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MULUND COLLEGE OF COMMERCE

ACADEMIC YEAR
2015-2016

PROJECT REPORT ON
FOREIGN INSTITUTIONAL INVESTMENTS (FIIs)

RIDDHI DANI
1510708
B.COM (BANKING & INSURANCE)
TYBCBI
SEM VI

CENTRAL BANKING
PROF. RAJASHRI DESHPANDE
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INDEX

PG

SR.N
O

CONTENTS

INTRODUCTION

3-4

INFORMATION

5-8

CONCLUSION

REFERENCE

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NO

INTRODUCTION

The term foreign institutional investment denotes all those investors or


investment companies that are not located within the territory of the country in
which they are investing. These are actually the outsiders in the financial
markets of the particular company. Foreign institutional investment is a
common term in the financial sector of India.
The type of institutions that are involved in the foreign institutional
investment are as follows:
Mutual Funds
Hedge Funds
Pension Funds
Insurance company

The economies like India, which are growing very rapidly, are becoming hot
favorite investment destinations for the foreign institutional investors. These
markets have the potential to grow in the near future .
This is the prime reason behind the growing interests of the foreign investors.
The promise of rapid growth of the investable fund is tempting the investors and
so they are coming in huge numbers to these countries.
The money, which is coming through the foreign institutional investment is
referred as hot money because the money can be taken out from the market at
anytime by these investors.
The foreign investment market was not so developed in the past. But once the
globalization took the whole world in its grip, the diversified global market
became united. Because of this the investment sector became very strong and at
the same time allowed the foreigners to enter the national financial market.
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At the same time the developing countries understood the value of foreign
investment and allowed the foreign direct investment and foreign institutional
investment in their financial markets. Although the foreign direct investments
are long term investments but the foreign institutional investments are
unpredictable. The Securities and Exchange Board of India looks after the
foriegn institutional investments in India. SEBI has imposed several rules and
regulations on these investments.

Some important facts about the foreign institutional investment:


The number of registered foreign institutional investors on June 2007 has
reached 1042 from 813 in 2006
US $6 billion has been invested in equities by these investors
The total amount of these investments in the Indian financial market till
June 2007 has been estimated at US $53.06 billion
The foreign institutional investors are preferring the construction
sector,bankingsector and the IT companies for the investments Most
active foreign institutional investors in India are HSBC, Merrill Lynch,
Citigroup, CLSA

Foreign Institutional investors (FIIs) are entities established or incorporated


outside India and make proposals for investments in India. These investment
proposals by the FIIs are made on behalf of sub accounts, which may include
foreign corporates, individuals, funds etcetera. In order to act as a banker to the
FIIs, the RBI has designated banks that are authorised to deal with them. The
biggest source through which FIIs invest is the issuance of Participatory Notes
(P-Notes), which are also known as Offshore Derivatives
.
Can FIIs invest in Indian companies?
Yes, FIIs can invest in the stocks and debentures of the Indian companies. In
order to invest in the primary and secondary capital markets in India, they have
to venture through the portfolio investment scheme (PIS). According to RBI
regulations, the ceiling for overall investment for FIIs is 24% of the paid up
capital of the Indian company. The limit is 20% of the paid up capital in the case
of public sector banks. However, if the board and the general body approves and
passes a special resolution, then the ceiling of 24% for FII investment can be
raised up to sectoral cap for that particular segment. In fact, recently Sebi
allowed FIIs to invest in unlisted exchanges as well, which means both BSE and
NSE (the unlisted bourses) can now allot shares to FIIs also.
Who all can get registered as FIIs?
There is a long list of entities that are eligible to get registered as FIIs such as
pension funds, mutual funds, insurance companies, investment trusts, banks,
university funds, endowments, foundations, sovereign wealth funds, hedge
funds and charitable trusts. In fact, asset management companies, investment
managers, advisors or institutional portfolio managers set up and/or owned by
NRIs are also eligible to be registered as FIIs. The nodal point for FII
registrations is Sebi and hence all FIIs must register themselves with Sebi and
should also comply with the exchange control regulations of the central bank.
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Apart from being allowed to invest in securities in primary and secondary


markets, FIIs can also invest in mutual funds, dated government securities,
derivatives traded on a recognised stock exchange and commercial papers.

Why are FIIs important for Indian markets?


FIIs are among the major sources of liquidity for the Indian markets. If FIIs are
investing huge amounts in the Indian stock exchanges then it reflects their high
confidence and a healthy investor sentiment for our markets. But with the
current global financial turmoil and a liquidity and credit freeze in the
international markets, FIIs have become net sellers (on a day to day basis). The
entry of FIIs in India has brought mixed consequences for our markets, on one
hand they have improved the breadth and depth of Indian markets and on the
other hand they have also become the major sources of speculation in testing
times like these.

