Foreign Portfolio Investment in India

Dushyant Goyal 2011D32 Pritesh Karnawat 2011D34 Akshay Gangrade 2011D35 Vikas Khandelwal 201D39 Tejasvi Vijayaraghavan 2011D40

Symbiosis Centre for Management & Human Resource Development

2011-13

Content
Page Introduction Foreign Portfolio Investment Foreign Institutional Investment o Registration and Eligibility criteria o Regulations of FII o Effects of FII on Economy o Advantages/Disadvantages of FII Portfolio Investment Schemes Types of NRI/PIO Accounts o NRO Account o NRE Account o FCNR Account Trends in FPI Recent Developments 3 4 5 6 8 11 12 15 17 17 18 19 20 23

Introduction In present era of globalization no country or economy has been left untouched from international trade and commerce. More access to international capital markets and foreign investments has helped developing countries surmount their less developed capital markets. During the past few years, a flow of capital has been seen from the developed part of the world to the less developed economies which has led to decrease in the vulnerability of developing countries to financial crisis by reduction in their external debt burden from 39% of gross national income in 1995 to 26% in 2006 and increase in foreign exchange reserves to 92% of long term debt and 423% of more volatile short term debt in 2006. Over the years same scenario has been witnessed in the Indian economy also. And thus, today most of the market entities are interested in attracting foreign capital as it not only helps in creating liquidity for the firms stock and the stock market but also leads to lowering of the cost of the capital for the firms and allows them to compete more effectively in the global market place. Foreign Investment It has been defined as a transfer of funds or materials from one country (called capital exporting country) to another country (called host country) in return for a direct or indirect participation in the earnings of that enterprise. Foreign investments provide a channel through which one can have access to foreign capital and after the opening up of the Indian economy; these have grown in leaps and bounds. Basically foreign investment can be made through following routes:

Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI). Private Equity investments-Foreign venture capital investor(FVCI)

Firstly, foreign direct investment pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Mostly it takes the form of buying or constructing a factory in a foreign country or adding improvements to such a facility in form of property, plants or equipments and thus is generally long term in nature. On the other hand, a private equity investment is one made by foreign investors in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF). Thirdly, a foreign portfolio investment is a short-term to medium- term investment mostly in the financial markets and is commonly made through foreign Institutional Investors (FIIs), nonresident Indian (NRI) and persons of Indian origin (PIO).

Foreign Portfolio Investment FPI is international investments (passive holdings) in equity and debt securities issued by unrelated non-resident entities, excluding any instruments classified as direct investments or reserve assets. With the opening of the economy and efforts to integrate with global markets in order to attract funds, India has introduced various liberalization measures in the fiscal, financial, trade and external sectors. Portfolio investment includes flows through issuance of ADRs or GDRs, which usually denote ownership of equity and investment by FIIs, offshore funds and others, thus covering the liabilities under portfolio investments. It covers external claims by or liabilities to reporting Indian company in equity and debt securities other than those included in direct investment. Debt securities include long-term bonds and notes, short-term money market instruments. Benefit to the real sector of the society Inflow of FPI can provide a developing non-debt creating source of foreign investment. FPI can induce financial resources to flow from capital-abundant countries, where expected returns are low, to capital scarce countries where expected returns are high. FPI affects the economy through its various linkage effects via the domestic capital market

FOREIGN INSTITUTIONAL INVESTORS The term FII is used to denote an investor, mostly in the form of an institution or entity which invests money in the financial markets of a country different from the one where in the institution or the entity is originally incorporated. According to Securities and Exchange Board of India (SEBI) it is an institution that is a legal entity established or incorporated outside India proposing to make investments in India only in securities. These can invest their own funds or invest funds on behalf of their overseas clients registered with SEBI. The client accounts are known as sub-accounts. A domestic portfolio manager can also register as FII to manage the funds of the sub-accounts. From the early 1990s, India has developed a framework through which foreign investors participate in the Indian capital market. A foreign investor can either come into India as a FII or as a sub-account. Basically FIIs have a huge financial strength and invest for the purpose of income and capital appreciation. They are not interested in taking control of a company. They are permitted to trade in securities in primary as well as secondary markets and can trade also in dated government securities, listed equity shares, listed non convertible debentures/bonds issued by Indian company and schemes of mutual funds but the sale should be only through recognized stock exchange. These also include domestic asset management companies or domestic portfolio managers who manage funds raised or collected or bought from outside India for the purpose of making investment in India on behalf of foreign corporate or foreign individuals. In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. Why are FIIs required? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI are insufficient.

