Tuesday, November 29, 2005

Little gyan on FII and PN

Coming back after little gap. The last few days were depressing with some bad memories haunting the day thoughts and taking away the sleep. As such am not a deep sleeper but when you don’t get a minute of sleep for 3 continuous days, it starts taking a toll. With the exams round the corner, sleep and good sleep is as necessary else nothing stays between the neurons in the grey matter and gives a blank feeling even after hours of study. Thus I am bracing up for the exams. I am on leave from today till the last exam.
I had taken all care at the office but at the last minute I get a call from CM, Mr Ravi about CGM desiring complete change in the note of swap. It was astonishing as all upto MD had gone through the draft note and had concurred. This sudden change of stance left me wondering. It just goes to show the public sector working and how it makes the decision making capabilities extremely impaired of confidence and guts.
Now I will be working from home and coordinating with Nambiar. He will be a great help being a dealer and in the thick of the things.
Lets see of the next note satisfies the weakness of public sector top management.

Till the time, this Monday carried timely ET in class room on FII and PN the two most responsible entities for the soaring capital markets in India.
The same is represented here below.

A foreign institutional investor 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 broad based fund.

Q. What is a broad based fund?
A. 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 fun 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 more than 10% of shares or units in the funds, then the institutional investor must itself be broad based.

Q. What is a sub account?
A. 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 authorized by RBI to act as 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.

Q. What sort of entities can be registered as an FII?
A. Under the SEBI (FII) Regulations, 1995, the following entities and funds are eligible to get registered as FII. This includes 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.

Q. On what basis does SEBI decide the eligibility on an application from FII?
A. 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 at least for one year. It also checks if the applicant is registered with an regulated by an appropriate foreign regulatory authority in the same capacity in which the application is filed with SEBI.

Q. Who can get registered as sub account?
A. Institutions, or funds, or portfolio 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 total equity of the company. With the sub accounts, the aggregate limit is 24%. For the sub account registered with under foreign companies/individual category, the investment limit is fixed at 5% of issued capital.

Q. What sort of financial investment can a FII conduct?
A. They can now invest in almost any dsort 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 recognized stock exchange in India, units of mutual funds, dated government securities, derivatives traded on a recognized stock exchanges and commercial papers.

Q. What is a participatory note?
A. 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 alternative to sub accounts by ultimate investors, who prefer to avoid making disclosures required by various regulators. The government as asked FIIs to wind down their exposures to such PNs and eliminate them from their books within five years. It is likely to be whittled down to three years.


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