fii in india sept 09

14th September 2009

FOREIGN INSTITUTIONAL INVESTORS

Report Submitted to Prof C. D. Sreedharan

In partial fulfilment of requirement of

International Finance Course

Prepared By

Lopamudra Biswas (307)

Manas Jain (324)

Nikhil Jain (327)

Deepak Kumar (333)

Rakshak Lodha (338)

Ashit Shetty (355)

Foreign Institutional Investors

September 14, 2009

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Table of Contents

Introduction................................................................................................................................................... 2

Differences between FII & FDI .................................................................................................................... 3

Types of FIIs ................................................................................................................................................. 4

Eligibility criteria for applicant seeking FII registration............................................................................... 9

FII Regulations............................................................................................................................................ 11

Offshore Derivatives Instruments (Participatory Notes).............................................................................16

Double Taxation Avoidance Agreement (DTAA)...................................................................................... 20

Advantages and Disadvantages of FIIs....................................................................................................... 23

Trends in FIIs.............................................................................................................................................. 25

Recent Developments ................................................................................................................................. 30

Recommendations....................................................................................................................................... 33

References................................................................................................................................................... 34


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Introduction The economic landscape of India underwent a paradigm change when the economy was

liberalized in 1991. It also laid the foundation for a strong regulatory network. India

witnessed stellar economic performance through the period 2003-09 .This was manifested

through an average 8.5 – 9 percent GDP growth rates, rising domestic savings and investment

levels and the amount of foreign capital flowing into the country.

Foreign investments can any of the three forms:

Portfolio investments in Indian companies Foreign Institutional Investor (“FII”) route

– essentially entailing transactions executed on stock exchanges in India;

Direct investment into Indian companies Foreign Direct Investment – (“FDI”) route;

Private Equity investments – Foreign Venture Capital Investor (“FVCI”) route

Foreign Institutional Investors have been a major source of funds into the Indian Capital

Markets in the past few years. Foreign Institutional Investors are defined under SEBI

Regulations as “an institution that is a legal entity established or incorporated outside India

proposing to make investments in India only in securities.” Foreign institutional investors

also include domestic asset management companies or domestic portfolio managers who

manage funds raised or collected or bought from outside India for the purpose of making

investment in India on behalf of foreign corporate or foreign individuals.

These investments are governed by the Securities and Exchange Board of India (Foreign

Institutional Investors) Regulations, 1995. Potential investors also have to get approval from

the Reserve Bank of India to operate foreign currency accounts to bring in and take out funds

and rupee bank accounts to pay for transactions.

The Reserve Bank of India also regulates the activities of FIIs, through exchange control

regulations.


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Differences between FII & FDIFDI and FIIs are two important sources of foreign financial flows into a country.

FDI (Foreign Direct Investment) the acquisition abroad of physical assets such as plant and

equipment, with operating control residing in the parent corporation. It is an investment made

to acquire a lasting management interest (usually 10 percent of voting stock) in an enterprise

operating in a country other than that of the investor, the investor’s purpose being an effective

voice in the management of the enterprise. It includes equity capital, reinvestment of

earnings, other long-term capital, and short-term capital. Usually countries regulate such

investments through their periodic policies. In India such regulation is usually done by the

Finance Ministry at the Centre through the Foreign Investment Promotion Board).

Types of Investments

FDI typically brings along with the financial investment, access to modern technologies and

export market. The impact of the FDI in India is far more than that of FII largely because the

former would generally involve setting up of production base - factories, power plant,

telecom networks, etc. that enables direct generation of employment. There is also multiplier

effect on the back of the FDI because of further domestic investment in related downstream

and upstream projects and a host of other services. Korean Steel maker Posco’s USD 8 billion

steel plant in Orissa would be the largest FDI in India once it commences. Maruti Suzuki has

been an exemplary case in the India's experience.

However, the issue is that it puts an impact on local entrepreneur as he may not be able to

always successfully compete in the face of superior technology and financial power of the

foreign investor. Therefore, it is often regulated that Foreign Direct Investments should

ensure minimum level of local content, have export commitment from the investor and ensure

foreign technology transfer to India.

FII investments into a country are usually not associated with the direct benefits in terms of

creating real investments. However, they provide large amounts of capital through the

markets. The indirect benefits of the market include alignment of local practices to

international standards in trading, risk management, new instruments and equities research.

These enable markets to become more deep, liquid, feeding in more information into prices

resulting in a better allocation of capital to globally competitive sectors of the economy.


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Since, these portfolio flows can technically reverse at any time, the need for adequate and

appropriate economic regulations are imperative.

Government PreferenceFDI is preferred over FII investments since it is considered to be the most beneficial form of

foreign investment for the economy as a whole. Direct investment targets a specific

enterprise, with the aim of enhancing capacity and productivity or changing its management

control. Direct investment to create or augment capacity ensures that the capital inflow

translates into additional production. In the case of FII investment that flows into the

secondary market, the effect is to increase capital availability in general, rather than

availability of capital to a particular enterprise.

Translating an FII inflow into additional production depends on production decisions by

someone other than the foreign investor — some local investor has to draw upon the

additional capital made available via FII inflows to augment production. In the case of FDI

that flows in for acquiring an existing asset, no addition to production capacity takes place as

a direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition

to production capacity does not result from the action of the foreign investor – the domestic

seller has to invest the proceeds of the sale in a manner that augments capacity or

productivity for the foreign capital inflow to boost domestic production. There is a

widespread notion that FII inflows are hot money — that it comes and goes, creating

volatility in the stock market and exchange rates. While this might be true of individual

funds, cumulatively, FII inflows have only provided net inflows of capital

StabilityFDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but

also better management and governance practices and, often, technology transfer. The know-

how thus transferred along with FDI is often more crucial than the capital per se. No such

benefit accrues in the case of FII inflows, although the search by FIIs for credible investment

options has tended to improve accounting and governance practices among listed Indian

companies.

Types of FIIsFII investments in India can be of the two types:


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1. Normal FIIs: FII allocation of its total investment between equity and non-equity

instruments (including dated government securities and treasury bills in the Indian

capital market) should not exceed the ratio of 70:30. Equity related instruments would

include fully convertible debentures, convertible portion of partially convertible

debentures and tradable warrants.

