group-6 presentation on fii

7/30/2019 Group-6 Presentation on FII

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Foreign InstitutionalInvestment (FII)

A Presentation by:

Apoorv Srivastav 08Alok Kavthankar 34Nishanth Joseph 52Pankaj Kumar Bothra 53Priyojeet Kumar 61


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2

Road Map for Presentation

What is FII

FII Guidelines

Distinction between FDI & FII

Background


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Background: India Transformed !!

India -- the largest Democracy - one of the fastest growing economies in the World!

Slow rate of growth

Bureaucratic

Protected and slow

Small consumer markets

Weak infrastructure

Yesterday

Today

Strong macro economic fundamentals

Encouraging foreign investment

Outsourcing destination

Growing consumerism

Impetus on infrastructure development


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YESTERDAYS INDIA

A major development in our country post 1991 has been

liberalization of the financial sector, especially that of capitalmarkets.

Our country today has one of the most prominent andfollowed stock exchanges in the world. Further, India has alsobeen consistently gaining prominence in various internationalforums.


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ADVANTAGES INDIA HAS TO OFFER

Stable democratic environment over 60 years of independence Large and growing market

World class scientific, technical and managerial manpower

Cost-effective and skilled labour

Abundance of natural resources

Large English speaking population

Well-established legal system with independent judiciary

Developed banking system and vibrant capital market

Well developed accountancy, legal, actuarial and consultancyprofession

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What is FII ?

Foreign Institutional Investment (FII):

1. FII is Foreign Institutional Investment: It is investment made by foreign Mutual Fundsin the Indian Market.

2. FII denotes all those investors or investment companies that are not located within theterritory of the country in which they are investing.

3. SEBIs definition of FIIs presently includes foreign pension funds, mutual funds,charitable/endowment/university funds etc. as well as asset management companiesand other money managers operating on their behalf.

4. Foreign investment banks are not permitted to directly invest in shares on the Indianstock exchange makes investments on behalf of foreign investors, referred to as sub-accounts.


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Distinction between FDI and FII

FDI

1. It is long-term investment

2. Investment in physical assets

3. Aim is to increase enterprise capacity or

productivity or change management

control

4. Leads to technology transfer, access to

markets and management inputs

5. FDI flows into the primary market

6. Entry and exit is relatively difficult

7. FDI is eligible for profits of the company8. Does not tend be speculative

9. Direct impact on employment of labour

and wages

10.Abiding interest in mgt.

FII

1. It is generally short-term investment

2. Investment in financial assets

3. Aim is to increase capital availability

4. FII results in only capital inflows

5. FII flows into the secondary market

6. Entry and exist is relatively easy

7. FII is eligible for capital gain8. Tends to be speculative

9. No direct impact on employment of labour

and wages

10.Fleeting interest in mgt. 7


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Overview


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What are Foreign Investors

looking for?

Good projects

Demand Potential

Revenue Potential

Stable PolicyEnvironment/Political Commitment

Optimal Risk Allocation

Framework

Rate of interest

Speculation

Profitability

Costs of production

Economic conditions

Government policies

Political factors

Factors affecting foreign

investment

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FIIs may invest in:

securities in the primary and secondary markets (shares,

debentures, warrants of listed and unlisted companies)

units issued by domestic mutual funds

dated Government securities

derivatives traded on a recognized stock exchangecommercial paper

debt instruments provided a 70/30 equity/debt ratio is

maintained


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Foreign Institutional Investors

FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up sharecapital of an Indian company

This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indiancompany by passing a board resolution/shareholder resolution

FIIs can purchase shares through open offers/private placement/stock exchange

Shares purchased by FII through stock exchange cannot be sold through a privatearrangement

Proprietary funds, foreign individuals and foreign corporates can register as a sub- accountand invest through the FII. Separate limits of 10% / 5% is available for the sub-accounts

FIIs can raise money through participatory notes or offshore derivative instruments forinvestment in the underlying Indian securities

FIIs in addition to investment under the FII route can invest under FDI route

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FII which based the pressure on the rupee from the balance of payments position andlowered the cost of capital to Indian business.

FIIs are the trendsetters in any market. They were the first ones to identify the potential

of Indian technology stocks. When the rest of the investors invested in these scrips, theyexited the scrips and booked profits.

Rolling settlement was introduced at the insistence of FIIs as they were uncomfortablewith the badla system.


