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FOREIGN INSTITUTIONAL INVESTORS IN INDIA

Foreign Institutional Investor (FII)

Foreign Institutional Investors (FII) include the following foreign based categories:

 Pension Funds
 Mutual Funds

 Investment Trust

 Insurance or reinsurance companies

 Investment Trusts

 Banks

 Endowments

 University Funds

 Foundations

 Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also
eligible to be registered as FIIs:

 Asset Management Companies


 Institutional Portfolio Managers

 Trustees

 Power of Attorney Holders


Foreign mutual funds are allowed to invest in
India subject to special rules and regulations.
See also Foreign Hedge Funds in India
Before investing in stocks in India, foreign
mutual funds are required to be registered in
Q1. Who is a Foreign Institutional Investor
India.
(FII)?

Ans. FII means an entity established or


_____****_____
incorporated outside India which proposes to
make investment in India.
Q2. What is a sub-account?

Ans. Sub-account includes those foreign corporations, foreign individuals, and institutions, funds
or portfolios established or incorporated outside India on whose behalf investments are proposed
to be made in India by a FII.

Q3. What is a Designated Bank?

Ans. Designated Bank means any bank in India which has been authorized by the Reserve Bank
of India to act as a banker to FII.

Q4. Who is a Domestic Custodian?

Ans. Domestic Custodian means any entity registered with SEBI to carry on the activity of
providing custodial services in respect of securities.

Q5. What is a Broad Based Fund?

Ans. Broad Based Fund means a fund established or incorporated outside India, which has at
least twenty investors with no single individual investor holding more than 10% shares or units
of the fund.

Provided that if the fund has institutional investor(s) it shall not be necessary for the fund
to have twenty investors.

Provided further that if the fund has an institutional investor holding more than 10% of
shares or units in the fund, then the institutional investor must itself be broad based fund.

FII REGISTRATION

Q6. Who can get registered as FII?

Ans. Following entities / funds are eligible to get registered as FII:

1. Pension Funds
2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Funds

7. Endowments
8. Foundations

9. 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. Asset Management Companies


2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holders

Q7. What are the parameters on which SEBI decides FII applicants’ eligibility?

Ans.

a. Applicant’s track record, professional competence, financial soundness,


experience, general reputation of fairness and integrity. (The applicant should
have been in existence for at least one year)
b. whether the applicant is registered with and regulated by an appropriate Foreign
Regulatory Authority in the same capacity in which the application is filed with
SEBI

c. Whether the applicant is a fit & proper person.

Q8. Which form needs to be filled in when applying for FII registration?

Ans. "Form A" as prescribed in SEBI (FII) Regulations, 1995.

Q9. Which documents need to be sent with "Form A"?

Ans.

a. Certified copy of relevant clauses (clauses permitting the stated activities) of


Memorandum of Association, Article of Association or Article of Incorporation.
b. Audited financial statement and annual report for the last one year (period
covered should not be less than twelve months

Q10. How much is the fee for registration as FII?

Ans. US $ 5,000.
Q11. When is the registration fee payable?

Ans. At the time of submitting the application for registration.

Q12. What is the mode of payment?

Ans. Demand Draft in favour of "Securities and Exchange Board of India" payable at New York

Q13. How many days it takes to get registered as FII?

Ans. SEBI generally takes seven working days in granting FII registration. However, in cases
where the information furnished by the applicants is incomplete, seven days shall be counted
from the days when all necessary information sought, reaches SEBI.

In cases where the applicant is bank and subsidiary of a bank, SEBI seeks comments from the
Reserve Bank of India (RBI). In such cases, 7 working days would be counted from the day
no objection is received from RBI.

Q14. What is the registration process for FII?

Ans. Please contact us for registration.

Q15. What is the validity period of FII registration?

Ans. The FII registration is valid for 5 years. After expiry of 5 years, the registration needs to be
renewed.

Q16. What is the process of renewal?

Ans. Same as initial registration. Along with "Form A" and all the relevant documents, the
applicants are required to fill in additional form (Annexure 1) while applying for renewal.

Q17. Is there any renewal fee?

Ans. Yes, US $ 5,000 needs to be paid for renewal of FII registration.

