Foreign Portfolio Investment (FPI) – Definition, Types, Example & Benefits
Imagine expanding your investment reach beyond borders, tapping into the growth of emerging markets or thriving industries across the globe—all without stepping foot outside your country. That’s the essence of foreign portfolio investment (FPI). Unlike foreign direct investment (FDI), where investors actively manage assets, FPI allows you to diversify internationally by holding stocks, bonds, or mutual funds in foreign markets. But what exactly is FPI? The full form of FPIs in the share market is Foreign Portfolio Investment. Let’s begin to understand what is a foreign portfolio investment example, the difference between FPI and FDI and how it plays a pivotal role in shaping a country’s economic landscape.
What is the Meaning of FPI in the Stock Market?
Now that we’ve covered FPIs full form, let’s understand the definition. The meaning of FPI in the share market is the inflow of investment from foreign individuals, corporations, and institutional investors into a country’s financial markets. They do this to take advantage of the opportunities in that country’s economy without actually controlling or managing the companies they invest in. This type of investment brings in extra money for the country, helping its financial markets grow.
In India, foreign portfolio investments have become an important source of investment capital.
The current fiscal year FY24 is on track to close with record net inflows from Foreign Portfolio Investors (FPIs) into the Indian market, with net investments nearing ₹12,000 crore ($1.4 billion) in the first week of March. Acting as a catalyst, FPIs in India bring liquidity to financial markets, promoting efficient capital allocation and price discovery. Now, let us further understand what FPI means in India.
Recent Foreign Portfolio Investment Example in India
Now that you know the meaning of FPI, investors should know that FPIs have gained momentum in the Indian market after months of lockdowns, job losses and eroding funds.
Here are some recent examples of foreign portfolio investment in India:
- SEBI’s report (March 2024) highlighted the distribution of FPIs across various countries, with the United States leading with 3,457 registered FPIs, followed by Luxembourg with 1,393 and Canada with 804.
- FPIs have demonstrated growing interest in the Indian debt market, emerging as net buyers for the second consecutive year with inflows of US$ 13.10 billion (Rs. 1.1 lakh crore) in 2024.
- Foreign portfolio investors (FPIs) have invested more than Rs 87,000 crore (over $10 billion) into domestic equities this quarter, marking the highest inflow since the September quarter ending in June 2023.
Therefore, it is likely that India will soon be the preferred destination for portfolio investors if the current trend continues.
Advantages of FPI (Foreign Portfolio Investment)
Unlike FDI, FPIs in the Indian 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 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.
- Flexibility
One of the biggest advantages of FPI is its flexibility. Unlike foreign direct investment (FDI), which requires a long-term commitment to foreign assets, FPI allows investors to enter and exit markets quickly, making it an ideal choice for those who want to respond to changing market conditions.
A great foreign portfolio investment example is when an investor diversifies their portfolio by holding stocks from multiple countries. This allows them to hedge against risks in their home country while gaining exposure to growing economies abroad.
What are the Types of Foreign Portfolio Investments?
There are different types of foreign portfolio investments according to RBI guidelines, but some of the most common foreign portfolio investment 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
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 shares or equities due to the strong performance of Indian equities.
The following table presents a comparative analysis of Foreign Portfolio Investment vs Foreign Direct Investment. FPI means financial investments without direct control, while FDI involves acquiring significant influence or ownership in the operations. 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 authorised 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?
Major advantages of foreign portfolio investment is the ability to diversify across different economies. Several factors influence net Foreign Portfolio Investment in India. These factors can broadly be categorised 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.
Risks Pertaining to FPIs
Understanding the difference between FPI and FDI is important for assessing risks. Foreign portfolio investors encounter key risks such as:
- 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.
FPI Categories in India
Now that you know the difference between foreign direct investment and foreign portfolio investment, you should know the categories of FPIs. FPIs in India are classified into three categories by the Securities and Exchange Board of India (SEBI), based on the risk profile and investor type. These categories help streamline regulatory processes and determine the level of scrutiny for foreign investors.
Category I
This category includes low-risk, highly regulated investors such as central banks, sovereign wealth funds, multilateral organisations, and certain government entities. Due to their credibility and low-risk nature, these entities enjoy simplified registration processes.
Category II
This includes regulated institutions such as banks, mutual funds, pension funds, and insurance companies. The risk level is moderate, and while the regulatory framework is slightly stricter than Category I, these investors still benefit from relaxed compliance requirements.
Category III
The third category consists of high-risk investors, including individuals, corporations, hedge funds, and trusts. These investors are subject to more stringent regulations and reporting requirements due to the potential for speculative activities.
Understanding these categories is essential for foreign investors looking to navigate India’s financial markets, as they define both the ease of entry and the level of oversight required.
What Factors Attract FPI into a Country?
A combination of economic, political, and market factors influences the flow of foreign portfolio investment (FPI) into a country. Key drivers include:
- Economic Stability and Growth: Investors are drawn to countries with strong economic fundamentals, such as high GDP growth, low inflation, and stable interest rates. Emerging markets with rapid growth often attract significant FPI as investors seek higher returns.
- Interest Rate Differentials: Higher interest rates relative to other markets can make a country more attractive for bond investments, as they offer better yields on debt securities.
- Currency Strength and Stability: A stable or appreciating currency attracts FPI, as it reduces exchange rate risks. Investors avoid markets with volatile currency fluctuations, which can erode returns.
- Political Stability and Regulatory Environment: Countries with predictable, investor-friendly policies and stable governments are more likely to attract FPI. Conversely, political uncertainty or sudden regulatory changes can drive investors away.
- Market Liquidity and Accessibility: Well-developed capital markets with high liquidity and ease of entry for foreign investors are more attractive for FPI, as investors prefer markets where they can easily buy and sell assets.
To Wrap It Up…
Foreign portfolio investment is one of the largest types of capital flows into India. Understanding the definition of FPIs has become a vital component of India’s economic landscape, fueling growth and bolstering its position in the global economy. The advantages of FPI lie in its ability to offer international diversification, liquidity, and flexibility, making it a valuable tool for investors looking to expand their portfolios across global markets without the direct involvement required by FDI. 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.
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 United States is the largest foreign portfolio investor (FPI) in India, followed by Luxembourg and Canada.
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 risky 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 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%, based on representations from stakeholders.
A portfolio investor might buy shares in a multinational company listed on the National Stock Exchange, while an FDI investor might open a subsidiary or establish a new factory in that country. The former is a passive investment; the latter involves managing operations.
The full form of FII/FPI is:
FII: Foreign Institutional Investor
FPI: Foreign Portfolio Investor
All You Need to Know About Starting Your Share Market Journey
Share market investments can seem a bit tedious at first but smallcase is here to simplify all your queries and worries. Right from “Share market for beginner”, “Portfolio Diversification” to “short term investments” we’ve got all the tips, just a single click away –
