Forign Institutional Investers (FII's)

World of Finance by M.Vijaya Sai

 

Foreign Investment refers to investments made by residents of a country in financial assets and production method of another country. 

 

After the opening up of the borders for capital movement these investments have developed in leaps and bounds. But it had wide-ranging effects across the countries. It can affect the factor productivity of the beneficiary country and can also affect the balance of payments. In developing countries there was a great necessitate of foreign capital, not only to increase their productivity of labor but also helps to build the foreign exchange reserves to meet the trade deficit. Foreign investment provides a channel all the way through which these countries can have access to foreign capital. It can come in two forms: 

1. Foreign direct investment (FDI) and 
2. Foreign portfolio investment (FPI).

Foreign direct investment involves in the straight production activity and also of medium to long-term nature. Although the foreign portfolio investment is a short-term investment mostly in the financial markets and it consists of Foreign Institutional Investment (FII). The FII, given its short-range nature, might have bi-directional causation with the returns of other domestic financial markets like money market, stock market, foreign exchange market, etc. For this reason, understanding the determinants of FII is very important for any emerging economy as it would have larger impact on the domestic financial markets in the short run and real impact in the long run. The present study examines the determinants of foreign portfolio investment in the Indian context for the fact that the country after experiencing the foreign exchange crisis opened up the economy for foreign capital.

 

India, being a capital insufficient country, has taken lot of measures to attract foreign investment ever since the beginning of reforms in 1991. Till the end of January 2003 it could catch the attention of a total foreign investment of around US$ 48 billions out of which US$ 23 billions is in the form of FPI (Foreign Portfolio investment).

 

FII consists of approximately US$ 12 billions in the total foreign investments. This shows the significance of FII in the overall foreigninvestment programmed. As India is in the development of liberalizing the capital account, it would have noteworthy impact on the foreign investments and particularly on the FII, as this would affect short-term stability in thefinancial markets . For this reason, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables which drive-in foreigninvestment . In addition FII has been subject of intense discussion, as it is held responsible for intensifying currency crisis in 1990’s somewhere else.

 

The present study would inspect the determinants of FII in Indian context. Here we make an effort to analyze the effect of return, risk and inflation, which are treated to be major determinants in the literature, on FII. The projected relation (discussed in detail later) is that inflation and risk in domestic country and return in foreign country would adversely have an effect on the FII flowing to domestic country, whereas inflation and risk in foreign country and return in domestic country would have constructive affect on the same.

 

One who propose to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates and individuals and fit in to any of the under given categories can be registered for FII.

 

• Pension Funds
  
• Mutual Funds
  
• Investment Trust
  
• Insurance or reinsurance companies
  
• Endowment Funds
  
• University Funds
  
• Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and
  
• Asset Management Companies
  
• Nominee Companies
  
• Institutional Portfolio Managers
  
• Trustees
  
• Power of Attorney Holders
  
• Bank
  
  

An application for registration has to be made in Form A, the layout of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the subsequent address within 10 to 12 days of receipt of application.

 

Supporting documents required for FII registration are:-

 

• Application in Form A duly signed by the authorized participant of the applicant.
  
• Certified copy of the applicable clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the candidate to invest on behalf of its clients
  
• Audited financial statements and annual reports for the last one year, provided that the time period covered shall not be less than 12 months.
  
• A declaration by the candidate with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organization or any other suitable regulatory authority with whom the applicant is registered in its home country.
  
• A declaration by the candidate that it has entered into a custodian agreement with a domestic custodian together with particulars of the domestic custodian.
  
• A signed declaration statement that appear at the end of the Form.
  
• Declaration with regarding fit & proper entity. 
  

The eligibility criteria for applicant seeking FII registration

As stated by Regulation 6 of SEBI (FII) Regulations, 1995, Foreign Institutional Investors are required to accomplish the following conditions to qualify for grant of registration:-

 

• Applicant should have track record, professional competence, financial soundness, experience, general reputation of justice and integrity;
  
• The candidate should be regulated by an appropriate foreign regulatory authority in the similar capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to meet the criteria as ForeignInstitutional Investor.  
  
• The candidate is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India.
  
• Candidate must be legally permitted to invest in securities outside the country or its in-corporation / establishment.
  
• The candidate must be a "fit and proper" person.
  
• The candidate has to appoint a local custodian and enter into an agreement with the custodian. Moreover it also has to appoint a designated bank to route its transactions.
  
• Payment of registration fee  amount up to US $ 5,000.00