Foreign Portfolio Investment (FPI)
|
Foreign Portfolio Investment (FPI) GS paper 3 |
|
Foreign Portfolio Investment (FPI) is investment by non-residents in Indian securities including shares, government bonds, corporate bonds, convertible securities, infrastructure securities etc. The class of investors who make investment in these securities are known as Foreign Portfolio Investors. FPI is induced by differences in equity price scenario, bond yield, growth prospects, interest rate, dividends or rate of return on capital in India’s financial assets. SEBI has recently stipulated the criteria for Foreign Portfolio Investment. According to this, any equity investment by non-residents which is less than or equal to 10% of capital in a company is portfolio investment. While above this the investment will be counted as Foreign Direct Investment (FDI). Investment by a foreign portfolio investor cannot exceed 10 per cent of the paid up capital of the Indian company. All FPI taken together cannot acquire more than 24 per cent of the paid up capital of an Indian Company. As per SEBI regulations, FPIs are not allowed to invest in unlisted shares and investment in unlisted entities will be treated as FDI. Who are Foreign Portfolio Investors? Foreign Portfolio Investors includes investment groups of Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) (Qualified Foreign Investors) and subaccounts etc. NRIs doesn’t comes under FPI. After the new SEBI guidelines, the RBI stipulated that Foreign Portfolio Investors include Asset Management Companies, Banks, Pension Funds, Mutual Funds, and Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies etc. Sovereign Wealth Funds are also regulated as FIIs. Who is a Foreign Institutional Investor? FII is an institution like a mutual fund, insurance company, pension fund etc. According to SEBI, “an FII is an institution established or incorporated outside India which proposes to make investments in India in securities”. FII is an institution who is registered under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995. FIIs comprised of a pension fund, a mutual fund, investment trust, insurance company or a reinsurance company. Who is a Qualified Foreign Investor? QFI is an individual, group or association which is a resident in a foreign country. The QFI should compliant with the Financial Action Task Force standard and should be a signatory to the International Organisation of Securities Commission. The FIIs are big and hence they have the capacity to make large-scale investment. On the other hand, small investors and individuals under QFI category can’t match FIIs in terms of business volume. So, often when we hear about foreign investment in the share market, it is the FIIs who steal the attention.
|
BREAKING DOWN 'Foreign Portfolio Investment - FPI'
Foreign portfolio investment is part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one monetary year. It includes the country’s capital investments, monetary transfers, and the number of exports and imports of goods and services.
Differences Between FPI and FDI
FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country. Because the investor does not actively manage the investments or the companies that issue the investments, he does not have control over the securities or the business. However, since the investor’s goal is to create a quick return on his money, FPI is more liquid and less risky than FDI.
In contrast, FDI lets an investor purchase a direct business interest in a foreign country. For example, an investor living in New York purchases a warehouse in Berlin so a German company can expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
The investor controls his monetary investments and actively manages the company into which he puts money. He helps build the business and waits to see his return on investment (ROI). However, because the investor’s money is tied up in a company, he faces less liquidity and more risk when trying to sell his interest.
The investor also faces currency exchange risk, which may decrease the value of his investment when converted from the country’s currency to U.S. dollars, and political risk, which may make the foreign economy and his investment amount volatile.
Example of Foreign Portfolio Investment
In 2016, the United States received approximately 84% of total remittances, which was the majority of outflows for FPI. The United Kingdom, Singapore, Hong Kong and Luxembourg rounded out the top five countries receiving FPI, with approximately 81% of the combined share. Net inflows from all countries were $451 million. Outflows were approximately $1.3 billion. Approximately 84% of investments were in Philippine Stock Exchange-listed securities pertaining to property companies, holding firms, banks, telecommunication companies, food, beverage and tobacco companies.
|
Categories of FPI |
|
As part of Risk based approach towards customer identity verification (KYC), FPIs have been categorized into three major categories: 1-Category I (Low Risk) which would include Government and entities like Foreign Central banks, Sovereign wealth Funds, Multilateral Organizations, etc 2- Category II (Moderate Risk) which would include Regulated entities such as banks, Pension Funds, Insurance Companies, Mutual Funds, Investment Trusts, Asset Management Companies, University related endowments (already registered with SEBI) 3- Category III (High Risk) which would include all other FPIs not eligible to be included in the above two categories
|