16 CHAPTER II FOREIGN INSTITUTIONAL INVESTORS AND INVESTMENT: AN OVERVIEW 2.1 INTRODUCTION Indian stock market has grown steadily over the years alluring domestic investors and foreign investors as a hotspot of investment. The major part of investment in Indian stock market is attributed to institutional investors among whom foreign investors are prominent in the post-liberalisation period. This chapter gives a brief sketch on conceptual and functional framework of FIIs and their benefits. The discussion on evolution of foreign institutional investment in Indian market and the development policies initiated by the Indian government regarding foreign institutional investors have been also described in this chapter. 2.2 EVOLUTION OF FOREIGN INSTITUTIONAL INVESTMENTS Until the late 1980s, India’s economic development strategy was focused on self-reliance and import substitution. Current account deficits were financed largely through debt flows and official development assistance. There was a general disinclination towards foreign investment or private commercial flows. After the launch of the liberalisation measures in the early 1990s, there was a gradual shift towards capital account convertibility. From September 14, 1992, with suitable restrictions, FIIs and Overseas Corporate Bodies (OCBs) were permitted to invest in financial instruments. The evolution of FII policy in India has displayed a steady and cautious approach to liberalisation of a system of quantitative restrictions (QRs). The policy liberalisation has taken the form of: Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
46
Embed
CHAPTER II FOREIGN INSTITUTIONAL INVESTORS AND INVESTMENT …shodhganga.inflibnet.ac.in/bitstream/10603/37287/3/chapter2.pdf · CHAPTER II FOREIGN INSTITUTIONAL INVESTORS AND INVESTMENT:
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
16
CHAPTER II
FOREIGN INSTITUTIONAL INVESTORS AND INVESTMENT: AN
OVERVIEW
2.1 INTRODUCTION
Indian stock market has grown steadily over the years alluring domestic
investors and foreign investors as a hotspot of investment. The major part of
investment in Indian stock market is attributed to institutional investors among whom
foreign investors are prominent in the post-liberalisation period. This chapter gives a
brief sketch on conceptual and functional framework of FIIs and their benefits. The
discussion on evolution of foreign institutional investment in Indian market and the
development policies initiated by the Indian government regarding foreign
institutional investors have been also described in this chapter.
2.2 EVOLUTION OF FOREIGN INSTITUTIONAL INVESTMENTS
Until the late 1980s, India’s economic development strategy was focused on
self-reliance and import substitution. Current account deficits were financed largely
through debt flows and official development assistance. There was a general
disinclination towards foreign investment or private commercial flows. After the
launch of the liberalisation measures in the early 1990s, there was a gradual shift
towards capital account convertibility. From September 14, 1992, with suitable
restrictions, FIIs and Overseas Corporate Bodies (OCBs) were permitted to invest in
financial instruments. The evolution of FII policy in India has displayed a steady and
cautious approach to liberalisation of a system of quantitative restrictions (QRs). The
policy liberalisation has taken the form of:
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
17
(i) relaxation of investment limits for FIIs;
(ii) relaxation of eligibility conditions;
(iii)Liberalisation of investment instruments accessible for FIIs.
The measures introduced by the government to liberalize provisions relating to
foreign investments in 1991 attracted investors from every corner of the world. Since
1992, FIIs have been allowed to invest in all securities traded on the primary and
secondary markets, including shares, debentures, and warrants issued by companies
that were listed or were to be listed on the stock exchanges in India and in schemes
floated by domestic mutual funds. As a result foreign investment inflows into India
has increased manifold in the form of foreign direct investment (FDI) and foreign
institutional investment (FII).
2.3 FOREIGN INVESTMENTS: THE INDIAN PERSPECTIVE
Foreign investments in the country can take the form of investments in listed
companies (i.e., FII investments), investments in listed/unlisted companies other than
through stock exchanges (i.e., through the foreign direct investment or private
equity/foreign venture capital investment route), investments through American
Depository Receipts/Global Depository Receipts (ADR/GDR), or investments by
non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) in various forms.
