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Exchange Control Manual

Foreign Institutional Investors
Date : Jun 01, 2005

Investment by Foreign Institutional Investors

10B.4 (i) Foreign Institutional Investors (FIIs) including pension funds, mutual funds, investment trusts, university funds, endowments, foundations or charitable trusts or charitable societies, etc. are permitted to invest in all securities, i.e. equity shares/debentures/ PCDs/FCDs/Rights renunciations/warrants of Indian companies (other than Banking Companies) listed as well as unlisted, dated Government securities, Treasury bills and units of domestic mutual fund schemes in the primary and secondary markets. Investments by FIIs will be subject to a ceiling of 24% of the total paid up equity capital of the company. The ceiling would apply to all holdings taken together including conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII or each SEBI approved sub-account of an FII or the concerned FII group in any company would also be subject to a ceiling of 10% of the total issued and paid up capital of the company. Indian companies, however, would be permitted to raise the normal ceiling limit of 24% to 40% of the issued and paid up capital of the company provided it has been approved by the Board of Directors of the company and a Special Resolution is passed to that effect by the General Body. The ceiling of 24% or 40%, as the case may be, applicable for investment by FIIs will not include investments made by NRIs/OCBs under the Portfolio Investment Scheme. It will also not include direct foreign investment by an FII as a foreign collaborator and investment by FIIs through off-shore funds, Global Depository Receipts and Euro - Convertible Bonds.

(ii) FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital market. Application for registration should be made by FIIs to SEBI in the prescribed form in duplicate. One copy of the application will be forwarded by SEBI to Reserve Bank. Reserve Bank will grant permission under FERA 1973 to the bank branch designated by the applicant FII to buy/sell equity shares/debentures/warrants/dated Government securities/Treasury Bills/units of domestic mutual funds. Reserve Bank's permission will be initially valid for five years and will be operative only after obtaining registration from SEBI. This permission can be renewed for a further period of five years on request. Reserve Bank's permission would enable the FIIs to buy/sell the securities and remit the income/dividend/sale proceeds after payment of applicable taxes through the designated bank branch. Reserve Bank's permission will also cover investment in shares/debentures of Indian companies in primary market i.e. new issues provided the company has reserved certain quota out of its public issue in favour of FIIs. The designated bank branch is required to submit to Reserve Bank a statement in form LEC(FII) on daily basis in respect of purchases/sales of shares/debentures made for the purpose of monitoring by Reserve Bank the overall ceiling of 24% or 40%, as the case may be, referred to in sub-paragraph (i).

(iii) In order to facilitate making of investments in India and repatriation of income/sale proceeds of such investments, Reserve Bank will permit the designated bank to open a foreign currency denominated account and a special Non-resident Rupee account in the name of FII. The designated bank branch will also be permitted (a) to transfer funds from foreign currency account to rupee account and vice versa, (b) to make investments out of the balance in the rupee account, (c) to credit sale proceeds of shares and other investments as also dividend/interest earned on the investments to the rupee account and (d) to transfer the repatriable proceeds (net of taxes) from the rupee account to the foreign currency account.

(iv) Reserve Bank vide its Notification No.F.E.R.A.212/99-RB dated 18th October 1999 has granted general permission to mutual funds in India to issue units or similar instruments to FIIs under the schemes approved by Securities and Exchange Board of India and to send such units/instruments out of India to their global custodians, as also to repurchase units/instruments from FIIs (cf. paragraph 10C.16A).