Portfolio Investment : Portfolio Investment FOREIGN INSTITUTIONAL INVESTOR : FOREIGN INSTITUTIONAL INVESTOR FII means Foreign Institutional Investors. When some investors who have same interest to invest in foreign company, they create the company and start to invest in foreign companies. In India, SEBI defines all these investors as foreign institutional investors.
In countries like India, statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category, with an estimated US$ 751.14 billion. Importance of FII : Importance of FII • Market Value $250 bn – 25% of GDP and 20% of total market cap.
• Close to USD 100 bn is estimated in PNs
• Turnover (cash) share – 31% ; MFs 10%
• BSE 500 – 22% share in market cap
• MF to FII holdings ratio – 1:5
• RBI Fx assets 26% - 28% of M3 (money supply)
• Co relation to developed market more than 0.50.
• FII flows and INR correlation – 87%
• Current account deficit converted into capital account surplus. Cont…. : Cont…. Foreign Institutional Investors (FIIs) can invest in India in the securities traded in both primary and secondary capital markets. The securities consist of shares, debentures, warrants, and units of mutual funds, government securities and derivative instruments.
FII is an institution that allows the investors top invest in Indian securities traded in both primary and secondary capital markets secondary market FII & the financial system : FII & the financial system Benefits of FII flows : Benefits of FII flows Lowers cost of capital, access to cheap global credit
Supplements domestic savings and investments
Capital markets reforms and financial sector development
Higher asset prices
Surplus domestic reforms Issues & Problems of FII : Issues & Problems of FII Inflation & Asset Bubbles,
Largest Credit –Consumption cycle in India funded by FII flows-Reversal ?
Real economy Impact-Currency, Interest rates, Bad Credit, Stock Markets-Negative Wealth effects
Disorderly adjustments of imbalances-Financial instability
High fiscal deficit, public debt, inflationary tendency, crude oil Role of FII in Indian Capital Market : Role of FII in Indian Capital Market As on that date the net cumulative investments made by Flls are around USD 35.9 billion representing around 6.55% of India's market capitalization.
Net Investments by Flls (Rs Cr.) 41416.45 in 2004-05 in Indian Companies.
FIIs are important for the market. They typically start a market rally. Subsequently flows come from all classes of investors. At this stage, the market behaves like a self-organized system. Mode of entry for Foreign Institutional Investment in the Indian Economy : Mode of entry for Foreign Institutional Investment in the Indian Economy There are two broad ways in which the foreign institutional investors may enter the Indian financial market - as an incorporated entity or an unincorporated Entity.
Foreign investing firms entering as incorporated entities need to abide by certain rules. They need to enter as a company as per the Companies Act,1956.
The incorporation can occur either through joint ventures or as wholly owned subsidiaries.
Foreign equity investment in these companies can reach up to 100%. Investment is subject to the set equity caps as directed by the Foreign Direct Investment Policy of India.
As an Unincorporated Entity, a foreign investment company can operate through its Liaison Office, Branch Office or Project Office. Investment activities undertaken by these offices need to be under India's Foreign Exchange Management Regulations,2000. More Information on Foreign Institutional Investment in Indian Economy : More Information on Foreign Institutional Investment in Indian Economy A resurgent India with opportunities galore has attracted Foreign Institutional Investment in an increasing amount. Foreign institutional investors (FIIs) need to be enlisted with the Securities and Exchange Board of India (SEBI).
The number of foreign institutional investors enlisted at the SEBI stood at 1,219 at the end of 2007. The comparable figure for the end of 2006 was lower than 1000. The enlisted FII sub accounts numbered 3,644.
2007 saw a lot of FII investments in the Indian economy. The figure reached an all time high of US$ 17.2 billion for the equity market . This pushed BSE and NSE a long way to attain record levels of 20,000 index points and 6,000 index points respectively. For 10 months in 2007, FIIs acted as net buyers. However, as soon as the repercussions of the crisis in the USA markets reached India the FIIs turned net sellers to negate that loss.
FCCBs , IPOs and QIPs accounted for 70% of the investments made by FIIs. The remaining were made through overseas offers, warrant conversion and preferential offers. Excellent macro economic performance of the Indian economy with commendable growth parameters have drawn more Foreign Institutional Investment in Indian Economy. ADR and GDR : ADR and GDR American Depositary Receipts (ADRs) : American Depositary Receipts (ADRs) American Depository Receipt is a depository receipt representing one or more shares of a foreign company that is traded publicly in U.S. markets. A negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign stock that is traded on a U.S. exchange.
ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help reduce administrative and duty costs that otherwise would be levied on each transaction.
American depositary receipts (ADRs) were the 1st depositary receipts issued—JP Morgan issued the 1st ADR in 1927. ADRs allowed companies domiciled outside of the United States to tap the United States capital markets.
