A Study on Foreign Institutional

Investor in India

An assignment submitted by S & P

M.Com Semester I

In

C0103: CAPITAL MARKETS

Department of Commerce

Goa University

October 2010
Sr.N Roll Name Topic Signat Remar
o. No. Covered ure k
1 13- Kinalkar Introduction
. 2010 Priyanka of FII’s
Prabhakar
2 34- Satardekar Impact of
. 2010 Sushant FII’s
Raghobha
3 37- Toraskar Ruban Trends and
. 2010 Ranganath Performance
of FII’s
4 30- Phadte Shradha FII
. 2010 Umakant Registration
Process and
SEBI
Regulation
5 23- Naik Sneha SEBI
. 2010 Ramchandra Regulation
and
Conclusion

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 INDEX

Sr.No. Title Page No.

1. Introduction 4
2. Impact of Foreign Institutional 8
Investors
3. Trends and Performance of FII’s 12
4. FII Registration Process and SEBI 15
Regulation
5. Conclusion 31

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 CHAPTER 1

1.1 INTRODUCTION

Since 1990-91, the government of India embarked on liberalization and economic reforms
with a view of bringing about rapid and substantial economic growth and move towards
globalization of economy. As per the part of reform process, the government under its new
industrial policy revamped its foreign investor policy recognizing the growing importance of
foreign direct investment. As an instrument of technology transfer, augmentation of foreign
exchange reserve and globalization of Indian economy. Simultaneously, the government for first
time, permitted portfolio investment from abroad by foreign institutional investors in the Indian
capital market. The entry of foreign institutional investors seems to be follow up of
recommendation of the Narsimhan Committee Report of financial system.

From Sept. 14, 1992 with suitable restrictions, foreign institutional investors were permitted to
invest in all the securities traded on the primary and secondary market, including shares,
debentures and warrants issued by companies which were listed or were to be listed on the
exchanges in India. India opened its stock market to foreign investors in September 1992 since
1993, received portfolio investment from foreigners in the form of foreign institutional
investment in equities. This has become one of the main channels of FII in India for foreigners.
In order to trade in Indian equity market foreign corporations need to register with SEBI as
Foreign Institutional Investor (FII).

1.2 MEANING

• Foreign institutional investor means “an institution established or incorporated outside

India which proposes to make investment in India in securities.
• It is used most commonly in India to refer to outside companies investing in the financial
markets of India.
• International institutional investors must register with the Securities and Exchange Board
of India (SEBI) to participate in the market.

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 • No controlling interest in the companies they invest in.

1.3 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.

1.4 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.

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 • 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
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.

1.5 DIFFERENCE BETWEEN FDI & FII

FDI 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)

• Where FDI is a bit of a permanent nature, FII flies away at the shortest political or
economical disturbance.

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• Entry and Exit is relatively very easy for an FII as compared to FDI. Entry difficult for
FDI because of infrastructure problems. Exit more difficult because of archaic labor laws.
• FDI is more desirable than portfolio investment because the investments there under are
made directly in the capital of the company and not in the secondary market.
• FDI helps in increasing production and employment, FII does not affect production and
employment.
• FII investment is frequently referred to as hot money for the reason that it can leave the
country at the same speed at which it comes in, in case of FDI it doesn’t.

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 CHAPTER II

IMPACT OF FOREIGN INSTITUTIONAL INVESTOR

2.1 IMPACT ON INDIAN STOCK MARKET

FIIs are companies registered outside India. In the past four years there has been more than $41
trillion worth of FII funds invested in India. This has been one of the major reason on the bull
market witnessing unprecedented growth with the BSE Sensex rising 221% in absolute terms in
this span. The present downfall of the market too is influenced as these FIIs are taking out some
of their invested money. Though there is lot of value in this market and fundamentally there is a
lot of upside in it. For long-term value investors, there’s little because for worry but short term
traders are adversely getting affected by the role of the FIIs are playing at the present. Investors
should not panic and should remain invested in sectors where underlying earnings growth has
little to do with financial markets or global economy.

