FIIs

How do Foreign Investors (FIIs) capitalize the money market?

Foreign Institutional Investors (FIIs) are institutional, individual, or group entities that pursue investing in a country’s economy other than where the entity is headquartered. FIIs play a significant role in the growth of emerging economies because they bring funds and capital to businesses in developing countries. These big companies, such as investment banks, mutual funds, etc., invest considerable money in the Indian markets, which benefits the economy. With the buying of securities by these big players, markets tend to move upward and move downward when the same is withdrawn from the market. These organizations and investors strongly influence the total inflows coming into the economy.

Understanding FIIs

These investors generally include hedge funds, mutual funds, insurance companies, and investment banks. FIIs usually hold equity positions in foreign financial markets. Beacuse of this, the companies invested in by FIIs generally have better capital structures due to a healthy inflow of funds. As a result, FIIs facilitate financial innovation and growth in capital markets. The entry of an FII can result in a drastic swing in domestic financial markets. The managing authority of a country imposes a result restrictions on how much stake FIIs can hold in the domestic company. 

Foreign Institutional Investors (FIIs) in India

FIIs India

Countries with growing economies tend to have a high volume of foreign institutional investments, which generally give investors higher growth potential than developed economies. Since India is a growing economy with much potential to grow beyond its limit, most FIIs are commonly found in India. As per guidelines, all FIIs in India should register with the Securities and Exchange Board of India (SEBI) to start participating in the market.

Indian Market regulator SEBI has more than 1450 foreign institutional investors registered. FIIs are considered a trigger and a catalyst for improving market performance by encouraging overall investment from all classes of investors, which leads to growth in the financial market trend under a self-organized system.

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Regulations on Investing in Indian Companies

FIIs are permitted to invest in Indian primary and secondary capital markets only through a portfolio investment scheme. It allows FIIs to purchase shares and debentures of Indian companies on its public exchanges.

However, It is not as simple as it may sound because there are many regulations to follow. For example, FIIs are limited to a maximum investment of 24% of the paid-up capital of the Indian firm receiving the investment. But, FIIs can invest more than 24% if the firm’s board approves the investment and passes a special resolution. The maximum limit on FIIs’ investments in Indian public-sector banks is 20% of the banks’ paid-up capital.

The Reserve Bank of India ensures compliance daily by implementing a cutoff percentage of 2% below the maximum investment limit. This gives a chance to alert the Indian firms receiving the investment before allowing the final 2% to be purchased.

Type of FIIs investing in India 

FIIs Types India
  • Hedge Funds: this is a pooled investment fund that trades in relatively liquid assets and can extensively use more complex trading techniques, portfolio construction, and risk management methods to improve performance, for example, short selling, leverage, and derivatives. 
  • Foreign Mutual Funds: It is a fund that invests in companies based internationally or outside the investor’s country of residence. These funds are also known as international funds. A foreign fund can be a mutual fund, a closed-end fund, or an exchange-traded fund.
  • Sovereign Wealth Funds: It is a state-owned investment fund made up of the money generated by the government, often generated from a country’s surplus reserves. SWFs provide many benefits to a country’s economy and its citizens. When it comes to funding SWF, it can come from various sources.
  • Pension Funds: also known as a superannuation fund in some countries, it is any plan, fund, or scheme that provides a retirement income. Pension funds can be described as pooled monetary contributions from pension plans by employers, unions, or other organizations to provide retirement benefits to their employees or members.
  • Trusts: It is a fiduciary arrangement that enables a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can also be arranged and specify exactly how and when assets pass to the beneficiaries.
  • Asset Management Companies: These companies pool investors’ money and provide a wide variety of assets to put that capital to work. These firms usually build and administer mutual funds and exchange-traded funds (ETFs) and provide easy access to bond markets, real estate, and private equity.
  • Endowments, University Funds.

Why FIIs pull out funds from markets?

