FDI vs FPI

FDI vs FPI

Subject : Economics

Context : Net foreign direct investment (FDI) into the country hit a fresh high of $43.366 billion in the year ended March 2021 as it crossed the previous high of $43.013 billion that it had reach last fiscal.

Concept :

Foreign Direct Investment

• FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).
• It is different from Foreign Portfolio Investment where the foreign entity merely buys stocks and bonds of a company. FPI does not provide the investor with control over the business.
• Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise.
• FDI has three components, viz., equity capital, reinvested earnings and intra-company loans.
• Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
• Reinvested earnings comprise the direct investors’ share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
• Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.

Routes through which India gets FDI:

• Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
• Government route: In this, the foreign entity has to take the approval of the government.
• The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through approval route.

Foreign Portfolio Investments

• Foreign portfolio investment (FPI) refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.
• This type of investment is at times viewed less favorably than direct investment because portfolio investments can be sold off quickly and are at times seen as short-term attempts to make money, rather than a long-term investment in the economy.
• Portfolio investments typically have a shorter time frame for investment return than direct investments.
• As securities are easily traded, the liquidity of portfolio investments makes them much easier to sell than direct investments. With any equity investment, foreign portfolio investors usually expect to quickly realize a profit on their investments.
• Portfolio investments are more accessible for the average investor than direct investments because they require much less investment capital and research.
• Examples of foreign portfolio investments include stocks, bonds, mutual funds, exchange traded funds, American depositary receipts (ADRs), and global depositary receipts (GDRs).