2. 100% Debt FIIs: FII that can invest the entire corpus in dated government securities

including treasury bills, non-convertible debentures/bonds issued by an Indian

company subject to limits, if any. A FII needs to submit a clear statement that it

wishes to be registered as FII/sub-account under 100% debt route.

Entities which can register as FIIs:Entities who propose to invest their proprietary funds or on behalf of "broad based" funds

(fund having more than twenty investors with no single investor holding more than 10 per

cent of the shares or units of the fund) or of foreign corporate and individuals and belong to

any of the under given categories can be registered for FII.

Pension Funds

Mutual Funds

Investment Trust

Insurance or reinsurance companies

Endowment Funds

University Funds

Foundations or Charitable Trusts or

Charitable Societies who propose to invest

on their own behalf, and

Asset Management Companies

Nominee Companies

Institutional Portfolio Managers

Trustees

Power of Attorney Holders

Banks

Foreign Government Agency

Foreign Central Bank

International or Multilateral Organization

or an Agency thereof

Some of the above mentioned types are described below:

Pension funds

A pension fund is a pool of assets that form an independent legal entity that are bought with

the contributions to a pension plan for the exclusive purpose of financing pension plan

benefits. It manages pension and health benefits for employees, retirees, and their families.

FII activity in India gathered momentum mainly after the entry of CalPERS (California

Public Employees’ Retirement System), a large US-based pension fund in 2004.

Mutual funds

A mutual fund is a professionally managed type of collective investment scheme that pools

money from many investors and invests it in stocks, bonds, short-term money

market instruments, or other such securities. The mutual fund will have a fund

manager that trades the pooled money on a regular basis. The net proceeds or losses are then

distributed to the investors.

Investment trust

An Investment trust is a form of collective investment .Investment trusts are closed-end

funds and are constituted as public limited companies. A collective investment scheme is a

way of investing money with others to participate in a wider range of investments than

feasible for most individual investors, and to share the costs and benefits of doing so

Investment banks

An investment bank is a financial institution that raises capital, trades in securities and

manages corporate mergers and acquisitions. Investment banks profit from companies and

governments by raising money through issuing and selling securities in capital

markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as

providing advice on transactions such as mergers and acquisitions.

Hedge funds

A hedge fund is an investment fund open to a limited range of investors that is permitted by

regulators to undertake a wider range of investment and trading activities than other

investment funds, and that, in general, pays a performance fee to its investment manager.

Every hedge fund has its own investment strategy that determines the type of investments and


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the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of

investments including shares, debt and commodities. Many hedge funds investments in India

were facilitated by global investors borrowing at near zero interest rates in Japan and

investing the proceeds in High interest markets like India.

University Fund

The purpose of investments of these funds is to establish an asset mix for each of the

University funds according to the individual fund’s spending obligations, objectives, and

liquidity requirements. It consists of the University’s endowed trust funds or other funds of a

permanent or long-term nature. In addition, external funds may be invested including funds

of affiliated organizations and funds where the University is a beneficiary.

Endowment fund

It is a transfer of money or property donated to an institution, usually with the stipulation that

it be invested, and the principal remain intact in perpetuity or for a defined time period. This

allows for the donation to have an impact over a longer period of time than if it were spent all

at once.

Insurance Funds

An insurance company's contract may offer a choice of unit-linked funds to invest in. All

types of life assurance and insurers pension plans, both single premium and regular premium

policies offer these funds. They facilitate access to wide range and types of assets for

different types of investors.

Asset Management Company

An asset management company is an investment management firm that invests the pooled

funds of retail investors in securities in line with the stated investment objectives. For a fee,

the investment company provides more diversification, liquidity, and professional

management consulting service than is normally available to individual investors.

The diversification of portfolio is done by investing in such securities which are inversely

correlated to each other. They collect money from investors by way of floating various

mutual fund schemes.


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Nominee Company

Company formed by a bank or other fiduciary organization to hold and administer securities

or other assets as a custodian (registered owner) on behalf of an actual owner (beneficial

owner) under a custodial agreement.

Charitable Trusts or Charitable Societies

A trust created for advancement of education, promotion of public health and comfort, relief

of poverty, furtherance of religion, or any other purpose regarded as charitable in law.

Benevolent and philanthropic purposes are not necessarily charitable unless they are solely

and exclusively for the benefit of public or a class or section of it.

Charitable trusts (unlike private or non-charitable trust) can have perpetual existence and are

not subject to laws against perpetuity. They are wholly or partially exempt from almost all

taxes.

An application for registration has to be made in Form A, the format of which is provided in

the SEBI (FII) Regulations, 1995.


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Eligibility criteria for applicant seeking FII registrationAs per Regulation 6 of SEBI (FII) Regulations, 1995, Foreign Institutional Investors are

required to fulfil the following conditions to qualify for grant of registration:

The applicant should have track record, professional competence, financial soundness,

experience, general reputation of fairness and integrity;

The applicant should be regulated by an appropriate foreign regulatory authority in the

same capacity/category where registration is sought from SEBI. Registration with

authorities, which are responsible for incorporation, is not adequate to qualify as Foreign

Institutional Investor.

The applicant is required to have the permission under the provisions of the Foreign

Exchange Management Act, 1999 from the Reserve Bank of India.

The Applicant must be legally permitted to invest in securities outside the country or its

in-corporation / establishment.

The applicant must be a "fit and proper" person.

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.

Payment of registration fee of US $ 5,000.00

Sub accountA ‘Sub-account’ is the underlying fund on whose behalf the FII invests. Sub- Accounts can

include those foreign corporate, 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.

It is possible for a registered sub-account to transfer from one FII to another. In such a case,

the FII to whom it is proposed to be transferred has to request SEBI with the following

documentation.

A declaration that it is authorised to invest on behalf of the sub-account.

A no-objection letter for the transfer of the sub-account from the transferor FII.


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Investment by FII is restricted to 24% of paid-up capital of the company which can be

extended up to 49% per sectoral cap by board resolution followed by special resolution.