Chart 2.1 reveals these forms of foreign investments.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
18
Chart 2.1: Foreign Investments in India
Source: NSE
2.4 FOREIGN INSTITUTIONAL INVESTOR:
FII is defined as an institution organized outside of India for the purpose of
making investments into the Indian securities market under the regulations prescribed
by SEBI. The term Foreign Institutional Investor is defined by SEBI as “an institution
established or incorporated outside India which proposes to make investment in India
in securities, provided that a domestic asset management company or domestic
portfolio manager who manages funds raised or collected or brought from outside
India for investment in India on behalf of a sub-account, shall be deemed to be a
Foreign Institutional Investor.” ‘FII’ include “Overseas pension funds, mutual funds,
investment trust, asset management company, nominee company, bank, institutional
portfolio manager, university funds, endowments, foundations, charitable trusts,
charitable societies, a trustee or power of attorney holder incorporated or established
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
19
outside India proposing to make proprietary investments or investments on behalf of a
broad-based fund.
2.4.1 Important Terms Related to FIIs:
1. 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, and who is registered as
a sub-account under the SEBI (FII) Regulations, 1995.
2. 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.
3. Domestic Custodian:
Domestic Custodian means any entity registered with SEBI to carry on the activity
of providing custodial services in respect of securities.
4. 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 49%
shares or units of the fund. If the broad-based fund has institutional investor(s), then it
is not necessary for the fund to have 20 investors. Further, if the broad-based fund has
an institutional investor who holds more than 49% of the shares or units in the fund,
then the institutional investor must itself be a broad-based fund.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
20
5. Caution List
When the total holdings of FIIs under the scheme reach the limit of 2 percent
below the sectoral cap, the RBI issues a notice to all designated branches of the
Authorised Dealer (AD) Category-I banks cautioning that any further purchases of
shares of the particular Indian company will require prior approval of the RBI. The
RBI gives case-by-case approvals to FIIs for the purchase of shares of companies
included in the Caution List. This is done on a first-come, first-served basis.
6. Ban List
Once the shareholding by FIIs reaches the overall ceiling/sectoral
cap/statutory limit, the RBI places the company in the Ban List. Once a company is
placed on the Ban List, no FII or NRI can purchase the shares of the company under
the Portfolio Investment Scheme.
2.4.2 Eligibility for Registration as FII:
According to SEBI regulations, the following conditions have to be adhered to
for registration as FII.
i. An institution established or incorporated outside India as a pension fund, mutual
fund, investment trust, insurance company, or reinsurance company;
ii. An international or multilateral organization or an agency thereof, or a foreign
governmental agency, sovereign wealth fund, or a foreign central bank;
iii. An asset management company, investment manager or advisor, bank, or
institutional portfolio manager that is established or incorporated outside India and
proposes to make investments in India on behalf of broad-based funds and its
proprietary funds, if any;
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
28
should establish separate accounts for detailing on a daily basis the investment
capital utilisation and securities held by each FII for which it is acting as
custodian. The custodian is supposed to report to the RBI and SEBI semi-annually
as part of its disclosure and reporting guidelines.
15. The RBI should make available to the designated bank branches a list of
companies where no investment will be allowed on the basis of the upper
prescribed ceiling of 30% having been reached under the portfolio investment
scheme.
16. Reserve Bank of India may at any time request by an order a registered FII to
submit information regarding the records of utilisation of the inward remittances
of investment capital and the statement of securities transactions. Reserve Bank of
India and/or SEBI may also at any time conduct a direct inspection of the records
and accounting books of a registered FII.
17. FIIs investing under this scheme will benefit from a concessional tax regime of a
flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long
term (one year or more) capital gains.
2.4.5 General Obligations and Responsibilities of FIIs:
General Obligations and Responsibilities laid down by the FII Regulations
1995 are as follows:
1) Appointment of domestic custodians: A Foreign Institutional Investor or a global
custodian acting on behalf of the Foreign Institutional Investor, should enter into an
agreement with a domestic custodian to act as custodian of securities for the Foreign
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
29
Institutional Investor. The Foreign Institutional Investor should ensure that the
domestic custodian takes steps for -
monitoring of investments of the Foreign Institutional Investor in India;
reporting to SEBI on a daily basis the transactions entered into by the
Foreign Institutional Investor;
preservation for five years of records relating to his activities as a Foreign
Institutional Investor; and
furnishing such information to SEBI as may be called for by SEBI with
regard to the activities of the Foreign Institutional Investor and as may be
relevant for the purpose of this regulation.
