India has come a long way after the liberalization of foreign investments either under FDI or FII windows which began in the early 1990s. The actual inflows have been substantial both in quantity and diversity. Such funds have helped the balance of payments situation in the short-run and in initiating qualitative change in the foreign investment ambience in the long-term. The relative merits of the two routes, the entry level barriers to be in force and even the desirability of any quantitative ceilings such as Tobin tax have been expressed from time to time. This article gives a holistic view of the foreign investment scenario with an update on the current position.
`Purchasing ownership shares in a foreign enterprise' is the textbook definition of foreign investment. Such investment by the nonresident i.e., foreign investment can be of two-types viz.: Portfolio investments or foreign direct investments.
The commonly spoken term of portfolio investment can be said to be a representative of passive holdings of several types of instruments such as foreign stocks, bonds or any other kind of financial assets. The issuer of such securities does not exercise any active management control over these instruments that are held by the investors. Such portfolio investment is the main component of FII investments in India. Institutional Investors face less protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves. They also attract preferential treatment and lower tariff in view of large volume involved. Foreign Direct Investment (FDI) on the other hand is the movement of capital across national frontiers in a manner that grants the investor, control over the acquired asset. |
