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Introduction to Indian Capital Markets SEBI Definitions & Regulations Significance of Corporate Debt Markets Foreign Institutional Investors (FIIs) Investments in India FIIs Role in Indian Debt Markets

Introduction to Indian Capital Markets Indian capital markets have witnessed a huge transformation in the past two decades and are considered to be one of the most attractive investment destinations among large emerging economies of the world. India has robust, transparent and stable financial markets regulated by SEBI. The SEBI regulatory regime provides an enabling framework for offshore investors to invest in Indian securities and participate in the India growth story. FII regulations and SEBI (Foreign Venture Capital Investor) Regulations, 2000 allow eligible foreign investors to invest in Indian listed and unlisted securities, mutual fund units etc. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 provide a robust framework for foreign investors, pension funds, foreign insurance companies, foreign mutual funds, sovereign wealth funds and several other eligible offshore investors to participate in initial offerings and private placements by Indian companies. Indian equity markets are one of the deepest and most liquid of any market in the world with volumes in the top five in the world and a market cap in excess of the GDP of the country. Foreign investors have been permitted to raise capital from Indian markets by issuing Indian Depository Receipts (IDRs). Standard Chartered Bank of UK recently raised US$ 530 million by way of an IDR issue. Many foreign companies are taking interest in raising money through this route redefining the term capital exporting economies. The number of FII registrations with SEBI has substantially increased post the 2008 Amendments and as on November 2010 there are 1738 FIIs and 5592 Sub-Accounts registered with SEBI. The number has increased substantially in the past two years in view of the Indian economy offering lucrative investment opportunities. The erstwhile rigid criteria of requiring FIIs and Sub-Accounts to register as a 70:30 FII/Sub-Account or 100% debt FII/Sub-Account has recently been done away with, further showing the commitment to simplify the registration and operational issues pertaining to foreign portfolio investors.

Foreign Institutional Investor (FII) FII means an entity established or incorporated outside India which proposes to make investment in India. Sub-Account Sub-account includes those foreign corporations, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by a FII. Designated Bank Designated Bank means any bank in India which has been authorized by the Reserve Bank of India to act as a banker to FII. Domestic Custodian Domestic Custodian means any entity registered with SEBI to carry on the activity of providing custodial services in respect of securities. Broad Based Fund Broad Based Fund means a fund established or incorporated outside India, which has at least twenty investors with no single individual investor holding more than 10% shares or units of the fund. Provided that if the fund has institutional investor(s) it shall not be necessary for the fund to have twenty investors. Provided further that if the fund has an institutional investor holding more than 10% of shares or units in the fund, then the institutional investor must itself be broad based fund.

FII REGISTRATION 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. Fee for registration as FII The fee is US $ 5,000. Days it takes to get registered as FII 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. Validity period of FII registration The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be renewed. 100 % Debt FIIs/Sub-Accounts & Process for registration 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure for registration of FII/sub-account, under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub-account under 100% debt route. SUB-ACCOUNT REGISTRATION Eligible Institutions/ Individuals a. Institution or funds or portfolios established outside India, whether incorporated or not. b. Proprietary fund of FII.

c. Foreign Corporates d. Foreign Individuals Fee for sub-account registration US $ 1,000 Days it takes to get a sub-account registered SEBI generally takes three working days in granting FII registration. However, in cases where the information furnished by the applicants is incomplete, three days shall be counted from the days when all necessary information sought, reaches SEBI. Validity period of sub-account registration The validity of sub-account registration is co-terminus with the FII registration under which it is registered. INVESTMENT OPPORTUNITIES Financial instruments available for FII investments a. Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; b. Units of mutual funds; c. Dated Government Securities; d. Derivatives traded on a recognized stock exchange; e. Commercial papers. Investment limits on equity investments by FII/sub-account a. FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian company. b. Investment on behalf of each sub-account shall not exceed 10% of total issued capital of an India company. c. For the sub-account registered under Foreign Companies/Individual category, the investment limit 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. Q40. What are the investment limits on debt investments by FII/sub-account? The FII investments in debt securities are governed by the policy if the Government of India. Currently following limits are in effect:
o

