Foreign
portfolio investment (FPI)
The portfolio
which consists of securities and other financial assets held by investors of
another country is termed as Foreign portfolio investment (FPI). FPI holdings can include Stocks, Bonds, Mutual
funds, American depositary receipts (ADRs), Global depositary
receipts (GDRs), Exchange traded funds
(ETFs), and other debt issued by companies or foreign governments,
etc. Unlike
FDI, FPI consists of passive ownership i.e. since the FPI
investments are financial assets, not the property or a direct stake in a
company, investors have no control over ventures or direct
ownership of property or a stake in a company, but they are
inherently more marketable i.e. relatively liquid depending on the volatility i.e.
currency exchange risk which may decrease the value of the investment when
converted from the foreign country’s currency to the home country’s currency
of the market.
Difference between FPI
and FDI
FPI, as with portfolio
investment in general, an investor does not actively manage their investments in
the companies i.e. do not have direct control over the assets or securities.
FPIs are
more suited to the average retail investor.
FDI, the investors have direct control over the acquisition / investments of assets or securities of the foreign companies. For example, an investor based in Mumbai (India) city purchases a warehouse in London (U.K) to lease to a U.K company that needs space to expand its operations. The main goal of an investor is to create a long-term income stream while helping the company in increase its profits. FDI investor controls their monetary investments and often actively manages the company into which they put money. FDIs are more suited to the Institutional investors, high net worth individuals, and companies.
(a) Economic growth
prospects Foreign investors seek to take benefit from
economic prosperity in the destination country. And they tend to withdraw their
investment during periods of the weak economy, such as recessions.
(b) Sovereign risk. The high risk
reflects the high chance of default by the government to pay back its debts. To
measure it, foreign investors usually use sovereign ratings to decide the
weight and allocation of investment in several countries, especially in the
bond market.
(c) Interest rate. Foreign
lenders prefer countries with high-interest rates because they offer high
returns.
(d) Tax rates. High tax rates
reduce returns realized from capital gains, dividends, or interest. Therefore,
foreign investors usually choose to invest in countries where taxes are low.
(e) Exchange rate. Exchange rate
movements expose translation risk because foreign investment involves two
different currencies, the destination country’s currency, and the currency of
operation. Exchange rates sometimes generate translation gains and, at other
times, generate losses. Also, an excessively volatile exchange rate increases
uncertainty, reducing investors’ interest in investing.
Advantages of FPI
Portfolio diversification which in turn helps the
investor when it comes to their risk-adjusted returns.
Source of supply of loanable funds
Feasible for retail investors
Quicker return on investment
Highly liquid
Access to Larger Markets
International Credit
Disadvantages of FPI
No direct
control/management of investments
Vulnerable to short-term
movements of exchange rates (Volatile)
Political
risk exposure
Cause of
economic disruption (if withdrawn)
Low
liquidity
Regulations in India
According to Reserve Bank of India (RBI), Foreign Institutional
Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin
(PIOs) can invest in the primary and secondary capital markets in India through
the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire
shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is
24% of the paid-up capital of the Indian company and 10% for NRIs/PIOs. The
limit is 20% of the paid-up capital in the case of public sector banks, including
the State Bank of India (SBI).
Source
https://penpoin.com/foreign-portfolio-investment
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