Foreign Institutional Investors (FII) And Their Importance For Foreign Investors And Developing Economies

Foreign institutional investor is a term used to denote any large investor or investment vehicle based another country.

What are foreign Institutional investors?

The term foreign Institutional investor is most notably used in India to describe large corporations investing in the country’s financial markets.

Some of the most common types of institutions engaging in this type of investing activity are pension funds, mutual funds, hedge funds, investment banks, insurance companies, asset managers, investment trusts, and sovereign wealth funds.

Some of the rise in popularity of the foreign Institutional investors should perhaps be attributed to the current global economic environment, which is broadly characterized by sluggish growth in most developed markets.

This has prompted many financial institutions to look for more attractive investing opportunities in economies with high growth potential, typically found in countries which form part of the developing world.

Benefits for foreign Institutional investors and local companies

Private investors residing in the United States will most likely not be allowed to directly invest in Indian listed companies with promising growth profiles. They can, however, buy shares in a US-based mutual fund with a mandate to invest in foreign developing markets, including India.

As long as the fund meets certain requirements, discussed below, it will be able to take equity positions on companies listed in the National Stock Exchange of India (NSE), or even take part in a local debt offering.

That way, US-based private investors can participate in the higher growth potential of public companies based in India, albeit in an indirect way.

At the same time, this type of investment from abroad will obviously benefit the local players too. In the case of equity investment, the increased demand will boost the price for the company’s share price, and increase the trading volumes in the local stock exchange.

With a debt investment, the local company will enjoy wider access to the capital it seeks to realize its future expansion plans.

Foreign Institutional investors regulations and limits

Naturally, for an foreign Institutional investor to be allowed to invest in a foreign market, it must meet certain requirements, abide by local rules and regulations, and stay within some set investing limits.

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For the case of the Indian market, an foreign Institutional investor must first and foremost register with the Securities and Exchange Board of India (SEBI), the country’s financial markets regulator. The regulations governing all foreign investments in India have been set by the Reserve Bank of India (RBI), the country’s central bank, since 1999.

In line with these, market regulator SEBI has been registering foreign Institutional investor since 2003, and currently monitors more than 1500.

foreign Institutional investors registered with SEBI are able to invest and trade in Indian public companies through a registered local broker, in either the primary or the secondary market. They can also issue offshore derivative instruments (ODIs) on these.

There is a ceiling for the maximum amount of investment allowable by an foreign Institutional investor in a local Indian company. At present, this is set at 24% of the local company’s paid-up capital, unless the latter is a public sector bank, in which case the limit is slightly lower, at 20%.

These percentages can sometimes be increased, but that requires the passing of special resolution by the company’s board of directors. To ensure compliance with these limits, positions on local companies by foreign Institutional investors are monitored on a daily basis by the RBI.

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