FOREIGN PORTFOLIO INVESTMENTS IN INDIA

INTERNATIONAL FINANCE

Alfred Rodrigues,

Roll No: 11,

PGPM 2016

Foreign Portfolio Investment - FPI

Securities and other financial assets passively held by foreign investors. Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is relatively liquid, depending on the volatility of the market invested in. It is most commonly used by investors who do not want to manage a firm abroad.

How FPI emerged in India?

In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic stock market

Since then ,FPI has emerged as a major source of private capital inflow in this country

India is more dependent upon FPI than FDI as a source of foreign investment.

During 1992 -2005 more than 50 percent of foreign investment in India came from FPI.

Major drivers for attracting portfolio inflows

Well performing stock market

Strong economic growth

Appreciating currency exchange rate

Domestic output growth of the country

Major factors that discourages the inflow High volatility in the exchange rate

Performance of stock market in other emerging countries

Interest rate - higher the interest rate in domestic market than foreign market, more the FPI flows and vice-verse

Poor output growth of the country

Eligibility Criteria for FPI The Applicant:

Is a person not resident in India

Is a resident of a country which is a signatory to SEBI MoU/IOSCO’s MMoU

Is resident of a country meeting FATF (Financial Action Task Force) requirements

If a Bank, should be resident of a country whose Central Bank is a member of the Bank for International Settlements

Is not a Non Resident Indian (NRI)

Is legally permitted to invest in Securities outside his country

Has sufficient experience, good track record, is professionally competent,financially sound, generally good reputation of fairness and integrity

Does not have a “opaque” structure (protected / segregated cell company or similar where ultimate beneficial owners are ring fenced from each another)

FPI Investment Guidelines

The portfolio investor registered in accordance with SEBI guidelines shall be called ‘Registered Foreign Portfolio Investor (RFPI)’.

RFPI may purchase and sell shares and convertible debentures of Indian company through registered broker on recognised stock exchanges in India in terms of relevant SEBI guidelines/ regulations.

RFPI may sell shares or convertible debentures so acquired in open offer  in accordance with the SEBI Regulations, 2011 (Substantial Acquisition of Shares and

Takeovers); or in an open offer in accordance with the SEBI Regulations, 2009 (Delisting of Equity shares); or through buyback of shares by a listed Indian company in accordance with the SEBI Regulations, 1998 (Buy-

back of securities)

FPI Investment Guidelines RFPI may also acquire shares or convertible debentures

in any bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the Central Government or any State Government;

or in any transaction in securities pursuant to an agreement entered into with merchant banker

in the process of market making or subscribing to unsubscribed portion of the issue in accordance with Securities and Exchange Board of India Regulations, 2009 (Issue of Capital and Disclosure Requirements).

The individual and aggregate investment limits for the RFPIs shall be below 10% (per cent) or 24% (per cent) respectively of the total paid-up equity capital or 10% (per cent) or 24% (per cent) respectively of the paid-up value of each series of convertible debentures issued by an  Indian company.

RFPI shall be eligible to open a Special Non-Resident Rupee (SNRR) account and a foreign currency account with Authorised Dealer bank and to transfer sums from foreign currency account to SNRR account at the prevailing market rate for making genuine investments in securities. The Authorised Dealer bank may transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to foreign currency account ;

FPI Investment Guidelines

RFPI shall be eligible to invest in government securities and corporate debt subject to limits specified by the RBI and SEBI  from time to time;

The investment by RFPI will be made subject to the SEBI (FPI) Regulations 2014, modified by SEBI/Government of India from time to time;

RFPI shall be permitted to trade in all exchange traded derivative contracts on the stock exchanges in India subject to the position limits as specified by SEBI from time to time;

RFPI may offer cash or foreign sovereign securities with AAA rating or corporate bonds or domestic Government Securities, as collateral to the recognized Stock Exchanges for their transactions in the cash as well as derivative segment of the market.

