Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?

The correct answer is B. The difference lies in the nature of the capital. FII is portfolio investment: foreign funds buy shares and debt in listed companies, mostly in the secondary market. It adds to overall market liquidity and capital availability, but brings no management control and can leave quickly. FDI is a long-term stake, usually 10 percent or more of equity with a say in management, and it is channelled into specific sectors subject to sectoral caps and entry routes under the FDI policy issued by DPIIT.

Why the other options fail:

• A reverses the truth. Management skills and technology come with FDI, while FII brings only capital.
• C is wrong on both counts. FDI is not confined to the secondary market, since greenfield projects create new capacity. FII is mainly a secondary-market player, though it can take part in primary issues.
• D inverts the accepted view. FII is called hot money because it can exit within days, which makes FDI the more stable form.

Mains angle: the FII versus FDI distinction is central to capital account liberalisation, current account financing and the lessons of the 1997 Asian crisis. Since 2014, SEBI regulations have replaced the FII label with Foreign Portfolio Investor (FPI).

Trap: candidates pick A because it sounds like a clean contrast. The question asks about the character of the capital, not which form is better.