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INVESTMENT BY THE FOREIGN INSTITUTIONAL INVESTORS DR SANJEEV KUMAR The Government of India is pursuing the policy of liberalisation, simplification and providing of level playing field to Indian as well as foreign institutions interested for investing in India in view of changing globalisation of trade and commerce. The role of foreign investors in the growth and development of economy is undisputed. However, in certain filed the attention of the Government is not yet drawn Presently, the Government of India has policy that the Foreign Institutional Investors (FII) registered with SEBI and the Reserve Bank of India can purchase shares or debentures of an Indian Company under Portfolio Investment Scheme (PIS) with the condition that: I. II.

The total holding by each FII/SEBI approved sub-account of FII shall not exceed 10% of the total paid-up capital or paid-up value of each series of convertible debentures, and The total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures.

In case a company has passed a resolution by the Board of Directors and subsequently a special resolution in a General Meeting, the total limit of 24% could be increased to 49%. The Government has opened up various sectors including defence sector for foreign investment in order to boost the growth of industries in the country. This reflects Government’s intention to withdraw all restrictions and gradually open of almost all sectors of economy for as much foreign investment as possible in order to enhance capital investment in India, creation of employment, improving of the quality of governance and management and creating competition SEBI also came out with Takeover Code providing that any investor could make an open offer of 20% over and above the minimum threshold limit of 15% and also for takeover of the control and management. The Takeover Bids, in fact, have resulted into good benefits to the small investors as they provide lucrative return to their investments. However, the policy with regard to FII investment does not fall in consistency with the above provisions related to FII Investments. It has two-fold problem. It restricts the overall limit as well as the individual limits of FII investments to impractical levels. Due to this the investors’ benefits are curbed and restricted and the promoters of the companies enjoy undue protection.

Overall Limit: The present policy restricts the overall FII investment, practically, at 24%. Any more investment is at the mercy of the company management i.e. the promoters. If the company passes, the resolutions increasing the limit from 24% to 49%, then only any FIIs can invest money in its shares beyond the limit of 24%. This is interesting, specially when the company management and the promoters can never be interested to allow any outsiders taking a substantial stake in the company, since that puts a lot of pressure on them and restricts their uninterrupted enjoyment of power within the company at the public money, while the investing public remains a silent spectator outside the company, not able to do anything. Individual Limits: The limit for individual investment by any FII is, presently, 10%. This is, impractically, lower. In the Takeover Code, the minimum limit for acquisition without an open offer has been enhanced from 10% to 15%. An acquirer has to make open offer only if he crosses this threshold limit of 15%. Thus, any FII can not acquire shares even upto this threshold limit of 15%, stipulated in the Takeover Code. Besides above, in case a foreign investor wishes to acquire more than 10% share capital of a company directly, it has to come through the route of the FIPB Approval. A foreign investor can safely adopt this route, if the company management and promoters may favour. In other cases, there is always a danger of premature disclosure of intentions of the investing applicant and to jeopardise the same action can be taken by those, who have vested interests in the matter, by price manipulation at the bourses. Resultantly, this may prove to be a futile exercise for the intending investor. In the light of the above, it is desirable that the Government may frame Foreign Exchange Management (Substantial Acquisition of Shares and Takeover) Rules bringing out consistency in the policies and provisions and providing a level playing field without any discrimination and in the overall interest of the investors. This would not only attract more foreign investment, but improve the level of corporate governance and performance too.

STATUS NOTE Sub:

Investment for Substantial Acquisition of Shares by a person who is a resident outside India

Such investments are now governed by the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000 (hereinafter referredt as the FEMA Regulations). According to Regulation 5 of the aforesaid FEMA Regulations purchase of shares by a person resident outside India can be made in the following manner: (i) (ii) (iii) (iv)

Purchase under the Foreign Direct Investment Scheme, Purchase by FIIs under Portfolio Management Scheme Purchase by NRIs/OCBs under Portfolio Scheme Purchase of Shares of PSUs and Other Other Securities.

Purchase under the Foreign Direct Investment Scheme, The terms and conditions of FDI Scheme are laid down under Schedule-I to the FEMA Regulations and briefly include the following: 1. Investment in securities of an Indian Company can be made under a joint venture/collaboration agreement by obtaining prior approval of the Central Government. 2. Investment can also be made in specified Industries upto specified percentage subject to compliance of the provisions of Industrial Policy Purchase by FIIs under Portfolio Management Scheme The terms and conditions of Portfolio Management Scheme for FIIs are laid down under Schedule-2 to the FEMA Regulations and briefly include the following: 1. Foreign Institutional Investors (FII) should be registered with SEBI and the Reserve Bank of India 2. FIIS can purchase shares or debentures of an Indian Company under Portfolio Investment Scheme (PIS) 3. The following limits are applicable

(a) The total holding by each FII/SEBI approved sub-account of FII shall not exceed 10% of the total paid-up capital or paid-up value of each series of convertible debentures, and (b) The total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. 4. In case a company has passed a resolution by the Board of Directors and subsequently a special resolution in a General Meeting, the total limit of 24% could be increased to 49% (earlier it was 40%). 5. The purchase can also be made under private placement/arrangement subject to the aforesaid limits. Purchase by NRIs/OCBs under Portfolio Scheme The terms and conditions for investment by NRIs/OCBs FIIs can be grouped as under: A. Investment on stock exchange under Portfolio Investment Scheme, B. Investment on non-repatriation basis are laid down under Schedule-3 (in respect of Portfolio Management to the FEMA Regulations and briefly include the following: 6. Foreign Institutional Investors (FII) should be registered with SEBI and the Reserve Bank of India 7. FIIS can purchase shares or debentures of an Indian Company under Portfolio Investment Scheme (PIS) 8. The following limits are applicable (c) The total holding by each FII/SEBI approved sub-account of FII shall not exceed 10% of the total paid-up capital or paid-up value of each series of convertible debentures, and (d) The total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. 9. In case a company has passed a resolution by the Board of Directors and subsequently a special resolution in a General Meeting, the total limit of 24% could be increased to 49% (earlier it was 40%). 10. The purchase can also be made under private placement/arrangement subject to the aforesaid limits.