Single FII investment can’t exceed 10% of paid-up capital of the company and single sub-

account investment can’t exceed 5% of the paid-up capital.

Eligible SecuritiesA FII can make investments only in the following types of securities

Securities in the primary and secondary markets including shares, debentures and

warrants of unlisted , to- be-listed companies or companies listed on a recognized

stock exchange

Units of schemes floated by domestic mutual funds including Unit Trust of India,

whether listed on a recognized stock exchange or not, and units of scheme floated by

a Collective Investment Scheme.

Government Securities

Derivatives traded on a recognized stock exchange – like futures and options. FIIs can

now invest in interest rate futures that were launched at the National Stock Exchange

(NSE) on 31st August, 2009.

Commercial paper

Security receipts


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FII RegulationsInvestment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of

important regulations by SEBI and RBI:

A Foreign Institutional Investor may invest only in the instruments mentioned earlier.

The total investments in equity and equity related instruments (including fully

convertible debentures, convertible portion of partially convertible debentures and

tradeable warrants) made by a Foreign Institutional Investor in India, whether on his

own account or on account of his sub- accounts, should be at least seventy per cent of

the aggregate of all the investments of the Foreign Institutional Investor in India,

made on his own account and through his sub-accounts.

The cumulative debt investment limit for FII investments in Corporate Debt is USD

15 billion. The amount was increased from USD 6 billion to USD 15 billion in March

2009.

USD 8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding

paltform while the remaining amount is allocated on a ‘first come first served’ basis

subject to a ceiling of Rs.249 cr. per registered entity.

The debt investment limit for FIIs in government debt in G-secs currently capped at

$5 billion and cumulative investments under 2% of the outstanding stock of G-secs

and no single entity can be allocated more than Rs. 1000 cr of the government debt

limits.

With regard to investments in the secondary market SEBI states that:

the Foreign Institutional Investor is allowed to transact business only on the basis of

taking and giving deliveries of securities bought and sold

short selling in securities is not allowed. However, in December 2007, abroad

regulatory framework enabling short selling by FIIs was put in place. Which

stipulated that naked short selling was not permitted and settlement of securities sold

short would be through a mechanism for borrowing of securities

FIIs are not permitted to short sell equity shares which are in the caution list of RBI;

Equity shares can be borrowed by FIIs only for the purpose of delivery into short sale.

No transactions on the stock exchange can be carried forward

Transaction of business in securities can be carried out only through stock brokers

who has been granted a certificate by the Board


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A Foreign institutional Investor or a sub-account having an aggregate of securities

worth rupees ten crore or more, as on the latest balance sheet date, can settle their

only through dematerialised securities.

Securities have to be registered in the name of the Foreign Institutional Investor, if he is

making investments on his own behalf or in his name on account of his sub-account, or in the

name of the sub-account, in case he is investing on behalf of the sub-account.

The purchase of equity shares of each company by a Foreign Institutional Investor investing

on his own account can not exceed ten percent of the total issued capital of that company.

Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign

registered as sub accounts of FII cannot exceed 5% of paid up capital. All FIIs and their sub-

accounts taken together cannot acquire more than 24% of the paid up capital of an Indian

Company. An Indian Company can raise the 24% ceiling to the Sectoral Cap / Statutory

Ceiling by passing a resolution by its Board of Directors followed by passing a Special

Resolution to that effect by their General Body.

For FIIs investing in the equity shares of a company on behalf of his sub-accounts, the

investment on behalf of each such sub-account can not exceed ten percent of the total issued

capital of that company.

SEBI has also placed the position limits in derivatives contracts :

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:

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 is 20% of the market wide limit.

For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position

limit in such stock is Rs. 50 Cr.

FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index is Rs. 250

Crore or 15 % of the total open interest of the market in index options, whichever is higher,


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per exchange. This limit is applicable on open positions in all option contracts on any

underlyring index.

FII Position limits in Index futures contracts

i. FII position limit in all index futures contracts on a particular underlying index is

Rs. 250 Crore or 15 % of the total open interest of the market in index futures,

whichever is higher, per exchange.

ii. This limit is applicable on open positions in all futures contracts on a particular

underlying index. In addition to the above, FIIs can take exposure in equity index

derivatives subject to the conditions that :

iii. Short positions in index derivatives (short futures, short calls and long puts)

cannot exceed (in notional value) the FII’s holding of stocks.

iv. Long positions in index derivatives (long futures, long calls and short puts) can

not exceed (in notional value) the FII’s holding of cash, government securities, T-

Bills and similar instruments.

FII Position Limits in Interest rate derivative contracts

i. At the level of the FII - The notional value of gross open position of a FII in

exchange traded interest rate derivative contracts is US $ 100 million.

ii. In addition to the above, FIIs cany 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.

iii. At the level of the sub-account - The position limits for a Sub-account in near

month exchange traded interest rate derivative contracts is the higher of: Rs. 100

Cr Or 15% of total open interest in the market in exchange traded interest rate

derivative contracts.

Investments by the Foreign Institutional Investor are also be subject to Government of India

Guidelines.

A foreign Institutional Investor or sub-account may lend securities through an approved

intermediary in accordance with the stock lending scheme of the Board.

Regulations for Portfolio Investments by NRIs/PIOs include:

Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can purchase/sell

shares/convertible debentures of Indian companies on Stock Exchanges under


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Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a

designated branch of a bank, which deals in Portfolio Investment. All sale/purchase

transactions are to be routed through the designated branch.

An NRI or a PIO can purchase shares up to 5% of the paid up capital of an Indian

company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid

up value of the company. (This limit can be increased by the Indian company to 24%

by passing a General Body resolution).

The sale proceeds of the repatriable investments can be credited to the NRE/NRO etc.

accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can

be credited only to NRO accounts.

The sale of shares is subject to payment of applicable taxes.

For ascertaining the track record in case of a newly established fund, the track record of the

investment manager of the fund who has promoted it will be considered. Such investment

manager has to furnish the details in respect of disciplinary action, if any, taken against it.

University Funds, Endowments, Foundations, Charitable Trusts and Charitable Societies may

be considered for registration even if they are not regulated by a foreign regulatory authority.

