Loading the player...

What is a 'Foreign Institutional Investor - FII'

A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India and refers to outside companies investing in the financial markets of India.

BREAKING DOWN 'Foreign Institutional Investor - FII'

A foreign institutional investor (FII) is any type of large investor who does business in a country other than the one in which the investment instrument is being purchased. In addition to the types of investors above, others include banks, large corporate buyers or representatives of large institutions. All FIIs take a position in a foreign financial market on behalf of the home country in which they are registered.

Foreign Institutional Investors (FII) in India

Countries with the highest volume of foreign institutional investments are those that have developing economies. These types of economies provide investors with higher growth potential than in mature economies. This is why these investors are most commonly found in India, all of which must register with the Securities and Exchange Board of India to participate in the market.

Example of a Foreign Institutional Investor (FII)

If, for example, a mutual fund in the United States sees an investment opportunity in an Indian-based company, it can purchase the equity on the Indian public exchange and take a long position in a high-growth stock. This also benefits domestic private investors who may not be able to register with the Securities and Exchange Board of India. Instead, they can invest in the mutual fund and take part in the high growth potential.

Regulations for Investing in Indian Companies

All FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme (PIS). This scheme allows FIIs to purchase shares and debentures of Indian companies on the normal public exchanges in India.

However, there are many regulations included in the scheme. There is a ceiling for all FIIs that states the max investment amount can only be 24% of the paid-up capital of the Indian company receiving the investment. The max investment can be increased above 24% through board approval and the passing of a special resolution. The ceiling is reduced to 20% of the paid-up capital for investments in public sector banks.

The Reserve Bank of India monitors daily compliance with these ceilings for all foreign institutional investments. It checks compliance by implementing cutoff points 2% below the max investment amounts. This gives it a chance to caution the Indian company receiving the investment before allowing the final 2% to be invested.

Foreign Institutional Investors in China

While the United States is the biggest destination for foreign direct investment, China is a popular favorite, and it has eased its restrictions in the past several years. In 2016, the country's State Administration of Foreign Exchange gave renminbi qualified foreign institutional investors requirements that the size of their investments match a certain percentage of the assets, with the exception of foreign sovereign funds, monetary authors and central banks. Some investments could exceed the limited size if they obtained approval. 

Prior to the changes, the foreign institutional investors were required to gain approval from the regulatory agency to buy any quota of stocks and bonds. The agency also gave the quotas only on an individual basis. Initially, around 20 countries received quotas to be renminbi qualified institutional investors. 

RELATED TERMS
  1. Participatory Notes

    Participatory notes are financial instruments required by investors ...
  2. Foreign Fund

    A foreign fund is a fund that invests in companies outside the ...
  3. Direct Investment

    A direct investment is the purchase or acquisition of a controlling ...
  4. Institutional Investor

    An institutional investor is a nonbank person or organization ...
  5. Qualified Foreign Institutional ...

    The Qualified Foreign Institutional Investor (QFII) program permits ...
  6. Foreign Earned Income Exclusion

    The foreign earned income exclusion excludes income earned and ...
Related Articles
  1. Investing

    An Introduction to the Indian Stock Market

    Emerging markets like India are fast becoming engines for future growth. Find out how to get in on the ground floor.
  2. Investing

    Bombay Stock Exchange CEO Ashish Chauhan on India Rising

    India's largest stock exchange is hitting its stride. We talk with CEO Ashish Chauhan in New York.
  3. Investing

    Will India Replace China As A Destination For Foreign Capital?

    For 2016, emerging market investors may have to look beyond China to its neighbor India.
  4. Small Business

    The Funds Keep Flowing Into Indian Tech Startups

    Investors are increasingly turning their attention to Indian tech startup companies. Billions of dollars are flowing into the startup sector in India.
  5. Investing

    Top 4 Mutual Funds With Exposure to India

    Discover four mutual funds that invest in India and how these emerging market portfolios are poised to take advantage of rapid growth in the nation's economy.
  6. Insights

    Ever Wanted to Own International Stocks? Here's How

    Tips and strategies for users to trade in different exchanges around the world.
  7. Retirement

    Going Back to India to Retire: A How-to Guide

    If your family hails from this land of vibrant culture and ancient traditions, retiring in India may be an ideal choice, provided you plan for it.
  8. Investing

    Playing It Safe in Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.
  9. Financial Advisor

    Indian Temp Workers are Basically Paying for Your Retirement

    H-1B workers in the U.S. pay social security taxes but see none of the benefits. The American government basically told India to just deal with it.
  10. Insights

    3 Economic Challenges for India in 2019

    India's economy is constrained by ingrained problems that will persist despite government investment in the nation's infrastructure.
RELATED FAQS
  1. What are the advantages of foreign portfolio investment?

    Foreign portfolio investment gives investors an opportunity to engage in the international diversification of portfolio assets. Read Answer >>
  2. Who decides when to print money in India?

    Find out the role of the Reserve Bank of India (RBI), and the amount of authority given to the government to issue currency ... Read Answer >>
  3. What Does a Negative Balance in the Capital Account Mean?

    Understand what a country's capital account represents and the significance of a negative, or deficit, balance in the capital ... Read Answer >>
Trading Center