Foreign Institutional Investors

Overview

Last updated: Apr, 2024

Introduction

Foreign Investments are considered crucial for nations, especially for an emerging economy like India. Foreign Investors can be classified majorly as Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs). FDIs are investments to acquire a substantial ownership stake in a company or project by an investor, company, or government from another country that directly augments the production of goods and services in an economy. FPIs investments by non-residents in Indian financial assets shares, government bonds, corporate bonds, convertible securities, and infrastructure securities. FPIs comprise investment groups such as Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs), and subaccounts. FIIs are big investor institutions Pension Funds, Mutual Funds, Insurance Companies, etc.

In India, both domestic and foreign investments are vital and contribute enormously to the nation's expansion. India is considered one of the fastest emerging economies in the world and a leading country in attracting foreign investments. India has several investment opportunities in its equity market for local and Foreign Institutional Investors (FIIs). Since its inception in 1992, India’s FII investments have largely remained positive. The FIIs poured a massive US$ 60.31 billion into Indian equities from March 2009 to November 2010 and lifted the Nifty from around 2,500 to 6,300. Similarly, during the Covid crisis, when the Nifty recovered and surged from around 8,000 (April 2020) to 18,600 (October 2021), the Indian markets saw investments of US$ 38 billion by FIIs.

Moreover, FPIs have cumulatively invested US$ 20 billion between March-August (2023) before becoming net sellers in Asia's third-largest equity market in September. For 2024 (until March 2024), FII investment stood at Rs. 3.39 lakh crore (US$ 40.67 billion). Additionally, the Indian rupee is performing better than other major global currencies such as the British pound, Japanese yen, and euro. The government has also liberalized regulations for foreign capital. All these factors have further strengthened India’s position in global markets.

Recent Developments

India has taken several initiatives recently to attract more foreign capital to the country. These initiatives have made it an attractive destination for investments. India-focused offshore funds have been able to generate more returns compared to other funds in emerging markets, which has attracted foreign investors to the country. Some of the recent developments in foreign investments are listed below:

According to a recent report by Colliers, between 2019 and 2023, foreign inflows comprised of 77% of the total institutional investment in Indian real estate sector with an average annual investment of US$ 4 billion.
In FY24, the net investment by FPIs were US$ 41.6 billion.
In first half of 2024 (till September 2023), foreign capital inflows stood at Rs. 1.44 lakh crore (US$ 17.34 billion).
On October 20, 2023, foreigners bought Rs. 456.21 crore (US$ 54.94 million) of Indian equities.
In (April-August) 2023-24, FPIs purchased around Rs. 21,350 crore (US$ 2.57 billion) in the primary market, marking a 90% increase compared to the previous fiscal year.
According to the Department for Promotion of Industry and Internal Trade (DPIIT), India's cumulative FDI inflow stood at US$ 971.52 billion between April 2000-December 2023.
The total FDI inflow into India from October 2023 to December 2023 stood at US$ 17.96 billion and FDI equity inflow for the same period stood at US$ 11.54 billion.
India also had major FDI inflows during April 2000-December 2023, coming from Mauritius at US$ 170.91 billion with a total share of 26%, followed by Singapore at 23% (US$ 155.61 billion), the USA at 9% (US$ 63.03 billion), Netherlands at 7% (US$ 46.03 billion), and Japan at 6% (US$ 41.47 billion).
For calendar year 2023, the overall FPI sell figure through the exchange is US$ 17.24 billion.
Private Equity-Venture Capital (PE/VC) funds invested US$ 13.50 billion in first quarter of 2024 (across 292 deals) in India-based companies.
India's National Stock Exchange (NSE) had the ninth-largest market capitalization in the world, with a total market value of US$ 4.31 trillion as of December 31, 2023.
Till April 23, 2024, the NIFTY 50 traded near the 22,368 mark and Sensex surpassed 73,738 on the back of strong inflows from foreign institutional investors (FIIs).
Around 130 SME companies went public in 2023 (till October 2023), raising a total of Rs. 3,540 crore (US$ 426.33 million) through IPOs.
The total DII buying is Rs. 4,500 crore (US$ 540.56 million) in 2023-24 (April-July).

