Foreign Portfolio Investment (FPI) is the investment made by foreign individuals or institutions in financial assets like stocks, fixed deposits, and mutual funds. It is a way for foreign entities to participate in a country’s financial markets without having significant control or ownership in the invested companies.
- What is FPI in India?
- Foreign Portfolio Investment Example
- Types of Foreign Investment
- Advantages of FPI
- Disadvantages of FPI
- Difference Between FDI and FPI
- What Is FPI in India – Quick Summary
- FPI Meaning – FAQs
What is FPI in India?
FPI stands for “Foreign Portfolio Investment”. It represents the investments made by foreign individuals, foreign institutional investors, and qualified foreign investors in various financial assets like stocks, bonds, and other securities within the Indian financial markets.
FPI in India is monitored by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
FPI lets foreigners invest in India’s financial markets, aiding capital inflow and helping the economy grow. It also allows them to sell their investments fairly easily. The framework for FPI in India is designed to maintain a balance between attracting foreign investments and safeguarding the nation’s economic interests.
FPI has become an essential source of funding for Indian companies and a means for foreign investors to spread their investments in one of the world’s fastest-growing economies.
Foreign Portfolio Investment Example
An example of Foreign Portfolio Investment (FPI) in India is when an overseas investor, such as an institution or individual from another country, invests in Indian stocks. For instance, a U.K.-based investment firm purchasing stocks in an Indian technology company would represent FPI. These investments bring funds into Indian markets without giving the investors significant ownership or authority in Indian businesses.
Types of Foreign Investment
The four primary Foreign Investments are:
- Foreign Direct Investment (FDI)
- Foreign Portfolio Investment (FPI)
- Foreign Aid
- Foreign Exchange Reserves
- Foreign Direct Investment (FDI): This involves a foreign entity making a substantial and lasting investment in a business, property, or project in another country.
- Foreign Portfolio Investment (FPI): FPI encompasses investments in financial assets like stocks and bonds, where the investor typically doesn’t seek control or management of the invested entity.
- Foreign Aid: Foreign governments and international organizations provide financial assistance to support economic development, humanitarian aid, or other specific purposes in another country.
- Foreign Exchange Reserves: Central banks in countries keep foreign money and financial assets in their reserves to ensure international trade and financial systems stay stable.
Advantages of FPI
The main advantage of FPI is its ability to offer investors liquidity and flexibility, as FPI assets are often easily tradable. It allows investors to buy or sell their investments quickly, providing financial flexibility and opportunities for short-term gains.
Below are the other advantages of FPI.
- Liquidity: FPI assets are often easily tradable, providing investors with liquidity and flexibility.
- Access to Growth: It allows you to tap into the growth of various markets and strong economies.
- No Management Control: Investors don’t have to manage or control the companies they invest in, reducing operational responsibilities.
- Foreign Exchange Earnings: It can bring in foreign exchange earnings for the host country.
Disadvantages of FPI
The primary disadvantage of FPI is its exposure to market volatility, which can lead to financial losses. FPI investments are highly influenced by market conditions, making them vulnerable to abrupt and significant value fluctuations, potentially causing losses to investors.
Below are the disadvantages of FPI
- Short-Term Focus: Investors in FPI often prioritize short-term gains, which can harm the stability of investments over a longer period.
- Lack of Control: FPI investors have limited influence on the companies they invest in.
- Currency Risk: Exchange rate fluctuations can affect the returns on FPI investments.
- Market Distortions: Big FPI investments can disrupt local markets, creating situations where prices soar unrealistically, potentially leading to instability
Difference Between FDI and FPI
The key difference between FDI and FPI is that FDI involves substantial, long-term investments with ownership and control in foreign businesses. In comparison, FPI centers on shorter-term investments in financial assets without any control over operations of the foreign business.
|Provides ownership and control||No control over foreign business|
|It’s a long term commitment||It’s a short term commitment|
|Contains higher risks||Comparatively lower risks and returns|
|Common in sectors like manufacturing, infrastructure and technology||Prevalent in financial markets.|
What Is FPI in India – Quick Summary
- Foreign Portfolio Investment (FPI) involves foreign individuals and institutions investing in financial assets, like stocks and bonds, without seeking control.
- FPI represents foreign investments in Indian financial assets, monitored by SEBI and RBI.
- It attracts capital inflow, aids economic growth, and enables easy divestment.
- An example of FPI is a UK-based firm investing in an Indian tech company would represent FPI.
- The four primary types of Foreign Investment are FDI, FPI, foreign aid, and foreign exchange reserves.
- FPI Advantages include diversification, liquidity, access to growth, no management control, and foreign exchange earnings.
- FPI Disadvantages include Market volatility, short-term focus, lack of control, currency risk, and market distortions.
- The key difference between FDI & FPI is that FDI involves ownership and control with a long-term commitment, while FPI is about short-term financial gains with no control over the business.
- Begin your Stock trading journey today with Alice Blue. Invest in stocks, Mutual Funds, and IPOs at no extra cost.
FPI Meaning – FAQs
1. What is Foreign Portfolio Investment?
Foreign Portfolio Investment (FPI) is when foreign individuals or institutions invest in financial assets like stocks, bonds, and mutual funds in a country’s financial markets. FPI allows foreigners to participate without seeking control over the invested companies.
2. Who Are Top FPI In India?
The Top FPI in India are as follows:
|Company||FPI holding ( Rs cr)|
|HOUSING DEVELOPMENT FINANCE CORP||266,854|
3. How Does FPI Work?
FPI works by investors buying and selling financial assets, like stocks, fixed deposits and mutual funds, in a foreign country’s financial markets. They aim to profit from price movements and interest income without seeking to manage or control the companies they invest in.
4. Who Controls FPI In India?
FPI in India is regulated by the Securities and Exchange Board of India (SEBI) and monitored by the Reserve Bank of India (RBI).
5. Who Can Make FPI?
The following conditions must be satisfied by an individual or institution registering for FPI:
- FPIs can be made by foreign individuals, foreign institutional investors (FIIs), and qualified foreign investors (QFIs).
- FPIs must comply with SEBI’s KYC requirements, which involve submitting identity and address proof, bank details, and other documents.
- FPIs are required to pay regulatory fees and follow SEBI’s fee structure.
6. What Is The Limit Of FPI?
When investing in equity shares of a company, FPI is not allowed to exceed 10% of the issued capital of that company.
7. Is FPI Taxable In India?
Yes, FPI income is subject to taxation in India. When FPIs receive dividends, tax is usually deducted at 20% or a rate mentioned in a tax treaty if it’s more favorable to the FPI.