It is always good to keep an eye on what the big movers are doing and plan individual strategy
accordingly. There are several reasons on FIIs selling, but there are three predominant factors
that are cited as being largely responsible.

1) The swings in the market forced several FIIs to withdraw from India and invest
their dollars in other emerging markets. Some of the other markets include
Uruguay, Russia, the Ukraine, and several other former soviet countries. Though
there have been swing’s in the past too but FII response this time was different
because of margin pressures back home as even they have to provide regular
returns to their investors.

2) The Indian markets are not seen as a good short-term any more. India is seen as a
good investment for the medium to long term. FIIs seem to fear the pace of
growth and the fundamentals of the markets.

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 3) Most FIIs are looking at corporate governance and execution abilities, which
could be significant drivers in creating a strong portfolio of Indian stocks. Recent
action taken by the market regulator indicates that the Indian government would
like to moderate the inflow of FII money.

Though valuations are very attractive on a selective basis, but stock picking has to be done based
on evaluation of business fundamentals. The subprime issue and problems in the credit markets
have raised concerns about potential growth slowdown in the US and Europe. The fear of a
slowdown will likely continue to weigh on markets average FII redemptions in India have been
lower than in other Asian economics. FIIs do get affected by it. India is among the economies
less sensitive to a deceleration in US growth and one should not be perturbed by FII flows in
either direction. One need not worry much about the volatility of the market as it is influenced by
temporary factors but the Indian story is still strong. Markets cannot go in one direction all the
times (upwards) which it was going. Volatility is too good for the market as it helps in keeping
the economy cycle moving and it will again help the values of the stocks at a fair price for
investments to again keep flowing and so will the FIIs too.

It is influence of the FIIs which changed the face of the Indian stock markets. Screen based
trading and depository are realities today largely because of FIIs. Equity research was something
unheard of in the Indian market a decade ago. It was FII which based the pressure on the rupee
from the balance of payments position and lowered the cost of capital to Indian business. It is
due to the FIIs that a concept like corporate governance is being increasingly adopted by Indian
companies; this is benefiting domestic investors also. 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 scrip’s, they exited the scrip’s and booked profits. Before the
arrival of FIIs, the activity in stocks used to be evenly attributed with little differences between
volumes in specified and cash groups. However since FIIs concentrate on the top 200 companies
against the 6,000 listed companies on BSE, the stock trading activity has concentrated to these
liquid scrip’s making them less liquid scrip’s totally illiquid. Thus, FIIs have become the driving
force behind the movements of the stock indices on the Indian stock markets.

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Rolling settlement was introduced at the insistence of FIIs as they were uncomfortable with the
badla system. The major beneficiaries of the rolling settlement system are FIIs as short
settlement cycles offer them quick exit from the market.

With their massive financial muscle FIIs have almost replaced conventional market of the Indian
bourse. Today financial institutions and mutual funds including UTI can do little to help the
stock markets at a time of crisis. Even UTI, which used to be counter force for FIIs has ceased to
play that role in the Indian stock markets.

It is expected that with the adoption of international practices such as rolling settlement and
derivatives FII participation will increase and more money will flow into the Indian capital
market.

2.2 FOREIGN INSTITUTIONAL INVESTORS INTEREST IN INDIA

India, the second fastest growing economy after China, has recently seen positive foreign
institutional investor (FII) inflows driven by the sound fundamentals and growth opportunities.

According to analysts, the upward revision of economic growth from 5.8 per cent to 6.1 per cent,
better-than-expected performance of companies in the quarter ended-June 30, the proposed new
direct taxes code that might lead to savings in the tax payer’s money, and the trade policy with
an ambitious target of US$ 200 billion exports for 2010-11 have all revived the confidence of
FIIs investing in India. FIIs have made net investments of US$ 10 billion in the first six months
(April to September) of 2009-10. A major portion of these investments have come through the
primary market, than through buying via secondary markets. (Source: India Brand Equity
Foundation).