For FII investments in Government debt, currently following limits are applicable:

100 % Debt US $ Route billion 70 : 30 Route Total Limit US $ million

1.55 200

US $ 1.75 billion

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

Q41. What other investment limits are there? Normal FII (70:30 Route) 100% Debt FII

Total investment in equity 100% investment shall be and equity related made in debt security instruments shall not be only. less than 70% of aggregate of all investments. Q42. In whose name should the securities be registered? a. In the name of FII when making investments on its own behalf b. In the name of sub-account when making investments on behalf of Sub-account c. In the name of "FII a/c sub-account" when making investments on behalf of Sub-account.

FII Brief Introduction India opened its stock markets to foreign investors in September 1992 and has, since 1993, received considerable amount of portfolio investment from foreigners in the form of Foreign Institutional Investors (FII) investment in equities. This has become one of the main channels of international portfolio investment in India for foreigners13. In order to trade in Indian equity markets, foreign corporations need to register with the SEBI as Foreign Institutional Investors (FII)14. SEBIs definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf. The trickle of FII flows to India that began in January 1993 has gradually expanded to an average monthly inflow of close to Rs. 1900 crores during the first six months of 2001. By June 2001, over 500 FIIs were registered with SEBI. The total amount of FII investment in India had accumulated to a formidable sum of over Rs. 50,000 crores during this time (see Fig. 1). In terms of market capitalization too, the share of FIIs has steadily climbed to about 9% of the total market capitalization of BSE (which, in turn, accounts for over 90% of the total market capitalization in India). The sources of these FII flows are varied. The FIIs registered with SEBI come from as many as 28 countries (including money management companies operating in India on behalf of foreign investors). US-based institutions accounted for slightly over 41%, those from the UK constitute about 20% with other Western European countries hosting another 17% of the FIIs. It is, however, instructive to bear in mind that these national affiliations do not necessarily mean that the actual investor funds come from these particular countries. Given the significant financial flows among the industrial countries, national affiliations are very rough indicators of the home of the FII investments. In particular institutions operating from Luxembourg, Cayman Islands or Channel Islands, or even those based at Singapore or Hong Kong are likely to be investing funds largely on behalf of residents in other countries. Nevertheless, the regional breakdown of the FIIs does provide an idea of the relative importance of different regions of the world in the FII flows. India is witnessing intense activities from foreign institutional investors (FIIs), on account of the country's positive investment environment and high growth potential. FIIs, convinced about India's economic progress, are increasingly looking forward for investment options in India, be it in the form of private equity (PE), mergers & acquisitions (M&As) or investment in equities and debt instruments. Quenching its thirst for foreign assets, India Inc announced 177 M&A deals worth US$ 26.8 billion in the first nine months of 2011. For the quarter July-September 2011, inbound deals worth US$ 7.32 billion were registered as against the deals worth US$ 2.65 billion in the previous quarter; total value being largely accounted for by two mega deals British Petroleum's (BP) US$ 7.2 billion acquisition of stake in Reliance Industries' oil and gas properties and Vodafone Group's purchase of partner Essar's 33 per cent stake in Vodafone Essar Limited for US$ 5.46 billion. The FII scenario has witnessed significant developments and investments in 2011, some of them being discussed hereafter. FII Recent Developments FIIs' net investment for the month of September 2011 stood at US$ 6.97 million and their injections from JanuaryAugust 2011 stood at over US$ 2 billion.

