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Foreign Portfolio Investment (FPI)

What is Foreign Portfolio Investment?

 

Foreign Portfolio Investment (FPI) serves as a bridge between global investors and emerging financial markets, facilitating cross-border capital flow. It allows investors to participate in a country’s financial ecosystem by investing in assets like stocks, bonds, and mutual funds without taking direct control of businesses. This form of investment not only helps investors diversify their holdings but also strengthens the host country's financial markets by enhancing liquidity and capital availability. With economies becoming increasingly interconnected, FPI has grown into a key driver of global investment trends, influencing stock markets, exchange rates, and economic policies worldwide. For investors learning stock market basics, understanding the meaning and relevance of FPI is crucial.

What is Foreign Portfolio Investment (FPI)?

The FPI full form is Foreign Portfolio Investment. FPI occurs when investors from one country allocate funds into the financial markets of another nation. FPI includes investments in a variety of financial instruments such as stocks, bonds, mutual funds, ETFs, and other marketable securities. These investments are typically more liquid and short-term in nature compared to foreign direct investments. Unlike strategic investments aimed at controlling or managing businesses, Foreign Portfolio Investment is primarily focused on generating financial returns through capital appreciation and dividends or interest income.

FPI plays a crucial role in global financial markets, enabling investors to diversify their portfolios while providing recipient countries with liquidity and capital inflows. In the Indian context, FPIs have become a significant source of capital inflow, with international investors seeking exposure to India's growth story through participation in its vibrant financial markets. The Securities and Exchange Board of India (SEBI) regulates FPI activities in the country, categorising investors based on their risk profiles and establishing guidelines for their market participation.

Foreign Portfolio Investment vs. Foreign Direct Investment (FDI)

Now that you know what is Foreign Portfolio Investment, let’s understand the differences between Foreign Portfolio Investment and Foreign Direct Investments:

Parameter

FPI

FDI

Full form

FPI full form is Foreign Portfolio Investment

FDI full form is Foreign Direct Investment

Nature of Investment

Purchase of financial securities without management control

Investment with management control and operational influence

Ownership Threshold

Typically less than 10% of a company's paid-up share capital

Usually more than 10% of a company's paid-up share capital

Investment Horizon

Short to medium-term

Long-term

Liquidity

Highly liquid, easily tradable

Relatively illiquid, difficult to exit quickly

Primary Objective

Financial returns through capital appreciation and income

Strategic business objectives, operational control

Risk Profile

Vulnerable to market volatility and sentiment

Less sensitive to short-term market fluctuations

Impact on Economy

Affects capital markets and exchange rates

Impacts production capacity, employment, and technology transfer

Regulatory Oversight

Primarily securities market regulators (SEBI in India)

Multiple regulators including investment boards (FIPB/DPIIT in India)

Entry and Exit

Relatively easy entry and exit

Complex entry and exit procedures

Contribution to Economy

Enhances market liquidity and capital availability

Contributes to physical capital formation and economic development

How Does Foreign Portfolio Investment Work?

  • Registration process: Foreign investors must register with SEBI as Foreign Portfolio Investors and obtain a registration number before making investments in Indian securities markets.
  • Account setup: FPIs need to open special foreign currency and rupee accounts with authorised dealer banks in India. They also need to open a Demat account for holding securities.
  • Investment channels: Investments are made through registered brokers on recognised stock exchanges or through primary market issuances like IPOs, FPOs, and rights issues.
  • Regulatory compliance: FPIs must adhere to investment limits set by SEBI and RBI for different sectors and individual companies, ensuring no single FPI owns more than prescribed thresholds.
  • Transaction mechanism: Purchase orders are executed through registered brokers, and settlements are processed via clearing corporations, typically following a T+1 or T+2 settlement cycle for equity transactions, depending on the market and stock exchange regulations.
  • Repatriation of funds: Profits, dividends, and sale proceeds can be freely repatriated subject to appropriate tax compliance and reporting requirements.
  • Monitoring and reporting: FPIs are required to maintain detailed records of their investments and submit periodic reports to regulatory authorities regarding their holdings and transactions.
  • Exit process: When divesting, FPIs sell their securities through stock exchanges and repatriate proceeds after fulfilling tax obligations under the applicable Double Taxation Avoidance Agreement (DTAA).

