Introduction to Foreign Institutional Investors (FII)
Foreign Institutional Investors is an institutional, individual or group entity seeking to invest in the economy of a country other than where the entity is headquartered. FIIs are important to emerging economies because they bring funds and capital to businesses in developing countries.
Understanding Foreign Institutional Investors
- 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.
