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.

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Foreign Institutional Investor (FII)

Understanding a 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 matches 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.