There are different types of foreign investment. Foreign investors can invest in India either through Foreign Direct Investment (FDI) or Foreign Institutional Investment (FII).
Types of Foreign Investment
1) Foreign Direct Investment
Foreign direct investment (FDI) is when a foreign company or individual makes an investment in India that involves either
(i) establishing new business operations (known as green-field FDI) or
(ii) acquiring business assets, including controlling interests, in an already existing Indian company. (known as brown-field FDI)
FDI is distinguished from FII in the sense it establishes a long-term relationship and involves substantial control over the decision making of the company.
- Inward FDI is when foreign companies or individuals invest in India.
- Outward FDI is when Indian companies or individuals invest in foreign countries
As per the Companies Act 2013, if a foreign investor owns more than 10 % shares in a listed company, it will be treated as FDI. The rationale behind the rule is that the higher equity ownership will result in substantial control over the decision-making of the company.
2) Foreign Institutional Investment
FII is when foreign institutional investors invest in the shares of an Indian company, or in bonds offered by an Indian company. So, if a foreign investor buys shares in Reliance, it is an FII.
Only institutional investors like Investment companies, Insurance funds, etc. are allowed to invest in the Indian stock market directly. Hence the term foreign institutional investor. These investors have to get a license from SEBI.
However, if foreign individuals want to invest in India’s markets, they have to get themselves registered as a sub-account of an FII. The FII will buy shares/ bonds from the Indian markets on their behalf.
India allows only wealthy foreign individuals or high net worth individuals (HNIs) who have a minimum net worth of $50 million to be registered as a sub-account of a foreign institutional investor (FII).
Foreign institutional investors are also known as ‘hot money’ because it is not stable in nature. The FIIs can pull out money from a country’s stock market/ bond market overnight.
3) Qualified Foreign Investment
As we know, foreign individuals cannot invest directly in India’s markets without sub-accounts with an FII.
As an alternative, QFI was introduced in the year 2002. A Qualified Foreign Investor can invest in India without sub-account.
However, they have to open a Demat account and Trade account with a depository participant in India.
[So the difference between QFI and FII is that a QFI can invest in India directly without subaccounts]
- The Qualified foreign investor (QFI) can be an individual, group, or association.
- The QFI should be a resident in a foreign country that is compliant with the standards of the Financial Action Task Force (FATF).
- In addition, the QFI must be a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding. (MMOU).
4) Foreign Portfolio Investment
In the Indian context, FIIs (along with sub-accounts with FIIs) and QFIs can be collectively classified as Foreign Portfolio Investment (FPI).
Note: The accounting record of FDI inward, FDI outward, etc. are reflected in the capital account of a country’s balance of payment (BOP). Read this article: /bop-current-account-explained/
So, we have explained the different types of foreign investment in the Indian context.
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