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FDI, FPI and FII - the difference

Foreign Investments

In a globalised world and liberalised economy the growth of any market is decided by the way in which it enables movement of capital from one market to another. Any investment that flows to one country from any other country is known as foreign investment. The flow of funds form cash rich or opportunity less markets to cash needed opportunity rich markets will help the economies to grow. Domestic industries look forward both economic and technologic collaborations. This capital raise from foreign counterparts complements and leads to domestic investments in capital-scarce economies. In India, Foreign investment can only be allowed to take the form of investments ( through Capital market) in listed companies referred to as FII/FPI Investment and any capital raise from other than these investments is termed as FDI.

FDI (Foreign Direct Investment)

Foreign Direct Investment means an investment made by a foreign company in an existing Indian company either direct or by setting up a subsidiary. Say for example if a company in Germany wants to invest in Maruthi they can do that directly or by setting up a subsidiary company in India. In both the ways India is getting foreign direct investment. In case of FDI, the motive of an investor is to gain effective power in an enterprise or significant degree of influence and control over the company. The Investment by the foreign company/group/person is termed as a direct investor and the enterprise where the investment is done is known as direct investment enterprise. A threshold of 10 percent of equity ownership is required to qualify an investor as a “foreign direct investor”.

Importance of FDI

  1. Foreign direct investment is very important to meet the changing capital requirements for the growth of the economy. This works as a source to fulfil the gap between income and savings of an economy.

  2. For proper technology up-gradation and efficient utilisation of resources both material and manpower, every country needs capital infusion.

  3. Efficient inflow of capital also helps in the development of basic infrastructure of the country.

  4. Helps in maintaining proper balance of payment conditions and positions.

  5. FDI helps a country and its firms improve their competitive positions in the country and across the globe.

  6. It helps in technology adoption and up-gradation for the growth of organisations.

  7. It helps to create, maintain and develop better marketing and corporate management network with proper inflow of capital.

What a country need?

  1. Country should have stable foreign investment policies.

  2. Market entry restriction should be minimal.

  3. There should be some tax incentives or exemptions for foreign investors.

  4. The economic factors like interest, subsidies on loans should be available.

  5. Availability of cheap and skilled labour should be there.

Foreign Portfolio Investment

Foreign portfolio investment means an investment made by a group of foreign investors as an investment to earn profit. They will not be bothered about the management of the company. Foreign Portfolio investment is the passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of the stated areas require active management or control of the securities‘ issued by the investor. In other words, FDI and FPI are similar except the fact that foreign investors have no role to play in active management and day to day business.

Some Examples Of Portfolio Investment Are:

  1. Investment in the shares of a foreign company.

  2. Investment by Purchasing the bonds issued by a foreign government.

  3. Acquisition of assets in a foreign country.

Factors Affecting International Portfolio Investment:

  1. The percentage of tax on interest or dividends. Lower the tax higher the investment.

  2. The interest rate offer by the recipient country must be high on Investment.

Foreign Institutional Investor (FII)

FII refers to the group of investors who helps to bring the FPI in a country. It helps the recipient country companies to improve performance. The way through which foreign portfolio investment is to allow into the Indian stock market is foreign institutional investors. Any of the given below entities can be considered as Foreign Institutional Investors.

  1. Pension Funds

  2. Mutual Funds

  3. Investment Trust

  4. Insurance or reinsurance companies

  5. Endowment Funds

  6. Trustees

  7. Bank


  1. India adopts two mechanisms to increase the inflow of foreign capital into the country. one is through FDI and second is by encouraging the portfolio capital inflow which provides financing means to Indian enterprises.

  2. FII plays an important role to create non-debt creating foreign capital inflows and it also develops the Capital market in India, lower the cost of capital for Indian enterprises and indirectly improve corporate governance structures.

  3. FII helps in the building of currency reserves of India, The Major source of their investment is in the form of participatory notes (P notes) also commonly known as offshore derivatives.

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