Foreign Portfolio Investment (FPI) – Definition, Types, Example & Benefits
In this fast-paced era of globalization, FPI has emerged as a game-changer, bringing capital, expertise, and opportunities to economies worldwide. But what exactly is FPI? The FPI full form in share market is Foreign Portfolio Investment. It is a type of investment made by foreign portfolio investors in India in the securities of a country other than their own.
Today, we are going to delve into the significance of FPI in India. Let’s begin to understand what foreign portfolio investment entails and how it plays a pivotal role in shaping a country’s economic landscape.Now, let us find out what is Foreign Portfolio Investment.
What is the Meaning of FPI in the Stock Market?
In its essence, FPI stands for Foreign Portfolio Investment meaning in share market. It refers to the inflow of investment from foreign individuals, corporations, and institutional investors into a country’s financial markets.
In addition to Foreign Direct Investment (FDI), Foreign Portfolio Investment is one of the easiest methods of investing abroad. Unlike foreign direct investment (FDI), which involves long-term investments in physical assets, FPI involves the purchase of securities such as stocks, bonds, and mutual funds. Additionally, the most important type of investment by FPI is in shares or equities due to the strong performance of Indian equities.
In India, foreign portfolio investments have become an important source of investment capital. Therefore, in 2022, FPIs invested a record $36 billion in Indian stocks and bonds. This investment has helped to support India’s economic growth and has made Indian markets more liquid and efficient. Acting as a catalyst, FPIs in India bring liquidity to India’s financial markets, promoting efficient capital allocation and price discovery. Now, let us learn what is FPI in India.
Understanding Foreign Portfolio Investment Better
Unlike FDI, foreign portfolio investment or FPI India means in share market doesn’t aim to control the company. Major companies around the world are leveraging Foreign Portfolio Investments (FPIs) for various reasons, enabling them to generate profits. Here are several key reasons why companies are benefiting from FPIs:
- Increased Access to Capital: FPIs can provide companies with a much-needed source of capital for growth and expansion. This is especially beneficial for companies in emerging markets, where access to capital can be limited.
- Improved Liquidity: FPIs can help to improve the liquidity of a company’s stock, making it easier for the company to raise capital and for investors to buy and sell shares. This can lead to higher stock prices and increased shareholder value.
- Diversification: FPIs can help companies to diversify their shareholder base, which can reduce the risk of a takeover or hostile bid. This can be especially beneficial for companies in industries that are prone to consolidation.
- Access to New Markets: Foreign Portfolio Investment can help companies to access new markets and expand their business internationally. This can lead to increased sales, profits, and shareholder value.
What are the Types of Foreign Portfolio Investments?
There are many different types of foreign portfolio investments RBI guidelines, but some of the most common foreign portfolio investment may include:
- Stocks: Stocks are shares of ownership in a company. When you buy a stock, you are essentially buying a piece of the company.
- Bonds: Bonds are loans that you make to a company or government. When you buy a bond, you are lending money to the issuer, and they agree to pay you back with interest over a set period of time.
- Mutual Funds: Mutual funds are baskets of stocks or bonds that are managed by a professional. Mutual funds offer a way for investors to diversify their portfolios and invest in a variety of assets without having to do the research themselves.
- Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds, but they are traded on exchanges like stocks. This makes them more liquid than mutual funds, which can be an advantage for investors who want to be able to buy and sell their investments quickly.
- American depositary receipts (ADRs): ADRs are a type of security that represents ownership of shares in a foreign company. ADRs are traded on U.S. exchanges, which makes them easier for U.S. investors to buy and sell.
- Global Depositary Receipts (GDRs): GDRs are similar to ADRs, but they are traded on exchanges outside of the United States. GDRs can be a good option for investors who want to invest in foreign companies but do not want to buy ADRs.
