Foreign institutional investors refer to companies from the foreign countries willing to invest their funds in the Indian market. These companies have to take permission from securities and exchange board of India. They can also work on the already existing security.

History of Foreign institutional investors in India

  1. India has been welcoming the foreign investors since 1992 and had been inviting portfolios since 1993.
  2. Near about 50% of the investment of the foreign investors is from offshore derivatives. They are ways to invest in the Indian market without registering with securities and exchange board of India.
  3.  Over a period of time, Indian companies performances have improved accordingly FIIs confidence is build up which leads to FII with a value of $ 10 billion in 2010.

Who can get registered as  FIIs?

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)

Impact On Indian Economy

Foreign investments have developed at a very rapid rate and have both positive and negative impacts-

Positive Impact  Negative Impact 
1. Enhanced Flow Of Equity Capital: – FII can help in increasing growth of rate of investment, development projects like building economic and social infrastructure, as well as boost the production, employment and income of the host country.

1. Potential Capital Outflows: –  FII funds controlled by investors either inflow or outflow from the market as the apprehension of funds or shortage of funds from the market.

2. Managing Uncertainty And Controlling Risk: – FIIs promote financial innovation and development of hedging instruments. FIIs not only enhance competition in financial markets but also improve the alignment of asset prices to fundamental which helps to stabilise markets.

2. Inflation: – Huge amounts of FII fund inflow into the country creates a lot of demand for the rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods.

3. Improved Corporate Governance: – Good corporate governance is essential to overcome the principal-agent problem between shareholders and management.  FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms‘ operations, improve corporate governance.

3. Adverse Impact On Exports FII flows leading to an appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee.

RBI Relaxation

The RBI has increased the sub limit of FII’s by 5 billion US dollars. RBI has also allowed foreign investors to invest up to 26% in insurances.Effective from February 4, 2014, The RBI has also allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/redeemable preference shares or debentures issued by Indian companies listed on established stock exchanges in India.

Taxation Relaxation

The countries with which India has double taxation avoidance agreement are exempted from capital gains tax escape minimum alternate tax.

With all the other countries, the normal procedure of taxation is applicable.


Foreign Institutional Investors are very beneficial to the economy of a country. But FIIs are more popular in developing countries for improving their economic growth due to high tax revenues and influx of capitals. Foreign investments are usually beneficial as they lead t the introduction of advanced technology in the domestic market and also raises trained professionals. Also, it increases employment options for the common people. Host countries usually try to channel the investments into new infrastructure and projects in order to enhance development