ADRs were structured to resemble other stocks on the American exchanges with comparable prices per share, shareholder notifications in English, and the use of United States currency for the sale and purchase of ADRs and for dividend payments. Types of ADRs : Types of ADRs Unsponsored ADR – This is ADR which involve no direct involvement of the foreign company (whose shares are involved). Custodian banks buy shares of the company, hold then, and issues ADRs through a brokerage firm. The ADR holder may not receive all the benefits associated with the shares. Unsponsored ADRs are traded usually over-the-counter.
Sponsored ADR – This is ADR which involve direct involvement of foreign company. The company chooses a single depository bank and registers DRs with SEC. The ADR holder receives all share holder benefits. Sponsored ADRs are usually traded through major exchanges like NYSE and AMEX.
Level 1 - These are found on Over the counter market and have the loosest requirements from Securities and Exchange Commission.
Level 2 - These are listed on an exchange or Nasdaq. They have slightly more requirements from the SEC, but they have greater visibility and trading volume.
Level 3 - The issuer floats a public offering of ADRs on a U.S. exchange. Advantages of ADRs : Advantages of ADRs ADRs help investors to invest in big foreign companies and are good instruments for portfolio diversification.
They help the investors to profit from many emerging market companies (high risk high return instruments).
All transactions including buying the shares, dividend payments and capital gains are done in U.S. Dollars.
The competitive rates of Euro and U.S. Dollar over other market currencies also benefit the investor.
ADRs offer more transparency and stability than trading the stock directly in a foreign market. Global Depositary Receipts (GDRs) : Global Depositary Receipts (GDRs) Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject of worldwide circulation on capital markets.
Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the company’s home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries.
Depositary receipts are structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy an interest in the company without worrying about differences in currency, accounting practices, or language barriers, or be concerned about the other risks in investing in foreign stock directly. Contd… : Contd… There are more than 900 GDR’s listed on exchanges worldwide, with more than 2,100 issuers from 80 countries.
Although ADRs were the most prevalent form of depositary receipts, the number of GDRs has recently surpassed ADRs because of the lower expense and time savings in issuing GDRs, especially on the London and Luxembourg stock exchanges. Source: J P Morgan The Global Depositary Receipt as a Financial Instrument : The Global Depositary Receipt as a Financial Instrument A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank.
A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer, and specifies the duties and rights of each party, both to the other party and to the investors. Provisions include setting record dates, voting the issuer’s underlying shares, depositing the issuer’s shares in the custodian bank, the sharing of fees, and the execution and delivery or the transfer and the surrender of the GDR shares. Contd…. : Contd…. A separate custodian bank holds the company shares that underlie the GDR. The depositary bank buys the company shares and deposits the shares in the custodian bank, then issues the GDRs representing an ownership interest in the shares
custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. The custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the GDR holders.
The voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a GDR holder according to his instructions; otherwise, without instructions, the depositary bank will not vote the shares. GDR Market : GDR Market London Stock Exchange,
Luxembourg Stock Exchange,
Dubai International Financial Exchange (DIFX),
Singapore Stock Exchange,
Hong Kong Stock Exchange.
Companies choose a particular exchange because it feels the investors of the exchange’s country know the company better, because the country has a larger investor base for international issues, or because the company’s peers are represented on the exchange. Most GDRs trade on the London or Luxembourg exchanges because they were the 1st to list GDRs and because it is cheaper and faster to issue a GDR for those exchanges. The Details of a GDR Purchase by An Investor : The Details of a GDR Purchase by An Investor An investor calls her broker to buy GDRs for a particular company.
The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company shares in the home market of the company by using a broker in the issuer's country. The foreign broker then delivers the shares to the custodian bank.
The investor’s broker notifies the depositary bank that ordinary shares have been purchased in the issuer's market and will be delivered to the custodian bank and requests depositary shares to be issued in the investor’s account.
The custodian notifies the depositary bank that the shares have been credited to the depositary bank’s account.
The depositary bank notifies the investor’s broker that the GDRs have been delivered.
The broker then debits the account of the investor for the GDR issuance fee. The Details of a GDR Sale by an Investor : The Details of a GDR Sale by an Investor An investor instructs his broker to sell his GDRs. The investor must deliver the shares within 3 business days if the shares are not in the street name of the broker.
The broker can either sell the shares on the exchanges where the GDR trades, or the GDRs can be canceled, and converted into the ordinary shares of the issuing company.
If the broker sells the shares on an exchange, then the broker uses the services of a broker in the issuer's market.
If, instead, the shares are canceled, then the broker will deliver the shares to the depositary bank for cancellation and provide instructions for the delivery of the ordinary shares of the company issuer. The investor pays the cancelation fees and any other applicable fees.
The depositary bank instructs the custodian bank to deliver the ordinary shares to the investor’s broker, who then credits the account of its customer