Financial Reporting

Types of Foreign Investment in India



Foreign Direct Investment is a module of country’s national financial accounts. In Foreign direct investment, the investment is made by foreign assets into domestic structures, equipment, and organizations. FDI is believed to be more useful to a country than investments in the equity of its companies because equity investments are potentially “high risk”. Whereas, FDI is durable and generally useful when things go well or badly. FDI means investment by Non-resident person or organization Resident outside India in the Capital of an Indian company as per Foreign Exchange Management Act.

Significance of FDI

  • Financial Transfer in Foreign Exchange
  • Production Technology
  • Management Skills
  • Physical Resources like Machinery Tools Equipment etc.
  • Institutional System
  • Information & Database
  • Worldwide Contacts
  • Research & Development
  • Training Resources
  • Trade Channels

Factors affecting FDI to Come in India

  • Stable democratic environment over 60 years of independence
  • Large size of the economy, particularly the large and growing middle class
  • Open door policy towards FDI
  • Abundance of natural resources
  • Diversified industrial sectors
  • Large and growing market
  • Cost-effective and skilled labor, World class scientific, technical and managerial manpower
  • Cheap and abundant availability of technical manpower at various level of skills
  • Emerging trends towards deregulation/ privatization and globalization
  • Large network of banking institutions
  • Declining structure of interest rates in-tune with global trends
  • Large base of existing MNC‟ in number of industrial segment

Types of Foreign Investments

Basically, there are three types of Foreign Investments in India. They are as follows:

  • Foreign Direct Investment (FDI)
  • Foreign Portfolio Investment (FPI)
  • Foreign Institutional Investment (FII)

Foreign Direct Investment (FDI)

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Foreign Direct Investment means an investment made directly by a person or organization in the business operation of another foreign country. In other ways, we can say that Foreign Direct Investment is an action of transferring capital overseas for the purpose of establishing a name for a company in the foreign country.

Foreign Portfolio Investment (FPI)

When any foreign organization or non-residents invest in Indian securities including shares, Debentures, Government bonds, corporate bonds, Infrastructure securities, convertible securities etc. it is Foreign Portfolio Investment. Such investors make sure that the capital invested can have controlling interest. While investing such capital they ensure that the scheme is flexible for entry and exit.

Foreign Institutional Investment (FII)

Foreign Institutional Investor means an entity established or incorporated outside India which proposes to make an investment in India and which is registered as an FII in accordance with the SEBI (FII) Regulations 1995. Foreign Institutional investment can make an investment in funds like hedge funds, insurance companies, pension funds and mutual funds.

Advantages of FII

  • Enhanced flows of equity capital
  • FIIs have a greater appetite for equity than debt in their asset structure. It improves capital structures.
  • Managing uncertainty and controlling risks.
  • FII inflows help in financial innovation and development of hedging instruments.
  • Professional bodies enhance competition and efficiency of financial markets.
  • Improved corporate governance

Relaxation in Policies

The government has hassle-free existing laws and made changes in some new laws to promote better opportunities for foreign investment in India. A five-year tax holiday has been extended to enterprises that are working in the development of infrastructural facilities. The Foreign companies which do not have registered office in India even can start multimodal transport services. RBI authorizes 100% foreign investment in the construction of roads and bridges.

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