India embraced the policy of economic liberalization in 1991. The change in economic policy triggered the process of industrialization, expanded the role of private and foreign investment, and ushered in the free-market system. Foreign investment was welcomed in two ways: FPI and FDI.
FPI vs. FDI: What is the difference?
What is FPI?
“FPI” stands for “Foreign Portfolio Investment.”
FPI refers to investments made by foreign individuals, corporate institutions, or investment funds in the Indian financial market. These could be in the form of stocks, bonds, and other financial instruments issued by Indian corporations and the state and central governments in India. The Securities and Exchange Board of India (SEBI) regulates FPI, and the players have to comply with the rules and restrictions notified by SEBI from time to time.
Each FPI investor will need to register with SEBI. They will be given a “Unique Identification Number” (UIN). They can use investment routes like the Portfolio Investment Scheme (PIS). Within specified limits, non-resident Indians (NRIs) and foreign nationals can invest in the Indian stock market.
FPI helps augment the capital inflow in the form of valuable foreign exchange, bolster the growth of industries, and give a fillip to economic growth. Periodically, the Indian government reviews the foreign investment process by easing regulations and streamlining investment procedures, making them more hassle-free.
What is FDI?
“FDI” is short for “Foreign Direct Investment.”
Under the FDI route, foreign investors can establish new businesses, completely take over an existing Indian business, or enter into a joint venture with an Indian partner.
India has been encouraging foreign capital through FDI by introducing several foreign investor-friendly reforms and policies. The services sector, the information technology industry (both software and hardware), construction, telecom, and trading are some sectors favored by FDI investors.
FDI helps bring in state-of-the-art technologies, expertise, and management policies that help our industrial sectors improve productivity and efficiency, leading to faster and healthier growth. Infrastructure gets a boost, not to mention more employment opportunities. To attract FDI investment, specific sectors like coal mining and aviation permit 100% FDI.
Top differences between FPI and FDI
1. Level of control–Under FDI, the foreign investor has greater control and ownership in the corporate entity; under FPI, this is not so.
2. Purpose of investment–Investments made through FDI are long-term ones as they are involved in economic activities for a longer period of time. FPI investments mostly restrict themselves to securities trading and short-term investments.
3. Restrictions—FDI investments are restricted in certain sensitive sectors, like defense, media, and telecom, in the interests of national security. However, FPI has relatively fewer restrictions.
4. Repatriation—FDI investors can repatriate capital and profits, while FPI investors can repatriate capital after paying taxes.
5. Taxes—FDI investments are subject to corporate taxes, dividend distribution taxes, etc. FPI investors pay fewer taxes.
6. Capital outlay—-FDI requires greater capital given the dimensions of the projects. FPI does not require large amounts of capital.
A detailed comparison between FPI and FDI
FPI belongs to passive investment as it finds its way to investments in stocks and financial market securities. FPI investors benefit from the existing financial entities without being able to influence their corporate policies. FDI is active as it creates corporate entities in which the investors have greater control and ownership. Such investments can influence company policy to a certain extent. Hence, many sensitive sectors like defense and telecom are not open to 100% FDI in the interest of national security.
FPI investments are more short-term as they mainly involve only trading activities. FDI, given its greater direct involvement in economic activity, is more long-term.
Given the nature of its projects, FDI requires more capital, while smaller players can partake in FPI.
Considering that both these players bring valuable foreign exchange into India, both bolster our economy. Since FPI mainly concerns financial markets, it is short-term in nature. A sudden large buy/sell transaction can lead to volatility in market prices. Conversely, FDI projects bring the latest technologies, establish newer industries, and create more jobs. In other words, FDI is more long-term, and therefore less volatile.
Why is FPI less risky than FDI?
FPI is generally less risky than FDI due to its liquidity, market diversification, and reduced control over invested entities. FDI involves long-term commitments and higher control, making it riskier.
Is FPI good?
Foreign Portfolio Investment (FPI) can be beneficial for investors seeking diversification and liquidity in their portfolios. However, its suitability depends on individual financial goals and risk tolerance.
Which is better, FDI or FPI?
The choice between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) depends on investment goals. FDI offers control and long-term commitment, while FPI provides liquidity and diversification.
What is the difference between FDI and FPI?
Foreign Direct Investment (FDI) involves long-term investments in physical assets, often with control over the business. Foreign Portfolio Investment (FPI) relates to short to medium-term investments in financial assets without control.
What are both FPI and FDI related to?
Both Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are related to cross-border investments in different forms. FPI involves financial assets, while FDI pertains to physical assets and business control.
Why is FPI better than FDI?
FPI is often considered better than FDI for its liquidity, portfolio diversification, and reduced risk due to minimal control over invested entities, making it suitable for short to medium-term investments.