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Difference between FDI and FII

  • Marisha Bhatt
  • Apr 17 2022
  • 7 minutes
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Finance is one of the key requirements for any organization. It is constantly needed to keep the wheels of the company rolling and ultimately meet the bottom line of generating profits for the shareholders. A company can need finance for various purposes like expansion, diversification, purchase of a new plant and machinery, meeting working capital needs, paying off short-term or long-term liabilities, etc. 

One of the many sources of finances for Indian companies is the funds received from foreign sources. This can be from individual investors or companies or organizations located outside India. Such investments by foreign entities are known as FDI and FII. In the last few decades, Indian Companies have seen tremendous growth and the country is also one of the topmost emerging markets in the world. Also, post the initial slump in the Indian markets after the pandemic, the Indian economy has bounced back faster as compared to many other economies. This has further increased the investment opportunities for foreign investors who aim to benefit from this economic boom and earn higher returns as compared to investments in developed countries or other emerging markets. 

Given below is the basic meaning of these two main sources of foreign investments, FDI and FII, as well as the key differences between the two.

What is FDI?

Investment in an Indian company by any foreign organization or company, i.e., a company organization that is incorporated and located in a foreign country, is termed Foreign Direct Investment (FDI). Through this mode of investment, the investors can gain long-term interest in the investee company in our country.

 FDI is also considered to be a primary or crucial mode of acquiring foreign investment and the investor entity acquires a controlling interest or influence in the company through their investment. It is an investment by an established organization and hence, it is a relatively stable form of foreign investment as compared to individual investments by foreign nationals. The regulations for FDI are quite stringent so they cannot enter or exit as easily as in the case of FIIs. An investment by FDI will let the investee company gain not only finance but also the technical knowledge and skill set of the foreign investor entity and direct involvement in their day-to-day affairs. 

What is FII?

Foreign Institutional Investor or FII is the investment by a foreign investor in an Indian company. Such investment can be by an individual investor or many investors pooling their funds to invest in an Indian company. FIIs can also be institutions belonging to financial or non-financial segments like Hedge Funds, Foreign Mutual Funds, Pension Funds, Trusts, University Funds, AMCs, etc. 

Eligible FIIs can invest in Indian companies through registered stock exchanges in the country. The central bank of the country has levied stringent regulations that limit the maximum investment by FIIS in any Indian company. The maximum permissible investment by any FII in an Indian company stands at 24% of the paid-up capital of the company and can be increased up to a sectoral cap or statutory ceiling provided such increase is backed by passing a resolution of the Board and the general body of the company.

 RBI has also set a cut-off which is fixed at 2% lower than the prescribed maximum investment ceiling i.e., at 22% of the paid-up capital in any company. When the FII investment reaches the cut-off point, RBI is immediately notified and any further investment in such investee company is only sanctioned after receiving prior approval from RBI. 

FIIs are also known as hot money as the investment is not subject to severe restrictions a sin case of FDIs. FIIs can enter and exit their investment in Indian companies quite easily. FIIs investment is usually directed to the secondary market and is usually for the short term. 

What is the differences between FDI and FII ?

After understanding the basic meaning of the two terms, let us not consider the key differences between FDI and FII.

CategoryFDIFII
MeaningInvestment in an Indian company by any company or organization located and incorporated in a foreign nation. Investment in an Indian stock market by a foreign investor 
Tenure of investmentThe investment by FDI is usually for long-termInvestment by FII is for the short-term
Ease of investment It is not easy for the investors to enter and exit the investment when it is made through FDI Investors can easily enter and exit the market when an investment is made through FII
Benefits for the investee companyThe investee company receives many benefits other than capital inflow in the form of technical know-how, strategic knowledge and inputs, etc. Through an FII investment, the investee company receives only the funds and no additional benefits that are part of the investment through FDI.
Targeted investment FDI investment targets a specific company.FII investment does not target a specific company. 
Impact of investment An investment through FDI is beneficial for the entire country as it results in an increase in the GDP of the country. Investment through FII results in an increase in the capital of the companies in the country. 
Transfer of control or influenceFDI investment results in  the transfer of control or influence over the investee company. FII investment does not provide any control or influence for the investors 

Conclusion

FDIs and FIIs are both crucial forms of investment for any Indian company. It also creates an attractive investment opportunity for foreign investors and gives a boost to the growth and development of the company ultimately benefiting the shareholders. However, investment in the form of FDI is preferred by Indian companies as it brings a lot more to the company than simply capital inflow as in the case of FIIs. 

FAQs

 What are the sectors where FDI investment is not permissible?

FDI investment is not permissible in the following sectors,
-Gambling, and betting
-Trading in Transferable Development Rights (TDRs)
-Lottery business (whether government or private sector)
-Activities or sectors that are prohibited for the private sector
-Manufacture of cigarettes, cigars, tobacco, and tobacco substitutes
-Chit funds and Nidhi Company

What are the consequences if FII investment in a company crosses the prescribed maximum limit set by RBI?

When the FII investment hits the maximum limit set by RBI, any further FII investment in such a company is not permitted. Also, the central bank will notify the general public of such an event through a press release

Where do the investment in FDI and FII flow?

Investment in FDI and FII is directed towards the primary market and secondary market respectively.

What are the different modes of investment through FDI which gives the investor a controlling interest?

The different modes of investment through FDI which gives the investor a controlling interest in the investee company are through merger or acquisition, joint venture, or incorporation of a fully owned subsidiary.

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