  • The increasing value of the U.S dollar: U.S dollar has strengthened significantly since the announcement of the U.S Federal Reserve in 2021 to hike interest rates by 2023. Because of this, FIIs have been liquidating a significant chunk of their holdings in developing and growing economies like India to bag more liquidity to invest in the U.S markets.
  • Tightening liquidity: There is less liquidity in a system, with central banks such as the Bank of England and the U.S Federal Reserve reducing their bond purchases. Simultaneously, interest rates are starting to rise. By observing the tighter Fed policies, FIIs tend to pull funds out of risky assets like emerging markets like India and invest in developed markets.
  • Rising Inflation: In order to counter the rising inflation, Central banks usually try to decrease the effect of inflation by increasing interest rates. A hike in interest rates shrinks company profits. Because of this, investors are reluctant to pay high valuations and start pulling money out of emerging markets.

RECENT DEVELOPMENTS

FIIs icons

Some of the recent FII/FPI developments in India are given below for reference:

  • FPIs invested Rs. Three thousand two hundred two crores (US$ 428.03 million) in the Indian market during the first week of January 2022.
  • According to the Department for Promotion of Industry and Internal Trade, the Foreign Direct Investment(FDI) equity inflow in India was at US$ 572.80 billion between April 2000-December 2021.
  •  Between October-December 2021, the FDI equity inflow in the Indian market was at US$ 12.021 billion. According to a report released by United Nations, India received US$ 64 billion FDIs (foreign direct investments) in 2020, the fifth-largest recipient of inflows in the world.
  • India’s National stock exchange (NSE), one of the stock exchanges in India, had the 8th largest market capitalization in the world, with a total market value of US$3.337 trillion in FY22.
  • In December 2020, Embassy Office Parks REIT, India’s first listed REIT and one of Asia’s largest by area, declared that it had completed a unit capital raise through an institutional placement of units Rs. 36.8 billion (US$ 501 million).
  • In the calendar year 2021, India’s stock market made investors rich by Rs. 72 lakh crore (US$ 962.22 billion), with Sensex crossing the 50,000 mark for the first time, reaching a lifetime high of 61,765.59 on October 18th,2021.
  • In April 2022, Domestic Institutional Investors were the major buyers in the Indian equity market and accounted for Rs. 29,869.52 crores (US$ 3.86 billion).
  • Foreign investors invested more than Rs. 1.4 trillion (US$ 19 billion) in the Indian stock market in 2020.
  • In 2021, around 63 IPOs (including Brookfield REIT, PowerGrid Infrastructure Investment Trust, Nykaa, and Zomato) had raised Rs. 1.19 trillion (US$ 15.89 billion).

GOVERNMENT/REGULATORY INITIATIVES

Some of the recent government initiatives and regulations concerning FII space are as follows:

  •  The Government allowed 100% Foreign Direct Investments in the Telecom sector in October 2021.
  • In August 2021, the Securities and Exchange Board of India or SEBI introduced the idea of ‘accredited investors in the Indian securities market to explore a new medium for raising funds.
  • In August 2021, SEBI mandated blockchain or distributed ledger technology to monitor the bond’s status or other listed debt securities.
  • In June 2021, the Securities and Exchange Board of India (SEBI) announced the increased overseas investment limit for mutual funds to US$ 1 billion from the previous US$ 600 million.
  • In the Union Budget 2021-22, the finance bill proposed amendments that enable foreign portfolio investors (FPIs) to participate in debt financing of emerging investment vehicles such as REITs and InvITs. This move is made aiming to enhance funding for infrastructure and real estate.
  •  EPFO investments in equity market were worth Rs. 1.23 lakh crore till November 2021.

Factors to Consider

  • Although Foreign Direct Investments (FDI) are a part of the investment made by Foreign Institutional Investors but not every FII will make an FDI in the country it invests in.
  • FIIs directly impact the country’s stock/securities market, exchange rate, and inflation.
  • FIIs are eligible to invest in listed, unlisted, and to-be-listed companies on the stock markets in both the primary and secondary markets.
  • In India, FIIs tend to invest via Portfolio Investment Scheme after registering with India’s Securities and Exchange Board SEBI.
  • Foreign Institutional Investors choose to invest in developing countries because they provide greater growth potential due to emerging economies like India.
  • Sometimes, FIIs invest in the securities for a short period because it is helpful for liquidity in the market, but they also cause instability inflow of money.

Conclusion

Developing economies such as India attract the highest volume of FII activities. The dynamic growth of EMs presents numerous opportunities for foreign investors compared to developed economies. India being a growing economy, draws FIIs that form a vital part of the backbone of the Indian capital market. 

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