FII vs QFI
Foreign investment is the process in which an investor from one country makes an investment in the stock markets of another country. Foreign investments are beneficial to a country as it brings an inflow of capital, thereby fuelling expansion, investment, employment and bringing about economic development. However, stringent regulations and requirements may deter investors from making foreign investments. Countries have introduced new classes of investors to overcome this issue. The article below explores two such types of investors and explains the requirements, regulations, and rules that need to be complied in order to become such an investor and explains the similarities and differences between FII and QFI.
What is FII?
FII stands for foreign institutional investor, where a FII is defined as an investment firm or fund that is not located in or registered in the country in which investments are being made. FIIs may include mutual funds, hedge funds, insurance firms, pension funds, financial institutions, etc. There are certain requirements and regulations that bind foreign institutional investors which may vary depending on the country in which investments are made. For example, in India, any foreign institutional investor is required to register with the SEC (Securities and Exchange Commission) before making international investments. Not everyone can invest in international stock markets, allowing only high net worth individuals to make investments. Parties who wish to make international investments also have to open a sub-account with a FII (that is already registered with the SEC of the particular country). Another major regulation that is imposed by international investments governing bodies and authorities are the placement on limits of ownership of national firms.
What is QFI?
QFI stands for qualified foreign investor. A QFI is an individual, firm, fund that is located outside of the country in which the investment is being made. These firms can directly make investments in the foreign markets without the requirement of opening a sub-accounts with other FIIs. QFIs offer an easier route for foreign investors to invest in international stock markets without having to open sub-accounts and complying with the strict high net worth requirements. However, in order to invest, a QFI must open a demat account and trade account with depository participant firm. The demat account is the account that is used to transfer purchased shares (in a paperless manner). A trade account is the account that allows the investor trade shares online. In order to become a QFI, the investor must be from a country that adheres to anti-money laundering as well as anti-terrorist financing such as being a member of the Financial Action Task Force (FATF).
What is the difference between FII and QFI?
Earlier, foreign investors that wished to invest in a foreign country’s share market had to follow a cumbersome procedure of opening sub-accounts with a FII and complying with strict regulations. While such regulations were put in place to ensure security of transactions and better control such requirements resulted in the process of foreign investment becoming complicated and cumbersome thereby deterring foreign investments. QFI was introduced as an alternative to FII where any international investor could invest in a foreign stock market much like a local citizen. The main difference between FII and QFI is that in order to invest as a FII the investor must open a sub account with a registered FII, whereas to invest as a QFI no such sub-account is necessary. A QFI can directly invest as long as they open a demat account, a trade account and is from a country that adheres to anti-money laundering as well as anti-terrorist financing. Furthermore, the investment as a QFI does not require individuals to be of high net worth as in FIIs and, therefore, any investor big or small can make foreign investments as a QFI.
Summary
FII vs QFI
• Foreign investment is the process in which an investor from one country makes an investment in the stock markets of another country.
• FII stands for foreign institutional investor, where a FII is defined as an investment firm or fund that is not located in or registered in the country in which investments are being made.
• FIIs may include mutual funds, hedge funds, insurance firms, pension funds, financial institutions, etc.
• Parties who wish to make international investments have to open a sub-account with a FII (that is already registered with the SEC of the particular country) and has to be individuals/firms of high net worth.
• QFI is a qualified foreign investor that maybe an individual, firm, fund that is located outside of the country in which the investment is being made. These firms can directly make investments in the foreign markets without the requirement of opening a sub-account with other FIIs.
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