India has a powerful economy among other countries such as the USA, China, Japan, Germany, etc. Unlike the above countries, India is a developing country. Developing countries have a larger scope of economic growth than its mature counterparts.
Since our trade and investments are not limited to the country itself, India’s markets receive a lot of interest and attention from international investors. Many international institutions such as banks, mutual funds, etc. invest in stocks and other securities of our country on a usual basis. These investors are called Foreign Institutional Investors or FIIs. They play a very important role in the economy of a country.
Description of FIIs
Foreign Institutional Investors are financial institutions such as banks, hedge funds, insurance companies, mutual funds, etc. They hold a substantial amount of securities of the Indian market and in doing so influence the market trends. For example, there can be huge fluctuations in the Indian stock market due to such heavy influx of money. Stock market trends might move downwards if these big players sell off a large chunk of their holdings.
FIIs are very commonly found in India,being a developing country. Each of them is required to register with the Securities Exchange Board of India (SEBI). Presently, SEBI has more than 1450 institutions registered.
Why Are FIIs So Important For Our Economy?
FIIs promote investments from all classes of investors, keeping the investor base diverse. This acts as a booster for economic growth as they can be considered both the trigger and catalyst for activity in the financial markets. Foreign investments are very crucial for a country’s economy as they help in the business cycle and regulation of funds.
Regulations for Foreign Institutional Investors
FIIs are subject to several rules and regulations as per the SEBI. They can only invest in Indian primary and secondary financial markets through the Portfolio Investment Scheme (PIS). The scheme allows foreign investors to purchase the shares and debentures of an Indian company.
One of the investing regulations is that FIIs can hold only up to a maximum of 24% of a company’s paid-up share capital they are interested in. In case they wish to raise the ceiling, they can do so by passing a special resolution and getting the board’s approval. In case of public sector banks, the ceiling is a maximum of 20%.
The country’s central bank, Reserve Bank of India daily checks the compliance of this ceiling for FIIs. Theyimplement a cut-off of 2 percent below the company’s existing ceiling and warn the company before the final 2% is invested in.
The Indian financial market has a huge investor base coming from different classes and backgrounds. Knowing the composition of our economy is important because it gives us a better understanding of how each part contributes to the growth and movement of the business cycle. Foreign investors play a big part because they bring in foreign currency which is important to any country’s trading power.
Becoming a successful investor and trader takes a lot of time and experience. One of the biggest factors that contribute to a trader’s growth is reading and market analysis. IndiraSecurities is dedicated to publishing informational blogs to help our readers and clients understand the Indian economy, even if they don’t belong to the financial background. Our articles are simple and concise for on the go learning. You could start reading an article each day.
Also read our article on “How to Identify a Stock Buy or Sell?”