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Foreign Institutional Investments in the Indian Stock Exchanges

IndianMoney.com Research Team | Posted On Sunday, April 12,2009, 03:38 PM

Foreign Institutional Investments in the Indian Stock Exchanges

 

 

 
In November 1995, SEBI notified the Foreign Institutional Investors Regulations which were principally based on the earlier guidelines issued in 1992. The regulations require FIIs to register with SEBI and to obtain authorization from the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973 to enable them buy and sell securities, open foreign currency and rupee bank accounts and remit and repatriate funds. For all realistic purposes, full convertibility of rupee is applicable to FII investments. Steadily, the scope of FII operations has been expanded by permitting
 
a.      Additional categories of investors,
b.      Recognizing other instruments in which they can invest, and
b.       Altering the individual and aggregate FII shares in whichever one Indian company.
 
The most recent position is that an FII (investing on its own behalf) or a sub-account can hold up to 10 % of paid-up equity capital (PUC) of a company. The total investment by all FIIs and sub-accounts in any one company cannot go beyond 24 % of the total PUC. In companies which exceed a special resolution in this regard, the total FII investment can reach up to 30 % of the PUC. Imposition of investment ceilings, one expects, was intended at: one, preventing cornering of shares that could result in take-over operations; and two, to keep price fluctuations under restrictions. The 24 % limit does not include investments made by the foreign portfolio investors outside the portfolio investment path, i.e., in the course of the direct investment approval process. Investments made through purchases of GDRs (Global/American Depository Receipts) and convertibles are also expelled. For calculating the FII investment limits, investments by NRIs and Overseas Corporate Bodies mainly controlled by them, which were included former, are no longer included for purposes of monitoring the FII investment ceilings. In the Budget Speech 2000-2001 it was proposed to raise the ceiling to 40 %.
 
See Also: Foreign Exchange Market In India
 
In spite of the fact that FPI has been given a significant place in India's financial sector under the liberalization package, very few studies on the FII operations in India exist. One reason for this has been the scarcity of data. Empirical studies have remained restricted to aggregate level studies. The studies normally point to the positive relationship between FII investments and movement of the Bombay Stock Exchange (BSE)” share price index. We viewed at the relationship in a fairly different way. It has been noticed that net FII investments were worse in the fourth quarter in all the years except for 1993, their first year of operations, and 1999. The average of BSE Sensex also fell down in the last quarter except in 1993 and 1999. Converse to the expectations FII investments pulled out up during the last quarter itself after a dip in the third quarter of 1999. Average level of Sensex also did not beg off during the last quarter. It does; yet, appear that FIIs buy in the first and second quarters following the depression created by their stumpy activity or relative selling pressure in the last quarter. The decline, which starts in the third quarter, reaches the highest in the last quarter. One of the promising explanations for the BSE Sensex also declining for the duration of the last quarter could be that the local market players look towards FIIs for leads. In such a state of affairs, even with relatively small turnovers, FIIs can roll the market by their actions. The extent of FII influence on market players can possibly be gauged from the truth that SEBI asked the stock exchanges not to release FII trading details as SEBI decided to release the data with a one day interval and after due confirmation with the FIIs' custodians.
 
 After 1993-94, SEBI closed giving a category-wise break up of the registered FIIs in India. The majority FIIs fall under two categories: `FA' and `FD' (Table 3). FA appears to set for fund advisers and asset management companies implying that the majority FIIs (56.57 %) work as representatives of others. From an analogous deduction it appears that FD stands for investment funds. These two categories wind up to 93 % of the FIIs. There are 9 FIIs under the category `FC' which are the majority likely pension funds. The other vital category is `FE' which includes an assortment of insurance companies, investment trusts and government bodies.
 
