In this article, Joseph V Gregory who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses ten things you should know about foreign institutional investor.

India is the third largest economy in the world in PPP terms. According to a report by Bank of America Merrill Lynch, India is the most favourite equity market for global investors for the year 2015 at 43% followed by China at 26%. The commencement of inflow of foreign investment can be dated back to the policy in 1992-1993.

Of the different types of Foreign Investment, FII is an investor or investment fund registered in a country outside of the one in which it is investing. They are registered as FIIs in accordance with Section 2(f) of the SEBI (FII) Regulations, 1995.

As defined by the European Union (FII), it is an investment which are saved collectively on behalf of investors used to investment in a foreign market by specialised financial intermediaries, especially small investors, towards specific objectives in term of risk, return and maturity of claims.

FIIs net investments stood at Rs 18,106 crore (US$ 2.68 billion) in March 2016, out of which Rs 16,731 crore (US$ 2.48 billion) was invested in equities and Rs 1,375 crore (US$ 203.83 million) was invested in debt. Cumulative value of investments by FIIs during April 2000-December 2015 stood at US$ 179.32 billion. FIIs importance has grown in emerging countries like India on the backdrop of Brexit which accelerated the move to the fastest growing economies. It’s growth has been more rapid than international trade or world economic production generally and has impacted economies positively and negatively.

According to the Finance Minister, in the Union Budget 2013-14, accepted and differentiated between FDIs and FIIs, the most common form of investments as –

“Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) is proposed to follow the international practice and lay down a broad principle that, where an investor has a stake of 10 percent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 percent, it will be treated as FDI.”

The foreign investments in India is regulated by the Reserve Bank of India by the provisions of Foreign Exchange Management Act, 1999 (relevant sections 6 & 47). FDIs and FIIs are defined in the Schedule 1 & 2 in FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. SEBI acts as the nodal point in registration of FIIs. FIIs by individuals cannot exceed 10% of paid up capital of a company while foreign corporates or individuals registered as sub-accounts of FII cannot exceed 5% of paid-up capital.

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

1. Securities in the primary and secondary markets including shares, debentures and warrants of companies listed or to be listed on a recognised stock exchange in India; and
2. Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognised stock exchange or not
3. Units of scheme floated by a collective investment scheme
4. Dated Government Securities
5. Derivatives traded on a recognised stock exchange
6. Commercial papers of Indian companies
7. Rupee denominated credit enhanced bonds
8. Security receipts
9. Indian Depository Receipt
10. Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector, where ‘infrastructure’ is defined in terms of the extant External Commercial Borrowings (ECB) guidelines
11. Non-convertible debentures or bonds issued by Non-Banking Financial Companies categorized as ‘Infrastructure Finance Companies’(IFCs) by the Reserve Bank of India
12. Rupee denominated bonds or units issued by infrastructure debt funds
13. Indian depository receipts; and
14. Such other instruments specified by the Board from time to time.

Following foreign entities/funds are eligible to get registered as FII

1. Pension Funds
2. Mutual Funds
3. Investment Trusts
4. Banks
5. Insurance Companies / Reinsurance Company
6. Foreign Central Banks
7. Foreign Governmental Agencies
8. Sovereign Wealth Funds
9. International/ Multilateral organization/ agency
10. University Funds (Serving public interests)
11. Endowments (Serving public interests)
12. Foundations (Serving public interests)
13. Charitable Trusts / Charitable Societies (Serving public interests)

FIIs are the major source of liquidity in the Indian market. High volumes of FIIs indicate confidence in the Indian market and hints at the strong base of domestic stock market to domestic investors. Foreign institutional investment can supplement domestic savings and augment domestic investment without increasing the foreign debt of the country. Such investment constitutes non-debt creating financing instruments for the current account deficits in the external balance of payments

The advantages and disadvantages are mentioned below

Advantages

1. Enhanced Flow of Capital

It helps in growth rate of the investment whereby development projects – economical and social infrastructure is built and so does boosts production and employment and income of the host country.

2. Managing Uncertainty and Controlling Risks

It helps promote hedging instruments and improve the competition in financial market and also alignment of assets which help in stabilizing markets.

3. Improved Corporate Governance

The FIIs constitute professional bodies like financial analysts who through their contribution to better understanding improve firms’ operations and corporate governance and overcome problems of principal-agent.

Disadvantages

1. Potential Capital Outflow

Since FIIs are controlled by investors there can be sudden outflow from markets leading to shortage of funds.

2. Inflation

Huge inflow of FII funds creates high demand for rupee and whereby pumping huge amount of money by the RBI into the market. This creates excess liquidity creating inflation.

3. Adverse Impact on Exports

With FII inflows leading to appreciation of currency, exports become expensive which ultimately leads to lower demand and hence shortfall in the export of goods, reducing competitiveness.

Unfortunately, there are certain myths about FIIs :

1. FIIs only participate in stock and exchange and never in unlisted entities.
2. FIIs investing during initial allotment of shares are FDIs and cannot invest at time of allotment.
3. FIIs do not generally influence management of enterprise and are mostly interested in capital gains and monetary price differences, unlike FDIs who invest directly in technology & management.

According to section 15(1)(a) of SEBI FII Regulations, 1995, an FII could invest in the 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. Infact FIIs are active in the OTC markets and in IPO market in India. Recently FIIs also have started influencing decisions in companies where they hold shares.

The following Guidelines are laid-down to enable the Foreign Investment Promotion Board (FIPB) to consider the proposals for Foreign Investment and formulate its recommendations.

1. All applications should be put up before the FIPB by the SIA (Secretariat of Industrial Assistance) within 15 days and it should be ensured that comments of the administrative ministries are placed before the Board either prior to/or in the meeting of the Board.
2. Proposals should be considered by the Board keeping in view the time frame of 30 days for communicating Government decision (i.e. approval of C&IM/CCEA or rejection as the case may be).
3. In cases in which either the proposal is not cleared or further information is required, in order to obviate delays presentation by applicant in the meeting of the FIPB should be resorted to.
4. While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-a-vis the proposal(s).
5. FIPB would consider each proposal in totality (i.e. if it includes apart from foreign investment, technical collaboration/industrial licence) for composite approval or otherwise. However, the FIPB’s recommendation would relate only to the approval for foreign financial and technical collaboration and the foreign investor will need to take other prescribed clearances separately.
6. The Board should examine the following while considering proposals submitted to it for consideration:

• Whether the items of activity involve industrial licence or not and if so the considerations for grant of industrial licence must be gone into;
• Whether the proposal involves technical collaboration and if so:- the source and nature of technology sought to be transferred.
• Whether the proposal involves any mandatory requirement for exports and if so whether the applicant is prepared to undertake such obligation (this is for items reserved for small scale sector as also for dividend balancing, and for 100% EOUs/EPZ units);
• Whether the proposal involves any export projection and if so the items of export and the projected destinations;
• Whether the proposal has concurrent commitment under other schemes such as EPC Scheme etc.
• In the case of Export Oriented Units (EOUs) whether the prescribed minimum value addition norms and the minimum turn over of exports are met or not;
• Whether the proposal involves relaxation of locational restrictions stipulated in the industrial licensing policy;
• Whether the proposal has any strategic or defence related considerations, and
• Whether the proposal has any previous joint venture or technology transfer/trademark agreement in the same or allied field in India, the detailed circumstance in which it is considered necessary to set-up a new joint venture/enter into new technology transfer (including trade mark), and proof that the new proposal would not in any way jeopardize the interest of the existing joint venture or technology/trade mark partner or other stake holders.