An asset management company, investment manager or advisor or an institutional portfolio

manager set up and / or owned by Non Resident Indians are eligible to be registered as FII.

However, they shall not invest their proprietary funds.

Additional restrictions for FII/sub-account registration

Nominee Company and a Power of Attorney holder are not eligible to be registered as

FII. Where the applicant for FII or sub-account registration is a University fund,

Endowments, Foundations or Charitable trusts or charitable societies, SEBI will also

consider whether the applicant has been serving public interest. Applicants for

registration as sub-account in category of “foreign corporate” and “foreign individual”

will have to meet the specified requirements. These are as under:

In case of a “Foreign Corporate” means a body corporate incorporated outside India

and fulfils the following conditions:

Its securities are listed on a stock exchange outside India;

It has asset base of not less than US $ 2 billion;

It had an average net profit of not less than US $ 50 million during the 3 financial

years preceding the date of the application.


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In case of a “ Foreign Individual” means a foreigner who fulfills the following

conditions:

Has a net worth of not less than US $ 50 million;

Holds the passport of a foreign country for a period of at least 5 years preceding the

date of application;

Holds a certificate of good standing from a bank;

The client of the FII or any other entity which belongs to the same group as the FII,

for a period of at least 3 years preceding the date of the application.

Conditions for issuance of offshore derivative instruments

Offshore derivative instruments are issued only to persons

who are regulated by an appropriate foreign regulatory authority;

after compliance with the stated ‘know your client’ norms


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Offshore Derivatives Instruments (Participatory Notes)Offshore derivatives instruments (ODIs) are investment vehicles used by overseas investors

not registered with the SEBI for an exposure in Indian equities or equity derivatives. They

may not be registered with SEBI, either because they do not want to, or due to regulatory

constraints for which they are not allowed to. It is a registered FII that makes purchases on

behalf of these investors and the FII s affiliate issues those ODIs. ODIs include equity-linked

notes, capped return notes, participating return notes, etc.

Participatory Notes (P-Notes) is one of the categories of ODIs. The underlying asset class

could be stocks, and returns would be directly related to the appreciation in prices of those

stocks. India based brokerages to buy India-based securities / stocks and then issue

participatory notes to foreign investors. Any dividends or capital gains collected from the

underlying securities go back to the investors. Since international access to the Indian capital

market is limited to FIIs. The market has found a way to circumvent this by creating

participatory notes

Eligibility for InvestmentAny 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;

Any entity that is regulated, authorized 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 authorized

but also be regulated by the aforesaid regulatory bodies;

Any entity that is regulated, authorized or supervised by a securities or futures commission,

such as the Financial Services Authority (UK), the Securities and Exchange Commission, the

Commodities Futures Trading Commission, 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;

Any entity that is a member of securities or futures exchanges such as the New York Stock

Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stock Exchange, NASD

(Sub-account) or other similar self-regulatory securities or futures authority or commission

within any country, state or territory provided that the aforesaid organizations which are in


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the nature of self regulatory organizations are ultimately accountable to the respective

securities / financial market regulators.

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 above criteria

P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The

registered FII looks after all the transactions, which appear as proprietary trades in its books.

However, it is not obligatory for the FIIs to disclose their client details to the SEBI, unless

asked specifically. P-Notes with stocks as underlying assets can be issued by an FII, subject

to a limit of 40% of the overall assets under the custody of that FII

The Issues with P-NotesAs per SEBI rules, the FII issuing ODIs/P-Notes should know the eventual beneficiary to

whom the instruments were being issued to. Though FIIs, which had to comply with the

‘know-your customer’ norms, are usually aware of the identity of the investor to whom the

note was issued, it is possible for the investor to sell the notes to another player resulting in

multi-layering. There were apprehensions among tax officials that PNs were becoming

popular among Indian money launderers who used the instrument to first take out funds out

of the country, through the hawala route, and then get it back using P Notes. Consequently,

there were fears that P-Notes are being used as a vehicle by promoters, market operators, and

politicians to repatriate illegitimate funds parked abroad. There were also concerns that too

much money flowing into the derivatives segment through the P-Note route is adding to

volatility, and pressures on the currency. There were also concerns that terrorist organizations

were channelling money through these offshore derivatives instruments and using the profits

to fund their activities.

In October 2007, SEBI proposed a ban on fresh issue of PNs which had equity derivatives are

the underlying assets, and required the existing positions to be unwound over a period of the

following 18 months. The total amount for which P-notes could be issued by each FII was

also capped at 40 per cent of the total assets under the custody of the respective FII. This was

a step to ensure transparency in the flow of funds.

Despite the P-note ban, Indian stock markets continued to rally in the period following this

move for a full four months until January 2008. This was when the credit crisis unleashed

itself first in the US and then spread into a global credit and liquidity cru

reversal in FII flows from the Indian market.

As global liquidity dried up, FII flows reduced dramatically. In an effort to

situation, SEBI announced the lifting of all its earlier restrictions on p

Foreign institutional investors can now issue P

per cent cap on P-note issue was rem

up their positions in Indian stocks.

The SEBI’s move to ease the curbs on

and arrests the outflow of funds from the Indian Capital Market. The reversal, thou

immediate effect, hadn’t helped rever

the last few months of 2009 that the stock markets are beginning to look up again.

The lifting of the ban has, however, not lead to an increase in the number of P

investing in the country. P-note investments had hit peak in September 2007 with 51 per cent

of the Assets under management of FIIs entering through the P

investments through P-notes route witnessed a sharp decline from 48% in October 2007 to

29.8% in October 2008 when there were restrictions on this route, the total share of P

investments fell from 19.8 per cent in October 2008 to 15.5 per cent in August 2009.

The following graph shows the proportion of Assets under management of FIIs coming

through the Participatory Notes route.

0

10

20

30

40

50

60

PN

Inv

estn

ents

as

% o

f F

II A

UM


September 14, 2009

18

itself first in the US and then spread into a global credit and liquidity cru

reversal in FII flows from the Indian market.

