FOREIGN INSTITUTIONAL INVESTORS IN INDIA

Summary

G. R. Parrikar and R. G. Katoti, both economists in the Department of Economics & Statistics at Tata Services Ltd., survey the entry of Foreign Institutional Investors (FIIs) into India’s capital markets in the early years after the September 1992 SEBI guidelines. The pamphlet, published by the Forum of Free Enterprise in November 1994, treats the opening-up of Indian equity markets to FIIs as one of the defining markers of the country’s transition to a market-driven economic system, situating the move within Finance Minister Manmohan Singh’s 1992-93 budget pledge to admit reputable foreign investors such as pension funds. The authors note the encouraging response of 1993-94 — over 225 FIIs registered with SEBI and cumulative net inflows of about $2.7 billion (Rs. 8,470 crores) — while flagging the cautionary view that international capital flows are ‘fair weather friends’ and that, as N. A. Palkhivala has argued, a cap on FII investments may be desirable.

Section I situates Indian FII activity in a global picture: FII-type vehicles date to 1868, the USA, UK and Japan still dominate flows, and only since the late 1980s have surplus savings rotated towards higher-yielding emerging markets in Asia, Latin America and Eastern Europe. The authors document the resulting shift — $160 billion into emerging markets in 1993, 12% of world equity trading versus 4% in 1983 — and quote the Bank for International Settlements’ observation that cross-border portfolio transactions now exceed trade-related transactions, sometimes by a large multiple. A comparative table on investment ceilings and tax rates places India’s 24% aggregate cap and graded tax regime against the more liberal stances of Pakistan, Sri Lanka and Indonesia.

Section II then walks through India’s policy framework — registration, the 24% aggregate / 5% single-FII ceiling, the RBI’s earlier 10% cap on preferential allotments (later raised to 15% from April 1994 after a controversy involving private placements by companies like Nicholas Piramal, Hero Honda, Bajaj Auto and Saw Pipes), repatriation, the special tax treatment (20% on dividend/interest, 30% short-term and 10% long-term capital gains, with NRI-style concessions explicitly denied), and other operational provisions including the ban on short-selling and the use of recognised custodians. The narrative records the surge in secondary-market investment from Rs. 150 crores in June 1993 to Rs. 4,455 crores in February 1994, the BSE Sensex’s parallel climb from 2,282 to over 4,000, and the contribution of FII inflows (alongside Euro Issues and FDI) of roughly $8.2 billion to forex reserves. A short transition introduces Section III, ‘Some Critical Issues’, which had only just begun on the last rendered page.

Key points

• Frames the opening of Indian capital markets to FIIs as a defining feature of India’s post-1991 transition to a market-driven economy, dated to Finance Minister Manmohan Singh’s 1992-93 budget speech and the SEBI guidelines of September 1992.

• Reports that by 1993-94 more than 225 FIIs had registered with SEBI, with cumulative net inflows of about $2.7 billion (Rs. 8,470 crores) and a market capitalisation ranking India seventh among 22 emerging markets.

• Traces the global shift of portfolio capital towards emerging markets since the late 1980s — $160 billion in 1993, 12% of world equity trading vs. 4% in 1983 — driven by the maxim that ‘money goes where money is’.

• Lays out India’s policy regime: SEBI registration, a 24% aggregate ceiling and 5% single-FII ceiling on issued share capital, an RBI cap on preferential allotments raised from 10% to 15% from April 1994, and graded tax rates (20% on dividend/interest, 30% short-term and 10% long-term capital gains).

• Catalogues operational rules — no short-selling, mandatory routing through recognised stock-exchange intermediaries including OTCEI, five-year renewable registration, repatriation through designated custodians like Hongkong Bank, Citibank, Standard Chartered and SBI.

• Documents the bullish impact of FII entry on secondary markets: secondary-market FII investments rose from Rs. 150 crores in June 1993 to Rs. 4,455 crores by February 1994 (a 29x jump), with the BSE sensex climbing from 2,282 in June 1993 past 4,000 by January 1994.

• Notes the cautious counter-view, citing the RBI Governor’s description of international capital flows as ‘fair weather friends’ and N. A. Palkhivala’s call for a cap on FII investments.

• Highlights qualitative effects: institutionalisation of Indian markets, broader-based investment across roughly 500 listed companies, and pressure on Indian firms to adopt greater efficiency, transparency and equity-research-based investment decisions.