Difference between FDI, FPI | Foreign Direct Investments

Foreign Direct Investment (FDI)
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October 20, 2021

In a developing country like India, the total capital requirements cannot be met with internal sources alone, so foreign investments become important in supplying capital. The two most regular foreign investments are FDI and FPI.

Foreign Direct Investments (FDI)
As the name suggests, it refers to investing directly in another country. A foreign company based in another country invests in India by setting up a wholly-owned subsidiary or getting into a joint venture with some company occupied in India and then operates its business in India.

There are two routes in FDI:

Automatic route
This route allows FDI without prior approval by India’s Government or Reserve bank (RBI).

Government route
Prior approval by the government is needed across this route. The application needs to be made through the Foreign Investment Facilitation Portal, facilitating the single-window consent of the FDI application under the approval route.

Foreign Portfolio Investments (FPI)
It is akin to FDI. It is also a direct investment but investments in only financial assets such as bonds, stocks, etc., on a company located in another country.

Foreign Institutional Investors (FII)
It is an investor group that brings FPI’s; such institutional investors include hedge funds, mutual funds and pension funds. They participate in the secondary market of the economy. They engage in the secondary market of the economy. To participate in the markets, the FII needs to get registered with SEBI.

FDI	FPI	FII
FDI includes investments in high-yielding assets such as the plant and machinery of a business.	FII includes investments in financial assets such as stocks, mutual funds, insurance companies etc.	FII consults to the group of investors who helps to bring the FPI into a country.
This kind of investment gives rights of ownership as well as management.	Investors get only the right to ownership and not management.	–
Engage in the decision-making process of the firm.	Not involved in the decision-making process of the firm.	–
These investors enter a country with a long-term approach of making a profit and contributing to creating a developed country.	These investors can plan for the long term but usually have short-term plans.	These kinds of investments help in developing the capital markets of the economy.
It is hard for the investors to depart from the country due to the considerable cost involved.	Investors can quickly depart from the country as they invest in stocks and bonds, which are liquid.	They are similar to FPI as they are responsible for bringing in FPI’s.

Out of FDI, FPI, FII FDI is most important for any economy as it is a kind of permanent investment in the economy. While talking about FPI, the investors can exit the nation whenever they want.

At AJSH, we assist our clients in setting up their businesses in India and ensuring they comply with all statutory requirements in a timely manner. If you have any questions or wish to know more about FDI, FPI and FII norms, kindly contact us.