Foreign investors have pumped in nearly Rs 8,000 crore in Indian equities in the first four trading sessions of June as risk sentiment improved amid sharply falling new Covid cases and strong corporate earnings. The inflows came after a net withdrawal of Rs 2,954 crore in May and Rs 9,659 crore in April.
What is Foreign Portfolio Investment?
Foreign portfolio investment (FPI) includes securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of the company’s assets and is relatively liquid based on market volatility. Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in the foreign economy. Both FDI and FPI are important sources of funding for most economies. FPI holdings can include stocks, bonds, mutual funds and exchange-traded funds.
Difference between FPI and FDI
In Foreign Portfolio Investment, investors do not actively manage the investments or the companies that issue the investments. They do not have direct control over the assets or the businesses.
Whereas in Foreign Direct Investment (FDI), investors buy a direct business interest in a foreign country. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
This FDI investor controls their monetary investments and often actively manages the company in which they invest. Helps the investor build the business and waits to see their return on investment (ROI). However, because the investor’s money is tied up in one company, they face less liquidity and more risk when trying to sell this interest. Whereas FPIs have the freedom to liquidity faster in their investments.
Benefits of Foreign Portfolio Investment
– Portfolio Diversification: Foreign portfolio investment allows investors to engage in international diversification of portfolio assets, which in turn helps in achieving higher risk-adjusted returns.
– International Credit: Investors who have a foreign investment portfolio have a wider credit base because they can access credit abroad where they have significant investments. This is beneficial when the credit sources available at home are expensive or unavailable due to various factors.
– Benefit From Exchange Rate: International currency exchange rates keep on changing. Sometimes the currency of the investor’s home country can be strong, and sometimes it can be weak. There are times when a stronger currency in a foreign country where an investor has a portfolio can benefit the investor.
– Access to a Bigger Market: Sometimes, a foreign market may be less competitive than a domestic market. Hence, FPI gives the investor exposure to the broader market. Foreign markets are comparatively less saturated and hence, they can offer higher returns and more diversification as well.
– High Liquidity: Foreign portfolio investment provides high liquidity. An investor can buy and sell a foreign portfolio. It gives investors the purchasing power to act when good buying opportunities arise. Investors can place buy and sell trades quickly and seamlessly.
Who Regulates FPIs in India?
The Securities and Exchange Board of India (SEBI) governs FPIs. In 2019, SEBI has introduced the Foreign Portfolio Investors Regulations. FPIs also have to comply with the Income Tax Act, 1961 and Foreign Exchange Management Act, 1999.
Eligibility Criteria for Foreign Portfolio Investment
An individual has to fulfil the following conditions to register as an FPI:
– As per the Income Tax Act 1961, the applicant should not be a non-resident Indian
– Must not be a citizen of a country covered by a FATF public statement.
– Should be eligible to invest in securities outside the country.
– For investing in securities, he/she should have MoA/AOA/Contract approval.
– A certificate that grants the applicant interest in the development of the securities market.
– If the bank is an applicant, it must belong to a nation whose central bank is a member of the Bank for International Settlements.