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Foreign Institutional Investment In IndiaPresented By Anant BerarDebarun Dey Jayesh Ghosh

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AGENDAIntroduction, Definition, HistoryIndia as a FII DestinationGrowth of FII and DeterminantsFII RegulationsWorking of Mechanisms of FIIFeatures of FIIComparative analysis of FDI and FIISector wise discussions of FII InvestmentEffect of FII on Indian EconomyAnalysis of Stock Market in context of FIIScope and Issue Analysis

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FOREIGN INVESTMENTFOREIGN INVESTMENT3

IntroductionForeign investment refers to the investments made by the residents of a country in the financial assets and production process of another country Necessary for all developing nations as well as developed nations but it may differ from country to country. The developing economies are in a most need of these foreign investments for boosting up the entire development of the nation in productivity of the labour, machinery etc4

Significances of Foreign Investment Expansion In EmploymentConsumer Benefit Technological ImprovementCultural Improvement Import Export Growth In EconomyGovernment BenefitsCompetitionManagerial RevolutionGlobal ExposerGlobal Relationship5

Types of Foreign Investment6

India before LPGEconomic policies under Nehru-Gandhis were greatly influenced by Soviet-style policiesThis Licence Raj was a result of Nehrus socialist ideology. He wanted to build a soviet-like economic system in which state controls everythingThe low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3% Only four or five licences would be given for steel, electrical power and communications. Licence owners built up huge powerful empires7

License Raj established the irresponsible, self-perpetuating bureaucracy Private players could manufacture goods only with official licenses.Up to 80s government agencies had to be satisfied before private companies could produce something and, if granted, thegovernment would regulate production .

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After LPG-1991 reformsPrivate sector literally didnt exist before 1991Main aim of 1991 economic reforms was to terminate this licence rajThe following were the market based reforms :Reduction of import duties , income taxes and corporate taxes , custom dutiesIntroduction of FDI in many sectors . India opened its doors of its markets to the world

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India opened its stock market to foreign investors in September 1992Since 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equitiesThis has become one of the main channels of FII in India for foreignersIn order to trade in Indian equity market foreign corporations need to register with SEBI as Foreign Institutional Investor (FII)

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What is FII?

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An institution established or incorporated outside India which proposes to make investment in India in securitiesUsed most commonly in India to refer to outside companies investing in the financial markets of India

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Why India is a hot destination for flowFastest growing EconomyStrong forex reservesEconomic ReformsCorporate RestructuringInformation Technology-the growth engine

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According to a poll conducted by Bank of America Merrill Lynch (BofA-ML) recently, India was the most favourite equity market for the global investors for the year 2015 at 43 per cent, followed by China at 26 per cent. The global investment bank is of the view that India remains to be in a structural bull market.According to Ernst & Young's (EYs) Global Capital Confidence Barometer (CCB) - Technology report, India ranks third among the most attractive investment destinations for technology transactions in the world.14

FII Investment DetailsFinancial YearINR croresEquityDebtTotal1992-93130131993-945127051271994-954796047962000-0110207-27399332001-02807269087632002-03252716226892006-07252365605308402007-085340412775661792008-09-477061895-458112009-10110221324381426582012-13140033283341683672013-1479709-28060516492014-151113331661272774612015-16-14172-4004-181762016-17 **48243610954352Total8534943086391162130** upto 09-Oct-2016

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FII Investment in 2016

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FPI/FII AUC Country-wise (top 10 countries) data December, 2015Sr. No.CountryAUC (INR Cr.)EquityDebtTotal1UNITED STATES OF AMERICA672,93343,454716,3882MAURITIUS415,00163,922478,9233SINGAPORE161,451101,578263,0294LUXEMBOURG152,29342,642194,9345UNITED KINGDOM98,9491,579100,5286NORWAY41,39323,91865,3117UNITED ARAB EMIRATES61,02682661,8528IRELAND50,4383,72354,1619JAPAN38,7949,68448,47810CANADA46,3061,71448,02011Other236,74652,170288,916Total1,975,329345,2102,320,539

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No. of FIIs In IndiaThe No. of SEBI registered FIIs declined to 1444 in 2014-15 from 1710 from previous year. Trend is same as last 3 years Since 2011-2012 to 2015 the no. fell by almost 16%

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Big Players of Indian FII market Euro-pacific is the biggest investor having with holding of 42530 crore in equities Govt. Of Singapore is the largest Govt. institutional player with total investment amount of worth 24192 crore

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Determinants of FII Inflow in IndiaRiskInflationInterest rateGood News/Bad NewsEquity ReturnsGDP of India

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How to ApplyAn application for registration has to be made in Form A, the format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with the required documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to SEBI within 10 to 12 days of receipt of application.

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Documents to be sent to SEBI

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As per Regulation 6 of SEBI (FII) Regulations, 1995, FIIs are required to fulfill the following conditions to qualify for grant of registration:23

Registration Process

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Entities which can register as FIIs in India:25

A few conditions under Regulations 6 of SEBI Regulations, 1995, need to be fulfilled. For example:Permission under the provision of the Foreign Exchange Regulation Act, 1973 from RBI Satisfaction of the Fit and Proper guidelines issued by SEBI

SEBI would also consider whether the grant of registration is in the interest of the development of the securities market

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Investment Conditions and Restrictions:An FII can only invest in the following:

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Foreign Institutional Investors may invest in Indian through two routes:

Equity Investment route: 100% investment could be in the equity related instruments or up to 30% could be invested in debt instruments100% Debt route: 100% investments have to be made in debt securities only.

