FII activity in India from 1992.docx

7/30/2019 FII activity in India from 1992.docx

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FII activity in India from 1992-2006

The Indian financial market was opened to the foreign institutional investors in 1992 to

widen and broaden the Indian capital market. Since then, the net investment by FIIs in India has

been positive every year except in 1998-99. During the last few years, there has been a

phenomenal increase in the portfolio investment by FIIs in the Indian market. (Table 1 & Chart

1). The gross purchases of debt and equity together by FIIs increased by 59.9 per cent to

Rs.3,46,978 crore in 2005-06 from Rs.2,16,953 crore in 2004-05. The gross sales by FIIs also

rose by 78.6 per cent to Rs.3,05,512 crore from Rs. 1,71,072 crore during the same period.

However, the net investment by FIIs in 2005-06 declined by 9.6 per cent to Rs.41,467 crore in

2005-06 from Rs.45,881 crore in 2004-05 mainly due to large net outflows from the debt

segment. The cumulative net investment by FIIs at acquisition cost, which was US$15.8 billion

at the end of March 2003, rose to US$ 45.3 billion at the end of March 2006. (Chart 2) The

provisional net investment figure as of March 2007 was US $ 3225 million as per RBI

Table1:InvestmentsbyFIIs

Source : SEBI Annual Report 2005-06


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Chart 1 : FII Investments in India


Chart 2: Trends in FII Investment

The FII investment in equity increased significantly since 2003-04. During 2005-06, FIIs

increased their net investment in equities, but reduced their commitments in debt Securities

(Table 2). The net FII investment in equity during 2005-06 was Rs.48,801 crore, the highest ever

in a single year. Buoyancy in the markets was sustained in 2005-06 on account of surge in net

investment by the institutional investors with FIIs playing a major role. Month-wise, FII

investment was negative in the months of April, May and October 2005. However, during the

remaining months of the financial year, there was large net equity investment by FIIs,


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particularly in the second half of 2005-06, which drove the benchmark indices to surpass the

earlier record highs on several occasions. The net FII investment in December 2005 was the

highest for 2005-06, followed by July 2005 and February 2006. However, month-wise, the FII

investment in the debt segment was negative in all the months in 2005-06. The total net

investment in the debt segment in 2005-06 declined by Rs.7,334 crore mainly due to firming up

of the yield rate of G-sec across the entire maturity spectrum.

Table 2: Investments by MFs & FIIs


Several factors are responsible for increasing confidence of FIIs on the Indian stock

market which include, inter alia, strong macro-economic fundamentals of the economy,

transparent regulatory system, abolition of long-term capital gains tax and encouraging corporate

results. Reflecting the congenial investment climate, the total number of FIIs registered with


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SEBI increased to 882 as on March 31, 2006 compared to 685 a year ago, an increase of 197

over the year ( Table 3). The diversity of FIIs has been increasing with the number of registered

FIIs in India steadily rising over the years.

Table 3: FIIs Registered in India

FINANCIAL YEAR DURING THE YEAR TOTAL REGISTERED AT

THE END OF THE YEAR

1992-93 0 0

1993-94 3 3

1994-95 153 156

1995-96 197 353

1996-97 99 439

1997-98 59 496

1998-99 59 450

1999-00 56 506

2000-01 84 528

2001-02 48 490

2002-03 51 502

2003-04 83 540

2004-05 145 685

2005-06 210 882

Source : Expert Group Report, GOI 2005


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SOURCES OF FIIS

As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest number of FIIs,

as on March 31, 2006, was from the USA (342), followed by the UK (148). About 90 per cent

FIIs come from the top 13 countries. There has been increase in the number of FII registrations

from non-traditional countries like Malaysia, Australia, Saudi Arabia, Trinidad and Tobago,Denmark, Italy, Belgium, Canada, Sweden, Ireland etc. (chart 3). These developments have

helped improve the diversity of the set of FIIs operating in India.

