Foreign Institutional Investors

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Last updated: Jan, 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.

Foreign portfolio managers have invested almost US$ 40 billion in Indian stocks and debt in 2014 so far on expectations that economic growth will quicken and interest rates will be slashed, as dwindling oil prices cool inflation, making India the most attractive destination among emerging markets and in Asia excluding Japan.

Market Size

FIIs have invested nearly US$ 24.7 billion in the Indian debt market this year and it’s for the first time that their investment in debt is higher than equity market. FIIs have invested US$16.3 billion in Indian equities in 2014, the highest among the seven emerging markets tracked by Bloomberg. Significantly, Indian government bonds have posted returns of 15.14 per cent in this year, which is the best in Asia.

Investments into domestic shares through participatory notes (P-Notes) increased to the highest level in more than six-and-half years at Rs 2.65 trillion (US$ 43.01 billion) in October 2014. According to the data released by the Securities and Exchange Board of India (SEBI), the total value of P-Note investments in Indian markets (equity, debt and derivatives) rose to Rs 265,675 crore (US$ 43.12 billion) at the end of October from Rs 2,22,394 crore (US$ 36.1 billion) in September. This reflects the highest level since February 2008, when the cumulative value of such investments stood at Rs 322,743 crore (US$ 52.39 billion).

As of November 12, 2014 out of a total FII debt investment limit of US$ 81 billion, 69.43 per cent has been invested by the FIIs.

Also, with the kind of appetite FIIs have recently shown for Indian bonds, November is set to be the seventh consecutive month of net FII inflows after the US$ 1.85 billion net selling by FIIs in April 2014.

Investments

  • India-focused private equity (PE) firm Everstone Capital Advisors has said that it has signed an agreement with PE fund Solmark, to acquire a controlling stake in Servion Global Solutions Ltd (Servion) for US$ 66 million. The investment has been done through Evertech Pte Ltd, Everstone's technology investing platform.
  • Indiabulls Group is set to launch a PE fund through the alternative investment fund (AIF) route and is expected to kick off the venture with a real estate fund. The high-risk, high-return AIFs invest in a wide range of sectors, including real estate, infrastructure and credit derivatives, among others.
  • Marquee PE firms, which include Temasek Holdings Pvt. Ltd, Warburg Pincus India Pvt. Ltd and KKR and Co. Llp, have increased their pace of investments in India although they continue to lag non-traditional investors like SoftBank Corp. and Tiger Global Management Llc, which have been more active so far this year. PE firms had invested US$ 8.4 billion in India between January and September, as against US$ 7.8 billion in 2013, according to Grant Thornton, a consultancy. In terms of volume of deals, 2014 has already seen a 38 per cent jump compared with the previous year.
  • The value of debt investments of foreign investors through P-notes has doubled in the first nine months of calendar year 2014. The total value of P-notes, also known as offshore derivative instruments, in debt has increased from Rs 9,500 crore (US$ 1.54 billion) in December 2013 to a record level of Rs 21,687 crore (US$ 3.52 billion) in September 2014, an increase of nearly 130 per cent. The share of P-notes in overall foreign investment into the debt market is nearly 10 per cent, indicating that a number of overseas investors are drawn towards the Indian paper through this fast-track investment route
  • PI Policy Innovations Pvt. Ltd, a Secunderabad-based school test design and assessment company has announced that it has raised US$ 1.8 million from Aspada Investment Co.

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.

India received foreign exchange (Forex) remittances worth US$ 70 billion in 2013 from its migratory workforce. Other top remittance recipient nations were China (US$ 60 billion), the Philippines (US$ 25 billion), Mexico (US$ 22 billion), Nigeria (US$ 21 billion), and Egypt (US$ 17 billion), according to a study by World Bank. Also, as per the report, India's US$ 70 billion in remittance receipts was "more than the US$ 65 billion earned from the country's flagship software services exports".

The Reserve Bank of India (RBI) has allowed Hinduja Foundries, a group company of Hinduja Group, to increase its foreign investment limit up to 60 per cent of paid-up capital. This rise in investment limit is under the Portfolio Investment Scheme (PIS).

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.

Exchange Rate Used: INR 1 = US$ 0.0162 as on January 21, 2015

References: Media Reports, Press Releases

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