Understanding the Concept of Foreign Investment

Kunal Garg

Most people generally get confused when it comes to understand or use the term Foreign Investment, Foreign Direct Investment or FDI, Foreign Portfolio Investment or FPI and Indirect Foreign Investment. Sometimes, Foreign Investment or Foreign Direct Investment is being used interchangeably, but one should know that there is a thin difference between both terms. All the 4 terminologies as referred are defined under Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA Rules”).

Rule 2(r) of FEMA Rules defines “Foreign Direct Investment or FDI as investment through equity instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company”.

Whereas Rule 2(s) defines “Foreign Investment as any investment made by a person resident outside India on a repatriable basis in equity instruments of an Indian company or to the capital of a LLP”. Further, the note provided under Rule 2(s) states that a person resident outside India may hold foreign investment either as FDI or as FPI (Foreign Portfolio Investment) in an Indian Company. So, as per this definition, it can be inferred that Foreign Investment is a bigger circle which comprises of Foreign Direct Investment and Foreign Portfolio Investment.

The following chart will be helpful in understanding this concept:

Rule 2(t) of FEMA Rules defines “Foreign Portfolio Investment or FPI as any investment made by a person resident outside India through equity instruments where such investment is less than ten percent of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than ten percent of the paid-up value of each series of equity instrument of a listed Indian company”. Based on the definitions of FDI and FPI as referred above, I have made following pointers to identify whether the investment is FDI or FPI:

Any investment by person resident outside India in equity instruments of unlisted Indian Company shall be treated as FDI;
Investment by person resident outside India in 10% or more of the post issue paid-up equity capital of a listed Indian Company shall also be treated as FDI;
Investment by person resident outside India in equity instruments of less than 10% of the post-issue paid-up share capital of a listed Indian Company shall be treated as FPI;
Investment by person resident outside Indian in equity instruments of less than 10% of the paid-up value of each series of a listed Indian Company shall also be treated as FPI.

The term equity instruments as referred in the definition of Foreign Investment, FDI or FPI means equity shares including partly paid equity shares, convertible debentures (fully, compulsorily and mandatorily convertible debentures), preference shares (fully, compulsorily and mandatorily convertible preference shares) and share warrants as issued by an Indian Company.

Apart from the terms Foreign Investment, FDI and FPI, there are other terms also which are most commonly used in understanding the concept of Foreign Investment. These are Indirect Foreign Investment, Downstream Investment etc. which I will discuss in the Second Part of my series on Understanding the Concept of Foreign Investment.

In case of any queries with regards to the present article, Kunal can be reached at gargkunal262@gmail.com