Regulatory Framework of Foreign Institutional Investment (FII) in India

Abstract

ABSTRACT

For the first time, in September, 1992, Foreign Institutional Investors were allowed to invest in all the listed securities traded in Indian capital market. According to the RBI, Report on Currency and Finance (2003-2004), since 1991 Indian economy is continuously moving towards its integration with world economy. Since then the regulation with respect to Fils investment has become more liberal. By liberalizing entry barriers to capital flow, India has attracted wide amount of foreign capital especially from developed countries On the health of recipient economy, International capital inflows have both negative as well as positive impact. On its positive side, levels of economic development are raised by augmenting the domestic investment and widen financial intermediation. But there are several threats by these capital inflows to the domestic economy and financial system such as appreciation in exchange rate, inflation, overheating of economy and possibility of sudden withdrawal. Investment by FIls is volatile in nature and is often called as 'hot money'. This feature of it adds to the chances of 'contagion'. In the present paper, effort has been made to deal with the regulatory framework of foreign Institutional Investment in India. In the light of growing and huge FIls investment inflows to India, proper policy formation is the requirement of the hour which will help in minimizing the impact of possible threats and increasing the advantage from the same to increase financial and economic development. This in turn calls for the requirement to estimate the detenninants of FIls . investment. Available evidences shows that inflows of FIls by and large are determined by the performance of stock markets and macroeconomic aggregates. of the concerned country. Hence, Fils investment is pulled towards an economy with sound macroeconomic factors, NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, BANGALORE Page 1

REGULATORY FRAMEWORK OF FOREIGN INSTITUTIONAL INVESTMENT IN rNDIA

lesser risks, high returns and growing stock markets in regard of rising market capitalization and turnover. Due consideration is given by FIls to risk return feature in the source country while investing in emerging markets. Apart from this, official policies of the home and host country i.e. degree of liberalization also determines the size of FIls inflow. I Thus an effort is made in this paper to understand the regulatory framework for Foreign Institutional Investors (FII) in India under six chapters. Its first chapter deals with historical background of FIls, its concept and importance in present era. Second chapter deals with structures of investment which include market design, determinants of FIls flow, pros and cons and difference between FIls and FDls. Third chapter deals with regulatory framework of FIls. Chapter is divided into two parts. The first part deal with legal framework prior to 1995 i.e. before SEBI(FIIs) Reguation,1995 come in force and other part deals with legal framework after the concerned regulation come into force and significant changes so far. Fourth chapter deals with FIls and its impact on stock market and Indian economy and role of RBI. Fifth chapter deals with taxability of FIls in India. Issues regarding capital gains, participatory notes, GAAR Provisions, Morgan Stanely case are dealt under this head. Last chapter deals with FIls and corporate governance issues in India.