Mode of FPI Investments

Foreign Institutional Investments Foreign Organization set up to invest in India

GDRs/ADRs Raising money from abroad through issue of shares abroad

Offshore Funds Funds raised outside India to be invested here

ADRs/GDRs Stands for American Depository Receipts/Global Depository Receipts

ADR/GDR provides a path for Indian companies to get listed in foreign stock exchanges indirectly.

If an Indian company wants to get listed in foreign stock exchange indirectly then it have to deposit its shares and securities in a bank of foreign country whose stock exchange the company wants to list in.

The receipts are issued by the bank against these securities which are then sold to the residents of that country.

The receipts are also listed in the stock exchange of that country which are available for buy and sell on the stock exchange like other instruments.

The prices of this receipts are also determined by supply and demands in the market.

The receipts traded in American market are termed as American Depository Receipts and the receipts traded in any other country (except America) are called as Global Depository Receipts.

Trends of FPI components in India

1992-1993, the FIIs were allowed to enter Indian capital market resulting into rise in FII investment in India.

1997-98 and 1998-99, there was sudden decrease in FII inflows due to impact of Asian crisis

1999-2000 FII flows to India rejuvenated till 2001-02.

In 2002-03, the FPI flows again doused to 2.77 billion dollars due to the downgrading of Indian economy by international credit rating agencies and poor performance of Indian stock market.

In 2003-04, the FIIs inflows shooted up to great extent due to increase in the investment limit for FIIs

In 2008-09, due global depression there are heavy down-turn in the FII inflows that created a chaos in Indian financial markets.

FPI trend is largely influenced by FII trend as both move in same direction at every single point i.e. they imitate each other

Procedure to be followed by Foreign investor for investing in India. REGISTERATION PROCESS

1. Apply to a DDP (designated depository participant) for FPI registration under one of the 3 categories

2. Documents to be submitted with FPI application:a. Duly filled and signed Form-Ab. SEBI registration fee & conversion fee (if applicable)c. Declarations and undertakings of updated material changes, non opaque structure etc.d. Obtaining registration certificate, formation certificate etc.e. The bank applicant has to forward the details to SEBI. DDP communicates the approval/rejection of application within 30 days to

the applicant and to SEBI. APPOINTING A COMPLIANCE OFFICER: the same needs to be appointed to comply with the FPI regulations APPOINT A CPA: a CPA needs to be appointed in India so as to meet the PAN card and tax related obligations Foreign Portfolio Investors have to be given the same tax status as that of an FII :

DividendsSubject to dividend distribution tax at the company level

Interest from Securities 0.2

Interest from specific Rupee denominated bonds 5%(wef. 1-4-2014)Short term capital gains on the floor of the exchange 0.15Other short term capital gains 0.3Long term capital gains on the floor of the exchange NILOther Long term capital gains 0.1

Order Management & Clearing

Note• Equity is settled on T+2 basis | MF Redemptions are settled on T+1

basis• Government Debt is settled T+1 basis | Corporate Debt is settled on

T+0 / T+1 basis• FPI can make use of Stock Lending and Borrowing segment to manage

any short sales.

Advantages of FPI to Investors Portfolio Diversification: Foreign portfolio investment gives investors an opportunity to engage

in international diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return.

International Credit: Investors who have foreign investment portfolios have a broader credit base because they can access credit in foreign countries where they have significant investments. This is advantageous when credit sources available at home are expensive or unavailable due to various factors. The ability to get credit on favorable terms and as quickly as possible can determine whether a business executes a new project or not.

Benefit from Exchange Rate: International currency exchange rates keep changing. Sometimes the currency of the investor's home country may be strong, and sometimes it may be weak. There are times when a stronger currency in the foreign country where an investor has a portfolio may benefit the investor

Access to a Bigger Market: Home markets in the United States have become very competitive, as there are many businesses offering similar services. Foreign markets, however, offer a less competitive and sometimes larger market. A business may make more sales selling shoes in one African country than in the entire U.S., for instance.

