Whether you are an individual or a company based abroad, you can invest in India or any other offshore country. The two means of investment are Foreign Direct Investments and Foreign Institutional Investors. This article highlights the differences between FDI and FII.
In the past few decades, India has emerged as a tremendous economic power. One of the factors leading to it is the rise of investments from locals as well as foreign establishments and institutions. As more and more foreign countries are recognising India’s economic status and growth potential, they are demonstrating their interest in Investing in India. Foreign Direct Investments and Foreign Institutional Investors are two of the most common methods of investing in India. But how are they different? This article highlights FII and FDI differences.
FDI vs FII – A look at the definitions
Before we can begin to compare the difference between FDI & FII, we need to understand their definitions. They are as under
Foreign Direct Investments
Foreign Direct Investments, abbreviated as FDIs are those investments that are made by an establishment or company situated offshore. Through FDI, the investing company may establish its business operations in a foreign land or even make an international acquisition.
Foreign Institutional Investors
Also known as FIIs, Foreign Institutional Investors, FIIs can be individual investors, investment funds, or assets that are invested in a foreign country, outside of the territory in which the investing company is registered or headquartered. FIIs typically belong to varying financial and non-financial sectors, including banks, mutual fund houses, infrastructure companies, etc.
FDI vs FII – Comparing the differences
Having explained the definitions of FDI and FII, let us now compare the two investment methods. The following points can help us distinguish between FDI and FII.
1. Entering vs exiting an investment
While making any investment, you should check whether it is accessible to both, enter and exit. It is quite easy to enter and exit an FII, and also make a significant amount of money in a short span. However, FDI investments are more controlled and may also need government approvals, which is why they are quite difficult to enter or exit.
2. The ideal investment term
Another FDI and FII difference revolves around the investment term preferred by the investor. FDIs are suitable for investors looking for long-term investments. It brings with it long-term capital to the company in which the investment is made. Conversely, investors who have both short and long-term investment objectives can invest in FIIs.
3. Type of investment
A crucial point of difference between FDI and FII revolves around the types of transactions permitted. FII typically involves the transfer of funds alone. On the other hand, FDI investments do more than just transfer money. When an FDI investment occurs, the offshore company investing in another country (for instance, the USA investing in India), moves its resources, technologies, technical know-how, skills, and strategies, among other things.
4. Consequences on the economy
One of the most profound consequences of FDI on a country’s economy is that it increases employment opportunities and the GDP of the investee company. It also promotes infrastructural development in the foreign country in which the investment is made, thereby improving its purchasing power. As such, FDI promotes economic growth. If we compare FII and FDI differences, the same cannot be said about FIIs, as FII only increases the country’s capital.
5. The investment target and control over the company
FDIs typically target specific companies and also obtain the investee company’s management control. In the case of FIIs, there is no particular target, nor does the company exert any control.
As is apparent, there are several differences between FDI and FII. There are also several benefits of investing via both modes of investment. For more details on FDI vs FII, consult Angel One.
FDI vs FII
| Aspect | Foreign Direct Investment (FDI) | Foreign Institutional Investment (FII) |
| Investment Type | Investment in a company’s operations or assets | Investment in stocks, bonds, or financial assets |
| Control Over Investment | Significant control and ownership in the company | No control over the company’s operations |
| Duration of Investment | Long-term, often several years | Short to medium-term, can be bought and sold daily |
| Purpose | Promote growth and expansion of the company | Seek financial returns through market investments |
| Investment Size | Typically, substantial amounts of capital | Varies from small to large investments |
| Influence on Management | FDI investors may have a say in company decisions | FII investors typically have no influence |
| Sector Focus | FDI often targetst specific industries | FII can invest in various sectors and assets |
| Regulatory Approval | Requires government approval and compliance | Fewer regulatory restrictions, subject to SEBI rules |
| Risk | Typically lower risk due to long-term commitment | Higher market risk due to short-term investments |
| Impact on Exchange Rates | It may have a more stable impact on exchange rates | This can lead to short-term currency fluctuations |
FAQs
What is the primary purpose of FDI and FII?
FDI is primarily intended to promote economic growth, job creation, and technology transfer within the host country. FII investments are made with the goal of seeking financial returns and portfolio diversification.
How much FII is allowed in India?
The ceiling decided by the government is as follows:
- 24% of the paid-up capital of Indian company
- 20% for PSU banks
What are the risks associated with FDI and FII?
FDI carries risks related to local market conditions, regulatory changes, and long-term economic fluctuations. FII investments are exposed to market volatility, currency risk, and short-term fluctuations in asset prices.
Which form of investment between FDI and FII is more stable?
FII has upper limits regarding investing in Indian companies. However, FDI has no ceiling and is often a long-term investment. For the country’s economy, FDI is regarded as a more stable form of foreign investment.
What is the level of control exercised by foreign investors in FDI and FII?
In FDI, foreign investors often have significant control and influence over the company’s management and operations due to their direct ownership. In FII, investors typically do not have control over the companies in which they invest; they are passive investors.