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Investment limits on Equity &Debt investments by FII

FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of anIndian company.

Investment on behalf of each sub-account shall not exceed 10% of total issued capital of anIndia company.

For the sub-account registered under Foreign Companies/Individual category, the investmentlimit 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.

investment limits on debt investments by FII

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 S $ 1.75 billion

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

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PARTICIPATORY NOTES

What is P-Note:

PNs are instruments issued by registered FIIs to overseas investors, who wish to invest in theIndian stock markets without registering themselves with SEBI.

Why is P-Note:

More than 30% of foreign institutional money coming into India is from hedge funds. Hedgefunds, which thrive on arbitrage opportunities, rarely hold a stock for a long time.

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

To monitoring investments through P Notes, Sebi decided that FIIs must report P-Notes details.

Reporting by FIIs

P-Notes issued - 7th day of the following month.

The FII merely investing for themselves through P-NotesQuarterly basis

FIIs who do not issue PNs but have tradesFile 'Nil' undertaking on a quarterly basis.

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Advantages & Disadvantages


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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 acceptedpreference for non-debt creating foreign inflows over foreign debt.Enhanced flow of equity capital helps improve capital structures andcontributes 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 marketsbut also improves the alignment of asset prices to fundamentals.

Improving capital markets.

Advantages


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FIIs as professional bodies of asset managers and financial analystsenhance competition and efficiency of financial markets.

Equity market development aids economic development.

By increasing the availability of riskier long term capital for projects, andincreasing 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 firmsoperations, improve corporate governance. Bad corporate governancemakes equity finance a costly option. Also, institutionalization increasesdividend payouts, and enhances productivity growth.

Advantages contd..


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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 ofRupee in the market as a result of demand created.

Problems for small investor: The FIIs profit from investing in emergingfinancial stock markets. If the cap on FII is high then they can bring in

huge amounts of funds in the countrys stock markets and thus havegreat influence on the way the stock markets behaves, going up or down

The FII buying pushes the stocks up and their selling shows the stockmarket the downward path. This creates problems for the small retail

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

Disadvantages


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Adverse impact on Exports: FII flows leading to appreciation of thecurrency may lead to the exports industry becoming uncompetitive dueto the appreciation of the rupee.

Hot Money: Hot money refers to funds that are controlled by investorswho actively seek short-term returns. These investors scan the market

for short-term, high interest rate investment opportunities. Hot moneycan have economic and financial repercussions on countries and banks.When money is injected into a country, the exchange rate for the countrygaining the money strengthens, while the exchange rate for the countrylosing the money weakens. If money is withdrawn on short notice, thebanking institution will experience a shortage of funds.

Disadvantges contd..


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Recent Developments


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After experiencing a record equity investment of `1,102,200 million in 20092010, the net

inflow of investments by FIIs remained flat at `1,101,207 million in 20102011. The

momentum seemed to be sluggish in the first half of 20112012; as the net FIIinvestments in equities during the period amounted to `22,090, compared to the net

investments of `637,160 million attracted in the first half of 2010-2011.

The net investments by FIIs in the debt segment grew by 11.96 percent in 20102011

with a staggering all-time high of ` 363,190 million, compared to `324,380 in 20092010.

The impressive trend has come to a halt; during AprilSeptember, 2011, the FIIs made

net investments worth ` 64,790 million in debts compared to `250,200 million in the firsthalf of 20102011.

Foreign Institutional Investments in Equity and Derivatives

The gross turnover of FIIs in the equity market segment on the Indian stock exchanges

(the NSE and the BSE) accounted for `14,330,091 million in 20102011, which marked a

year-on-year growth of 12.39 percent. The total turnover of the FIIs in the equity marketconstituted 15.30 percent of the total turnover on the BSE and the NSE in 20102011, an

improvement from 11.56 percent recorded in 20092010.


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FII I t t & M k t R ti


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FII Investments & Market Reaction

While strong inflow of funds from foreign

institutional investors (FIIs) has been a

reason tocheer, it could turn into anightmare and if the global investors make asudden exit can send the bourses

crashing.

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FII Inflo s Vs Sense


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FII Inflows Vs Sensex

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

120000

2005 2006 2007 2008 2009 2010

Rs. in (Crores)

Rs. in (Crores)

FII Investment from 2005 - 2010 BSE Sensex

FII Investment Vs Sensex FII average holding in BSE 500

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FIIs have started playing a critical role in the movement of stock prices.The assets under management of domestic mutual funds have crossedRs. 100,000 crores.

