FOREIGN INSTITUTIONAL INVESTOR IN INDIA

PRESENTED BY:

Tanmay Rane 422Sushil Rajmane 421Deval Tripathi 428Gaurav Chikane 434Shahuraj Dhanegave 435

FIIs -

Source: economictimes

• India opened its stock market to foreign investors in 1993

• FIIs are those institutional investors which invest in the assets belonging to a different country.

• FIIs are allowed to invest in primary and secondary capital market in through portfolio investment scheme i.e. acquire shares/debentures of Indian company through the stock exchanges in India

• Plays a very important role in any economy.

• These are usually big companies such as investment banks, mutual funds, insurance companies etc.

• They are the largest non-promoters share holders in the Indian market.

Source: economictimes

WHO CAN BE REGISTERED AS AN FIIs?

Broad based" funds or of foreign corporate 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

IS FIIS & FDI SIMILAR ? (1/2)

A lot of ambiguity surrounds around FIIs & FDI

FII• FIIs refer to outside companies

investing in the financial markets of India.

• International institutional investors must register with the Securities and Exchange Board of India to participate in the market

FDI• FDI refers to an investment made by

a company in one country, into a company based in another country.

• The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture

Source: IIFL

IS FIIS & FDI SIMILAR ? (2/2)

• In the Budget 2013-14, Mr Chidambaram said that foreign investors with less than 10% stake in a particular stock will be considered as FII, and more than 10% stake as FDI.

“To remove the ambiguity that prevails on what is FDI and what is FII, I propose to follow the international practice and lay down a broad principle that, where an investor has a stake of 10% or less in a company, it will be treated as FII and, where an investor has a stake of more than 10%, it will be treated as FDI,”

Source: IIFL

FII & FDI ARE PART OF FOREIGN INVESTMENT

Foreign Investment in India

ADR & GDRInvestment by NRIs/

person of Indian origin

Investment in listed/unlisted

companies (except through route of stock

exchanges)

Institutional investment in listed companies through

stock exchanges

FDI PE/ Foreign Venture

FIIs

WHY THERE IS NEED OF FII ?

• Supplements and augmented domestic savings and domestic investment without Increasing the foreign debt of our country

• Capital inflows to the equity market increase stock prices, lower the cost of equity capital and encourage the investment by Indian firms

• Provide access to cheap Global Credit

EFFECT OF FII ON INDIAN ECONOMY

• Enhanced flows of equity capital

• Managing uncertainty and controlling risks

• Improving capital markets

• Enhance trade volume and market capitalization

• Access to cheap global credit

• Potential capital outflows inflation

• Problem to small investors • Adverse impact on exports

• Create Asset Bubbles

• FII’s may increase Inflation

REGULATIONS

24% Of paid up capital –ceiling for overall investment for FIIs

20% In case of PSUs

The ceiling can be raised upto sectoral cap/statutory ceiling, subject to approval of board, passing special revolutionary

Source: RBI

On march 7,2014 – RBI RBI raises FII purchase limit in

Manappuram Finance to 49%

MONITORING FIIs

• RBI monitors the ceiling of FIIs on daily basis

• For effective monitoring, RBI has fixed cut-off points that are 2% less than actual ceiling

• Once the aggregate purchase of equity shares of FIIs reach the cut off mark, the RBI cautions all banks as not to purchase any more equity shares on behalf of FIIs without approval of RBI

• Details are sent to RBI by banks

• On receipt of proposal, RBI gives clearance till investment reach to its stated limit

Source: RBI

FII INVESTMENT IN INDIA

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013

-100000

-50000

0

50000

100000

150000

200000

Investment in Rs. Cr.

• Exponential growth of 6000% from 1993 to 2013

• Maximum outflow in 2008, as market was all time high during this year when investor realized the maximum return on investment

Source: SEBI

INVESTMENT BY FIIsGenerally two ways to invest for FIIs – Equity & Debt

Equity investment route: • Securities in the primary and secondary market including shares which are unlisted,

listed or to be listed on a recognized stock exchange in India.

• Units of schemes floated by the Unit Trust of India and other domestic mutual funds,whether listed or not.

• Warrants

Debt investment route: • Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.)

• Bonds

• Dated government securities

• Treasury Bills

• Other Debt Market Instruments

1995

1996

1998

2004

2012

SEBI released regulations for FII investment in Indian debt markets. The debt limit was kept at $1-1.5 bn. FIIs were allowed to invest in debt markets via the 70: 30 route equity investments shall not be less than 70% of total funds and maximum 30% of investment was allowed in debt.

