According to IMF definition, 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). In India, a particular Foreign Institutional Investor (FII) is allowed to invest up to 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. FIIs can individually purchase up to 10% and collectively up to 24% of the paid-up share capital of an Indian company.
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 categorized as FDI. FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. “SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.”
Following are the few features one should know about FDI and FII:-
1. Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market.
2. FDI is a long term investment whereas FII is generally short term
3. Entry and exit in markets for FDI is far more difficult than FII. It is relatively effortless for a foreign institutional investor (FII) to enter the capital market. A SEBI registration, preceded by a fairly perfunctory due diligence, is all it takes before an FII can enter the Indian stock market and commence trading. Exit is equally simple. For FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper, problems remain at the grassroots. There are innumerable clearances that need to be obtained at the state and district levels. There are also a number of practical hurdles, such as infrastructure bottlenecks, all of which make entry difficult. Exit is even more complicated. Archaic labour laws, such as the Industrial Disputes Act, prohibit the closure of any company employing more than 100 workers without obtaining prior state government permission.
4. FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process. FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially “hot money” which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or not.
5. FII is a fair weather friend. It can wreck havoc with the rupee when FIIs sell in big number. This situation takes back the dollars that were brought in the economy.