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What is FII?

31 Oct 2023

The Indian share market is a place of abundance for investors. The investment in stocks has risen by leaps and bounds in the past few years, with domestic investment hitting highs, and a keen investment interest from overseas too. Investors may have chanced upon the acronym, “FII”. What is an FII? Furthermore, what is the implication, if any, that FIIs may have on the Indian markets and the economy in general? It is worthwhile to find out. 

What is an FII?

In the BFSI sector, people come across several acronyms which are used frequently but don’t know what they stand for. “FII” is an acronym that stands for “foreign institutional investor”. Regarding the share market in India, FII is a relevant concept to learn about as this may affect investment and the general condition of markets. Foreign institutional investors or FIIs are any foreign entities that are permitted to invest in the primary and secondary markets in India. They may be NRIs (non-resident Indians) and POIs (persons of Indian origin), or any other foreign companies/bodies. The Reserve Bank of India, the main regulatory financial authority in India, has made it possible for these investors to invest in the Indian economy through the PIS, or the portfolio investment scheme. 

FIIs in the Indian Share Market

As a term, foreign institutional investor relates, usually, to the markets of India and China, where it is used in an official capacity. Nevertheless, an FII is any individual investor or body that invests in a country other than the one in which it is headquartered or registered. Now, if you want to take the query further and ask, “What is an FII in the share market?", you may get different answers. For instance, FIIs may include insurance companies, hedge funds, mutual funds, pension funds and investment banks. Furthermore, any foreign entity may invest in the Indian stock markets either directly, or via an upcoming IPO

In developing economies like India, FIIs are crucial sources of capital. However, India has placed certain restrictions on the total asset value of FIIs and the number of equity shares that any FII may buy. Although this may be seen as a curb on FII investment, it is a good move in a way. Through this, the government limits the influence that FIIs exert on individual companies and the overall financial state of the nation's markets. Predicting that FIIs tend to flee at the first sign of any crisis in the country, this is an action taken to prevent any potential damage this may cause. 

FIIs - Key Takeaways

Now that you know the answer to the question, “What is an FII?”, there are some important aspects of FIIs to take note of. Here are some things to consider: 

  • Emerging economies, like India, have some of the highest volumes of FIIs. These developing economies give FIIs a higher potential for growth than mature economies. This is a main reason why FIIs are primarily found in Indian share markets. 
  • Indian companies offer high potential for growth with cost-effective operational management and the maximization of profits. FIIs find Indian companies attractive to invest in. 
  • Every FII has to mandatorily register with SEBI, or the Securities and Exchange Board of India, to guarantee participation in the Indian stock market
  • By bringing foreign capital into developing countries like India, FIIs make Indian businesses stronger. 

What is an FII in the share market? An Example

An example will probably help you to grasp the concept of an FII better. Let’s assume that a US-based mutual fund sees an investment opportunity with high potential growth in a company listed in India. The mutual fund may take a long position and purchase shares in the Indian stock market. Such an arrangement has advantages for private investors in the US as they may not be permitted to buy stocks from India directly. Investing in a mutual fund that has Indian stocks may be a way to partake in the high growth opportunity in an Indian company. 

Regulations to be Aware Of

The Reserve Bank of India has made it crystal clear that FIIs can only invest in the Indian markets through its portfolio investment scheme. The scheme permits FIIs to buy debentures and stocks of companies in India via the country’s exchanges. In other regulations laid out by the Reserve Bank of India, FIIs are restricted to a maximum amount of investment of 24% of an Indian company’s paid-up capital. Nonetheless, this investment can be increased if the board of the said company approves it. Furthermore, there is a ceiling of FII investment in Indian public sector banks (like the State Bank of India, for instance) of 20% of the paid-up capital of the bank. 

Growth with FIIs

When FIIs invest in Indian companies, they do so after long periods of monitoring and research into the company’s credentials and growth prospects. This could be a good indicator for Indian investors to invest in such companies, as FIIs give the company a degree of credibility by way of their investment.

 

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