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Prohibitions on Investments:FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: Business of chit fund Nidhi Company Agricultural or plantation activities Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges).Trading in Transferable Development Rights (TDRs).

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Channels of FII Investments in IndiaPortfolio investments in India include ADRs/GDRs, Foreign Institutional Investments and investments in offshore funds.Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India.Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities.

TAXATION FOR FIIs

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INCOMECOMPANY DEFINED UNDER SEC 2(17)NON COMPANYAggregate Income > 1 CroreAggregate Income < 1 CroreDIVIDENDSExempt under Income Tax Act of 1961INCOME IN RESPECT TO SECURITIES21.012%20.60%20.60%SHORT TERM CAPITAL GAINS31.518%30.90%30.90%LONG TERM CAPITAL GAINS10.506%10.30%10.30%

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Salient features of FIIsInvestment in all securities traded on the primary and secondary markets permitted. FIIs would be required to obtain an initial registration with SEBI to enter the market nominee companies.Affiliated and subsidiary companies will be treated as separate FIIs for registration. Shall seek various permissions under FERA from the RBI, both SEBI and RBI registration will be under a single window approach. SEBIs initial registration would be valid for 5 years. Renewable for 5 years.FIIs shall be required to hold a registration from the securities commission in their country of domicile/incorporation.

Open foreign currency account(s) in a designated bank.Open a special non-resident rupee account to which all receipts from the capital inflows, sale proceeds of shares dividends and interest could be credited. Transfer sums from the foreign currency accounts to the rupee accounts and vice-versa, at the market rates of exchange. Make investment in securities in India out of the balances in the rupee accounts. Transfer repatriable (after tax) proceeds from the rupee account to the foreign currency accounts. Register FIIs holding without any further clearance under FERA.

The general permission from the RBI will enable the FIIS to:

RBI may at any time request a registered FII to submit information regarding records of the utilization of the inward remittances of investment capital and the statement of its securities transactions.

RBI and /or SEBI may also any time conduct a direct inspection of the records and accounting books of a registered FII.

FOREIGN DIRECT INVESTMENT (FDI)Key component in Global Economic IntegrationInvestment of foreign assets into domestic structures, equipments and organizationsMore useful to a country than investments in equity because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and useful whether things go well or badlyInvestment by non-resident entity, resident outside India in the capital of an Indian company under schedule 1 of foreign exchange management (transfer or issue of security by a person resident outside India)

STRATEGIES TO ACHIEVE FDIsGreenfield Investment: Company to set up new factories and plants from the ground upExample: McDonalds, Starbucks

Brownfield Investment: Cross border Mergers and Acquisitions that involve acquiring an existing foreign enterprise in the country of interestExample: Tata Motors acquisition of Land Rover and Jaguar from Ford in 2008

RECENT SIGNIFICANT FDIs IN INDIARosneft, partners buy Essar Oil for $13 billion in largest FDIdeal(Rosneft bought a 49 per cent stake in Essar Oil, while Netherlands-based Trafigura Group Pte and Russian investment fund United Capital Partners split another 49 per cent equity equally)Honeywell International Inc, the US-based technology and manufacturing solutions provider, has unveiled a new refining technology in GurgaonApple Inc has started its first development centre outside the US in HyderabadE-commerce giant Amazon plans to set up its second largest global delivery centre outside the United States, in Hyderabad

FDI VS FII

FDIFIIIt is a long term investmentIt is generally a short term investmentInvestment in physical assetsInvestment in financial assetsAims to increase enterprise capacity or productivity or change management controlAim is to increase capital availabilityLeads to technology transfer, access to markets and management inputsResults in only capital inflowsFlows into the primary marketFlows into the secondary marketEntry and exit is relatively difficultEntry and exit is relatively easyEligible for profits of the companyEligible for capital gainDoes not tend to be speculativeTends to be speculativeDirect impact on employment of labour and wagesNo direct impact on employment of labour and wagesAbiding interest in managementFleeting interest in management

TREND OF FII INVESTMENT ON THE STOCK MARKET

MAJOR AREAS AFFECTED BY FIIsStock Market: Movers and shakers of the Indian market. They wield a great influence on Indian markets due to their sheer capacity to purchase and sell in huge numbersExchange Rate: Investing in India will bring dollars into the country thus strengthening the rupee in terms of dollarExports and Imports: As FII lead to strengthening of currency our Exports become uncompetitiveInflation: Huge FII in country leads to demand for Rupee resulting in RBI pumping in more Rupee in the market. This leads to excess liquidity in the market causing Inflation

ADVANTAGES OF FII INVESTMENTEnhanced flow of equity capitalImproving capital marketsImproved corporate governanceManaging uncertainty and controlling risksReduced cost of equity capitalImparting stability of Indias BOPKnowledge FlowsImprovement to market efficiency

DISADVANTAGES OF FII INVESTMENT

Volatility and capital outflowsPrice riggingHerding and positive feedback tradingBOP vulnerabilityPossibility of taking over companies or backdoor controlMoney launderingManagement controlInflation

FUTURE OF FIIs IN INDIAMacro economic prospects are improving i.e. CAD narrowing and fiscal deficit expected to stay in controlBetter policies and improved earnings are leading to more +ve outlook for Indian equitiesEasing of Geographical tensions has helped improve sentiment of Global investorEpisodic volatility may provide attractive entry points for global investors in coming monthsEquity Inflows should pick up once the INR stabilisesRecent pick up in government spending should also revive growth and market liquidity

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