What is Foreign Portfolio Investment?
Foreign Portfolio Investment (FPI) refers to the purchase and holding of a wide array of foreign financial assets by investors seeking to invest in a country outside their own. Foreign portfolio holders have access to a range of investment instruments such as stocks, bonds, mutual funds, derivatives, fixed deposits, etc. These investment opportunities are made keeping a factor of relatively high risk for high reward in mind. Due to the increased share price volatility that FPI investors are faced with, they also face a higher risk (this also differentiates depending upon the country of investment). Hence, they expect and seek greater rewards from FPI endeavors.
Although FPI poses a higher risk, there are a variety of indicators to consider to weigh the potential upside against the downside. These factors include the ease in purchase and sale of FPIs for a particular country, access to international credit, fluctuations in currency exchange rates, development state and stability of a nation, etc.
The primary difference between an FPI and an FDI is the factor of ownership. In Foreign Direct Investment, you’re investing to seek control over the functionality and a foreign enterprise or entity. In FDI you seek ownership, whereas Foreign Portfolio Investment is a form of investment in the assets of a foreign enterprise such as stocks or bonds. It does not offer any form of control over the entity and hence offers no ownership of the entity.
FPI has been seen as a method of opening up the global markets to a plethora of investors of various forms. This feature isn’t limited to individual investors and is also accessible by enterprises and organizations as well as the governments of a nation. Foreign Portfolio Investment in India was considerably eased by SEBI back in June 2014. According to the most recent reports, the countries with the highest FPI in India are the United States, followed by Mauritius, and then Luxembourg.
What are the benefits of Foreign Portfolio Investments?
The primary benefit offered by FPI and the primary reason why most people seek this form of investment is diversification. Investment diversification allows both increased returns as well as a cushion in the case of losses.
FPI opens up a world of investment opportunities. It enables access to wider markets that may be less saturated compared to the domestic market.
The benefit of the Exchange rate
Investors can reap the benefit of a fluctuating exchange rate amongst certain nations. Investing at a time when the exchange rate has dipped and sold your financial holdings when the exchange rate rises can result in a dual benefit in the form of investment returns further boosted by a heightened exchange rate.
International credit score
Investors may have an unkempt domestic credit score while having a favorable international credit score. Holding increased amounts of credit in foreign nations allows for a broadened credit base and this may lead to higher returns on equity-based investments.
What are the eligibility criteria for FPI?
The following criteria must be fulfilled by an individual to qualify and register as an FPI:
- The applicant should not be a non-resident Indian as per the Income Tax Act 1961.
- The applicant must be eligible to invest in securities outside the country
- The applicant must have the approval of the MOA/AOA/Agreement to invest in securities.
- The applicant must not be a citizen of a country that falls under the public statement of FATF.
- They must obtain a certificate that grants the applicants genuine interest in the development of the securities market.
- In case the applicant is a bank, the central bank of the nation the bank belongs to must be a member of the Bank for International Settlements.
Frequently Asked Questions Expand All
The primary risks faced by FPI investors are risks relating to volatile asset pricing which occurs due to the volatility of different financial markets in different countries, and any form of jurisdictional risk such as changes in law, money laundering, etc.
The revised limit for FPI for April 2021 to September 2021 is 10,14,957 crore rupees. This includes 2,43,914 crore rupees for G-sec General and 5,74,263 crore rupees for Corporate Bonds.
FPI isn’t restricted only to particular individuals, as long as the entity meets the criteria. This includes individuals, enterprises or organisations and even governments.
According to SEBI, Category I FPIs (the most well-regulated kind) have to apply for separate registration for particular purposes relating to offshore hedging.
The simple answer is yes, similar to a Foreign Institutional Investor (FII), a Foreign Portfolio Investor (FPI) can place orders directly through a broker.