Foreign Institutional Investors (FIIs) is a concept that refers to large overseas entities, such as pension funds, mutual funds, hedge funds, and asset management companies, that invest in the financial assets of a country other than their own. In the Indian context, FIIs were institutional entities that channeled global capital into domestic markets, primarily investing in equities, bonds, and other financial instruments. The entry of FIIs into the Indian primary and secondary markets was first permitted in 1992. This move was part of India's economic liberalization, intended to solve the problem of insufficient domestic capital by attracting foreign funds, thereby boosting market liquidity and efficiency.
The mechanism for FIIs was governed by the SEBI (FII) Regulations, 1995. However, the term FII has been replaced and the regulatory framework significantly changed. The Securities and Exchange Board of India (SEBI), based on the recommendations of the K. M. Chandrasekhar Committee Report, introduced the Foreign Portfolio Investor (FPI) regime. The SEBI (Foreign Portfolio Investors) Regulations, 2014, which came into force on January 7, 2014, repealed the earlier FII Regulations.
The new FPI concept harmonized the erstwhile categories of FIIs, their sub-accounts, and Qualified Foreign Investors (QFIs) into a single investor class. The key mechanism now involves registration as an FPI through a Designated Depository Participant (DDP), which acts as a single-window clearance point. The FPI regime connects to the distinction between portfolio investment and Foreign Direct Investment (FDI): an investment is generally treated as FPI if the investor's stake is 10 percent or less of the company's total issued capital, while a stake of more than 10 percent is classified as FDI. The core change is the simplification of the regulatory structure, while the fundamental act of large foreign institutions investing in Indian securities remains the same.