FOREIGN FINANCIAL INVESTORS

Through the Portfolio Invesment Scheme (PIS), the foreign financial investors (FIIs) were allowed to invest in the Indian stock market—the FIIs having good track record register with SEBI as brokers. FIIs make investments in markets on the basis of their perceptions of expected returns from such markets. Their perceptions among other things are influenced by :

(i) the prevailing macro-economic environment;

(ii) the growth potential of the economy; and

(iii) the corporate performance in competing countries.

Increased FII inflows into the country during the year 2012 helped the Indian markets become one of the best performing in the world in 2012, recovering sharply from their dismal performance in 2011. At the end of December 2012, 1,759 FIIs were registered with SEBI with their net FII

flows to India at US$ 31.01 billion.10 These flows were largely driven by equity inflows (80 per cent of total flows) which remained buoyant, indicating FII confidence in the performance of the Indian economy in general and Indian markets in particular. The economic and political developments in the Euro zone area and the United States had their impact on markets around the world including India. The resolution of the fiscal

cliff 11 in the US had a positive impact on the market worldwide including in India. Further, reform measures recently initiated by the government have been well received by the markets.

New Rules for Foreign Investment

To promote the flow of foreign funds into the economy the RBI, on 24 January, 2013, further liberalised the provisions of investment in India’s security market—

(i) FIIs and long-term investors12 investment limit in Government Securities

(G-Secs) enhanced by US $5 billion (to US $ 25 billion).

(ii) Investment limit in corporate bonds by the above-given entities enhanced by $5 billion (to $50 billion).

(iii) The RBI also relaxed some investment rules by removing the maturity restrictions for first time foreign investors on dated G-Secs (earlier a three-year residual maturity was must for first time foreign investors). But such investments will not be allowed in short-term paper like Treasury Bills.

(iv) Foreign investors restricted from investing in the ‘money market’ instruments —certificates of deposits (CDs) and commercial paper (CPs).

(v) In the total corporate debt limit of $50 billion, a sub-limit of $25 billion each for infrastructure and other than infrastructure sector bonds has been fixed.

(vi) Rules requiring FIIs to hold infrastructure debt for at least one year has been abolished.

(vii) The qualified foreign investors (QFIs) would continue to be eligible to invest in corporate debt securities (without any lock-in or residual maturity clause) and mutual fund debt schemes, subject to a total overall ceiling of $1 billion (this limit of $1 billion shall continue to be over and above the revised limit of $50 billion for investment in corporate debt).

(viii) As a measure of further relaxation, it has been decided to dispense with the condition of one year lock-in period for the limit of $22 billion (comprising the limits of infrastructure bonds of $12 billion and $10 billion for non-resident investment in IDFs) within the overall limit of

$25 billion for foreign investment in infrastructure corporate bond.

(ix) The residual maturity period (at the time of first purchase) requirement for the entire limit of $22 billion for foreign investment in the infrastructure sector has been uniformly kept at 15 months. The five-year residual maturity requirement for investments by QFIs within the $3 billion limit has been modified to three years original maturity.

SEBI has classified the FIIs into three broad categories, and they are allowed to issues PNs in accordance with the provision announced by the SEBI:

Category I: The government entities/institutions investing in Indian security market on behalf of the Central Bank.

Category II: The financial institutions, mutual funds, etc., which duly regulated in the countries of their origin.

Category III: The financial institutions which do not fall either of the above-given categories.