Foreign Portfolio Investment in India
Foreign portfolio investment (FPI) is a type of investment made by foreigners in the financial assets of another country such as stocks, bonds, money market instruments, and other securities like derivatives. FPI is considered to be passive because it involves no direct control over a company’s operations and management.
The foreign investor has no voting rights in the management of the company. Foreign investors make these investments to earn returns or capital gains on their investments. They may also be looking for diversification opportunities.
The most common form of portfolio investment is equity investment, which can done through ADRs or GDRs listed abroad or through depository receipts listed in Indian stock exchanges. Foreign investors can also make bond investments through primary issues or secondary markets.
Benefits of Foreign Portfolio Investment
Benefits of Foreign Portfolio Investment
- Foreign portfolio investment is often done to diversify one’s wealth and to take advantage of the returns available in a foreign market.
- Foreign portfolio investments are sometimes less volatile than direct investments in foreign companies, because they do not involve ownership stakes or positions on corporate boards.
- The country that receives FPI may benefit from the funds flowing into its economy.
- Diversification: Investing internationally is a way for foreign investors to diversify their portfolio by spreading their investment across different countries and currencies. This strategy helps reduce overall risk because it eliminates dependence on domestic economies. For example, if an investor has only invested in the U.S., his entire portfolio would suffer if the U.S. economy were to take a downturn, but including investments in other economies would help mitigate that risk.
- Access to Emerging Markets: Foreign portfolio investors often have more access to emerging markets than domestic investors do. Emerging markets offer high returns because they tend to be more volatile and under-researched than developed markets; however, they also carry higher risk.
- Benefits to Domestic Companies: Foreign portfolio investments in India can also benefit domestic companies through capital inflow and increased exposure. Capital inflow is beneficial for domestic companies because it brings new money into the economy and can help create jobs and increase productivity.
- High Liquidity
- Exchange Rate Benefit
- Investment Diversity
Who Regulates Foreign Portfolio Investment in India?
The Securities and Exchange Board of India (SEBI) is the main regulator of foreign portfolio investment in India. There are some additional rules that apply to FPIs depending upon their location. SEBI established in 1992 and took over from the Controller of Capital Issues, which had previously regulated Indian capital issues. It has regulatory powers over corporate governance, insider trading, market manipulation and other securities issues.
Eligibility Criteria for Foreign Portfolio Investment
- An eligible investor is a foreign portfolio investor (FPI) who has registered with SEBI and received the certificate of registration. The eligibility criteria are;
- Applicant is a foreign citizen or entity or an NRI who is a citizen of India or a PIO who is not a citizen of Pakistan or Bangladesh;
- The Applicant is an individual, company, trust, body corporate, partnership firm, limited liability partnership, university or educational institution, endowment, society, government, government pension/provident fund etc.
- Applicant should regulate by an appropriate foreign regulatory authority in its home country. For details please refer to Annex A;
- The applicant should have a minimum net worth of USD 5 million as on the last audited balance sheet date and the net worth should be certified by the auditor;
- Please note that the minimum net worth limit will reviewed after six months and thereafter at regular intervals. The periodicity of review will announced by SEBI from time to time;
- The applicant should have completed two years since its incorporation/formation/constitution;
Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, the foreign portfolio investor shall meet the following conditions:-
- It is not owned, controlled or incorporated in a country identified by the FATF as a non-cooperative country and territory;
- Not engaged in any activity which is detrimental to the interest of India’s sovereignty and integrity;
- Registered/incorporated in a country identified by Financial Action Task Force (FATF);
- Filed income tax returns for at least three immediately preceding financial years in the country of its incorporation;
- Not a citizen or an entity of Bangladesh, Pakistan and Sri Lanka;
- At least ten investors, other than individuals and each of such investors have invested atleast USD 1 lakh.