Foreign Institutional Investors (FII), who can register as FIIs, their role in India, and the latest SEBI regulations, along with their features, advantages, and disadvantages.
20/June/2025 01:34
Share:
Here is a detailed and structured explanation of Foreign Institutional Investors (FII), who can register as FIIs, their role in India, and the latest SEBI regulations, along with their features, advantages, and disadvantages.
---
What is a Foreign Institutional Investor (FII)?
A Foreign Institutional Investor (FII) is an institution or group of investors established outside India that invests in Indian financial markets (such as stocks, bonds, mutual funds).
FIIs include foreign:
Asset Management Companies (AMCs)
Hedge Funds
Insurance Companies
Banks
Pension Funds
Endowment Funds
Sovereign Wealth Funds
FIIs typically invest in listed securities and have short- to medium-term investment horizons.
---
Who Can Be Registered as an FII in India?
Under SEBI (Securities and Exchange Board of India), any of the following foreign entities can register as an FII or FPI (Foreign Portfolio Investor, the new term replacing FII post-2014):
Eligible Entities:
1. Asset Management Companies (AMCs)
2. Investment Trusts
3. Banks and other financial institutions
4. Pension Funds
5. Insurance and Reinsurance Companies
6. University and Endowment Funds
7. Government agencies or sovereign funds
8. Charitable institutions
These entities must register with SEBI and adhere to KYC (Know Your Customer) and compliance norms.
---
FII vs. FDI vs. FPI
Type Meaning Nature Duration Example
FDI Foreign Direct Investment Long-term, control-based Long-term Setting up a factory
FII / FPI Foreign Institutional / Portfolio Investment Market-based, shares/securities Short/medium term Buying shares on NSE
---
FII and India: Importance and Role
Importance:
Provide capital to Indian markets
Increase liquidity in stock exchanges
Help in market development and depth
Bring global best practices and governance norms
Contribution:
Significant contributors to India's stock market boom (especially post-2000)
Major players in sectors like IT, finance, pharma, and energy
Risk:
FII flows are highly sensitive to global interest rates, policies, and crises
Their sudden withdrawal can lead to market crashes
---
New SEBI Regulations on FIIs / FPIs (2023–24 Highlights)
1. Tighter KYC & Disclosure Norms
SEBI has asked high-risk FPIs (Foreign Portfolio Investors) to disclose:
Ultimate Beneficial Owners (UBO)
Geographic source of funds
Aim: Prevent misuse of FPI route for stock manipulation or round-tripping.
2. Classification Based on Risk Category
FPIs are categorized into low, moderate, and high-risk entities.
High-risk FPIs need additional compliance (especially if holding large equity positions in a single company).
3. Threshold-Based Reporting
Any FPI holding over 50% in a single Indian company must provide additional disclosures.
4. FPI Registration Simplification
SEBI allows faster onboarding for low-risk entities (like government funds or regulated banks).
5. Monitoring of High-Risk Jurisdictions
SEBI is monitoring investments from offshore tax havens to prevent illicit flows.
---
Characteristics and Features of FIIs
1. Cross-border investors investing in India from foreign countries
2. Regulated by SEBI and international financial laws
3. Invest primarily in listed shares and debt instruments
4. Can enter and exit quickly, unlike FDI
5. Must follow SEBI’s risk, ownership, and disclosure norms
6. Contribute to market volatility
---
Advantages of FII in India
1. Boosts Liquidity:
Increases daily trading volumes in Indian markets
2. Capital Inflow:
Helps bridge India’s current account and fiscal deficits
3. Improves Market Efficiency:
Professional investors demand better governance, disclosures
4. Strengthens Rupee Value:
Inflow of foreign currency stabilizes exchange rates
5. Promotes Economic Growth:
Channelizes funds into productive enterprises
---
Disadvantages of FII in India
1. Market Volatility:
Sudden FII exit leads to crashes, hurting retail investors
2. Short-Term Focus:
FIIs often chase quick profits and avoid long-term commitments
3. Currency Pressure:
Rapid outflows put pressure on rupee and foreign exchange reserves
4. Possible Manipulation:
Can lead to speculation and stock price manipulation
5. Over-dependence:
Makes Indian markets vulnerable to external shocks and US Fed decisions
---
Conclusion
Foreign Institutional Investors play a crucial role in India's financial ecosystem by bringing capital, professionalism, and global linkages. However, they also bring risks of volatility and external dependency. The SEBI regulations in recent years aim to strike a balance — encouraging genuine investment while tightening control over non-transparent or high-risk funds.