Q18. When the application for renewal should be submitted

Ans. Three months before expiry of the FII registration.

Q19. What are 100 % debt FIIs/sub-accounts, and what is the process for their
registration?

Ans. 100 % debt FIIs are debt dedicated FIIs which invest in debt securities only. The procedure
for registration of FII/sub-account, under 100% debt route is similar to that of normal funds
besides a clear statement by the applicant that it wishes to be registered as FII/sub-account under
100% debt route.

Q20. Where the application for FII registration should be sent?

Ans. The FII registration application should be sent to:

Securities and Exchange Board of India


Division of FII & Custodian
Mittal Court "B" Wing, First Floor
224, Nariman Point
Mumbai 400 021
India

Note: In case the applicant is a ‘Bank’ or "Subsidiary of a Bank" then the application form
and relevant documents need to be submitted in duplicates.

SUB-ACCOUNT REGISTRATION

Q21. Who can get registered as sub-account?

Ans.

a. Institution or funds or portfolios established outside India, whether incorporated


or not.
b. Proprietary fund of FII.

c. Foreign Corporates

d. Foreign Individuals

Q22. Who need to apply for sub-account registration?

Ans. The FII should apply on the behalf of the Sub-account. Both the FII and the Sub-account
are required to sign the Sub-account application form.

Q23. Which form needs to be filled when applying for sub-account registration?

Ans. "Annexure B" to "Form A" (FII application form).

Q24. What documents need to be sent with Annexure A?


Ans. None

Q25. How much is the fee for sub-account registration?

Ans. US $ 1,000

Q26. When is the registration fee payable?

Ans. At the time of submitting the application.

Q27. What is the mode of payment?

Ans. Demand Draft in the name of "Securities and Exchange Board of India" payable at New
York

Q28. How many days it takes to get a sub-account registered?

Ans. SEBI generally takes three working days in granting FII registration. However, in cases
where the information furnished by the applicants is incomplete, three days shall be counted
from the days when all necessary information sought, reaches SEBI.

Q29. What is the validity period of sub-account registration?

Ans. The validity of sub-account registration is co-terminus with the FII registration under which
it is registered.

Q30. What is the process of renewal of sub-account?

Ans. Same as initial registration.

Q31. Is there renewal fee?

Ans. Yes, US $ 1,000

Q32. Can OCBs / NRIs permitted to get registered as FII/sub-account?

Ans. No, they are not permitted.

POST-REGISTRATION PROCESSES

Q33. What is the procedure in case the FII/sub-account changes its name?

Ans. If a registered FII/sub-account undergoes name change, then the FII need to promptly
inform SEBI about the change. It should also mention the reasons for the name change and give
an undertaking that there has been no change in beneficiary ownership.
In case of name change of FII, the request should be accompanied with documents from home
regulator and registrar of the company evidencing approval of name change, and the original FII
registration certificate issued by SEBI should be sent back for necessary amendment.

Q34. What is the procedure for transferring a sub-account from one FII to another?

Ans. The FII to whom the Sub-account is proposed to be transferred has to send a request along
with a declaration that it is authorized to invest on behalf of the Sub-account. The transferor FII
should also submit a No-objection certificate.

Q35. What is the procedure for change of domestic custodian?

Ans. The FII should send a request, along with no-objection certificate from existing domestic
custodian, for change in domestic custodian.

Q36. Can FII/sub-account registration be cancelled on request?

Ans. Yes, the FII would be required to send a request for cancellation of its registration or
registration of its Sub-account/s clearly mentioning the name and registration number of the
entity. The FII should ensure that it / Sub-account has nil cash / securities holdings.

Q37. What if the FII does not renew its/sub-account’s registration?

Ans. The registration of the FII / Sub-account would get expired at due date and it would not be
allowed to trade in Indian securities markets. If it is not interested in renewal but has certain
residual assets, it can apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001
dated June 04, 2001 and abide by the guidelines specified in this regard.

INVESTMENT OPPORTUNITIES

Q38. Which financial instruments are available for FII investments?

