Foreign investment refers to the investment in domestic companies and assets of another country by a foreign investor. Large multinational corporations will seek new opportunities for economic growth by opening branches and expanding their investments in other countries.

Following sectors are prohibited for FI:

I. Lottery Business

II. Gambling and betting

III. The business of chit fund

IV. Nidhi Company

V. Trading in transferable development rights (TDRs)

VI. Manufacturing of cigars, cheroots, cigarillos and cigarettes, tobacco or its substitutes

VII. Atomic Energy

VIII. Railways Operation

Types of Foreign Investment in India

Any investment that is made in India with the source of funding that is from outside of India is a foreign investment. By this definition, the investments that are made by Foreign Corporates, Foreign Nationals, as well as Non-Resident Indians would fall into the category of Foreign Investment.

Types of Foreign Investments

Funds from foreign country could be invested in shares, properties, ownership / management or collaboration. Based on this, Foreign Investments are classified as below.

Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI)
Foreign Institutional Investment (FII)

Details on each of the foreign investment type can be found below :

Foreign Direct Investment (FDI)

FDI is an investment made by a company or individual who us an entity in one country, in the form of controlling ownership in business interests in another country. FDI could be in the form of either establishing business operations or by entering into joint ventures by mergers and acquisitions, building new facilities etc.

Here are the different types of foreign investments

1. Horizontal FDI

The most common type of FDI is Horizontal FDI, which primarily revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. Here, a company invests in another company located in a different country, wherein both the companies are producing similar goods. For example, the Spain-based company Zara may invest in or purchase the Indian company Fab India, which also produces similar products as Zara does. Since both the companies belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI.

2. Vertical FDI

Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. As such, when vertical FDI happens, a business invests in an overseas firm which may supply or sell products. Vertical FDIs are further categorised as backward vertical integrations and forward vertical integrations. For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations in countries such as Brazil, Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the supply chain, this type of FDI is known as backward vertical integration. Conversely, forward vertical integration is said to occur when a company invests in another foreign company which is ranked higher in the supply chain, for instance, a coffee company in India may wish to invest in a French grocery brand.

3. Conglomerate FDI

When investments are made in two completely different companies of entirely different industries, the transaction is known as conglomerate FDI. As such, the FDI is not linked directly to the investors business. For instance, the US retailer Walmart may invest in TATA Motors, the Indian automobile manufacturer.

4. Platform FDI

The last types of foreign direct investment is platform FDI. In the case of platform FDI, a business expands into a foreign country, but the products manufactured are exported to another, third country. For instance, the French perfume brand Chanel set up a manufacturing plant in the USA and export products to other countries in America, Asia, and other parts of Europe.

If you intend to invest via FDI, you must know about the different types of FDI with examples. With FDI, the money invested can be used to start a new business in a foreign country or to invest in an already existing business in a foreign country. For more information on FDIs, consult Angel Broking advisors.

Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) is an investment by foreign entities and non-residents in Indian securities including shares, government bonds, corporate bonds, convertible securities, infrastructure securities etc. The intention is to ensure a controlling interest in India at an investment that is lower than FDI, with flexibility for entry and exit.

Foreign Institutional Investment (FII)

Foreign Portfolio Investment (FPI) is an investment by foreign entities in securities, real property and other investment assets. Investors include mutual fund companies, hedge fund companies etc. The intention is not to take controlling interest, but to diversify portfolio ensuring hedging and to gain high returns with quick entry and exit.

The differences in FPI and FII are mostly in the type of investors and hence the terms FPI and FII are used interchangeably.

The Securities Market in India is regulated by Securities and Exchange Board of India (SEBI). Refer to the article on SEBI to get more information on this topic.

Types of FII

There are different types of FIIs operating in India. A wide variety of foreign institutions can be categorised as FIIs in India. Here is a list of foreign institutional types investing in India.

– Pension funds

– Mutual Funds

– Investment trusts

– Banks

– Sovereign Wealth Funds

– Asset Management Company

– Insurance/Reinsurance Companies

– Foreign Central Banks

– Foreign Government Agencies

– Endowments

– Foundations

– University Funds

– Charitable Trusts

Foreign individuals can also invest in Indian markets by registering as sub-accounts of FIIs. While there are different types of FIIs, the government has streamlined the process of investment to make it easier for FIIs to access financial markets in India. To invest in Indian securities, FIIS have to register with the Securities and Exchange Board of India and invest through a registered broker and a recognised stock exchange. Different types of foreign institutional investors can invest in shares or convertible debentures through private placement or offer for sale. FIIs are also allowed to issue Offshore Derivative Instruments to entities regulated by a foreign regulatory authority. The sub-accounts/FIIs have to appoint a local custodian for the Indian securities. The domestic custodian holds the securities in its custody. The local custodian is registered and monitored by the markets regulator. FIIs/subaccounts have to ensure that the local custodian monitors its investments and reports all the transactions at regular intervals.