Advantages of Fiis in Indian Markets

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FIIs are contributing to the foreign exchange inflow as the funds from multilateral finance institutions and FDI are insufficient, says Abhijit Roy THE RECENT spat over the tax authorities issuing notices to foreign institutional investors (FIIs) which take advantage under the Indo-Mauritius Bouble Taxation Avoidance Agreement, has once again drawn attention to the role that FII investment is playing in the capital markets in India. This article endeavours to place the overall picture in perspective. The Union Government allowed the entry of FIIs in order to encourage the capital market and attract foreign funds to India. Today, FIIs are permitted to invest in all securities traded on the primary and secondary markets, including equity shares and other securities listed or to be listed on the stock exchanges. The original guidelines were issued in September 1992. Subsequently, the Securities and Exchange Board of India (SEBI) notified the SEBI (Foreign Institutional Investors) Regulations, 1995 in November 1995. Over the years, different types of FIIs have been allowed to operate in Indian stock markets. They now include institutions such as pension funds, mutual funds, investment trusts, asset management companies, nominee companies, incorporated/institutional portfolio managers, university funds, endowments, foundations and charitable trusts/societies with a track record. Proprietary funds have also been permitted to make investments through the FII route subject to certain conditions. The SEBI is the nodal agency for dealing with FIIs, and they have to obtain initial registration with SEBI. The registration fee is $10,000. For granting registration to an FII, the SEBI takes into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria as may be considered relevant by SEBI. Besides, FIIs seeking initial registration with SEBI will be required to hold a registration from an appropriate foreign regulatory authority in the country of domicile/incorporation of the FII. The broadbased criteria for FII registration has recently been relaxed. An FII is now considered as broadbased if it has at least 20 investors with no investor holding more than 10 per cent of shares/units of the company/fund. The SEBI's initial registration is valid for five years. The Reserve Bank of India's general permission to FIIs will also hold good for five years. Both will be renewable. There are approximately 500 FIIs registered with SEBI, but not all of them are active. The RBI, by its general permission, allows a registered FII to buy, sell and realise capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest in all recognised stock exchanges through a designated bank branch and appoint domestic custodians for custody of investments held. FIIs can invest in all securities traded on the primary and secondary markets. Such investments include equity/debentures/warrants/other securities/instruments of companies unlisted, listed or to be listed on a stock exchange in India including the Over-the-Counter Exchange of India, derivatives traded on a recognised stock exchange and schemes floated by domestic mutual funds. A major feature of the guidelines is that there are no restrictions on the volume of investment - minimum or maximum - for the purpose of entry of FIIs. There is also no lock-in period prescribed for the purpose of such investments. Further, FIIs can repatriate capital gains, dividends, incomes received by way of interest and any compensation received towards sale/renouncement of rights offering of shares subject to payment of withholding tax at source. The net proceeds can be remitted at market rates of exchange. All secondary market operations would be only through the recognised intermediaries on the Indian stock exchanges, including OTCEI. Forward exchange cover can be provided to FIIs by authorised...
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