An Overview – Difference Between FDI And FII
Finance is a critical component for any firm. It is continually required to keep the company’s wheels turning and, eventually, to achieve the bottom line of creating profits for the shareholders. A corporation may require financing for a variety of reasons, including diversification, expansion, fulfilling working capital requirements, the purchase of new plant and machinery, repaying short-term or long-term commitments, and so on.
Funds received from international sources are one of many sources of capital for Indian companies. This can come from individuals, companies, or organisations based outside of India. Such foreign investments are referred to as FDI and FII. Indian companies have grown tremendously over the previous few decades, and the country is now one of the world’s top developing markets. Furthermore, following the initial collapse in Indian markets during the pandemic, the Indian economy has recovered faster than many other economies. This has boosted investment opportunities for international investors looking to capitalise on the economic boom and earn larger returns than investments in developed countries or other emerging economies.
What Is FDI?
Foreign Direct Investment refers to investment in an Indian company by any foreign organisation or corporation, that is, a company organisation that is incorporated and based in a foreign nation. Investors can get a long-term interest in the investee company in our country through this kind of investment.
FDI is also regarded as a key or critical means of acquiring foreign investment, with the investor entity acquiring a controlling interest or influence in the company as a result of their investment. Because it is an investment by a well-established corporation, it is a more stable kind of foreign investment than individual investments by foreign persons. Because FDI restrictions are fairly stringent, they cannot enter or exit as readily as FIIs. An FDI investment allows the investee business to obtain not only finance, but also the foreign investor entity’s technical knowledge and skill set, as well as active involvement in their day-to-day operations.
What Is FII?
Foreign Institutional Investor, or FII, is a foreign investor’s investment in an Indian company. An investor or a group of investors merging their money to invest in a domestic company can make such an investment. FIIs can also be financial or non-financial institutions such as foreign mutual funds, hedge funds, trusts, pension funds, AMCs, university funds and so on.
Eligible FIIs can invest in Indian enterprises using the country’s registered stock markets. The country’s central bank has imposed rigorous limits that limit the maximum investment by FIIS in any Indian company. The maximum allowable investment by any FII in an Indian company is 24 percent of the firm’s paid-up capital, which can be increased up to a sectoral cap or statutory ceiling if supported by a resolution of the Board and the general body of the company.
The RBI has also established a cut-off point that is 2% lower than the permitted maximum investment ceiling, i.e., 22% of any company’s paid-up capital. When a FII investment hits the cut-off point, the RBI is promptly alerted, and any further investment in the investee business is only permitted with prior clearance from the RBI. FIIs are also characterised as hot money because their investments are not subject to rigorous regulations, as is the case with FDIs. FIIs can readily enter and exit their investments in Indian enterprises. FIIs typically invest in the secondary market and for a limited period of time.
Wrapping Up
Both FDIs and FIIs are important types of investment for any domestic firm. It also presents an appealing investment opportunity for international investors and contributes to the company’s growth and development, ultimately benefiting the owners. However, FDI investment is preferred by Indian enterprises because it delivers much more to the company than simply financial inflows, as in the case of FIIs.
Frequently Asked Questions (FAQs)
Q. What happens if a FIIs investment in a firm exceeds the RBI’s authorised maximum limit?
When a FII investment reaches the maximum limit imposed by the RBI, further FII investment in that company is prohibited. In addition, the central bank will notify the public of such an event via a press release.
Q. What are the industries where FDI is not permitted?
Foreign direct investment is not permitted in the following sectors:
- Transferable development rights trading
- Gambling and wagering
- Private sector activities or sectors that are restricted
- Lottery enterprise
- Cigarette, cigar, tobacco, and tobacco replacements manufacturing
- Chit funds
Q. What are the various ways of FDI investment that provide the investor a controlling interest?
The various types of FDI investment that provide the investor with a controlling position in the investee company are merger or acquisition, joint venture, or formation of a fully owned subsidiary.
Q. Where does FDI and FII investment go?
FDI and FII investments are focused toward the primary and secondary markets, respectively.