A positive contribution of the FIIs has been their role in improving thestock market infrastructure.

The FIIs are playing an important role in bringing in funds needed by theequity market.

The increase in the volume of activity on stock exchanges with the adventof on screen trading coupled with operational inefficiencies of the formersettlement and clearing system led to the emergence of a new systemcalled the depository System.

Net Investment by FII (USD Mn) in


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-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

NET INVESTMENT(USD MN)

Net Investment by FII (USD Mn) in

India



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The Indian capital market was opened up for foreign

institutional investors (FIIs) in 1992

Tap international capital markets through ADRs, GDRs, FCCBs,ECBs and NRIs

FII investment with it averaging around $9599 million a yearduring 2003-05.

This figure is around 5 times the average annual inflowswitnessed from 1993-94 to 1997-98 and from 1999 to 2002 and

more than 20 times the average annual inflows during 1997-99and 2002-03

FIIs


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FIIs. While cumulative net FII inflows into India from early 1990s to end of

March 2003 amounted to $15,804 million, in the period thereafter till

about December 2005, the addition to this value was of $25,267 million.

At the same time the Sensex had fallen to about 3000 crossed 4000 and5000 respectively by August and November 2003. It broke through the

6000 level by January 2004 before crossing the 7000 mark in June2005, crossing 10,000 in February 2006 and 15,000 in July 2007.

FIIs have a compounding effect on the size and nature of the firm in

that the firm becomes in a position to acquire other firms and hencegrow even more.

To Attract FIIs


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To Attract FIIs

The ceiling for overall investments of FIIs was increased 24% of

the paid up capital of Indian company.

Allowed foreign individuals and hedge funds to directly registeras FIIs.

Investment in government securities was increased to US $ 5Billion.

Simplified registration norms.

Encouraged FIIs because


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Encouraged FIIs because..

Global liquidity into the equity markets

Raised the price-earning ratio

Built our reputation in the international community

Instrumental in capital formation

Terms related to FII


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Terms related to FII

Sub-account

Includes those foreign corporations, foreign individuals, and institutionsfunds or portfolios established or incorporated outside India on whosebehalf investments are proposed to be made in India by a FII.

Designated bankAny bank in India which has been authorized by the Reserve Bank of India

to act as a banker to FII.

Domestic custodianDomestic Custodian means any entity registered with SEBI to carry onthe activity of providing custodial services in respect of securities.

Regulations


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Regulations

The SEBI is the nodal agency for dealing with FIIs, and they have toobtain initial registration with SEBI.

The SEBI's initial registration is valid for five years. The Reserve Bank ofIndia's general permission to FIIs will also hold good for five years. Bothwill be renewable.

FIIs can invest in all securities traded on the primary and secondarymarkets.

FIIs can repatriate capital gains, dividends, incomes received by way ofinterest and any compensation received towards sale/renouncement ofrights offering of shares.

Investment Regulations


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Investment Regulations

The total investments in equity and equity related instruments should

be at least seventy per cent of the aggregate of all the investments ofthe Foreign Institutional Investor in India.

The cumulative debt investment limit for FII investments in CorporateDebt is USD 15 billion.

The debt investment limit for FIIs in government debt in G-secscurrently capped at $5 billion and cumulative investments under 2% ofthe outstanding stock of G-secs.


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The Foreign Institutional Investor is allowed to transact business onlyon the basis of taking and giving deliveries of securities bought andsold.

A Foreign institutional Investor or a sub-account having an aggregateof securities worth rupees ten crore or more, as on the latest balance

sheet date, can settle their only through dematerialised securities.

Investment by individual FIIs cannot exceed 10% of paid up capital.Investment by foreign registered as sub accounts of FII cannot exceed5% of paid up capital

Sources


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Sources

www.indiastudychannel.com

www.kpmg.com

www.nseindia.com

Google Images
http://www.indiastudychannel.com/http://www.kpmg.com/http://www.nseindia.com/http://www.nseindia.com/http://www.kpmg.com/http://www.indiastudychannel.com/


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"If there is one place on the

face of this Earth where all

the dreams of living men have

found a home when man

began the dream of existence,

it is India".

Romain Rolland,

French philosopher

group-6 presentation on fii

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