Categories of Foreign Portfolio Investment in India

​The Securities and Exchange Board of India (SEBI) revised its Foreign Portfolio Investor (FPI) regulations in 2019, consolidating the previous three-category system into two main categories to simplify the regulatory framework. This restructuring aimed to enhance clarity and ease of compliance for investors.​

Current Categories:

  1. Category I FPIs: This category includes entities considered to have a low-risk profile, such as:
    • Government and government-related investors (e.g., central banks, sovereign wealth funds).
    • Appropriately regulated entities like pension funds, mutual funds, insurance/reinsurance companies, banks, asset management companies, investment managers/advisors, and broker-dealers from Financial Action Task Force (FATF) member countries.
    • Entities whose investment managers are appropriately regulated and registered as Category I FPIs.
  2. Category II FPIs: This category encompasses investors not eligible under Category I, including:
    • Appropriately regulated funds not qualifying as Category I FPIs.
    • Endowments, foundations, charitable organizations, corporate bodies, family offices, individuals, and unregulated funds in the form of limited partnerships and trusts.

Under the previous framework, there was a Category III that included investors such as endowments, charitable societies/trusts, foundations, corporate bodies, trusts, and individuals. However, with the implementation of the SEBI (Foreign Portfolio Investors) Regulations, 2019, this category was eliminated. Entities previously classified under Category III were reclassified into the new Category II. This change was part of SEBI's efforts to streamline the FPI regime and reduce complexity in the categorization process.

Pros and Cons of FPIs

If you are a foreign portfolio investor looking to invest in US stocks or invest in bonds of foreign markets, you must understand the pros and cons involved:

 

Pros

Cons

Enhanced capital availability for domestic companies

Market volatility due to sudden inflows and outflows

Improved market liquidity and depth

Currency fluctuation risks

Increased corporate governance standards

Potential for speculative bubbles in asset prices

Technology and knowledge transfer

Risk of capital flight during economic crises

Broader investor base for domestic securities

Overexposure to global economic shocks

International diversification for foreign investors

Regulatory compliance costs for hosting economies

Lower cost of capital for domestic entities

Tax revenue challenges due to treaty shopping

Development of sophisticated financial instruments

Pressure on domestic financial institutions to compete

Price discovery efficiency in markets

Short-term investment horizons affecting long-term planning

Economic integration with global financial systems

Potential influence on domestic monetary policy decisions

Risks of Foreign Portfolio Investment (FPI)

  • Market risk: FPIs are exposed to fluctuations in equity and debt markets, which can be particularly volatile in emerging economies like India. Market downturns can lead to significant capital losses. Moreover, FPIs leveraging the Margin Trading Facility (MTF) can face heightened risks during market downturns, as leveraged positions may trigger margin calls in volatile trading conditions.
  • Exchange rate risk: Currency fluctuations between the Indian Rupee and the investor's home currency can substantially impact returns, potentially eroding gains even when the underlying investments perform well.
  • Liquidity risk: Despite being generally liquid, certain securities may face liquidity challenges during market stress, making it difficult for FPIs to exit positions without significant price impact.
  • Regulatory risk: Changes in investment regulations, taxation policies, or foreign exchange rules can adversely affect FPI returns and operational capabilities in the host country.
  • Political risk: Political instability, changes in government, or shifts in economic policies can create uncertainty for foreign investors and lead to capital outflows.
  • Systemic risk: Weaknesses in the financial infrastructure, settlement systems, or market mechanisms can expose FPIs to operational failures beyond their control.
  • Repatriation risk: Potential restrictions on capital repatriation during economic crises can trap foreign investments within the host country, preventing investors from accessing their funds.

