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Foreign Direct & Portfolio Investment

Introduction


Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example: stocks, bonds, Government debt, etc. Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India). On the other hand, sale of assets like sale of share of an Indian company to a Chinese customer is a credit item on the capital account.


Capital Account Balance


When capital inflows (such as borrowing funds from overseas or selling assets or shares in foreign companies) match capital outflows, the capital account is in balance (like repayment of loans, purchase of assets or shares in foreign countries). A surplus in capital account occurs when capital inflows exceed capital outflows, while a deficit in capital account occurs when capital inflows exceed capital outflows.


Foreign Direct Investment


Foreign direct investment (FDI) occurs when a corporation acquires control of a commercial entity in another country. Foreign enterprises that engage in FDI are directly engaged in the day-to-day activities of the host country. This implies they're contributing more than just money; they're also bringing knowledge, skills, and technology.


In general, FDI occurs when an investor develops overseas business activities or buys foreign business assets, such as acquiring ownership or controlling stake in a foreign firm. Management and ownership is the key component



FDI Prohibition


There are a few industries where FDI is strictly prohibited under any route. These industries are

  • Atomic Energy Generation

  • Any Gambling or Betting businesses

  • Lotteries (online, private, government, etc)

  • Investment in Chit Funds

  • Nidhi Company

  • Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)

  • Housing and Real Estate (except townships, commercial projects, etc)

  • Trading in TDR’s

  • Cigars, Cigarettes, or any related tobacco industry


Routes through which India gets FDI


Automatic route, For FDI, a non-resident or Indian firm does not need the RBI's or the government of India's prior approval.


The government route requires the consent of the government. The corporation must submit an application via the Foreign Investment Facilitation Portal, which allows for single-window approval. The application is then forwarded to the respective ministry, which will approve/reject the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. The DPIIT will release the Standard Operating Procedure (SOP) for the processing of applications under the current FDI policy.


Foreign Portfolio Investment


Foreign portfolio investment (FPI) is a common way to invest in overseas economies. It covers securities and financial assets owned by foreign investors. It is a foreign entity registered at SEBI, and who buys upto 10% in equity / shares of an Indian Company. As per the revised rules each entity up to 10% equity and all in total up to the cap of that respective sector/area.


For eg; if 49% is the capped as the limit then all FPIs can invest up to 49% only and each holding maximum 10 %,not exceeding individual limit as well as sectoral limit.

FPI is not considered stable, that is why it is also referred as ‘hot money’, when economy goes down they are the first to flight off , investors withdraw money leaving economy in a limbo.


Securities (in FPI) include stocks or American Depositary Receipts (ADRs) of companies in nations other than the investor's nation. Bonds or other debt issued by these corporations or foreign governments, as well as mutual funds or exchange-traded funds (ETFs) that invest in assets abroad or overseas, are also included.


On a macroeconomic level, foreign portfolio investment is accounted for in a country's capital account and is reflected in its balance of payments (BOP). BOP measures the amount of money moving from one nation to another over the course of a fiscal year.

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