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.
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.