Disadvantages of FPI to Investors

Problems of exchange rate

Political Risk represented by the possibility of change in the political environment resulting in change in investment norms and repatriation regulations.

Emerging markets which are the beneficiaries of most FPI traditionally suffer from low retail participation which results in inadequate liquidity which results in price volatility.

Exorbitant transaction and information cost.

Procedural and cumbersome formalities.

Advantages of FPI to Host Country Provides a developing country non-debt creating source of foreign investment.

Supplement domestic saving by providing foreign exchange to the developing countries.

Reduces the pressure of foreign exchange gap for the LDCs

FPI can induce financial resources to flow from capital-abundant countries, where expected returns are low, to capital-scarce countries, where expected returns are high.

FPI gives an upward thrust to the domestic stock market prices. This has an impact on the price-earning ratios of the firms. A higher P/E ratio leads to a lower cost of finance, which in turn can lead to a higher amount of investment.

Increased competition from foreign financial institutions also paves the way for the derivatives’ market.

Disadvantages of FPI to Host Country Due to the unpredictable nature of such funds there is a tendency to shift from one market to

another at short intervals. Volatility arising out of FPI inflows and out flows has adverse effects on the host country economy.

Negative Influence on Exchange Rates: Foreign portfolio investments can occasionally affect exchange rates during the abrupt withdrawal by source country.

Risk from Political Changes: Because political issues in other countries can instantly change, foreign portfolio investment is very risky.

Impact of FPI on India's economy

Impact of FPI on India's economy The heavy inflow of FPI can provide Indian economy a non-debt creating source

of foreign investment.

FPI also reduces the pressure of foreign exchange gap

The flow of resources into the capital-scarce countries like India reduces their cost of capital, increases investment, and raises output

It act as a catalyst for overall development of stock market performance of India.

The lower cost of capital and a booming share market can encourage new equity issues in India (e.g. CCD).

FPI Investments in India

Financial YearINR crores

Equity Debt Total

2010-11 110121 36317 146438

2011-12 43738 49988 93726

2012-13 140033 28334 168367

2013-14 79709 -28060 51649

2014-15 111333 166127 277461

2015-16 -19837 6777 -13060

Top 4 registered foreign investors in India.1. Name 1199 SEIU GREATER NEWYORK PENSION FUND

Registration No. INUSFD290213Registration valid upto 7/10/2016 0:00Address 330 West 42nd Street, NewYork, USA Country Name UNITED STATES OF AMERICATelephone No / Fax No. 6464738300 / / 2. Name 1199 SEIU HEALTH CARE EMPLOYEES PENSION FUNDRegistration No. INUSFD290313Registration valid upto 7/10/2016 0:00Address 330 West 42nd Street, NewYork, City Country Name UNITED STATES OF AMERICATelephone No / Fax No. 6464738300 / / 3. Name 1199 SEIU HOME CARE EMPLOYEES PENSION FUNDRegistration No. INUSFD290513Registration valid upto 7/14/2016 0:00Address 330 West 42nd Street, NewYork City, NY Country Name UNITED STATES OF AMERICATelephone No / Fax No. 646 473 8300 / / 4. Name 1832 ASSET MANAGEMENT L.P.Registration No. INCAFD300914Registration valid upto 4/28/2017 0:00Address 51ND FLOOR 40 KING STREET WEST, TORONTO Country Name CANADATelephone No / Fax No. 1-1800-268-8186 / 416-865-3463 /

CONCLUSION

This study provides the detailed analysis of the components of foreign portfolio investments such as FII and ADR/GDR flows along with the factors that influence the overall flow of capital to India were also analyzed in detailed.

As per analysis the most common factors that attracts both FIIs and ADR/GDR flows are performance of domestic stock market, exchange rate, volatility in exchange rate, interest rate differentials and domestic output growth of the country.

The study also concludes that the FII have always been a dominant component of aggregate foreign portfolio investments, so the result of aggregated foreign portfolio investments are identical to FII flows.

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Thank You