Every country needs money for its growth, just like private companies. While private firms and individuals turn to banks for it or take some other route, nations look forward to foreign investors. Foreign investors take the route when they have a long-term interest in mind. In FDI an investor usually acquires foreign business assets and establishes ownership or controlling interest in a company. Foreign companies are directly involved in day-to-day operations in the other country with the help of FDI. They are not only bringing money with them, but they also bring knowledge, skills and technology with them.
The investor company has at least 10 per cent stake in the company, which gives them a large amount of influence and control over the investee company. Walmart acquiring 77 per cent of Flipkart, India's biggest online retailer, is an investment.
Let's explore the ways through which the FDI comes into India. The rules prescribed by the Indian government say that FDI can come either via an automatic route or via a government route.
Non-resident or Indian companies do not need prior approval from the RBI or the government for FDI in the automatic route. It is for the sectors where the FDI is not restricted and doesn't need government scrutiny. The second is the government route. The application will have to be submitted through the Facilitation Portal, which facilitates single-window clearance. What do FPIs get if FDIs get ownership in a company? Foreign Portfolio Investment or FDI is meant for short-term profit booking. Foreign investors put capital in financial assets through this route, such as stocks and bonds. The purchase of securities can be easily bought or sold. Such an investment is made with the aim of making short term financial gain and not obtaining significant control over management operations of the enterprise.
FDI owns a controlling stake in a company by investing in its physical assets while FPIs invest only in financial assets. While FDI is a more stable long-term investment, FPI money is usually considered hot money. Let us know which one is the better investment route? FDI and FPI are important sources of funding for most economies. FDI is preferred by most countries for attracting foreign investment because it is more stable than FPI and signals long-lasting commitment.
FPIs, on the other hand, have a higher degree of volatility because of its tendency to flee at the first signs of trouble in an economy. These massive portfolio flows can cause economic problems to occur during times of uncertainty.