Foreign investment in India has two components, viz., Foreign Direct Investment (FDI) and foreign portfolio investment. According to the notion referred to globally, FDI relates to a long-term relationship with ‘lasting interest’ of the foreign direct investor in the country where such FDI takes place. For an investment to qualify as FDI, the foreign investor needs to have a 10 per cent or higher share in a business or investment in a given company, whereas if the equity stake is less than 10 per cent, then such an investment falls under the foreign portfolio investment category. Until now, this has not been followed strictly in India. However, in the 2013-14 budget speech, the Union Finance Minister has proposed to follow such international norms in making the distinction between the two types of foreign investment; in order to examine the feasibility of following such a norm, the Union Government has constituted a separate committee, viz. “Committee for Rationalizing the Definition of FDI and FII”. As of now, in the Indian context in general, FDI comprises three components: (i) Equity, (ii) Reinvested earnings, and (iii) Other capital. Equity capital in FDI may be either greenfield investments (i.e. fresh investments), or brownfield investments (i.e. investments in / acquisition of existing shares in another company or by merging with another company). However, often brownfield investment is a hybrid of greenfield investment and Merger & Acquisition activity, and may be difficult to distinguish. Reinvested earning (i.e. the undistributed corporate profits) is the difference between profits of a foreign direct investor and dividends distributed to its shareholders. Other capital indicates the inter-company debt transactions of FDI entities.

Foreign Direct Investment