FII inflows into Indian equities have been steady ever since the markets were opened up to FIIs
in 1993. With the exception of FY99 and FY09, net flows have been positive. FIIs own a
dominant 16% of Indian equities (worth US$147bn) and account for 10-15% of the equity
volumes. (Source: CLSA Asia-Pacific Markets).

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Although FIIs pulled out US$ 9.77 billion of the Indian equity markets during FY09, they have
been quick to return in FY10 and within just the first four months they have nearly made up for
the exit, reinvesting US$ 8.50 billion or 87% of the amount that they had pulled out in FY09.
(Source: CLSA Asia-Pacific Markets).

India is well placed to attract FII flows over the long term. With FIIs holding 16 per cent of
equity of India's biggest 500 companies (Source: India Brand Equity Foundation) and as growth
in the Indian economy accelerates, FII sentiment is expected to remain positive towards India.

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 CHAPTER III

TRENDS AND PERFORMANCE OF FII’s

3.1 TRENDS IN INDIA

Portfolio investments in India include investments in American Depository Receipts (ADRs)/

Global Depository Receipts (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. Thereafter, the 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/instruments of companies listed/to be listed on stock exchanges in India.

FIIs invested US$ 9923 million in equities between Jan1 and July 31, 2010, and US$ 7649.98
million in debt between the same period. India accounted for more than one-fifth of the US$ 22.1
billion private equity (PE) investments received by the emerging markets across the globe in
2009. PE and venture capital (VC) investments are projected to reach US$ 17 billion (around
Rs 80,000 crore) in 2010. Sensex rising by nearly 140 points to a fresh 32-month high as FIIs
continued to bet big on India

3.2 PARTICIPATORY NOTES

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Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are not
registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities.
Participatory notes are instruments that derive their value from an underlying financial
instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted
FIIs to register and participate in the Indian stock market in 1992.

Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any
dividends or capital gains collected from the underlying securities go back to the investors.

Participatory notes are instruments used for making investments in the stock markets. However,
they are not used within the country. They are used outside India for making investments in
shares listed in that country. That is why they are also called offshore derivative instruments.

In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use
these instruments for facilitating the participation of their overseas clients, who are not interested
in participating directly in the Indian stock market. For example, Indian-based brokerages buy
India-based securities and then issue participatory notes to foreign investors. Any dividends or
capital gains collected from the underlying securities go back to the investors. According to an
expert group constituted by the finance ministry in India, in August 2004, participatory notes
constituted about 46 per cent of the cumulative net investments in equities by FIIs. Now
according to Subramanyam Swamy (Ex Union Minister) the PNs contribute about 60% of
investment by FIIs.

Any entity investing in participatory notes is not required to register with SEBI (Securities and
Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through
participatory notes is easy because participatory notes are like contract notes transferable by
endorsement and delivery. Secondly, some of the entities route their investment through
participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly,
participatory notes are popular because they provide a high degree of anonymity, which enables
large hedge funds to carry out their operations without disclosing their identity.

3.3 FII INVESTMENT PERFORMANCE IN INDIA

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Foreign institutional investors have gained a significant role in Indian capital market.
Availability of foreign capital depends on many firm specific factors other than economic
development of the country. in this context this paper examines the contribution of foreign
institutional investment particularly among companies included in sensitivity index (sensex) of
Bombay stock exchange. Also examined is the relationship between foreign institutional
investment and firm specific characteristics in terms of ownership structure, financial
performance and stock performance. It is observed that foreign investors invested more in
companies with a higher volume of shares owned by the general public. The promoters holdings
and the foreign investments are inversely related, foreign investors choose the companies where
family shareholding of promoters is not substantial. Among the financial performance variables
the share returns and earnings per share are significant factors influencing their investments
decisions.

