Difference Between FDI, FPI and FII

• Similar-sounding terms like foreign direct investment (FDI), foreign portfolio investment (FPI), and foreign institutional investor (FII) can be very confusing. To make it easy to understand and retain the information in the long run, we explain the Difference Between FDI, FPI, and FII with a well-structured Infographic.

Foreign Direct Investment (FDI)

• FDI is a Non-debt monetary source (it involves the transfer of a part of the ownership to the investor rather than the creation of debt).
• In FDI, a foreign company or a foreign investor not only invests in a company (in another country) but is also directly involved with the day-to-day operations of the company that they have invested in, thus bringing knowledge, skills, and technology.

FDI Routes

• Government Route: For investment in sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB);
• Automatic Route: No need for government approval.

Types of FDI

1. Horizontal FDI: Expansion of similar business operations in a foreign country to expand market reach, reduce transportation costs, and gain access to local markets.
2. Vertical FDI: Investment in various stages of production (backward or forward in the supply chain) to control the supply chain, reduce production costs, and secure inputs or market channels.
3. Conglomerate FDI: Diversification into completely different industries in a foreign market.

Foreign Portfolio Investment (FPI)

• Foreign Portfolio Investment refers to the purchase of securities and other financial assets by investors from another country.
• FPI holdings may consist of stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
• FPI involves only passive ownership, granting investors no control over ventures, property, or direct stakes in companies.
• Investments made by Non-Resident Indians (NRIs) are not categorized as FPI.

Regulatory framework governing FPIs in India

• The Foreign Exchange Management Act, 1999.
• SEBI’s regulations on foreign institutional investors (FIIs).

Foreign Institutional Investor (FII)

• A FII is an investor or investment fund that invests in a country other than the one in which it is registered or headquartered.
• FII can include pension funds, investment banks, hedge funds, and mutual funds.
• FIIs can be important sources of capital in developing economies. Yet, many nations, such as India, have limited the total value of FII investment, particularly in a single company. This helps limit FIIs’ influence on individual companies and the nation’s financial markets and the potential damage that might occur if they fled en masse during a crisis.

Regulatory framework governing FIIs in India

• The Foreign Exchange Management Act, 1999.
• SEBI’s regulations on foreign institutional investors (FIIs).
• Both SEBI and RBI regulate the FII’s investments in India. RBI monitors ceilings on FII/NRI/PIO investments in Indian companies daily.

Ceilings on FII

• Eligible categories of FIIs have been expanded to include university funds, endowments, foundations and charitable trusts with a five-year track record and which are registered in their country.
• Each FII or sub-account of an FII has been permitted to invest up to 10% of the equity of any one company, subject to the overall limit of 24% on investments by all FIIs, NRIs and OCBs.
• FIIs have been permitted to invest in unlisted securities, and FIIs have been allowed to invest their proprietary funds.

FDI vs FPI vs FII