It lowers cost of capital, access to cheap global credit. It supplements domestic savings and investments. It leads to higher asset prices in the Indian market. And has also led to considerable amount of reforms in capital market and financial sector.

Investments by FIIs A FII may invest through 2 routes:

Equity Investment 100% investments could be in equity related instruments or up to 30% could be invested in debt instruments i.e.70 (Equity Instruments): 30 (Debt Instruments) 100% Debt 100% investment has to be made in debt securities only

Equity Investment route: In case of Equity route the FIIs can invest in the following instruments: A. Securities in the primary and secondary market including shares which are unlisted, listed or to be listed on a recognized stock exchange in India. B. Units of schemes floated by the Unit Trust of India and other domestic mutual funds, whether listed or not. C. Warrants 100% Debt route: In case of Debt Route the FIIs can invest in the following instruments: A. B. C. D. E. Debentures (Non Convertible Debentures, Partly Convertible Debentures etc.) Bonds Dated government securities Treasury Bills Other Debt Market Instruments

It should be noted that foreign companies and individuals are not be eligible to invest through the 100% debt route. Liberalization of Laws: Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. Initially, only pension funds, mutual funds, investments trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers were permitted to invest directly in the Indian stock markets. In 1996-97, the group was expanded to include banks, university funds, endowments foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund. When India opened investment into listed equities through the FII framework not all foreign investors were eligible to register with the Indian securities regulator (SEBI). No FII was permitted to own more than 5% of a firm and there were restrictions on ownership by all FIIs taken together. Foreign investors faced many difficulties in accomplishing transactions in the Indian equity market. Presently the ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian company. The limit is 20% of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. Procedure for Registration: The Procedure for registration of FII has been given by SEBI regulations. It states- no person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations.

An application for grant of registration has to be made in Form A, the format of which is provided in the SEBI (FII) Regulations, 1995. Registration process for FII

Eligibility Criteria for FIIs: Following entities / funds are eligible to get registered as FII: 1. 2. 3. 4. 5. 6. 7. 8. 9. Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks University Funds Endowments Foundations Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 1. 2. 3. 4. Asset Management Companies Institutional Portfolio Managers Trustees Power of Attorney Holders

The Eligibility criteria for applicant seeking FII registration is as follows:

Good track record, professional competence and financial soundness. Regulated by appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) from the RBI. Legally permitted to invest in securities outside country or its incorporation/establishment. The applicant must be a fit and proper person. Local custodian and designated bank to route its transactions.

FII Regulations: Investment by FIIs is regulated under SEBI (FII) Regulations, 1995. Following are some of important regulations by SEBI and RBI: 1. A Foreign Institutional Investor may invest only in the instruments mentioned earlier. 2. The total investments in equity and equity related instruments (including fully convertible debentures, convertible portion of partially convertible debentures and tradable warrants) made by a FII in India, whether on his own account or on account of his sub- accounts, should be at least 70% of the aggregate of all the investments of the FII in India, made on his own account and through his sub-accounts. 3. The cumulative debt investment limit for FII investments in Corporate Debt is US $15 billion. The amount was increased from US $6 billion to USD 15 billion in March 2009. 4. US $8 billion will be allocated to the FIIs and Sub-Accounts through an open bidding platform while the remaining amount is allocated on a first come first served basis subject to a ceiling of Rs.249 cr. per registered entity. 5. The debt investment limit for FIIs in government debt is currently capped at $5 billion and cumulative investments under 2% of the outstanding stock and no single entity can be allocated more than Rs. 1000 crores of the government debt limits. Further, in 2008 amendments were made to attract more foreign investors to register with SEBI, these amendments are:
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1. The definition of broad based fund under the regulations was substantially widened allowing several more sub accounts and FIIs to register with SEBI. 2. Several new categories of registration viz. sovereign wealth funds, foreign individual, foreign corporate etc. were introduced, 3. Registration once granted to foreign investors was made permanent without a need to apply for renewal from time to time thereby substantially reducing the administrative burden, 4. Also the application fee for foreign investors applying for registration has recently been reduced by 50% for FIIs and sub accounts 5. Also, institutional investors including FIIs and their sub-accounts have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008. 6. Also the rigid criteria of requiring FIIs and sub-account to register as a 70:30 FII/ sub-account or 100% debt FII/sub-account has recently been done away with. Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. Monitoring Foreign Investments The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release.
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EFFECTS OF FII ON INDIAN ECONOMY The various reforms introduced by Indian government to encourage FIIs to invest in Indian market have been effective to such an extent that in November 2010 FIIs stood at 5426 whereas it stood at 1713 in early 1990s. The changes have led to increase in liquidity, reduce risk, improve disclosure and thus FIIs have become the corner stone in the phenomenal rise of the Indian stock market. It has led to shift of focus of foreign investors away from Indian securities traded at London or New York, and the primary markets for India- related equities trading has become the NSE and BSE in Bombay. From the table below it becomes apparent that from just Rs 4 crores of net investment in 1992-93, the investment rose to Rs 5445 the next financial year when the economic changes were introduced and further today in 2010-11 it stands at Rs 133,049. YEAR 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010 2010-2011 Net Investments by FIIs (Rs cr.) 4 5445 4777 6721 7386 5908 -729 9765 9682 8273 2669 44000 41416 47,602 36,396.60 71,952 -53,796 84,269 133,049

