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Meaning of 'Foreign Institutional Investor - FII'

The term is used most commonly in India to refer to outside companies investing in the financial markets of India.  International institutional investors must register with the Securities and Exchange Board of India to participate in the market. FIIs are allowed to subscribe to new securities or trade in already issued securities.

History of FII  in India

India opened its stock market for foreign investors in September 1992, and In 1993 for receiving portfolio investment from foreigners in the form of foreign institutional investment (FII) in equities.    

The major source (almost 50%) of money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes called Offshore Derivatives. They are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. Over a period of time, Indian companies performances have improved accordingly FIIs confidence is build up which leads to FII with value of $ 10 billion in 2010.

Who can get registered as  FIIs

Following foreign entities / funds are eligible to get registered as FII:

  1. Pension Funds
  2. Mutual Funds
  3. Investment Trusts
  4. Banks
  5. Insurance Companies / Reinsurance Company
  6. Foreign Central Banks
  7. Foreign Governmental Agencies
  8. Sovereign Wealth Funds
  9. International/ Multilateral organization/ agency
  10. University Funds (Serving public interests)
  11. Endowments (Serving public interests)
  12. Foundations (Serving public interests)
  13. Charitable Trusts / Charitable Societies (Serving public interests)

How Indian Economy is impacted with FII

Over the past ten years, foreign investment has grown at a significantly more rapid pace than either international trade or world economic production generally. FIIs has both Positive and negative impacts on India as below :-

Positive Impact :-

Negative Impact :-

  1. Enhanced Flow Of Equity Capital :-  FII can help in increasing growth of rate of investment , development projects like building economic and social infrastructure, as well as boosts the production, employment and income of the host country.
  2. Managing Uncertainty And Controlling Risk :- FIIs promote financial innovation and development of hedging  instruments. FIIs not only   enhance competition in financial   markets, but also improve the alignment of   asset prices to fundamental which helps  to stabilizing markets.
  3. Improved Corporate Governance :- Good corporate governance is essential to overcome the principal-agent   problem between shareholders and management.  FIIs constitute   professional bodies of asset managers and financial analysts, who, by   contributing to better understanding of firms‘ operations, improve corporate  governance.
  1. Potential Capital Outflows :-  FII funds controlled by investors either inflow or outflow from the market as apprehension of funds or shortage of funds from the market.
  2. Inflation :- Huge amounts of FII fund inflow into the country creates a lot of demand for   rupee, and the RBI pumps the amount of Rupee in the market as a result of   demand created. This situation leads to excess liquidity thereby leading to   inflation where too much money chases too few goods.
  3. Adverse Impact On Exports
    FII flows leading to appreciation of the currency may lead to the exports   industry becoming uncompetitive due to the appreciation of the rupee.

E.How does  government taking initiatives to promote FII in India?

Economies like India, which offer immense growth potential, are emerging as favorite investment destinations for foreign institutional investors (FIIs). India continues to be a preferred market for foreign investors.

RBI Relaxation :-       

The RBI has hiked the FIIs’ sub-limit in government bonds by US$ 5 billion, after the US$ 20 billion limit was nearly exhausted with stabilize yields. The RBI has allowed foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs) to invest up to 26 per cent in insurance and related activities via the automatic route. "Effective from February 4, 2014, The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India.

Taxation Relaxation :-

Foreign institutional investors (FIIs) from countries with which India has double taxation avoidance agreements (DTAAs) that specifically exempt them from capital gains tax escape minimum alternate tax (MAT) otherwise normal provisions for taxation will be applicable.

How global markets are influenced by foreign investments?

Foreign investments contribute significantly for every country’s economic growth and prosperity. However developing countries are more associated with FIIs for enhancement and improved  economic growth due to the influx of capital and increased tax revenues for the country. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Furthermore, foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources The local population may benefit from the employment opportunities created by new businesses .


Level of investment


34.7% market share of FDI into Asia pacific region.


43% market share of FDI into Asia pacific region.

United States

United States has a fundamentally "open economy" and low barriers to FDI,

84% of FDI in the United States in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada

United Kingdom

the United Kingdom is the eleventh largest recipient of direct foreign investment (FDI) in the world and the 17th largest investor.


Published by

CA Barkha Bhasin
(Chartered Accountant)
Category Professional Resource   Report

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