The purchase of shares and bonds of Indian companies by Foreign Institutional Investors (FIIs) is generally known as which type of investment?

Introduction / Context:
In international economics and finance, it is important to distinguish between different types of foreign investment. Foreign Direct Investment (FDI) usually involves a long term interest and control in an enterprise, while portfolio investment involves purchase of financial assets without management control. Foreign Institutional Investors (FIIs) are large entities that invest in financial markets of other countries. This question asks how the purchase of shares and bonds of Indian companies by FIIs is classified.

Given Data / Assumptions:

• The investors in question are Foreign Institutional Investors, not individual Non Resident Indians.
• The instruments purchased are shares and bonds of Indian companies.
• Options include FDI, NRI investment, portfolio investment, foreign indirect investment, and external commercial borrowing.
• We assume standard international finance definitions where the key distinction is between control and financial ownership.

Concept / Approach:
Portfolio investment refers to investment in securities such as shares, bonds, and other financial instruments without seeking control or significant influence over management. FIIs typically buy and sell these securities in stock and debt markets, focusing on returns and diversification rather than controlling the company. In contrast, FDI usually involves acquiring a substantial equity stake and active involvement in management decisions, such as setting up factories or joint ventures. Therefore, purchases of shares and bonds by FIIs fall under the category of portfolio investment.

Step-by-Step Solution:
Step 1: Identify the nature of the investment: FIIs are purchasing shares and bonds, which are marketable securities.Step 2: Recall that portfolio investment refers to such financial investments without direct management control.Step 3: Distinguish this from FDI, which would involve projects, factories, or controlling stakes in companies.Step 4: Compare the definition of portfolio investment with the activity described in the question.Step 5: Select portfolio investment as the correct classification.

Verification / Alternative check:
International financial statistics and balance of payments manuals classify FII purchases of equity and debt securities under portfolio investment flows. Balance of payments statements of India also record such inflows under the portfolio category, separate from FDI and external commercial borrowing. This official classification confirms that the question refers to portfolio investment.

Why Other Options Are Wrong:
Foreign Direct Investment involves significant control or influence on management and typically includes setting up new ventures or acquiring substantial stakes in enterprises. That is not the primary nature of foreign institutional trading in securities. NRI investment refers to investments by individual Non Resident Indians, not FIIs. Foreign indirect investment is not a standard classification term in this context. External commercial borrowing deals with loans taken from foreign lenders, not equity and bond purchases by institutional investors in domestic markets. Hence, these options do not fit the description.

Common Pitfalls:
A common error is to confuse any foreign investment with FDI, forgetting that portfolio flows form a separate category. Another mistake is to overlook the word institutional and assume that NRI investment is being discussed. Candidates should remember that FIIs mainly engage in portfolio investment by buying and selling securities in capital markets, while FDI relates to long term direct involvement in business operations.

Final Answer:
Portfolio investment is the correct term for the purchase of shares and bonds of Indian companies by Foreign Institutional Investors.