Foreign Institutional Investors and Depository Receipts

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Foreign Institutional Investors


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Foreign Institutional Investors

Foreign institutional investormeans anentity established or incorporated outsideIndia which proposes to make investment

in India. Positive tidings about the Indianeconomy combined with a fast-growingmarket have made India an attractivedestination for foreign institutional

investors.


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Entry Options For FII


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Entry Options For FIIA foreign company planning to set upbusiness operations in India has thefollowing options:

Incorporated Entity

Unincorporated Entity


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Incorporated EntityBy incorporating a company under theCompanies Act,1956 through

Joint Ventures; or Wholly Owned Subsidiaries

Foreign equity in such Indian companies can beup to 100% depending on the requirements of

the investor, subject to equity caps in respect ofthe area of activities under the Foreign DirectInvestment (FDI) policy.


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Unincorporated EntityAs a foreign Company through

Liaison Office/Representative Office Project Office Branch Office Such offices can undertake activities permitted

under the Foreign Exchange ManagementRegulations,2000.


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Foreign Institutional Investor

One who propose to invest their proprietaryfunds or on behalf of "broad based" funds or offoreign corporate and individuals and belong toany of the under given categories can be

registered for FII. Pension Funds Mutual Funds Investment Trust

Insurance or reinsurance companies Endowment Funds University Funds


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Foundations or Charitable Trusts or CharitableSocieties who propose to invest on their ownbehalf, 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 bemade in Form A, the format of which isprovided in the SEBI(FII) Regulations,

1995 and submitted with under mentioneddocuments in duplicate addressed to SEBIas well as to Reserve Bank of India (RBI)and sent to the following address within 10

to 12 days of receipt of application.


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What is a sub-account?

Sub-account includes those foreigncorporations, foreign individuals, andinstitutions, funds or portfolios established

or incorporated outside India on whosebehalf investments are proposed to bemade in India by a FII.


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What is a Designated Bank?

Designated Bank means anybank in India which has been

authorized by the Reserve Bankof India to act as a banker to FII.


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Who is a Domestic Custodian?

Domestic Custodian means anyentity registered with SEBI to

carry on the activity ofproviding custodial services inrespect of securities.


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What are the parameters on which SEBI

decides FII applicants eligibility?

Applicants track record, professionalcompetence, financial soundness,experience, general reputation of fairnessand integrity. (The applicant should havebeen in existence for at least one year)

whether the applicant is registered with andregulated by an appropriate ForeignRegulatory Authority in the same capacity inwhich the application is filed with SEBI

Whether the applicant is a fit & properperson.


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Which form needs to be filled in whenapplying for FII registration?

"Form A" as prescribed in SEBI (FII)Regulations, 1995.


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Which documents need to besent with "Form A"?

Certified copy of relevant clauses (clausespermitting the stated activities) ofMemorandum of Association, Article of

Association or Article of Incorporation. Audited financial statement and annual

report for the last one year (period coveredshould not be less than twelve months


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How much is the fee for registration asFII?

US $ 5,000.

When is the registration fee payable? Ans. At the time of submitting the

application for registration.

What is the mode of payment? Demand Draft in favour of "Securities and

Exchange Board of India"

H d it t k t t


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How many days it takes to getregistered as FII?

SEBI generally takes seven working days ingranting FII registration. However, in caseswhere the information furnished by theapplicants is incomplete, seven days shall becounted from the days when all necessaryinformation sought, reaches SEBI.

In cases where the applicant is bank andsubsidiary of a bank, SEBI seeks commentsfrom the Reserve Bank of India (RBI). In suchcases, 7 working days would be counted fromthe day no objection is received from RBI.


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What are P-no tes?

P-Notes are instruments like contractnotes issued by FIIs to overseas investorswho cannot directly invest in equity market

as they are not registered. Out of over1,100 FIIs registered with SEBI, only 34have been issuing PNs.


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Some Investment Highlights

The Indian growth story has attracted global majorslike CLSA, HSBC, Citigroup, Crown Capital, Fidelity,Goldman Sachs, Morgan Stanley, UBS, T Rowe Price

International, Capital International and ABN Amroamong others to enter the Indian financial market.

