How does foreign investment work in India


An experiment conducted by a marine biologist included placing a shark in a tank of small fish. The first day, the shark ate them up instantly. The next day, a fiberglass partition was placed between the shark and the small fish and the shark ended up slamming into the glass. However, it kept slamming onto the fiberglass to reach the small fish but to no avail. Gradually, its attempts to reach to the fish became lower, to the point that when the fiberglass was removed, the shark did not even attempt to get to the small fish. Both fishes swam peacefully in the same tank. The moral of this experiment is that there is a block in the minds of Indians when it comes to stocks, because they don’t wish to incur the risks that come with it. However, when it comes to foreign investors, their versatility and presence of mind during investing befuddle even the best discount brokers.
However, there are rules and regulations as set by SEBI when it comes to foreign investment in our country.

The type of foreign investments in India.

  • Foreign investments are divided into two parts- foreign direct investment and foreign portfolio investment.
  • The investor who has complete control of shares as well as day to day management of the company and its daily activities and operations has these investments treated as FDI.
  • The investor who has bought the shares but does not have control over the daily management and operation of the company has these investments treated as FPI.
  • For FPIs, the foreign investor should have a registration as a foreign institutional investor (FII), or a sub-investor of an already established as an FII.
  • These investments include pensions funds, endowments, sovereign wealth funds, insurance companies, banks, and asset management companies. These registrations are granted by SEBI, and at present foreign individuals are not permitted to directly invest in the Indian stock market.

The facilities enjoyed by FII.

  • FIIs and their sub-accounts can directly invest in the stocks listed in the stock exchanges. However, these portfolio investments have various types, such as investment in the securities of primary and secondary markets, shares, debentures, and warrants in the companies present on the list of reputed stock exchanges in India. They can also try their hand by investing in units or mutual funds, and derivatives traded on other stock exchanges.
  • If foreign investors choose to invest in unlisted securities outside stock exchanges, then the prices must be approved by the Reserve Bank of India.
  • FIIs can invest their 100% of their investments in debt instruments, if they have been registered as debt-only FIIs. Ordinary FIIs need to invest 70% in equity whereas the rest of the 30% can be a debt-investment.
  • They must utilize the provision for special non-resident rupee bank accounts, where the money that moves in and out of India is retained. This also helps in maintaining a track record for currency conversions and the stock market ups and downs.

Thus, foreign investment is a Herculean task, but it is still managed by sharp foreign investors with a strong business foresight.

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