Difference between FDI,FPI and FII, Notes on What is FDI,What is FPI, Types of FDI, Types of FII. Advantages, Disadvantages of FDI and Obstacles in India free Download

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.

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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.	Only investment of 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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