Chart 3: Country-wise FIIs Registered with SEBI as on 31st

March 2006

Several factors were responsible for increasing confidence of FIIs on the Indian stock market

which include:

Strong economic fundamentals and attractive valuations of companies. Improved regulatory standards, high quality of disclosure and corporate governance

requirement, accounting standards, shortening of settlement cycles, efficiency of clearing

and settlement systems and risk management mechanisms.

Product diversification and introduction of derivatives.

Strengthening of the rupee dollar exchange rate and low interest rates in the US.


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2.11 FII ACTIVITY FOM 2006-2010

2008 FII sell-off the largest ever

The Indian equity market kept on sliding in September 2008 with the S&P CNX NIFTY,

showing the second sharpest fall since January 2008, with a decline of around 10%. With all

courtesy to the US financial markets and its crisis bug, an estimated amount of Rs 2.3 trillion of

shareholders' wealth were eroded in the Indian stock markets.

We hear a lot about sales and purchases made by foreign institutional investors (FIIs) in

Indian equity markets, with these numbers often making headlines. Why are we so obsessed with

FIIs? The answer, is "Indian markets are primarily driven by FII fund flows."

The market slide can be attributed to lower FII inflows in 2011. A look at stock indices since

2006 shows that the markets peak when FII inflows are the highest and fall when FIIs are

missing in action. For instance, in 2008, the BSE Sensex fell almost 50% due to the global

financial meltdown, wiping out the gains of 2007. The year 2008 has seen the biggest ever FIIs

sell-off for the Indian markets. FIIs were allowed to invest since 1991 when the economy opened

up. FIIs sell-off of USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the

total FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3 lakh

crores.

The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in 2008, while

the number of registered sub-accounts have increased from 3644 in 2007 to 4872 in 2008. In

2008, there were negative FIIs' flows seen for 10 months, and the longest selling streak was seenfrom May to November. Since 1999, there have been 32 months of negative FIIs flows as against

88 months of positive flows. Since 2003, there have been 19 months of negative FIIs' flows as

against 53 months of positive flows. October and January were two carnage months, where USD

3.8 billion and UDS 3.2 billion, respectively, were sold.

The depreciation by 23% in rupee and the 51% sell-off in the markets has resulted in the

Defty falling 61%, making India one of the worst emerging market performers for 2008. The

biggest sell-off was seen in March, when the FIIs sold Rs 1,881 crore. In January, a correction

bought the most at Rs 7,702 crore follwed by Rs 3,179 crore in June.

"What hurt in 2008 was not the performance of companies but rapid outflow of $13

billion (Rs 55,000 crore) as investors fled risky assets," says Nick Paulson-Ellis, India head,

Espirito Santo Securities.The markets were flat during the first three months of 2009 as FIIs

stayed away. After that, governments across the globe implemented plans to boost their

economies. India, helped by robust economic growth, became a preferred destination for

investors.


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85% was the surge in the Sensex in 2009 with FIIs investing a net Rs 84,000 cr, crossing the

2007 level.

With FIIs investing a net $19 billion (Rs 93,100 crore) in 2009, crossing the 2007 level, theSensex surged 85%. In 2010, the trend continued and FIIs pumped in $30 billion(Rs 1.3 lakh

crore) into Indian equities, helping the Sensex gain 25%. Between December 2006 and July

2011, the number of FIIs registered in India rose from 1,024 to 1,730.

Table 1: Net FIIs Investment in Equity (2007-10)

MONTH 2007 2008 2009 2010

JAN 94.45 -17326.30 -3009.50 5902.40

FEB 6065 5419.90 -2690.50 2113.50

MARCH 1403.30 124.40 269 18833.60

APRIL 5431.80 979.00 7384.20 9764.50

MAY 4574.50 -4917.30 20606.90 -8629.90

JUNE 7939.60 -10577.70 3224.90 10244.60

JULY 18132.80 -1012.90 11625.30 17120.60

AUG -7526.80 -2065.80 4028.70 11185.30

SEPT 18948.50 -7937.00 19939.50 29195.80

OCT 15577.60 -14248.60 8304.10 24770.80

NOV -4597.40 -2820.30 5317.80 18519.90

DEC 4896.70 1330.90 10367.20 1476.10

Table shows the position of FIIs investment in equity from 2006-10. It is clear from the

above table that during 2007, apart from August 2007, FIIs showed keen interest in purchasing

the equity in the Indian market. But so far as the month of August was concerned, FIIs turned

towards net selling in equity for profit booking and seeing the massive sell out of shares in global

markets including India especially on August 16 & 17 when there was massive equity selling.

