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What is Foreign Portfolio Investment (FPI)?

This blog will cover a variety of noteworthy subjects linked to foreign portfolio investment, including what it is, why we need it, its various categories, and many other topics related to it.

Given below are the following topics we are going to discuss:

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What is Foreign Portfolio Investment?

A Foreign Portfolio Investment, or FPI, is a foreign investor’s purchase of Indian securities such as shares, corporate bonds, convertible securities, business trust units, etc.

Foreign portfolio investors are the group of investors who purchase these assets. FPIs are governed by the Securities and Exchange Board of India (SEBI). SEBI recently amended and repealed the SEBI (Foreign Portfolio Investors) Regulations, 2019, and they are currently in force.

Moreover, FPIs are expected to accept the Income-tax Act of 1961 and the Foreign Exchange Management Act of 1999. In March 2016, FPIs were permitted to invest in units of the real estate investment trust (REIT) and the infrastructure investment trust (InvIt). 

The Indian rules for FPIs have undergone several regulatory changes in the last few years to ease investment. FPIs primarily consist of securities and other financial assets passively held by foreign investors, generally for short-term speculation.

When foreign investors invest funds in the Indian stock market, the price of shares goes up, which also pushes the liquidity in the secondary market. As an effect of this, the cost of issuing shares goes down, which enhances the equity as it increases the local demand as well as foreign demand due to improved access to capital. 

Thus, it encourages other investors and causes higher efficiency in the market by increasing supply, demand, and liquidity. The country’s currency rate, foreign reserves, monetary policy, saving and investing habits are all impacted by the entrance of foreign money. Huge foreign investments contribute to growth in the demand for domestic currency as the GDP of the country goes up.

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Why do we need Foreign Portfolio Investment?

There is a high demand for foreign portfolio investment in the investment banking sector because FPI was an important factor in the expansion of the Indian economy. 

FPIs have made significant investments in Indian debt and equity securities, supplying much-needed money to Indian businesses. 

The Indian stock market has grown as a result of FPI investments, which benefits the economy as a whole. FPI investments, however, can also contribute to market volatility because they have a tendency to sell off their holdings during difficult periods. 

To create a climate that is favorable to foreign investment, the Indian government and regulatory bodies must make sure that the FPI policies are reliable and stable.

A foreign portfolio investment (FPI) enables an individual investor to trade in both domestic and international bonds and securities. It also enables small-scale investors to make short-term investments in overseas businesses and get profit from the market’s turbulence.

Foreign Portfolio Investment (FPI) also significantly fosters economic growth, particularly in emerging nations like India. An FPI serves to diversify the sources of outside funding, foster the growth of regional markets, and lowers capital expenses.

Categories of Foreign Portfolio Investment

Let’s go through each of the three different types of FPI categories in more detail so that you can have a better understanding of the topic:

Categories of Foreign Portfolio Investment

Category I: This is the first category where investors are from the government sector such as central banks, government agencies, and internal agencies.

Category II: Regulated broad-based funds like mutual funds, investment trusts, and insurance firms are included in this category. Regulated banks, portfolio managers, and investment advisors also come under this category of foreign portfolio investments.

Category III: It comprises people who fall outside the first two categories of eligibility. In this category Endowments, charitable societies, trusts for philanthropic purposes, foundations, corporations, trusts, and private people are included.

Difference between FPI vs FDI

We looked at the various FPI categories in the section above. Let’s now look at the fundamental distinction between FPI and FDI.

Foreign Portfolio Investment Foreign Direct Investment 
Foreign investors’ investments in the financial assets of international businesses are referred as FPIs or Foreign Portfolio Investments. The investment made by foreigners to acquire sizeable ownership in a firm based in a separate country is known as a Foreign Direct Investment (FDI).
The investor’s position in FPI is passive. The investor’s role in FDI is active.
The degree of Control is low in FPI. The degree of Control is High in FDI.
Short-term investment happens through FPI. Long-term investment happens through FDI.
Management of projects is comparatively less efficient. Management of projects is efficient.

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Advantages of Foreign Portfolio Investment

Foreign Portfolio Investment (FPI) brings a range of benefits for economic growth through various factors. Let’s see the various benefits to know how it gives an advantage to FPIs:

Advantages of Foreign Portfolio Investment

The liquidity of local capital markets is increased by foreign portfolio investment, which can also contribute to the growth of market efficiency. A greater range of ventures may be financed as markets grow more liquid, deeper, and wider. In this way, liquid markets can also increase the appeal of long-term investing.

The growth of equity markets and the participation of shareholders in corporate governance can both be helped by foreign portfolio investments. The market will reward greater performance, better prospects for future success, and stronger corporate governance as firms compete for funding.

By bringing more sophisticated tools and technologies for managing portfolios, foreign portfolio investors may potentially benefit domestic capital markets. 

An increase in demand for these instruments would help local markets expand this role, enhancing risk management alternatives for both domestic and international investors.

The development of human capital may be one of the most significant advantages of foreign direct investment. The managerial know-how and technological advancements of the foreign owners will be advantageous to the enterprises. Hence, the host country’s human capital may be grown relatively directly through foreign direct investment and technology transfer.

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In the past 15 years, there have been significant changes to the Indian financial markets. FPI’s assistance has helped Indian markets become more effective and competitive, which has benefited the nation’s economic growth. By examining the key economic indicators, it becomes clear that FPI is crucial to the nation’s financial stability.

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