According to latest data released by Securities and Exchange Board of India (SEBI), 21 institutions registered as FIIs with the market regulator in 2011-12 (till September), enhancing the presence of registered FIIs to 1,743. Moreover, the number of registered sub-accounts has increased by 342, taking the count to 6,028 in September 2011. Both figures are all-time highs. According to the data available at Bombay Stock Exchange (BSE), FIIs have increased their stake in ten out of 100 companies in quarter ended September 2011. FIIs' holdings through participatory notes or P-notes increased by 1.4 per cent in equities and debt instruments, including the derivatives, in August 2011. FII P-note position was noted at 15.4 per cent in August, as against 14 per cent in July 2011, according to the SEBI data. India's foreign exchange reserves marked a new high at US$ 319 billion as on July 29, 2011, as per the data by the Reserve Bank of India (RBI). Growth in foreign currency assets and appreciation in gold reserves contributed to the reserves' increment. While the gold reserves recorded an all-time high of US$ 25,349 million, foreign currency assets were valued at US$ 286 billion on that date. FII- Key Investments South Africa-based Life Healthcare Group Holdings is buying 26 per cent stake in the healthcare arm of Max India, valued at Rs 1,984 crore (US$ 405 million). PE firms such as Warburg Pincus, Goldman Sachs and International Finance Corporation hold around 25 per cent stake in Max India while its FII investors also include Temasek. Marking its second investment in India, Warren Buffet's Berkshire Hathaway will induce investment in a chlorinated polyvinyl chloride (CPVC) industrial unit in Gujarat, through its wholly owned subsidiary Lubrizol Corporation. Lubrizol will initially invest Rs 1,177 crore (US$ 245 million) in the project and its construction work is expected to commence by January 2013. In order to tap more foreign funds, Cox and Kings has got the nod from Foreign Investment Promotion Board (FIPB) to increase its foreign equity by 10 per cent to 53.94 per cent, from the previous 43.81 per cent. Currently, foreign promoters have a stake of 19.87 per cent and FIIs hold 22.72 per cent. FIPB has granted its approval to the travel company to raise Rs 750 crore (US$ 152.67 billion) from foreign markets. Government Initiatives The RBI supervises the ceilings on investments pertaining to FIIs/ non-resident Indians (NRIs) / persons of Indian origin (PIO) on a daily basis. For effective scrutiny of foreign investment ceiling limits, RBI has fixed cut-off points that are two percentage points lower than the actual ceiling. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. In a bid to enhance the transparency of foreign funds, lower liquidity risks and curb volatility, SEBI has asked the foreign investors to have at least one broad-based sub-account' for retaining their licences and has given them a year (until January 2012), to comply with the norms. Broad-based subaccounts of FIIs are meant for large overseas wealth funds and have a wide investor base.

To attract more FII investments in India, the Government has reduced the residual maturity limit and the lock-in period for investment in infrastructure bonds. As of current policy, FIIs are allowed to invest up-to US$ 25 billion long-term infrastructure bonds that have a minimum residual maturity of five years and a lock-in period of at least three years. The modifications would be made to both the clauses of the scheme. Moreover, the Government is considering allowing foreign individuals or Qualified Foreign Investors (QFIs), to buy equities directly in stock markets, a senior Finance Ministry official has revealed. In an initiative to highlight India as a major investment hub and attract higher foreign equity, the government has already allowed QFIs to invest up to US$ 13 billion in equity and debt schemes of mutual funds in the infrastructure sector. Institutional dealers bet big on Indian FII ecosystem for the years to come and anticipate 2012 to be a period when the scenario would improve to a greater extent. On the back of increased FII activity, CRISIL expects rupee to strengthen to Rs 45-46 per dollar by March 2012. Industry analysts believe that strong domestic consumption-driven growth in India would lure significant positive cash inflow in near future.

Way Forward The Indian economy is possessed with a sound and stable financial and banking sector resulting in greater foreign participation as is evident in continuously rising FDI and FII investments. These trends are likely to continue given the liberal trade policies and efficient regulatory regime. India is in the process of introducing comprehensive and far reaching changes to its commercial and corporate regulatory framework. Such proposed changes include introduction of a new Companies Act, Direct Tax Code, fully adopting International Financial Reporting Standards (IFRS) and moving to more transparent models of governance. With a strong commitment to ensure effective compliance with Basel norms and the standards prescribed by International Organizational Securities Commissions (IOSCO), India is following international best practices and standards. The cautious and at the same time liberal investment norms ensure that the country would continue to attract large foreign investments and continue to outpace other developing and developed economies.