Foreign Institutional Investors and the Indian Stock Market

Investment is the most important pre-requisite for the economic development of a nation. However, many of the developing countries, including India are capital scarce. Hence these countries rely on funds from other economies to meet their capital requirements.

Based on the risk involved, the funds from outside the nation can be basically classified into two: debt creating funds and non-debt creating funds. The debt creating funds are borrowed funds and it should be repaid with interest. The nondebt creating funds are the acquisition of ownership in the productive assets in a country by the foreigners. The important non-debt creating sources of foreign capital

are Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Foreign Direct Investment is the investment made by an entity based in one country in the business of another country with the objective to obtain control in the business. On the other hand, Foreign Portfolio Investment is the mechanism in which a foreign entity acquires the stocks, bonds and financial assets in another country through stock exchanges, without the objective to obtain control in the business. Hence, such investment is generally short term and volatile in nature. In India, foreign portfolio investment is mainly made by the foreign entities registered with SEBI and they are known as Foreign Institutional Investors1 (FIIs).