As global liquidity dried up, FII flows reduced dramatically. In an effort to

situation, SEBI announced the lifting of all its earlier restrictions on p-notes in October 2008.

ign institutional investors can now issue P-notes with derivative as underlying. The 40

was removed and P Note holders are no longer required to wind

up their positions in Indian stocks.

move to ease the curbs on P-Notes was aimed at shoring up market sentiments

the outflow of funds from the Indian Capital Market. The reversal, thou

n’t helped reverse the direction of fund flows immediately. It is only in

hs of 2009 that the stock markets are beginning to look up again.

, however, not lead to an increase in the number of P

note investments had hit peak in September 2007 with 51 per cent

ts under management of FIIs entering through the P-Notes route

notes route witnessed a sharp decline from 48% in October 2007 to

29.8% in October 2008 when there were restrictions on this route, the total share of P



through the Participatory Notes route.

itself first in the US and then spread into a global credit and liquidity crunch, triggering a

As global liquidity dried up, FII flows reduced dramatically. In an effort to contain the

notes in October 2008.

notes with derivative as underlying. The 40

oved and P Note holders are no longer required to wind

Notes was aimed at shoring up market sentiments

the outflow of funds from the Indian Capital Market. The reversal, though it took

se the direction of fund flows immediately. It is only in

hs of 2009 that the stock markets are beginning to look up again.

, however, not lead to an increase in the number of P-Notes

note investments had hit peak in September 2007 with 51 per cent

Notes route While Portfolio

notes route witnessed a sharp decline from 48% in October 2007 to

29.8% in October 2008 when there were restrictions on this route, the total share of P-note




September 14, 2009

19

Hedge Funds and P-Notes:A significant portion of the global portfolio investments made in India have come in via the

hedge fund route Hedge funds are not regulated in their home country. Therefore they do not

qualify for registration as an FII under SEBI’s regulations. Hedge funds and other foreign

investors, due to confidentiality concerns among others, have used the P-notes route.

Hedge fund managers wanting exposure to Indian securities have two ways to do so. The first

is to register with SEBI as an FII, through a Mauritius based operating company. This is not

feasible for a hedge fund, since it has a high probability of being denied and also would not

benefit from the regulatory and disclosure requirements that FIIs must comply with.

Moreover, due to investment restrictions on FIIs, registering as an FII would not be in-line

with investment strategies and styles that most hedge funds follow.

The most common route taken by hedge fund managers wanting exposure to Indian securities

is via the P-notes route. For example, a North American hedge fund wanting to hold Indian

securities would place an order with a large brokerage house for P-notes in the underlying

security. The brokerage house would have an operation in Mauritius, which in turn would be

registered as an FII with SEBI. The order placements, the issuance of the P-notes and the

final clearing of the trade would take place through internal systems of the brokerage house.

The large broker in essence would act like the market itself.


September 14, 2009

20

Double Taxation Avoidance Agreement (DTAA)A major portion of international capital flows entering the Indian economy is aided by

taxation laws and systems among countries like the Double Taxation Avoidance Agreement.

The phenomenal growth in international trade and commerce and increasing interaction

among nations, citizens, residents and businesses of one country has extended their sphere of

activity and business operations to other countries. A person earning any income has to pay

tax in the country in which the income is earned (as Source Country) as well as in the country

in which the person is resident. As such, the income is liable to be taxed in both the countries.

To avoid this hardship to individuals and also with a view to ensure that national economic

growth does not suffer, the Central government under Section 90 of the Income Tax Act has

entered into Double Tax Avoidance Agreements (DTAA) with other countries.

Definition: Double taxation can be defined as the levy of taxes on income or capital in the

hands of the same tax payer in more than one country, in respect of the same income or

capital for the same period

DTAAs provide for the following reduced rates of tax on dividend, interest, royalties,

technical service fees, etc., received by residents of one country from those in the other.

Where total exemption is not granted in the DTAAs and the income is taxed in both

countries, the country in which the person is resident and is paying taxed, the credit for the

tax paid by that person in the other country is allowed.

DTAT with MauritiusThe Indo-Mauritius DTAT was first signed in 1983. The main provision of the agreement

was that no resident of Mauritius would be taxed in India on capital gains arising out of sale

of securities in India. The treaty gives capital gains exemption for investments if routed via

Mauritius. The treaty remained on paper until 1992 when FIIs were allowed into India. The

same year, Mauritius passed the Offshore Business Activities Act which allowed foreign

companies to register in the island nation for investing abroad. Registering a company in

Mauritius has obvious advantages such as, total exemption from capital gains tax, quick

incorporation, total business secrecy and a completely convertible currency.

For foreign investors willing to invest in India, it made sense to set up a subsidiary in

Mauritius and route their investments through that country. By doing so, they would avoid

paying capital gains tax all together -- India won't tax because the company is based in


September 14, 2009

21

Mauritius and Mauritius had anyway exempted investors from capital gains tax.

In the last few years Mauritius has emerged as the largest foreign investor [analysts estimate

about 25% of all inbound FII money is routed thorough Mauritius] in India thus clearly

indicating that it has become a tax haven for foreign investors. This indicates the route

investors are taking into India to avoid otherwise due taxation.

There are allegations that foreign companies are using ‘notional residence’ in Mauritius to

avoid paying taxes in India. It has even been claimed that tax losses to India are more than

incoming investments. In spite of the controversies generated, it has been kept in its present

form. As it was felt that changing its clauses would lead to flight of capital from the country,

slowing down foreign investment inflows and may lead to a significant stock market crash.

It is reported that Indians used Mauritius-registered companies and Mauritius offshore trusts

to hold assets abroad beyond the reach of Indian tax laws. This is called 'round-tripping',

where Indians re-route their money stashed abroad through the Mauritius route.

It is now hoped that the Treaty, duly modified, will help encourage Indian investments in

Mauritius, rather than the other way around. It is expected that Mauritius will agree to the

changes as having signed similar DTATs with other ASEAN countries, it will be able to

highlight its attraction as a tax haven and also plug gaps to stop both ‘round tripping’ and

‘treaty shopping’.

