What Exactly Is a Foreign Institutional Investor (FII)?
Foreign institutional investors (FIIs) are investors or investment funds outside their registered or headquarters nation. Foreign institutional investors invest in India’s financial markets and are usually referred to as such. The phrase is officially used in China.
Knowing Foreign Institutional Investors
FIIs include hedge funds, insurance firms, pension funds, investment banks, and mutual funds. FIIs may provide cash to emerging economies, but many countries, like India, limit the value of assets and equity shares they can buy, especially in a single firm.1
This reduces the impact of FIIs on firms and financial markets and the harm they may cause if they depart in a crisis.
Foreign Institutional Investors in India
Countries with significant foreign institutional investment volumes are often emerging economies with better development potential than mature economies.
India’s high-growth economy and appealing individual companies attract FIIs. To access the Indian market, all FIIs must register with SEBI.
Rules for Investing in Indian Companies
India only allows FIIs to engage in primary and secondary capital markets through its portfolio investment plan. Under this arrangement, FIIs can buy shares and debentures from Indian firms on the public market.
But there are numerous rules. FIIs are typically limited to investing up to 24% of the paid-up capital of the Indian firm receiving the investment. FIIs can support more than 24% with board approval and a specific resolution. FII investments in Indian public-sector banks are limited to 20% of paid-up capital.
The Reserve Bank of India monitors compliance with investment limitations daily by setting cutoff thresholds 2% below the maximum. This allows it to warn the Indian business receiving the investment before buying the last 2%.
Foreign Institutional Investors in China
China attracts foreign investors looking for capital markets with solid development potential. In 2019, China removed the restrictions on foreign institutional investors (FIIs) pertaining to stock and bond investments. We took the decision to attract international investment in response to a stagnating economy while simultaneously engaging in a trade dispute with the United States.
Foreign Institutional Investor (FII) Example
A US mutual fund can buy Indian stock market shares to invest in a high-growth India-listed firm.
This approach also advantages individual U.S. investors who cannot acquire Indian equities directly. So, they may invest in the mutual fund and benefit from significant growth.
The mutual fund, a FII, must fulfill all regulations in the country where it invests. Most countries that support FIIs have severe requirements.
The Difference Between FDI and FII
“FDI” is “foreign direct investment,” generally in a foreign firm. “FII” stands for “foreign institutional investor,” a person or entity that invests in a foreign stock market.
FII companies
Some of the Indian firms that have significant foreign institutional investment (FII) include CarTrade Tech, HDFC, PB Fintech, Axis Bank, Kiri Industries, ITC, ICICI Bank, and Standard Industries.
Benefits of FIIs
FIIs assist economies by bringing in foreign cash, which boosts growth and foreign reserves. FIIs benefit from more variety and international market exposure.
Bottom Line
Some nations call international stock market investors foreign institutional investors (FII). The world usually connects fast-growing economies like India and China with rigorous foreign investment requirements.
To invest, FIIs must follow these nations’ regulations and the securities they can buy. Foreigners can diversify and get exposure to fast-growing economies by entering these areas.
Conclusion
- Global financial markets attract investments from a variety of international institutional investors.
- Institutional investors from other countries include mutual funds, hedge funds, investment banks, and pension funds.
- Several nations place restrictions on the investments made by foreign investors.
