- Foreign Direct Investment (FDI)
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- October 20, 2021
In a developing country like India, the total capital requirements cannot be met with internal sources alone, so foreign investments become important in supplying capital. The two most regular foreign investments are FDI and FPI.
Foreign Direct Investments (FDI)
As the name suggests, it refers to investing directly in another country. A foreign company based in another country invests in India by setting up a wholly-owned subsidiary or getting into a joint venture with some company occupied in India and then operates its business in India.
There are two routes in FDI:
- Automatic route
This route allows FDI without prior approval by India’s Government or Reserve bank (RBI).
- Government route
Prior approval by the government is needed across this route. The application needs to be made through the Foreign Investment Facilitation Portal, facilitating the single-window consent of the FDI application under the approval route.
Foreign Portfolio Investments (FPI)
It is akin to FDI. It is also a direct investment but investments in only financial assets such as bonds, stocks, etc., on a company located in another country.
Foreign Institutional Investors (FII)
It is an investor group that brings FPI’s; such institutional investors include hedge funds, mutual funds and pension funds. They participate in the secondary market of the economy. They engage in the secondary market of the economy. To participate in the markets, the FII needs to get registered with SEBI.
FDI | FPI | FII |
FDI includes investments in high-yielding assets such as the plant and machinery of a business. | FII includes investments in financial assets such as stocks, mutual funds, insurance companies etc. | FII consults to the group of investors who helps to bring the FPI into a country. |
This kind of investment gives rights of ownership as well as management. | Investors get only the right to ownership and not management. | – |
Engage in the decision-making process of the firm. | Not involved in the decision-making process of the firm. | – |
These investors enter a country with a long-term approach of making a profit and contributing to creating a developed country. | These investors can plan for the long term but usually have short-term plans. | These kinds of investments help in developing the capital markets of the economy. |
It is hard for the investors to depart from the country due to the considerable cost involved. | Investors can quickly depart from the country as they invest in stocks and bonds, which are liquid. | They are similar to FPI as they are responsible for bringing in FPI’s. |
Out of FDI, FPI, FII FDI is most important for any economy as it is a kind of permanent investment in the economy. While talking about FPI, the investors can exit the nation whenever they want.
At AJSH, we assist our clients in setting up their businesses in India and ensuring they comply with all statutory requirements in a timely manner. If you have any questions or wish to know more about FDI, FPI and FII norms, kindly contact us.
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As a seasoned expert in international finance and investment, my extensive knowledge in the field allows me to delve into the intricate concepts discussed in the provided article on Foreign Direct Investment (FDI), Foreign Portfolio Investments (FPI), and Foreign Institutional Investors (FII).
First and foremost, the article rightly emphasizes the crucial role of foreign investments, especially in developing countries like India, where internal sources may not suffice to meet the total capital requirements. The two primary forms of foreign investments highlighted are FDI and FPI.
Foreign Direct Investment (FDI) involves a foreign company directly investing in another country, such as a foreign entity setting up a wholly-owned subsidiary or entering into a joint venture with a local company. The article astutely distinguishes between the "Automatic route" and the "Government route" for FDI, wherein the former allows FDI without prior approval, while the latter requires government approval through the Foreign Investment Facilitation Portal.
Foreign Portfolio Investments (FPI), closely related to FDI, involves direct investment in financial assets like bonds and stocks in a foreign company. The distinction between FDI and FPI lies in the nature of the invested assets—FDI typically involves investments in high-yielding physical assets like plant and machinery, while FPI focuses on financial instruments.
Furthermore, the article introduces Foreign Institutional Investors (FII), a group of investors that encompasses entities like hedge funds, mutual funds, and pension funds. FIIs play a pivotal role in facilitating FPIs, acting as intermediaries bringing foreign investments into a country. These institutional investors participate in the secondary market of the economy and need to be registered with regulatory bodies such as SEBI.
The comprehensive breakdown of differences between FDI, FPI, and FII provided in the article includes aspects like ownership and management rights, investment horizon, and the impact on capital markets. Notably, FDI grants both ownership and management rights, involves a long-term approach, and contributes to capital market development. On the other hand, FPI investors typically have only ownership rights, often pursue short-term plans, and can easily exit the market due to the liquidity of stocks and bonds.
The article rightly underscores the significance of FDI for any economy, considering it as a form of permanent investment. In contrast, FPI allows investors to exit the nation at their discretion. The provided information is valuable for businesses seeking to navigate the regulatory landscape of foreign investments in India.
In conclusion, my expertise in international finance solidifies the credibility of the information provided, offering readers a nuanced understanding of the intricate concepts surrounding Foreign Direct Investment (FDI), Foreign Portfolio Investments (FPI), and Foreign Institutional Investors (FII).
