FII registration process for a company outside India – Foreign Institutional Investor.

One of the major difficulties in the path of economic development of the developing countries is a serious shortage of capital. That is why most developing countries encourage the flow of foreign investment capital into the country. In India, the original regulations restricted the inflow of foreign capital with a view to protecting the domestic economy. However, this idea has largely been modified and foreign capital and investments are now actively encouraged.

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Foreign institutional investor or FII refer to an entity which invests capital in India but is registered in some other country. They bring valuable capital into the country but can leave as fast as they entered. That is why FII are often referred to as hot money.

Terms and procedures regarding the FII

How does a FII function in India?

  • ·         The Securities and Exchange Board of India has the authority to register a financial entity as a FII.
  • ·         The entities which are eligible for the above registration include banks, endowments, foundations, mutual funds, insurance companies, investment trusts, pension funds etc.
  • ·         The FII which seek to register with SEBI may be broad based. This means that it should have at least twenty investors with no individual holding more than 10% shares. However, foreign corporate, foreign individuals or proprietary entities need not be broad based to seek registration.
  • ·         The FII will have to fill up form A provided by SEBI regulations 1995. Several supporting documents have to be supplied with the application. These include certified copy of those clauses in the Article of association which permit the stated activities, the audited financial statements as well as the annual reports. Other documents include declaration of having entered into custodian agreement with domestic custodian and signed declarations at the end of the agreements.
  • ·         The FII has to submit a registration fee of $5000. This registration is granted within seven days of submission of the completed form and will be valid for five years at the end of which period the FII will have to apply for re-registration. The process is same as the original registration.
  • ·         The SEBI grants registration to only well established reputed foreign entities. These should be duly registered with the appropriate foreign regulatory authority. Other factors of consideration include professional fairness and integrity, experience and track record.
  • ·         With the aim of increasing the inflow of foreign capital into the domestic market, the investment limit of the FII has been raised from $6 billion to $15 billion.
  • ·         There are certain prescribed forums where the FII is allowed to invest. These include commercial papers, dated government securities, mutual funds, debentures, shares and warrants of different companies.

Sub accounts and FII

A perusal of the FII remains incomplete without understanding the concept of sub accounts. These are essentially the organizations for which foreign direct investment is made in India.

  • ·         A sub account is the entity on behalf of which the FII makes the investment. It can be corporate, individual or institution but it has to be registered outside India.
  • ·         The sub account has to be registered with the SEBI with the submission of annexure B and the payment of $1000.
  • ·         In order to carry on trading, the FII has to enter into an agreement with a designated bank which has been authorized by RBI to act as the banker to the FII.
  • ·         You should know that NRI are not eligible to get registered as sub accounts and FII.

·         There are several regulations regarding name change, transferring a sub account from one FII to another etc. Careful study is required to set up the entire operation of the FII.

Trading the World’s Currencies Requires a Fundamental Perspective

Global investors are a fickle lot.  If one investment medium is not delivering the desired returns, then many broadminded investors often look for opportunities elsewhere.  In the past decade, one arena that has attracted a healthy number of new recruits is currency trading.  New and improved trading software and a flexible schedule that allows for trading nearly any time of day are the primary draws.  Forex trading, however, involves high risk, and many hours of preparation and specialized training are prerequisites if you wish to be successful in this genre.

Experts will tell you that there are three factors for success – knowledge, experience, and emotional control.  The latter is often the most difficult to acquire, since it has more to do with your personal psychological programming than anything else.  Experience can come from practice trading on a free “demo” forex account that uses “virtual” cash and real time quotes to aid your learning the vagaries of the forex market and developing strategies that work.  As for knowledge, seminars and tutorials are mandatory, and you should seek out a “mentor” to guide your early development.

One key area of your educational process will be devoted to what are known as the “fundamentals”.  Fundamental data, whether economic, political, financial, or crisis related, are what move the market.  Developing your trading strategy starts here.  Let’s begin by taking a look at the Indian Rupee versus the U.S. Dollar for the past year in the chart below:

 Forex Chart

The “Blue” line represents the pricing behavior for the Rupee, reflecting a 20% decline in value over the period.  What fundamental factors led to this decline?  By understanding the past, you can learn to appreciate what needs to be known when you wish to forecast what might happen in future.  Here are a few of the causes for the drop in value:

  • Interdependencies: In today’s modern era of globalization, our economies are interconnected in so many ways that it is sometimes difficult to discern the individual forces at play.  Traders deal with this phenomenon by searching for “correlations” to guide their fundamental interpretation.  The pricing behaviors for the five items presented are very similar, with slight adjustments due to local considerations.  India’s economy is very dependent on the global economy in general, and Copper is one proxy for the health of the global economy.  As Copper fell, it dragged the Rupee down with it over time.
  • Economic Data: Any government releases related to GDP growth, government spending, investment flows, trade balances, and foreign exchange reserves are just a few of the factors in this area that can move forex rates in the market.  GDP growth in India has slowed to 5.3% over the past year, imports have been greater than exports, and investment flows have been outward, all reasons for the general decline above.  Inflation has also risen to 7.6%, thereby reducing the purchasing power of the Rupee and its value versus other currencies;
  • Financial Data: Interest rate changes and monetary policy from the central bank are key components here.  The RBI recently reduced rates in April by half a point.  This reduction accounts for the modest drop in April when other currencies and stocks remained flat over the month;
  • The European Debt Crisis: India has historical trading ties with Europe.  Any drop in their demand for imports will ripple through all economies of the world, but more so with respect to India.

These items are just the tip of the forex “iceberg”.  Be sure to invest the time up front, if you wish to reap forex dividends down the road.