FOREIGN PORTFOLIO INVESTMENT (FPI)
WHY IN NEWS?
- Recently, new rules restrict FPI holding in assets of a single Indian corporate group to 50 per cent and overall investment of each FPI in Indian equity to ₹25,000 crore.
WHAT IS FPI?
- Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country.
- It involves an array of financial assets like fixed deposits, stocks, and mutual funds.
- All the investments are passively held by the investors.
- It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market.
- Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy.
- FDI and FPI are both important sources of funding for most economies.
DIFFERENCE BW FPI AND FDI:
- The primary difference between an FPI and an FDI is the factor of ownership.
- FPI : With FPI, an investor does not actively manage the investments or the companies that issue the investments.
They do not have direct control over the assets or the businesses.
- FDI: It lets an investor purchase 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.
For example, say an investor based in New York City purchases a warehouse in Berlin to lease to a German company that needs space to expand its operations.
CHARACTERSTICS OF FPI:
- FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange traded funds.
- FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.
- On a more macro level, foreign portfolio investment is part of a country’s capital account and shown on its balance of payments (BOP).
- FPI has been seen as a method of opening up the global markets to a plethora of investors of various forms.
HOW DO THEY OPERATE?
- In times of global uncertainty, foreign investors embrace a risk-off trade, meaning they move money from risky assets such as equities and add more of bonds and gold.
- When interest rates rise in the US and other advanced economies, they withdraw money from emerging markets such as India and invest in the bonds in their domestic markets.
- The 10-year US bond has shot up from a low of 0.54% in July 2020 to over 3.30% now.
BENEFITS OF FPI :
- Foreign Portfolio Investment option is feasible with retail investors as the amount of money is much less than that of the FDI and involves simpler legalities in general.
- 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 is more liquid than FDI and offers the investor a chance for a quicker return on his money or a quicker exit.
- Investors can reap the benefit of a fluctuating exchange rate amongst certain nations.
- 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.
CHALLENGES OF FPI:
- 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
- In contrast to FDI, in FPI the investor has no control over the management or functioning of the firm or business entity whose asset is bought.
- When FPIs sell their holdings, and repatriate funds back to their home markets, the local currency takes a beating.
STATUS OF FPIs IN INDIA:
- FPIs are the largest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of the market.
- Holding of FPIs (in value terms) in companies listed on NSE stood at Rs 51.99 lakh crore as on March 31, 2022, a decrease of 3.36% from Rs 53.80 lakh crore as on December 31, 2021, due to the sustained sell-off since October 2021.
- FPIs hold sizeable stakes in private banks, tech companies and big caps like Reliance Industries.
- The US accounts for a major chunk of FPI investments at Rs 17.57 lakh crore as of May 2022, followed by Mauritius Rs 5.24 lakh crore, Singapore Rs 4.25 lakh crore and Luxembourg Rs 3.58 lakh crore, according to data available from the National Securities Depository Ltd (NSDL).
SYLLABUS: MAINS, GS-3, ECONOMY
SOURCE: INDIAN EXPRESS