Foreign Institutional Investor (FII)

Apr 16, 2022

Reading time: 4 min

As an emerging economy, India has shown vast potential for growth and investments for foreign investors. So, here we have this article which focuses on the definition, understanding, scope, and regulations of Foreign Institutional Investor (FII) in India with examples.

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What is a Foreign Institutional Investor (FII)?

A Foreign Institutional Investor (FII) is regarded as an investor, investment fund, or asset carrying out investments in a foreign country beyond its origin. This term holds a specific and significant role in India’s economic sphere. These are generally considered large companies and organizations such as banks, insurance companies, mutual fund houses, and others that can invest heavily in the Indian market. Their presence is a moral booster and generates confidence among small, medium, and extensive domestic and foreign investors. At the same time, it increases the cash flow in the market.

Understanding Foreign Institutional Investors (FIIs)

Now that we know what a foreign institutional investor means, let’s look at what is included in the FII. Developing countries usually open all kinds of markets to foreign investors. It helps them to sustain their development by funds inflow.

Gross Income vs. Net Income

However, despite India being a developed country, it has imposed certain restrictions on such investments. Primarily to keep control over these firms and financial markets and ensure the availability of good investment options for domestic investors. The biggest problem with this foreign investment is that if it exceeds a certain level, it could cause a financial crisis once the investment is returned. It can happen at any time, especially if the country where the money is invested is unstable.

Foreign Institutional Investors (FIIs) in India

India remains the most sort after developing country as far as FIIs are concerned. It offers investors more significant growth potential than the most matured economies. Let’s analyze the data of the last few years of the FII investments in India regarding equity, debt, debt-VRR, and hybrid investments. We will find that the overall investments (though declined in specific industries) have been steady.

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In addition, if we analyze the global currency, we will find that Indian Rupee has performed better than the British pound, Japanese yen, and euro. The Indian government has also made favorable changes to the regulations for foreign capital investments. It has also led to the strengthening of Indian markets for Foreign Institutional Investors (FIIs).

Note! A government agency, the Securities and Exchange Board of India (SEBI), controls and assesses investments in India. Registration with SEBI is mandatory for FII.

Investment opportunities in India

We will now dwell upon specific investment opportunities that the Indian Financial Markets provide to FIIs:

First and foremost is the financial market in terms of shares, debentures, bonds, derivatives, etc., which SEBI controls.
FIIs can invest in units such as the Unit Trust of India (UTI) and others. It even opens the option for investment in non-listed units.
The option of diversifying investments into Government Securities and Commercial papers, mainly of purely Indian establishments, corporations, firms, and organizations, is available.
Credit-enhanced bonds and Indian Depository receipts, and Security receipts.
Infrastructure Sector is open for listed and unlisted non-convertible bonds or debentures issued explicitly by Indian companies.
The non-banking financial companies sector also allows the investment of FIIs in non-convertible bonds or debentures. These companies are classified as Infrastructure Finance Companies or IFCs by the Reserve Bank of India.

The list seems vast and endless, but the catch is the limits and the government control through SEBI and the Reserve Bank of India.

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Example of a Foreign Institutional Investor (FII)

The fund management agency or a firm in a foreign country looking for investments in India may find the Infrastructure sector a lucrative business seeing the steady and growing infrastructure development across India. They can invest in this sector through registration with SEBI. The investments can be in equity, bonds, shares, mutual funds, etc., in government and private firms. It allows local investors in the investing country to reap the benefits of investing in Indian markets.

Regulations on investing in Indian companies

The Government of India controls the FIIs in India through two organizations:

The Reserve Bank of India controls the inflow and outflow of funds;
SEBI regulates the financial markets.

The primary and secondary capital markets are open to the FIIs. However, investors can only do this through the portfolio investment scheme, which allows long-term and short-term investments to be invested. The FIIs can thus buy and sell in public market exchanges.

Primary markets vs. Secondary markets

The ceiling for overall investment for FIIs is 24% of the paid-up capital of any Indian company, and it is 10% for NRIs/PIOs. In the case of public sector banks like the State Bank of India, the limit is 20% of the paid-up capital. Suppose the board and the company’s general body allow a particular regulation to pass. The ceiling can be increased to the maximum sectoral cap/statutory top in that case.

Note! The investment regulations are lists enunciated by the Government of India through RBI and SEBI. The FIIs must thoroughly understand these rules before starting to invest.

The bottom line

There are ample opportunities for foreign institutional investors to invest in India. SEBI controls the FII’s investment in Indian markets, being the primary market regulator, and has over 11.000 registered companies on its website. It shows the enormous faith in and the growth potential demonstrated by the Indian markets.

FIIs serve as catalysts and a trigger to encourage investments from all types of investors, enabling the financial market trends to grow under an organized system. However, the financial risks of investments are subject to individual knowledge and understanding of the market. Thus, think wisely before investing your funds.

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