Foreign Institutional Investment

The term foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. These are actually the outsiders in the financial markets of the particular company. Foreign institutional investment is a common term in the financial sector of India. The type of institutions that are involved in the foreign institutional investment are as follows:

Mutual Funds Hedge Funds Pension Funds Insurance Companies

The economies like India, which are growing very rapidly, are becoming hot favorite investment destinations for the foreign institutional investors. These markets have the potential to grow in the near future . This is the prime reason behind the growing interests of the foreign investors. The promise of rapid growth of the investable fund is tempting the investors and so they are coming in huge numbers to these countries. The money, which is coming through the foreign institutional investment is referred as 'hot money' because the money can be taken out from the market at anytime by these investors. The foreign investment market was not so developed in the past. But once the globalization took the whole world in its grip, the diversified global market became united. Because of this the investment sector became very strong and at the same time allowed the foreigners to enter the national financial market. At the same time the developing countries understood the value of foreign investment and allowed the foreign direct investment and foreign institutional investment in their financial markets. Although the foreign direct investments are long term investments but the foreign institutional investments are unpredictable. The Securities and Exchange Board of India looks after the foriegn institutional investments in India. SEBI has imposed several rules and regulations on these investments.

Who can get registered as FII?

FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital. Application for registration should be made by FIIs to SEBI in the prescribed form in duplicate. One copy of the application will be forwarded by SEBI to Reserve Bank. Reserve Bank will grant permission under FERA 1973 to the bank branch designated by the applicant FII to buy/sell equity shares/debentures/warrants dated Government Securities/Treasury Bills/ units of domestic mutual funds. Reserve Banks permission will be initially valid for five years and will be operative only after obtaining registration form SEBI. This permission can be renewed for a further period of five years on request. Reserve Banks permission would enable the FIIs to buy/sell the securities and remit the income/dividend/sale proceeds after payment of applicable taxes through the designated bank branch. Reserve Banks permission will also cover investment in shares/debentures of Indian companies in primary market i.e. new issues provided the company has reserved certain quota out of its public issue in favour of FIIs. The designated bank branch is required to submit to Reserve Bank a statement inForm LEC on daily basis in respect of purchase/sales or shares/ debentures made for the purpose of monitoring by Reserve Bank the overall ceiling of 24% or 30%, as the case may be.

In order to facilitate making of investments in India and repatriation on income/sale proceeds of such investments, Reserve Bank will permit the designated Bank to open a foreign currency denominated account and a special Non-resident rupee account in the name of FII. The designated bank branch will also be permitted (a) to transfer funds from foreign currency account to rupee account and vice versa (b) to make it investments out of the balance in the rupee account, (c) to credit sale proceeds of shares and other investments as also dividend/interest earned on the investments to the rupee account and (d) to transfer the repatriable proceeds (net of taxes) from the rupee account to the foreign currency account.

Following entities / funds are eligible to get registered as FII: 1. 2. 3. 4. 5. 6. 7. 8. 9. Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks University Funds Endowments Foundations Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 1. 2. 3. 4. Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders

Parameters on which SEBI decides FII applicants eligibility a. Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year) b. whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI c. Whether the applicant is a fit & proper person. form needs to be filled in when applying for FII registration

"Form A" as prescribed in SEBI (FII) Regulations, 1995. documents need to be sent with "Form A" a. Certified copy of relevant clauses (clauses permitting the stated activities) of Memorandum of Association, Article of Association or Article of Incorporation. b. Audited financial statement and annual report for the last one year (period covered should not be less than twelve months fee for registration as FII US $ 5,000. SEBI generally takes seven working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, seven days shall be counted from the days when all necessary information sought, reaches SEBI. In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day no objection is received from RBI. registration process for FII

Supporting documents required are Application in Form A duly signed by the authorised signatory of the applicant. Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the applicant to invest on behalf of its clients Audited financial statements and annual reports for the last one year , provided that the period covered shall not be less than twelve months. A declaration by the applicant with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory authority with whom the applicant is registered in its home country. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulatrs of the domestic custodian. A signed declaration statement that appears at the end of the Form. Declaration regarding fit & proper entity. The eligibility criteria for applicant seeking FII registration As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to

fulfill the following conditions to qualify for grant of registration: 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. 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

Where can FII Invest

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect. The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs. The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to: - the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and - the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company. Monitoring Foreign Investments The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches tostop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release. The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings is:

Companies where NRI/PIO Investment has already reached 10 % and no further purchases can be allowed Companies where the NRI investment has reached the trigger point of 8% and further purchases are allowed only with prior permission of RBI 1 Codura Exports Ltd 2 Cosmo Films Ltd 3 Dalmia Cement (Bharat) Ltd 4 Deccan Cements Ltd 5 Garden Silk Mills Ltd. 6 Nexus Software Ltd 7 Polyplex Corporation Ltd 8 Premier Explosives Ltd Companies in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investment as stipulated by Government has been reached. Pantaloon Retail (India) Ltd. Companies in which the Caution limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None

Print Media Companies in which the Caution limit in respect of maximum permissible foreign holding including FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None Print Media Companies in which the Ban limit in respect of maximum permissible foreign holding including FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None

Public Sector banks in which 20% limit has been reached and no further investments are permitted None Public Sector banks in which 18% caution limit has been reached and further purchases

by FIIs/NRIs/PIOs are allowed only with prior permission of RBI 1 Punjab National Bank 2 Bank of Baroda

Private Sector Banks in which the Caution limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached 1 ING Vysya Bank Ltd. 2 IndusInd Bank Ltd Private Sector Banks in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached None

Private Sector Banks in which the Caution limit in respect of FIIs Investment has reached. None Private Sector Banks in which the Ban limit in respect of FIIs Investment has reached. None Further purchases are allowed only with prior permission of RBI. No further purchases are allowed.