[Economy] QFI (Qualified Foreign Investor) vs FII, Need, Implication, Currency Depreciation, Demat Account and more (Story of Forex continues)

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Pavan Kumar

The Technically incorrect Story of Forex continues with new topics : FII, QFI (Qualified Foreign Investors), Demat, PAN card and more

What is FII, Why did Rupee weaken against Dollar. Why did QFI come?

  1. Story of Foreign Institutional Investor (FII)
  2. Serious Note on FII
  3. QFI: Qualified Foreign Investor
  4. QFI from Newspapers
  5. MOCK Economy Question for CSAT

Foreign Institutional Investor (FII)

Tom Cruise: What is FII?Anil Kapoor: It means foreign player can invest money in Indian stock market.
Tom Cruise: Cool. Tell you what, I’m not getting much interest-rate in my savings account in American bank, I got $1 million in the suitcase, let’s go to Bombay Stock Exchange and buy some shares!
Anil Kapoor: Ain’t that easy! An individual foreigner can’t simply walk in the Dalal street and do shopping. Go to Maxwell Assets Manager . He will explain everything to you.

Sub-Account under FII

Maxwell Manager: I’m an established financial asset Management firm. I’ve got a licence from SEBI to operate as an FII (foreign institutional investor) in Indian market. (After paying $5000 application fees). Mr.Cruise, you will have to register as ‘sub-account’ under our FII firm. And then you give your suitcase to us, we’ll invest it in Indian stock market on your behalf.

Tom Cruise: Are you the only FII guy ?

Maxwell Manager: Well I’m not the only FII, there are many others like BNP PARIBAS, MORGAN STANLEY and other 1,700 FIIs and more than 5,500 sub-accounts registered with SEBI. But we are the best, we charge the least Commission and give free caller tunes and Unlimited talk time*. So, Let’s goto SEBI office and get it done. (*conditions apply)
cut to SEBI Office.
Peon: Our Saaheb is gone for tea-break so wait for 145 minutes.
(after 145 minutes)

Tom Cruise: (to the SEBI clerk) ya I wanna open a FII sub-account.

SEBI Clerk: oh Really? Every desi dude here wants to be an IAS, IIM, IIT and every firangi dude wants to be an FII ever since the sub-prime crisis. But are you a wealthy foreign individual or firm with a minimum net worth of $50 million (about Rs. 260 crore)? Only then we give the license, and not to any random swinging dude that walks into our office!

Tom Cruise You don’t know me? I’m the Tom Cruise.

SEBI Clerk Who’s that?

Maxwell Manager He is a famous Hollywood hero, got billions of dollars.

SEBI Clerk hmm never heard of you. I only watch the movies of India’s Finest Actor, Fighter, Dancer and Bollywood Superstar Mimoh Chakraborty. Anyways here is the application form for $1000. Fill it up, Attach photocopies of your id and address proof, 10th,12th, Graduation marksheets, Work-Ex and Extra curricular activity certificates: Everything in triplicate, and attested by a Gazetted Officer and your three passport sized photographs with white background, no smile, and sign on your photo with black pen only.

Tom Cruise: Man this is so hopeless, it sounds like a perfect plot for Mission Impossible #5. Anil Kapoor can get the 2 minute’s role of Gazetted Officer, while I fool the Indian audience for the second time spreading rumors that he is given a big role just like in MI-4!
Tom gets the sub account opened.
Maxwell Manager: congrats. Now we can invest your money in Indian Stock market on your behalf, so which company do you want to put your money in?

Tom Cruise: hmm, I’ve been doing some market research myself, recently saw Abhishek Bacchan’s Idea 3G ad in Divya-Bhaskar (Gujarati Edition), I think that company and its 3G service is going to be huge hit. Buy some Idea-shares for me so I can earn huge dividends later on. Also buy a few of Vedanta cause they acquired some oilfields from Cairn India, they will also make huge profits and pay good dividends to their shareholders.

Maxwell Manager Whaat an Idea sir-ji!

Cut to : Supreme Court cancels 2G licenses of all Telecom companies.

