Who is a FII and what are these PNs?

A foreign institutional investor (FII) means an entity established or incorporated outside India which proposes to make investments in India. To ensure that such funds are not just a front for one wealthy individual, the government has prescribed that an FII must be a broad-based fund.

What is a broad-based fund?

A broad-based fund means a fund established or incorporated outside India, which has at least 20 investors with no single individual investor holding more than 10% shares or units of the fund. But if the fund has institutional investors like banks or a pension outfit or a similar established entity, then it shall not be necessary for the fund to have 20 investors. However, if the fund has an institutional investor holding of more than 10% of shares or units in the fund, then the institutional investor must itself be a broad-based fund.

What is a sub-account?

A sub-account includes those foreign corporate, foreign individuals, and institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by an FII.

Similarly, a designated bank means any bank in India which has been authorised by the RBI to act as a banker to an FII. There is also a domestic custodian, which is an entity registered with the Sebi to carry on the activity of providing custodial services in respect of such securities.

What sort of entities can be registered as an FII?

Under the Sebi (FII) Regulations, 1995, the following entities and funds are eligible to get registered as FII. This include pension funds, mutual funds, insurance companies, investment trusts, banks, university funds, endowments, foundations, charitable trusts and charitable societies. The Sebi (FII) Regulations, 1995, also says the following entities proposing to invest on behalf of broad-based funds are also eligible to be registered as FIIs. These are asset management companies, institutional portfolio managers, trustees, and power of attorney holders.

On what basis does Sebi decide on an FII applicant’s eligibility?

The parameters analysed include the 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) and also 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 the Sebi whether the applicant is a fit & proper person.

Who can get registered as a sub-account?

Institutions or funds or portfolios established outside India, whether incorporated or not, proprietary fund of FIIs, foreign corporates and foreign individuals. An FII should apply on behalf of the sub-account. Both the FII and the sub-account are required to sign the sub-account application form.

The maximum limit of FII investment in any company as of now is 10% of the total equity of the company. With the sub-accounts, the aggregate limit is 24%. For the sub-account registered under the foreign companies/individual category, the investment limit is fixed at 5% of the issued capital.

What sort of financial investments can a FII conduct?

They can now invest in almost every sort of products in the stock markets including primary and secondary markets. This comprise shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognised stock exchange in India, units of mutual funds, dated government securities, derivatives traded on a recognised stock exchanges, and commercial papers.

What is a participatory note?

PNs are instruments used by FIIs, not registered in the country, for trading in the domestic market. They are a derivative instrument issued against an underlying security which permits the holder to share the capital appreciation or income from that security.

PNs are, therefore, like contract notes and are issued by FIIs to their overseas clients, who may not be eligible to invest in the Indian stock markets. PNs are used as an alternative to sub-accounts by ultimate investors, who prefer to avoid making disclosures required by various regulators.

The government has asked FIIs to wind down their exposure to such PNs and eliminate them from their books within five years. It is likely to be whittled down to three years.