The list of FIIs that have preferred to invest in India via Mauritius includes Aberdeen Asset

Management, Citi Group Global, CLSA Merchant Bankers, Deutsche Securities, Emerging

Markets Management LLC, Fidelity Assets Management, Golden Sachs Investments, HSBC

Global Investment, JP Morgan Fleming Asset Management, Merrill Lynch Investment

Managers and UBS Securities Asia

DTAA with Singapore – Lesson Learnt Under the India Singapore DTAA (2005), a Singapore tax resident is not subject to Indian

taxes on capital gains derived from the sale of shares in an Indian company. The changes

introduced in 2005 put the Singapore DTAA on par with the India-Mauritius DTAA with

respect to tax exemption on capital gains but include two important limitations on beneficial

treatment for capital gains:

First, investors from Singapore do not receive an exemption from Indian capital gains tax if

the affairs of the company were arranged with the "primary purpose" of taking advantage of


September 14, 2009

22

the capital gains exemption (the so-called "limitation on benefits"). Specifically, a

"shell/conduit" company cannot avail itself of the capital gains exemption, but provides a safe

harbour for companies listed in India or Singapore or a company with more than S$200,000

or Rs. 5 million of total annual expenditures on operations in Singapore in the preceding 24-

month period.

A second important limitation ties the fate of the capital gains exemption under the Singapore

DTAA to the India-Mauritius DTAA. Investors from Singapore will lose their capital gains

exemption if India and Mauritius amend their DTAA to take away the corresponding

exemption.

The Indian Government has entered into similar DTAAs with 79 countries including Cyprus

(renegotiated now), UAE, Spain, Luxembourg etc. and other courtiers such as Saudi Arabia

and Kuwait are eager to have such agreements with India in place.


September 14, 2009

23

Advantages and Disadvantages of FIIsFII flows into a country are associated with several advantages and disadvantages.

The advantages of FII flows into the country include:

Advantages Enhanced flows of equity capital

FIIs have a greater appetite for equity than debt in their asset structure. The opening up

the economy to FIIs has been in line with the accepted preference for non-debt creating

foreign inflows over foreign debt. Enhanced flow of equity capital helps improve

capital structures and contributes towards building the investment gap.

Managing uncertainty and controlling risks

FII inflows help in financial innovation and development of hedging instruments. Also,

it not only enhances competition in financial markets, but also improves the alignment

of asset prices to fundamentals.

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.

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. Also,

institutionalization increases dividend payouts, and enhances productivity growth.

Disadvantages Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of

demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of

demand created

Problems for small investor: The FIIs profit from investing in emerging financial stock

markets. If the cap on FII is high then they can bring in huge amounts of funds in the

country’s stock markets and thus have great influence on the way the stock markets


September 14, 2009

24

behaves, going up or down. The FII buying pushes the stocks up and their selling shows

the stock market the downward path. This creates problems for the small retail investor,

whose fortunes get driven by the actions of the large FIIs.

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.

Hot Money: "Hot money" refers to funds that are controlled by investors who actively

seek short-term returns. These investors scan the market for short-term, high interest

rate investment opportunities. "Hot money" can have economic and financial

repercussions on countries and banks. When money is injected into a country, the

exchange rate for the country gaining the money strengthens, while the exchange rate

for the country losing the money weakens. If money is withdrawn on short notice, the

banking institution will experience a shortage of funds.

Trends in FIIsIn 1993, when investments in FII s were introduced, Pictet Umbrella Trust Emerging

Markets’ Fund, an institutional investor from Switzerland,

Indian market. While in 1994, no new registrations were reported, between 1995 and 2003,

an average of 51 new FIIs began operations in the country each year. The graph below clearly

indicates the steep increase in number of FI

to the number of registered FII’s at the end of each calendar year). Currently, there are 1,695

registered FIIs and 5,264 registered sub

Since 1993 when FII’s were first allowed to enter the India, there has always been a

preference towards investing in equity than debt. The following graph shows the debt and

equity FII flows from

Figures in $ mn 1

517637

0200400600800

10001200140016001800

2003 2004

8698.4

1675.2 1433.6-48.3 48.6 27.1

-15000

-10000

-5000

0

5000

10000

15000

20000Net

Investment

Debt


September 14, 2009

25

In 1993, when investments in FII s were introduced, Pictet Umbrella Trust Emerging

Markets’ Fund, an institutional investor from Switzerland, was the only FII to enter the



indicates the steep increase in number of FIIs since the year 2003. (The data in the chart refer


registered FIIs and 5,264 registered sub-accounts (As on 11th September, 2009).



637823

993

1219

2005 2006 2007 2008

Number of Registered FIIs

1433.62806.6

749

6628.58669.3

10706

8106.2

17654.7

-11974

27.1 37.1 11.71001.3 699.8 1224.8 882.5

2340.2 2636.1

Year

Debt and Equity FII Flows

In 1993, when investments in FII s were introduced, Pictet Umbrella Trust Emerging

was the only FII to enter the



Is since the year 2003. (The data in the chart refer


accounts (As on 11th September, 2009).



15941695

2008 2009

11974

8748.2

2636.1

-158.9

Equity

Debt

Trends in Equity There has been a steep rise in FIIs in Equity beginning 2003. Except for 2008, since 1993,

only once have foreign investors turned net sellers. This has primarily been on account of

rise in global liquidity conditions primarily driven by

affected to counter recessionary condition post the dot

towards US, for its huge current account deficit and growth of the ‘emerging’ economies like

China, India etc. FIIs have been progress

since 2003, the year that saw the beginning of the bull

2008, when the recession hit. Liquidity dried up. So did the risk

emerging markets.

The year 2009 has seen a net inflow of USD 8748.2 million in equities so far. The

investments in equity stand at USD 63902 million or Rs. 272772.70 crores. The graph below

shows the trend in FII sales and purchases over the 1999

below, the FII activity has undertaken a beating in 2009 with lower purchases and higher net

sales.

Trends in Debt Flows Investments in Debt have been low as compared to Equity owing to the following reasons:

First, most of the investments in Government securities remain restricted in India owing to

persistent budgetary deficits. The above 80% public debt is significant cause for concern.

Second, debt tolerance of foreign investors in emerging market economies has been low,

especially during times of credit crunch.

-40,000

-20,000

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

Eq

uit

y F

II f

low

s in

Rs.