Tom Cruise Man this is hopeless. I think investing in Idea was a bad Idea. Company is gonna make any decent money now, my return on investment will be ridiculous. Vedanta-Cairn deal is also stuck in the Cabinet, means no quick and huge profit there either.

Tom Cruise (phonecall to Maxwell Manager) hi, sell all my shares of Idea and Vedanta.

Maxwell Manager Sure. But Where should I invest the money then?

Tom Cruise: I have no idea sir-ji, what do you suggest?

Maxwell Manager I have been looking at the IIP (index of industrial production), the numbers are going in negative range. RBI is also hellbent on tightening the monetary policy, thus increasing the loan-rates and decreasing the demand of products to contain inflation. Indian industries are facing a slump, there is electricity problem, there is problem of getting environment clearances. Even blue chip software, chemical or automobile companies are not doing good thanks to slowdown in America and Europe. No hope in Airline companies either..

I don’t think it is worth it to play in Indian market any more. Besides you’ve one million dollars, meaning If Indian market gives you 5% return on Investment and Singapore’s gives you just 6%, still you should run away because 1% of one million dollar= easy $10,000, huge cash! So, I suggest we pull out your money completely from India and get it invested somewhere else, Singapore, Australia, perhaps?

Tom Cruise: Just Do It. Anything is better than the stalemate and “Policy paralysis” in India.

Serious Note on FII (copied from Newspapers)

  • At present, a foreign individual seeking to invest in Indian stocks has to be registered as a sub-account of an FII, which in turn has to apply to Sebi on the behalf of the sub-account holder.
  • India allows only wealthy foreign individuals or high networth individuals (HNIs) who have a minimum net worth of $50 million (about R260 crore) and registered as a sub-account of a foreign institutional investor (FII) to invest directly in local equities
  • FIIs pulled out money on account of growth falling below 7% and widely-publicised difficulties in obtaining regulatory clearances. Net outflows exceeded $450 million last year
  • For many FIIs, economic woes in their home markets, especially due to the European debt crisis and a perceived policy paralysis in India following a string of scams, exacerbated their pull-out.
  • Euro zone crisis has led to investors pulling money out of Indian equities. For India, the problem has been compounded by a slump in investor confidence because of policy inaction leading to a sharp fall in new projects.
  • Reserve Bank of India (RBI) estimate says that a 10 percent fluctuation in FII investment results in a 35 percent variation in stock prices.
  • FIIs pulled out money on account of GDP falling below 7% and widely-publicised difficulties in obtaining regulatory clearances. Net FII outflows exceeded $450 million last year.

QFI: Qualified Foreign Investor

Finance Minister’s office

Secretary: Sir, the FIIs are pulling out their money like there is no tomorrow. They have lost confidence in India’s growth story (thanks to you). Since they’re pulling out money, Demand of Dollar is increased and demand of rupee is decreased. Currently $1 goes for 54 Rupees in Forex market. We have to do something before all hell breaks loose!

Finance Minister: damn, let us start a new scheme “Qualified Foreign Investor” (QFI) as New year gift from 1st January 2012 to increase the ‘confidence’ of investors in Indian Market.

Secretary: What does is do? Another (bogus) scheme like your MNREGA?

Finance Minister It means a foreign individual, group or foreign firm can directly invest in Indian stock-market like any normal Indian citizen, without requiring the sub-account with FII. This should bring in some more investors, who’re interested in investing in India but feel turned off because of this sub-account and strict High Net-worth rules.
Tell RBI manager to do verification of the applicants though, make sure these individual, group or associations are resident in a foreign country that adheres to anti-money laundering and anti-terrorist financing guidelines as defined by the financial action task force (FATF).

Secretary: Good idea but I suggest we name this scheme “IGQFI” or “RGQFI”

Finance Minister: ??

Secretary: Indira Gandhi or Rajiv Gandhi QFI :P

Finance Minister: Why not both of them simultaneously? IGRGQFI

Secretary: Whaat an Idea Sir-ji!!
Brad Pitt: haha my turn now, I’m gonna purchase some shares from Indian Market!

HDFC Manager: hey Wait, you can’t just walk in like that. First you’ve to open a Demat account and a Trade account with a DP (Depositary Participant) like us!