In 1993 the first and only FII to invest in India was Pictet Umbrella Trust Emerging Markets Fund, an institutional investor from Switzerland but today Indian growth story has attracted global majors like CLSA, HSBC, Citigroup, Merrill Lynch, Crown Capital, Fidelity, Goldman Sachs and Morgan Stanley, among others to enter the Indian financial market. Goldman Sachs and Macquarie have acquired a 20% stake each in PTC India Financial services Ltd. Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) have picked a combined stake of 10% in Bharti Infratel. Also an entity of Merrill Lynch has picked up 49% stake in seven residential projects of real estate major, DLF.

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This boost, though good for Indian economy has led to a number of negative consequences. Let us study the positive and the negative side of this rise of investments by FIIs one by one. Positive impacts: It has been emphasized upon the fact that the capital market reforms like improved market transparency, automation, dematerialization and regulations on reporting and disclosure standards were initiated because of the presence of the FIIs. But FII flows can be considered both as the cause and the effect of the capital market reforms. The market reforms were initiated because of the presence of them and this in turn has led to increased flows. A. Enhanced flows of equity capital: FIIs are well known for a greater appetite for equity than debt in their asset structure. For example, pension funds in the United Kingdom and United States had 68 per cent and 64 per cent, respectively, of their portfolios in equity in 1998. Not only it can help in supplementing the domestic savings for the purpose of development projects like building economic and social infrastructure but can also help in growth of rate of investment, it boosts the production, employment and income of the host country. B. Managing uncertainty and controlling risks: FIIs promote financial innovation and development of hedging instruments. These because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures. FIIs not only enhance competition in financial markets, but also improve the alignment of asset prices to fundamentals. FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of FIIs with a variety of risk-return preferences also help in dampening volatility. C. Improving capital markets: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to supply more information about them, the FIIs can help in the process of economic development. D. Improved corporate governance: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavor. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Among the four models of corporate control - takeover or market control via equity, leveraged control or market control via debt, direct control via equity, and direct control via debt or relationship banking-the third model, which is known as corporate governance movement, has institutional investors at its core. In this third model, board representation is supplemented by direct contacts by institutional investors.

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Negative impact: If we see the market trends of past few recent years it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the factors are: A. Potential capital outflows: Hot money refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. Hot money can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds. B. Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. C. Problem to small investors: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. D. Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. E. Issue related to participatory notes: When Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Secondly, some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly, participatory notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity. The hedge funds borrow money cheaply from western markets and invest these funds into stocks in emerging economies. It is also feared that the hedge funds, acting through participatory notes, will cause economic volatility in Indian exchange and generally these are blamed for the sudden fall in indices. These unlike FIIs are not directly registered under SEBI, but they operate through sub accounts with FIIs and according to a number of studies it has been found that more than 50% of the funds are flowing through this anonymous route, which can lead to a great loss to the Indian economy.

