The foreign investment is very important for economic development of country. The foreign investment usually comes in the form of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) / Foreign Institutional investor (FII). So, lets discuss about FDI vs FPI.
There has been rise in FDI and FPI inflow in India, owing to liberalization policy since 1991.
FDI vs FPI
Let’s understand FDI vs FPI one by one:
What is FDI (Foreign Direct Investment) in FDI vs FPI
Foreign Direct Investment (FDI) is defined as investment made by a person resident outside one country to create productive assets of another nation. If an investment made by a foreign company in already existing company of other nations or by setting up a subsidiary company is referred as FDI. It is one of the major sources of non-debt finance to push economic development of country.
Since foreign investors take stake in domestic companies, they have significant degree of influence and control over the management of company. FDI is generally considered as stable investment as it is not easy to liquidate the assets and leave the country. It is a longer investment which brings capital, technology, managerial knowledge.
Definition of FDI based on investment limit
The following investments are considered as FDI:
- Foreign investment of 10% or more in a listed company
- Foreign investment in an unlisted company, irrespective of the threshold limit
Types of FDI
There are three types of FDI:
- Horizontal FDI: In horizontal FDI, the foreign firm manufactures roughly same product and services as it is producing in home market. Horizontal FDI arises because it is too costly to serve the foreign market by exports due to transportation costs or trade barriers
- Vertical FDI: In vertical FDI, the foreign firm splits the production chain. The production process generally consists of multiple stages with different input requirements. If input prices vary across countries, the firms usually outsource some production stages to other countries with low input prices. Thus, it become profitable for firm to split the production chain
- Conglomerate FDI: In Conglomerate FDI, the investment is made in entirely different industry. The industry is not at all linked with investor business.
Routes of FDI in India
There are two routes of infusing FDI in India:
- Automatic route: Under automatic route of FDI, the investor can invest in domestic company without any prior approval of government or RBI. RBI takes care of FDI under automatic route. They can notify after making the investment. Most of the sectors in India are open for 100% investment under automatic route.
- Government route: Under government route of FDI, the investor has to take prior approval from concerned Department or Ministry before making any investment. Further, approval of Cabinet Committee on Economic Affairs is required, if FDI value is more than Rs. 5000 crores
The eleven notified sectors/activities requiring government approval are Mining, Defence/cases relating to FDI in small arms, Broadcasting, Print media, Civil Aviation, Satellites, Telecom, Private Security Agencies, Trading(Single, Multi brand and Food Products), Financial services not regulated or regulated by more than one regulator/ Banking Public and Private and Pharmaceuticals
Sector where FDI is prohibited
The FDI is prohibited in following sectors/activities:
- Lottery business including government/private lottery, online lottery
- Chit funds
- Nidhi Company
- Gambling and betting including casinos
- Real estate business or construction of farm houses
- Manufacturing of cigars, cigarettes, tobacco or tobacco substitutes
- Sector that are not open to private sector investment like atomic energy etc
- Trading in Transferable Development Rights
FDI pattern of last 5 years
- India has received Foreign Direct Investment (FDI) inflows worth USD 339.55 billion in the last five years
- The year-wise FDI inflow in country is as follows (in billion US dollars):
- 2016-17: 60.22 USD
- 2017-18: 60.97 USD
- 2018-19: 62.00 USD
- 2019-20: 74.39 USD
- 2020-21: 81.97 USD
What is FPI (Foreign Portfolio Investment) in FDI vs FPI
Foreign Portfolio Investment (FPI) is defined as investment made by a person resident outside India as passive holdings of securities such as foreign stocks, bonds, or other financial assets. There is no active involvement of investor in the day-to-day operations of the domestic company as there is no direct ownership of company. Thus, there is no controlling stake involved.
These investments are highly liquid in nature and can exit the nation quite quickly, therefore it is quite speculative in nature. Thus, is also known as hot money.
FPI is shown in capital account of country.
Definition of FDI based on investment limit
A foreign investment is categorized FPI if investment is:
- less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company; or
- less than 10 percent of the paid-up value of each series of capital instruments of a listed Indian company
Types of FPI (Foreign Portfolio Investment)
Foreign Portfolio Investors include Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs).
Foreign Institutional Investor (FII)
Foreign Institutional Investor (FII) is defined as an institutional investor who invest in the shares or bonds of an Indian company. It may include capital instruments like stocks, bonds, ADR, GDR, mutual funds, exchange traded funds etc. Only institutional investors like Investment companies, Insurance funds, etc. are allowed to invest in the Indian stock market directly, therefore called Foreign Institutional Investor (FII). The FII has been permitted to invest up to 10% of the equity of any one company, subjected to the overall limit of 24% on investments by all FIIs, NRIs and OCBs. It is not allowed in unlisted companies.
This kind investment is not stable in nature, as investor can anytime sell his share/bond holdings from capital market.
FII has to get themselves registered with SEBI before making any investment in Indian market. The following category of investors can register themselves as Foreign Institutional Investor (FII):
- Pension Funds
- Mutual Funds
- Investment Trust
- Insurance or reinsurance companies
- Endowment Funds
Any high net-worth foreign individual can invest in Indian market by registering themselves as sub-account of FII
Qualified Foreign Investor (QFIs)
Qualified Foreign Investors (QFIs) is defined as any foreign individual, groups or association or residents from country which is member of FATF. QFI should be signatory to International Organisation of Securities Commission. A QFI can invest in India without maintaining any sub-account as an FII. It is a sub-category of FII.
QFIs are permitted to invest in specified instruments by opening Demat account in SEBI approved Qualified Depository Participant.
Download as PDF