FII

Subitted by

Anil Vishnu B

How FII started in India?• India opened its stock market to foreign

investors in september 1992.• since 1993,received portfolio investment

from foreigners in the form FII in equities• In order to trade in Indian equity market

foreign corporation need to register with SEBI as FII and shall comply with the Exchange Control Regulations of RBI.

Objectives of SEBI

• To protect the interest of the investors in securities

• To promote the development of securities market

• To regulate the securities market .

WHO CAN BE REGISTERED AS AN FII?

• Pension Funds• Mutual Funds• Insurance Companies• Investment Trusts• Banks• University Funds• Foundations• Charitable Trusts / Charitable Societies

• In 1993, 12 FIIs got registered • At the end of 1996-97, 439 FIIs were

registered• In 2001, there were 482 foreign investors

registered with Sebi. • The number increased to 489 in 2002 and to

517 and 637 in 2003 and 2004 respectively. • The total number should be around 1540.

Where FII can invest?

• Securities in primary and secondary markets including shares, unlisted, listed or to be listed on a recognized stock exchange in India;

• FIIs Investments. • Appreciation of the rupee : • Higher forex reserves .• Creating wealth .• Direct effect on Inflation.

• Appreciation of the Rupee: Taking a closer look at the funds flow, FIIs bring dollars to India which get converted into rupees in the inter-bank foreign exchange market. As the supply of dollars increase, the law of demand-supply starts operating and the rupee appreciates vice versa the dollar .

• Higher forex reserves :So, higher foreign (dollar) inflows into India usually translate into more rupee liquidity in the system. This increases the money supply and facilitates easy availability of credit

(loans) from banks

• Creating wealth: FII flows also aid in lowering the cost of borrowings. The easy availability of credit and the lower borrowing costs increase consumption demand for housing, durables, cars and real-estate. This higher demand often leads to greater public and corporate investments, resulting in higher economic growth .

• Direct effect on Inflation :This positive wealth effect also often leads to higher consumption and greater demand for other asset classes such as gold, real-estate etc., which, in turn, fuels economic growth and inflation. Higher FII flows can, thus, be seen to help create wealth through higher asset prices

Why there is need of FII ?

• FII flows supplements and augmented domestic savings and domestic investment without increasing the foreign debt of our country

• Capital inflows to the equity market increase stock prices and encourage the investment by Indian firms

Impact Of FIIs On Indian Markets • In the past four years there has been more than $41 trillion

worth of FII funds invested in India.• The present downfall of the market too is influenced as these

FIIs are taking out some of their invested money. • For long-term value investors, there’s little because for worry

but short term traders are adversely getting affected by the role of FIIs are playing at the present.

Why FII called good friend for good time – volatile in nature

• In the Indian stock markets movement of the stock depends on the limited no of stocks

• As FIIs purchase and sell these stocks there is a high degree of volatility in the stock market

• If any set of development encourages outflow of capital that will increase the vulnerability of the situation in the stock market

How they performThe degree of volatility can be attributed to the following

reasons:• The increase in investment by FIIs increases stock indices the

stock prices and encourages further investment . In this event when any correction takes place the stock prices decline and there will be pull out by the FIIs in a large numbers as earning per share declines

• The FIIs manipulate the situation of boom in such a manner that they wait till the index rises up to a certain height and exit at an appropriate time. This tendency increases the volatility further

FIIs as major cause of market crash( Jan 21 to Jan 29 2008)

• The Indian capital markets have been left reeling under the impact of liquidity crunch

caused by multiple factors• It began with two mega issues of reliance

power and future capital holdings, which drew out huge amounts of money from the market

• FIIs bowed out from the capital market with more than Rs 10000 crore

There are several reasons on FIIs selling

• The swings in the market forced several FIIs to withdraw from India and invest their dollars in

other emerging markets. Some of the other markets include Uruguay, Russia, the Ukraine,

and several other former Soviet countries. Though there have been swing’s in the past too

but FII response this time was different because of margin pressures back home as even they

have to provide regular returns to their investors.

• The Indian markets are not seen as a good short-term bet any more. India is seen as a good

investment for the medium to long term. FIIs seem to fear the pace of growth and the

fundamentals of the markets.

• Most FIIs are looking at corporate governance and execution abilities, which could be

significant drivers in creating a strong portfolio of Indian stocks. Recent action taken by the

market regulator indicates that the Indian government would like to moderate the inflow of

FII money.

The Indian stock markets have really come of age there were so many developments in the last 15 years that make the markets on par with the developed markets.

The foreign capital is free and unpredictable and is always on the look out of profits Flls frequently move investments, and those swings can be expected to bring severe price fluctuations resulting in increasing volatility.

The growth of institutional investors in the market is having its own advantages as well as its own share of problems on the brighter side almost always purchase stocks on the basis of fundamentals.

FII affecting the Exchange Rates

• FII need to maintain an account with the RBI for all the transactions.

• How the value of one currency goes up (appreciates) or goes down against the

other currency

• FII’s for every dollar that they bring into the country, there is a demand for

rupee

• Exchange rate was 1 USD = Rs 40, it could become 1 USD = Rs 39 after they

invests.

• When FII withdraw the capital from the markets, they need to earn back the

(USD)

• always a gain for FII whenever the currency of the country invested in

appreciates w.r.t the home currency

• Similarly when rupee depreciates w.r.t US Dollar and exchange rate becomes 1

USD = Rs. 80 I get only 0.5 Dollar and I lose 0.5 of the 1 USD invested.

FII and Inflation

• Too much money chases too few goods

• Huge amount of FII fund inflow A lot of demand for rupee

• RBI pumps the amount of Rupee in the market

• This situation could lead to excess liquidity

• Thus there should be a limit to the FII inflow in the country.

FII and Local companies: FII bring lot of funds to the country’ markets leading to

free availability of funds for the local companies in need of funds to carry on

expansion in their production capacities or starting new ventures.

FII and Exports

• FII lead to appreciation of the currency

• Lead to the exports industry becoming uncompetitive due to the appreciation of

the rupee

• For e.g. if 1 USD = Rs.40 and a soap costs 1 USD

• Now when the rupee appreciates 1 USD = Rs. 20

• Will have to sell the same soap to the US for 2 US Dollars

• In order to sustain the same income that I have been making i.e. Rs.40

• Thus excess FII fund inflow in the country can also make a negative impact on the

economy of the country.