FDI vs FPI
Notes
Foreign Direct Investment (FDI) is an investment by a non-resident in a business enterprise with a lasting interest and control or significant influence. In India, a foreign holding of 10% or more of the paid-up equity of an Indian company is treated as FDI. Foreign Portfolio Investment (FPI) is investment in financial assets (shares, bonds) with less than 10% equity in a company and without management control.
FDI routes in India
- Automatic route: no prior government approval; most sectors, often up to 100%.
- Government route: prior approval through the Department for Promotion of Industry and Internal Trade (DPIIT) via the Foreign Investment Facilitation Portal (FIFP) (the FIPB was abolished in 2017).
- Prohibited sectors: lotteries, gambling, chit funds, Nidhi companies, tobacco manufacturing, and real estate business (excluding townships).
- Press Note 3 (2020): investments from countries sharing a land border with India (including China) need government approval.
- Sectoral caps vary: defence (74% automatic, higher with approval), insurance (raised to 74% in 2021, with moves towards 100%), multi-brand retail (51% with conditions).
FPI: regulated by SEBI (the FPI Regulations, 2019); registered investors fall in Category I and II; investment through the stock exchanges and bond markets; participatory notes (P-notes) allow indirect access.
Basis | FDI | FPI |
|---|---|---|
Stake | 10% or more; lasting interest | Below 10%; financial return only |
Control | Management control or influence | No control |
Nature | Long-term, stable | Short-term, volatile ("hot money") |
Assets | Factories, businesses, capacity | Shares, bonds, mutual funds |
Effect on economy | Brings capital, technology, jobs | Raises market liquidity, but can cause sudden outflows |
Regulator | DPIIT, RBI (FEMA) | SEBI, RBI |
Exit | Difficult | Easy |
Trends: FDI sources: Singapore, Mauritius, USA, Netherlands, Japan; sectors: services, computer software, trading and automobiles. FPI flows are volatile and respond to global interest rates and risk sentiment; the Government promotes FDI through Make in India (2014), PLI schemes and Start-up India.
Key Points
- FDI: 10% or more, with control; FPI: below 10%, passive.
- FDI routes: automatic and government (DPIIT).
- FPI is regulated by SEBI; it is volatile.
- Press Note 3 (2020) restricts investments from land-border countries.
- FDI is more stable and brings technology.
MCQs
Q1. A foreign investor holding 12% of a company's equity is classified as: (a) FPI (b) FDI (c) ECB (d) NRI deposit Ans: (b).
Q2. FPI in India is regulated by: (a) DPIIT (b) SEBI (c) NITI Aayog (d) Ministry of Commerce Ans: (b).
Q3. Which of the following is a feature of FPI? (a) Long-term control (b) Volatile "hot money" (c) Brings technology (d) Greenfield investment Ans: (b).