Vikrant Gugnani, CEO of Reliance Mutual Fund in Mumbai explains the background to the foreign investment rules: “FIIs were first allowed to invest in India in 1992. Initially the FII holdings in any company were subject to various investment limits. Also funds invested by FIIs had to have at least 50 participants with no single investor holding more than 5%. This was done to ensure a broad base and prevent such investment acting as a camouflage for individual investment in the nature of FDI, which required Government approval. Individuals were left out because of the difficulties in checking their antecedents, their perceived lack of expertise in market matters and relatively short-term perspective. The regulations have gradually made provisions to increase the participation of foreign investments in Indian capital markets.

“In 2000, the FII regulations were amended to permit foreign corporate and high net worth individuals to invest as sub-accounts under the regulations, provided the FII acts as an investment manager for the sub account.

“The regulation allows an FII or its sub account to invest in the following:

■ Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognised stock exchange in India;

■ Units of mutual funds;

■ Dated government securities;

■ Derivatives traded on a recognized stock exchange;

■ Commercial papers.

“However there are certain limits imposed on investment into Fixed Income securities. These restrictions are governed by the kind of registration the FII takes:

■ Regular FIIs - These are required to invest not less than 70% of their investment in equity-related instruments and up to 30% in non-equity instruments.

■ 100% Fixed Income Fund FIIs - permitted to invest only in fixed incomeinstruments.

Unless a pension fund is willing to take 100% of its exposure in fixed income, applying for a regular FII license makes more sense.

“There are 973 FIIs currently registered with SEBI. The regulatory climate in India has become increasingly very investor friendly. SEBI generally takes seven to ten working days in granting FII registration and three to seven working days in granting FII-sub account registration when the information furnished is complete and to the satisfaction of SEBI.”