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.
Indias 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.

 In India, there are three important components

of foreign capital flows :

1)Foreign Capital Investments
2)Foreign Aid
3)External Commercial Borrowings

Foreign
capital
investments
refer
to
investments made by an entity which is not the
resident of the country. In India there are two
components of foreign capital Investments:
(i)Foreign Direct Investments (FDI)
(ii)Foreign Portfolio Investments (FPI)
FDI refers to the physical investments made by
foreign investors in the domestic country ie.
investments into building, machinery and
equipments.

In India there are threeimportant element of

FDI:
(a)Equity investments by foreign investors;
(b) Reinvested earnings i.e retained earning of
FDI companies;
(c)Debt Investment
Theimportant forms of FDIare investments
through:
(i)Financial Collaboration
(ii)Joint Ventures and Technical Collaboration
(iii)Capital Markets
(iv)Private Placements.

 FPI refers to the short-term investments by

foreign entity in the financial markets.

These are indirect investments and include
investment in tradable securities, such as
shares, bonds, debenture of the companies.
Foreign
Portfolio
investors
dont
have
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 enterprise.

 There are three kinds of FPI in India:

a) Foreign Institutional Investment:These

are the investments made by foreign institutions

like pension funds, foreign mutual funds etc. in
the financial markets.
b)Funds raised through Global Depository
Receipts or American Depository Receipts
(GDRs/ADRs):
GDRs
and
ADRs
are
instruments which signify the purchase of share
of Indian companies by foreign investors or
American investors respectively.
c) Off-shore funds:The schemes of mutual
funds that are launched in the foreign country.

 Foreign aid refers to the concessional foreign

finance with flexible terms and conditions.

It may be in the form of long term concessional
debt or grants (doesnt involves any repayment
obligations). The tenure of the aid is generally
very long.
The importantsourcesof foreign aid in India
are: Official Aid (IMF, World Bank or ADB etc.),
Bilateral Aid, Multilateral Aid, Private Aid etc

ECBs
comprises
of
borrowings
from
international capital market on commercial
terms.
It covers all medium/long term loans e.g.
suppliers credit, foreign currency convertible
bonds (FCCBs), e.g. India development bonds,
resurgent India bond (RIBs) etc.
The interest rates on these borrowings are
higher than foreign aid.
The higher dependence on these borrowings
can cause financial burden on the economy.