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Foreign indirect investment

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What is Foreign indirect investment
If the Indian investing company has foreign
investment in it,an Indian company would
have indirect foreign investment.
This is a type of investment in financial
securities such as bonds, debentures, stocks,
warrants, options, domestic mutual funds,
etc., with an intent to get financial gain.
The investors of FII are not interested in the
management control of the firm in which they
invest as it is a short-term investment plan.
Bigger loss or risk is involved in making of FII as
foreign shareholders cannot sue the domestic
stock exchange or the public entity in which they
invested their money.
It is easy to sell off the shares in FII.
The probability of withdrawal of FII is greater
than that of FDI.

Difference between FDI & FII
The major point of difference between FDI and FII is
that direct investors gain interest in the ownership
(maximum 10%) by controlling the domestic firm, but
Indirect investors do not have any managerial control
or securities control over the firm in which they
invested.
FDI is a long-term process wherein the investor reflects
a long-lasting and controlling interest in the firm, while
FPI is a short-term process.
Direct investors are more informed about the changes
in the prospects of the project as compared to indirect
investors.
Status of FPI in India
Helped in mitigating foreign exchange
shortages
Have a strong influence on the stock market.
Stock market depth(ratio of stock market
capitalization to GDP)
Development of secondary market took place,
however primary market has not shown any
significant effect.


How FPI Can Benefit The Real Sector
Of An Economy :

In Three Broad Ways
Inflow of FPI can provide a developing non debt
creating source of foreign investment.

FPI can induce financial resources to flow from capital
abundant countries, where expected returns are low,
to capital scarce countries where expected returns are
high.

FPI affects the economy through its various linkage
effects via the domestic capital market.

Reasons for slow primary market
development
Rapid growth of private placements markets
which are preferred due to:
can be tailored to specific needs of
entrepreneurs
Issuing securities not under regulation till
recent past.
Withdrawal of domestic retail investors from
stock markets.(1.37% of total household
savings)

Irregularities, uncertainties and lack of
protection measures result in decline

FIIs also much less active due to prolonged
lock in period for the primary markets.
Government Initiatives in india
Indias foreign investment policies allow FDI up to
26 per cent and FII of (an additional) 23 per cent
in stock exchanges. Under the regulation.

FIIs and the NRIs are allowed to invest in Indian
Depository Receipts (IDRs)

FPI have been allowed to trade in IRFs, but limits
have been put in place to keep their influence
under check

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