What is Foreign Portfolio Investment?

Foreign Portfolio Investment (FPI) involves an investor buying foreign financial assets. It involves an array of financial assets like fixed deposits, stocks, and mutual funds. All the investments are passively held by the investors. Investors who invest in foreign portfolios are known as Foreign Portfolio Investors.

Foreign Portfolios increase the volatility. As a result, it leads to increased risk. The intent of investing in foreign markets is to diversify the portfolio and get some handsome return on investments. Investors expect to receive high returns owing to the risk they’re willing to take. Foreign Portfolio Investment is a prominent investment alternative nowadays. From individuals and businesses to even Governments invest in Foreign Portfolios.

This article will take you through the benefits of foreign portfolio investment, categories of foreign portfolio investment, criteria of FPI, and various risks associated with it.

  • Investment Diversity
  • FPI provides investors an opportunity to diversify their portfolio. As an investor, you can diversify your portfolio to achieve high returns. Suppose if you incur major losses in investment assets of a Country X, you can accrue profits in investment assets of a country Y. In this way, you can experience less volatility in your investments and increase chances of profits.

  • International Credit
  • Investors can get access to increased amounts of credit in foreign countries. They can broaden their credit base. By expanding their credit base, investors can secure their line of credit. In case the domestic credit score is unfavourable, having an international credit score can be beneficial. This allows the investor to utilize more leverage and get high returns on equity investment.

  • Access to a Bigger Market
  • Sometimes, foreign market can be less competitive than the domestic market. Hence, FPI gives you an exposure to a wider market. The foreign markets are comparatively less saturated and hence, they may offer higher returns and more diversity as well.

  • High Liquidity
  • Foreign Portfolio Investments provides high liquidity. An investor can buy and sell foreign portfolios seamlessly. This offers buying power for investors to act when good buy opportunities arise. Investors can buy and sell trades in a quick and seamless manner.

  • Exchange Rate Benefit
  • An investor can leverage the dynamic nature of international currencies. Some currencies can drastically rise or fall, and a strong currency can be used in investor’s favour.

One can register FPI in one of the below categories:

  • Category I: This includes investors from the Government sector. Such as central banks, Governmental agencies, and international or multilateral organizations or agencies.
  • Category II: This category includes :
  • Regulated broad-based funds such as mutual funds, investment trusts, insurance/reinsurance companies.-
  • Also include regulated banks, asset management companies, portfolio managers, investment advisors, and managers.
  • Category III: It includes those who are not eligible in the first two categories. It includes endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals.

Securities and Exchange Board of India (SEBI) operates the FPIs. Recently, SEBI has introduced the Foreign Portfolio Investors Regulations, 2019. FPIs also need to follow the Income-tax Act, 1961 and Foreign Exchange Management Act, 1999.

An individual must fulfill the following conditions to register as FPI:

  • As per the Income-tax Act 1961, the applicant should not be a non-resident Indian
  • Should not be a citizen of a country that falls under the public statement of FATF.
  • Must be eligible to invest in securities outside the country.
  • To invest in securities, he/she must have the approval of the MOA / AOA / Agreement.
  • A certificate that grants the applicant holds an interest of the development of the securities market.
  • In case the bank is the applicant, it must belong to a nation whose central bank is a member of the Bank for International Settlements.

Here are some factors affecting Foreign Portfolio Investment:

  • Growth Prospects
  • The economy of a country plays a crucial role in foreign investments. If an economy is robust and growing, investors are more inclined to investing in the financial assets of that country. On the other hand, if the country goes through a financial turmoil or a recession, investors tend to withdraw their investments.

  • Interest Rates
  • Investors yearn for a high return on investment. Hence, investors prefer to invest in countries with high interest rates.

  • Tax Rates
  • The tax is levied on capital gains. Higher tax rates reduces the return on investments. Hence, investors prefer to invest in countries which have lower tax rates.

Foreign Portfolio Investments has some risks associated with it - for both the investors and the destination country. Here are a few risks involved in it:

  • Political Risk Exposure
  • The change in the political environment may give rise to political risk. This results in a change of investment criteria, economic policies, and repatriation regulations.

  • Low Liquidity
  • In developing countries, the capital market liquidity often tends to be low resulting in a higher price volatility.

  • Whether non-regulated entities are eligible to register as FPIs?
  • Non appropriately regulated entities can register under Category III FPIs.

  • Do FPIs need to enroll with SEBI?
  • No. there is no need for FPIs to directly register from SEBI. The Registration can be granted by a designated depository participant (DDP) instead of SEBI.

  • How long is the FPI registration valid?
  • The validity period of the FPI registration is permanent unless suspended or canceled by SEBI or surrendered by the FPI, however, this is subject to payment of the applicable renewal fee during every three-year block.

  • What is the cap for maximum shareholding by FPI?
  • The purchase of equity shares of each company by a single FPI must be below 10% of the total issued capital of the company.

  • Can FPIs open more than one depository account?
  • No. Each FPI will be allowed to open only one depository account for their FPI investments. Further, the purchase and sale of all eligible securities must be transacted through that depository account only.

  • Can an FPI directly place an order with a stockbroker?
  • Yes. Similar to FIIs, an FPI can place orders directly with the broker.

  • Is borrowing or lending of funds or securities available in FPI?
  • Yes, FPIs provide investors to engage in borrowing or lending in accordance with the Securities Lending and Borrowing program of SEBI.

  • Can I do in Foreign Portfolio Investments in India?
  • Yes. Any NRI individual or organizations can make foreign portfolio investments in India.