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Further, FIIs have contributed a lot in making Indian economy one of the fastest growing economy in the world today. Foreign institutional investment can play a useful role in development by adding to the savings of low and middle income developing countries. And India among the world inventors is believed to be a good investment destination in spite of all the political uncertainty and infrastructural inefficiencies. After the liberalization of financial policies India has been able to attract a lot of FII from rest of the world and which in turn has played its part very well by helping in development of Indian economy from what it was in early 1990s to a would be super power that it is today. But still the harsh consequences of FIIs should not be ignored by the government and further reforms should be introduced in the economic sector to counter the tendency of the FIIs to destabilize the emerging equity market. And also attempts should be made to encourage small domestic investors to participate in the equity market.

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PORTFOLIO INVESTMENT SCHEME (PIS) Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to: The total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of a) 24 per cent of the company's total paid up equity capital and b) 24 per cent of the total paid up value of each series of convertible debenture; and - the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company. The Foreign Exchange Management Act 2000 defines the Portfolio Investment Scheme, permitting non-resident Indians and foreign institutional investors to buy and sell shares and convertible debentures of Indian companies, and units of domestic mutual funds at any of the Indian stock exchanges. Purchase of shares of any company from the secondary market is subject to a ceiling of 5% of the paid-up share capital and 5% of the paid-up value of each series of debentures. Application for the PIS Banks designated by the RBI can accept applications at branches located close to the nearest stock exchange. A NRI can operate the PIS through only one selected branch. To operate from more than one branch, special permission from the RBI is required. The following documents are generally required by designated banks to apply for the PIS:

PIS application form RPI or NRI Form, with details of shares bought from the primary market Tariff Sheet of the PIS Demat Account opening form Sale of shares The PIS allows for sale of shares, bonds and debentures by NRIs to residents through private arrangements with the approval of the RBI. General authorization from the RBI is also available for transfer of shares, bonds and debentures by way of gifts to resident close relatives.
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For sale or transfer of shares and debentures of Indian companies to other NRIs, no permission is required from RBI. The transferee NRI, however, would require permission for purchase of the shares. Short-selling or selling the shares bought by NRI investors before delivery is prohibited. Tax Obligations Investors under the Portfolio Investment Scheme are liable to pay Capital Gains Tax on their investments which depends on the tenure of their stocks. Prevailing rates are deducted at source by the designated bank. Reparability of PIS Proceeds of sale of stocks purchased under the PIS from NRE or FCNR accounts or from foreign remittances are repatriable. Investments made in the PIS from NRO accounts are not eligible for repatriation. A combination of repatriable and non-repatriable investments under the PIS is permitted, though these would have to be operated through NRE and NRO accounts respectively. Exclusive NRE and NRO accounts have to be maintained for PIS, which can be held by joint account holders. Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs, OCBs cannot be transferred, by way of sale under private arrangement. Difference between NRI and PIO Non Resident Indian A Non Resident Indian (NRI) is a person resident outside India, who is a citizen of India or is a person of Indian origin. Person of Indian Origin A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if: He at any time held Indian passport; OR He or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); OR The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b). Different Type of Accounts maintained in India by NRI & PIO There are 3 different types of accounts that a NRI or PIO can open, hold and maintain with an Authorized Dealer( a bank authorized to deal in foreign exchange) in India, without prior permission of RBI. However, individuals/ entities of Bangladesh and Pakistan require the prior approval of the Reserve Bank. These are
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1. NRO Account (Non Resident Ordinary Rupee Account) 2. NRE Account (Non Resident External Rupee Account) 3. FCNR Account (Foreign Currency Non Resident Account) Lets discuss each of them in detail now. A. Non-Resident (Ordinary) Rupee Account (NRO Account) NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed deposit accounts. NRO Savings accounts can also be maintained with the Post Offices in India.

Savings Account - Normally maintained for crediting legitimate dues /earnings / income such as dividends, interest etc. On 16th Dec, 2011 RBI has deregulated the interest rates offered by the banks on NRO account with the condition that the rate of interest offered cannot be more than that offered on comparable domestic rupee deposits. Term Deposits - Banks are free to determine the interest rates with a condition that the interest rates offered should not be more than that offered on comparable domestic rupee deposits. Account should be denominated in Indian Rupees. Permissible credits to NRO account are transfers from rupee accounts of non-resident banks, remittances received in permitted currency from outside India through normal banking channels, permitted currency tendered by account holder during his temporary visit to India, legitimate dues in India of the account holder like current income like rent, dividend, pension, interest, etc., sale proceeds of assets including immovable property acquired out of rupee/foreign currency funds or by way of legacy/ inheritance. Eligible debits such as all local payments in rupees including payments for investments as specified by the Reserve Bank and remittance outside India of current income like rent, dividend, pension, interest, etc., net of applicable taxes, of the account holder. NRI/PIO may remit from the balances held in NRO account an amount not exceeding USD one million per financial year, subject to payment of applicable taxes. The limit of USD 1 million per financial year includes sale proceeds of immovable properties held by NRIs/PIO. The accounts may be held jointly with residents and / or with non-resident Indian. As per RBI, deposits in NRO account were $11 billion by the end of Oct, 2011.

