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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. |
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