Capital markets play an important role in creating wealth. Millions of small investors use capital markets to save money and to accumulate funds to reach their life goals. Contrary to popular belief, capital markets don't just attract domestic money. Foreign investors invest billions of dollars each year in Indian capital markets. India's economy is influenced by foreign capital. Foreign capital is important for stabilizing the exchange rate, and it also helps to develop countries with less resources. Each country categorizes capital from foreign countries based on its role.
There are many types of foreign investment. Foreign investors are classified by governments for better oversight and regulation. Foreign investment can be divided into two categories: Foreign Direct Investment (FDI), and Foreign Institutional Investors (FII). FII can be defined as any institution that is incorporated in a foreign country and proposes to invest Indian securities. FIIs can invest in initial public offerings and securities already traded on the exchanges. There is a distinction between FDI (foreign direct investment) and FII (foreign direct investment). The classification of foreign investment is determined by the ownership percentage of a company. As per the internationally-accepted definition, an investment that leads to over 10% ownership of common shares or voting rights is called as FDI. Indian FIIs can invest up to 10% of a company's paid capital. Schedule 1 and 2 of Regulations 2000 on Foreign Exchange Management (Transfer of Security by a Person Resident Outside India) clarify the distinction between FDI or FII.
A new category of Foreign Portfolio Investor (FPI), which was created by recent government changes, has replaced the FII category. The SEBI (Foreign portfolio Investors) Regulations 2014 merged the three existing investor classes, FIIs, Qualified Foreign Investors, and Sub Accounts to create the FPI category. After all systems and procedures had been put in place, the FPI regime was created on June 1. FPIs are treated similarly to FIIs in tax. FPI and FII can be interchangeably, even though they no longer exist.
There are many types of FIIs in India. There are many foreign institutions that can be classified as FIIs India. Here's a list listing Indian institutions that invest in India.
- Pension funds
- Investment trusts
- Sovereign Wealth Funds
Asset Management Company
- Insurance/Reinsurance Companies
- Foreign Central Banks
- Foreign Government Agencies
- University Funds
- Charitable Trusts
Foreign investors can also invest in Indian markets through sub-accounts with FIIs. There are many types of FIIs. However, the government simplified the process to allow FIIs easier access to Indian financial markets. FIIS must register with the Securities and Exchange Board of India and make investments through a registered broker and a recognized stock exchange to invest in Indian securities. Foreign institutional investors of different types can invest in convertible debentures or shares through private placements or offers for sale. Offshore derivative instruments can also be issued by FIIs to foreign entities that are regulated by a foreign regulatory agency. Sub-accounts/FIIs must appoint an Indian custodian. The securities are held in the custody of the domestic custodian. The markets regulator registers and monitors the local custodian. Subaccounts and FIIs must ensure that the local custodian monitors their investments and reports on all transactions at regular intervals.
FIIs increase capital market efficiency and stimulate the capital markets. Different types of FIIs are catalysts for domestic markets and draw capital from other investors. FIIs prefer equity to debt. This helps maintain and improve the capital structures of domestic businesses. FIIs that are incorporated in India bring best practices and financial innovations to Indian markets. Although FIIs are beneficial to the domestic market and companies, they can also lead to increased volatility if there is not proper regulation and monitoring.