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 CHAPTER IV

FII REGISTRATION PROCESS AND SEBI’s REGULATION

4.1 FII REGISTRATION PROCESS

One who propose to invest their proprietary funds or on behalf of "broad based" funds or of
foreign corporates 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
• Bank

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An 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 under mentioned documents in duplicate
addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address
within 10 to 12 days of receipt of application.

Address for application

The Division Chief
FII Division
Securities and Exchange Board of India,
224, Mittal Court, 'B' Wing, 1st Floor,
Nariman Point, Mumbai - 400 021.
INDIA.
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 particulars 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

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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.

4.2 SEBI ’S REGULATION

1) Application for certificate.

An application for the grant of certificate shall be made to the Board in Form A. No person shall
buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a
certificate granted by the Board under these regulations.

2) Furnishing of information, clarification, and personal representation.

The Board may require the applicant to furnish such further information or clarification
regarding matters relevant to the activities of the applicant for grant of certificate. The applicant
shall appear before the Board for personal representation in connection with the grant of a
certificate.

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3) Application to conform to the requirements.

Any incomplete, false or not conform to the instructions specified in the form or misleading in
any material shall be rejected by the Board. Before rejecting any such application, the applicant
shall be given a reasonable opportunity to remove, within the time specified by the Board.

4) Consideration of application.

For the purpose of the grant of certificate the Board shall take into account all matters which are
relevant to the grant of a certificate and in particular the following, namely:-

(a) The applicant's track record, professional competence, financial soundness, experience,
general reputation of fairness and integrity:

(b) Whether the applicant is regulated by an appropriate foreign regulatory authority:

Provided that university funds, endowments, foundations, charitable trusts and

charitable societies may be considered for registration even though they are not
regulated by a foreign regulatory authority

(c) Whether the applicant has been granted permission under the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making
investments in India as a Foreign Institutional Investor;

(d) Whether the applicant is –

(i) An institution established or incorporated outside India as a pension fund, mutual fund,
investment trust, insurance company or reinsurance company. [(ia) an International or
Multilateral Organisation or an agency thereof or a Foreign Governmental Agency, [Sovereign
Wealth Fund] or a Foreign Central Bank;

(ii) an asset management company, investment manager or advisor , bank or institutional

portfolio manager, established or incorporated outside India and proposing to make investments
in India on behalf of broad based funds and its proprietary funds, if any;

33
(iii) a trustee of a trust established outside India and proposing to make investments in India on
behalf of broad based funds and its proprietary funds, if any;

(iv) university fund, endowments, foundations or charitable trusts or charitable societies.

Provided that while considering the application from applicants under clause (iv) the Board may
take into account the following, namely:-

(a) Whether the applicant has been in existence for a period of at least 5 years;

(b) Whether it is legally permissible for the applicant to invest in securities outside the country
of its incorporation or establishment;

(c) Whether the applicant has been registered with any statutory authority in the country of their
incorporation or establishment;

(d) Whether any legal proceeding has been initiated by any statutory authority against the
applicant.

e) Whether the applicant has been serving public interest.

5) Criteria for Fit and Proper person.

For the purpose of determining whether an applicant or foreign institutional investor is a fit and
proper person the Board may take into account the criteria specified in Schedule II of the
Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

6) Procedure and grant of certificate.

Where an application is made for grant of certificate under these regulations, the Board shall, as
soon as possible but not later than three months after information called for by it is furnished, if
satisfied that the application is complete in all respects, all particulars sought have been
furnished and the applicant is found to be eligible for the grant of certificate, grant a certificate in
form B, subject to payment of fees in accordance with the Second Schedule. provided that the
Board may exempt from the payment of fees, an applicant such as the World Bank and other

33
 institutions established outside India for providing aid, and which have been granted privileges
and immunities from the payment of tax and duties by the Central Government. Provided further
that the Board shall refund the fees already collected from the institutions which are exempted
from the payment of fees

7) Code of conduct.

