FOREIGN PORTFOLIO INVESTMENT (Syllabus GS Paper 3 – Economy)

Context: Foreign portfolio investors (FPIs) seemed to have some indication about the outcome of Lok Sabha elections as their selling in stocks intensified since January this year.

Foreign Portfolio Investment (FPI)

• Definition: FPI involves investors purchasing and holding various foreign financial assets outside their home country's borders.
• Investment Instruments: Foreign portfolio investors can choose from a variety of financial instruments including stocks, bonds, mutual funds, derivatives, and fixed deposits.
• Objective: To inject funds into foreign stock markets with the expectation of generating rapid returns on investment.

o Management of venture Not for obtaining significant control over managerial operations of the enterprise. 

• Regulatory body: Security and Exchange Board of India (SEBI).
• Impact on economy: Impacts the liquidity in the market, often lead to volatility in stock market.
• FPIs Advantages: Diversification, liquidity, access to growth, no management control, and foreign exchange earnings.
• FPI Disadvantages: Market volatility, short-term focus, lack of control, currency risk, and market distortions.

Foreign Direct Investment

• About: FDI involves acquiring a significant ownership stake (usually more than 10%) in a foreign company, indicating a long-term interest.
• FDI is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.