Defence Exam Notes: FDI and FPI

Today we will learn an essential topic of Economy FDI and FPI/FII. This article is important for upcoming Defence exams.

Capital is necessary for the economic growth of the country, but since most countries are not able to meet their total capital requirement from domestic sources alone, they go for foreign investors.

Foreign Investors invest in an overseas country through two routes:

Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI)/Foreign Institutional Investor

Question. What is Foreign Investment?

Investment done by an individual or a company in asset or ownership of a company located in a foreign nation is known as foreign Investment.

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Foreign Direct Investment

Investments by foreign companies, mostly MNC’s in construction, services, insurance, aviation, manufacturing, etc. In most of the cases, these investments came along with the latest technology used by the foreign Investor, which enhances productivity and motivates domestic companies to emulate foreign companies.

Thus FDI means that foreign Investor wishes to invest in a country with the long term objective of staying in the country, manufacturing in a country, making profits, sending parts of the profits to its parent company and thus spreading its operations globally. Hence by definition, FDI is the most preferred and stable form of the foreign capital that stays in the country for a long period of time.

There are two routes for FDI in India.

Automatic Route: Prior approval of Government or RBI is not required before Investment
Government Route: Prior approval of Government is required through this route.

Note-

To strengthen ‘Make in India’ for the defence sector, the Government has increased the Foreign Direct Investment (FDI) limit from 49% to 74% in the defence sector under the automatic route.

Foreign Portfolio Investment

FII means that foreign investors invest in a country like India, by way of investing in the stock market and buying shares and bonds of Indian companies with the sole objective of making short term gains. Thus by definition, portfolio investment can be volatile in nature and thus called “hot money,” i.e. money that has a tendency to fly out of the country if the stock market is unstable.

Thus it is also called “fly by night capital”.Portfolio investment is made with the aim of short term investment unlike FDI (long term)

In India Portfolio investments were allowed for first time in 1993. Foreign investors are allowed to invest in India,s stock market by way of buying shares of Indian companies, bonds/debentures of Indian companies and even in mutual funds. They are also permitted to invest in government securities. Portfolio Investment in India comes through three routes.

Foreign Institutional Investors
ADRs/GDRs
Offshore funds and NRI.’

FDI	FPI
Foreign Firm is investing in the specific economic sector in India.	Foreign Financial Institution Investing in Portfolio of financial instrument in India
Physical Investment also called a long term investment.	No physical Investment, Short term Investment.
Better brings technology to the country.	Volatile nature. It does not bring technology. Also called as hot money.