A foreign institutional investor holding a certificate shall, at all times, abide by the Code of
Conduct as specified in Third Schedule.

8) Validity of certificate.

(1) As per the provisions of this act, regulations, the circulars issued and obligations to pay
the fees are specified in these regulations.

a) Any registration granted by the Board shall be permanent unless suspended or cancelled
by the Board;
b) Any registration already granted by the Board prior to the commencement of the
Securities and Exchange Board of India (Foreign Intuitional Investors) (Amendment)
Regulations, 2008 shall be deemed to be permanent, unless suspended or cancelled by the
Board.

(2) A foreign institutional investor or a sub-account, having a certificate referred to in clause (b)
of sub-regulation (1) shall file information in Form A or Form AA, as the case may be, at
least three months prior to the expiry of period of certificate or within three months from
such commencement, whichever is later.

(3) A foreign institutional investor or a sub account may surrender the certificate of registration
granted to it by the Board.

(4) While accepting a surrender of registration, the Board may impose such conditions upon the
foreign institutional investor or the sub account as it deems fit.

9) Conditions for grant of certificate to Foreign Institutional Investors.

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The certificate which is granted to the Foreign Institutional Investor shall be subject to the
following conditions namely:

a) He shall abide by the provisions of these regulations;

b) If any information or particulars previously submitted to the Board are found to be false
or misleading, in any material respect, he shall forthwith inform the Board in writing;
c) If there is any material change in the information previously furnished by him to the
Board, which has a bearing on the certificate granted by the Board, he shall forthwith
inform the Board
d) He shall, before making any investments in India, enter into an arrangement with a
designated bank for the purpose of operating a special non-resident rupee or foreign
currency account;
e) Before making any investments in India on behalf of a sub-account, if any, he shall
obtain registration of such sub-account, under these regulations.

10) Procedure where certificate is not granted

Where an application for grant of a certificate does not satisfy the requirements specified in
regulation 6, the Board may reject the application after giving the applicant a reasonable
opportunity of being heard.

a) The decision to reject the application shall be communicated by the Board to the
applicant in writing stating therein the grounds on which the application has been
rejected.
b) The Board shall, as soon as possible, in the light of the submissions made in the
application for reconsideration made under sub-regulation (3) and after giving a
reasonable opportunity of being heard, convey its decision in writing to the applicant.

11) .Application for registration of sub-accounts.

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 (1) A Foreign Institutional Investor shall seek from the Board registration of each sub-
account on whose behalf he proposes to make investments in India: Provided that before
making an application for registration on behalf of a proposed sub-account being a
foreign corporate, the foreign institutional investor shall verify the necessary details and
documents and satisfy itself about the identity of the proposed sub-account after applying
its know your client proceed.

2) An application for registration as sub-account shall be made in Form AA.

12. Procedure and grant of registration of sub-accounts.

For granting the registration the board shall take into account all matters which are relevant to sub-
account.

(a) The applicant falls into any of the following categories, namely:-

a) Broad based fund or portfolio which is broad based, incorporated or established outside
India; or
b) Proprietary fund of a registered foreign institutional investor; or
c) Foreign corporate; or
d) Foreign individual; or
e) University fund, endowment, foundation, charitable trust or charitable society who are
eligible to be registered as a foreign institutional investor under these regulations.

Explanation I: For the purposes of clause (a),

(A) “foreign corporate” means a body corporate incorporated outside India which fulfills the
following conditions:-

(i) Its securities are listed on a stock exchange outside India;

(ii) It has asset base of not less than two billion US dollars;

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(iii) It had an average net profit of not less than fifty million US dollars during the three financial
years preceding the date of the application.

(B) “Foreign individual” means a foreigner who fulfills the following

Conditions:-

(i) has a net worth of not less than fifty million US dollars;

(ii) holds the passport of a foreign country for a period of at least five years preceding the date of
application;

(iii) holds a certificate of good standing from a bank;

(iv) Is the client of the foreign institutional investor or any other entity which belongs to the
same group as the foreign institutional investor, for a period of at least three years preceding the
date of the application?