Consequently the SENSEX broke down to even 4 to 5% of its previous levels. Moreover, the

bears took command of the market and some brokers also started off-loading their positions

anticipating a further fall and stop loss button was pressed by many investors. So far as themonth of October was concerned, the impact of supportive level was pulling the FIIs money in

India. As a result positive impact in the net position was seen. Again a bearing trend could be

noticed during November due to the fact that new norms about PNs were announced which

ordered the winding up of PNs within next 18 months.


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The analysis of the above table depicts a negative view of the FIIs investment in India

during 2008. The main reason could be tremendous selling at the beginning of the year. The next

three months i.e. February, March & April showed a consistent pattern in the trading activities.

But from the month of May to November, FIIs again showed the exit mode from the stock

market. This was due to the fact that impact of international recession had started affectingIndian markets also. Further the famous subprime crisis of USA e.g. the crash of Banks and

investment firms like Lehman Brother had also started impacting global economy. Market

analysts feel that the foreign fund managers were trying to play safe and therefore rushed

towards risk aversion and taking off their money. Due to this reason a negative impact of FIIs

was reflected showing immense selling and taking back their money from the Indian stock

market.

During the year 2009, FIIs investment in equity showed an initial sell off in the first two

months, may be the impact of 2008 was still continuing. This year market sentiments seemed to

improve from March onwards as the foreign investors starting returning with their investments.

India emerged out as one of the better performing markets since October crash and the growth

potential was seen. The trend turned positive with the sign of revival of economies. The trend of

FIIs inflows witnessed during quarter from April to June continued further and FIIs proved to

be the prime investors in the month of September. The reasons for such huge investments by

FIIs in this month could be attributed to number of positive news about Indian economy.

During the year 2010, the same trend of revival of economic activity could be observed. As a

result, FIIs went on to purchase more equity during this year with the exception of the month of

May. This showed positive view of FIIs about Indian market. FIIs started pumping funds into

emerging markets like India because of its growth potential and stability of Indian Stock Market.

Table No: 2 FII Inflows in Equity (2006-10)

YEARS NET PURCHASE/ SALES

RS. (IN CRORES)

TREND %

2006 32254.08 100.00

2007 70940.05 226.978

2008 -530517.70 -169.743

2009 85367.2 264.494

2010 140497.2 436.949It is evident from this table that apart from the year 2008, in all other years, there has

been a positive trend in FII inflows in India. The year 2008, as we all know, was the year of

worldwide recession. The value of the trend is higher during last two years of this study i.e. 2009

and 2010 because of the fact that Indian economy could recover well from the shocks of

worldwide recession due to its strong fundamentals and rules and regulations.


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Table 3: FII Investments in Debt (2006-10)

YEARS NET PURCHASE/

SALES

RS. (IN CRORES) DEBT

TREND (%)

2006 3629.18 100.00

2007 8356.13 230.248

2008 12340.40 147.68

2009 3458.40 28.025

2010 54442.80 1574.219

The analysis of the above table depicts the positive trend of FIIs investment in debt

market. The sharp rise in the FII inflows into the debt market came after a sharp rise in the

interest rates over the past couple of years which attracted the foreign investors towards the

Indian market. Besides that market observers believed that the huge inflow into the Indian equity

market also led to FIIs parking a portion of their capital into the debt market as a hedge against

any potential downslide in the stocks. The sharp rally in rupee against the US dollar also led to

an increase in the FII interest in the debt market.