FPI vs FDI
The following table presents a comparative analysis of Foreign Portfolio Investment vs Foreign Direct Investment. Here is the difference between FPI and FDI:
| Aspects of Comparison | Foreign Portfolio Investment (FPI) | Foreign Direct Investment (FDI) |
|---|---|---|
| Investment Type | Passive investment in financial assets like stocks and bonds. | Active investment in businesses and physical assets. |
| Control and Ownership | Limited control and ownership in the invested entity. | Significant control and ownership in the invested entity. |
| Purpose | Generally for portfolio diversification, seeking returns. | To establish or expand a business, often for long-term growth.FDI and portfolio investment, although, go hand in hand. |
| Liquidity | Highly liquid, easy to buy and sell financial assets. | Less liquid, long-term commitment with fewer exit options. |
| Risk | Generally lower risk, subject to market fluctuations. | Higher risk due to operational and business risks. |
| Regulatory Approval | Fewer restrictions and approvals are usually not as stringent. | Often subject to more regulatory approvals and restrictions. |
| Reporting and Disclosure | Typically lower disclosure and reporting requirements. | Stringent reporting and transparency standards. |
| Taxation | Subject to capital gains tax on investment income. | Taxed at the corporate tax rate, as applicable in the host country. |
Now that we have learned the differences between FDI and FPI, let us learn how to create an FDI account.
How to Create a Foreign Portfolio Investment Account?
On January 27, 2020, the Government of India (Ministry of Finance published a Common Application Form (CAF) for registering Foreign Portfolio Investors (FPI) with SEBI, receiving Permanent Account Numbers (PANs) from the Income Tax Department, completing Know Your Customer (KYC), and opening bank and demat accounts.
Therefore, create an FPI investment account by following these easy steps:
- Choose a Designated Depository Participant (DDP): A DDP is a financial institution that is authorized by the Securities and Exchange Board of India (SEBI) to facilitate foreign portfolio investment in India.
- Open a Demat Account with the DDP: Open a demat account from the preferred DDP options that offer FPI services such as National Securities Depository Limited (NSDL), Central Depository Services (India) Limited (CDS), Citibank N.A., HSBC Bank Plc. and Standard Chartered Bank.
- Submit an Application to SEBI for FPI Registration: The application process can be found on the SEBI website or the NSDL website.
- Provide Documents: The documentation required includes a copy of your passport or other valid identification document, PAN card, bank statement and a letter from your bank confirming that you have sufficient funds to invest.
Once you have submitted your application and provided the required documentation, the DDP will process your application and open an FPI account for you. You will then be able to start investing in Indian securities.
Eligibility Criteria for FPI Investments
To register as an FPI, an individual must meet the following criteria:
- Be a resident Indian according to the Income-tax Act 1961.
- Not be a citizen of a country on the FATF’s public statement.
- Be eligible to invest in foreign securities.
- Hold the necessary approval from MOA / AOA / Agreement for securities investment.
- Possess a certificate indicating an interest in the securities market’s development.
- If a bank applies, it should belong to a nation with a central bank as a member of the Bank for International Settlements.
What are the Factors Affecting FPI Investment in India?
Several factors influence net Foreign Portfolio Investment in India. These factors can broadly be categorized into economic indicators, political and regulatory environment, and market conditions. Here are the key factors affecting FPI investment in India:
- Economic Growth: A strong and growing economy is one of the most important factors that attracts FPI. Investors are more likely to invest in countries with strong economic growth prospects.
- Interest Rates: Investors are also attracted to countries with high-interest rates. This is because high-interest rates can provide investors with a higher return on their investment.
- Exchange Rates: The value of the Indian rupee relative to other currencies can also affect FPI. If the rupee is strong, it makes Indian assets more expensive for qualified foreign investors.
- Political Stability: Political stability is another important factor that can affect foreign portfolio investment. Investors are more likely to invest in countries with stable political systems.
- Regulations: The regulatory environment can also affect FPI investments. Investors are more likely to invest in countries with transparent and predictable regulatory systems.