SEBI allowed a new category of FIIs – 100% debt FII The overall debt limit was maintained at $1-1.5 bn for FII investments routed through both kinds of categories

Finance Minister in his Budget Speech for 1998-99 announced FII investment to be allowed in unlisted securities. Thereby, SEBI permitted FII investment in unlisted debt securities.

the Government debt limit was increased from $1 bn to $1.75 bn. The debt limit for 70:30 was raised from $100 mn to $200 mn. a separate debt ceiling was kept for corporate bonds of $ 500 mn. This was over the $1.75 billion ceiling for government bonds

- GoI increased the FII debt limit from $5 bn to $ 10 bn in the Government Bond (long term) category and also raised corporate bond limit

INVESTMENT BY FIIs – EQUITY & DEBT

Current FII limit: G-Sec: US$25bn, corporate debt: US $51bn

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013

-100000

-50000

0

50000

100000

150000

EquityDebt

Investment in Rs. Cr.

• FIIs still prefer equity over debt, due to high return on investment

INVESTMENT BY FIIs – EQUITY & DEBT

Source: SEBI

STAKE OF FIIS – SECTOR WISE BREAKUP

29.23

6.73

14.39.68

11.43

10.75

9.49

4.933.42 Service (financial & non financial)

Computer

Telecommunication

Housing & Real estate

Automobile

Power & Oil

Metallurgical Industries

Petroleum & Natural gas

Chemicals

IMPACT OF FIIs ON INDIAN MARKETS • In the Indian stock markets movement of the stock depends on the

limited no of stocks

• As FIIs purchase and sell these stocks there is a high degree of volatility in the stock market

• If any set of development encourages outflow of capital that will increase the vulnerability of the situation in the stock market

• FIIs was major cause of market crash from Jan 21 to Jan 29 2008, when they pulled more than Rs. 10,000 Cr, from capital market

• As result , the market came crashing down and in two days Jan. 21 and 22 the market tumbled 2284 points from the closing levels point of Friday (jan.18)

HOW THEY PERFORM

The degree of volatility can be attributed to the following reasons:

• The increase in investment by FIIs increases stock indices the stock prices and encourages further investment . In this event when any correction takes place the stock prices decline and there will be pull out by the FIIs in a large numbers as earning per share declines

• The FIIs manipulate the situation of boom in such a manner that they wait till the index rises up to a certain height and exit at an appropriate time. This tendency increases the volatility further

MAJOR AREAS AFFECTED BY FII’SStock Market:They wield a great influence on Indian Markets due to their sheer capacity to purchase and sell in huge numbers.

Exchange Rate:Investing in India will bring dollars into the country thus strengthening rupee in terms of dollar

Exports and Imports :As FII lead to strengthening of currency our Exports become uncompetitive.

Inflation: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.

FII EFFECTS • There have been significant FII outflows of about US$ 14.6 billion during May 27

to August 9, 2013 which extended sharp downwards pressure on exchange rate.

• FIIs on a net basis disinvested US$ 8.3 billion of their bond portfolio and US$ 2.1 billion of their equity portfolio in cash markets in India. The resultant net outflow brought the rupee under immense pressure.

• As part of the global bond sell-off, FIIs also pulled out money from Indian government bonds, which contributed to the hardening of yields. As a result, the 10-year G-sec generic yield hardened from 7.12% on May 24, 2013 to 7.45%

• The withdrawal of FIIs, especially from the debt market, due to currency depreciation and narrowing yield differential affected CAD.

FII’S IN INDIA TODAY

• Since 12 Feb 2014 FII’s invested Rs 7000 Crore ($1.1 billion dollar) in Indian stocks.

• In DEBT markets(so far) FII’s have purchased fixed income paper worth nearly $5billion.

• Flows into equities muted at $820 million (Rs 4850 crore).

• After investing $1.1billion in Indian stocks(since 12 Feb 2014) .Benchmark equities have rallied nearly 6%.i.e It pushed SENSEX to 21525.14 (all time high) on March 6. Nifty to 6401.

• Rupee strengthened from 62.21 to a dollar on Feb 11 to 61.11 currently(march 7).

• In calendar year 2013, the Indian markets had seen FII inflow of nearly $20 Bn

FUTURE OF FII’S IN INDIA• Macro economic prospects are improving , i.e CAD narrowing and

fiscal deficit expected to stay in control.• Better policies and improved earnings are leading to more +ve

outlook for Indian equities. (eg BNP Paribas)• Easing of Geographical tensions has helped improve sentiment of

global investor.• Episodic volatility may provide attractive entry points for global

investors in coming months.• Equity Inflows should pick up once the INR stabilises.• Recent pick up in government spending should also revive growth

and market liquidity.

THANK YOU