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What Is Foreign Institutional Investment?

Foreign institutional investment (FII) refers to the investment made by a country’s citizen in the fiscal resources and manufacturing process of some other nation i.e. to invest in the assets belonging to a different country other than that where these organizations are based. A foreign institutional investor is an investor investing in a country outside of the one in which it is registered or headquartered. The term foreign institutional investor is most commonly used in India, where it refers to outside entities investing in the nation’s financial markets. Foreign investment helps enhance the country’s growth in the output of labour, machinery, etc.

Foreign investment is of two types:

  • Direct investment (FDI)
  • Portfolio investment (FPI)

A foreign direct investment (FDI) is a venture in the form of a proprietorship business in a nation by a body in other nations. It is different from a foreign portfolio investment by a notion of direct control.

A portfolio investment (FPI) is the Proprietorship of a stock, bond, or some other form of the economic asset, expecting that it will either make a profit or its worth would increase with time. In some instances, it is not only making a profit, but it’s worth is also enriched with time.

Difference between FDI and FII:

Foreign Direct Investment

  • Usually, investment is for an extended period
  • Investment in physical assets
  • Its goal is to enhance efficiency or enterprise capability or change administration mechanism.
  • Its goal is to enhance monetary recourses.
  • It expedites the technology transfer, approach to markets, and administration inputs.
  • It flows into the primary or main market
  • It is hard to enter and exit
  • It is appropriate for the company’s gain
  • It directly affects the employment of labor and their wages.

Foreign Institutional Investment

  • Usually, investment is for a short period.
  • Investment in financial assets.
  • Its goal is to enhance monetary recourses.
  • It helps in the monetary influx.
  • It flows into the secondary market.
  • It is easier to enter and exit in comparison to FDI.
  • It is appropriate for monetary profit.
  • It does not directly impact the employment of labor or wages.

A registration application is made in form A to apply for FII under the format given in SEBI (FII) Regulations, 1995.

To qualify for a grant of registration, the FII needs to fulfill certain conditions:

  • Applicants should be “fit and proper.”
  • He ought to have documentation, specialized competency, economic reliability, proficiency, general repute of sprite, and honesty.
  • He ought to be controlled by a proper foreign regulatory authority in the equivalent competence where registration is sought from SEBI.
  • Permission is needed from the Reserved Bank of India under the provisions of the Foreign Exchange Management Act,1999.
  • He should be lawfully allowable to finance in securities which are beyond their nation’s territory.
  • He needs to assign a native guardian after making a formal agreement.
  • He shall appoint a bank to direct its businesses.

Significant features of FIIs:

  • Venture in all securities traded on the principal and other minor sells is permissible.
  • To enter market applicant companies, prior registration is compulsory with SEBI.
  • For registration, allied and ancillary companies are referred to as two distinct FII.
  • Registration is valid for five years, and then it can be renewed for another five years.
  • FII shall have registration from the securities commission in the country they reside in.

Main areas touched by FII:

  • Stock market
  • Exchange rate
  • Exports and imports
  • Inflation

Benefits of FII investment:

  • Improve the flow of equity capital.
  • Improves corporate authority.
  • Manage uncertainty and control threats.
  • Reduces the rate of equity capital.
  • Communicating stability of India’s BOP (balance of international payments)
  • Helps in gaining Information.
  • Enhance market productivity

Shortcomings of FII investment:

  • Instability and money outflow
  • Possibility of price rigging
  • Possibility of market herding and positive feedback trading.
  • BOP vulnerability
  • There is a risk of backdoor control.
  • Possibility of money laundering
  • Possibility of inflation

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