Foreign capital has a key role in the economic development process of the country. It is a source of modernization, income and employment generation in the economy. India’s recent liberalization of its foreign investment regulations has generated strong interest by foreign investors, turning India into one of the fastest-growing destinations for global investment inflows. Foreign firms are setting up joint ventures and wholly-owned enterprises in services such as computer software, telecommunications, financial services, and tourism.
Components of Foreign Capital in India:
Foreign capital refers to the capital flows from the resident entity of one country to the resident entity of another country. The resident entity may be an individual, corporate firm or Government. In India, the important components of foreign capital flows are Foreign Aid and Foreign Capital Investments
I. Foreign Aid: Foreign aid refers to concessional foreign finance with flexible terms and conditions. It may be in the form of long term concessional debt or grants which does not involve any repayment obligations. The tenure of the aid is generally very long. The important sources of foreign aid in India are:
1. Official Aid: It is given by foreign governments or international official bodies such as World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB) etc. It can be: a) Bilateral Aid: Loans or grants under bilateral agreement i.e. between two countries. b) Multilateral Aid: loans or grants extended by multilateral agencies i.e. more than two countries e.g. Loans from IMF, World Bank etc.
2. Private Aid: It is the fund that is received from private individuals, firms or institutions.
II. Foreign Capital Investments: Foreign capital investments refer to investments made by an entity that is not a resident of the country. In India there are two components of foreign capital Investments:
1. Foreign Direct Investments (FDI): FDI refers to the physical investments made by foreign investors in the domestic country. Physical investments refer to the direct investments into building, machinery and equipment. Reserve bank of India (RBI) defines FDI as a process whereby a resident of one country (i.e. home country) acquires ownership for the purpose of controlling production, distribution and other activities of a firm in another country. (i.e. the host country). It reflects the lasting interest by the foreign direct investors in the entity or enterprise of the domestic economy. There exists a long-term relationship between the foreign investor and the domestic enterprise. Foreign direct investors generally exert a high degree of influence on the management of the entity. The direct investor can be an individual, public or private enterprise (referred to as multinational corporations or MNCs)) or Government. The management influence is exerted if the foreign investor holds significant shareholding or voting power in the domestic entity. The important forms of FDI are investments through Financial Collaboration, Joint Ventures and Technical Collaboration, Capital Markets, and Private Placements.
2. Foreign Portfolio Investments (FPI)/Foreign Institutional Investment (FII): FPI refers to the short-term investments by foreign entities in the financial markets. These are indirect investments and include investment in tradable securities, such as shares, bonds, debenture of the companies. Foreign Institutional Investment is the investments made by foreign institutions like pension funds, foreign mutual funds etc. in the domestic financial markets. Foreign Portfolio/Institutional investors do not exert management control on the enterprise in which they invest. The important objective of FPI is the appreciation of the capital investment regardless of any long-term relationship with the enterprise (IMF, Balance of Payment Manual). Foreign Portfolio/Institutional Investors (FPI/FII) have been one of the biggest drivers of India’s financial markets and have invested around Rs 12.51 trillion (US$ 171.81 billion) in India between FY02-18. Highly developed primary and secondary markets have attracted FIIs/FPIs to the country. Investments by FIIs/FPIs in India are regulated by the Securities and Exchange Board of India (SEBI) while the ceilings on such investments are maintained by the Reserve Bank of India (RBI).
I. Foreign Aid: Foreign aid refers to concessional foreign finance with flexible terms and conditions. It may be in the form of long term concessional debt or grants which does not involve any repayment obligations. The tenure of the aid is generally very long. The important sources of foreign aid in India are:
1. Official Aid: It is given by foreign governments or international official bodies such as World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB) etc. It can be: a) Bilateral Aid: Loans or grants under bilateral agreement i.e. between two countries. b) Multilateral Aid: loans or grants extended by multilateral agencies i.e. more than two countries e.g. Loans from IMF, World Bank etc.
2. Private Aid: It is the fund that is received from private individuals, firms or institutions.
II. Foreign Capital Investments: Foreign capital investments refer to investments made by an entity that is not a resident of the country. In India there are two components of foreign capital Investments:
1. Foreign Direct Investments (FDI): FDI refers to the physical investments made by foreign investors in the domestic country. Physical investments refer to the direct investments into building, machinery and equipment. Reserve bank of India (RBI) defines FDI as a process whereby a resident of one country (i.e. home country) acquires ownership for the purpose of controlling production, distribution and other activities of a firm in another country. (i.e. the host country). It reflects the lasting interest by the foreign direct investors in the entity or enterprise of the domestic economy. There exists a long-term relationship between the foreign investor and the domestic enterprise. Foreign direct investors generally exert a high degree of influence on the management of the entity. The direct investor can be an individual, public or private enterprise (referred to as multinational corporations or MNCs)) or Government. The management influence is exerted if the foreign investor holds significant shareholding or voting power in the domestic entity. The important forms of FDI are investments through Financial Collaboration, Joint Ventures and Technical Collaboration, Capital Markets, and Private Placements.
2. Foreign Portfolio Investments (FPI)/Foreign Institutional Investment (FII): FPI refers to the short-term investments by foreign entities in the financial markets. These are indirect investments and include investment in tradable securities, such as shares, bonds, debenture of the companies. Foreign Institutional Investment is the investments made by foreign institutions like pension funds, foreign mutual funds etc. in the domestic financial markets. Foreign Portfolio/Institutional investors do not exert management control on the enterprise in which they invest. The important objective of FPI is the appreciation of the capital investment regardless of any long-term relationship with the enterprise (IMF, Balance of Payment Manual). Foreign Portfolio/Institutional Investors (FPI/FII) have been one of the biggest drivers of India’s financial markets and have invested around Rs 12.51 trillion (US$ 171.81 billion) in India between FY02-18. Highly developed primary and secondary markets have attracted FIIs/FPIs to the country. Investments by FIIs/FPIs in India are regulated by the Securities and Exchange Board of India (SEBI) while the ceilings on such investments are maintained by the Reserve Bank of India (RBI).
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