Role of FIIs, DII/MF/QIB in Capital Markets

Role of FIIs, DII/MF/QIB in Capital Markets,Participatory Notes and Its Impact and Process,Index Formation

ByAbhishek ShrivastavJanki PatelManju YadavNidhi SharmaWho are Institutional Investors?Organizations, Individuals or groups of investors that trades securities in large enough share quantities that they qualify for preferential treatment and lower commissions.Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.Foreign Institutional InvestorsDefinition: An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing.

3FIIs Role in Capital Markets:

LiquidityVolatilityReduced cost of equityStability of BoPKnowledge FlowsImproving market efficiency

FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)

CategoryDateBuy valueSell valueNet ValueFII24-Oct-20132890.311898.48991.83Domestic Institutional InvestorsDII is used to denote an investor mostly of the form of an institution or entity , which invests money in the financial markets of their own country where the institution or entity was originally incorporated.DIIs Role in Capital MarketsStrengthening of Corporate GovernanceLiquidityPrice building mechanismSpeculation

Domestic Institutional Investors trading activity on NSE and BSE on Capital Market Segment

CategoryDateBuy ValueSell valueNet ValueDII24- Oct- 2013800.891536.29-735.4Mutual FundsAccording to SEBI (Mutual Funds) Regulations, 1996, a mutual fund is a fund established in the form of a trust to raise money through the sale' of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments."Role of MFs in Capital MarketMobilizes SavingsBoost To Capital MarketDiversificationEconomies Of ScaleSafety And LiquidityStability to stock marketQualified Institutional BuyersQualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.In terms of clause 2.2.2B (v) of DIP Guidelines, a 'Qualified Institutional Buyer' shall mean: a. Public financial institution as defined in section 4A of the Companies Act, 1956;

b. Scheduled commercial banks;

c. Mutual funds;

d. Foreign institutional investor registered with SEBI;

e. Multilateral and bilateral development financial institutions;

f. Venture capital funds registered with SEBI.

g. Foreign Venture capital investors registered with SEBI.

h. State Industrial Development Corporations.

Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).

j. Provident Funds with minimum corpus of Rs.25 Crores

k. Pension Funds with minimum corpus of Rs. 25 Crores)Role of QIBs in Capital MarketVolatilityLiquidityStability to Stock MarketParticipatory Notes & Its ImpactParticipatory NotesCommonly known asP-NotesorPNsInstruments issued by registered foreigninstitutional investors(FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India -SEBI.Used for making investments in thestock markets. Used outside India for making investments in shares listed in the Indian stock market. In the Indian context,foreign institutional investors (FIIs)and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market.Aid investors who do not want to register with SEBI and reveal their identities to take positions in the Indian market.However, they are not used within the country. That is why they are also called offshore derivative instruments. 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.

16Advantages of participatory notes:

Anonymity:Any entity investing in participatory notes is not required to register with SEBI, whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity.

Ease of trading

Tax saving

It strengthen rupee against the dollar.

Disadvantages of P-notes:Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. It is alleged that a lot of unaccounted money made its way to the country through the participatory note route.

Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.

Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.

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INDEX FORMATIONMeaningA Stock index or Stock Market Index is a measurement of the value of a section of the stock market.

It is computed from the prices of selected stocks (typically a weighted average)

It is a tool used by investors and financial managers to describe the market,and to compare the return on specific investments.Types of IndicesA 'world' or 'global' stock market index includes (typically large) companies without regard for where they are domiciled or traded.

Two examples are MSCI World (Morgan Stanley Capital International) and S&P Global 100.(Standard and Poors)FormationSome indices,such as the S&P 500, have multiple versions.

These versions can differ based on how the index components are weighted and on how dividends are accounted for.

For example, there are three versions of the S&P 500 index: PRICE RETURN, which only considers the price of the components, TOTAL RETURN, which accounts for dividend reinvestment, and NET TOTAL RETURN, which accounts for dividend reinvestment after the deduction of a withholding taxIndex Representation (S & P)

Index Representation (MSCI)

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