Table 4: Comparison between FII inflows & Industrial Growth Rate

YEARS NET FII INFLOWS INDUSTRIAL

GROWTH RATE (%)

2006 32254.08 7.4

2007 70940.05 7.6

2008 -530517.70 9.8

2009 85367.2 6.32010 140497.2 5.8

The analysis of above table shows that there is a Low Degree of Correlation between FII

inflows & Industrial Growth Rate. It means that during the period under study, with the increase

of FII inflows, the industrial growth of India also rose up. Industrial growth plays a pivotal role

in increasing the GDP. In the year 2008, in spite of major outflows, the industrial growth rate

still increased. During the next two years, a fall in industrial growth can be observed. Thus it can

be safely said that industrial growth rate has not been much influenced by the FII inflows.Table 5: Relationship between FII Inflows & SENSEX

YEAR SENSEX FII INFLOWS2006 13786 31254.08

2007 20826 70940.05

2008 9647 -53051.70

2009 17464 85367.20

2010 20509 140497.20


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Table 5 shows the impact of FIIs on SENSEX. In 2006 the foreign institutional

investors (FII) inflows were a bit slow, but they once again proved that they were the drivers of

the Indian equity market. Interestingly, the dependence of the Indian equity markets on the

foreign investors was further proved by the fact that in the period between May 10, 2006 to June

14, 2006, when the SENSEX moved from a high of 12,612.38 to a low of 8,928.44.

In the year 2007 when FIIs were pumping money in stock market and were Net Buyers of Equity

worth Rs. 70940.05 Crores; the SENSEX was moving upwards on the weekly basis. It took

nearly two months for the SENSEX to move from the level of 15000 to 17000. But from 17000

to 20000 it moved in a span of few weeks i.e. from 26th September 2007 to 29th October 2007.

As the Indian markets move from one peak to another this year, foreign institutional investors

(FIIs) have pumped top dollar into stocks. Investments during 2007 by foreign funds were the

most influential group of investors in the market. In September, FIIs injected $2.7 billion into the

markets, sending the benchmark indices to record peaks. The bulk of this amount came in after

the US Fed cut interest rates on September 18 which ultimately led to increasing liquidity in

global markets.

In January 2008 the SENSEX touched the new height of 21000. This rally of 1000 points

of SENSEX infused Rs. 2403 Crores during a period of just 49 trading days. But in the later part

of 2008 the SENSEX crashed affecting large number of investors. The major cause of this crash

was attributed to the recession in the global economies, especially with the US dollar losing its

strength to the Indian rupee. A large amount of equity in the form of shares was floated in the

Indian economy as an impact of Foreign Institutional Investors (FIIs) withdrawing their money

from the Indian markets. This has disturbed the demand and supply ratio to a great extent

resulting in easy availability of shares of well-performing companies, thus leading to a dip in the

selling price of these shares.

However, in 2009 with the sign of revival of economies, the trend turned positive and overseas

investors started betting big on the domestic bourses as the liquidity conditions started

improving. In 2010 most of the stocks which have shown an increase in prices were driven by

huge FII buying. India continued to be a favored destination for FIIs and would continue to be so

because of its strong fundamentals. This could well be reflected in the FII inflows towards the

country, which had already reached all-time highs. Thus it can be observed that there is a

positive correlation between FII inflows and SENSEX.

PROPPING UP STOCKS

Investing in stocks with high FII interest can give good returns. For instance, the FII holding in

HDFC has been 58-60% since 2008. Similarly, the FII holding in ICICI Bank has been 38-40%

for years. Between March 2008 and 29 September 2011, HDFC Bank and ICICI Bank have risen

35% and 20%, respectively.


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PRESENT SCENARIO (2010-2011)

Recent Trends in Foreign Institutional Investment

Foreign Institutional Investors play an important role in Indian securities markets.Since 1992-93,

when FIIs were allowed entry into Indian financial markets, foreign institutional investment has

increased over the years except in 2008-09. In tandem with the boom in stock markets and a

better global scenario, investments by FIIs into India were quite high in last few years,

particularly since 2003-04. FIIs made a record investment in the Indian equity market in

2010-11, surpassing the 2009-10 inflows.

