Wednesday, February 5, 2025

Entry Routes for Foreign Investment in India:

There are broadly three entry routes are there for foreign investment in India:

(a) Foreign Portfolio Investor (“FPI”) ;

(b) Foreign Direct Investment (“FDI”); and

Foreign Portfolio Investment (FPI):

FPIs are short term investments in the form of:

Such investment is subject to the total holding by each FPI, investment in listed company should be less than 10% of the total paid-up equity.

FOREIGN DIRECT INVESTMENT (FDI):

FDI is a long-term investment made from abroad alongwith technology, entrepreneurship, capital and managerial know-how.
FDI is about being shareholder in the company so FDI is equity holder exclusively and debt is never categorized as FDI.

Technically,

FDI is the investment by a person resident outside India

(a) in an unlisted Indian company; or

(b) in 10 percent or more in a listed Indian company.

Investments under the FDI route are subject to entry routes, sectoral caps, pricing guidelines, and attendant conditionalities.

When total holding of the FPI in a listed Company increases to 10% or more of the paid-up share capital, the total investments of the FPI are re-classified as FDI.
FPI is considered ‘hot money’ as it is more speculative and volatile and hence have limited potential in economic development of the country while FDI is comparatively more stable and contributes in the economic development of the country.
FDIs own controlling stake in a company by investing in its physical assets while FPIs invest only in financial assets.
Significant tax benefit for FPIs as securities held as FPIs are subjected to capital gains while FDI income is subjected to corporate income (which is subject to higher rate of tax).
FII inflows have a very high service burden among all the foreign resources ie FDI, foreign borrowings, NRI deposits.
Actually FII comes to earn good returns from the market and exchange rate speculations.
FDI is regulated primarily by India's Department of Promotion of Industry and International Trade (DPIIT), under its Foreign Exchange Management Act regime (FEMA Regime) while SEBI REGULATES FPI.
The FPI route is considered attractive for debt investments given debt investments by FPIs are not classified as external commercial borrowings, which is far more regulated.

Foreign investor, who is registered under the Regulations and proposes to make investment in accordance with the Regulations.
RBI has restricted investment by FVCIs to investment in:

(a) Indian companies engaged in 10 permitted sectors (including infrastructure, biotechnology and IT related to hardware and software);

(b) start- ups irrespective of the sectors; and

Investments by FVCIs in capital instruments are subject to sectoral caps on foreign investment in India and attendant conditions.

The key benefits that the FVCI route provides are exemptions from:

(a) the pricing guidelines stipulated under the FEMA Regulations, and

(b) pre-issue capital lock-in requirements prescribed under the regulations governing issue of securities.

Therefore, foreign investors seeking to make investments in the ten permitted sectors, start-ups made investments under the FVCI route.
Investments under the FVCI route are subjected to at least two-third of its investible funds in equity and the remaining one-third of investible funds in debt in which the FVCI already has equity investment.

Overseas Direct Investment (ODI) is what Indian residents are investing abroad in the form of assets (opposite of FDI) abroad, shares abroad (opposite of FPI) like Western firms like JAGUAR, Novelis have been acquired by Indians abroad.
It also includes Reserve Assets held by RBI in the form of Foreign currencies that RBI is holding.