Foreign Institutional Investor (FII) Share 

Foreign Institutional Investor (FII) means an institution established or incorporated outside India which

proposes to make investment in securities in India. They are registered as FIIs in accordance withSection 2

(f) of the SEBI (FII) Regulations 1995. FIIs are allowed to subscribe to new securities or trade in already

issued securities. This is just one form of foreign investments in India, as may be seen here:

However, FII as a category does not exist now. It was decided to create a new investor class

called "Foreign Portfolio Investor" (FPI) by merging the existing three investor classes viz. FIIs, Sub

Accounts and Qualified Foreign Investors. Accordingly, SEBI (Foreign Portfolio Investors) Regulations,

2014 were notified on January 07, 2014 followed by certain other enabling notifications by Ministry of

Finance and RBI. In order to ensure the seamless transition from FII regime to FPI regime, it was decided

to commence the FPI regime with effect from June 1, 2014 so that the requisites systems and procedures

are in place before migration to the new FPI regime.

With the new FPI regime, which has commenced from 1 June 2014, it has now been decided to dispense

with the mandatory requirement of direct registration with SEBI and a risk based verification approach has

been adopted to smoothen the entry of foreign investors into the Indian securities market.

FPIs have been made equivalent to FIIs from the tax perspective, vide central government notification

dated 22nd January 2014.

FII Vs FDI: International standards and Indian definition

According to IMF and OECD definitions, the acquisition of at least ten percent of the ordinary shares or

voting power in a public or private enterprise by non-resident investors makes it eligible to be categorized

as foreign direct investment (FDI). (see OECD benchmark definition) In India, a particular FII is allowed to

invest upto 10% of the paid up capital of a company, which implies that any investment above 10% will be

construed as FDI, though officially such a definition does not exist. However, it may be noted that there is

no minimum amount of capital to be brought in by the foreign direct investor to get the same categorised as

FDI.

Given this backdrop, in the Union Budget 2013-14, announced on 28 February 2013, vide para 95,

Honourable FM announced his intention to go by the internationally accepted definition for FIIs and FDIs,

as stated below:

"In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is

Foreign Institutional Investment (FII), it is proposed to follow the international practice and lay down a

broad principle that, where an investor has a stake of 10 percent or less in a company, it will be treated as

FII and, where an investor has a stake of more than 10 percent, it will be treated as FDI. A committee will

be constituted to examine the application of the principle and to work out the details expeditiously."

Meanwhile, to rationalize/harmonize various foreign portfolio investment windows and to simplify

procedures, SEBI had formed a “Committee on Rationalization of Investment Routes and Monitoring of

Foreign Portfolio Investments” under the chairmanship of Shri K. M. Chandrasekhar, former Cabinet

Secretary. The Committee submitted its report on June 12, 2013.

In accordance with the budget announcement, a committee has been constituted under the chairmanship

of Secy (DEA), to examine and work out the details of the application of the principle followed

internationally for defining FDI and FII. The committee submitted its report in June 2014.

In India, FDI and FII are defined in Schedule 1 and 2 respectively of the Foreign Exchange Management

(Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000. (Original notification

is available at http://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174 Subsequent amendment

notifications are available at http://rbi.org.in/Scripts/BS_FemaNotifications.aspx)

Myths about FIIs

There are certain myths / beliefs about FIIs which are not necessarily true.

Myth -1:- FIIs do not invest in unlisted entities. They participate only through stock exchanges

Myth -2:- FIIs cannot invest at the time of initial allotment. Foreign investors investing in initial allotment of

shares (say IPOs or when a group of entities come together to float a company) are categorized as FDIs

Truth on 1 and 2:- As per Section 15 (1) (a) of the SEBI FII Regulations, 1995, a Foreign Institutional

Investor (FII) may invest in the securities in the primary and secondary markets including shares,

debentures and warrants of companies unlisted, listed or to be listed on a recognized stock exchange in

India. In fact FIIs are very active in the over the counter (OTC) markets and in the IPO market in India.

Myth 3:- FDI has more direct involvement in technology, management etc while FIIs are interested in

capital gain and momentary price differences. Generally direct investment involves a lasting interest in the

management of an enterprise and includes reinvestment of profits. In contrast, FIIs do not generally

influence the management of the enterprise.

Truth on 3:- To some extant this notion is true and is emphasized in policy documents. For instance,

consolidated FDI Policy of Department of Industrial Policy and Promotion (DIPP) states that “foreign Direct

Investment, as distinguished from portfolio investment (FII), has the connotation of establishing a ‘lasting

interest’ in an enterprise that is resident in an economy other than that of the investor”.

However, of late, there have been occasions where FIIs come together to influence decisions in companies

where they hold shares. The difference between FDI and FII, except for the fact that the latter necessarily

has to be an institution (FDI can come from an individual also), rather lies in the registration or approval

process and to some extent in the individual investment limits or lock-in conditions specified for each

category.