Explanation II: Non-resident Indian shall not be eligible to apply as sub-account:

(b) The applicant is a fit and proper person;

(c) The Foreign Institutional Investor through whom the application for registration is made to
the Board holds a certificate of registration as Foreign Institutional Investor;

(d) The Foreign Institutional Investor through whom an application for registration of sub-
account is made is authorized to invest on behalf of the sub-account.

13) Responsibility of foreign institutional investors.

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(1) A foreign institutional investor shall be responsible and liable for all acts of commission and
omission of all its sub-accounts and other deeds and things done by such sub-accounts in their
capacity as sub-accounts under these regulations.

(2) Nothing contained in sub-regulation (1) shall be deemed to detract from any responsibility or
liability of the sub-account under these regulations or under any other law for the time being in
force.

(3) Sub-regulation (1) shall have effect irrespective of whether the foreign institutional investor
exercises discretion in respect of funds of the sub-account or not.

14) Investment conditions and restrictions.

1) Commencement of investment.

A Foreign Institutional Investor shall not make any investments in securities in India without
complying with the provisions of this Chapter.

2) Investment restrictions.

(1) A Foreign Institutional Investor may invest only in the following:-

(a) Securities in the primary and secondary markets including shares, debentures and
warrants of companies [unlisted], listed or to be listed on a recognized stock exchange in
India; and

(b) units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed on a recognised stock exchange or not units of scheme floated by a
Collective Investment Scheme

(c) Dated Government Securities .

(d) Derivatives traded on a recognised stock exchange.

(e) Commercial paper.

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 (f) Security receipts.

(1A) Where a foreign institutional investor or sub-account holds equity shares in a company
whose shares are not listed on any recognised stock exchange, and continues to hold such
shares after initial public offering and listing thereof, such shares shall be subject to lock-
in for the same period, if any, as is applicable to shares held by a foreign direct investor
placed in similar position, under the policy of the Central Government relating to foreign
direct investment for the time being in force.

(2) Not withstanding anything contained in sub-regulation (1) of this regulation, the total
investments in equity and equity related instruments (including fully convertible debentures,
convertible portion of partially convertible debentures and tradable warrants) made by a Foreign
Institutional Investor in India, whether on his own account or on account of his sub-accounts,
shall not be less than seventy per cent of the aggregate of all the investments of the Foreign
Institutional Investor in India, made on his own account and on account of his sub-accounts:

Provided that nothing contained in sub-regulation (2) shall apply to any investment of the
Foreign Institutional Investor either on its own account or on behalf of its sub-accounts in debt
securities which are [unlisted or] listed or to be listed on any stock exchange if the prior approval
of the Board has been obtained for such investments:

Provided further that the Board may while granting approval for the investments impose
conditions as are necessary with respect to the maximum amount which can be invested in debt
securities by the foreign institutional investor on its own account or through its sub accounts.

Provided further that a foreign corporate or individual shall not be eligible to invest through the
hundred percent debt route

Provided further that no foreign institutional investor shall invest in security receipts on behalf of
its sub account.

(3) In respect of investments in the secondary market, the following additional conditions shall
apply:-

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(a) a foreign institutional investor or sub-account shall transact in the Indian securities market
only on the basis of taking and giving delivery of securities purchased or sold:

(b) No transaction on the stock exchange shall be carried forward; and

(c) The transaction of business in securities shall be only through stock brokers who have
been granted a certificate by the Board under sub section (1) of section 12 of the
securities and Exchange Board of India Act, 1992:

Provided that transactions in government securities [, commercial paper] [including

treasury bills] shall be carried out in a manner specified by the Reserve Bank of India.

Provided further that nothing contained in clause (c) shall apply to sale of securities by a
Foreign Institutional Investor in response to a letter of offer sent by an acquirer in
accordance with the Securities and Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997.

