2. Foreign Portfolio Investment - FPI
Securities and other financial assets passively held by foreign
investors. Foreign portfolio investment (FPI) does not provide
the investor with direct ownership of financial assets, and thus
no direct management of a company. This type of investment
is relatively liquid, depending on the volatility of the market
invested in. It is most commonly used by investors who do not
want to manage a firm abroad.
3. How FPI emerged in India?
In 1992, India opened up its economy and allowed foreign portfolio
investment in its domestic stock market
Since then ,FPI has emerged as a major source of private capital inflow in
this country
India is more dependent upon FPI than FDI as a source of foreign
investment.
During 1992 -2005 more than 50 percent of foreign investment in India
came from FPI.
4. Major drivers for attracting portfolio
inflows
Well performing stock market
Strong economic growth
Appreciating currency exchange rate
Domestic output growth of the country
5. Major factors that discourages the
inflow
High volatility in the exchange rate
Performance of stock market in other emerging countries
Interest rate - higher the interest rate in domestic market than foreign
market, more the FPI flows and vice-verse
Poor output growth of the country
6. Eligibility Criteria for FPI
The Applicant:
Is a person not resident in India
Is a resident of a country which is a signatory to SEBI MoU/IOSCO’s MMoU
Is resident of a country meeting FATF (Financial Action Task Force) requirements
If a Bank, should be resident of a country whose Central Bank is a member of the Bank for International
Settlements
Is not a Non Resident Indian (NRI)
Is legally permitted to invest in Securities outside his country
Has sufficient experience, good track record, is professionally competent,financially sound, generally good
reputation of fairness and integrity
Does not have a “opaque” structure (protected / segregated cell company or similar where ultimate beneficial
owners are ring fenced from each another)
7. FPI Investment Guidelines
The portfolio investor registered in accordance with SEBI guidelines shall be called ‘Registered Foreign
Portfolio Investor (RFPI)’.
RFPI may purchase and sell shares and convertible debentures of Indian company through registered
broker on recognised stock exchanges in India in terms of relevant SEBI guidelines/ regulations.
RFPI may sell shares or convertible debentures so acquired
in open offer in accordance with the SEBI Regulations, 2011 (Substantial Acquisition of Shares and Takeovers); or
in an open offer in accordance with the SEBI Regulations, 2009 (Delisting of Equity shares); or
through buyback of shares by a listed Indian company in accordance with the SEBI Regulations, 1998 (Buy-back of
securities)
8. FPI Investment Guidelines
RFPI may also acquire shares or convertible debentures
in any bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the
Central Government or any State Government;
or
in any transaction in securities pursuant to an agreement entered into with merchant banker in the process
of market making or subscribing to unsubscribed portion of the issue in accordance with Securities and
Exchange Board of India Regulations, 2009 (Issue of Capital and Disclosure Requirements).
The individual and aggregate investment limits for the RFPIs shall be below 10% (per cent) or 24% (per cent)
respectively of the total paid-up equity capital or 10% (per cent) or 24% (per cent) respectively of the paid-up
value of each series of convertible debentures issued by an Indian company.
RFPI shall be eligible to open a Special Non-Resident Rupee (SNRR) account and a foreign currency account
with Authorised Dealer bank and to transfer sums from foreign currency account to SNRR account at the
prevailing market rate for making genuine investments in securities. The Authorised Dealer bank may transfer
repatriable proceeds (after payment of applicable taxes) from SNRR account to foreign currency account ;
9. FPI Investment Guidelines
RFPI shall be eligible to invest in government securities and corporate debt subject to limits specified by the RBI
and SEBI from time to time;
The investment by RFPI will be made subject to the SEBI (FPI) Regulations 2014, modified by SEBI/Government
of India from time to time;
RFPI shall be permitted to trade in all exchange traded derivative contracts on the stock exchanges in India
subject to the position limits as specified by SEBI from time to time;
RFPI may offer cash or foreign sovereign securities with AAA rating or corporate bonds or domestic
Government Securities, as collateral to the recognized Stock Exchanges for their transactions in the cash as well
as derivative segment of the market.
10. Mode of FPI Investments
Foreign Institutional Investments
Foreign Organization set up to invest in India
GDRs/ADRs
Raising money from abroad through issue of shares abroad
Offshore Funds
Funds raised outside India to be invested here
11. ADRs/GDRs
Stands for American Depository Receipts/Global Depository Receipts
ADR/GDR provides a path for Indian companies to get listed in foreign stock exchanges indirectly.
