What is Foreign Portfolio Investment (FPI)?

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Overview:

Sebi recently proposed allowing increased participation from NRIs and Overseas Citizens of India (OCIs) in the Indian securities market through the Foreign Portfolio Investor (FPI) route.

About Foreign Portfolio Investment (FPI):

  • FPI refers to the purchase and holding of a wide array of foreign financial assets by investors seeking to invest in a country outside their own.
  • Foreign portfolio investors have access to a range of investment instruments such as stocks, bonds, mutual funds, derivatives, fixed deposits, etc.
  • FPI generally intends to invest money into the foreign country’s stock market to generate a quick return.
  • Who regulates FPI in India?
    • In India, foreign portfolio investment is regulated by the Securities and Exchange Board of India (SEBI).
    • FPI in India refers to investment groups or FIIs (foreign institutional investors) and QFIs (qualified foreign investors).
  • Advantages:
    • It offers investors the freedom to diversify their portfolios internationally.
    • A portfolio investor can also take advantage of exchange rate differences. Thus, an investor from an economically challenged country can invest heavily in a foreign country that has a much stronger currency, thereby making sizeable profits.

 

What is Foreign Direct Investment (FDI)?

  • It is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.
  • It is an ownership stake in a foreign company or project made by an investor, company, or government from another country.
  • FDI is a key element in international economic integration because it creates stable and long-lasting links between economies.

 

FPI vs. FDI:

  • FDI seeks an ownership stake in a foreign company or project made by an investor, company, or government from another country.
  • FPI is a form of investment in the assets of a foreign enterprise, such as stocks or bonds. It does not offer any form of control over the entity and hence offers no ownership of the entity.
  • Unlike FDIs, an FPI does not require any transfer of IP, technology, or know-how. There is no need to enter a joint venture with a partner company.
  • FDI comprise significantly larger sums, and any tie-ups or operations tend to last longer than portfolio investments.
  • Portfolio investments typically have a shorter time frame for investment return than direct investments.
  • FDIs are usually the domain of major players in the industry, venture capital ecosystems, and investment branches of globally-recognised financial institutions. Most Financial Portfolio Investment examples include smaller players who invest in a foreign country’s assets and securities for short-term profits.

 


Q1) What are stocks?

Stocks, also known as shares or equities, represent ownership in a corporation or company. Owning stocks means you have a claim on a portion of the company's assets and earnings. The more shares you own, the greater your ownership stake in the company.Companies issue stocks as a way to raise capital for various purposes, such as expanding their business, funding research and development, or paying off debt. When investors buy these stocks, they provide the company with the funds it needs.Some companies pay dividends to their shareholders. Dividends are typically a portion of the company's earnings distributed to shareholders on a per-share basis.

Source: Sebi looking to boost participation of NRI, OCI investments in Indian securities mkt through FPI route