Foreign institutional investors play a very important role in any economy . An FII is typically an investor, an investment fund or an asset which invests in a foreign country outside of the one where it is headquartered or registered.
Foreign institutional investments are generally made in developing economies since they provide higher growth potential to the investors
In India, FII refers to big companies and organisations such as banks, mutual fund houses and other such entities that invest in the Indian financial markets.
These investors can invest in the Indian market after registering with the Securities & Exchange Board of India.
REGULATIONS FOR FOREIGN INSTITUTIONAL INVESTORS IN INDIA
FIIs are allowed to invest in India’s primary and secondary capital markets only through the country’s portfolio investment scheme (PII) which allow these investors to purchase shares and debentures of Indian companies on the normal public exchanges in India.
FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment.
This limit of 24% can be extended if the investment is approved by the company’s board and a special resolution is passed.
ADVANTAGES OF FOREIGN INSTITUTIONAL INVESTORS
- FII’s enhance the flow of capital into the country.
- They also help in the financial innovation of capital markets.
- These institutions are professionally managed by asset managers and analysts who can improve the capital markets of the country.
- Foreign investments boost the production, employment and income of the country.
DISADVANTAGES OF FOREIGN INSTITUTIONAL INVESTORS
- FII can cause severe inflation in the economy since it increases the demand for the local rupee.
- If the investors seek investments only for short term returns it may result in shortage of funds when they pull their investments back.
- Although FII enhances the flow of capital but it doesn’t have any significant effect on the economic growth of a country.
Thus, in simple words FII refers to an entity established or incorporated outside India which proposes to make investment in India & is registered in accordance with the SEBI regulations 1995.