Foreign Institutional Investors (fii) in India

Introduction to Foreign Investment

Foreign investment refers to the investments made by the residents of a country in the financial assets and production process of another country. For example, an investor from the USA invests in the equity stock of HDFC Bank (an Indian Bank).

Foreign Institutional Investors (FII) in India

FIIs don’t directly invest in companies by buying shares; they usually go through the secondary route. Foreign investments in the country can take the form of investments in listed companies (i.e., FII investments), investments in listed or unlisted companies other than through stock exchanges. This may be through FDI or private equity/foreign venture capital investment, 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.

Economies like India, which provide comparatively higher growth than developed economies, have gained favor among investors as engaging investment destinations for foreign institutional investors (FIIs). Investors are optimistic about India, and sentiments are favorable following the government’s announcement of a series of reform measures in recent months. According to Ernst & Young’s (EYs) international Capital Confidence Barometer (CCB) - Technology report, India ranks third among the most engaging investment destinations for technology transactions worldwide. India is the third largest start-up base globally, with over 4,750 technology start-ups, and around 1,400 new start-ups being supported in 2016, per a report by Nasscom.

FII’s net investments in Indian equities and debt have reached record highs in the past financial year, backed by expectations of an economic recovery, falling interest rates, and improving earnings outlook. FIIs' net investments in Indian equities and debt stood at US$ 7.46 billion in 2016-17 (up to April 14, 2017). The cumulative value of investments by FIIs from April 2000 to December 2016 stood at US$ 183.69 billion.

India-focused offshore funds and exchange-traded funds (ETFs) witnessed net inflows of $565 million in November and helped the overall tally to reach nearly $6.5 billion in 2017. Equity mutual funds recorded the 17th straight month of net inflows with record Rs 20,362 crore (US$ 3.18 billion) inflows in August 2017 due to the rally in Indian stock markets. Equity funds received an inflow of Rs 2.86 trillion (US$44.6 billion) from November 2016 to October 2017.

The total market capitalization (M-cap) of all the companies listed on the Bombay Stock Exchange (BSE) rose to a record high level of Rs 146 trillion (US$ 2.27 trillion) on November 19, 2017, backed by positive sentiment in the broader market.

India has emerged as one of the strongest performers in terms of deals related to mergers and acquisitions (M&A). M&A activity in India more than doubled year-on-year to reach US$ 61.26 billion in 2016-17. During 2017, India witnessed record private equity investments worth US$ 24.4 billion. Private equity (PE) investments in the logistics industry grew at 9 percent to US$ 501.71 million during 2016-17 and are expected to grow at 8.6 percent annually from 2015-2020, driven by increased opportunities resulting from low entry barriers and Goods and Services Tax (GST).

Common Myths about FIIs

There are certain myths or beliefs about FIIs that are not necessarily true:

Myth 1: FIIs do not invest in unlisted entities. They participate only through stock exchanges.

Myth 2: FIIs cannot invest at the time of IPO (initial public offering). Foreign investors investing in the initial allotment of shares through IPO, FPO, or Private Issue are categorized as FDIs.

Truth about 1 and 2: As per Section 15 (1) (a) of the SEBI FII Regulations, 1995, a Foreign Institutional Investor (FII) can 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. In fact, FIIs are very active in the over-the-counter (OTC) markets and the IPO market in India. However, subsequent to SEBI (FPI – foreign portfolio investors) regulations, FIIs are allowed to invest only in listed or to-be-listed entities and only through stock exchanges.

Myth 3: FDI has more direct involvement in technology, management, etc., while FIIs are interested in capital gain and momentary price differences. Generally, FDI involves a long-term interest in the management of an enterprise and includes reinvestment of profits. In contrast, FIIs do not generally influence the management of the enterprise.

Truth about 3: To some extent, this notion is true and is emphasized in policy documents. For instance, the consolidated FDI Policy of the Department of Industrial Policy and Promotion (DIPP) states that “Foreign Direct Investment, as distinguished from portfolio investment (FII), has the connotation of establishing a 'lasting interest' in an enterprise that is resident in an economy other than that of the investor.” However, of late, there have been occasions where FIIs come together to influence decisions in companies where they hold shares. The difference between FDI and FII, except for the fact that the latter necessarily has to be an institution, while FDI can come from an individual also, rather lies in the registration or approval process and to some extent in the individual investment limits or lock-in conditions specified for each category.

Regulations Governing Foreign Investments in India

The regulations for foreign investment in India have been framed by the Reserve Bank of India in terms of Sections 6 and 47 of the Foreign Exchange Management Act, 1999, and notified via Notification No. FEMA 20/ 2000-RB dated May 3, 2000, viz. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000, as amended from time to time. In line with these regulations, since 2003, the Securities and Exchange Board of India (SEBI) has been registering FIIs and monitoring investments made by them through the portfolio investment route under the SEBI (FII) regulations 1995. SEBI acts as the nodal point in the registration of FIIs. Subsequent to SEBI (FPI) Regulations, 2014, depositories register and monitor the activities of the FIIs, and SEBI will continue to be the regulator for the same.

Conclusion

In conclusion, foreign institutional investors play a significant role in the Indian economy. Their investments contribute to the growth of various sectors and help in enhancing market dynamics. The regulatory framework provided by SEBI ensures that these investments are made in a structured and transparent manner, thereby boosting investor confidence and fostering economic development.

References

• Ernst & Young. (n.d.). International Capital Confidence Barometer - Technology Report.
• Nasscom. (2016). Start-up Report.
• Reserve Bank of India. (2000). Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations.
• Securities and Exchange Board of India. (1995). SEBI (FII) Regulations.
• Department of Industrial Policy and Promotion. (n.d.). Consolidated FDI Policy.