B. Non-Resident (External) Rupee Account (NRE Account) NRE account may be in the form of savings, current, recurring or fixed deposit accounts. Such accounts can be opened only by the non-resident himself and not through the holder of the power of attorney.

Savings - The interest rates on NRE Savings deposits shall be at the rate applicable to domestic savings deposits. On 16th Dec, 2011 RBI has deregulated the interest rates offered by the banks on NRE account with the condition that the rate of interest offered
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cannot be more than that offered on comparable domestic rupee deposits. Currently, banks offer 3.51 per cent on NRE deposits for two-three years and 3.64 per cent for deposits above three years. Term deposits The interest rates are deregulated by the RBI on 16 Dec, 2011. Currently, banks offer 3.51 per cent on NRE deposits for two-three years and 3.64 per cent for deposits above three years. NRE accounts cannot be held jointly with residents Account will be maintained in Indian Rupees. Balances held in the NRE account are freely repatriable. Accrued interest income and balances held in NRE accounts are exempt from Income tax and Wealth tax, respectively. Authorized dealers/authorized banks may at their discretion/commercial judgment allow for a period of not more than two weeks, over drawings in NRE savings bank accounts, up to a limit of Rs.50, 000 subject to the condition that such over drawings together with the interest payable thereon are cleared/repaid within a period of two weeks, out of inward remittances through normal banking channels or by transfer of funds from other NRE/FCNR accounts. Permissible credits to NRE account are inward remittance to India in permitted currency, proceeds of account payee cheques, demand drafts / bankers' cheques, issued against encashment of foreign currency, where the instruments issued to the NRE account holder are supported by encashment certificate issued by AD Category-I / Category-II, transfers from other NRE / FCNR accounts, interest accruing on the funds held in such accounts, interest on Government securities/dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc. Eligible debits are local disbursements, transfer to other NRE / FCNR accounts of person eligible to open such accounts, remittance outside India, investments in shares / securities/commercial paper of an Indian company, etc. Loans up to Rs.100 lakh can be extended against security of funds held in NRE Account either to the depositors or third parties. Such accounts can be operated through power of attorney in favor of residents for limited purpose of withdrawal of local payments or remittances through normal banking channels to the account holder himself. As per RBI, the deposits in NRE accounts were $25 billion by the end of Oct, 2011.

Advantages of NRE Account Non-residents can enjoy the following advantages by maintaining NRE Accounts: i. ii. iii. iv. The interest on deposits and any other income accruing on the balance in the accounts are free of Indian Income-tax. The balances in the accounts are free of Wealth-tax. Gifts to close relatives in India from out of balances in the accounts are free of Gift-tax The entire credit balance (inclusive of interest earned thereon) can be repatriated outside India at any time without reference to the Reserve Bank.

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Disadvantages of NRE Accounts NR (E) accounts are opened in Indian rupees and all foreign exchange remittances received for credit of those accounts are first converted to Indian rupees at the buying rates by the banks. Any withdrawal in foreign currency will be permitted by the bank by converting Indian rupees in the account to foreign currency at the selling rate Hence they bear an exchange risk. C. Foreign Currency Non Resident Account

FCNR (B) accounts are only in the form of term deposits of 1 to 5 years All debits / credits permissible in respect of NRE accounts are permissible in FCNR (B) accounts also. Account can be in Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar In case the depositor with any convertible currency other than designated currency desires to place a deposit in these accounts, authorized dealers may undertake with the depositor a fully covered swap in that currency against the desired designated currency. Such a swap may also be done between two designated currencies. Loans up to Rs.100 lakh can be extended against security of funds held in FCNR(B) deposit either to the depositors or third parties. The interest rates are stipulated by the Department of Banking Operations and Development, Reserve Bank of India. At present, in respect of FCNR (B) deposits of all maturities contracted effective from the close of business in India as on November 15, 2008, interest shall be paid within the ceiling rate of LIBOR / SWAP rates plus 100 basis points for the respective currency/corresponding maturities (as against LIBOR/SWAP rates plus 25 basis points effective from close of business on October 15, 2008).On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency / maturity plus 100 basis points. For floating rate deposits, the interest reset period shall be six months. When an account holder becomes a person resident in India, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. Terms and conditions as applicable to NRE accounts in respect of joint accounts, repatriation of funds, opening account during temporary visit, operation by power of attorney, loans/overdrafts against security of funds held in accounts, shall apply to FCNR (B).

