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Issues in Indian Commerce Chapter 5 FDI AND FOREIGN PORTFOLIO INVESTMENT
Foreign Direct Investment FDI refers to foreign investment in which the investor gets a lasting interest in a business enterprise in another country. It includes setting-up a direct business interest in a foreign country such as purchasing or setting up a manufacturing business, building warehouses, or purchasing buildings.
Foreign Portfolio Investment (FPI) FPI refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.
Difference between Foreign Direct Investment and Foreign Portfolio Investment Basis 1. Meaning Foreign Direct Investment (FDI) Any investment from an individual or business firm that is located in a foreign country into a country is called Foreign Direct Investment. 2. Management Generally in FDI, a foreign business and Control entity acquires ownership or controlling stake in the shares of a business corporate in one country or establishes businesses there. 3. Type of FDI consists of equity capital, Investment technical and managerial services, capital equipment and intermediates inputs and legal rights to patented or secret products, processes or trade-marks. 4. Time Period Foreign direct investment is generally long term in nature and relatively permanent. 5. Type of FDI generally deals with primary Market market. Investors purchase shares directly from the company through IPOs, private placement and flow from public. 6. Source of Most of the FDI is made by large Investment business corporations such as multinational corporations. Foreign Portfolio Investment (FPI) FPI refers to the amounts raised by business corporations through Euro Equities, Global Depository Receipts and American Depository Receipts. In foreign portfolio investment, the foreign entity merely buys equity shares of a company. FPI takes the form of the purchase of equity in a foreign stock market or credit or capital from private or official sources. Foreign portfolio investment is generally short term in nature and relatively temporary. FPI generally deals with secondary market. Investors purchase securities of business entity i. e. shares, debentures and bonds through stock exchanges. FPI is generally made by foreign institutional investors like banks, financial institutions, mutual funds.
7. Return The return that an investor acquires on FDI usually take the form of profit. 8. Favourable or FDI tends to be viewed more Less favourably. It involves Favourable establishing more of a substantial long-term interest in the economy of a foreign country. 9. Entry and Both entry and exit in foreign Exit direct investment are complex and difficult. 10. Risk FDI involves more risk, work and commitment. 11. Liquidity In FDI, it is much more difficult to liquidate or pull out of the investment. 12. Accessibility The return that an investor acquires on FPI usually take the form of interest payments or dividends. FPI is at times viewed less favourably than FDI because portfolio investments can be sold off quickly and are at times seen as short-term attempts to make money. Both entry and exit in foreign portfolio investment are simple. FPI involves less risk, work and commitment. In FPI, as securities are easily traded the liquidity of portfolio investments makes them much easier to sell than direct investments. Foreign direct investments are Foreign portfolio investments are less accessible for average more accessible for the average investors because they require investor than FDI because they heavy capital investment. require much less capital investment.
13. Suitability 14. Modes of Investment FDI is likely only suitable for large-corporations, institutions and private equity investors buying stakes of foreign companies. In India, FDI may take the form of FDI is likely only suitable for banks, financial institutions and mutual funds. In India, FPI may be (ii) Joint venture and (i) Investment by Foreign Institutional Investors (FIIs) including NRIs. (iii) Acquisitions. (ii) Investment in (i) Wholly owned subsidiary, (a) GDRs (Global Depository Receipts) (b) FCCBs (Foreign Currency Convertible Bonds
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