Indirect investment refers to the investment method where investors purchase financial assets like stocks and bonds to earn returns, without being involved in the specific use of the investment. There are two main forms of indirect investment: stock investment and bond investment. Many countries have policies to regulate capital flows for indirect investment. This article summarizes the forms, characteristics and management policies of indirect investment.
Main forms of indirect investment
There are two main forms of indirect investment: stock investment and bond investment. Stock investment means purchasing shares issued by companies to obtain part ownership and a claim on earnings and assets. Investors gain returns through capital gains when stock prices appreciate and dividends paid by profitable companies. Bond investment refers to purchasing debt securities like corporate bonds and government bonds to gain interest income. Bonds represent a loan that investors make to the bond issuer. So indirect investors earn income through interest payments from the bond issuer.
Indirect investment capital account
Many countries require foreign investors to open a special capital account called indirect investment capital account (IICA) to make portfolio investments. For example, in Vietnam, foreign investors owning less than 51% of shares in a company need to open IICA accounts. The account is used to receive investment capital, make payments for purchasing stocks and bonds, transfer profits and dividends, and conduct other transactions related to indirect investments.
Regulations on capital flows
Many countries have regulations on cross-border capital flows related to indirect investment to manage risks. For example, China has a qualified foreign institutional investor (QFII) system that sets investment quotas and lock-up periods for foreign investors buying Chinese securities. Malaysia limits foreign ownership in companies to 30% for major sectors. Thailand requires foreign investors to report securities transactions exceeding a threshold to its central bank each day.
Repatriation of investment returns
Many emerging economies impose restrictions on capital outflows to limit currency depreciation pressures. For example, India generally allows free repatriation of portfolio investment returns like dividends after payment of taxes. But when the rupee is under pressure, India can impose restrictions on capital outflows. So indirect investors need to evaluate the repatriation risks before investing in countries with capital controls.
Indirect investment through purchasing stocks, bonds and other financial assets provides an alternative avenue for global asset allocation besides direct investment. But investors need to understand the capital flow regulations and repatriation risks for cross-border portfolio investments.