A Foreign Institutional Investor may appoint more than one domestic
custodian with prior approval of SEBI, but only one custodian may be appointed for a
single subaccount of a Foreign Institutional Investor.
2) Appointment of designated bank: A Foreign Institutional Investor should appoint
a branch of a bank approved by the Reserve Bank of India for opening of foreign
currency denominated accounts and special non-resident rupee accounts.
3) Investment advice in publicly accessible media: A foreign institutional investor
or any of his employees should not render directly or indirectly any investment advice
about any security in the publicly accessible media whether real-time or non real-
time, unless a disclosure of his interest including long or short position in the said
security has been made, while rendering such advice. In case of an employee of the
foreign institutional investor is rendering such advice, he should also disclose the
interest of his dependent family members and the employer including their long or
short position in the said security, while rendering such advice.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
30
4) Maintenance of proper books of accounts, records, etc: Every Foreign
Institutional Investor should keep or maintain, as the case may be, the following
books of accounts, records and documents, namely:
a) true and fair accounts relating to remittance of initial corpus for buying,
selling and realising capital gains of investment made from the corpus;
b) accounts of remittances to India for investments in India and realising capital
gains on investments made from such remittances;
c) bank statement of accounts
d) contract notes relating to purchase and sale of securities; and
e) communication from and to the domestic custodian regarding investments in
securities.
The FII is suppose to intimate SEBI in writing the place where such books,
records and documents will be kept or maintained.
5) Preservation of books of accounts, records, etc: Every Foreign Institutional
Investor should preserve the books of accounts, records and documents mentioned
above.
6) Appointment of compliance officer: Every FII should appoint a compliance
officer who would be responsible for monitoring the compliance of the Act, rules and
regulations, notifications, guidelines, instructions, etc, issued by the SEBI or the
central government. The compliance office officer has to immediately and
independently report to the SEBI any non-compliance observed by him.
7) Information to SEBI: Every Foreign Institutional Investor is required to submit to
SEBI or the Reserve Bank of India, as the case may be, any information, record or
documents in relation to his activities as a Foreign Institutional Investor as SEBI or as
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
31
the Reserve Bank of India may require. Further, the FII should disclose information
concerning the terms of and parties to off-shore derivative instruments such as
Participatory notes, Equity Linked Notes or any other such instruments, by whatever
names they are called, entered into by it or its sub-accounts or affiliates relating to any
securities listed or proposed to be listed in any stock exchange in India as and when
and in such form as SEBI may require.
2.4.6 Code of Conduct for FIIs:
The codes of conduct given by SEBI are:
1. A FII and its key personnel are required to observe high standards of integrity,
fairness and professionalism in all dealings in the Indian Securities market
with intermediaries, regulatory and other Government authorities.
2. A FII should at all times render high standards of service, exercise due
diligence and independent professional judgement.
3. A FII should ensure and maintain confidentiality in respect of trades done on
its own behalf and/or on behalf of its sub-accounts/clients.
4. A FII should ensure the following:
a. clear segregation of its own money/securities and sub-accounts
money/securities.
b. arms length relationship between its business of fund
management/investment and its other business.
5. A FII should maintain an appropriate level of knowledge and competency and
abide by the provisions of the Act, regulations made there under and the
circular and guidelines, which may be applicable and relevant to the activities
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
32
carried on by it. Every FII should also comply with the award of the
Ombudsman and decision of SEBI under SEBI (Ombudsman) Regulations
2003.
6. A FII should not make any untrue statement or suppress any material fact in
any documents, reports or information furnished to SEBI.
7. A FII should ensure that good corporate policies and corporate governance are
observed by it.
8. A FII should ensure that it does not engage in fraudulent and manipulative
transactions in the securities listed in any stock exchange in India.
