FOREIGN

INSTITUTIONAL
INVESTORS
(AN OVERVIEW)

Barcelona Panda
21st December,
2010.

WHY FOREIGN INSTITUTIONAL INVESTORS

INVEST IN INDIA

Market Size
Liberalized Trade Policy
Labour Costs and Productivity
Political Scenario
Infrastructure
Disinvestment Policy
Robust Bank & Financial Institutions
Investor friendly policies and incentive
based schemes.

X a Foreign Central Bank approaches M

(Law firm in India) to find out whether it
can invest in Indian Company Z
Industries Ltd
X asks for legal advice in these area:

the procedure of registering FII.

Whether it can invest in company Z?
If yes, what are the regulatory compliances
that have to be followed for such investment?
What are the Tax Implications on such
Investments?

REGULATORY FRAMEWORK
FOR FII
SEBI

Securities
Securities and
and Exchange
Exchange Board
Board of
of India
India (Foreign
(Foreign
Institutional
Institutional Investors)
Investors) Regulations
Regulations 1995.
1995.

Securities
Securities and
and Exchange
Exchange Board
Board of
of India
India (Foreign
(Foreign
Institutional
Institutional Investors)
Investors) (Amendment)
(Amendment) Regulations,
Regulations,
2010.
2010.

RBI

DIPP

Regulation
Regulation 5(2)
5(2) of
of FEMA
FEMA Notification
Notification No.20
No.20 dated
dated
May
May 3,
3, 2000,
2000,

REGISTRATION PROCESS FOR

FII
Duly
Duly filled
filled in
in
Form
Form A
A
with
with
required
required
documents
documents
SEBI
SEBI
Processing
Processing
of
of
Application
Application

Is
Is the
the
applicant
applicant
eligible
eligible
Yes
Issue
Issue
Registratio
Registratio
n
n
certificate
certificate

RBIs
RBIs
approval
approval

NO
Communicate
Communicate the
the
rejection
rejection with
with reason
reason
and
and refund
refund of
of
application
application fee
fee

QUALIFYING CRITERIA FOR AN

FII
Parameters on which SEBI decides FII applicants eligibility

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)
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
Whether the applicant is a fit & proper person [In Re:
Jermyn Capital LLC, MANU/SB/0072/2009]

 Annexure B of the Regulations duly

filled and signed by the FII and SubAccount
Regulation 6 of SEBI (FII)
Regulations,1995
Grant of Certificate FORM B
Application to SEBI- FORM A
Application to RBI

Registrat
Registrat
ion of
of
ion
SubSubAccount
Account

Eligibility
Eligibility
Criteria
Criteria

Registra
tion of
FII

PROCESS OF REGISTERING FII

IN SEBI

INVESTMENT RESTRICTION ON
FII
Regulation 15 of SEBI (FII) Regulations, 1995:
Without permission of the company, all FII in aggregate
cannot hold more than 24% of the total equity of a
company
A single FII cannot hold more than 10% of the total
equity of a company (5% for some FII)
FIIs cannot engage in short selling of securities.
Other additional restrictions as mentioned in SEBI FII
Regulations 1995.

INVESTMENT LIMITS ON FII

INVESTMENT
INVESTMENT
LIMITS
LIMITS ON
ON FII
FII

on
on equity
equity
investment
investment
s
s

FII, on its own behalf, shall not invest in

equity more than 10% of total issued
capital of an Indian company.
Investment on behalf of each subaccount shall not exceed 10% of total
issued capital of an Indian company.
For the sub-account registered under
Foreign Companies/Individual
category, the investment limit is fixed at
5% of issued capital.
Overall limit of 24% / 49 % / or the
sectoral caps as prescribed by
Government / Reserve Bank of India.

on
on debt
debt
investmen
investmen
ts
ts

Governme
Governme
nt
nt debt
debt
Corporate
Corporate
Debt
Debt

Government debt
100 % Debt Route -US $ 1.55
billion
70 : 30 Route- US $ 200 million
Total Limit -US $ 1.75 billion
For corporate debt the
investment limit is fixed at
US $ 500 million.

DIFFERENCE BETWEEN FII AND

FDI
FII

FDI

Portfolio investment by foreign

institutions in a market which
is not their home country.
Short term benefit to the
country

Long term commitment to a

particular company in a sector
in terms of equity investment
by some foreign entity.

Influences Stock Market to a

greater level

The Economy high and low

depends on the FDI's
Investment
have to follow a high rules and
regulations to enter the
market

FII flows
the secondary
FDI flows than
into the
FDI into
is perceived
to be more beneficial
FII primary
market
Increases productionmarket
and employment opportunities

Brings revenue for the country by way of taxes

FII exit is easier than that of FDI

PARTICIPATORY NOTES- TESTING

THEIR LEGALITY

Participatory notes (PN) are derivative instruments that are held

by foreign investors not eligible to invest directly in the Indian
capital markets.
Regulation 15 A + 20A of the FII Regulations
FII to follow requirements on disclosures and provide a
complete picture about its ODI issuances.
FIIs can issue ODIs only to regulated entities.
FIIs to observe KYC norms
In Re: Societe Generale case
Questions:
Why Investors use PN?
What is the problem with PN?
What is the extent to which PN are used?

TAX REGIME ON FIIS

Section 115AD of Income-Tax Act, 1961

levied a 10 per cent tax on the short-term
capital gains made in the stock market
whetherby
FII
gains are in
FIIs.
the nature of
Issues:

capital gains
or trading
income?

Taxation of Foreign Institutional Investors in India.

How the Authority for Advanced Rulings is influencing
the tax-payers.
How FIIs are avoiding tax by not having a Permanent
Establishment (PE) in India.
The liability of FIIs in India in case of capital gains.

PENDING DIRECT TAX CODE BILL, 2010

Draft Code proposes to tax the income

the FIIs as capital gains which could
increase certain FIIs tax liability.
Capital gains to be subject to tax at
30% in case of non-residents
No distinction between short-term and
long-term capital gains
in determining the tax liability of a
non-resident, the provision of the tax
law or a DTAA, whichever is more
beneficial, applies.

IMPACT OF FII ON STOCK

MARKET

creates liquidity: This leads to lower cost of

capital for the firm and allows firm to compete
more effectively in the global market place. This
directly benefits the economy and the country
Black Monday: As per the information provided in
BSE India.com during the fortnight from May 16th to May
31st 2006, the withdrawals by FIIs were to the extent of
US$2.061 billion. This explains the fact that sales of FIIs
had a major impact on the market and this impact led to
the crash.

foreign portfolio investments are found to be very

volatile in nature.

Impact of FII Investments on Indian Stock Market

100000
80000
60000
40000
FII Investments

20000
0
-20000
-40000
-60000

YEAR
FII in Rs Cr.

Thank You