Also Read: Nifty Index Share Price

Eligibility Criteria for Foreign Portfolio Investment

Understanding what Foreign Portfolio Investment is not enough. To participate in Foreign Portfolio Investment (FPI) in India, applicants must adhere to specific eligibility criteria established by the Securities and Exchange Board of India (SEBI) and other relevant authorities. Key requirements include:

  • Non-Resident Indian (NRI) status: The applicant should not be a Non-Resident Indian.
  • Country of origin: The applicant must not be a citizen of a country identified in the public statements of the Financial Action Task Force (FATF) as having strategic deficiencies.
  • Regulatory approval: The applicant must be legally permitted to invest in securities outside their home country. This includes obtaining necessary approvals as per their Memorandum of Association (MOA), Articles of Association (AOA), or equivalent constitutional documents.
  • Market development certification: The applicant should possess a certificate indicating their interest in the development of the securities market.
  • Bank applicant criteria: If the applicant is a bank, it must be incorporated in a country whose central bank is a member of the Bank for International Settlements (BIS).

Factors Driving the Flow of FPI into a Country

  • Economic growth prospects: Countries with strong GDP growth projections and expanding consumer markets tend to attract higher Foreign Portfolio Investment inflows as investors seek capital appreciation opportunities.
  • Interest rate differentials: Higher interest rates compared to developed markets create yield advantages for fixed-income investments, attracting portfolio flows seeking better returns.
  • Political stability: A stable political environment with policy continuity provides confidence to foreign investors regarding the safety of their investments.
  • Regulatory environment: Transparent, predictable, and investor-friendly regulations with strong protection for minority shareholders encourage portfolio investments.
  • Market liquidity and accessibility: Well-developed financial markets with adequate depth, breadth, and sophisticated trading infrastructure facilitate easier entry and exit for foreign investors.
  • Currency stability: A relatively stable currency or one with appreciation potential reduces exchange rate risks for foreign investors.
  • Corporate governance standards: Strong corporate governance frameworks with transparent disclosures and shareholder rights protection enhance investor confidence.
  • Macroeconomic indicators: Healthy foreign exchange reserves, manageable inflation levels, and fiscal discipline contribute to a favorable investment climate.
  • Global risk sentiment: During periods of high global liquidity and risk appetite, emerging markets typically see increased Foreign Portfolio Investment inflows as investors seek higher returns.
  • Inclusion in Global Indices: Addition to major global equity or bond indices can trigger passive fund flows into a country's securities markets.

Examples of Foreign Portfolio Investments

Foreign portfolio investors (FPIs) have significantly influenced India’s capital markets in recent years with large swings in investment flows. For instance, in March 2020, FPIs withdrew around ₹61,973 Crore from Indian equities amid the global COVID-19 shock​. This trend reversed in the following year, and by the end of FY2020-21 India saw a record net FPI inflow of roughly ₹2.6 Lakh Crore[1]  as foreign investors poured money into stocks on hopes of a speedy economic recovery​.

However, 2022 brought the opposite: facing aggressive global rate hikes and geopolitical tensions, FPIs pulled out about ₹1.21 Lakh Crore[2] , marking the highest annual portfolio outflow ever recorded. More recently, sentiment has rebounded — in FY2023-24, overseas investors again pumped in about ₹2.04 Lakh[3]  Crore into Indian equities, reflecting renewed confidence in India’s growth prospects. This fresh inflow of FPI has also boosted various parameters of the Indian stock market including indices like the BSE Sensex.

Conclusion

Foreign Portfolio Investment plays a vital role in enhancing capital liquidity and integrating economies into global financial markets. While FPI contributes to economic development and market expansion, it also brings risks associated with volatility and foreign capital dependency. Investors and policymakers must strike a balance between encouraging Foreign Portfolio Investment inflows and ensuring financial stability. Diversification and regulatory safeguards are essential for managing the impact of FPI on domestic markets.

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Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.