Out of the 502 FIIs, as several as 200 were from USA and another 121 have UK addresses. A few FIIs are reported to be from Hong Kong, Singapore, Luxembourg, etc., but a few of them, it is our assessment, had their source in USA and UK. For illustration, those registered from the city of Singapore includes, Citicorp Investment Bank (Singapore) Ltd., Templeton Asset Management Ltd., and J.P. Morgan Securities Asia Pvt. Ltd. The registrants from the city, Hong Kong includes Jardine Fleming Intl. Mgt. Inc., Merril Lynch Far East Ltd., and ABN Amro Asia Ltd. One among the registrants from Bahrain is Citicorp Banking Corp. Exceptionally few FIIs had their addresses in tax havens like Bahamas and Cayman Islands. Only one FII has agreed a Mauritius address. It therefore appears that the event of FIIs is essentially a domain of funds from USA and UK.
 
The bigger FIIs have multiple associates in India including nearby incorporated companies which operate either as brokers, managers or mutual fund operators. A number of of the FIIs floated joint ventures with Indian companies will be either belonging to the broking community or India's business groups, which is coupled with the fact that the FIIs can invest through the GDR (Global/ American Depository Receipts) route; it appears that the operations of FIIs cannot be unstated if investments by FIIs registered with SEBI are examined in isolation. The system of entities belonging to the Jardine Fleming Group may offer a concrete example in this regard. 

 

Country
Asset Management Cos./Fund
Advisers$
 
Investment Funds/ Trustees on Behalf of Such Funds
  
Insurance Cos.
Investment trusts, Government bodies, etc
Pension Funds
 
Others
Total
 
[FA]
[FD]
[FE]
[FC]
 
 
(1)
(2)
(3)
(4)
(5)
(6)
(7)
USA
102
86
5
7
-
200
UK
68
42
10
1
-
121
Hong Kong
31
2
1
-
-
34
Singapore
19
1
2
-
1
23
Luxembourg
8
22
-
-
-
30
Australia
5
10
1
-
-
16
Switzerland
12
2
1
-
-
15
Canada
8
4
-
1
-
13
Netherlands#
7
6
-
-
-
13
Italy
6
1
-
-
-
7
Japan
4
1
-
-
-
5
Others (Incl. unclassified)
 
14
6
5
-
-
Total
284
183
25
9
1
502
 
$ - This classification is based on relating registration numbers with the names of FIIs.
# -it also includes one from Netherlands Antilles.
 
 From the accessible information it appears that FIIs do not play a most important role in the primary market. According to SEBI, in 1995-96, out of the 1,426 public issues involving an issue amount of Rs 14,240 crore, in 79 issues Rs 212 crore were set aside for FIIs. In the subsequent year Rs 549 crore were reserved in 23 issues out of a total amount of Rs 11,557 crore issued by 751 companies. In 1997-98 the total amount reserved was Rs 12 crore out of 3 issues. The subsequent exercise will, hence, be focused on the FII operations in the secondary market. In the secondary market also, going by the principles, FIIs are more active on the equity market than in the debt segment. At the Bombay Stock Exchange, which accounts for about half of the FII sales and purchases, aligned with the total market turnover of Rs 5, 27,960 crore in 1999, FII purchases were Rs 17,165 crore and sales, Rs13, 174 crore. The overall turnover for 1998 was for about Rs 2, 65,995 crore and FII purchases amounted up to Rs 6,684 crore and their sales was nothing less than Rs 6,940 crore respectively. Accordingly, in comparison to total trading values on the BSE, FII sales and purchases appeared to be quite small.
 
The N-30 filings of investment funds with US capital market regulatory body, specifically, the Securities and Exchange Commission (SEC). Form N-3D is mandatory to be filed by registered investment companies and contains semi-annual and annual reports mailed to the shareholders. The SEC data are accessible for different years. One can, for that reason, make useful comparisons over a period. The filings also present details on the investment strategies of FIIs. A study of American funds could be reasonably representative of the FIIs investment behavior in India because most FIIs registered in India are from the USA.
 
By a process of sequence search in, we could recognize 53 funds which invested in India in 1998. Only 5 of them were precise to India. The others invested in GDRs of Indian companies, India specific funds of USA or UK or straightforwardly in a few Indian companies. Apart from the five India specific funds, only 6 other funds invested in over Ten Indian Companies in 1998. This may point out that the focus of FIIs on India is fairly narrow.
 

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