Foreign investments in India have broadly been categorized as Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The reason for this classification is the internationally accepted norm that owning 10% or higher stake would give controlling rights to the investor, else not. Thus, foreign investments that own greater than 10% stake in the firm are classified as FDI, and if the ownership is less than 10% then classified as FPI. Though owning 10% of the stake would not yield ownership control, yet this definition has been accepted as the yardstick for distinction between FDI and FPI world over. This definition has been put forth by Organization of Economic Cooperation and Development (OECD) and has been reiterated by Arvind Mayaram Committee Report of 2014.

Raising of Funds:

The other point of difference between FDI and FPI is the way in which funds are raised. FDI funds are raised in a transparent manner that clearly establishes the relationship between issuer and holder, while FPI funds are raised in a manner that keeps the relationship between the issuer and the holder anonymous.

According to Arvind Mayaram Committee report, Foreign Direct investment (FDI) is characterised by a long term relationship and significant degree of influence that is signified by ownership of 10 percent or more of the ordinary shares or voting power.

Degree of Tradability:

FPI and FDI investments also differ in context of degree of tradability. FPIs are easily tradable on stock exchanges whereas FDIs are not.

FDI primarily takes place via mergers and acquisitions (M&A) with the objective to build new facilities via Greenfield or brownfield investments, whereas FPI is the ‘Hot Money’ that seeks quick returns on investment. Foreign Investment in an unlisted company irrespective of threshold limit shall be treated as FDI.

Route for FDI investments in India:

• Automatic Route: Under this route no central government permission is required.     However, investment information has to be shared with RBI within 30 days of investment.
   
• Approval Route: This route is also known as the FIPB route as foreign company has to take permission from FIPB before investing in India. Approval from Cabinet Committee on Security is required for more than 49% FDI in defense. The proposals involving investments of more than INR 30 billion are considered by Cabinet committee on Economic Affairs.

Route for FPI investments in India:

FPI investments take place via primary and secondary segments of capital markets.

Benefits of Foreign Investment:

A firm that has surplus capital and is aiming to acquire new markets and raw materials abroad, can establish itself in the host country’s market either by undertaking a Greenfield (new) investment or by partnering with an existing firm in an already established project. The foreign investor would earn profits which can be repatriated to his home country after paying tax in the host country. The host country benefits by generation of employment opportunities, investment in supporting infrastructure like road, railways, logistics etc. As the foreign firm expands it’s production base and employs the local populace, the government of the host nation collects greater direct and indirect tax receipts which strengthens its fiscal position and macroeconomic parameters.

Determinants of Foreign Inflows:

• Political certainty – Only when the ruling political dispensation of the country is consistent with its programmes and policies, firms are able to plan their expansion plans.
• Taxation policy – Only when tax liability is certain in the host country, will the foreign firm undertake investment. For ex. The Vodafone retrospective taxation issue dissuaded potential foreign investors to delay their plans of investing until there was clarity on the issue.
• Exchange rate stability – Only when the host nation’s exchange rate is stable, will the foreign investors be able to repatriate their profits at a competitive rate. If the host nation’s currency is volatile and keeps depreciating, the foreign investor would have to pay more in terms of host nation’s currency to buy his own currency and thus suffer loss. This loss is attributed to currency risk.
• Availability of cheap factors of production – will allow the foreign firm to incur a low cost of production and thus raise his profitability.
• Prevalence of law and order – is a necessary pre-requisite for economic activity to take place.

The reforms undertaken by the incumbent Modi govt. have positioned India as the most favoured investment destination in the World. In the financial year 2015-16, India received highest ever capital flows to the tune of $55.46 billion signifying that India’s economic reforms and liberalization policies have infused great confidence in foreign investors.