Chart: Trends in Foreign Institutional Investment

The gross purchases of debt and equity by FIIs increased by 17.3 percent to 9,92,599 crore in2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The combined gross sales by FIIs also

increased by 20.2 percent to 8,46,161 crore from ` 7,03,780 crore during the same period in

previous year. The total net investment of FII was 1,46,438 crore as compared to of 1,42,658

crore in 2009-10. This was the highest net FII investments into Indian securities market in

any financial year so far.


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Table : Investment by Foreign Institutional lnvestors

Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of

March, 2010, increased to US$ 1,21,561 million at the end of March, 2011. During 2010-11, FIIsinvested 1,10,121 crore in equity and 36,317 crore in debt as compared to an investment of

1,10,220 crore in equity and 32,438 crore in debt during 2009-10 respectively (Table 2.51 and

Chart 2.12). Month-wise, the net FII investment was the highest in equity segment in October,

2010 (28,563 crore) followed by September,2010 ( 24,979 crore) and November,2010 (18,293

crore). In debt segment, FII investment was the highest in January, 2011 (10,177 crore) followed

by July, 2010 (8,107 crore) and September, 2010(7,690 crore).


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The FIIs have been permitted to trade in the derivatives market since February, 2002. The

cumulative FIIs trading in derivatives was 5,34,748 crore as on March 31, 2011 as compared to

3,88,310 crore as on March 31,2010. Open interest position of FIIs in index options was the

highest at 11,33,838 crore by end-March 2011, followed by stock futures( 6,22,875 crore), index

futures (2,83,890 crore) and stock options ( 22,547 crore) (Table 2.52).

Table 2.51: Investments by Mutual Funds and Foreign Institutional lnvestors


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Chart: Net Institutional Investment (crore) and Monthly Average Nifty

Registration of Foreign Institutional Investors and Custodians of Securities

There was a small increase in the number of Foreign Institutional Investors (FIIs) registered with

SEBI. As on March 31, 2011, there were 1,722 FIIs registered with SEBI as compared to 1,713 a

year ago, showing an increase of 0.53 percent during the year. There were 5,686 sub-accounts

registered with SEBI as on March 31, 2011 as compared to 5,378 as on March 31, 2010, an

increase of 5.73 percent The number of custodians registered with SEBI under the SEBI

(Custodian of Securities) Regulations, 1996 was 19, as on March 31, 2011, as compared to 17 a

year ago. Status of registration of FIIs, sub-accounts and custodians during 2010-11 is provided

in below Table

Table : Number of Registered FIIs, Subaccounts and Custodians


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The Indian economy has successfully proved its mettle time and again in terms of financial

stability and economic sustainability as it has resiliently weathered global financial turmoil.

Where majority of emerging economies are experiencing huge capital outflows by foreign

institutional investors (FIIs), Indian markets have managed to hold their confidence as well as

investments during such times. A report titled 'Doing Business in India' by Ernst & Young

(E&Y) further supports the fact by highlighting India as the second most preferred destination

for foreign investors, next only to China.

Overseas entities are among the important drivers for Indian stock markets. FII flows account for

about 45 per cent of the market free-float.

The overview further discusses recent developments, investments, facts & figures and

Government initiatives pertaining to foreign investments in India.

FII Recent Developments

According to the data released by Securities and Exchange Board of India (SEBI), FIIspurchased stocks worth Rs 600,000 crore (US$ 113.81 billion) during 2011. FIIs were

also seen attracted to the debt market in 2011 wherein they infused Rs 42,067 crore (US$

7.98 billion). This intense interest in debt markets helped India get a net FII inflow of Rs

39,353 crore (US$ 7.46 billion) for the year (taking both- debt and stocks- into account).

Global rating agency Moody's has uplifted Indian bond market by upgrading credit ratingof the Indian government's bonds from the speculative to investment grade. The move is

expected to attract higher investments from FIIs and help companies raise funds at

competitive rates abroad. India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011. According to the data available with the Bombay Stock Exchange (BSE), FIIs have

consolidated their holdings in 11 out of the 30-Sensex firms during the July-September

quarter of 2011. They majorly enhanced their holdings in auto stocks such as Mahindra &

Mahindra, Maruti Suzuki, Hero MotorCorp and Bajaj Auto.

