Foreign Portfolio Investment (FPI) – An Overview

Foreign Portfolio Investment (FPI) refers to the investment made by foreigners in the equity and debt securities of companies listed on the stock exchanges of a country other than their own.

• This article aims to provide an overview of FPI, its benefits, and its impact on the economy.

Foreign Portfolio Investment (FPI) plays a crucial role in promoting economic growth and development in many emerging markets. It offers investors access to a broader range of investment opportunities, allows them to diversify their portfolio, and provides liquidity to the stock market. For the host country, FPI brings in foreign exchange, promotes the development of the capital market, and helps to improve corporate governance. However, FPI can also pose risks, such as volatility in the stock market and sudden outflows. Therefore, it is essential to have a robust regulatory framework to manage these risks effectively.

Foreign Portfolio Investment (FPI) refers to the investment made by foreigners in the equity and debt securities of companies listed on the stock exchanges of a country other than their own. In other words, it is a means of investing in a foreign country’s stock market without having any ownership or control over the company. FPI is one of the essential sources of capital inflows in many emerging markets, and it plays a significant role in promoting economic growth.

Must Read: What Is A Foreign Portfolio Investor (FPI) And How Does It Work?

Benefits of Foreign Portfolio Investment (FPI)

FPI offers several benefits to both investors and the host country.

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Firstly, FPI allows investors to diversify their portfolios by investing in various countries and companies, reducing their risk.

Secondly, it offers investors access to a broader range of investment opportunities, which may not be available in their home country.

Thirdly, it provides liquidity to the stock market, making it easier for companies to raise funds for expansion and growth.

For the host country, FPI brings in foreign exchange and improves the balance of payments. Moreover, FPI can help to improve the country’s credit rating, making it easier for the government and companies to borrow at lower interest rates.

Types of Foreign Portfolio Investment (FPI)

There are two types of FPI- equity and debt. Equity FPI refers to the purchase of shares of a company listed on the stock exchange, while debt FPI involves buying bonds and other debt instruments issued by the government or companies. Equity FPI is riskier than debt FPI as it involves ownership of the company and is subject to fluctuations in the stock market. However, equity FPI offers higher returns than debt FPI, making it attractive to investors looking for higher yields.

Impact of Foreign Portfolio Investment (FPI) on the Economy

FPI has a significant impact on the economy of the host country. Firstly, it brings in foreign exchange, which helps to finance the current account deficit and improves the balance of payments. Secondly, FPI provides a stable source of capital, which can be used for long-term investment in infrastructure and other development projects. Thirdly, FPI promotes the development of the capital market, which provides companies with access to long-term funding. Lastly, FPI helps to improve corporate governance by making companies more accountable to their shareholders.

Examples of Foreign Portfolio Investment (FPI)

India is one of the countries that have benefited significantly from FPI. In 2020, India received $35.6 billion in FPI, with most of it going to the equity market. FPI has helped to improve the liquidity of the Indian stock market, making it easier for companies to raise funds for growth and expansion. Moreover, FPI has helped to stabilize the Indian rupee and reduce the country’s dependence on external borrowing.

China is another country that has seen significant FPI inflows in recent years. In 2020, China received $46.2 billion in FPI, with most of it going to the debt market. FPI has helped to finance China’s current account surplus and improve the country’s balance of payments. Moreover, FPI has helped to promote the development of China’s capital market and improve corporate governance.

Recent Example from India

According to a report published in Economic Times, amid mistrust, sanctions and weaponization of the dollar, some of the large Russian investors may be preparing to directly bet on Indian stocks. Two Russian institutional entities and an individual, all born in Moscow, appear in the list of registered foreign portfolio investors (FPIs) with the Securities and Exchange Board of India (SEBI), as per the information shared by the National Securities Depository Limited.

Alfa Capital Management Company, which is believed to be part of the eponymous Russian asset manager, has taken both category-1 and 2 FPI licenses through two outfits while the third FPI is registered in the name of Vsevolod Rozanov, a well-known individual investor. This is the first instance of Russians, who have typically used the foreign direct investment route to invest in India, participating as FPIs. The licenses of all three entities – issued for three years – are valid till early 2026. Orbis Financial is the custodian for Alfa Capital.

“Even though SEBI has made the ecosystem more stringent, we may see a gradual increase in FPIs directly coming in from Russia given the geopolitical situation. While Russia is currently not an FATF member, category-1 and 2 licenses can be obtained from Sebi, subject to the legal form and structure of the applicant and/or its investment manager,” said Prakhar Dua who leads the financial services and regulatory practice at law firm Nishith Desai Associates.

As the Ukraine war rages, big-ticket Russian investors could look out for new markets and ways to ring-fence wealth in less hostile jurisdictions where their money or assets are unlikely to be frozen. It’s, however, too early to say whether any meaningful part of that portfolio flow would find its way to India. “It would be interesting to see whether their exposure is more towards equity or derivatives,” said Dua.

According to senior officials of banks (which act as custodians or bookkeepers for the FPIs), the government, as well as the regulator, have not been averse to Russian investors stepping in as FPIs, though there has been only a handful so far. Only in recent months, there has been some interest from Russians, they said.

On February 24, 2023, on the first anniversary of the invasion of Ukraine, FATF had suspended its membership of Russia. However, since Russia is not on the grey or black list of FATF, Russian companies can still trade as a category-1 FPI if the asset management company of the fund is a FATF member or a non-investing category-1 FPI with Sebi.

Key Benefits

An offshore fund or investor from Moscow may enjoy similar benefits (like tax exemption on capital gains from derivative trades) as the FPI vehicles do in Mauritius and Singapore – the financial centres that most FPIs choose to enter India.

“Technically, there is no bar on Chinese FPIs. However, on certain occasions authorities have informally expressed their reservations about Chinese money in FPI pools or corpuses of foreign private equity and venture capital funds,” said a person familiar with the matter.

As against the three Russian FPIs, there are 16 Chinese FPIs registered with SEBI – of which 15 are category-1 funds.

Category-1 funds are typically sovereign funds, pension funds, and funds meeting certain regulatory criteria while category-2 funds can be investor pools organized as funds, trusts, corporate bodies or registered by an individual. Tightening the anti-money laundering disclosure norms, Sebi has recently lowered the threshold for identifying ‘beneficial owners’ (BO) or, the last natural persons in an FPI, as well as directed them to disclose any direct or indirect change in control, ownership and structure within seven days.