Investment Facilities for NRIs NRI may, without limit, purchase on repatriation basis:

Government dated securities / Treasury bills Units of domestic mutual funds; Bonds issued by a public sector undertaking (PSU) in India. Non-convertible debentures of a company incorporated in India. Perpetual debt instruments and debt capital instruments issued by banks in India.

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Shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids. Shares and convertible debentures of Indian companies under the FDI scheme (including automatic route & FIPB), subject to the terms and conditions specified in Schedule 1 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time.

NRI may, without limit, purchase on non-repatriation basis :

Government dated securities / Treasury bills Units of domestic mutual funds Units of Money Market Mutual Funds National Plan/Savings Certificates Non-convertible debentures of a company incorporated in India Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedules 3 and 4 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. Exchange traded derivative contracts approved by the SEBI, from time to time, out of INR funds held in India on non-repatriable basis, subject to the limits prescribed by the SEBI.

Note: NRIs are not permitted to invest in small savings or Public Provident Fund (PPF). . TRENDS IN FPI Foreign direct investment in India has surpassed portfolio investment by almost $5.6bn in 200607, marking a significant change from past trends. During 2003-04 and 2004-05, portfolio investments in India were much higher than FDI inflows. According to the IIP report, FDI inflow during 2003-04 was $6.32bn as against portfolio investment of $12.01bn. Likewise, in 2004-05, FDI inflows were lower at $6.64bn as compared with portfolio investment of $8.94bn. The cumulative portfolio investment of $80.25bn at the end of March 2007 was higher than the FDI inflows which totaled $72.33bn; Incoming FDI was recorded at $21.19bn in 2006-07, while portfolio investments stood at $15.62bn.

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Following chart shows the FPI inflows since liberalization (Source of data: RBI, Handbook of Statistics on Indian economy)
Rs. Crore 748 11188 12007 9192 11758 6794 -257 13112 12609 9639 4738 52279 41854 55307 31713 109741 -63618 153516 143435 US$ million 244 3567 3824 2748 3312 1828 -61 3026 2760 2021 979 11377 9315 12492 7003 27271 -13855 32376 31471

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

200000 150000 100000 US$ million 50000 0 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 -50000 -100000 2010-11 Rs. Crore

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Overall International Investment Position of India

Net IIP
0 -50 -100 Net IIP -150 -200 -250

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Recent Developments Now, an FII can invest up to $15 billion in government securities, and for the corporate bonds the cap has been enhanced to $20 billion. FII investment in India has reached its current limit for both government papers and corporate bonds, reflecting confidence of foreign investors in Indian economy. As on October 31, 2011, FIIs have invested more than Rs 41,000 crore in government papers and Rs 68,000 crore in corporate bonds. The present ceiling for government securities is Rs 43,650 crore and for the corporate bonds it is 74,000 crore. NRI deposits highest ever at $1.7 bn in November. Overseas Indians have started flocking India markets with a weak rupee and high interest rates making them so attractive amid rising global uncertainties. To improve inflow of foreign currency, the Reserve Bank of India (RBI) on 16th Dec 2011 deregulated the interest rates that banks would pay on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) accounts. Banks are free to determine their interest rates on both savings deposits and term deposits of a maturity of one year and above under NRE deposit accounts and savings deposits under NRO accounts with immediate effect following which banks have raised the rates sharply bringing them on par with local rates. Indian government has decided to allow qualified foreign investors (QFI) direct entry in Indian stock market. In QFI foreign investors can directly sell and buy shares of Indian companies in the Indian stock markets. Finance ministry said that decision has been taken deliberately to widen the class of investors, attract more foreign funds and reduce market volatility and deepen the capital market. . It would also mean facilitating the entry of a set of relatively wealthy investors who could not access the Indian markets as there were regulatory restrictions on their entry.

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