Goldman Sachs picked up an 8.16 per cent stake inNew Delhi Television Ltd (NDTV) and a minoritystake in Sterling & Wilson Pvt. Ltd.

RREEF Alternative Investments, the globalalternative investment management business ofDeutsche Bank, plans to invest over US$ 1 billion inthe country.


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Goldman Sachs and Macquarie haveacquired a 20 per cent stake each in PTCIndia Financial Services Ltd. They have both

invested about US$ 16.06 million each. Temasek Holdings, Investment Corporation

of Dubai, Goldman Sachs, Macquarie, AIFCapital, Citigroup and India Equity Partners

(IEP) have each picked a combined stake of10 per cent in Bharti Infratel at US$ 1 billion.


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Further, New York-based private equity firm,Kohlberg Kravis Roberts and Co. (KKR), hasalso invested US$ 250 million in Bharti Infratel.

Private equity firm Blackstone has taken up a 26per cent stake in MTAR Technologies for US$65 million.

Citigroup, Morgan Stanley, Goldman Sachs and

BSMA have picked up a combined stake of overseven per cent in Gitanjali Gems at US$ 23.51million.


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Fidelity Investments International haspicked up close to seven per cent equity inTransport Corporation of India (TCI) for

US$ 10.72 million.

JP Morgan Chase has invested Rs 250crore (US$ 51.37 million) in BPTP Ltd, a

Delhi-based real estate company.


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Depository Receipts


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Depository Receipts are a type ofnegotiable (transferable) financial security,representing a security, usually in the form

of equity, issued by a foreign publicly-listed company. However, DRsare traded on a local stock exchange

though the foreign public listed company isnot traded on the local exchange


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Thus, the DRs are physical certificates, whichallow investors to hold shares in equity of othercountries. This type of instruments first started in

USA in late 1920s and are commonly known asAmerican depository receipt (ADR). Later onthese have become popular in other parts of theworld also in the form of Global Depository

Receipts (GDRs). Some other common type of DRs are European

DRs and International DRs.


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How do Depository Receipts

Created?


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How do Depository ReceiptsCreated?

When a foreign company wants to list itssecurities on another countrys stockexchange, it can do so

through Depository Receipts (DR)mode. To allow creation of DRs, theshares of the foreign company, which theDRs represent, are first of all delivered

and deposited with the custodian bank ofthe depository through which they intendto create the DR.


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How do Depository ReceiptsCreated?

On receipt of the delivery of shares, thecustodial bank creates DRs and issuesthe same to investors in the country

where the DRs are intended to be listed.These DRs are then listed and traded inthe local stock exchanges of that country.


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WHAT IS AMERICAN

DEPOSITORY RECEIPT?


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American Depository Receipts arenegotiable instruments issued by adepositary bank, representing ownership

in non-US securities, usually referred to asthe underlying ordinary shares. Theyenable investors to acquire and trade non-US securities without concern for the

differing settlement timetables and theproblems sometimes associated withoverseas markets


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Depository receipt issued by a company in the UnitedState of America is known as American DepositoryReceipts which is govern by Securities and ExchangeCommission of USA.

An ADRs is generally created by the deposit of the

securities of an non united states company with acustodian bank in the country of incorporation of theissuing company.The custodian bank informs the depository in the U.S.that the ADRs can be issued. ADRs are united statesdollar denominated and are traded in the same way asare the securities of the U.S. companies.
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American Depository Receipts popularly knownas ADRs were introduced in the Americanmarket in 1927.

ADR is a security issued by a company outsidethe U.S. which physically remains in the countryof issue, usually in the custody of a bank, but istraded on U.S. stock exchanges.

In other words, ADR is a stock that trades in theUnited States but represents a specified numberof shares in a foreign corporation


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Thus, we can say ADRs are one or moreunits of a foreign security traded in

American market. They are traded just

like regular stocks of other corporate butare issued / sponsored in the U.S. by abank or brokerage.


