Foreign Investments | FDIs, FIIs, FVCIs, NRIs

Why in news?
The Cabinet in July 2015 approved the implementation of ‘composite cap’ for foreign direct investments.
What are the various forms of Foreign Investment in India?

Foreign investment can take multiple forms, and involve multiple investor classes. 

1. An overseas investor can buy directly into a company involved in manufacturing, infrastructure development, banking, insurance, retail, etc. 
1. FDI : If the investment is 10 % or more of a company’s equity, it is classified as Foreign Direct Investment (FDI) as per OECD norms. 
2. Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) purchase a company’s stock through the stock markets. 
3. Foreign Venture Capital Investors (FVCIs) put money mainly in new or relatively new ventures from which conventional investors stay away, given the risks involved. 
4. Then, there are investments by Non-Resident Indians (NRIs). 
1. These overseas investments can be in the form of equity capital, Foreign Currency Convertible Bonds or FCCBs (even though these become foreign investment only when the bonds are actually converted into shares), or 
2. investment in shares of Indian companies when they are listed in overseas exchanges through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs).

India's Traditional Policy:

• India needs foreign investment especially to finance its current account deficit — a broad measure of trade in goods and services. 
• Its foreign investment policy has long been designed to encourage more of FDI, which is considered to be more enduring because it manifests itself in plant and machinery on the ground, besides helping to develop skills, create jobs, and diffuse technology and global production practices.
• Policymakers have been less welcoming of FPI, as it is considered relatively ‘fickle’. 
• BUT - Cumulative net FII investment flows into India since November 1992 (when they were first allowed) have amounted to $ 227 billion — $ 169 billion in equity and the rest ($ 58 billion) in debt. 
• FIIs have generally remained invested in India; the few episodes of selloffs have largely involved debt rather than equity. 
• FIIs have typically sold shares only to reinvest in fresh purchases.
• There are investment caps or ceilings on specific sectors. 
• 100% foreign investment is allowed in many sectors 
• food processing 
• railway infrastructure 
• non-banking finance companies, 
• 74% cap in 
• private banks, and 
• 49% in 
• insurance, 
• defence and 
• commodity exchanges, 
• clearing corporations, 
• stock exchanges and 
• depositories.
• Within the overall cap, there have been sub-ceilings for various categories of foreign investors. 
• For instance, commodity exchanges, 
• FDI is capped at 26%, 
• while combined FPI cannot exceed 23%, 
• And even when FIIs are allowed to invest 23% or more in certain sectors, an individual FII or FPI can invest only up to a maximum of 10%.

The change in government’s policy now: Composite Caps:

The approval of the so-called ‘composite cap’ has no effect on the sectoral ceilings. Thus, foreigners cannot own more than 49% in any insurance or defence venture. But the current distinctions between FDI, FPI and other categories of foreign investors have been abolished. The colour of the mice (or cats!) does not matter so long as these are foreign, and so long as they don’t own more than the prescribed limit, if any, in a particular sector.

• Composite cap applicable to all sectors except two - Defence and Banking

For more : 

• Composite caps - Click here
• Other Foreign Investment Reforms - Click here