Capital high: foreign investment in India

Context:

  • Foreign investors appear to have rediscovered India.
  • The inflow of foreign capital into India’s stock market in the month of March hit a high of $4.89 billion, the biggest foreign inflow into Indian stocks since February 2012.
  • As a result, the stock market rose a solid 8% in March.
  • Foreign investment in Indian equities stood at $2.42 billion in February, as against a net outflow of $4.4 billion during the same month a year earlier, and is expected to be strong in April as well.
  • Both cyclical and structural factors are behind this sudden uptick in foreign investment that has helped the rupee make an impressive comeback. 

What Are the Different Kinds of Foreign Investment?

International investment or capital flows fall into four principal categories:

  • Commercial loans.
  • Official flows
  • Foreign direct investment (FDI).
  • Foreign portfolio investment (FPI).

Commercial loans: which primarily take the form of bank loans issued to foreign businesses or governments.

Official flows: which refer generally to the forms of development assistance that developed nations give to developing ones.

Foreign direct investment (FDI): pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country.

  • Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.
  • FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or branch.
  • The reinvestment of earnings and transfer of assets between a parent company and its subsidiary often constitutes a significant part of FDI calculations.
  • Foreign portfolio investment (FPI), on the otherhand is a category of investment instruments that is more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise.
  • These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise which does not necessarily represent a long-term interest.

Stocks:

  • Dividend payments
  • Holder owns a part of a company
  • Possible voting rights
  • Open-ended holding period

Bonds:

  • Interest payments
  • Ownership of bond rights only
  • No voting rights
  • Specific holding period

Calculating Investment:

  • Calculations of FDI and FPI are typically measured as either a “flow,” referring to the amount of investment made in one year, or as “stock,” measuring the total accumulated investment at the end of that year.

How Can Indian Company can receive foreign investment?

  • In India, foreign direct investment policy is regulated under the Foreign Exchange Management Act, 2000 governed by the Reserve Bank of India.
  • FIIs/FPIs are allowed to invest and trade in equity securities, with a maximum total investmentof 24 percent of the issued and paid up capital of a company.

Is FDI allowed in LLP?

  • Foreign investment is permitted under the automatic route in LLP operating in sectors/activities where 100% Foreign Direct Investment (FDI) is allowed through the automatic route and there are no FDI-linked performance conditions.

What troubled India last year in foreign investment?

  • Federal Reserve and the European Central Bank, for instance, have promised to keep interest rates low for longer.
  • This has caused investors to turn towards relatively high-yielding emerging market debt.
  • Indian mid-cap stocks, which suffered a deep rout last year, are now too attractive to ignore for many foreign investors.
  • Long-pending reforms to the labour and land markets are the most pressing structural changes that will affect India’s long-term growth trajectory.
  • The high fiscal deficit of both the Centre and the State governments and the disruptive outflow of foreign capital are the other macroeconomic challenges. 

Way forward:

  • The return of foreign capital is obviously a good sign for the Indian economy. But policymakers need to be careful not to take foreign investors for granted.
  • Other emerging Asian economies will be competing hard to attract foreign capital, which is extremely nimble.
  • Any mistake by policymakers will affect India’s image as an investment destination. 

 

 

 

 

 

 

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