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How It Works/Example:

Investors can purchase ADRs from broker/dealers.These broker/dealers in turn can obtain ADRs for theirclients in one of two ways: they can purchase already-issued ADRs on a U.S. exchange, or they can create

new ADRs. To create an ADR, a U.S.-based broker/dealerpurchases shares of the issuer in question in the issuer'shome market. The U.S. broker/dealer then depositsthose shares in a bank in that market. The bank then

issues ADRs representing those shares to thebroker/dealer's custodian or the broker-dealer itself,which can then apply them to the client's account.


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A broker/dealer's decision to create newADRs is largely based on its opinion of theavailability of the shares, the pricing and

market for the ADRs, and marketconditions.


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Broker/dealers don't always start the ADRcreation process, but when they do, it is referredto as an unsponsoredADR program (meaningthe foreign company itself has no active role in

the creation of the ADRs). By contrast, foreign companies that wish tomake their shares available to U.S. investorscan initiate what are called sponsoredADRprograms. Most ADR programs are sponsored,as foreign firms often choose to actively create

ADRs in an effort to gain access to Americanmarkets.


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Which Indian companies haveADRs and / or GDRs?

Un-sponsored ADRs: These are issued withoutany formal agreement between the issuingcompany and the depository, although theissuing company must consent to the creation of

the ADR facility. Under this, certain costsincluding those associated with disbursement ofdividends are borne by the investor. They areexempted from most of reporting requirements

of the securities and exchange commission.
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ii. Sponsored ADRs : These are created by asingle depository which is appointed by theissuing company under rules provided in adeposits agreement. There are two broad types

of sponsored ADRs, those that are restrictedwith respect to the types of buyer which isallowed and are therefore privately placed andthose that are unrestricted with respect to buyer

and are publicly placed and traded.


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Restricted ADRs are allowed to be placed only amongselected investors and face restriction on their re-sale.

As those are not issued to general public, they areexempted from reporting to the commission and are not

even registered with them.Unrestricted ADRs are issued to and traded by thegeneral investing public in US capital market. There arethree classes of UR ADRs , each increasinglydemanding in terms of reporting requirement to the

commission as well as attractive in terms of degree ofvisibility provided.
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Global Depository Receipt (GDR)

These are similar to the ADR butare usually listed on exchanges outsidethe U.S., such as Luxembourg or London.

Dividends are usually paid in U.S.dollars. The first GDR was issued in1990.


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What are GDRs?

Global Depository Receipts means any instrument in theform of a depository receipt or certificate (by whatevername it is called) created by the Overseas DepositoryBank outside India and issued to non-resident investorsagainst the issue of ordinary shares or Foreign CurrencyConvertible Bonds of issuing company.

A GDR issued in America is an American DepositoryReceipt (ADR). Among the Indian Companies RelianceIndustries Limited was the first company to raise funds

through a GDR issue.


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Foreign Investment through GDRs(Euro Issues)

Foreign Investment through GDRs istreated as Foreign Direct Investment inIndia. Indian companies are allowed to

raise equity capital in the internationalmarket through the issue of GlobalDepository Receipt (GDRs). GDRs are

designated in dollars and are not subjectto any ceilings on investment.


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An applicant company seekingGovernment's approval in this regardshould have consistent track record for

good performance (financial or otherwise)for a minimum period of 3 years. Thiscondition would be relaxed forinfrastructure projects such as power

generation, telecommunication, petroleumexploration and refining, ports, airportsand roads.


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Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a company or a group ofcompanies in the financial year . A companyengaged in the manufacture of items covered

under Annex-III of the New Industrial Policywhose direct foreign investment after aproposed Euro issue is likely to exceed 51% orwhich is implementing a project not contained in

Annex-III, would need to obtain prior FIPBclearance before seeking final approval fromMinistry of Finance.


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Restrictions

Investment in stock markets and real estate will not bepermitted. Companies may retain the proceeds abroador may remit funds into India in anticiption of the use offunds for approved end uses. Any investment from aforeign firm into India requires the prior approval of theGovernment of India.

GDR Issues by Indian Corporates are floated as perscheme approved and notified by the Finance Ministrytitled "Issue of Foreign Currency Convertible Bonds and

Ordinary Shares (Through Depositary ReceiptMechanism) Scheme, 1993".

Foreign Institutional Investors and Depository Receipts

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