Ans.

a. Securities in primary and secondary markets including shares, debentures and


warrants of companies, unlisted, listed or to be listed on a recognized stock
exchange in India;
b. Units of mutual funds;

c. Dated Government Securities;

d. Derivatives traded on a recognized stock exchange;

e. Commercial papers.

Q39. What are the investment limits on equity investments by FII/sub-account?


Ans.

a. FII, on its own behalf, shall not invest in equity more than 10% of total issued
capital of an Indian company.
b. Investment on behalf of each sub-account shall not exceed 10% of total issued
capital of an India company.

c. For the sub-account registered under Foreign Companies/Individual category, the


investment limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by
Government of India / Reserve Bank of India.

Q40. What are the investment limits on debt investments by FII/sub-account?

Ans. The FII investments in debt securities are governed by the policy if the Government of
India. Currently following limits are in effect:

o For FII investments in Government debt, currently following limits are


applicable:

100 % Debt Route US $ 1.55 billion

70 : 30 Route US $ 200 million

Total Limit US $ 1.75 billion


o For corporate debt the investment limit is fixed at US $ 500 million.

Q41. What other investment limits are there?

Ans.

Normal FII (70:30 Route) 100% Debt FII

Total investment in equity and equity 100% investment shall be made in


related instruments shall not be less debt security only.
than 70% of aggregate of all
investments.
Q42. In whose name should the securities be registered?

Ans.

a. In the name of FII when making investments on its own behalf


b. In the name of sub-account when making investments on behalf of Sub-account

c. In the name of "FII a/c sub-account" when making investments on behalf of Sub-
account.

DERIVATIVES POSITION LIMITS

Q43. What are the restrictions on investment in derivatives?

Ans.

b. The FII position limits in a derivative contracts (Individual Stocks)

The FII position limits in a derivative contract on a particular underlying stock i.e. stock
option contracts and single stock futures contracts are:

o For stocks in which the market wide position limit is less than or
equal to Rs. 250 Cr, the FII position limit in such stock shall be
20% of the market wide limit.
o For stocks in which the market wide position limit is greater than
Rs. 250j Cr, the FII position limit in such stock shall be Rs. 50 Cr.

b. FII Position limits in Index options contracts

FII position limit in all index options contracts on a particular underlying index shall be
Rs. 250 Crore or 15 % of the total open interest of the market in index options, whichever
is higher, per exchange.

This limit would be applicable on open positions in all option contracts on a particular
underlying index.

c. FII Position limits in Index futures contracts:

FII position limit in all index futures contracts on a particular underlying index shall be
Rs. 250 Crore or 15 % of the total open interest of the market in index futures, whichever
is higher, per exchange.

This limit would be applicable on open positions in all futures contracts on a particular
underlying index.
In addition to the above, FIIs shall take exposure in equity index derivatives subject to
the following limits:

i. Short positions in index derivatives (short futures, short calls and


long puts) not exceeding (in notional value) the FII’s holding of
stocks.
ii. Long positions in index derivatives (long futures, long calls and
short puts) not exceeding (in notional value) the FII’s holding of
cash, government securities, T-Bills and similar instruments.

b. FII Position Limits in Interest rate derivative contracts

At the level of the FII

The notional value of gross open position of a FII in exchange traded interest rate
derivative contracts shall be:

i. US $ 100 million.
ii. In addition to the above, the FII may take exposure in exchange traded in
interest rate derivative contracts to the extent of the book value of their
cash market exposure in Government Securities.

At the level of the sub-account

The position limits for a Sub-account in near month exchange traded interest rate
derivative contracts shall be higher of:

 Rs. 100 Cr

or

 15% of total open interest in the market in exchange traded interest rate
derivative contracts.

OFFSHORE DERIVATIVES/PARTICIPATORY NOTES


Q44. Can FII/sub-account issue Offshore Derivatives / Participatory Notes?

Ans. Yes, FII/sub-account may issue, deal in or hold off-shore derivative instruments such as
Participatory Notes, Equity Linked Notes or any other similar instruments against underlying
securities, listed or proposed to be listed on any stock exchange in India.

Q45. Who can subscribe to/invest in Participatory Notes?