The number of FIIs registered with SEBI stood at 1,749 as of October 2011, while thenumber of FII sub-accounts was 6,058 during the month. The statistics revealed that there

were 1,743 FII accounts and 6, 028 sub-accounts at the end of September 2011

FII- Key Investments

FIIs have bought stakes in BSE and National Stock Exchange of India (NSE) recently.Argonaut Ventures (a US-based private equity firm) increased its stake in BSE from 2.54

per cent at the end of May 2010 to 4.75 per cent at the end of June 2011, while couple of

SEBI-registered FIIs and sub-accounts bought stakes in NSE.


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India-based micro-lender SKS Microfinance has raised investment limit for foreigninstitutional investors in the company to 74 per cent from 24 per cent and the company

plans to raise funds of up to Rs 5 billion (US$ 94.84 million) through a share sale to

institutional investors by March 2012.

World Bank's private equity arm IFC has made its single-largest country exposure toIndia at 8.8 per cent of total committed portfolio in fiscal 2011. Also, India is expected to

take the lead during the fund allocation for the current fiscal (year ending June 2012),

when IFC's approved funding is estimated at US$ 10 billion. According to market

insiders, IFC plans to scale up equity investments over debt funding in private firms in

India.

According to data released by auditing and consultancy firm KPMG, first three quartersof 2011 witnessed a 31 per cent increment in private-equity (PE) investment to US$ 7.89

billion. Private equity firms like Blackstone India and Kohlberg Kravis Roberts & Co

(KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported

to have said that he intends to close 5-6 deals a year in India whose financial valuationswould revolve around roughly US$ 100 million to US$ 120 million each.

As on October 31, 2011, FIIs injected Rs 41,253 crore (US$ 7.82 billion) in Governmentsecurities (G-secs) and Rs 68,289 crore (US$ 12.95 billion) in corporate bonds.

Government Initiatives

Government of India keeps taking different initiatives in order to attract FII investments. For

instance, investment limit in infrastructure bonds was raised from US$ 5 billion to US$ 25

billion in March 2011. Similarly, in November 2011, the Ministry of Finance enhancedinvestment limit for FIIs in G-secs and corporate bonds by US$ 5 billion each, increasing the cap

to US$ 15 billion and US$ 20 billion respectively. The Government intends to increase capital

flows in Indian markets through such measures that would eventually increase the availability of

resources for Indian corporate.

Also, along with the debt instruments issued by infrastructure companies, FIIs can now also

invest in debt instruments issued by non-banking financial companies (NBFCs) categorised as

'Infrastructure Finance Companies' by the Reserve Bank of India (RBI).

In a bid to attract more FII funds into the Indian infrastructure sector, the Government isconsidering a trim on the lock-in-period in the corresponding bonds to one year from three years.

The Government's top priority seems to be the enhancement of investor base for the Indian

markets. That is why the Ministry of Finance started 2012 with a happy announcement by

allowing foreign nationals, trusts and pension funds to invest directly in the country's listed

companies from mid-January 2012.


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EPISODES OF VULNERABILITY IN INDIA

There have been some episodes of vulnerability in India, which are negative shocks affecting the

economy, and influencing the behavior of investors. These are: the East Asian crisis in 1997, the

Pokhran Nuclear explosion (May 1998) and the attendant sanctions, the stock market scam of

early 2001, and the Black Monday of May 17, 2004. The investment behavior of the FIIs vis--

vis the movements of the stock market indices during these episodes

FII investment behavior during these four specific events indicates that these events did affect

the behaviour of the foreign portfolio investors. But, these events did affect domestic investors

behaviour as well. The critical question to ask is: whether there was any perceptible difference,

particularly with a bias towards destabilization, in the behaviour of the FIIs vis--vis that of

domestic investors?

