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Are you wondering how to diversify your portfolio? Do the stocks on foreign exchanges seem attractive to you? If yes, this is the article you’re looking for.
Continue reading to discover more about foreign investments, available alternatives, and the benefits and drawbacks of making these investments.
What is FPI?
FPI full form – Foreign Portfolio Investments.
As the term suggests, FPI refers to the process of purchasing securities and other financial assets in foreign countries. A common way for investors to get involved in the economy of a foreign nation, FPI’s popularity is increasingly popular today.
Various kinds of financial assets are at the disposal of investors interested in foreign investments.
Examples of FPI are:
- Stocks – Investing in stocks and shares of foreign corporations.
- Bonds – Investing in debt financing instruments issued by foreign entities.
- American Depository Receipts (ADRs) – ADRs are certificates held by banks in the United States, representing a certain number of shares of a foreign corporation’s stock.
- Global Depository Receipts (GDRs) – GDRs are similar to ADRs. While ADRs specifically hold shares issued in the United States, GDRs hold shares issued in multiple countries.
Benefits of FPI
- FPI opens international markets for stocks and boosts the demand for a company’s share, making it easy for them to raise capital.
- From the investor’s perspective, FPI allows diversification of portfolios.
- FPI widens the access of international credits to investors.
- With access to different markets having different features, investors can benefit from the varied risk-return ratios each market offers.
Risks involved with FPI
- The country’s economy may impact FPIs negatively during times of economic lows and political instability.
- Every market is volatile, and the fluctuations are rapid. If investors do not act quickly on their foreign investments, they are prone to incur high losses.
- Since foreign investments are subject to higher volatility, these investments are not very reliable and predictable. Large dependence on FPIs may be unfavourable to companies, at times.
FPI in India
In recent years, Foreign Portfolio Investments (FPI) have significantly impacted the Indian economy. Foreign capital inflows have helped to finance the country’s current account deficit, increase liquidity in financial markets, and support business and infrastructure growth.
The combined FPI Investments of January and February 2023 in India were negative ₹ 34,146 crores. However, the situation improved from March, and FPIs pumped in ₹ 47,148 crores in June 2023, marking June as the best month in the last ten months.
Foreign nationals must fall under one of these categories to be part of FPI in India:
- Category 1: Includes investments from the government sector of foreign countries.
- Category 2: Regulated funds not within the government sector fall under this category – mutual funds, exchange-traded funds, insurance companies, etc.
- Category 3: Eligible investors not falling under the above categories, like charitable trusts and individuals, come under this category.
The Securities and Exchange Board of India (SEBI) regulates FPI transactions in India.
The difference between FPI and FDI
While investing in a foreign entity’s securities is called FPI, Foreign Direct Investment (FDI) refers to investing in businesses of foreign countries.
It is done through various ways – establishing subsidiaries, merging with an existing company, or starting a joint venture with a foreign company.
Differences based on the features of these investments:
| Foreign direct investments | Foreign portfolio investments |
| FDI investors are active owners and have a say in business decisions. | FPI investors are passive owners without strong powers to influence decision-making. |
| FDI is a form of direct and long-term investment. | FPI is an indirect investment and is generally for a short term. |
| The procedures for entering and exiting FDIs are complex. | Investment in FPI is relatively easy. |
| FDI investors invest in the physical business and have a high control over it. | FPI investors invest in financial assets and do not have control over the business. |
| FDI investments are stable and involve less risk. | FPI investments are riskier and more volatile. |
Bottomline
Individuals or institutional investors interested in diversifying their portfolios try their chances at foreign portfolio investments.
Developing economies expected to grow bigger generally attract huge numbers of investors through FPI.
FPI is also one of the significant ways for countries to expand their horizons and have cross-border transactions, thereby positively impacting the country’s international relations.
FAQs
A foreign investor is one who purchases an asset in a foreign country. Any investment that involves cash flow between two countries to exchange ownership is called a foreign investment. Often, foreign investment might be a strategy to diversify the investment portfolio and earn additional income. But, if the ownership stake is large, the foreign investor may have the power to influence the firm’s business too.
FPI is important both to investors and the economy. From the investor’s perspective, FPI allows investors to hold a diverse portfolio, by giving them exposure to foreign markets. From an economic standpoint, foreign investments improve the relationships between different nations, they promote foreign capital and increase liquidity in the market.
A foreign investor can invest in India if the below requirements are met:
Should not be an Indian resident or resident of any country restricted by the FATF (Financial Action Task Force) or the Indian government.
Should have legal permission to invest in foreign countries.
If the investor is a foreign bank, the central bank of that foreign country should be a member of the Bank of International Settlements (BIS).
In the case of trusts or corporations, a valid Memorandum of Association (MoA) or Articles of Association (AoA) or any equivalent document should be signed.
The inflow of FPIs has been a crucial driver of the Indian stock market, accounting for a significant portion of the trading volume. But, they are prone to market risks and volatility, causing a shaky financial system in the country. However, FPIs are a significant source of foreign capital and promote growth and development across multiple sectors.
To address these risks, the RBI has formulated various measures, including investment restrictions in specific sectors, debt investment restrictions, and periodic reviews of FPI legislation.
FII stands for Foreign Institutional Investors. This is a subset of FPI and specifically deals with foreign investments from institutions and not individuals.
From the Indian perspective, FIIs include all institutions registered in other countries, investing in the Indian financial market.