9. A FII or any of its directors or managers should not either through its/his own
account or through any associate or family members, relatives or friends
indulge in any insider trading.
10. A FII should not be a party to or instrumental for –
a) creation of false market in securities listed or proposed to be listed in
any stock exchange in India;
b) price rigging or manipulation of prices of securities listed or proposed
to be listed in any stock exchange in India;
c) passing of price sensitive information to any person or intermediary in
the securities market.
2.4.7 Prohibitions on Investments:
FIIs are not permitted to invest in equity issued by an Asset Reconstruction
Company. FIIs are also not allowed to invest in any company which is engaged or
proposes to engage in the following activities:
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
33
1) Business of chit fund or
2) Nidhi Company or
3) Agricultural or plantation activities or
4) Real estate business, or construction of farm houses (real estate business
does not include development of townships, construction of
residential/commercial premises, roads or bridges).
5) Trading in Transferable Development Rights (TDRs)
2.4.8 FII POLICY - TIMELINE OF DEVELOPMENTS
The historical evolution of the FII policy is summarized in the Table2.4.1. The
objective of these policy changes was to increase the participation by FIIs, to allow
operational flexibility, and also to give access to domestic asset management
capability.
Table 2.4.1: Timeline of FII Policy Developments
Year Policy changes
1992 FIIs are allowed to invest by the government guidelines in all securities in
primary and secondary markets as well as in schemes floated by mutual
funds. Single FIIs to invest 5 percent and all FIIs are allowed to invest 24
percent of a company’s issued capital. Broad-based funds shall have 50
investors with no one holding more than 5 percent.
1997
The aggregated limit for all FIIs increased to 30 percent, subject to
special procedure and resolution.
1998 FIIs permitted to invest in dated government securities subject to a ceiling
of US $ 1 billion. The aggregate portfolio investment limit of FIIs was
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
34
enhanced from 5 percent to 10 percent, and the ceilings made mutually
exclusive.
2000 Foreign firms and high net worth individuals permitted to invest as sub-
accounts of FIIs. Domestic portfolio manager were allowed to be
registered as FIIs to manage the funds of subaccounts.
2001 FII ceiling under special procedure was enhanced to 49 percent to
increase FII participation. FII ceiling under special procedure was also
raised in sectoral cap.
2003 The FII dual approval process of the SEBI and the RBI changed to a
single approval process of the SEBI to streamline the registration process.
2006 FII investment up to 23% permitted in market infrastructure institutions
in the securities markets, such as stock exchanges, depositories, and
clearing corporations.
2007 FIIs were allowed to invest US $ 3.2 billion in government securities.
2008 Government increased the cumulative debt investment limits from US $ 3
billion to US $ 6 billion for FII investments in corporate debt. The
restriction of investment at a ratio of 70:30 in equity and debt was
removed. The restrictions on Overseas Derivatives Instruments (ODIs)
were removed.
2009
FIIs lending shares abroad was disapproved and E-bids platform for FIIs
were introduced. FIIs are allowed to participate in interest rate futures.
2010 FIIs are allowed to offer domestic government securities and foreign
sovereign securities with AAA rating as collateral (in addition to cash) to
recognized stock exchanges in India for their transactions in the cash
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
35
segment of the market. The Investment caps for FIIs were increased by
US $ 5 billion each in government securities and corporate bonds to US $
10 billion.
2011 The limit of US $ 5 billion in corporate bonds issued by companies in the
infrastructure sector with a residual maturity of over five years increased
by an additional limit of US $ 20 billion, taking the total limit to US $ 25
billion.