Table 7: India: FII Behaviour During East Asian Crisis

Table 8: India : FII Behaviour in the aftermath of Pokhran Nuclear Explosion


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Table 9: India : FII Behaviour during the Stock Market Scam 2001

Table 10: India: FII Behaviour around Black Monday, May 17, 2004

These experiences show that FII outflow of as much as a billion dollars in a month which

corresponds to an average of $40 million or Rs.170 crore per day has never been observed.

These valuesRs.170 crore per dayare small when compared with equity turnover in India. In

calendar 2004, gross turnover on the equity market of Rs.88 lakh crore contained Rs.5 lakh crore

of gross turnover by FIIs. This suggests that as yet, FIIs are a small part of the Indian equity

market. Transactions by FIIs of Rs.5 lakh crore in a year might have been large in 1993, but the

success of a radical new market design in the Indian equity market have led to enormous growth

of liquidity and market efficiency on the equity market. Through this, Indias ability to absorb

substantial transactions on the equity market appears to be in place.


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RECENT DEVELOPMENTS

FII investment limit in government securities, bonds hiked

The finance ministry on Nov 18, 2011 decided to increase investment limit of Foreign

Institutional Investor (FIIs) in government securities and corporate bonds by $5 billion as the

current limit for this year has almost been exhausted. Now, an FII can invest up to $15 billion in

government securities , and for the corporate bonds the cap has been enhanced to $20 billion.

The changes will be effective in the next few days after the Securities and Exchange Board of

India issues a circular and notifies it.

FII investment in India has reached its current limit for both government papers and corporate

bonds, reflecting confidence of foreign investors in Indian economy. As on October 31, 2011,

FIIs have invested more than Rs 41,000 crore in government papers and Rs 68,000 crore in

corporate bonds. The present ceiling for government securities is Rs 43,650 crore and for the

corporate bonds it is 74,000 crore. The changes are likely to enhance capital flows and

investments at lower cost. Indian corporates also have enough room to borrow through the

External Commercial Borrowing route where the cap is $30 billion, of which, so far, this year's

borrowings have touched $21 billion.

In September, the government had relaxed norms for FIIs investment in long-term infrastructure

bonds, reducing the residual maturity period to one year for investments of up to $5 billion.

Though the government had raised investment limit of FIIs in long-term infrastructure bondsfrom $5 billion to $25 billion in the 2011-12 Budget, investments under this scheme had a

minimum residual maturity of five years and were subject to a minimum lock-in period of three

years.

From the table below, we can see that as on October 31, 2011, FIIs have nearly exhausted the

investment limit in government securities and corporate bonds. This move will further give an

investment opportunity of approximately Rs 25000 cr in each, government security and

corporate bond (assuming a conversion rate of Rs 50). However, the investment in long term

infrastructure bonds is merely Rs 2837 cr (in the first 7 months of FY12 ) versus the limit of Rs

112095cr

Since infrastructure is a key area where India is still lacking, the government should bring in

reforms and attract investments in infrastructure, which can further boost the country's economic

growth. The move will help in cooling the 10-year government bond yields, and will reduce the

borrowing cost for the government. Further, this will also help in developing our bond market.
http://timesofindia.indiatimes.com/topic/government-securitieshttp://timesofindia.indiatimes.com/topic/FIIshttp://timesofindia.indiatimes.com/topic/FIIshttp://timesofindia.indiatimes.com/topic/government-securities


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We further feel that this move will attract a lot of FIIs, as the interest rate cycle in India is almost

at its peak. Going forward, there could be a rise in the prices of the bonds, leading to better

capital gains. It will also ease some pressure from the government with respect to the rupee,

which has depreciated in the past couple of quarters.

Overall, the move has multiple purposes. such as moving a step ahead for developing the bondmarket, helping the rupee stabilise, a cool off in the 10-year bond yield to some extent and

attracting foreign investment in the country.

