Foreign Portfolio Investment (FPI) in India

Similar to Foreign Direct Investment, Foreign Portfolio Investment (FPI) is a most explored way of investment in India. Foreign Portfolio Investment allows an investor to invest in multiple securities in foreign country such as shares, bonds, fixed deposits etc. 

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Unlike FDI, investment in FPI is done for the purpose of getting return and not for the purpose of control. FPI is controlled in India through Security and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

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This article carries out a detailed discussion of Foreign Portfolio Investment in India:

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1. What is Foreign Portfolio Investment?

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As the name depicts, Foreign Portfolio investment allows an inverter to forms an investment portfolio in the foreign country. Investment is diversified into various financial assets such as stock, mutual foreign, bonds, fixed deposts etc.

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Read Also: Authorized Dealer under FEMA

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Unlike Foreign Direct Investment (FDI), intent of FPI is to diversify the investment and earn the profits from the investment in accordance with risk factor. Investors expect to receive high returns owing to the risk they’re willing to take. Foreign Portfolio Investment is a prominent investment alternative nowadays.

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2. Foreign Portfolio Investment (FPI) regulations in India

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Foreign Portfolio Investment is regulated by Security Exchange Board of India through  Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”). These regulations defines criteria of registering as FPI, permissible securities for investment, reporting requirement, etc.

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As per the FPI Regulations, a Foreign Portfolio Investment is required to satisfy the eligibility conditions given under Regulation 4 and required to register itself as FPI with designated  depository participant. Upon receipt of application from FPI, the designated Depositary participant shall grant the certificate of registration.

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Further, an FPI is allowed to invest only list of securities specified under Regulation 20 of the regulations. 

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3. What are the benefits of Investing as FPI

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Following are the benefits of investment as FPI:

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a. Investment Diversity: FPI allows an investor to park their funds in multiple securities at the same time and therefore, allows them to leverage the risk by investing in high risk and low risk securities simultaneously and get higher return. An investor can diversify his portfolio to achieve high returns. 

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b. Less regulated as compared to FDI: Under FDI, investment is made to obtain the direct control or access over the entity. However, FPI is made for the purpose of investment and to get better returns. Therefore, FDI are more regulated and stringent as compared to FPI. 

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c. 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.

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d. Access to a Bigger Market: In some cases, investment in foreign market is higher as compared to the domestic market. FPI provides a better investment opportunity. 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.

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e. High Liquidity: Since FPI are less regulated as compared to FDI therefore, it allows high liquidity to the investors. An investor can buy and sell foreign portfolios seamlessly. Investors can buy and sell trades in a quick and seamless manner.

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f. Automatic Investment in foreign currency: Apart from return from investment, an investor also automatically invests in the foreign currency of the country where investment is made. Therefore, if the exchange rate of foreign currency is less at the time of investment and increases at the time of sale then investors shall earn not only profit on the sale of investment but will also get the profit on sale of foreign currency.

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4. Foreign Portfolio Investment (FPI) Vs Foreign Direct Investment (FDI)

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Following are the difference in FPI and FDI:

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1. Intent of Investment: Foreign Direct Investment is done with the intent of obtaining control over the entity and earning profits through business growth. Whereas, Foreign Portfolio investment is done for the purpose of getting returns by way of interest and regular market fluctuation. FPI does not have any intention of getting control over the entity.

2. Period of Investment: FDI is an investment made in a business entity and generally intended for a long term period whereas FPI is a short term or medium term investment.

3. Controlled: FDI is an investment made for a long term and holds direct control over the entity. Whereas, FPI is an investment done for short and medium term. Therefore, FDI is more controlled and regulated by the Reserve Bank of India as compared to FPI.

4. Liquidity: FDI is a controlled investment and generally made for a long term period. Therefore, if an investor intends to divest its FDI funds then he is required more clearance from RBI. Whereas, FPI is less regulated as compared to FDI and therefore is more liquid.

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5. Category of Investors:

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As per Regulation 5 of The FPI regulations, an applicant shall seek registration as a foreign portfolio investor in one of the following categories:

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1. Category I FPI: This category shall include Government  and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.
2. Category II FPI: Category II FPI shall include:

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Registration for category II shall be seeked under any one of the following categories, which is more appropriate for the investor:

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1. Appropriately  regulated  broad  based  funds  such  as  Mutual  Funds, Investment Trusts, Insurance/ Reinsurance Companies.
2. Appropriately  regulated  entities  such  as  Banks,  Asset  Management Companies, Investment Managers/ Advisors, Portfolio Managers.
3. Not   appropriately   regulated   broad   based   funds   whose   investment manager  is  appropriately  regulated  and  is  registered  on  behalf  of  the Board  by  the designated depository participant  as  Category  II  foreign portfolio investor
4. University Funds and Pension Funds
5. University   related   Endowments   already   registered   with   SEBI   as FII/Sub Account

3. Category III FPI: Registration under category III shall be applicable to all FPIs  not  eligible  under  Category  I  and  II  such  as  Endowments, Charitable   Societies/   Trust,   Foundations,   Corporate    Bodies,   Trusts, Individuals, Family Offices.

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6. Eligibility criteria for Foreign Portfolio Investor:

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As per Regulation 4 of the FPI regulations, no certificate of registration shall be granted as  a  foreign  portfolio  investor unless  the  applicant  satisfies the following conditions:

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1. the applicant is a person not resident in India;
2. the applicant is resident of a country whose securities market regulator is a signatory   to   International   Organization   of   Securities   Commission‘s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with the Board;
3. the applicant being a bank, is a resident of a country whose central bank is a member of Bank for International Settlement
4. the  applicant is not  resident  in  a  country  identified  in  the  public  statement of Financial Action Task Force 
5. The applicant is not a non-resident Indian
6. the applicant is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business; 
7. the applicant is authorized by its MOA and AOA to invest on its own behalf or on behalf of its clients;
8. the applicant has sufficient experience, good track record, is professionally competent,  financially   sound  and  has  a  generally   good  reputation  of fairness and integrity
9. the grant of certificate to the applicant is in the interest of the development of the securities market;
10. the  applicant  is  a  fit  and  proper  person  based  on  the  criteria  specified  in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;