2.4.9 Mauritius Route of Foreign Investment
Double Taxation Avoidance Agreement (DTAA) with Mauritius was signed
by India in August 1982. The treaty specified that capital gains made on the sale of
shares of Indian companies by investors resident in Mauritius would be taxed only in
Mauritius and not in India. In 1992, Mauritius passed the Offshore Business Activities
Act which allowed foreign companies to register in the island nation for investing
abroad. As a result, the benefits are quick incorporation of a company in Mauritius,
total exemption from capital- gains tax, total business secrecy and a completely
convertible currency. The DTAA has helped Mauritius in the development of its
Financial Services sector; India has on the other hand benefitted in terms of foreign
investments. Many Indian and foreign-based companies have set up subsidiaries in
Mauritius only to avail themselves of tax exemptions. Some of its salient features are:
Capital gains earned by the Fund (organized in Mauritius) registered as a sub-
account of an FII from its investments in Indian Companies would be tax
exempt subject to the condition that it does not have a permanent
establishment in India.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
36
Interest income earned by the Fund (organized in Mauritius) registered as a
subaccount of an FII from India from debt (whether listed or unlisted) incurred
in foreign currency would be taxed at the rate of 20%.
Interest income earned by the Fund (organized in Mauritius) registered as a
subaccount of an FII from all investments in listed debt securities of Indian
Companies (whether or not incurred in foreign currency) would be taxed at the
rate of 20%.
Interest income earned by the Fund (organized in Mauritius) registered as a
subaccount of an FII other than that mentioned above would be taxed at the
rate of 35% under the India-Mauritius tax treaty.
Dividends earned by the Fund would not be subject to any withholding tax in
India.
2.4.10 Tax Provisions for FIIs
According to Income-tax Act, 1961; tax provisions for FIIs are summarised as
follows:
a. Interest earned by an entity (registered as an FII or sub-account of a registered
FII) from India from its investments in listed debt securities of Indian
Companies (whether or not incurred in foreign currency) will be taxed at the
rate of 20% under section 115AD of the Income-tax Act, 1961 (the “ITA”).
b. Interest income of an entity (registered as an FII or sub-account of a registered
FII) from debt (whether listed or unlisted) incurred in foreign currency would
be taxed at the rate of 20% under section 115A of the ITA.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
37
c. Other interest income earned by an entity (registered as an FII or sub-account
of a registered FII) from unlisted debt not incurred in foreign currency would
be taxed at the rate of 48%.
d. Long-term capital gains earned by an entity (registered as an FII or sub-
account of a registered FII) from sale of listed debt securities of Indian
Companies would be taxed at the rate of 10% and short-term capital gains
would be taxed at 30% in terms of section 115AD of the ITA.
e. Long-term capital gains earned by an entity (registered as an FII or sub-
account of a registered FII) from sale of unlisted securities of Indian
Companies would be taxed at the rate of 20% and short-term capital gains
would be taxed at 48% under the ITA.
f. Dividends earned by an entity (registered as an FII or sub-account of a
registered FII) would not be subject to any withholding tax in India.
2.5 TRENDS IN FOREIGN INVESTMENT IN INDIA
The measures introduced by the government to liberalize provisions relating to
foreign investments in 1991 lured investors from every corner of the world. As a
result foreign investment inflows to India has increased manifold as the foreign direct
investment (FDI) and foreign institutional investment (FII). The data in the given
Table2.5.1 provides the trend foreign investment flows into India classified as Foreign
Direct Investment (FDI) and Portfolio Investments (FII). Foreign direct
investment (FDI) refers to the net inflows of investment to acquire a lasting
management interest (10 percent or more of voting stock) in an enterprise operating in
an economy other than that of the investor. Foreign Institutional Investment (FII)
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
38
refers 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 Indian markets.
