Foreign Portfolio Investment is one of the largest type of capital flows into India. Foreign capital is a generic term indicating different types of investable money into the country. They comprise of investment type fund flows like FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment), loans like External Commercial Borrowings, concessional loans like external assistance, funds raised by Indian entities in foreign stock exchanges like Depository Receipts etc.
But FDI and FPI are the major type of capital flows into India and in many other developing economies as well. Of this, FPI is investment made by foreign investors in Indian bonds, shares etc. Basically, FPI is not aimed to take control of a company. Rather it is aimed to reap speculative profit. Because of this, FPI is considered as very fluctuating and hence less reliable. Foreigners purchasing shares in the India’s stock exchanges is an important form of FPI.
FPI policy in India
The government has brought a well-designed FPI policy that starts from defining FPI, identifying different type of investors under FPI, setting investment limit in companies and government securities, classifying them in terms of their risk profile etc. All these together we can call the FPI policy.
Most important type of investment by FPI is in shares or equities. Here, we have to differentiate it from FDI because both FPI and FDI are equity capital ie., they are expressed as percentage of shares owned by investor in a company. For example, 49% FDI, 51% FDI, 100% FDI etc. indicate percentage of shareholding by a foreign direct investor in an Indian company.
According to the present FPI policy, investment up to 10% shareholding by a single foreign investor in an Indian firm is FPI. More than 10% shareholding will be considered as FDI. This differentiation between FDI and FPI is needed for regulatory purposes.
FPI investment limit of 10 percent of the equities includes the future conversion of existing convertible securities such as Compulsorily Convertible Debentures (CCD) Compulsorily Convertible Preference Shares (CCPS) of an Indian company.
All FPI taken together cannot acquire more than 24 per cent of the paid-up capital of an Indian Company. But this condition has been modified and more elaborated as per the composite foreign investment cap (FDI or FPI) policy by the government.
Besides setting the investment limit for FPI, SEBI has introduced an investment group known as foreign portfolio investors.
Foreign Portfolio Investors (FPIs) is the merger of various portfolio investment groups. Different classes of investors such as FIIs, their Sub Accounts and Qualified Foreign Investors (QFIs) are merged into the new category, to put in place a simplified and uniform set of entry norms for them.