What is the difference between FDI And FII?

Answer 1

Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Types of FDI based on the motives of the investing firm

FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:

* Resource Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.

* Market Seeking: Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy;[1] it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.[2] This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms.[3]

* Efficiency Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.[2] Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).

Foreign Investments in Indian Capital Markets

Foreign companies/Individuals are permitted to invest in equity shares traded in Indian Stock markets if they are registered as a Foreign Institutional Investor (FII) or if they have a sub account in India.

Investment in Indian securities is also possible through the purchase of Global Depository Receipts (GDR), American Depository Receipts (ADR), Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers, which are listed, traded and settled overseas and mainly denominated in US dollars.

Foreign Investors (whether registered as a FII or not) can also invest in Indian securities outside the FII route. Such investments require case-by-case approval from the Foreign Investment Promotion Board in the Ministry of Industry and Reserve Bank of India (RBI), or only by the RBI depending on the size of the investment and the industry in which this investment is to be made.

FII investments in Indian capital market is more than US $ 11,000 million. Indian Stock market with a market capitalization of over US $ 165,000 million has been a major attraction for investors all over the world, thanks to the new economy boom and excellent functioning of Stock Exchanges in the Country. The combined daily turnover of National Stock Exchange (NSE) and The Stock Exchange, Mumbai (BSE) is in excess of US $ 30,000 million. The screen base trading of NSE and BSE provides transparency in execution of orders, settlement & trade guarantees and elimination of risk of bad deliveries (in case of dematerialized shares, which constitute over 90% of trade).

Terms & Conditions for grant of registration as FII:

FII Registration is a cumbersome process, which involves registration with Securities and Exchange Board of India (SEBI) and approval from RBI. The terms and conditions for grant of registration is as below:

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The applicant is required to have a track record for a period of atleast 5 years with professional competence, financial soundness, experience, general reputation of fairness and integrity.
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The applicant should be regulated by an appropriate Foreign Regulatory Authority such as a securities regulator, Central Bank or Government Ministry, Agency or Department. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as FII.
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The applicant is required to have the permission under the provisions of Foreign Exchange Regulation Act, 1973 (FERA) from RBI.
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The applicant has to satisfy the “fit and proper” guidelines issued by SEBI.
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The applicant’s activities and its registration with their regulatory authority should enable it to be categorized in the eligible categories as mentioned above.
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The applicant has to appoint a local custodian and enter into an agreement with a custodian. Besides it also has to appoint a designated bank to route its transactions.
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In addition to the above, SEBI would also consider whether the grant of registration is in the interest of the development of the securities market.

Answer 2

FDI is foreign direct investment
FII is foreign institutional invertors

Answer 3

fdi is foreign direct investment
fii is foreign investment institution

Answer 4

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