The ceiling for overall investments of FIIs was increased 24% of the paid up capital of Indian company.

Allowed foreign individuals and hedge funds to directly register as FIIs.

Investment in government securities was increased to US $ 5 Billion.

Simplified registration norms.

P-Notes (Participatory Notes) are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. For example, Indian-based brokerages buy India-based securities and then issue Participatory Notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. That is why they are also called Offshore Derivative Instruments. Trading through Participatory Notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Secondly, some of the entities route their investment through Participatory Notes to take advantage of the tax laws of certain preferred countries. Thirdly, Participatory Notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity.

The first question that we need to ask is the necessity of FIIs as an instrument for investment into India. This is not a common place of markets; if, for example, a non-resident of the US or of England chooses to invest in an American or an English or a German stock, he does not have to hold his investment indirectly through an FII, but can hold it directly in his own name. An FII in India is a superfluous addition created simply to suit the regulatory requirements of SEBI.

FIIs serve no economic purpose but they exist in order to provide SEBI with a bureaucratic layer between a foreign investor and the regulator. It enables SEBI to pretend that it controls foreign investors when in fact SEBI has no control on the ultimate investor. It is a good example of obscuring the true character of foreign investment in India through a non-transparent and expensive set-up. The P-Note is an additional twist in this indirect investment as it enables those who wish to invest in the Indian market to do so without disclosing their identity.

Influence of FIIs on Indian Stock Market

The current investments of FIIs is Rs. 2,55,464.40 Crores. This is almost 9% of the total market capitialisation. If we explain the things in simple terms, market pundits often attribute the rally of stock market and fall of stock market to the flow of funds by FIIs. We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the major impacts are: -

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* Contributed by: -
T. N. Aravind, V. Venkata Raghavendra & Suby Philip,
Engineering graduates currently pursuing PGDBM from Institute of Public Enterprise (IPE), Hyderabad.
Article posted on October 18, 2008.