Finance @ Knowledge Zone


FII Inflows - Is It Really Hot Money?

- by Subhasree Chakraborty & Ambar Roy *

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In the first year of the crisis, 1997-98, there was a large FII net inflow of $1,828 million. In the second and worst year, 1998-99, there was a tiny outflow of $68 million. And in the last year of the crisis, 1999-2000, there was again a net inflow of $3,024 million.
FIIs would love to sell at high prices and exit during a panic, but this might be really impossible for them. Even a small sale of $100 million by the FIIs causes the Sensex to plummet by 10%.

The following are some of the appropriate measures to ensure a positive impact of FII inflows.

  • Short-term controls can help economies cope with the downside of FII flows.

  • Long-term, the best armour is to strengthen domestic financial systems, only then can countries benefit from FII inflow without falling victim to its costs.

  • Addressing fundamental issues such as strengthening SEBI, encouraging the domestic household savings, banks, mutual funds to invest in capital markets would make our economy more robust and less dependent on the volatility of FII inflows.

Evolution of Foreign Institutional Investors

India embarked on a gradual shift towards capital account convertibility with the launch of the reforms in the early 1990s. Although foreign natural persons - except NRIs - were prohibited from investing in financial assets, such investments were permitted by FIIs and Overseas Corporate Bodies (OCBs) with suitable restrictions. Ever since September 14, 1992, when FIIs were first allowed to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies, which were listed or were to be listed on the Stock Exchanges in India and in the schemes floated by domestic mutual funds, the holding of a single FII and of all FIIs, Non-resident Indians (NRIs) and OCBs in any company were subject to the limit of 5 percent and 24 per cent of the company's total issued capital, respectively.

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* Contributed by -
Subhasree Chakraborty & Ambar Roy,
Department of Management Studies,
IIT Delhi.