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Investments are essential for the growth of an economy and every country encourages domestic industries to invest in various investment avenues for the economic growth of the country. Investments in a country comprise domestic investments as well as foreign investments. FDI and FPI are the most common routes through which capital inflow takes place in a country abroad. We all know that Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the most common forms of foreign investments in India. We know that both contribute to the economic growth[1] and development of the country. We also know that the Indian government along with the security market regulators are actively involved in reducing the regulatory requirements to promote FDI and FPI in India. But do we know the differences between FDI and FPI? Do we know what FDI and FPI exactly are? If not, then we will find out in this blog.
The various basic difference between FDI and FPI is that when a foreign investor invests with the intention to have a long-term interest, it is known as FDI. To make FDI, the investor mainly acquires business assets, obtains ownership or controlling interest in a company and gets involved in the day-to-day business operations. Inflow is not only limited to money but also knowledge, skills and technology. To make FDI in India, an investor has to acquire a minimum of 10% of the total stake in the company. Acquiring at least 10% of the stake allows the investor to get a substantial amount of influence and control over the investee company. Whereas talking of FPI, is a short-term profit-making investment vehicle where foreign investors invest capital in financial assets like stocks and bonds. It involves the purchase of financial securities which can be easily bought or sold. FPIs yield short-term financial gain and it does not result in control over managerial operations in the investee company. Unlike FDI, FPIs have to be less than 10% of the total stake in a company. Once it touches 10% of the total stake in a company, it will be considered FDI. In simple words, it can be said that FDI acquires a controlling stake in a company by investing in physical assets to obtain a more long-term investment. Whereas FPI is invested in the financial assets of a company and is usually considered ‘hot money’.
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The Indian Government has taken several steps to relax the FDI norms across various sectors such as defence, PSU, oil refineries, power exchanges, stock exchanges, etc. In the financial year 2021-22, India has attracted the highest-ever FDI inflows including FDI equity inflows in service sectors. In addition to this, the UNCTAD’s World Investment Report, 2022 states that India will be the 7th largest beneficiary of FDI in the list of top 20 countries.
When it comes to FPI, it is a new form of investment vehicle which have been operating since 2019 subject to certain exceptions which came into force in 2021. So it is too early to analyze the performance of FPIs in India.
FDI, as well as FPI, are common ways to invest in a foreign country. Both are important sources of fundraising sources for most countries. FDI is usually preferred for attracting foreign investment as it is stable when compared to FPI and also ensures a long-term commitment. FPIs on the other hand are highly volatile and uncertain. In FDI, high-net-worth individuals or institutions can invest whereas in FPI only a retail investor can invest. However, both have a positive impact on the inflow of funds in the country and improve the position of the balance of payments.
Also Read:CFDI vs. FPI – Read the Exhaustive Analysis of Foreign InvestmentAnalysis on Types of Foreign Investment in India: FPI, FDI and FI
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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