Explanation:

Portfolio investments is not the part of FDI.
Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Institutions established or registered in other countries (i.e. outside India)to make investment in the securities listed/unlisted in the Indian stock exchanges, but equally in India they have to register themselves with SEBI & governed by the rules & regulations of SEBI. Along with the existing securities FII’s are also allowed to participate in Initial Public Offer commonly known as IPO.

However since 1st June 2014,for better administration of all classes of investments & better conceptional clarity, Ministry of Finance & RBI has merged three classes of investors i.e. . FII, Qualified Foreign Investors (QFI) & , Sub accounts & introduced one class of investor i.e.”FOREIGN PORTFOLIO INVESTORS” & insured smooth transition from FII to FPI. So technically now FII concept as such ceased to exist now.

In India FPI’s are allowed to invest in any Indian company’s shares up to 10 % of paid up capital of the company & any investment more than that known as FDI ( however any official definition as such does not exist). But in 2013-14 Union budget Finance Minister has introduced the internationally accepted standards of 10 % cap on FII investment ( as mentioned above) to distinguish between FDI & FII.

Some of the examples of registered FII’s are :- pension funds, Mutual Funds, Investment Trust, Banks, Insurance & reinsurance companies, Sovereign wealth Funds, etc.
FPI’s may invest in any tradable/non tradable equity shares of the company, Govt bond ,debentures, MF schemes, security receipts, commercial papers, Indian depository receipts(IDR).

FII can also invest on behalf of sub account i.e. any person outside India on whose behalf investments are proposed to be made in India by FII. But for sub accounts investment cannot exceed 5 % of paid up capital of the company.FII and there sub accounts are required to appoint Indian custodian (registered with SEBI) to ensure daily reporting of their trading activities to the SEBI, preserves record of transactions for specified period.

Difference between FDI & FII:

• Besides the basic difference of 10 % investment cap, a major difference is of investment approach. FPI’s investment is in the stock markets & securities & its approach is always of short term whereas FDI’s investment is always of long term.
• Because of investment in securities, FPI’s investment is easy to liquidate compare to FDI.
• In comparison with FDI, FII’s have low exit barriers. However often it results in stock market crashes.