Foreign Institutional Investment

Changes to the SEBI (Foreign Institutional Investors) Regulations, 1995

In 1996-97, several changes have been made to the SEBI (Foreign Institutional Investors) Regulations, 1995 to diversify the foreign institutional investor base and to further facilitate inflow of foreign portfolio investment. The changes have also aimed at facilitating investment in debt securities through the FII route. The changes are as follows:

• the eligible categories of FIIs have been expanded to include university funds, endowments, foundations, charitable trusts and charitable societies which have a track record of 5 years and which are registered with a statutory authority in their country of incorporation or establishment
  
  
• each FII or sub-account of an FII has been permitted to invest upto 10% of the equity of any one company, subject to the overall limit of 24% on investments by all FIIs, NRIs and OCBs
  
  
• the 24% limit may be raised to 30% in the case of individual companies who have obtained shareholder approval for the same
  
  
• FIIs have been permitted to invest in unlisted securities
  
  
• FIIs have been allowed to invest their proprietary funds
  
  
• FIIs who obtain specific approval from SEBI have been permitted to invest 100% of their portfolios in debt securities. Such investment may be in listed or to be listed corporate debt securities or in dated government securities, and is treated to be part of the overall limit on external commercial borrowing.

The impact of these changes was felt as several endowment funds, proprietary funds and 100% debt funds of FIIs obtained registration. Further details are given in Part II of this Report. In order to simplify the FII registration process, SEBI and RBI set up a co-ordination committee. At the end of 1996-97 there were no applications for FII registration pending with SEBI and RBI.

Foreign investment in Indian securities has also been made possible through the purchase of Global Depository Receipts, Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers which are listed, traded and settled overseas. Foreign investors, whether registered as FII or not, may also invest in Indian securities outside the FII route. Such investment requires case by case approval from the Foreign Investment Promotion Board (FIPB) and the RBI, or only by the RBI depending the size of investment and the industry in which this investment is to be made.

Foreign financial services institutions have also been allowed to set up joint ventures in stock broking, asset management companies, merchant banking and other financial services firms along with Indian partners. The foreign participation in financial services requires the approval of FIPB. In 1996-97, the FIPB announced guidelines for foreign investment in the non-banking financial services sector.