Foreign institutional investors (FIIs)

PRESENTED To : Prof. Sagheer Ahmad

Ansari

Presented by : Naseem
Ahmad

Dept. Of Agr. Economics & bus. Management

 Introduction
The Economic Development of any country depends upon the existence of well
organized financial markets. It is the financial system, which supplies the necessary
financial inputs for the production of goods and services, which in turn promote the well
being and standard of living of the people of a country.
 Definition
Financial Institutional investors which invest in the financial assets belonging to a different
country other than that where these organizations are based.

FIIs play a very important role in any economy. These are the big co. such as intvt.banks, MFs
etc. who invest considerable amount of money in the Indian markets. With the buying of
securities by these big players, markets trend to move upward and vice-versa. They exert strong
influence on the total inflows coming into the economy.
Role of SEBI

SEBI has over 1450 FIIs, which are considered as both a trigger and a catalyst for the market performance by
encouraging Invt. from all classes of investors which further leads to growth in FM trends under a self-organized
system.

FII in India

Emerging economies like India, which offer relatively higher growth than the developed economies, have become
favorable among investors as attractive investment destinations for foreign institutional investors (FIIs)

A poll conducted by Bank of America Merrill Lynch (BofA-ML) recently, in which 50 investors participated,
revealed that India was the most favorite equity market for the global investors for the year 2015 at 43 per cent,
followed by China at 26 per cent. Invested around Rs 12.51 trillion (US$ 171.81 billion) in India between FY02-18.
India is being viewed as a potential opportunity by investors, with the economy having
the capacity to grow tremendously. Buoyed by strong support from the government,
FII investments have been strong and are expected to continue to improve going
forward. FII flows have seen a bumpy ride so far this year, with a meager investment
of $15 million, while domestic institutional investors (DIIs) continue to invest more
aggressively into the Indian equity market and have bought net assets worth $7.9
billion. economictimes.indiatimes.com .
 ROLE OF FIIs IN INDIAN CAPITAL
MARKET
Until the 1980s there was a general disinclination towards foreign investment or private commercial
flows because India’s development strategy was focused on self-reliance and import substitution and
current account deficits were financed largely through debt flows and official development assistance.
After the reforms,(FIIs) have been allowed to invest in all securities traded on the primary and
secondary markets, including shares, debentures and warrants issued by companies which were listed
on the Stock Exchanges in India and in schemes floated by domestic mutual funds.
Cont…
Foreign Institutional Investors (FIIs) have been playing a significant role in the Indian
capital market.

Capital Formation and Economic Development of the country since the

implementation of New Economic Reforms in 1991. India, being a capital scarce
country, has taken many measures to make the investment environment encouraging
for Foreign Institutional Investment since the beginning of reforms.
Currently, the following entities are eligible to invest under FII route
As FIIs
Overseas Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee
Companies, Banks, Institutional Portfolio Managers, University Funds, Endowments Foundations, Charitable
Trusts, Charitable Societies.
As Sub-Accounts
The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are
eligible to be registered as sub-account, viz. Partnership Firms, Private Company, Public Company, Pension
Fund, Investment Trust And Individuals.
Domestic Entities
A domestic portfolio manager or a domestic asset management company shall also be eligible to be registered
as FII to manage the funds of sub-accounts.
 Recent Developments/Investments

1. In March 2019, initial public offer (IPO) of India’s first real estate investment trust (REIT) was subscribed
2.6 times.

2. In February 2019, net inflows from foreign portfolio investors (FPI) in India reached a 15-month high of Rs
17,220 crore (US$ 2.49 billion).

3. Union Bank of Switzerland (UBS) maintained its Nifty target at 9,500 by March 2019.

4. Morgan Stanley expects the BSE Sensex to reach 42,000 by December 2019 end.

5. In September 2018, Embassy Office Parks filed the papers for India’s first Real Estate Investment Trusts
(REIT).

6. The total (M-cap) of all the companies listed on Bombay Stock Exchange (BSE) rose to a record high level
of Rs 142.25 trillion (US$ 1.95 trillion) in 2017-18.
 Advantages of FII
1. Enhanced Flow of Equity Capital: FIIs have a greater appetite for equity than debt in their asset
structure.

2. Managing Uncertainty and Controlling Risk: FIIs promote financial innovation and development
of hedging instruments.

3. Improving Capital Markets: FIIs as professional bodies of asset managers and financial analysts’
enhance competition and efficiency of financial markets.

4. 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.
 Disadvantages of FII Inflows
1. Potential Capital Outflows: Hot money refers to funds that are controlled by investors who
actively seek short-term returns. Hot money can have economic and financial repercussions
on countries and banks.
2. Inflation: Huge amounts of FII inflow into the country creates a lot of demand for rupee and
the RBI pumps the amount of Rupee in the market to meet the demand created.
3. Problem to Small Investors: The FII profits from investing in emerging financial stock
markets.
4. Adverse Impact on Exports: FII flows leading to appreciation of the currency may lead to
the exports industry becoming uncompetitive due to the appreciation of the rupee.
 Regulation of FIIs
The regulations for foreign investment in India have been framed by the Reserve Bank of India
in terms of Sections 6 and 47 of the Foreign Exchange Management Act, 1999 SEBI acts as the
nodal point in the registration of FIIs. Subsequent to SEBI (FPI) Regulations, 2014 depositories
register and monitor the activities of the FIIs and SEBI continues to be the regulator. FIIs can
invest their own funds as well as invest on behalf of their overseas clients registered as such
with SEBI. Foreign Institutional Investment is basically short-term in nature and mostly made in
the financial markets.
 FII investment limits
Investment by individual FIIs/ sub-accounts (excluding foreign corporates and
individuals) cannot exceed 10 per cent of paid up capital of a company. Investment by
foreign corporates or individuals registered as sub accounts of FII cannot exceed 5 per
cent of paid up capital. All FIIs and their sub-accounts taken together cannot acquire
more than 24 per cent of the paid up capital of an Indian Company.
 Monitoring Foreign Investments

The RBI monitors the ceilings on FII investments in Indian companies on a daily basis.
For effective monitoring of foreign investment ceiling limits, the RB has fixed cut-off
points that are two %age points lower than the actual ceilings. The cut-off point, for
instance, is fixed at 22 per cent for companies in with 24 per cent ceiling. Once the
aggregate net purchases of equity shares of the company by FIIs reach the cut-off point,
which is 2% below the overall limit, the RB cautions all designated bank branches so as
not to purchase any more equity shares of the respective company on behalf of FIIs
without prior approval of the Reserve Bank.
 Determinants of Foreign Institutional Investment
FII can supplement domestic savings and augment domestic investment without increasing the foreign debt of the county. Such investment
constitutes non-debt creating financing instruments for the current account deficits in the external balance of payments. Determinants of FII
can be put into two groups: economic determinants and policy/regulatory determinants

Investors will typically focus on the following factors:

a) High economic growth rate
b) Exchange rate stability Macroeconomic stability
c) Level of foreign exchange reserves
d) Health of domestic banking system
e) Stock and bond market liquidity
f) Real interest rates
Policy/regulatory determinants
The main determinants in this group are the following:
a) Ease of repairing dividends and capital.
b) Domestic capital gains tax.
c) Stock and bond market regulation.
d) Quality of domestic accounting disclosure standards 16.
e) Speed and reliability of settlement system.
f) Availability of domestic custodians and brokers.
g) Degree of investor rights protection.