Foreign portfolio investment
Foreign Portfolio Investment (FPI) is the capital inflow from one country to another that takes the form of portfolio investment, which is more liquid and involves less control than direct investment. Foreign portfolio investment is a type of passive investing where investors purchase securities of foreign companies, but do not actively participate in the management of those companies. The term "passive" means that the investors are not involved in the day-to-day operations of the companies they invest in; they simply buy securities and hope that their value increases over time.
Portfolio investment is a type of investment involving a collection of assets — usually financial securities — owned by an individual or company. Portfolio investments are typically made with the expectation that they'll generate income and/or capital gains.
Categories in Foreign Portfolio Investment
- Category I: Investors from the public sector are included in Category I. Central banks, government institutions, and international or multilateral organisations and agencies are only a few examples.
- Category II: This category includes the following items: Regulated broad-based funds such as Mutual funds, investment trusts, and insurance/reinsurance firms. Regulated banks, asset management firms, portfolio managers, investment advisors, and managers are also included.
- Category III: Those who do not qualify for the first two categories are placed in Category III. Endowments, charitable societies, charitable trusts, foundations, corporations, trusts, and people are all included.
Benefits of Foreign Portfolio Investment
The primary benefit of foreign portfolio investment is:
- Economic growth due to greater flow of capital into a country. This can help companies expand operations and hire new workers. It may also help governments finance infrastructure projects and improve public services like education or healthcare.
- Diverse Investments: FPI allows investors to diversify their investment portfolio.
- Credit Across Boundaries (International Credit): In foreign countries, investors can obtain access to larger quantities of credit.
- Gain Access to a Larger Market: FPI gives you access to a larger market.
- High Liquidity: High liquidity is provided via Foreign Portfolio Investments. An investor can easily acquire and sell overseas portfolios.
- Improved investment environment
- Improved transparency and disclosure of information
Risks of Foreign Portfolio Investment
In addition to its potential benefits, there are some significant risks associated with foreign portfolio investment. These can include currency risk, interest rate risk, political risk and regulatory risk. Many emerging markets have volatile currencies which may strengthen or weaken substantially over time depending on political circumstances, inflation and other factors. Low Liquidity is the risk of FPI, The capital market liquidity in emerging countries is generally poor, resulting in more price volatility.
Who Regulates FPI in India?
The Securities and Exchange Board of India (SEBI) regulates foreign portfolio investment in India. To invest in a company in India, foreign investors must obtain an approval from SEBI.
Eligibility Criteria for Foreign Portfolio Investment in India
- The applicant must not be a non-resident Indian as defined by the Income Tax Act of 1961.
- Should not be a citizen of a country that is subject to the FATF's public statement.
- To invest in securities outside of the country, you must be eligible.
- Must have the MOA / AOA / Agreement's approval and many more.