Brad Pitt: wait wait wait, so many words in a sentence, I’m getting confused, let’s talk this one at a time:

What is this Demat account?

When you purchase shares, you don’t get paper certificates, but those shares get electronically transferred to your demat account in the Depositary. Meaning your shares are not in physical paper (material) form but electronic format. De-materializied= De-mat. No fear of theft, misplacement, delay in transfer etc. Something like having a caller-tune in your mobile. You own the tune but don’t actually have to have it in your phone’s memory card.

What is Depository?

A Depository is like a bank locker where securities (shares) are held in electronic (dematerialised) form.
In India, there are only two Depositories -National Securities Depositories Limited (NSDL) and Central Depository Services Limited (CDSL).

What is Depository Participants (DP)?

DP’s are like bank branches where shares in physical (paper) form need are deposited for converting them in electronic (demat) form and email it to the Depositary.
Examples of Depository Participants (DP) :ICICI, SBI, HDFC etc. You’ve to open a Demat Account with any one DP.

Demat Depository

And what about this “Trade account”

The same DP bank also act as stock-brokers. You open a trade account with us, This enables you to trade in shares without going through the hassles of manually converting your dollars in rupees or chasing your broker for cheques or Transfer Instructions etc. Everything will be done after you login to our online portal.
Brad Pitt: ok so If I get it correctly: First I purchase shares using my trade account, then transfer them in my demat account. I can do this all without needing a third party agent (FII or Share-Broker), just like how an Indian citizen can play in share-market and Government took this step to increase money inflow and reduce volatility in the market, which was created by FIIs. This is the crux of QFI. Sounds good. I’m desperate to become a QFI, Open my Trading account right NOW!
HDFC Manager:But for that you need a Demat account.

Brad Pitt:Ok open my demat account.

HDFC Manager:but you need a PAN card for that.

Brad Pitt:Ok open my PAN card account.

HDFC Manager:You’ve to get PAN card from Income Tax department.

Brad Pitt:Man this is hopeless. No wonder why India ranks low in “Doing Business” Index.Now What is this PAN card?HDFC Manager:Permanent Account Number (PAN) refers to a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department in India.
It is now compulsory to quote PAN in share-trading and financial transactions. Although Dividends from companies and mutual funds are not taxable in India, PAN card is required to fulfill the KYC (know your customer) norms for us— a critical requirement in the age of laundering and transferring terrorist money!

Brad Pitt:But I’m a Foreigner! Do I need PAN card too?

HDFC Manager:Yes you do mister. and you’ll have to get it from IT office.

Cut to- Income Tax Office.

Peon (To Brad Pitt) Saaheb is gone for a tea-break. Wait for 145 x 109 minutes.

Brad Pitt (Facebook-twitter status update): #missionimpossible6On a serious note, QFI from Newspapers

  • 2011: QFI were allowed to invest in pension and mutual funds only and not in the Indian Sharemarket as such.
  • Until now Foreign Institutional Investors/sub-accounts and Non-Resident Indians are allowed to directly invest in the Indian equity (Share) market.
  • 2012: Now QFI can also invest in sharemarket.
  • QFI is an individual, group or association resident in a foreign country that adheres to anti-money laundering and anti-terrorist financing guidelines as defined by the financial action task force (FATF), a multi-lateral body.
  • The QFIs do not include FII/sub-accounts.
  • QFIs can own up to 5% of Indian companies while their cumulative investments are capped at 10%. These limits are over and above the FII and NRI investment ceilings prescribed under the portfolio investment route for foreign investment in India
  • The QFIs shall be allowed to invest through the SEBI-registered Qualified Depository Participant (DP), with the QFI required to open only one demat account and a trading account with any of the qualified DP and make purchase and sale of equities (shares) through that DP only.

Mock Questions for CSAT (Economy)

Which of the following statements are correct?

  • At present there are four Depositories to hold shares in Dematerilized form
  • PAN card is issued by SEBI
  • Only Indian Nationals can get PAN card.
  • PAN card has 16 digits.
  • Aadhar (UID) card has 10 digits.

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