If an Indian company wants to get listed in foreign stock exchange indirectly then it have to deposit its shares
and securities in a bank of foreign country whose stock exchange the company wants to list in.
The receipts are issued by the bank against these securities which are then sold to the residents of that country.
The receipts are also listed in the stock exchange of that country which are available for buy and sell on the
stock exchange like other instruments.
The prices of this receipts are also determined by supply and demands in the market.
The receipts traded in American market are termed as American Depository Receipts and the receipts traded in
any other country (except America) are called as Global Depository Receipts.
12. Trends of FPI components in India
1992-1993, the FIIs were allowed to enter Indian capital
market resulting into rise in FII investment in India.
1997-98 and 1998-99, there was sudden decrease in
FII inflows due to impact of Asian crisis
1999-2000 FII flows to India rejuvenated till 2001-02.
In 2002-03, the FPI flows again doused to 2.77
billion dollars due to the downgrading of Indian
economy by international credit rating agencies and
poor performance of Indian stock market.
In 2003-04, the FIIs inflows shooted up to great
extent due to increase in the investment limit for
FIIs
In 2008-09, due global depression there are heavy
down-turn in the FII inflows that created a chaos in
Indian financial markets.
FPI trend is largely influenced by FII trend as both
move in same direction at every single point i.e.
they imitate each other
13. Procedure to be followed by Foreign investor for investing in India.
REGISTERATION PROCESS
1. Apply to a DDP (designated depository participant) for FPI registration under one of the 3 categories
2. Documents to be submitted with FPI application:
a. Duly filled and signed Form-A
b. SEBI registration fee & conversion fee (if applicable)
c. Declarations and undertakings of updated material changes, non opaque structure etc.
d. Obtaining registration certificate, formation certificate etc.
e. The bank applicant has to forward the details to SEBI. DDP communicates the approval/rejection of application within 30 days to the
applicant and to SEBI.
APPOINTING A COMPLIANCE OFFICER: the same needs to be appointed to comply with the FPI regulations
APPOINT A CPA: a CPA needs to be appointed in India so as to meet the PAN card and tax related obligations
Foreign Portfolio Investors have to be given the same tax status as that of an FII :
Dividends Subject to dividend distribution tax at the company level
Interest from Securities 0.2
Interest from specific Rupee denominated bonds 5%(wef. 1-4-2014)
Short term capital gains on the floor of the exchange 0.15
Other short term capital gains 0.3
Long term capital gains on the floor of the exchange NIL
Other Long term capital gains 0.1
14. Order Management & Clearing
Note
• Equity is settled on T+2 basis | MF Redemptions are settled on T+1 basis
• Government Debt is settled T+1 basis | Corporate Debt is settled on T+0 / T+1
basis
• FPI can make use of Stock Lending and Borrowing segment to manage any short
15. Advantages of FPI to Investors
Portfolio Diversification: Foreign portfolio investment gives investors an opportunity to engage in international
diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return.
International Credit: Investors who have foreign investment portfolios have a broader credit base because they
can access credit in foreign countries where they have significant investments. This is advantageous when credit
sources available at home are expensive or unavailable due to various factors. The ability to get credit on
favorable terms and as quickly as possible can determine whether a business executes a new project or not.
Benefit from Exchange Rate: International currency exchange rates keep changing. Sometimes the currency of
the investor's home country may be strong, and sometimes it may be weak. There are times when a stronger
currency in the foreign country where an investor has a portfolio may benefit the investor
Access to a Bigger Market: Home markets in the United States have become very competitive, as there are
many businesses offering similar services. Foreign markets, however, offer a less competitive and sometimes
larger market. A business may make more sales selling shoes in one African country than in the entire U.S., for
instance.
16. Disadvantages of FPI to Investors
Problems of exchange rate
Political Risk represented by the possibility of change in the political environment resulting in change in
investment norms and repatriation regulations.
Emerging markets which are the beneficiaries of most FPI traditionally suffer from low retail participation which
results in inadequate liquidity which results in price volatility.
Exorbitant transaction and information cost.
Procedural and cumbersome formalities.
17. Advantages of FPI to Host Country
Provides a developing country non-debt creating source of foreign investment.
Supplement domestic saving by providing foreign exchange to the developing countries.
Reduces the pressure of foreign exchange gap for the LDCs
FPI can induce financial resources to flow from capital-abundant countries, where expected returns are low, to
capital-scarce countries, where expected returns are high.
