(i) Types of Foreign Investment:  Foreign investment can be divided into two parts Foreign Direct Investment and Foreign Portfolio Investment.  

a) Foreign Direct Investment (FDI) is direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.  Foreign direct investment includes merger and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans. As per IMF definition acquisition of at least ten percent of ordinary shares or voting power in a public or private enterprise by non-resident investors makes it eligible to be categorized as Foreign Direct Investment.

  • Horizontal FDI: When a firm duplicates its home country based activities at the same value chain stage in another country through FDI.  Say, Toyota sets up a plant in Bangkok to manufacture cars to cater to Thailand market, and opens another plant in India to cater to Indian market; this will be called Horizontal FDI. 
  • Vertical FDI: when FDI is made in a country to move up or down stream of existing value chain of the company.  Say Toyota is making cars in Bangkok and sets up a plant in India to manufacture some of its parts which are shipped to Bangkok, the investment will be vertical FDI.
  • Platform FDI: FDI from source country to destination country for the purpose of exporting to third country.  Say Toyota invests in a plant in India with the sole purpose of exporting cars to other country. 

b) Foreign Portfolio Investment: Foreign Portfolio Investment is an investment made by non resident Indian in Indian securities, including shares, govt bonds, corporate bonds, convertible securities, infrastructure securities etc.  The class of investors who make an investment in these securities are known as Foreign Portfolio Investors.  Foreign Portfolio investment includes investment groups of Foreign Institutional investors, Qualified institutional investors and small group of investors.

  • Foreign Institutional Investor: An investor or investment fund that is from or registered in a country outside the one in which it is currently investing is called Foreign Institutional Investor. The term is used most commonly in India to refer to outside companies investing in the financial markets of India.

Usually, FIIs invest in the stocks and debentures of Indian companies. In order to invest in the primary and secondary capital markets in India the funds must get themselves registered with the Securities and Exchange Board of India.  The general cap on foreign investment is 24% of paid up capital of Indian company, if the board and the general body approves and passes a special resolution, the ceiling of 24% can be raised up to sectoral caps for that particular segment. Investment upto sectoral caps, through automatic route or government route, is defined in FDI Policy.

The institutions which are usually engaged in foreign institutional investment are:- i) Mutual funds, ii) Hedge Funds, iii) Pension Funds and iv) Insurance cos.