FII vs FDI

What explains the greater attraction of the Indian market for portfolio investors as compared to foreign direct investment (FDI)? In his column Bullish FII versus cautious FDI in these pages (FE, February 14), Senthil Chengalvarayan has compared the Indian scenario, characterised by strong portfolio inflows and much weaker foreign direct investment (FDI), with China, where the situation is the reverse. He attributes the difference to the opening of the capital market. Open up the real sector and investments will flow, he argues. While his broad thrust is correct, there is another factor thats just as critical, if not more. Ease of entry and exit. Today, it is relatively effortless for a foreign institutional investor (FII) to enter the capital market. A Sebi registration, preceded by a fairly perfunctory due diligence, is all it takes before an FII can enter the Indian stock market and commence trading. Exit is equally simple. For FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper, problems remain at the grassroots. There are innumerable clearances that need to be obtained at the state and district levels. There are also a number of practical hurdles, such as infrastructure bottlenecks, all of which make entry difficult. Exit is more complicated. Archaic labour laws, such as the Industrial Disputes Act, prohibit the closure of any company employing more than 100 workers without obtaining prior state government permission. Bankruptcy laws are convoluted and legal processes costly and long-winded.

Definition of 'Foreign Institutional Investor - FII'

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

Investment in Indian Companies by FIIs/NRIs/PIOs

Regulations
Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect. The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs. The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to: - the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and

- the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release.

The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings is:
List of companies
Companies in which NRIs/PIOs investment is allowed up to 24% of their Paid-up Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Alembic Chemical Works Co. Ltd Amar Investments Ltd, Calcutta. Anglo-India Jute Mills Co.Ltd Arvind Mills, Ahmedabad Ashima Syntex Ltd, Ahmedabad Ashoka Viniyoga Ltd Bharat Nidhi Ltd BLB Shares & Financial Services Ltd BPL Ltd Burr Brown (India) Ltd Camac Commercial Company Ltd Ceenik Exports (India) Ltd Cifco Finance Ltd, Mumbai Classic Financial Services & Enterprises Ltd, Calcutta CPPL Ltd,(Reliance Ind. Infrastructure Ltd), Mumbai CRISIL DCM Shriram Consolidated Ltd Dharani Sugars & Chemicals Ltd. Dolphin Offshore Enterprises (I) Ltd Essar Oil Ltd Essar Shipping Ltd, B'lore Essar Steel Ltd Eveready Industries India Ltd Fabworth (I) Ltd Ferro Alloys Corporation Ltd, Tumsar Global Tele Systems Ltd Grasim Industries Ltd Hamco Mining & Smelting Ltd Hindustan Development Corp Ltd, Calcutta Hindusthan Nitroproducts (Gujrat) Ltd Hindustan Transmission Products Ltd, Mumbai HMG Industries Ltd, Mumbai India Securities Ltd IVP Ltd. Jagatjit Industries Ltd, New Delhi Jai Parabolic Springs Ltd, New Delhi Jaysynth Dyechem Ltd

38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82

Jindal Strips Ltd Jindal Iron & Steel Co.Ltd JJ Spectrum Silk Ltd Kartjikeya Paper & Boards Ltd Lakhani India Ltd Matsushita Television And Audio India Ltd M.P.Agro Fertilisers Ltd, Bhopal Macleod Russel (I) Ltd, Mazda Enterprises Ltd,Mumbai Media Video Ltd Multimetals Ltd, Mumbai National Steel Industries Ltd Nicholas Laboratories India Ltd, Mumbai O.P. Electronics Ltd, Mumbai Oriental Housing Development Finance Corp Ltd Padmini Technologies Ltd. Panacea Biotech Ltd. Pearl Polymers Ltd, New Delhi Piramal Healthcare Ltd PNB Finance & Industries Ltd Rajath Leasing & Finance Ltd Rama Petrochemicals Ltd. Rama Phosphates Ltd. Reliance Industries Ltd, Mumbai Rishra Investment Ltd, Calcutta Rossell Industries Ltd, Calcutta Sahu Properties Ltd Sanghvi Movers Ltd Saurashtra Paper & Board Mills Ltd Saw Pipes Ltd Sayaji Hotel Ltd Sharyans Resources Ltd Shrenuj & Company Ltd Shibir India Ltd, Calcutta Shriram Industries Enterprises Ltd,N.Delhi Silverline Industries Ltd Sonata Software Ltd SRF Ltd Sterling Lease Finance Ltd, Mumbai Svam Software Ltd Synthetics and Chemicals Ltd,Mumbai The Champdany Industries Ltd, Calcutta The Dharamsi Morarji Chemical Company Ltd The Investment Trust of India Ltd The Morarjee Goculdas Spinning & Weaving Company Ltd,Mumbai

