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.
Table of Contents
Let’s understand FDI vs FPI one by one:
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:
There are three types of FDI:
There are two routes of infusing FDI in India:
Sector where FDI is prohibited
The FDI is prohibited in following sectors/activities:
FDI pattern of last 5 years
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.
A foreign investment is categorized FPI if investment is:
Foreign Portfolio Investors include Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs).
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):
Any high net-worth foreign individual can invest in Indian market by registering themselves as sub-account of FII
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.
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