FPI gives an upward thrust to the domestic stock market prices. This has an impact on the price-earning ratios
of the firms. A higher P/E ratio leads to a lower cost of finance, which in turn can lead to a higher amount of
investment.
Increased competition from foreign financial institutions also paves the way for the derivatives’ market.
18. Disadvantages of FPI to Host Country
Due to the unpredictable nature of such funds there is a tendency to shift from one market to another at short
intervals. Volatility arising out of FPI inflows and out flows has adverse effects on the host country economy.
Negative Influence on Exchange Rates: Foreign portfolio investments can occasionally affect exchange rates
during the abrupt withdrawal by source country.
Risk from Political Changes: Because political issues in other countries can instantly change, foreign portfolio
investment is very risky.
20. Impact of FPI on India's economy
The heavy inflow of FPI can provide Indian economy a non-debt creating source of
foreign investment.
FPI also reduces the pressure of foreign exchange gap
The flow of resources into the capital-scarce countries like India reduces their cost
of capital, increases investment, and raises output
It act as a catalyst for overall development of stock market performance of India.
The lower cost of capital and a booming share market can encourage new equity issues
in India (e.g. CCD).
21. FPI Investments in India
Financial Year
INR crores
Equity Debt Total
2010-11 110121 36317 146438
2011-12 43738 49988 93726
2012-13 140033 28334 168367
2013-14 79709 -28060 51649
2014-15 111333 166127 277461
2015-16 -19837 6777 -13060
22. Top 4 registered foreign investors in India.
1. Name 1199 SEIU GREATER NEWYORK PENSION FUND
Registration No. INUSFD290213
Registration valid upto 7/10/2016 0:00
Address 330 West 42nd Street, NewYork, USA
Country Name UNITED STATES OF AMERICA
Telephone No / Fax No. 6464738300 / /
2. Name 1199 SEIU HEALTH CARE EMPLOYEES PENSION FUND
Registration No. INUSFD290313
Registration valid upto 7/10/2016 0:00
Address 330 West 42nd Street, NewYork, City
Country Name UNITED STATES OF AMERICA
Telephone No / Fax No. 6464738300 / /
3. Name 1199 SEIU HOME CARE EMPLOYEES PENSION FUND
Registration No. INUSFD290513
Registration valid upto 7/14/2016 0:00
Address 330 West 42nd Street, NewYork City, NY
Country Name UNITED STATES OF AMERICA
Telephone No / Fax No. 646 473 8300 / /
4. Name 1832 ASSET MANAGEMENT L.P.
Registration No. INCAFD300914
Registration valid upto 4/28/2017 0:00
Address 51ND FLOOR 40 KING STREET WEST, TORONTO
Country Name CANADA
Telephone No / Fax No. 1-1800-268-8186 / 416-865-3463 /
23. CONCLUSION
This study provides the detailed analysis of the components of foreign portfolio investments such
as FII and ADR/GDR flows along with the factors that influence the overall flow of capital to India
were also analyzed in detailed.
As per analysis the most common factors that attracts both FIIs and ADR/GDR flows are
performance of domestic stock market, exchange rate, volatility in exchange rate, interest rate
differentials and domestic output growth of the country.
The study also concludes that the FII have always been a dominant component of aggregate
foreign portfolio investments, so the result of aggregated foreign portfolio investments are
identical to FII flows.
24. References
Foreign Portfolio Investment in Some Developing Countries: A Study of Determinants and Macro Economic Impact by Agarwal, R. (1997).
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Institutional Investors and Asset Pricing in Emerging Markets. IMF Working Paper 96/2 by Buckberg, E. (1996).
FII Flows to India: Nature and Causes by Chakrabarti, R. (2001).
Foreign Direct Investment and Economic Activity in India by Dua, P. and Rashid, A.I. (1998).
The Surge in Capital Inflows to Developing Countries: Prospects and Policy Response by Fernandez-Arias, E. & Montiel, P. J., (1995).
Portfolio Flows into India: Do Domestic Fundamentals Matter? IMF Working Paper No. 20 by Gordon, J. and Gupta, P. (2003).
Determinants of Foreign Institutional Investors Investment in India. Eurasian Journal of Business and Economics, 3(6), 57-70 Kaur, M. and S. S. Dhillon
(2010).
Modeling Economic Fundamentals for Forecasting Capital Flows to Emerging Markets, International Journal of Finance and Economics 6(3),201-216
by Mody, A., Taylor, M.P. and Kim J.Y. (2001).
