What is the new FPI Fraud SEBI has Warned Investors Against?

What’s in Today’s Article?

• Why in the News?
• What is Foreign Portfolio Investment (FPI)?
• Benefits of FPI
• Difference Between FPI and FDI
• News Summary
• SEBI’s Clarification

Why in the News?

• The markets regulator Securities and Exchange Board of India (SEBI) has warned individuals against fraudulent trading platforms.
• The SEBI has warned that certain trading platforms are falsely claiming or suggesting affiliation with its registered Foreign Portfolio Investors (FPIs).

What is Foreign Portfolio Investment (FPI)?

• Foreign Portfolio Investment (FPI) involves an investor buying foreign financial assets. It involves an array of financial assets like fixed deposits, stocks, and mutual funds.
• All the investments are passively held by the investors. Investors who invest in foreign portfolios are known as Foreign Portfolio Investors.
• Foreign Portfolios increase the volatility. As a result, it leads to increased risk.
  • The intent of investing in foreign markets is to diversify the portfolio and get good return on investments.
  • Investors expect to receive high returns owing to the risk they’re willing to take.
• Securities and Exchange Board of India (SEBI) operates the FPIs.
• Recently, SEBI has introduced the Foreign Portfolio Investors Regulations, 2019.
• FPIs also need to follow the Income-tax Act, 1961 and Foreign Exchange Management Act, 1999.

Benefits of FPI

• Investment Diversity:
  • FPI provides investors an opportunity to diversify their portfolio.
  • As an investor, you can diversify your portfolio to achieve high returns.
  • Suppose if you incur major losses in investment assets of a Country X, you can accrue profits in investment assets of a country Y.
  • In this way, you can experience less volatility in your investments and increase chances of profits.
• International Credit:
  • Investors can get access to increased amounts of credit in foreign countries.
  • They can broaden their credit base. By expanding their credit base, investors can secure their line of credit.
  • In case the domestic credit score is unfavorable, having an international credit score can be beneficial.
  • This allows the investor to utilize more leverage and get high returns on equity investment.
• Access to a Bigger Market:
  • Sometimes, foreign market can be less competitive than the domestic market.
  • Hence, FPI gives you an exposure to a wider market.
  • The foreign markets are comparatively less saturated and hence, they may offer higher returns and more diversity as well.
• High Liquidity:
  • Foreign Portfolio Investments provides high liquidity.
  • An investor can buy and sell foreign portfolios seamlessly.
  • This offers buying power for investors to act when good buy opportunities arise.
  • Investors can buy and sell trades in a quick and seamless manner.
• Exchange Rate Benefit:
  • An investor can leverage the dynamic nature of international currencies.
  • Some currencies can drastically rise or fall, and a strong currency can be used in investor's favour.

Difference Between FPI and FDI

News Summary

• The markets regulator Securities and Exchange Board of India (SEBI) has warned individuals against fraudulent trading platforms falsely claiming or suggesting affiliation with its registered Foreign Portfolio Investors (FPIs).
• These platforms are misleading individuals by claiming to offer them trading opportunities through FPI or Foreign Institutional Investor (FII) sub-accounts or institutional accounts with special privileges.
• The SEBI said it has received many complaints where fraudsters are enticing victims through online trading courses, seminars, and mentorship programmes in the stock market.
  • They are leveraging social media platforms like WhatsApp or Telegram, as well as live broadcasts.
• These scamsters are posing as employees or affiliates of SEBI-registered FPIs, and coaxing individuals into downloading applications.
  • These applications purportedly allow them to purchase shares, subscribe to IPOs, and enjoy ‘institutional account benefits’—all without the need for an official trading or Demat account.
• These operations often use mobile numbers registered under false names to orchestrate the fraudulent schemes, SEBI, said.

SEBI’s Clarification

• The market regulator clarified that the FPI investment route is unavailable to resident Indians, with limited exceptions as outlined in the SEBI (Foreign Portfolio Investors) Regulations, 2019.
• SEBI has not granted any relaxations to FPIs regarding securities market investments by Indian investors.

Q1) What is a Hedge Fund in simple terms?

Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.

Q2) What do you mean by Investment Banking?

Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments.

Source: What is the new FPI fraud SEBI has warned investors against | TOI