Foreign Institutional Investors

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Last updated: Apr, 2015

Introduction

Economies like India, which offer immense growth potential, are emerging as favourite investment destinations for foreign institutional investors (FIIs). With a rising conviction about the performance of Indian debt securities, FIIs are gradually increasing their investments as Indian bonds are likely to outperform other emerging markets in the medium-term, according to some of the global fund managers. Investors are highly optimistic on India, their sentiments riding high following the government’s announcement of a series of reform measures in recent months.

According to a poll conducted by Bank of America Merrill Lynch (BofA-ML) recently, in which 50 investors participated, India was the most favourite equity market for the global investors for the year 2015 at 43 per cent, followed by China at 26 per cent. The global investment bank is of the view that India remains to be in a structural bull market.

Significantly, India saw 800 new technology start-ups—taking the total number of start-ups to 3,100—setting up their ventures so far in 2014-15, as per IT-BPO industry body Nasscom. India is poised to become the second biggest eco-system option after the US in the next two years on account of the ongoing high growth rates. Such start-ups have received over US$ 2.3 billion in funding since 2010, while over 70 private equity (PE) and venture capital (VC) funds remain active in the segment. Apart from this, there were over 62 angels active in 2014 and there are over 80 incubators and start-up accelerators operating in the country at present.

Market Size

FII’s net investments in Indian equities and debt are set to touch a record this financial year, backed by expectations of an economic recovery, falling interest rates and improving earnings outlook. FIIs have invested a net of US$ 43.5 billion so far in 2014-15— expected to be their highest investment in any fiscal year. Of this, a huge amount—US$ 26.3 billion—was invested in debt and it is their record investment in the asset class, while equities absorbed US$ 17.2 billion.

India continues to be a preferred market for foreign investors. Listed India-focused funds saw record inflows of US$ 1.7 billion in January this year, while most other emerging markets (EMs) saw redemptions to the tune of US$ 3 billion. FIIs pumped in US$ 2.87 billion into Indian equities in January, most of this coming from listed funds.

During February, Indian companies witnessed 113 deals worth US$ 3.4 billion, an increase of 40 per cent in terms of volume and around 36 per cent in terms of deal value as compared to the same period last year, according to the latest Deal Tracker report by Grant Thornton India Llp.

In 2014, private equity (PE) funds pumped in US$ 11 billion into Indian companies, 11 per cent more than last year, and touching a four-year high, according to a report by Grant Thornton. While the overall merger & acquisition (M&A) volume in the country stands at US$ 37 billion, the volume generated through qualified institutional placements and initial public offerings (IPOs) is US$ 5 billion.

Investments

  • Limited partners (LPs), who invest in India through PE and VC funds say they are stepping up their allocations to the country because of increased opportunities to invest in e-commerce and technology companies as well as potentially easier exits through M&As and IPOs.
  • US-based private equity firm Carlyle Group has acquired a 49 per cent stake in PNB Housing Finance from Destimoney Enterprises Private Ltd (DEPL). The non-banking finance company (NBFC) was valued at around US$ 500 million, according to sources.
  • Global private equity major TPG Capital Management is buying a 'significant minority stake' in Bengaluru-based hospital operator Manipal Health Enterprises (MHEPL) for US$ 146 million, the companies said in a joint statement.
  • STAR India, a unit of 21st Century Fox, has acquired the entire broadcast business of MAA Television Network Ltd.
  • Global private equity fund Actis Llp has committed US$ 230 million to create an Indian renewable energy platform, Ostro Energy.
  • Infosys has announced that it would buy Panaya, which provides automation technology, in an all-cash deal of US$ 200 million
  • Idria, an affiliate of Creador II LLC, has invested Rs 135 crore (US$ 21.31 million) for a minority stake in publicly listed PC Jeweller. This is the 15th investment (sixth in India) for Creador, a private equity firm focused on long-term investments in growth-oriented businesses in Southeast Asia.

Government Initiatives

The RBI has hiked the FIIs’ sub-limit in government bonds by US$ 5 billion, after the US$ 20 billion limit was nearly exhausted. The move is projected to stabilise yields that were unstable in the recent past. The overall limit for FII investment in government bonds has been kept at the previous US$ 30 billion.

The RBI has allowed foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs) to invest up to 26 per cent in insurance and related activities via the automatic route. "Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector," as per the RBI.

The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India. The investment should be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with SEBI will also be deemed as eligible investors.

Road Ahead

India is being viewed as a potential opportunity by investors, with the economy having the capacity to grow tremendously. Buoyed by exceptional support from the country’s government, the FII sector in India looks set to prosper, and the outlook looks extremely promising. "FIIs are flocking towards Indian bonds as the confidence level of central bank and the government is at one of the highest levels and benign commodity prices have added confidence," said Rahul Goswami, Chief Investment Officer for fixed income at ICICI Pru Mutual fund. "India is among the few geographies where interest rates are expected to drop with fair visibility, which would attract flow from FII," said Arvind Sethi, MD& CEO, TATA Asset Management.

A PricewaterhouseCoopers India report based on a survey of 40 PE firm partners has projected that the country has the potential to get PE funding of US$ 40 billion by 2025. Future PE investments would be driven by India’s consumption story, realistic valuations, competitive businesses, growing private entrepreneurship, among other factors, as per the report.

"The FII participation has been very consistent as far as India is concerned and we see the trend continuing. We have been overweight India in the context of Asia and emerging markets since November 2013 and that stance very much continues," said Mr Bharat Iyer, MD, Global Research, JP Morgan India.

Exchange Rate Used: INR 1 = US$ 0.0157 as on April 28, 2015

References: Media Reports, Press Releases

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