall investment for FIIs : 24 per cent of the paid up capital of the Indian company Can be raised up to the sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company

FIIs in INDIA
The Indian financial market was opened to the foreign institutional investors in 1992 to widen and broaden the Indian capital market. The net investment by FIIs in India has been positive every year except in 1998-99. During the last seven years, there has been a phenomenal increase in the portfolio investment by FIIs in the Indian market Several factors are responsible for increasing confidence of FIIs on the Indian stock market which include strong macro-economic fundamentals of the economy transparent regulatory system abolition of long-term capital gains tax encouraging corporate results

PROS of FII
A. Enhanced flows of equity capital A greater appetite for equity than debt in their asset structure. Opening up the economy to FIIs is in line with the accepted preference for non-debt creating foreign inflows over foreign debt Improve corporate capital structures. Contribute in bridging the investment gap.

PROS of FII
B. Managing uncertainty and controlling risks

Promote financial innovation and development of hedging instruments Not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals.

C. Improving capital markets

FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets Equity market development aids economic development. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to provide more information about their operations, FIIs can help in the process of economic development.

D. Improved corporate governance

FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Institutionalization increases dividend payouts, and enhances productivity growth.

PARTICIPATORY NOTES
Simple derivative instruments that foreign investors not registered with Securities & Exchange Board of India (SEBI) use to trade in Indian markets These investors place their order through brokerage houses The brokerage houses then repatriate the dividends and capital gains back to these entities. In this case, the broker acts like an exchange: it executes the trade and uses its internal accounts to settle the trade. They keep the investors name anonymous.

CONCLUSION
Nowadays FIIs are the major contributors to the stock markets. The pros of allowing FIIs to invest in the Indian markets far outweigh the cons. Simply banning participatory notes cannot be a solution. It is up to the policy makers of India to allow FIIs to operate and provide them with more opportunities and reasons to invest in Indian markets.