Fii: An Indian Perspective

FII – An Indian Perspective Once again foreign institutional Investors (FIIs) are hyper active in Indian stock market. After withdrawing more than 50K crores from Indian stock market in 2008, which led BSE to fall around 50%, FII have turned net buyers in 2009. FII have pumped more than USD 3 billion till May pushing Sensex over 15000. The cumulative FII investment in India is more than USD 50 billion. Presently there are more than 1500 FIIs & about 5000 sub-accounts registered with SEBI. Historical Overview: Before liberalization in 1991, India was a self reliant economy with markets depending on Domestic institutions and investors. FIIs & OCBs were permitted to invest in Indian financial instruments in September 1992 with restrictions. Entities which can invest under FII route are:

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As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10 per cent of the shares or units of the fund)

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As Sub-accounts: They are partnership firms, private company, public company, pension fund, investment trust, and individuals. FIIs invest on behalf of sub-accounts

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Earlier Indian Portfolio Managers & Asset Management companies were allowed to register as FII to trade on behalf of sub-accounts

FII can be of two types: •

Normal: investing in equity and non-equity instruments in ratio of 70:30

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Debt FII: investing 100% in debt securites

What SEBI considers (while registering a FII): •

applicant's track record, professional competence, financial soundness, experience, reputation etc. (in case of fund, fund managers track record)

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applicant is regulated by an appropriate foreign regulatory authority

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applicant is permitted by RBI under FEMA, 1973

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applicant must fulfill eligibility criteria (mentioned above)

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grant of certificate to the applicant is in the interest of the development of the securities market

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applicant is a fit and proper person

Investment by FII is restricted to 24% of paid-up capital of the company which can be extended to sectoral cap by board resolution followed by special resolution. Single FII investment can’t exceed 10% of paid-up capital of the company and single sub-account investment can’t exceed 5% of the paid-up capital. Participatory Notes: These are offshore derivatives instruments issued by FIIs to their clients who may not be eligible to invest in Indian stock markets. Beneficial ownership is not revealed in PNs and hence they have become point of concern for Indian regulators. PN route is cost effective for investors who have small quantum to invest and it is also hassle free mechanism. Pros & Cons of FIIs: FII and FDI augment domestic investment by supplementing domestic savings. They give boost to security markets, provide capital at lower cost and encourage investment by domestic firms. Overall

this gives boost to economy and India achieving growth rate of 9% was a major outcome of foreign investment. The best part is that they don’t create foreign debt but on the flip side they are temporary and non-reliable. FII Vs. FDI As per definition of IMF, FDI reflects lasting interest i.e. long-term relationship with the investor. FDI investor looks for management & control of the organization which is not the case with FIIs. EU law defines FDI as more than 10% acquisition of stake while FII is less than 10%. SEBI emphasizes that FII should not participate in management and control of the enterprise and have put various restrictions to ensure the same. FII are very important for development of securities market and hence should be encouraged. SEBI should have complete power to investigate any dubious or doubtful transaction of FII. As an age old Indian tradition of “Athithi Devo Bhavh”, we should welcome & treat FII as tourists and should create atmosphere where more and more FIIs come and invest in India.

Investment by individual FIIs cannot exceed 10% of paid up capital. Investment by foreign registered as sub accounts of FII cannot exceed 5% of paid up capital. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. An Indian Company can raise the 24% ceiling to the Sectoral Cap / Statutory Ceiling, as applicable, by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by their General Body.

This surge in FII investment has led to the cumulative net investments by FIIs into Indian equities to total US$ 52.76 billion by the end of November 2008, since December 1993, when FIIs were allowed to enter India. As of November 28, 2008, 1581 FIIs and 4824 sub-accounts were registered with the Securities and Exchange Board of India (SEBI). According to the data given by the Securities and Exchange Board of India (SEBI), the FII investments in equities as on March 17, 2009 stood at US$ 50950.20 million and in debts, equalled US$ 6541.50 million at exchange rate of 1 USD = 40.34 INR. As per SEBI, number of registered FIIs stood at 1626 and number of registered sub-accounts stood at 4972 as on March 17, 2009. As many as 330 FIIs have registered with SEBI since January 31, 2008, taking the total number of FIIs in India to 1,609 as on January 31 this year. Even the FII sub-accounts have gone up over 30 per cent to 4,938 compared with 3,795 in January last year. In fact, this year, 45 new FIIs have registered with SEBI, according to data given by the regulator. Majority of these FIIs are from the US and Europe. There are also FIIs based out of Mauritius.

MINT: After pulling out a hefty Rs52,987 crore from the Indian stock markets in 2008, which saw the Bombay Stock Exchange benchmark Sensex plunging 51%, FIIs have turned net buyers since from the last week of March this year. Foreign Institutional Investors (FIIs) inflow into the Indian stock markets has crossed the $3 billion mark (over Rs15,725 crore) so far this year, with as much as $2 billion coming in just five trading sessions. The Sensex has gained over 45% so far this year to touch 14,302 points, the highest level in the past seven months.

FORMATION OF A COMPANY AS PER COMPANIES ACT, 1956 Before understanding how a company is formed we need to understand possible types of companies. Generally there are two types i.e. public limited & private limited. The main differences between these are:

The steps for company formation are: 1. Select in order of preference 6 names, ensuring that the name doesn't resemble the name of an existing Company. 2. Apply to the Registrar of Companies (RoC) to ascertain the availability of name in Form– 1A along with fee of Rs. 500/- online. RoC informs the status of the application within 2 days. If the name proposed is not available, apply again for a fresh name. 3. Arrange for drafting of the Memorandum and Articles of Association (MAA) through a Consultant, vetting of the same by the ROC and printing of the same. 4. Arrange for stamping of the MAA as per Registrar of Companies instructions. 5. Get the MAA signed by, at least 7 persons in case of Public Limited Company (2 in case of private limited company), each shall also write in his own hand his father’s name, occupation and address and number of shares subscribed for, and duly witnessed by at least one person who shall also write in his own hand his father’s name, occupation and address. The M & A should be dated on a date after the date of stamping. 6. The following forms are to be filled and signed: (a) Declaration of Subscribers – Form No.1. (b) Notice of situation of Registered Office – Form No. 18. (c) Particulars of Directors (at least 3 directors in case of public limited company & 2 in case of private limited company), Manager or Secretary – Form No.32. 7. File the following documents with the RoC with necessary Registration and filing for: (i) Stamped and signed copy of Memorandum and Articles of Association. (ii) Form No. 1, 18 and 32 in duplicate (first upload on MCA website, pay online & then physical forms are submitted accompanied with copy of challan). (iii) Any other agreement referred to in the Memorandum and Articles.

(iv) Any agreement proposed for appointment of Managing Director/whole time Director. (v) Certified true copy of the RoC letter intimating availability of name. (vi) Power of attorney in favor of any person for making corrections on their behalf in the documents and papers filed for registration. 8. Obtain the certificates of incorporation from Registrar of Companies. 9. In case of Public Limited Company following additional steps are to be completed before commencement of business. 10. Arrange for payment of application and allotment money in cash by the Directors on the shares taken or agreed to be taken by them. 11. File the statement in lieu of prospectus with the Registrar of Companies in accordance with Schedule IV of the Companies Act, 1956. 12. File a declaration in Form No.20 with the Registrar of Companies to the effect that the application and allotment monies have been paid/will be paid in respect of shares taken up /agreed to be taken up by the Directors. 13. Obtain the certificate of commencement of Business from the Registrar.