Cro

res


September 14, 2009

26

There has been a steep rise in FIIs in Equity beginning 2003. Except for 2008, since 1993,


rise in global liquidity conditions primarily driven by low interest rates in US that was

affected to counter recessionary condition post the dot –com bubble, a rising aversion


China, India etc. FIIs have been progressively raising their investments in Indian market

since 2003, the year that saw the beginning of the bull-run in the Sensex. This continued until

2008, when the recession hit. Liquidity dried up. So did the risk-aversion of investors towards

The year 2009 has seen a net inflow of USD 8748.2 million in equities so far. The


shows the trend in FII sales and purchases over the 1999- 2009 period.


Investments in Debt have been low as compared to Equity owing to the following reasons:

nts in Government securities remain restricted in India owing to



ring times of credit crunch.

There has been a steep rise in FIIs in Equity beginning 2003. Except for 2008, since 1993,


low interest rates in US that was

com bubble, a rising aversion


ively raising their investments in Indian market

run in the Sensex. This continued until

aversion of investors towards

The year 2009 has seen a net inflow of USD 8748.2 million in equities so far. The cumulative


2009 period. As evident from


Investments in Debt have been low as compared to Equity owing to the following reasons:

nts in Government securities remain restricted in India owing to



Purchase

Sales

Net Purchase

Thirdly, low returns in the debt market compared to attractive returns in the equity market

encouraged greater flows to domestic equity markets.

The corporate debt market is also underdeveloped. Weak market infrastructure lim

liquidity and the price discovery process.

However, the period 2003-08 witnessed relatively high debt flows as compared to the

preceding periods into currency bond markets owing to low inflation and high global

liquidity. FII investments into Debt have

2009 and USD 544.80 million in the first ten days of September, 2009. Cumulative debt FII

flows till 11th September stand at the level of USD 6252.30 million or Rs. 26639.10 crores.

The graph shows flows into debt from 1999 to 2009.

FIIs, Stock Markets and the Exchange RateFIIs are a major determinant of the direction in which the stock market moves. The following

graph shows the movement of the BSE Sensex along with net FII flows from January 2004 to

March 2005.

-10,000.00

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

FII

Deb

t fl

ows

( in

Rs.

cro

res)


September 14, 2009

27


encouraged greater flows to domestic equity markets.

The corporate debt market is also underdeveloped. Weak market infrastructure lim

liquidity and the price discovery process.

08 witnessed relatively high debt flows as compared to the


liquidity. FII investments into Debt have been USD 514.9 million for in the month of August


September stand at the level of USD 6252.30 million or Rs. 26639.10 crores.

nto debt from 1999 to 2009.

FIIs, Stock Markets and the Exchange RateFIIs are a major determinant of the direction in which the stock market moves. The following


Purchase Sales Net Purchase


The corporate debt market is also underdeveloped. Weak market infrastructure limits

08 witnessed relatively high debt flows as compared to the


been USD 514.9 million for in the month of August


September stand at the level of USD 6252.30 million or Rs. 26639.10 crores.

FIIs are a major determinant of the direction in which the stock market moves. The following


Net Purchase

The Sensex achieved a peak near

investments into the Indian markets as can be seen from the graph. FIIs profit from investing

in emerging financial stock markets. The FII buying pushes the stocks up and their selling

shows the stock market the downward path. The ma

selling.

FIIs also have an impact on to the foreign exchange rate. For every foreign currency inflow

that FIIs bring in, there is demand for the domestic currency (Rupee).Consequently an

increase in the demand for Ru

to the dollar. The following chart explains the same trend in the recent months.

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000N

et F

II f

low

s( in

US

D m

n)

0

5000

10000

15000

20000

25000

Relationship

Sen

sex


September 14, 2009

28

The Sensex achieved a peak near the end of 2007.This also coincided with huge FII



shows the stock market the downward path. The markets were heavily affected by the FIIs



increase in the demand for Rupee creates pressure for the currency to appreciate with regard


Relationship between Sensex(FIIs) and Exchange Rates

oincided with huge FII



rkets were heavily affected by the FIIs



pee creates pressure for the currency to appreciate with regard


Sensex

0

10

20

30

40

50

60

Sensex

Re-$ Rate

Re-

$ Exch

ange

Ra te


September 14, 2009

29

The period between January 2007 and June 2007 witnessed an approximate 10% appreciation

of the Rupee as the Sensex rose in response to FIIs. In the graph we see the gap widening.

During the whole period between April 2008 and February 2009, a fall in Sensex due with

FII outflows is associated with the depreciation of the Rupee. Considering that Sensex (stock

market) movements are largely driven by movements in FIIs, the relationship between

exchange rate movements and foreign institutional inflows become evident.


September 14, 2009

30

Recent Developments

FII IndexFIIs are the most successful investors in India and their investments and also determine the

direction of Indian stock market. The FIIs have outperformed the Domestic Institutions

Investors by over 10 per cent in the last five years. The FIIs have also outperformed the

corporate investors.

A new index, namely the Instanex FII index came into existence to compete with the Nifty

and Sensex. Instanex FII index tracks 15 stocks in which FII funds have been invested. These

stocks account for 55 per cent of the market cap of the FII holdings in India and the top 100

stocks they own account for 90 per cent of their holdings in India. The Index has been

developed by and is owned by Instanex Capital Consultants Pvt. Ltd., Mumbai, India.

The Index comprises the top 15 companies by value of FII holdings subject to

Stock future listed in India,

Restriction of company weight to 20%, industry to 30% and principal shareholder to 30%.

The companies included in the Index and their weights are as follows:

RIL : 16.24% Bharti Airtel : 13.36% HDFC: 12.56% Infosys: 11.66% ICICI Bank :

8.45%

BHEL : 5.44% HDFC Bank : 5.36% ITC : 4.59% HUL : 4.12% ONGC:

4.09%

SBI : 3.77% NTPC : 2.97% L&T :2.69% TCS: 2.57% Sun Pharma :

2.13%

The Index weights are based on adjusted market value of holdings. The Index is adjusted for

all corporate actions, including bonus, split and rights. Reviews are conducted quarterly and

companies are deleted from the Index if they are not among the top 20 FII holdings. The base

date is September 30, 2003 (=100).


