FOREIGN PORTFOLIO INVESTMENT (FPI)

02.11.2023

FOREIGN PORTFOLIO INVESTMENT (FPI) , Daily Current Affairs , RACE IAS : Best IAS Coaching in Lucknow 

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.

CHARACTERISTICS 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.

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.

What are the Types of Foreign Portfolio Investments?

Stocks: Stocks are shares of ownership in a company. When you buy a stock, you are essentially buying a piece of the company.

Bonds: Bonds are loans that you make to a company or government. When you buy a bond, you are lending money to the issuer, and they agree to pay you back with interest over a set period of time.

Mutual Funds: Mutual funds are baskets of stocks or bonds that are managed by a professional. Mutual funds offer a way for investors to diversify their portfolios and invest in a variety of assets without having to do the research themselves.

Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds, but they are traded on exchanges like stocks. This makes them more liquid than mutual funds, which can be an advantage for investors who want to be able to buy and sell their investments quickly.

American depositary receipts (ADRs): ADRs are a type of security that represents ownership of shares in a foreign company. ADRs are traded on U.S. exchanges, which makes them easier for U.S. investors to buy and sell.

Global Depositary Receipts (GDRs): GDRs are similar to ADRs, but they are traded on exchanges outside of the United States. GDRs can be a good option for investors who want to invest in foreign companies but do not want to buy ADRs.

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).

 Source:The Times of India