Provided further that in case of an offer by a company to buy-back its securities, the
foreign institutional investor, may sell the securities held by it to such company, in
accordance with the Securities and Exchange Board of India (Buy-back of securities)
Regulations, 1998.

(d) a Foreign Institutional Investor or a sub-account, shall, subject to such instructions as

may be issued by the Board, deliver or cause to be delivered only securities in
dematerialized form for settlement of its transactions undertaken on a recognised stock
exchange, except in cases where the issuer of such securities has established connectivity
with all depositaries registered with the Board under Securities and Exchange Board of
India (Depositories and Participants) Regulations, 1996

(4) Unless otherwise approved by the Board, securities shall be registered –

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 (a) in the name of the Foreign Institutional Investor, provided the Foreign Institutional
Investor is making investments on his own behalf; or

(b) 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:

Provided that the names of the sub-accounts on whose behalf the Foreign Institutional
Investor is investing are disclosed to the Board by the Foreign Institutional Investor.

(5) The purchase of equity shares of each company by a Foreign Institutional Investor investing
on his own account shall not exceed ten percent of the total issued capital of that company.

(6) In respect of a Foreign Institutional Investor investing in equity shares of a company on

behalf of his sub-accounts, the investment on behalf of each such sub-account shall not exceed
ten percent of the total issued capital of that company:

Provided that in case of foreign corporate or individuals, each of such sub-account shall not
invest more than 5% of the total issued capital of the company in which such investment is made.

(7) The investment by the Foreign Institutional Investor shall also be subject to Government of
India Guidelines.

(8) A foreign institutional investor or sub-account may lend or borrow securities in accordance
with the framework specified by the Board in this regard.

15) General obligations and responsibilities.

A) Appointment of domestic custodian.

(1) A Foreign Institutional Investor or a global custodian acting on behalf of the Foreign
Institutional Investor, shall enter into an agreement with a domestic custodian to act as custodian
of securities for the Foreign Institutional Investor.

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(2) The Foreign Institutional Investor shall ensure that the domestic custodian takes steps for –

(a) Monitoring of investments of the Foreign Institutional Investor in India;

(b) Reporting to the Board on a daily basis the transactions entered into by the Foreign
Institutional Investor;

(c) Preservation for five years of records relating to his activities as a Foreign Institutional
Investor; and

(d) Furnishing such information to the Board as may be called for by the Board with regard to
the activities of the Foreign Institutional Investor and as may be relevant for the purpose of this
regulation.

(3) A Foreign Institutional Investor may appoint more than one domestic custodian with prior
approval of the Board, but only one custodian may be appointed for a single sub-account of a
Foreign Institutional Investor.

B) Appointment of designated bank.

A Foreign Institutional Investor shall appoint a branch of a bank approved by the Reserve Bank
of India for opening of foreign currency denominated accounts and special non-resident rupee
accounts.

C) Investment Advice in publicly accessible media.

(1) A Foreign Institutional Investor or any of his employees shall not render directly or
indirectly any investment advice about any security in the publicly accessible media, whether
real-time or non real-time, unless a disclosure of his interest including long or short position in
the said security has been made, while rendering such advice.

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(2) In case, an employee of the Foreign Institutional Investor is rendering such advice, he shall
also disclose the interest of his dependent family members and the employer including their long
or short position in the said security, while rendering such advice.

D) Maintenance of proper books of accounts, records, etc.

(1) Every Foreign Institutional Investor shall keep or maintain, as the case may be, the following
books of accounts, records and documents, namely:-

(a) true and fair accounts relating to remittance of initial corpus for buying, selling and realising
capital gains of investment made from the corpus;

(b) Accounts of remittances to India for investments in India and realising capital gains on
investments made from such remittances;

(c) Bank statement of accounts;

(d) Contract notes relating to purchase and sale of securities; and

(e) Communication from and to the domestic custodian regarding investments in securities.

