Institutional, retail, corporate and proxy advisory participants (NISM Series XV, chapter 2)

Two broad camps

The investor is the backbone of the market: the one lending surplus resources to companies for productive use. The syllabus splits investors into retail and institutional, then lists a long cast under each. Institutional investors include domestic financial institutions, banks, insurance companies, mutual funds and foreign portfolio investors. What follows is the roll call, with the fact the exam attaches to each.

Cross-border money

Foreign portfolio investors (FPIs)

Entities established or incorporated outside India that propose to invest in India. They must register with SEBI to participate.

P-note participants

Participatory notes are instruments issued by SEBI-registered FPIs to overseas investors who want exposure to Indian securities without registering with SEBI themselves. The note gives them access; the FPI holds the underlying.

Pooled domestic money

Mutual funds

Professionally managed collective schemes that pool money and buy securities according to a stated objective. A fund manager with a research team decides what to hold, in what proportion, and when to exit. Investors hold units representing a share of the pool, and diversification reduces the chance of losing on everything at once.

Insurance companies

Their core business is insuring assets and lives, but their large corpus makes them among the most important investors in the economy, holding equities, government securities and bonds through designated investment teams.

Pension funds

Pools of retirement contributions from employees and employers (sometimes employees alone), run for stable long-term growth to provide retirement income. Usually managed by a financial intermediary, sometimes in-house by large corporations; among the largest institutional investors.

Employee Provident Fund

A defined-benefit retirement scheme for employees of covered organisations. The employer contributes 12% of basic salary and an equal amount is deducted from the employee's salary; the money sits with the Employees' Provident Fund Organisation, which manages it, pays a pre-determined interest rate decided yearly, and invests in debt and equity. Employees have no say in the investments or asset allocation.

National Pension Scheme

Government-sponsored. Subscribers contribute regularly; at maturity the accumulation buys annuity products, with an option to withdraw part of it. Employers can offer corporate NPS alongside other retirement benefits, and subscribers choose among funds.

Risk capital

Venture capital funds

Pooled vehicles that invest in early-stage enterprises with long-term growth potential. Long gestation and a high failure rate shut such companies out of banks and capital markets; venture capitalists supply managerial and technical expertise along with money.

Private equity firms

Funding for companies at early stages, in expansion or in buy-outs, whether privately held or listed. The term includes venture capital. Investors are limited partners; the general partners invest and manage. Some funds specialise by industry, stage or deal type.

Hedge funds

Vehicles that pool capital and invest across assets, products and geographies under a very wide mandate, hunting for returns wherever they can be found. The syllabus calls the name a misnomer: these funds are not necessarily hedged and are not hedging anything for their clients.

Alternative investment funds

An AIF is a privately pooled scheme investing in alternative assets: real estate, private companies, commodities and the like. Alternative means everything other than listed equities, fixed income, fixed deposits, and collective vehicles such as mutual funds, NPS and insurance plans that hold those assets. Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 defines an AIF as a privately pooled fund, from Indian or foreign sources, set up as a trust, company, body corporate or LLP, that is not covered by any other SEBI fund regulation (mutual funds, collective investment schemes) nor directly regulated by another sectoral regulator such as IRDAI, PFRDA or the RBI.

	What it invests in	Examples
Category I	Start-ups, early-stage ventures, social ventures, SMEs, infrastructure, and other sectors the government or regulators consider socially or economically desirable	Venture capital funds (including angel funds), SME funds, social venture funds, infrastructure funds
Category II	Anything not in I or III, without leverage or borrowing beyond day-to-day operational needs	Real estate funds, private equity funds, funds for distressed assets
Category III	Complex strategies including leverage and derivatives	Hedge funds, PIPE funds

Exam trapCategory II is defined by what it is not

Category II has no positive description of its own: it is whatever is neither I nor III and does not borrow except for operations. If a question describes a fund that uses leverage, it cannot be Category II, however ordinary its assets sound.

Advisers, storage and quality

Investment advisers

Help investors decide asset allocation and pick investments based on needs, time horizon, return expectation and ability to bear risk; may also build financial plans that define goals and propose saving and investment strategies.

Warehouse service providers

Specialised entities providing storage (warehouses, cold storage, silos, automated systems with climate control, pest management and security) plus inventory management, grading, packaging and logistics. Many are registered with the Warehouse Development and Regulatory Authority and issue negotiable warehouse receipts, which let farmers and traders raise credit against stored goods and avoid distress sales.

Quality assayers

Professionals or certified laboratories that test and certify commodity quality: moisture, purity, size, grading and contaminants for agricultural produce; chemical composition, weight and physical properties for metals and minerals. Often accredited by the WDRA, and their certification is required for issuing negotiable warehouse receipts. Impartial assessment reduces disputes and supports price discovery.

Other pools of money

Family offices

Organisations that manage a wealthy family's finances end to end: investments, estate and tax planning, day-to-day accounting of the family's income and expenses, and handling payments to vendors, household staff and the like. Single-family offices serve one family; multi-family offices serve several.

Corporate treasuries

Companies with surplus funds earmarked for future opportunities or obligations invest them temporarily rather than leave them idle in current accounts. Large corporates run dedicated treasury teams with access to many securities; smaller businesses mostly park surplus in mutual funds.

Retail investors, corporates and proxy advisers

Retail investors are individuals buying and selling for their personal account, not for a company or organisation. High net-worth and ultra high net-worth individuals are retail investors who deploy large sums. The RBI has granted general permission to non-resident Indians, persons of Indian origin and qualified foreign investors to invest directly in Indian companies under the automatic route.

Corporates, in this chapter, means processors, manufacturers, importers and exporters that depend on commodities: their margins move with commodity prices, and they sit in the value chain that carries a commodity from production to consumption.

Proxy advisory firms advise investors on exercising their rights in companies, including recommendations on public offers and on how to vote on agenda items. Investors cannot track every announcement of every investee company or analyse every proposal in depth, so proxy advisers analyse the proposals, judge their effect on investor interests and suggest a vote. Their clients are typically institutional investors.

Take these into the exam

Institutional investors: domestic financial institutions, banks, insurers, mutual funds and foreign portfolio investors. FPIs are foreign entities registered with SEBI; P-notes are issued by registered FPIs to overseas investors who want exposure without registering.
AIFs under the 2012 regulations: Category I (start-ups, SMEs, social ventures, infrastructure; venture and angel funds), Category II (no leverage beyond operations; private equity, real estate, distressed assets), Category III (complex strategies with leverage and derivatives; hedge funds, PIPE funds).
EPF: employer contributes 12% of basic salary and an equal amount is deducted from the employee; EPFO manages it; interest is fixed yearly; employees have no say in allocation. NPS: government-sponsored, buys an annuity at maturity with partial withdrawal allowed.
Retail investors trade for their personal account (HNIs and UHNIs invest large sums; NRIs, PIOs and QFIs may invest under the automatic route). Corporates are commodity users whose margins move with commodity prices. Proxy advisers tell institutional investors how to vote.