83 84 85 86 87 88 89

Tolani Bulk Carrier Ltd Uniworth International Ltd Valecha Engineering Ltd VisualSoft Technologies Ltd Weltermann International Ltd Woolworth (India) Ltd Zora Pharma Ltd

Companies in which NRIs/PIOs investment is allowed up to 17% of their Paid-up Capital 1 Garware Shipping Corporation Ltd

Companies where NRI investment has reached 8% and further purchases are allowed only with prior approval RBI 1. Astra IDL Ltd. 2. M/s. Codura Exports Ltd. 3. IDL Industries Ltd. 4. Nexus Software Ltd. 5. Dalmia Cement (Bharat) Ltd. Companies where NRI investment has already reached 10% and no further purchases can be allowed 1. DSQ Biotech Ltd 2. Global Trust Bank Ltd. 3. Madras Aluminium Co. Ltd 4. SPL Ltd 5. Seirra Optima Ltd 6. The Baroda Rayon Corp 7. Tai Industries Ltd. Companies where NRI investment has already reached 22% and no further purchases can be allowed None Companies in which FII Investment is allowed upto 30% of their paid up capital

1. Aptech Ltd 2. Asian Paints (India) Ltd 3. Capital Trust Ltd 4. Container Corporation of India 5. Ferro Alloys Corporation Ltd 6. Garware Polyester Ltd 7. GIVO Ltd (formerly KB&T Ltd) 8. Gujarat Ambuja Cements Ltd 9. Infotech Enterprises Ltd. 10. Mastek Ltd 11. Orchid Chemicals and Pharmaceuticals Ltd 12. Pentasoft Technologies Ltd (Pentafour Communications Ltd) 13. Polyplex Corporation Ltd 14. Ranbaxy Laboratories Ltd 15. Software Solutions Integrated Ltd 16. Sonata Software Ltd 17. The Credit Rating Information Services of India Ltd. 18. The Paper Products Ltd 19. Vikas WSP Ltd Companies in which FII Investment is allowed upto 40% of their paid up capital 1. Balaji Telefilms Ltd. 2. M/s. Burr Brown (India) Ltd. 3. M/s. Elbee Services Ltd. 4. Hero Honda Motors Ltd. 5. Jyoti Structures Ltd 6. Maars Software International Ltd. 7. Padmini Technologies Ltd 8. Pentamedia Graphics Ltd. 9. Thiru Arooran Sugars Ltd. 10. UTV Software Ltd. 11. VisualSoft Technologies Ltd 12. M/s. Silverline Technologies Ltd. 13. Ways India Ltd 14. SSI Ltd

Companies in which FII Investment is allowed upto 49% of their paid up capital 1. Blue Dart Express Ltd 2. CRISIL 3. HDFC Bank Ltd 4. Hindustan Lever Ltd 5. Himachal Futuristic Communications Ltd 6. Infosys Technologies Ltd. 7. NIIT Ltd. 8. Dr. Reddy's Laboratories 9. Panacea Biotec Ltd 10. Reliance Industries Ltd. 11. Reliance Petroleum Ltd. 12. Sofia Software Ltd 13. Sun Pharmaceutical Industries Ltd 14. United Breweries Ltd. 15. United Breweries (Holdings) Ltd. 16. Zee Telefilms Ltd. Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital 1. ICICI Bank Ltd. Companies in which FII Investment is allowed upto sectoral cap/statutory ceiling of their paid up capital 1. GTL Ltd. - (74%) 2. Housing Development Finance Corporation Ltd. - (74%) 3. Infosys Technologies Ltd. - (100%) 4. Pentamedia Graphics Ltd. - (100%) 5. Pentasoft Technologies Ltd. - (100%) 6. Mascon Global Ltd. - (100%)

7. Punjab Tractors Ltd. - (64%) 8. Satyam Computer Services Ltd - (60%) Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI 1. ACC Ltd. 2. Digital GlobalSoft Ltd. Companies where 28% FII investment limit has reached and further purchases are allowed with prior approval of RBI
None

Companies where 38% FII investment limit has reached and further purchases are allowed with prior approval of RBI None Companies in which the Caution limit (47%) in respect of maximum permissible foreign holding including NRI/PIO/FII Investment as stipulated by Government has been reached None Companies where 49% limit has been reached and no further purchases will be allowed None Public Sector banks including SBI in which 18% limit has been reached. None Public Sector banks including SBI in which 20% limit has been reached. 1. State Bank of India Companies falling under 24% None

Companies falling under 30% None Companies in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investment as stipulated by Government has been reached 1. ICICI Ltd. Companies in which the Caution limit (47%) in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached None

Companies in which no purchases are allowed Companies in which investments may be made with prior approval of the RBI

Investopedia explains 'Foreign Institutional Investor - FII'

The term is used most commonly in India to 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. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.