Foreign Institutional Investors, or FIIs, are entities like investment funds, insurance companies, and pension funds that invest in the foreign markets. Ex: A foreign insurance company investing in an Indian stock is a Foreign Institutional Investor.
- What Is FII?
- FII Example
- Types Of Foreign Institutional Investors
- Fdi Vs Fii
- Taxation Of Foreign Institutional Investors In India
- What Is FII – Quick Summary
- Fii Full Form – FAQs
What Is FII?
Foreign Institutional Investors (FIIs) are organizations that invest in the financial markets of a country other than the one where they are originally registered. These investments can be in the form of shares, bonds, securities, and other financial instruments.
In the year 2012, a well-known FII, Vanguard Group, made a substantial investment in the Indian equity market. Through its investment in various Indian stocks, Vanguard contributed to the capital flow in the Indian market. The investment was dispersed across different sectors, including technology, pharmaceuticals, and consumer goods.
This investment not only led to increased liquidity in the Indian stock market but also built confidence among other foreign investors. Vanguard’s actions were in line with its investment strategy, and the Indian market provided an opportunity for growth and diversification. This example highlights how an FII operates, selecting investment avenues in foreign markets to maximize returns and spread risks.
Types Of Foreign Institutional Investors
There are various types of Foreign Institutional Investors, including:
- Mutual Funds
- Insurance Companies
- Pension Funds
- Investment Banks
- Hedge Funds
Each of these types serves a different purpose:
- Mutual Funds: They pool money from investors to purchase stocks, bonds, and other financial instruments. Example: Franklin Templeton’s investment in Indian bonds.
- Insurance Companies: They invest the premiums collected from policyholders in foreign markets. Example: MetLife’s investments in Indian equities.
- Pension Funds: These funds invest in foreign markets to grow the retirement savings of employees. Example: The California Public Employees’ Retirement System (CalPERS) invests in Indian infrastructure.
- Investment Banks: They act on behalf of clients or on their proprietary accounts. Example: Goldman Sachs’s direct investments in Indian companies.
- Hedge Funds: Specialized investment funds that employ various strategies to earn returns for their investors. Example: Renaissance Technologies investing in Indian IT companies.
FDI VS FII
The main difference between FDI vs FII is that FDI refers to the direct investment in a country’s industries, forming a lasting interest and often resulting in management control. FII, on the other hand, refers to investment in financial markets without any direct control over the businesses.
|Foreign Direct Investment (FDI)
|Foreign Institutional Investment (FII)
|Long-term investment with direct control over management and operations
|Short-term investment without direct control, focusing on market participation
|Focused on expansion, management control, and strategic influence within businesses and industries
|Primarily aimed at capital gains and diversification of investment portfolios through market securities
|Investment in industries, businesses, and tangible assets, often creating a significant presence within the host country
|Investments in stocks, bonds, and securities, emphasizing market exposure and financial gains
|Impact on Economy
|Leads to structural changes in the economy, new business ventures, job creation, and technology transfer
|Enhances market liquidity and capital flow, providing flexibility and opportunities for short-term gains
|Often varies by country and industry, generally subject to stricter rules and compliance requirements
|More flexible, primarily governed by market regulations, and generally uniform across different countries
|Lower risk due to long-term nature and direct control, offering stability and consistent returns
|Higher risk due to market fluctuations, potential volatility, and susceptibility to global trends
|Taxed based on the industry, structure, and nature of the investment, often involving complex tax considerations
|Governed by capital gains laws and standard market regulations, offering clarity and uniformity in taxation
Taxation Of Foreign Institutional Investors In India
The Income Tax Act of 1961 governs how foreign institutional investors (FIIs) are taxed in India. Under the Act, FIIs are taxed on their income from securities or capital gains arising from the transfer of such securities. The tax rates for FIIs are as follows:
- Short-Term Capital Gains Tax: Taxed at 15% if the securities are sold within one year.
- Long-Term Capital Gains Tax: Taxed at 20% if the securities are sold after one year.
- Interest Income Tax: Interest earned from government securities or bonds is taxed at 20%.
- Dividend Income: Generally exempt but subject to certain conditions.
However, there are some exceptions to these tax rates. For example, FIIs are not taxed on interest income from government securities. In addition to the above, FIIs are also subject to withholding tax (TDS) on certain payments made to them. The rate of TDS varies depending on the type of payment. For example, the TDS rate on interest payments is 5%.
Here are some additional things to keep in mind about the taxation of FIIs in India:
- FIIs are not allowed to claim any deductions or exemptions under the Income Tax Act.
- FIIs are subject to the same tax rates as domestic investors, unless there is a specific provision in the tax treaty between India and the country where the FII is located.
- FIIs are required to register with the Securities and Exchange Board of India (SEBI) before they can invest in India.
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What Is FII – Quick Summary
- Foreign Institutional Investors (FIIs) are entities that invest in a foreign country’s financial markets.
- FIIs invest in shares, bonds, and other financial instruments, contributing to the liquidity and diversification of the host country’s markets.
- Types of FIIs include Mutual Funds, Insurance Companies, Pension Funds, Investment Banks, and Hedge Funds.
- Foreign direct investment in a country’s industries creates a lasting interest and management control, unlike FII. However, FII invests in financial markets without controlling businesses.
- Taxation of FIIs in India Interest on securities: 20%, Short-term capital gains: 15%, Long-term capital gains: 20%
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Fii Full Form – FAQs
Who are foreign institutional investors?
Foreign Institutional Investors (FIIs) are international entities such as mutual funds, insurance companies, pension funds, investment banks, and hedge funds that invest in financial markets outside their home country. They invest in various instruments, including stocks, bonds, and government securities.
Who is the biggest FII in India?
Here are some of the biggest FIIs in India:
|Global Assets Managed (in Trillions)
|Investments in India (in Billions)
|State Street Global Advisors
Who is eligible for FII?
Entities eligible for FII status in India include:
- Asset Management Companies
- Investment Trusts
- Insurance Companies
- Pension Funds
- University Funds
- Charitable Trusts
Who regulates FII in India?
The Securities and Exchange Board of India (SEBI) is the primary regulatory authority for Foreign Institutional Investors in India. SEBI formulates policies, issues guidelines, and monitors the functioning of FIIs to safeguard the interests of investors.
Do FII pay tax in India?
Yes, Foreign Institutional Investors do pay tax in India. The taxation structure for FIIs includes:
- Short-Term Capital Gains Tax: If securities are sold within one year, they are taxed at 15%.
- Long-Term Capital Gains Tax: If securities are sold after one year, they are taxed at 20%.
- Interest Income Tax: A tax of 20% is applied to interest earned from government securities or bonds.
- Dividend Income: Generally exempt, but subject to specific conditions and regulations.
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