All About FDI,FII,QFI,FPI etc. (in Hindi)

Lesson 6 of 13 • 54 upvotes • 13:06mins

Vikas Kumar Singh Tomar

FDI The Foreign Direct Investment refers to the direct investment into the production and management. This can be one by either buying a company or by expanding operations of an existing business. One example is Unilever which has its own subsidiary and long term investment here via its subsidiary Hindustan Unilever. This means that FDI brings foreign capital, technology & management. FII FII (Foreign Institutional Investment) and FPI (Foreign Portfolio Investment) are same things. The foreign institutions invest in a capital / money market which is not their home country. Such kinds of investments are seen in the Mutual Funds, Investment Companies, Pension Funds and Insurance Houses. This means that FII/ FPI brings only capital. FII is also called Foreign Indirect Investment. QFI QFI (Qualified Foreign Investor) is an individual, group or association, resident in a foreign country that is compliant with Financial Action Task Force (FATF) standard and that is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding. Though, QFI are also portfolio investors, yet in context with India, QFIs do not include Foreign Institutional Investors or Sub-accounts as per the regulations. Differences between FDI and FII The first notable difference is that while FDI brings foreign capital, technology & management, FII brings only foreign Capital. Second difference we can understand with an example. Suppose, Wal-Mart comes to India and opens up stores here, this means that the investment made by Wal-Mart would come with a long term commitment. Thus, FDI brings in funds with long term commitments. On the other hand, if the company of Warren Buffett buys shares of an Indian company, they can sell it any time (as per regulations). This means that FII does not come with long term commitment. This also means that the money invested in India via FII can be taken back more easily than FDI. Thus, there is always a risk of flight of capital in terms of FII outflows but not generally in FDIs. Why Foreign Investors go for FDI? Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country. FDI can be done to acquire lasting interest in enterprises operating in the target country. Why Foreign Investors go for FII? A portfolio investment does not entail active management or control of the target organization. This is done by the investors if they are not interested in involvement in the management of a company. The objective of the indirect investment is to financial gain only and does not create a lasting interest in or effective management control over an enterprise. How a Foreign Company can enter in India? A foreign company planning to set up business operations in India need to set up a company under the Companies Act, 1956. For example, Hindustan Unilever is the Indian subsidiary of Unilever, British–Dutch multinational consumer goods company. The incorporation of the company can be done via a Joint Venture or Wholly owned Subsidiary. Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the sector/area of activities under the FDI policy. These companies enter into India via an office or representation in India which is known as Liaison Office/Representative Office or Project Office or even Branch Office. Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000 (Establishment in India of branch or office of other place of business). What attracts Foreign Direct Investment? The growth rate of the source economy is an important determinant of FDI into the country. The political and economic stability of the target region attracts FDI. Any FDI investment into the target country depends upon how ‘open’ the economy is towards foreign trade (both imports and exports). Apart from that, the policies, rule, regulations and loopholes incidental thereto also affect the flow of FDI. For example, Mauritius has been top FDI source for India due to the later reasons. What is the impact of FDI on Inflation? FDI has been generally touted as a measure to dampen inflation. But this can NOT be concluded in all situations. The FDI’s impact on dampening the inflation is based upon the assumption that FDI would result in the developing of country’s back-end infrastructure and crack the supply bottlenecks. Practically, it may or may not happen. Economics has no rule to link FDI and Inflation because Inflation may have many reasons behind it rather than only infrastructure and supply bottlenecks. Generally the FDI’s role in containing inflation is supported by the facts that: It improves Infrastructure It improves supply chain It brings permanent investment What is the impact of FII on Inflation or vice-versa? The FII impact inflation indirectly rather than directly. If there an excess inflow of FII, it may shoot the prices of stocks very high. When stocks become costly, there would be a huge demand for Indian rupees. To fulfil that demand, RBI would need to print more money and pump this money to economy. All of a sudden, if FII withdraw the funds, there would be an excess of liquidity in the markets. This would lead to a situation of too much money chasing too few goods and thus things would become costlier. Thus, unchecked FII inflow and outflow can bring into demand pull inflation. When there is a high inflation in the country, it repels FII. Rising inflation in India makes the investors bothering. What are benefits of FII? Controlled FII helps in improving the local environment. When huge FII comes in, there is much availability of fund for local companies to increase their capacity. The sufficient FII inflow in the country means that the need to borrow from international sources seldom arrives. This helps in those countries where domestic saving is not sufficient for funding the expansion plans. Why FII inflows are volatile? FII inflows are aimed at making money on the invested capital i.e. Capital gains. The capital gains are linked to the interest rates and stock market environment. If the interest rates / potential gains in one country go down in comparison to other target country, the FII inflow may halt or outflow may begun. That is why FII money is called hot money sometimes. In summary, the most suitable conditions for FII are as follows: Attractive Interest Rates Adequate money supply and stable rate of inflation Stable exchange rates Low deficit in Balance of payments.