Globally also, the acquisition of at least ten percent of the ordinary shares or voting power in a public or

private enterprise by non-resident investors makes it eligible to be categorized as FDI, rather than the

purpose of the investments, as intimated or stated by the investing foreigner due to difficulty in assessing it

and also for statistical consistency.

Regulation of FIIs

The regulations for foreign investment in India have been framed by the Reserve Bank of India in terms of

Sections 6 and 47 of the Foreign Exchange Management Act, 1999 and notified vide Notification No. FEMA

20/ 2000-RB dated 3rd May 2000 viz. Foreign Exchange Management (Transfer or issue of Security by a

person Resident outside India) Regulations 2000, as amended from time to time. In line with the said

regulations, since 2003, the Securities and Exchange Board of India (SEBI) has been registering FIIs and

monitoring investments made by them through the portfolio investment route under the SEBI (FII)

regulations 1995. SEBI acts as the nodal point in the registration of FIIs.

Who can get registered as FII?

Following foreign entities / funds are eligible to get registered as FII:

1. Pension Funds

2. Mutual Funds

3. Investment Trusts

4. Banks

5. Insurance Companies / Reinsurance Company

6. Foreign Central Banks

7. Foreign Governmental Agencies

8. Sovereign Wealth Funds

9. International/ Multilateral organization/ agency

10. University Funds (Serving public interests)

11. Endowments (Serving public interests)

12. Foundations (Serving public interests)

13. Charitable Trusts / Charitable Societies (Serving public interests)

Thus it may be seen that sovereign wealth funds (SWFs) are also regulated under FII regulations only,

and no separate regulation exists for SWFs. Further, following entities proposing to invest on behalf

of broad based funds, are also eligible to be registered as FIIs:

1. Asset Management Companies

2. Investment Manager/Advisor

3. Institutional Portfolio Managers

4. Trustee of a Trust

5. Bank

Foreign individuals can register as sub-accounts of FII to make investments in Indian securities.

What FIIs can do?

A Foreign Institutional Investor may invest only in the following:-

i. securities in the primary and secondary markets including shares, debentures and warrants of

companies unlisted, listed or to be listed on a recognised stock exchange in India; and

ii. units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on

a recognised stock exchange or not

iii. units of scheme floated by a collective investment scheme

iv. dated Government Securities

v. derivatives traded on a recognised stock exchange

vi. commercial paper

vii. Security receipts

viii. Indian Depository Receipt

FIIs are allowed to trade in all exchange traded derivative contracts subject to the position limits as

prescribed by SEBI from time to time. Clearing Corporation monitors the open positions of the FII/ sub-

accounts of the FII for each underlying security and index, against the position limits, at the end of each

trading day.

How do they invest?

A SEBI registered FII (as per Schedules 2 of Foreign Exchange Management (Transfer or Issue of Security

by a Person Resident Outside India) Regulations 2000) can invest/trade through a registered broker in the

capital of Indian Companies on recognised Indian Stock Exchanges. FIIs can purchase shares / convertible

debentures either through private placement or through offer for sale.

An FII can also invest in India on behalf of a sub-account (means any person outside India on whose

behalf investments are proposed to be made in India by a FII) which is registered as a sub-account under

Section 2 (k) of the SEBI (FII) Regulations, 1995.

Also, an FII can issue off-shore derivative instruments (ODIs) to persons who are regulated by an

appropriate foreign regulatory authority and after compliance with Know Your Client (KYC) norms.

Every FII/sub-account is required to appoint a domestic Indian custodian to hold in custody its Indian

securities. Custodian of Securities is a registered and regulated entity by SEBI. The FII/sub-account is also

required to ensure that the domestic custodian it has appointed monitors the investments made by it in

India, reports its transactions in securities to SEBI on a daily basis and preserve records of transactions for

a specified period. The FII/sub-account is also required to suitably enable the custodian to furnish reports

pertaining to its activities, to SEBI, as and when required by SEBI.

Authorized dealer banks (i.e. the bank which is authorized by RBI to deal in foreign currency) can offer

forward cover (i.e, to minimize the impact of currency fluctuations, banks offer them the option to sell /

purchase foreign currency on a fixed future date at a rate specified today) to FIIs to the extent of total

inward remittances of liquidated investments.

FII investment limits

Investment by individual FIIs/ sub-accounts (excluding foreign corporates and individuals) cannot exceed

10 per cent of paid up capital of a company. Investment by foreign corporates or individuals registered as

sub accounts of FII cannot exceed 5 per cent of paid up capital. All FIIs and their sub-accounts taken

together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. An Indian

Company can raise the 24 per cent ceiling to the Sectoral Cap / Statutory Ceiling, as applicable, by passing

a resolution by its Board of Directors followed by passing a Special Resolution to that effect by their

General Body. The list of such companies who have passed a Special Resolution in this regard can be

seen from the RBI website.