Table: 2.5.1Trend of Foreign Investments in India
Year A. Direct
investment B. Portfolio investment Total Investment (A+B)
Rs. Crore Rs. Crore Rs. Crore 1990-91 174 11 185
1991-92 316 10 326
1992-93 965 748 1,713
1993-94 1,838 11,188 13,026
1994-95 4,126 12,007 16,133
1995-96 7,172 9,192 16,364
1996-97 10,015 11,758 21,773
1997-98 13,220 6,794 20,014
1998-99 10,358 -257 10,101
1999-00 9,338 13,112 22,450
2000-01 18,406 12,609 31,015
2001-02 29,235 9,639 38,874
2002-03 24,367 4,738 29,105
2003-04 19,860 52,279 72,139
2004-05 27,188 41,854 69,042
2005-06 39,674 55,307 94,981
2006-07 103,367 31,713 135,080
2007-08 140,180 109,741 249,921
2008-09 173,741 -63,618 110,123
2009-10 179,059 153,516 332,575
2010-11 138,462 143,435 281,897
Source: SEBI
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
39
The distinction between FDI and FII is that FDI have lasting interest in
management of the firm while FII are “fair weather friends” who are concerned about
safety of their investment. The Table 2.5.1 reveals the investments made in FDI and
FII ever since 1990-91 in India. It can be noticed that FDI has shown a steady growth
of Rs.174 crores in 1990-91 to Rs. 179,059 crores 2009-2010. There has been sharp
increase of FDI in the year 2006-07 from Rs. 103,367 crores from the previous year
of Rs. 39,674crores. In contrast portfolio investments indicate periods of up trends
and down trends since 1990-91. There have been more capital outflows than inflows
during the years 1998-99 and 2008-2009 as far as portfolio investments are
concerned.
2.5.1 Registered FIIs in India:
The Table2.5.2 highlights the number of FIIs registered in India since
initiation of foreign investments in India. With liberalisation of Indian economy, there
has been a steady increase in registration of FIIs in India from 1993. The number of
registered FIIs in 1995 was 156 which has rose to 1765 in 2011. Some prominent FIIs
registered in India are: California Public Employees’ Retirement System (CalPERS),
United Nations for and on behalf of the United Nations Joint Staff Pension Fund,
Public School Retirement System of Missouri, Commonwealth of Massachusetts
Pension Reserves Investment Trust, Treasurer of the State North Carolina Equity
Investment Fund Pooled Trust, the Growth Fund of America, and AIM Funds
Management Inc (Department of Economic Affairs, Ministry of Finance).
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
40
Table: 2.5.2 Number of Registered FIIs
Financial Year Number of FIIs registered with SEBI
1993 0
1994 3
1995 156
1996 353
1997 439
1998 496
1999 450
2000 506
2001 527
2002 490
2003 502
2004 540
2005 685
2006 882
2007 997
2008 1319
2009 1635
2010 1722
2011 1765
Source: NSE
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
41
Registered FIIs in India have various countries of origin. 42% of FIIs are from
US, followed by UK (20%) and Europe (17%) as indicated in Chart2.5.1. The
diversity of FIIs has been increasing with the number of registered FIIs in India
steadily rising over the years.
Chart: 2.5.1 Sources of FIIs in India
Source: SEBI
The Chart2.5.2 shows a constant growth of registered FIIs in India irrespective
of the stock market performance in India. It also shows that net investment made by
FIIs have not proportionately increased as the number of registered FIIs.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
42
Chart: 2.5.2 Number of FIIs and Net Foreign Institutional Investment
Source: NSE
2.5.2 Sensex movements and FII
According to information given by SEBI, the net investment made by FIIs was
highest in the year 2010-2011. A negative trend was noticed in the year 1999 and
2009 due to East-Asian crisis and Global financial crisis respectively. According to
financial press, FIIs are facing a cash crunch in their home markets and shrinking
profit margins of Indian investments attributes to decline in amount of net investments
made by FIIs.
Chart: 2.5.3 FII and Sensex Behaviour
Source: SEBI
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
43
Since the beginning of liberalisation, FII flows to India have steadily grown in
volume and importance. Over the same time, Sensex, the benchmark index measuring
the stock market performance, has also shown remarkable growth. India, with the
world’s second highest growth rate, has been an attractive market for foreign
investors. Since 2001, FIIs have invested huge money into the Indian equity market
which is one of the major reasons for the significant jump in Sensex over the last
decade. Despite the economic slowdown, FIIs have continued to pump in money in
India. DIIs too have been investing in the Indian stock market; however, the level of
investments and their investment strategy differs from FIIs, as shown in chart 2.5.4.