Particulars New Cap

for

Investment

(In USD bn)

Old Cap for

Investment

(In USD bn)

Investment

limit

according to

old cap

(Converted

into INR Cr)

Investment

made by FII

according to

old cap

(Converted

into INR Cr)

Additional

Investment

could be

made

(Assuming

Conversion

rate of Rs

50) in INR

Cr

Government

Securities

15 10 43650 41253 25000

Corporate Debt 20 15 74416 68289 25000

Corporate Debt

- Long Term

Infra

25 25 112095 2837 -


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2.13 FII activity in 2012

The investment by overseas investors into Indian stock market since the beginning of 2012 has

crossed $7 billion level, out of which more than $5 billion were pumped in the month of

February. Foreign Institutional Investors (FIIs) purchased equities and debt securities worth a

gross amount of Rs 76,548 crore in January 2012, while their gross sales for the month were

worth Rs 50,219 crore, translating into a net inflow of Rs 26,329 crore, as per data compiled by

the market regulator Sebi.

Overseas investors poured in over Rs 26,000 crore ($5.08 billion) in Indian markets in January

2012, the highest one-month net inflow in 16 months, as

sentiments got a boost from easing inflation concerns and

attractive valuations.

The Foreign Institutional Investors (FIIs) infused a net amount

of $ 5.12 billion (about Rs 25,212 crore) during February, taking

the total for 2012 so far to $7.16 billion for the Indian stocks.

Market analysts attributed strong FII inflows to signs of a

reversal in RBIs monetary policy and the subsequent impact of improved liquidity position.

They expect the positive trend to continue further, given that the liquidity conditions remain

strong.Market analysts attributed strong FII inflows to signs of a reversal in RBI's monetary

policy and the subsequent impact of improved liquidity position.

During February, FIIs were gross buyers of shares worth Rs 79,898.6 crore, while they sold

equities amounting to Rs 54,686.6 crore, translating into a net investment of Rs 25,212 crore ($

5.12 billion), as per data available with market regulator Sebi. This is the highest monthly net

investment by FIIs in equities since October 2010, where they had infused Rs 28,563 crore.

The foreign fund houses also infused Rs 1,0016 crore ($2.03 billion) in the debt market last

month. This takes the overall net investments by FIIs into debt markets to Rs 25,987 crore ($5.08

billion) so far this year. FIIs have been infusing money into the Indian market due to change in

RBIs monetary policy that have added liquidity to the system. This liquidity will help in growth

of the country, Wellindia Executive Director Hemant Mamtani said. Indian market will

continue to witness inflows in the whole year, if the liquidity conditions remain strong, headded. Strong surge in FII inflows in 2012 so far has helped boost the equity markets, as also

the rupee.

The stock market barometer Sensex has gained 15 per cent in 2012, despite a fall of about 3.25

percent last month. The index finished at 17,752.68 on February 29. FIIs had mostly stayed away


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from Indian equities in 2011. They flocked towards the debt market last year with a net

investment of Rs 20,293 crore, while pulling out Rs 2,812 crore from equities.

In the year 2011, FIIs purchased stocks and bonds worth Rs 8 lakh crore, but sold securities

worth Rs 7.9 lakh crore, resulting in a net investment of Rs 17,480 crore during the year. Strong

surge in FII inflow in 2012 has helped boost the equity markets as well as helped the Indian

rupee to strengthen. The foreign fund houses have also infused Rs 17,281 crore in the debt

market so far this year. Strong surge in FII inflow in 2012 has helped boost the equity markets as

well as helped the Indian rupee to strengthen.

It is not only India which has witnessed an upsurge in investment, equity funds focused on all

emerging markets put together have seen an inflow of over $24 billion in 2012. "FIIs

investments in debt market are rising because of higher yields on local bonds," Bandyopadhyay

said. In terms of equity investment, foreign funds have poured in maximum money in

infrastructure and pharma stocks, he added. This is the highest net investment by FIIs in stocks

and bonds since September 2010.

In 2012, FIIs infused money into the Indian market mainly on account of easing inflation, a

relaxing of foreign investor restrictions and the RBIs policy moves, CNI Research Head Kishor

Ostwal said. Stock market inflows in the first 17 days of February, at Rs 13,867 crore, were

higher than that for the entire month of January 2012, which stood at Rs 10,358 crore.

Documents

FII activity in India from 1992.docx