September 14, 2009

31

FII investments through QIPsQIPs are private placements or issuances of certain specified securities by Indian listed

companies to qualified institutional buyers in accordance with the provisions of SEBI

guidelines. Qualified Institutional placements or QIPs were introduced in mid-2006.

Indian companies that are listed on stock exchanges having nationwide terminals — the BSE

and NSE have been raising capital through the QIP route. Quarterly Institutional buyers are

preferred primarily because these entities have a large risk appetite, possess the general

expertise and have the experience to make an informed decision.

In August 2008, SEBI liberalised the pricing conditions for QIPs by reducing the period of

reckoning to an average of two weeks’ stock price, prior to the relevant date, against the

earlier requirement of taking the higher of the previous six months’ or 15 days’ average price.

The pre-existing slowdown in the markets led to attractive valuations for the investors.

Companies have taken advantage of this revision in pricing guidelines .Unitech, raised Rs

1,621 crores in April 2009 at Rs 38.50 per share, and again raised Rs. 2,760 crores in July

2009 at Rs 81 per share. Other companies which successfully raised capital through QIPs

were HDIL, Shobha Developers, Network 18, Dewan Housing and Bajaj Hindustan. Most of

the companies which came out with QIPs were in the real-estate/infrastructure sector.

However, some companies like GMR Infrastructure were not so successful and had to

withdraw their issue and GVK Power and Infrastructure had to scale down by nearly 60%

due to problems in the valuations. Domestic institutional investors, especially life insurers

kept away from the QIPs on valuation concerns. However, FIIs which were net sellers had

purchased Rs 9,500 crores in the same period.

This led several FIIs to pick up the target stocks via QIP before the July 6th Budget and

offload the same after the budget session. As per a CRISIL study, 10 out of 13 QIPs are

currently quoting below the offer price. Since most of QIPs were in the reality and

infrastructure sectors, one explanation is that FIIs came in expecting some quick gains from

significant sops to the infrastructure and housing sectors in the Budget. It is also possible that

the rush for QIPs was driven largely by short-term considerations, where the FIIs hedged

their bets by taking short positions in the issuers’ stock even as they bought into the offers.


September 14, 2009

32

New sources of FII fundsThe Securities and Exchange Board of India is in talks with the Cayman Islands Monetary

Authority (Cima), over allowing funds based in the Caribbean into the country. Cayman

Islands is one of the world’s largest tax havens and a lot of global hedge funds are based out

of Cayman Islands Sebi has received numerous applications from Cayman-based funds since

June when Cima was admitted as a full member of the international body of securities market

regulators, the International Organisation of Securities Commissions (Iosco),

Iosco's constituents regulate more than ninety percent of the world's securities markets. Funds

from Cayman Islands were usually not favoured by SEBI owning to lack of transparency and

difficulty in establishing the owner base. Consequently, these investments were viewed

unfavourably and any Cayman fund seeking to invest in India had to be carefully examined.

Post Cayman’s admission to Iosco, Sebi is now determining which grades of investment

funds can be admitted expeditiously and which should be examined more carefully.

Presently, there are 19 registered foreign institutional investors from Cayman Islands, taking

the total to 19. The two recent additions have been Fir Tree Capital Opportunity Master Fund

and Fir Tree Value Master Fund. The fund base of Cayman Islands is huge. There are about

9870 funds based there. Indian markets can expect more inflow from Cayman Island if SEBI

agrees to let them come in.


September 14, 2009

33

Recommendations Increase cap on G-Sec Bond Markets :

Currently, the cap on FII investments in the bond market is USD 6 Billion. As per the new

budget, proposes to borrow Rs.4.5 lakh crore in 2009-10 to support its infrastructure and

other developmental projects. This could be opened up to the FIIs so that they can take part in

India’s hitherto almost closed debt market. The Indian debt markets are not fully developed

and see low volumes. The lifting of the cap on FIIs will increase the traded volumes and it

will also help in preventing the ‘crowding out’ of investment for private enterprises.

Allow dollar settlements in India :

The suggestion by SEBI to permit dollar settlements for FIIs would revolutionise the way in

which they invest in the country. This will help mitigate risks of currency fluctuations for

FIIs, and help in improve the volume and liquidity of the derivatives market.

With dollar settlements, many participants, who want to take exposure to Indian markets

through index buying, will be able to participate freely. This, in turn, will give stability to

Indian markets as there will be buying of underlying stocks by the sellers of these contracts to

FIIs.

At present, settlements in India are done in rupee denominations. As a result, a number of

FIIs, who intend to trade in Nifty futures, take the Singapore route where CNX Nifty index

futures are traded on SGX.

About 50 per cent of the total open interest (OI) build-up in Nifty futures takes place on the

SGX, which allows settlements in US dollar. This enables different types of FIIs to operate

there. Also, low transaction costs due to the absence of securities transaction tax, stamp duty

and P-note complications have resulted in a gradual shift of FIIs into offshore markets.

Settlements in dollar would also help in reducing the volatility in dollar-rupee conversion

value caused due to FII flows. Each time a settlement is done, a seller of futures contracts to

an FII would buy an equivalent amount of underlying stocks to hedge his/her exposure due to

the sale. This would increase the trading volume and liquidity of Indian markets, once dollar

settlement is allowed.

Stricter implementation of regulation to curb p-notes etc.


September 14, 2009

34

To prevent the misuse of the participatory notes, there should be stricter implementation of

the regulations. Tough implementation of KYC norms should be done. In the long run, the

group is of the opinion that registration procedures for FIIs should be made simpler after

which P-Notes should be done away with.

Referenceswww.sebi.gov.in

www.rbi.org

www.livemint.com

http://www.economist.com

http://www.ficci.com/media-room/speeches-presentations/2009/jan/petro/Bhashit%20Dholakia.ppt

http://blogs.livemint.com/blogs/livelounge/archive/tags/Participatory%20Notes%20policy%20SEBI/default.aspx

http://www.business-standard.com/india/storypage.php?autono=339221

fii in india sept 09

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