Ans.

a. Any entity incorporated in a jurisdiction that requires filing of constitutional


and/or other documents with a registrar of companies or comparable regulatory
agency or body under the applicable companies legislation in that jurisdiction;
b. Any entity that is regulated, authorised or supervised by a central bank, such as
the Bank of England, the Federal Reserve, the Hong Kong Monetary Authority,
the Monetary Authority of Singapore or any other similar body provided that the
entity must not only be authorised but also be regulated by the aforesaid
regulatory bodies;

c. Any entity that is regulated, authorised or supervised by a securities or futures


commission, such as the Financial Services Authority (UK), the Securities and
Exchange Commission (Sub-account), the Commodities Futures Trading
Commission (Sub-account), the Securities and Futures Commission (Hong Kong
or Taiwan), Australian Securities and Investments Commission (Australia) or
other securities or futures authority or commission in any country , state or
territory ;

d. Any entity that is a member of securities or futures exchanges such as the New
York Stock Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stock
Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securities
or futures authority or commission within any country, state or territory provided
that the aforesaid mentioned organizations which are in the nature of self
regulatory organizations are ultimately accountable to the respective securities /
financial market regulators.

e. Any individual or entity (such as fund, trust, collective investment scheme,


Investment Company or limited partnership) whose investment advisory function
is managed by an entity satisfying the criteria of (a), (b), (c) or (d) above.

Q46. What are the reporting Requirements for the FII / Sub-account issuing

Participatory Notes?

Ans.
a. FII/sub-account who issue/renew/cancel/redeem PNs, require to report on
Monthly basis. The report should reach SEBI by the 7th day of the following
month.
b. The FII/sub-account merely investing/subscribing in/to the Participatory
Notes/Access Products/Offshore Derivative Instruments or any such type of
instruments/securities with underlying Indian market securities are required to
report on quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).

c. FIIs/sub-accounts who do not issue PNs but have trades/holds Indian securities
during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to
submit 'Nil' undertaking on a quarterly basis.

d. FIIs/sub-accounts who do not issue PNs and do not have trades/ holdings in
Indian securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-
Dec): No reports required for that reporting quarter.

Q47. How to send report on Participatory Notes?

Ans.

o The format for reporting on issuance/ renewal / redemption of the Participatory


Notes is prescribed as per "Annexure B" in our Circular No. IMD/CUST/15/2004
dated April 02, 2004 [
o The reports should be e-mailed only to SEBI

o In case of Nil-reports, ‘Annexure B’ is not required. Instead the FII on behalf of


its Sub-account should submit the undertaking prescribed in our circular No.
IMD/CUST/9/2003 dated November 20 , 2003

o The reporting should be done in MS Excel format only

SEBI ANNOUNCES NEW REGULATIONS FOR FII'S

Market regulator Security Exchange Board of India recently announced new rules for foreign
investments through financial instruments such as participatory notes, asking FIIs to wind up P-
Notes for investing in derivatives within 18 months.

SEBI also imposing curbs on P-Notes for investing in spot market.

In derivatives, foreign institutional investors (FIIs) and their sub-accounts cannot issue fresh P-
Notes and will have to wind up their current position in 18 months.
In spot market, FIIs will not be allowed to issue P-Notes more than 40 per cent of their assets
under custody. The reference date for calculating such assets will be September 30.

Those FIIs who have issued P-Notes of more than 40 per cent of their assets could issue such
instruments only if they cancel, redeem, or close their existing PNs. Those FIIs who have issued
P-Notes less than 40 per cent of their assets under custody can issue additional instruments at the
rate of 5 per cent of their assets.

Highlights of New Rules

 New norms to come into effect from tomorrow


 Unregulated pension fund, university fund, charitable fund, endowments etc to be treated
as FIIs
 No dilution of know-your-customers norms for registration of FIIs to prevent money
laundering
 FIIs to be registered on a permanent basis instead of earlier practice of renewing
registration every three years

What are P-notes?

P-Notes are instruments like contract notes issued by FIIs to overseas investors who cannot
directly invest in equity market as they are not registered. Out of over 1,100 FIIs registered with
SEBI, only 34 have been issuing PNs.

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