What are the Pros and Cons of Foreign Portfolio Investment?
It is important to know the advantages and disadvantages of investing in net foreign portfolio investment (FPI). Therefore, we have listed a few:
| Advantages | Disadvantages |
|---|---|
| Allows investors to diversify their portfolios by investing in assets in different countries. | Often more volatile than domestic markets, due to factors such as political instability and economic uncertainty. |
| Gives investors access to new markets and investment opportunities that may not be available domestically. | Subjected to different tax rules than domestic investments. This can make it difficult to calculate returns and may lead to unexpected tax liabilities. |
| Generates foreign exchange gains for investors, if the value of the currency in which the investment is denominated appreciates against the investor’s home currency. | It is possible that political turmoil and economic turmoil may negatively impact FPI investments. |
Let us now look at an example of FPI.
Foreign Portfolio Investment Example in India
In recent years, FPIs have gained momentum in the Indian market after months of lockdowns, job losses, eroding funds, and disappointing stock market performances.
- During the period between November 2nd and 6th 2020, foreign portfolio investors have pumped in approximately Rs. 8,381 crores into Indian markets, indicating that most investors are optimistic about India’s economic recovery.
Here are some recent example of foreign portfolio investment in India:
- In March 2023, BlackRock Inc., the world’s largest asset manager, invested $1 billion in India’s National Infrastructure Pipeline (NIP). The NIP is a $1 trillion plan to develop infrastructure in India over the next five years.
- In April 2023, Fidelity Investments, a global investment management company, invested $500 million in India’s startup ecosystem. The investment will be used to support early-stage startups in India.
- In May 2023, Temasek Holdings, a Singapore-based sovereign wealth fund, invested $300 million in India’s renewable energy sector. The investment will be used to support the development of solar and wind power projects in India.
Therefore, it is likely that India will soon be the preferred destination for portfolio investors if the current trend continues.
Risks Pertaining to FPIs
Foreign portfolio investors encounter key risks:
- Asset Price Volatility: Different global markets exhibit varying levels of risk. For instance, the Deutscher Aktienindex (DAX), a German stock market index, historically displays higher volatility than the S&P 500.
- Jurisdictional Risk: Investing in foreign countries carries jurisdictional risk. Legislative changes can significantly affect investment returns, and countries battling financial crime, like money laundering, heighten this risk.
To Wrap It Up…
Foreign Portfolio Investment is one of the largest types of capital flows into India. Foreign Portfolio Investment is categorized under Foreign Capital. It has become a vital component of India’s economic landscape, fueling growth, and bolstering its position in the global economy. As India continues on its path of economic development, FPI companies serve as a bridge, connecting international portfolio investment investors with the country’s promising opportunities. With a proactive policy framework, favorable investment climate, and a diverse range of sectors ripe for investment, India stands poised to attract an even greater inflow of FPI, driving its economic transformation and shaping its future success.
FAQs
The entities encompassed in this category include regulated asset management companies, investment funds, portfolio managers, banks, pension funds, and other regulated funds.
The Securities and Exchange Board of India (SEBI) controls FPI in India. Established in 1992, SEBI is the regulatory body for the securities market in India that protects the interests of investors.
According to the present FPI policy, investment of up to 10% shareholding by a single foreign investor in an Indian firm is FPI.
According to the Securities and Exchange Board of India (SEBI), the largest FPI investor is the United States with $672.9 billion, followed by Mauritius with $415.0 billion.
FPI in the share market is more liquid than FDI and offers the investor a chance for a quicker return on his money—or a quicker exit making it less riskier than Foreign Direct Investment (FDI).
Foreign portfolio investments are more suited to the average retail investor. FPI provides diversification and higher returns. However, it is important to do your research and understand the risks involved before investing in foreign markets.
In September 2020, the government amended the tax law, capping the maximum surcharge on dividend tax for non-corporate and non-partnership FPIs at 15 percent, based on representations from stakeholders.
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