Forms of
Foreign Capital
What is FDI?
An investment abroad usually where the company
being invested in is controlled by the foreign
corporation
For example: An American company taking a
majority stake in a company in China
FDIs require a business relationship between a
parent company and its foreign subsidiary
FDI relationships give rise to MNCs
For an investment to be regarded as FDI, parent
firm needs to own ≥10% of ordinary shares of its
foreign affiliates
The investing firm may also qualify for FDI if it
owns voting power in a business enterprise
FDI IN INDIA
FDI is recognized as an important driver of
growth in any country
Is freely allowed in all sectors including services
sector, except a few sectors where the existing
and notified policy does not permit FDI beyond
a ceiling
FDI for virtually all activities can be brought in
through the Automatic Route under powers
delegated by RBI
Government approval required for remaining
activities
These approvals depend on recommendations
Government Initiatives
In August 2019, government permitted 100 per cent FDI under the
automatic route in coal mining for open sale (as well as in developing
allied infrastructure like washeries).
In Union Budget 2019-20, the government of India proposed opening of
FDI in aviation, media (animation, AVGC) and insurance sectors in
consultation with all stakeholders.
100 per cent FDI is permitted for insurance intermediaries.
As of February 2019, the Government of India is working on a road map
to achieve its goal of US$ 100 billion worth of FDI inflows.
In February 2019, the Government of India released the Draft National E-
Commerce Policy which encourages FDI in the marketplace model of e-
commerce. Further, it states that the FDI policy for e-commerce sector
has been developed to ensure a level playing field for all participants.
Government of India is planning to consider 100 per cent FDI in
Insurance intermediaries in India to give a boost to the sector and
attracting more funds.
Foreign Portfolio
Investment
The purchase of stocks, bonds, and money
market instruments by foreigners for the purpose
of realizing a financial return, which does not
result in foreign management, ownership, or legal
control.
Some examples of portfolio investment are:
purchase of shares in a foreign company.
purchase of bonds issued by a foreign
government.
acquisition of assets in a foreign country.
purchase of stocks in a foreign company.
Factors affecting international portfolio investment:
Investors will normally prefer countries where the
tax rates are relatively low
interest rates (money tends to flow to countries
with high interest rates)
exchange rates (foreign investors may be
attracted if the local currency is expected to
strengthen)
Portfolio investment is part of the capital account
on the balance of payments statistics.
A portfolio investment is in contrast to a
direct investment.
What is FII?
Foreign Institutional Investors, foreign
investors invest in the markets of a foreign
country for example, insurance
companies, investment companies,
charitable organizations etc.
Basically outside companies investing in
financial markets of India
International institutional investors must
register with the SEBI to participate in the
market
These are the short term investments.
ADRs and GDRs
Each publicly listed company issues shares and
these shares are listed and traded on various
stock exchanges like in India- BSE, NSE
These shares can also be listed and traded on
foreign stock exchanges like NYSE, NASDAQ.
But to get listed on foreign stock exchanges,
company has to follow the policies of these stock
exchanges. Policies of developed nations’ stock
exchanges are many times more stringent than
our BSE and NSE. Such stringent policies do not
allow companies to list their shares directly on
those stock exchanges.
What happens exactly in case of ADRs and GDRs?
Company deposits a large amount of its shares with a
bank located in the country where the company wants
to list its shares.
The bank issues receipts against these shares, each
receipt will have a fixed number of shares as an
underlying (usually 2 or 4)
These receipts are then sold to the people of this
foreign country and even to NRIs.
Thus the shares get listed on the foreign stock
exchange and they exactly behave like normal stocks,
their prices do fluctuate depending on their demand
and supply.
ECBs
An external commercial borrowing (ECB) is an instrument
used in India to facilitate the access to foreign money by
Indian corporations and PSUs (public sector undertakings).
ECBs include commercial bank loans, buyers' credit,
suppliers' credit, securitised instruments such as floating rate
notes and fixed rate bonds etc., credit from official
export credit agencies and commercial borrowings from the
private sector window of multilateral financial Institutions
such as International Finance Corporation (Washington), ADB,
WTO, etc.
ECBs cannot be used for investment in stock market or
speculation in real estate. The DEA (Department of Economic
Affairs), Ministry of Finance, Government of India along with
Reserve Bank of India, monitors and regulates ECB guidelines
and policies.
Foreign Collaborations like Joint participation
between private parties, foreign firms, govt
sector, between two govts.
Inter-government loans
Loans from International Institutions.
These are also some of the forms of foreign capital.
