Must Knows

What are foreign institutional investors?

[] FIIS are created outside of India to make investment proposals in India.

FII full form is foreign institutional investors. They are organisations that are created or incorporated outside of India that make investment proposals in India. These offers are primarily submitted on behalf of sub-accounts by foreign institutional investors, which could include foreign corporations, persons, funds, and so on. 

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The Reserve Bank of India (RBI) has registered banks that are authorised to interact with FII in order to operate as bankers to them. The most common way for FIIs to invest is via granting of participatory notes (p- notes), often known as offshore derivatives.

FIIs in India 

Nations with developing economies have the largest volume of foreign institutional investment. These countries offer investors greater potential for growth than developed economies.  All FIIs are required to register with the Securities and Exchange Board of India (SEBI) in order to participate in the market.

Where can FIIs invest in India? 

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Here is a list of investment options open to FIIs looking to invest in India. 

  1. Securities traded on the primary and secondary markets, such as shares, debentures, or company warrants. 
  1. Units of programmes offered by domestic fund institutions, such as the Unit Trust of India. Whether or not unit schemes are registered on recognised stock markets, FIIs can invest in them. 
  1. Scheme units offered by collective investment schemes.
  1. Derivatives traded on reputable stock exchanges.
  1. Scheduled government securities and business papers issued by Indian companies, enterprises, organisations, or firms.
  1. Rupee-denominated credit-enhanced bonds. 
  1. Depository receipts and security receipts in India.
  1. Non-convertible bonds or debentures released by infrastructure corporations in India, both listed and unlisted. The phrase ‘infrastructure’ refers to the rules of the External Commercial Borrowings, or ECB.  
  1. Non-convertible bonds or debentures provided by enterprises in the NBFC (Non-Banking Financial Companies) market. These companies are classified as Infrastructure Finance Companies (IFCs) by the RBI. 
  1. Rupee-denominated bonds issued by infrastructure debt funds.

Effect of FIIs on Indian economy

Foreign investments are growing at a quick pace and have equally positive and negative consequences: 

Advantages Disadvantages
Increased flow of equity capital

FII can assist in boosting the rate of investment, development projects such as the construction of industrial and social infrastructure, as well as improving the host country’s manufacturing, employment, and revenue. 

Prospective capital outflows

FII resources managed by shareholders either inflow or outflow from the marketplace as a result of fund fear or a lack of funds in the market. 

Controlling uncertainty and risk

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 FIIs encourage financial development and the creation of hedging tools. FIIs not only create competition in financial markets, but they also strengthen asset price alignment to fundamentals, which helps to stabilise markets.


FII capital inflows into the country produce a lot of demand for the currency, and the RBI increases the amount of rupee in the economy as a consequence of the demand created. This condition results in excess liquidity, which causes inflation since too much cash chases too few things. 

Better corporate governance

To solve the principal-agent dilemma between shareholders and management, strong corporate governance is required. FIIs are professional organisations of asset managers and financial experts who strengthen corporate governance by giving a better knowledge of firms’ operations. 

Harmful impact on exports

FII flows resulting in currency appreciation may cause the exports industry to become uncompetitive as a result of the rupee’s rise.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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