Government/Regulatory Initiatives

The Government of India has taken several initiatives to improve regulations and attract foreign capital. India has set up an international stock exchange for assisting foreign investors investing in the country. It also plans to launch the first India International Bullion Exchange (IIBX) at GIFT City. Apart from these, the government has undertaken several initiatives to attract foreign capital. Some of the recent government initiatives and regulations in the FII space are as follows:

Securities and Exchange Board of India (Sebi) announced disclosure norms for foreign portfolio investors (FPIs) which will come into effect from November 1, 2023. Under these regulations, overseas funds that hold more than 50% of their equity investments in a single Indian corporate group or have more than Rs. 25,000 crore (US$ 3.01 billion) of equity assets under management (AUM) in the Indian market, will have to provide detailed information about their beneficial owners.
The Reserve Bank of India has taken a number of actions to increase foreign exchange inflows. These actions consist of:
- Exempting additional Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
- Authorization for banks to accept new FCNR(B) and NRE deposits without regard to current interest rate regulations until the end of October 2022.
- Inclusion of all new issuances of 7-year and 14-year G-Secs under the Fully Accessible Route (FAR) for FPls.
- Exemption from the short-term limit for FPls' investments in G-Secs and corporate debt made until October 31st, 2022.
- Permitting FPI in commercial paper and non-convertible debentures with an original maturity of up to one year.
- A temporary increase in the limit for external commercial borrowings (ECBs) under the automated route from US$ 750 million or its equivalent per fiscal year to US$ 1.5 billion.
- Increase in the all-in cost ceiling under the ECB framework by 100 basis points, subject to the borrower having an investment grade rating.
- Permission for AD Cat-I banks to use foreign currency borrowings made abroad to fund foreign currency loans to organisations for a variety of end uses other than exports.
Liberalisation of Forex Flows was revised on 6th July 2022 to expand India’s external sector, diversify the sources of forex funding to mitigate volatility, dampening global spill overs and supporting exports of goods and services and rising remittances. Some measures are taken with the vision of enhancing India’s robust forex inflows while ensuring overall macroeconomic and financial stability.
The Government of India increased FDI in the defence sector by increasing it to 74% through the automatic route and 100% through the government route.
By February 2022, the Union Cabinet allowed 20% FDI for the Life Insurance Corporation of India (LIC).
In October 2021, the government allowed 100% FDI in the telecom sector.
In August 2021, the Securities and Exchange Board of India (SEBI) introduced the idea of 'accredited’ investors in the Indian securities market to explore a new channel for raising funds.
In August 2021, SEBI mandated using blockchain or distributed ledger technology to monitor the bond's status or other listed debt securities.
In June 2021, SEBI announced the revised overseas investment limit for mutual funds to US$ 1 billion from the previous US$ 600 million.
In the Union Budget 2021-22, the finance bill proposed amendments to allow FPIs to participate in the debt financing of emerging investment vehicles such as REITs and InvITs. This move is aimed at enhancing funding for infrastructure and real estate.
Employees’ Provident Fund Organisation (EPFO) investments in the equity market were worth US$ 16.4 billion until November 2021.

Road Ahead

India has emerged as one of the most important global investment hubs in recent years. Despite various challenges such as rising interest rates, excessive inflation in global commodity prices and the threat of a global recession, the Indian economy and markets have shown to be incredibly robust. Indian markets have provided good returns compared to other emerging markets. India is also one of the most attractive FDI destinations. In FY23, India was able to attract FDI of US$ 46.03 billion and has also signed free trade agreements with countries such as the UAE, Australia, Singapore, and Japan. This is expected to buoy investors’ sentiment and increase global private investments. India also has a strong start-up ecosystem: the number of Indian start-ups has increased from 471 in 2016 to 92,683 in 2023. India also had one of the best-performing IPO markets in 2021. Favourable government policies, increased infrastructure investment, relaxation of norms and improvement in financial infrastructure can further boost the inflow of foreign capital in the country in future.

Note: Conversion rate used for January 2024 is Rs.1 = US$ 0.012