Chart: 2.5.4 Institutional Investments and Sensex
Source: BSE
2.5.3 Composition of Foreign Institutional Investment in India
Foreign Institutional Investments in Indian stock market may take the form of
equity or debt. The amount invested by FIIs is more in equity compared to debt
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
44
investments and hence total investments of FIIs are depends heavily upon equity
investments. Table 2.5.3 depicts that FIIs have been investing in equity instruments
since 1993 but started investing in the debt instruments only from 1997.
Table: 2.5.3 Investments by FIIs in Equity and Debt
Financial Year Net investment by FIIs(Rs crore)
Equity Debt Total
1993 13 0 13
1994 5,127 0 5,127
1995 4,796 0 4,796
1996 6,942 0 6,942
1997 8,546 29 8,575
1998 5,267 691 5,958
1999 -717 -867 -1,584
2000 9,670 453 10,122
2001 10,207 -273 9,933
2002 8,072 690 8,763
2003 2,527 162 2,689
2004 39,960 5,805 45,765
2005 44,123 1,759 45,881
2006 48,801 -7,334 41,467
2007 25,236 5,605 30,840
2008 53,404 12,775 66,179
2009 -47,706 1,895 -45,811
2010 1,10,221 32,438 1,42,658
2011 1,10,121 36,317 1,46,438
2012 43,738 49,988 93,726
2013 1,40,033 28,334 1,68,367
Total 6,28,377 1,68,467 7,96,844
Source: SEBI
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
45
In terms of net cumulative investments by FIIs, US-based FIIs dominate with
45 percent of the net cumulative FII investments in India, followed by UK at 18 per
cent. Chart2.5.5. Also a significant number belonged to Europe and Japan FIIs that
registered with SEBI in recent years. These developments have helped improving the
diversity of the set of FIIs operating in India (Department of Economic Affairs,
Ministry of Finance).
Chart: 2.5.5 Country Wise Share of Net FII in India
Source: SEBI
Table 2.5.4 indicates FII turnover in the Indian stock markets from the year
2001 to the year 2012. Purchases by FIIs have been more than the sales through the
study period except in the 2009.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
46
Table: 2.5.4 Trends in FII turnover
Year Gross Purchases (INR crore)
Gross sales (INR crore)
Net Investment (INR crore)
2001 74051 64118 9933
2002 50071 41308 8763
2003 47062 44372 2689
2004 144855 99091 45764
2005 216951 171071 45880
2006 346976 305509 41467
2007 520506 489665 30841
2008 948018 881839 66179
2009 614576 660386 -45811
2010 846433 703776 142658
2011 992596 846158 146438
2012 921285 827562 93725
Source: SEBI
2.5.4 FII Ownership in NSE-Listed Companies
The FII ownership of shares in the various sectors of NSE-listed companies is
depicted in Table 2.5.5. FIIs held the highest stake of 18.41 % in the Banking sector
followed by Finance and Media & Entertainment of 18.18 % and 15.20 %
respectively. At the end of March 2013, FIIs held the highest stake of 16.9 percent in
the banking sector, followed by FMCG and finance (9.2 percent and 8.8 percent,
respectively). The total percentage of shares held by FIIs across different sectors was
6 percent of the total shares of the companies listed on the NSE as at the end of March
2013 which has decreased from 10.78 percent at the end of March 2007.
Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark.
47
Table 2.5.5 : Sectoral Composition of FII in NSE
Sectors
Percentage Share of Foreign institutional Investors at the end of
Mar-07 Mar-08 Mar-09 Mar-10
Mar-11
Mar-12
Mar-13
Banks 18.41 19.15 14.27 16.02 17.62 15.9 16.9
Engineering 11.45 10.63 7.34 8.28 9.36 5.1 4.6
Finance 18.18 17.44 13.01 16.53 23.35 8.4 8.8
FMCG 11.91 14.07 12.72 14.09 16.34 9.4 9.2
Information Technology 14.53 16 12.44 11.68 21.16 7.3 7.2
Infrastructure 7.15 8.86 7.31 8.9 7.87 5.9 6.3
Manufacturing 9.57 9.46 7.28 8.79 9.41 4.8 4.6
Media & Entertainment 15.2 11.7 11.42 7.06 10.97 5.8 6.1