FDI vs. FPI: Key Differences and Recent Developments

What is the Difference Between FDI and FPI?

Foreign Direct Investment (FDI) involves a long-term investment where a foreign investor acquires a substantial stake (usually above 10%) in a company or project in another country. This often results in managerial influence, requiring government approvals, and is focused on specific sectors or projects.

On the other hand, Foreign Portfolio Investment (FPI) refers to short-term investments in financial assets such as stocks and bonds in a foreign country. FPIs are generally passive investments and do not provide control over the company.

What is the Recent RBI Directive on FPI and FDI?

The Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) have recently permitted FPIs holding over 10% in an Indian company to reclassify this excess as FDI. This conversion is aimed at streamlining foreign investments and providing operational flexibility.

What Happens if FPIs Breach the 10% Threshold?

If an FPI's stake in an Indian company exceeds 10%, it must reclassify the excess stake as FDI within five trading days from the date of the breach. This conversion entails obtaining approval from the Indian government and concurrence from the investee company.

What Approvals are Required for Conversion of FPI to FDI?

The concerned FPI must secure various approvals covering investment caps, limits from bordering countries, sectoral restrictions, and other FDI conditions. Additionally, the investee company must consent to the reclassification, and government approvals are necessary where applicable.

What is an Example of How the New Rule Works?

For instance, if an FPI acquires a 22% stake in an Indian company, under the new regulation, 12% of this stake (the excess over the 10% threshold) can be classified as FDI, provided that all necessary approvals are obtained.

What Benefits Does this Directive Bring for Companies and Investors?

This regulatory change allows FPIs to hold significant stakes without the need to divest, thereby encouraging foreign investments in Indian companies. It simplifies the investment process and provides Indian companies with easier access to foreign capital.

How Does This Relate to Current Market Conditions?

The introduction of this new rule comes at a time when FPIs have withdrawn over Rs. 1.36 lakh crore from the Indian stock market since October 1, reflecting recent outflows. This policy aims to counteract these outflows by creating a more appealing investment structure for FPIs.