FOREIGN INSTITUTIONAL INVESTMENT
What is FII?
Foreign institutional investors (FIIs) are those institutional investors which invest in the assets belonging to a different country other than that where these organizations are based.
Understanding Foreign Institutional Investors
- In India, FII is used for overseas entities that invest in the Indian financial markets. FIIs play a significant role in any economy. They are typically big companies and organisations such as banks, mutual fund houses, and other such entities that invest massive sums of money in the Indian investment market. The presence of FIIs in a stock market, and the securities they purchase, help the markets move upward. As such, they can strongly influence the total cash inflow coming into an economy.
- These investors usually include hedge funds, mutual funds, insurance companies and investment banks among others. FIIs generally hold equity positions in foreign financial markets. Due to this, the companies invested in by FIIs generally have improved capital structures due to healthy inflow of funds. Thus, FIIs facilitate financial innovation and growth in capital markets.
- The entry of an FII can cause a drastic swing in domestic financial markets. It increases demand for local currency and directs inflation. Therefore, there are restrictions put by the managing authority of a country on how much stake FIIs can hold in the domestic company. This ensures that the FII’s influence on the company is limited, so as to avoid exploitation.
Factors to Consider
- Foreign Direct Investments (FDI) are a part of the investment made by Foreign Institutional Investors. However, not every FII will make an FDI in the country it is investing in.
- FIIs directly impact the stock/securities market of the country, its exchange rate and inflation.
- FIIs can invest in listed, unlisted, and to-be-listed companies on the stock markets, in both the primary and secondary markets.
- FDIs are more intentional, while FIIs are more concerned with transfer of funds and looking for capital gains in a prospective company.
- In India, FIIs tend to invest via Portfolio Investment Scheme (PIS) after registering with Securities and Exchange Board of India (SEBI).
- Foreign Institutional Investors choose to invest in developing countries because they provide greater growth potential, due to the emerging economies.
- Sometimes, FIIs invest in the securities for a short period of time. This is helpful for liquidity in the market, but they also cause instability in flow of money.
Where can foreign institutional investors invest in India?
- Asset Management Companies
- Foreign Mutual Funds
- Hedge Funds
- Insurance Companies
- Investment Banks
- Pension Funds
- Sovereign Wealth Funds
- Treasury Funds
- Trusts – Private and Public
- University Funds
Advantages of FII’s
- FII’s will enhance the flow of capital into the country
- These investors generally prefer equity over debt. So this will also help maintain and even improve the capital structures of the companies they are investing in.
- They have a positive effect on the competition in the financial markets
- FII help with the financial innovation of capital markets
- These institutions are professionally managed by asset managers and analysts. They generally improve the capital markets of the country.
Disadvantages of FII’s
- The demand for the local currency (rupee) increases. This can cause severe inflation in the economy.
- These FII’s drive the fortune of big companies in which they invest. But their buying and selling of securities have a huge impact on the stock market. The smaller companies are taken along for the ride.
- Sometimes these FII’s seek only short-term returns. When they pull their investments banks can face a shortage of funds.