Most developing countries need foreign investment to embark upon their path to progress. Global investors, on the other hand, have the incentive to earn better returns on their investment when they invest in such economies. Ever since the opening of the Indian economy in the early nineties, India has been attracting foreign investment which has grown steadily over the years. However, with the aim of protecting the domestic industry, certain restriction and limitations have been imposed on foreign investment in India. Foreign investments are highly regulated in India. We will discuss here the types of foreign investment that are allowed in India.
Foreign Direct Investment-FDI
Foreign direct investment is when a foreign company or an individual invests in another country to acquire business assets in that country. It could be in the form of joint venture with a local partner to start a new project, take a substantial stake in an existing company, or set up new business operations facilities. Any investment made in India to take more than 10% stake in a company is termed as foreign direct investment.
The essence of FDI is that the foreign investment in Indian company should be for a long term committed relationship. However, there are certain norms and restrictions on the amount of investment that can be made by a foreign entity in India. The norms vary across industry. For some industry foreign investors are not allowed to acquire a majority stake in a company, that is, not more than 49%. Whereas in some industry, foreign investors are free to acquire as much stake as they want, even up to 100%. Depending on the type of industry, the FDI caps have been fixed. Generally it is 26%, 49%, 74%, and up to 100%. In some sectors, it is totally prohibited.
Foreign Institutional Investment
When foreign entities make investment in Indian stock market, it is called foreign institutional investment. It could be in the form equity shares, debentures or bond issued by an Indian company. As the name suggests, only institutional investors such as investment banks, mutual funds, and other financial institutions are allowed to directly invest in Indian stocks. All foreign institutions that want to invest in the Indian stock market have to be licensed by the securities and exchange board of India. Foreign individuals who wish to invest in Indian stocks, have to do so by obtaining a sub account from a SEBI registered foreign institutional investor. However, only high net worth foreign individuals (minimum $50 million) are allowed to trade in the Indian stock market. Unlike FDI, FIIs have no long term commitment; they can exit the market whenever they want.
Foreign Portfolio Investment
Foreign portfolio investment is clubbing together of financial assets such as stocks, bonds, or other cash equivalents. Investment can be made by depositing money in the banks or investing through the stock markets. Unlike FDI, this instrument does not allow any direct ownership to the investor. Individuals and companies can directly make FPI in India. Recently, in order to boost foreign investment in India, the RBI has proposed to merge NRI investment route with the FPI route of investment. The RBI has also proposed to allow companies to raise the current cap of 24% FPI in a company up to the sectoral limit through a board resolution.
Qualified foreign investment
Foreign individuals are not allowed to directly invest in Indian markets; they can only invest through foreign institutional investors registered with SEBI. To make it easier for foreign individuals to invest in India and also to boost foreign capital inflows into the country, the qualified foreign investment route was introduced in the year 2002. A qualified foreign investor can be an individual, a group, or an association in a foreign country. Only investors from countries that comply with the standards mandated by FATF are allowed to invest through this route. FATF or Financial Action Task Force is an inter-governmental body of several participating countries to combat money laundering and terrorist financing.
Qualified foreign investors or QFIs can now invest directly in the Indian stocks by opening a demat and trading account with a depository participant. Individual QFIs are allowed to invest up to 5% of the paid up capital of a company and the combined total qualified foreign investment is capped at 10% of the paid up capital of a listed company. The QFI limit is exclusive of the limit set for FIIs, FPIs and NRI investments.
Amy Jones is the expert lawyer at Ahlawat & Associates-legal firm in India. She is a passionate writer and loves to help people in all aspects of FDI.