Foreign Portfolio Investment


 
FPI is a mode of investment in which investors hold securities and other financial assets in other countries. FPI holdings can include stocks, ADRs, bonds, mutual funds, and exchange-traded funds.
  • Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.
  • FPI offers the advantage of quicker return or a quicker exit to an investor. Thus by nature, FPI is more volatile.
  • According to SEBI, any equity investment by non-residents which is less than or equal to 10% of capital in a company in a company is portfolio investment. ANY investment above 10% will be counted as FDI.
  • As per SEBI regulations, FPI is not allowed in unlisted shares and investment in unlisted entities is treated as FDI.
  • Foreign Portfolio Investors includes investment groups of Foreign institutional Investors (FII’s), Qualified Foreign Investors (QFI’s), etc.
  • NRI’s don’t come under FPI.UPSC Prelims 2024 dynamic test series
  • Foreign Institutional Investor (FII) is an institution like a mutual fund, pension fund, insurance company, etc. which proposes to make investments in Indian securities.
  • Qualified Foreign Investors (QFI) include individuals, groups or associations, resident in a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF.
  • FPI in India is allowed in Government Securities (G-Secs), State Development Loans (SDL’s) and corporate bonds.
  • Recently the Reserve Bank of India (RBI) withdrew the 20 percent limit on investments by FPIs in corporate bonds of an entity with a view to encouraging more foreign investments. It was stipulated that no FPI should have an exposure of more than 20 percent of its corporate bond portfolio to a single corporate.
FOREIGN CAPITAL
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two important forms of foreign capital.
 
Similarities:
  • An advantage of both FDI and FPI is that the receiving country need not repay the debt like in the case of External Commercial Borrowings (foreign loans).
  • Both are thus described as non –debt creating, and hence involve no payment obligations.
  • Their own servicing depends on the future growth of the economy. This is why most developing countries prefer FDI and FPI compared to other forms of foreign capital like ECBs.
 
Differences:
  • While FDI aims to take control of the company in which investment is made; FPI aims to reap profits by investing in shares and bonds of the invested entity without controlling the company.
  • FDI means real investment; whereas FPI is a monetary or financial investment.
FDI means the investor makes a direct investment in buildings and machinery. FPI is just a financial investment.
  • FDI has a direct impact on employment, output, and export. FPI affects the foreign exchange rate, domestic money supply, value of rupee, call money rates, security market, etc. It is otherwise known as hot money. It is highly volatile and involves exchange risks and may lead to capital flight and currency crisis affecting real economic variables. It is destabilizing in the foreign exchange market.
  • The portfolio investors stay his money in the capital market only for a short period of time. FDI is certain, long term and less fluctuating; FPI is speculative, highly volatile and un-predictive.
  • Hence, FDI is superior to FPI.

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