Progression of allowable limit of FIIs investment in Debt Instruments is given below:

FIIs investment in Debt Instruments [In US$ Billion]

  2006 2007 2008 2009 2010 2011 (March) 2011 (Nov) 2012 (June)

Corporate Bond 0.5# 1.5# 3# 15#20

(15# + 5**)

40

(15# + 25 **)

45

(20# + 25**)

46

(20# + 25** +1 ##)

Govt. Securities 1.75* 3.2* 5* 5* 10 10 15 20

(5* + 5^) (5* + 5^) (10* + 5^) (10* + 10^^)

Notes:

* G-Sec Old: The limit can be invested in securities without any residual maturity criterion.

^ G-Sec LT: The limit can be invested in securities with residual maturity of five years.

^^ G-Sec LT: The limit can be invested in securities with residual maturity of three years.

# Corporate Debt Old: The limit can be invested in securities without any residual maturity/lock-in criterion.

** Incremental limit of US$ 5 billion would be invested in securities with residual maturity of over five years

issued by companies in infrastructure sector.

## A separate sub-limit of USD 1 billion has been created for QFIs investment in corporate bonds and

mutual fund debt schemes.

** Distribution of USD 25 Billion limit is as under:

i. US$10 billion investment in Infrastructure Debt Funds (IDF) –(a) Lock-in period of 1 Year (b)

Residual maturity of at least 15 months.

ii. US$ 12 Billion for FII investment in in long term infrastructure bonds – (a) Lock-in period of 1 Year

(b) Residual maturity of at least 15 months.

iii. USD 3 billion for QFI Investment in MF debt schemes which hold at least 25% of their assets

(either in debt or equity or in both) in the infrastructure sector.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII investments in Indian companies on a daily basis.

For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that

are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 22 per

cent for companies in with 24 per cent ceiling. Once the aggregate net purchases of equity shares of the

company by FIIs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all

designated bank branches so as not to purchase any more equity shares of the respective company on

behalf of FIIs without prior approval of the Reserve Bank. The link offices are then required to intimate the

Reserve Bank about the total number and value of equity shares/convertible debentures of the company

they propose to buy on behalf of FIIs. On receipt of such proposals, the Reserve Bank gives clearances on

a first-come-first served basis till such investments in companies reach the investment limit or the sectoral

caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all

designated bank branches to stop purchases on behalf of their FIIs. The Reserve Bank also informs the

general public about the `caution’ and the `stop purchase’ in these companies through a press release.

Data on FII

The data on FII investments can be obtained from three sources, SEBI, Stock Exchanges and RBI. The

figures may vary across these sources.

Custodians on a daily basis, report to SEBI the investments made by the FIIs on the previous day/s. The

details can be accessed here. http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii

All figures reported to SEBI are about investment details and FIIs are necessarily required to invest in

Rupees. Thus all figures are in Rupees on SEBI website. The USD figure mentioned on the SEBI data is

for representational purpose only- i.e., the USD rate is taken from RBI website and the conversion is done

automatically by the software.

SEBI data on FIIs thus, represents only investments activity; it does not indicate the actual flow of money

out of India or into India. Hence, SEBI always mentions investment activity of FIIs and never states that it is

reporting inflow or outflow of funds.

The RBI data, on the other hand, represents the actual flow of money in and out of India. As per Schedule

II of FEMA Notification no. 20, the FIIs can maintain a non-interest bearing foreign currency account and a

non-interest bearing Special Non-Resident Rupee account where the cash balances can be kept without

any caps. It has been observed that FIIs keep balances in these accounts without making investments at

times. These balances reflect the amounts received from abroad as well as divestments proceeds accruing

to the FIIs from their investments in India. In terms of the regulations issued under FEMA for investment

into the Portfolio Investment Scheme, RBI has not placed any restriction on the amount being kept on

these accounts. Accordingly, there is no one to one correspondence between foreign capital flows on

account of FIIs and investments made by FIIs in any particular period of time.

The Foreign Institutional Investors (FII) related provisional figures reported on the websites of National

Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are also not comparable to the FII Investment

Figures published on the SEBI website for the following reasons:

1. The FII data reported on the BSE-NSE website is provisional trade data reported on the trade date

(T day) as per the trades posted by the brokers in the exchanges’ trading system.

2. The FII investment data as reported on SEBI website is confirmed trade data provided by

custodian of securities after confirmation of transactions on behalf of FII, to the stock exchange(s).

3. The FII investment data on SEBI website is provided by custodians of securities after their

confirmation on T+1 basis.

4. The provisional trade data reported by NSE/BSE on their website is limited only to transactions in

secondary market, whereas the custodian reporting to SEBI includes the following transaction

types:-

Purchase and sale in secondary market

Purchase and sale of mutual fund units in secondary market

Purchase in primary market

Preferential allotment

Purchase through rights issue

Conversion of debentures into equity shares

Receipt of bonus shares

Redemption of debenture /units of mutual funds

Lodging shares in terms of open offer

Repurchase of units by mutual fund

Buyback of shares by company

Payment of allotment/call money

Square off - on account of short delivery received

Square off and auction- on account of short delivery given

Consolidation sub division of securities.