What is Foreign Investment?
Flows of Capital from
one nation to another in exchange for significant ownership stakes in domestic
companies or other domestic assets is known as Foreign Investment. Foreign
Investment can come in several ways.
Types of Foreign Investment:
1.
Foreign
Direct Investment (FDI)
2.
Foreign
Portfolio Investment (FPI)
1.
Foreign Direct Investment (FDI): FDI refers to investment in a foreign country where
the investor retains the control over the investment. It means that a foreign
investor generally an MNC invest in a country by way of setting up a plant,
project or factory. They come with an intention of producing a commodity, construction
of some infrastructure, providing some services (like Banking, Insurance,
Aviation etc.) or technology. FDI is the most preferred form of Foreign Capital
because it is stable, it is for long term and adds productive capacity to
economy.
FDI can come to a nation through following routes:
You might have heard about:
29% FDI is allowed under Automatic route and 76% FDI is allowed under FIPB
route. So here is the detail about the FDI routes.
a.
Automatic Route: Under this, a
foreign investor does not require a prior approval of RBI before investing in
INDIA. It has to inform within one month to RBI of bringing its Capital.
Further, within next one month it has to inform RBI of issuing shares to
non-resident Indians.
b.
Foreign Investment Promotion Board (FIPB):
Under this, a foreign investor has to seek a prior approval of FIPB before
investing in India. FIPB was set up in 1992. The sectors and industries for
which FIPB approval is needed may be those:
·
Activities requiring industrial license
·
Small Scale Industries
·
Industry where the Foreign investor already
have a joint venture etc.
c.
NRIs
and Overseas Corporate Bodies (OCB): Under this, government
encourages NRI and OCB to invest in INDIA. Most of this are owned by NRIs.
Advantages / Merits of FDI:
·
It brings Foreign
Exchange.
·
It helps increase
the investment level, income and employment
in the host country
·
Increase the tax
revenue of the government.
·
It bridges trade
Gap i.e. it promotes exports
·
Reduces import
requirements
·
Helps to increase
competition
·
Improves the
quality and reduces cost of inputs
·
It bridges resource
gap
·
It bridges
technology gap i.e. Facilitates the transfer of technology
·
Enhance productive
capacity
Disadvantages
/ Demerits of FDI:
·
It threatens a country’s economic and
political sovereignty
·
Increase in prices of land and Property
·
Focus on short term personal profits rather
than long term benefits for the economy
·
Suppression of domestic entrepreneurs and
industries
Obstacles for FDI in India:
·
Pathetic Infrastructure
·
Red Tapism: It means the delay in file work
in the government offices.
2.
Foreign Portfolio Investment (FPI): FPI
means a foreign investor invest in a country’s stock market (Capital Market) by
buying shares, bonds, debentures. FPI is short term and volatile and has a
tendency to fly out of the country. FPI hence is also called as Hot money.
NOTE:
Do not get confuse FPI with FII. FII is a type of FPI, it means both are more
like same. All FII must be FPI but all FPI may not be FII.
FPI comes to a nation through following routes:
a.
Foreign Institutional Investor (FII):
Foreign Institutional Investors (FIIs) are allowed to invest in India in the
securities traded in both primary and secondary capital markets subjected to
their registration with SEBI. These securities include shares, debentures,
warrants, and units of mutual funds, government securities and derivative
instruments.
b.
Global Depository Receipt (GDR) / American
Depository Receipt (ADR): Under this, shares are issued by an
Indian company to an intermediary called as Depository. After this the Depository
issues the receipts i.e. GDR (in pound or Euro in European markets) or ADR (in
US Dollar in American Markets). After this Foreign investor can invest in these
Receipts.
For ex: if
Reliance wants to sell some of its share to raise Capital from foreign
investors then Reliance sells its share to a Depository. The Depository buys
the shares and issues a receipt (i.e. ADR or GDR) and sells to the foreign
investor.
c.
Offshore Funds & NRIs:
Under this, NRI and certain funds registered as viable funds are permitted to
invest in Indian Capital market.
Difference between FDI and FPI:
FDI
|
FPI
|
|
Full Form
|
Foreign Direct Investment
|
Foreign Portfolio Investment
|
Involvement
|
Involved in management and ownership
control; long-term interest
|
No active involvement in management.
Investment instruments that are more easily traded, less permanent and do not
represent a controlling stake in an enterprise.
|
Sell
|
It is more difficult to sell off or pull
out.
|
It is fairly easy to sell securities and
pull out because they are liquid.
|
Comes from
|
Tends to be undertaken by Multinational
Companies
|
Comes from more diverse sources e.g. a
small company's pension fund or through mutual funds held by individuals;
investment via equity instruments (stocks) or debt (bonds) of a foreign
enterprise.
|
What is invested
|
Involves the transfer of non-financial
assets e.g. technology and intellectual capital, in addition to financial
assets.
|
|
Volatility
|
Having smaller in net inflows
|
Having larger net inflows
|
Management
|
Projects are efficiently managed
|
Projects are less efficiently managed
|
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