Investments by FIIs Under The Portfolio Investment
Scheme(PIs)
Jan
29, 2002
Q.
What are the regulations regarding Portfolio
Investments
by Foreign Institutional Investors ( FIIs)
Ans. Investment by FIIs is regulated under SEBI
(FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20
dated May 3, 2000. For details please see Schedule 2.
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FIIs include Asset Management Companies, Pension Funds, Mutual
Funds, Investment Trusts as Nominee Companies,
Incorporated/Institutional Portfolio Managers or their Power of
Attorney holders, University Funds, Endowment Foundations, Charitable
Trusts and Charitable Societies.
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SEBI acts as the nodal point in the entire process of FII
registration. FIIs are required to apply to SEBI in a common
application form in duplicate. A copy of the application form is sent
by SEBI to RBI along with their ‘No Objection’ so as to enable RBI
to grant necessary permission under FEMA. RBI approval under FEMA
enables an FII to buy/sell securities on Stock Exchanges and open
foreign currency and Indian Rupee accounts with a designated bank
branch.
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FIIs are required to allocate their investment between equity and
debt instruments in the ratio of 70:30. However, it is also possible
for an FII to declare itself a 100% debt FII in which case it can make
its entire investment in debt instruments.
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FIIs can invest in listed and unlisted securities including shares,
debt instruments, dated Government Securities and Treasury Bills.
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No individual FII/sub-account can acquire more than 10% of the paid
up capital of an Indian company.
All FIIs and their sub-accounts taken together cannot
acquire more than 24% of the paid up capital of an Indian Company.
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Indian Companies can raise the above mentioned 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 its General Body in terms of Press Release dated
Sept.20,2001 and FEMA Notification No.45 dated Sept. 20,2001.
Explanation:
Presence of Sectoral Cap/ Statutory
ceiling means that foreign investment from all sources cannot exceed a
specified level. A Company to which no sectoral cap/statutory ceiling is
applicable can raise the limit of permissible FII investment to 100% of
the paid up capital. A Company to which a 49% cap is applicable can raise
the limit of permissible FII investment to 49% and if there is an existing
foreign direct investment of 15%, possible FII investment can only be up
to 34%.
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No permission from RBI is needed so long as the FIIs purchase and
sell on recognized stock exchange. All non-stock exchange
sales/purchases require RBI permission.
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In order to ensure that the sectoral / statutory ceilings on foreign
investment in a company are not violated due to investment by FIIs,
RBI monitors these ceilings for the companies in respect of which
sectoral caps /statutory ceiling have been indicated by Government of
India.
When the total holdings of FIIs reaches within 2% of
the applicable limit, Reserve Bank issues a notice to all concerned that
any further purchases of the shares of the said Company requires prior
approval of RBI.
High Net worth Individuals /foreign corporates can
invest through SEBI Registered FIIs subject to an sub-limit of 5% each
within the aggregated limit of 24%.
FIIs can invest in Stock Index Futures for purpose of
hedging up to 100% of the value of their investments.
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