(2) The Foreign Institutional Investor shall intimate to the Board in writing the place where such
books, records and documents will be kept or maintained.

E) Preservation of books of accounts, records, etc.

Subject to the provisions of any other law, for the time being in force, every Foreign Institutional
Investor shall preserve the books of accounts, records and documents specified in regulation 18
for a minimum period of five years.

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F) Appointment of Compliance Officer.

(1) Every Foreign Institutional Investor shall appoint a compliance officer who shall be
responsible for monitoring the compliance of the Act, rules and regulations, notifications,
guidelines, instructions etc issued by the Board or the Central Government.

(2) The compliance officer shall immediately and independently report to the Board any non-
compliance observed by him.

G) Information to the Board.

Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve
Bank of India should submit as the case may be, any information, record or documents in
relation to his activities as a Foreign Institutional Investor as the Board or as the Reserve Bank of
India may require.

Foreign Institutional Investors shall fully disclose information concerning the terms of and
parties to off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or
any other such instruments.

16) PROCEDURE FOR ACTION IN CASE OF DEFAULT

A) Liability for Action in case of default.

A Foreign Institutional Investor who contravenes any of the provisions of the Act, rules or
regulations framed there under shall be liable for one or more actions specified therein including
the action under the SEBI (Intermediaries) Regulations, 2008.

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 CHAPTER V

CONCLUSION

Foreign institutional investment is an institution established or incorporated outside India which

proposes to make investment in Indian securities. Due to liberalization and economic reforms
there is an increase in foreign institutional investment (FII).FII is an part of Foreign direct
investment.FII had greatly helped the country in improving the economic development. The
government had introduced permitted portfolio instrument which have help the investor from
abroad to invest in Indian capital market.FII are allowed to invest in primary and secondary
market instruments such as in shares, debentures, warrants etc.FII had help to flow the equity
capital, improving competition in capital market, improved corporate governance, helps in
financial innovation and hedging instruments etc.FDI and FII are important sources of raising
capital in country.FII flies away at the shortest political or economic disturbance where as FDI is
of permanent nature.FII had greatly influenced on Indian stock market, from the past four years
there has been more than $41 trillion worth of FII funds invested in India, due to these sensex of
our country is rising in absolute terms. Short term traders are adversely getting affected by the
role of FII at present. Nowadays FII are looking at corporate governance and execution liabilities
which has significantly helped in creating strong portfolio on Indian stock screen based trading
and depositories are realities today largely because of FII. Due to introduction of rolling
settlement system and derivatives FII participation has increased and more money is flowing in
the Indian capital market. FII’s have made net investment of US$ 10 billion in the first six
months of 2009-2010.A major portion had invested in primary market and then in secondary
market. The market for FII was open in 1993.FII’s own as dominant 16% on Indian equities
(worth US$ 147bn) and account for 10-15 of the equity volumes.FII is holding 16% of equity in
India’s biggest 500 companies. Participatory notes are the instruments used for making
investment in stock market. This are not used within the country. They are used outside India for
making an investment in shares listed in the country. This is called offshore derivative
instruments in stock market. Participatory notes contribute about 60% of investment by FII.SEBI
had made the rules and regulations for FII under SEBI act 1995 provides the registration for FII.

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This act had also laid down the rules and regulations for FII. It can registered through pension
funds, mutual fund, investment trust, institutional portfolio management etc. For registration
investors had to follow various rules and regulations mentioned in the SEBI act.FII had greatly
helped the country in improving economic development.

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 BIBLOGRAPHY
Websites
1) www.moneyworks4me.com

2) www.financialexpress.com

3) www.equitymaster.com

4) www.oppapess.com

5) www.investmdia.com

6) www.in.reuter.com

7) www.sebi.com

8) www.moneycontrol.com

9) www.joaag.com

10) www.investopedia.com

11) www.sebi.gov.com

Books:
1) Indian Financial System, by Bharati V Pathak.

2) Foreign institutional investor by G. Gopal Krishna Murthy

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