A combination of 'push' and 'pull'


Indian investors should keep in mind that FII portfolio flows in practice always
reflect a combination of both external (or 'push') factors, like US interest rates,
or global risk appetite, and domestic (or 'pull') factors, like domestic GDP
growth, or corporate profits etc.
So while a gradual rise in Fed funds rate in 2015 will be a 'negative' push factor
for FII portfolio flows to India, it is unlikely to outweigh a combination of
favorable 'pull' factors, notably a strong, stable government, a macro-economy
that has bottomed out and begun to recover, relative stability on the external
front and domestic investors who are clearly warming towards their own equity
market for the first time since FY09

Some EMs more at risk of outflows


We do not mean to imply that there is no risk to inflows to India or EMs
generally from the Fed's monetary tightening in 2015, especially if stronger US
economic data in the next three or four months looks to be leading the Fed to an
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earlier first rate hike and a subsequent upward path in rates that is steeper than
the gentle climb currently factored into futures markets.
But in our view not all EMs face equal risks in this respect. India in particular
appears better placed than most to weather future bouts of Fed-related market
turbulence. Since the 'taper fears' last summer some EMs have made efforts to
strengthen their macro economies and reduce external balances, efforts that
have been reflected in a drop in their current account deficit (ex-China) from
3% of GDP to around 1% now.
Of those economies that have made significant improvements to macro
imbalances, none in our view has made better progress than India. Should
severe market tremors due to Fed tightening worries return next year, then India
will inevitably feel some of the fall-out. However, we doubt very much that the
country will be at the epicenter of international investors' EM concerns as it was
last year.
What if the dollar strengthens?
It has to be admitted that the trend towards a stronger US dollar has in the past
proved a headwind for EM equities, which has only managed to outperform the
global benchmark on about 33% of occasions in a rising dollar environment. A
weaker local currency will add to inflation pressures, may increase energy
subsidies and may also put upward pressure on local interest rates.
But in India's case, the external financing need is now quite modest and should
not prove that difficult to finance, while domestic inflation is clearly on a
downward trend. And although the RBI appears to be in no hurry to move on
interest rates, the next move is clearly down, not up. So in the Indian Rupee's
case, there is perhaps less to fear from a rising dollar in coming months than is
the case for some other EM currencies.
A gradually rising dollar is unlikely to prompt a mass exodus of FII flows,
especially from countries like India that currently possess good fundamentals
and a strong secular domestic growth story. As long as the Indian economy
remains on a cyclical recovery track and the government persists with its reform
agenda, we believe the start of US interest rate normalisation by the Fed in 2015
poses only a limited threat to India's capital account.
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According to data on the National Securities Depository Ltd (NSDL) website,


FIIs have exhausted more than 99% of their total $30 billion investment limit in
government securities.
In the corporate bond market, 74% of the total limit has been exhausted and no
fresh investments are allowed in the short term commercial paper segment,
according to the NSDL website.
The prime reason for the strong inflows in debt is the interest rate trajectory in
India. We have already seen a 50 basis points (bps) cut and we will see more in
days to come. Apart from yields, it is more about pricing of bonds. FIIs tend to
gain on mark to market and in terms of capital gains, said Vaibhav Sanghavi,
managing director of Ambit Investment Advisors Pvt. Ltd.
Also, India has been a relatively stable currency compared with other emerging
markets; and that makes it attractive to invest in Indian debt, added Sanghavi.
The Indian rupee has fallen a mere 4.9% in fiscal year 2015, compared with a
30.1% decline in Brazils real and a 43.5% fall in Russian rouble.
Sanghavi. who expects interest rate cuts 75-100 basis points between now and
the end of FY16, expects the flows are likely to continue. But the fact that FIIs
limits to invest in government securities was exhausted could act as a hitch, he
said.
One basis point is one-hundredth of a percentage point.
Inflows into equities were backed by strong expectations that the Narendra
Modi government that took charge in May could turn around the sluggish
economy and steer it to a strong growth path.
Its a long-term story. India is one of the best placed emerging markets in terms
of improving economic fundamentals. On a relative scale, India is going to
attract continuous flows and going to be a preferred destination, said Sanghavi
of Ambit.

According to the Economic Survey released on 27 February, Asias third-largest


economy is set to grow by 8.1-8.5% in 2015-16, up from an estimated 7.4% in
the financial year ending on 31 March, and accelerate to a double-digit pace in a
couple of years.
The estimates are based on a revised way of calculating gross domestic product
adopted recently by the governments statistical arm.

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CONCLUSION
Nowadays FIIs are the major contributors to the stockmarkets. The pros of
allowing FIIs to invest in the Indian markets far outweigh the cons.
Simply banning participatory notes cannot be a solution.
It is upto the policy makers of India to allow FIIs to operate and provide them
with more opportunities and reasons to invest in Indian markets.
The entry of FIIs is expected to bring that much needed capital. However,as
most of the purchases by FIIs are on secondarymarket,their direct contribution
to investment may not be very significant.Yet, FIIs contribute indirectly in a
number of ways towards increasing capital formation in the host country like
India. Increased participation of foreign investors increases the potentially
available capital for investment and thus lowers the cost of capital

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REFERENCE

www.economictimes.com
Business standards
www.indianexpress.com
www.slideshare.com

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