1. What is a Foreign Direct Investment (FDI)?
The term foreign direct investment (FDI) refers to an ownership stake in a foreign company
or project made by an investor, company, or government from another country. FDI is
generally used to describe a business decision to acquire a substantial stake in a foreign
business or to buy it outright to expand operations to a new region. The term is usually not
used to describe a stock investment in a foreign company alone. FDI is a key element in
international economic integration because it creates stable and long-lasting links between
economies.
Types of Foreign Direct Investment
Foreign direct investments are commonly categorized as horizontal, vertical, or conglomerate.
• With a horizontal FDI, a company establishes the same type of business operation in
a foreign country as it operates in its home country. A U.S.-based cellphone provider
buying a chain of phone stores in China is an example.
• In a vertical FDI, a business acquires a complementary business in another country.
For example, a U.S. manufacturer might acquire an interest in a foreign company that
supplies it with the raw materials it needs.
• In a conglomerate FDI, a company invests in a foreign business that is unrelated to its
core business. Because the investing company has no prior experience in the foreign
company’s area of expertise, this often takes the form of a joint venture.
Examples of Foreign Direct Investment
Foreign direct investments may involve mergers, acquisitions, or partnerships in retail,
services, logistics, or manufacturing
2. Rights of Holders: -
Shareholders, as owners, have voting rights and can influence company decisions, while
debenture holders, as creditors, receive fixed interest payments and have priority in
liquidation, but lack voting rights.
Shareholder Rights:
• Ownership: Shareholders are part-owners of the company, holding a stake in its
assets and profits.
• Voting Rights: They have the right to vote on key company matters, such as electing
directors, approving mergers, and other major business decisions.
• Dividend Payments: Shareholders may receive dividends, which are a share of the
company's profits, though these are not guaranteed and depend on the company's
performance and decision to distribute profits.
• Right to Information: Shareholders have the right to receive copies of the annual
report and other financial statements.
• Right to Transfer Ownership: Shareholders can freely transfer their shares to
others.
• Right to Sue: Shareholders have the right to sue the company for wrongful acts.
Debenture Holder Rights:
• Creditorship:
Debenture holders are creditors of the company, meaning they have lent money to the
company.
• Fixed Interest Payments:
They receive regular interest payments on their debentures, regardless of the company's
profitability.
• Priority in Liquidation:
Debenture holders have a higher claim on a company's assets than shareholders in case
of liquidation.
• No Voting Rights:
Debenture holders typically do not have voting rights or influence in company
management.
• Right to Receive Interest and Redemption Payments on Time:
Debenture holders have the right to receive interest and redemption payments on time.
• Right to Receive Copies of the Annual Report:
Debenture holders have the right to receive copies of the annual report.
• Right to approach Debenture Trustee:
Debenture holders have the right to approach the Debenture Trustee in case of any
grievance.
3. Difference between Shares and Debentures: -
Shares
Firm’s capital is identified as shares and is usually sold in the stock market to raise funds for a
business. The price at which the investor buys the share is known as share price. The
shareholders are qualified to receive the dividend as mentioned by an organization because
they are the owner of a portion of share iv the company.
The shares are transferrable/movable and are broadly categorized into two different sections.
• Equity share
• Preference share
Debentures: -
A debenture is a debt tool used by a company that supports long term loans. Here, the fund is
a borrowed capital, which makes the holder of debenture a creditor of the business. The
debentures are both redeemable and unredeemable, freely transferable with a fixed interest rate.
It is unsecured and sustained only by the issuer’s credibility.
The debenture holders who are the creditor of the company do not hold any voting rights. The
debentures are of following types:
• Secured Debentures
• Convertible Debentures
• Unsecured Debentures
• Registered Debentures
• Non-convertible Debentures
• Bearer Debentures