GS III-Economy
Foreign Portfolio Investment (FPI) refers to investments made by foreign entities in a country’s financial assets, such as stocks, bonds, and other securities.
Unlike Foreign Direct Investment (FDI), FPI does not entail control over the operations or management of the company.
Key Features of FPI
- Passive investment: Investors do not participate in a company’s management decisions.
- Short-term focus: Primarily aims for capital gains rather than long-term strategic interests.
- Enhances market liquidity: Increases capital flows, market efficiency, and investment opportunities.
- Highly sensitive to market sentiments: FPI is often volatile, as investors can quickly withdraw funds during economic or political uncertainty.
FPI Policy in India
- A foreign investor may hold up to 10% of the total paid-up capital of an Indian company without the investment being classified as FDI.
- Holdings exceeding 10% are categorized as FDI.
- FPI in India is regulated by SEBI, ensuring compliance with financial regulations.
Foreign Institutional Investors (FIIs) vs. FPIs
Foreign Institutional Investors (FIIs) represent a subset of FPIs and include large entities such as:
- Mutual Funds
- Pension Funds
- Insurance Companies
- Hedge Funds
Unlike individual investors, FIIs often follow more structured and strategic investment approaches. While all FIIs are considered FPIs, not all FPIs are FIIs.
Differences Between FPI and FDI
| Dimension | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
| Control & involvement | Investors participate in business management | No direct role in management |
| Investment type | Physical assets (e.g., factories, offices) | Financial assets (e.g., stocks, bonds) |
| Liquidity & exit | Harder to exit due to asset ownership | Easier to exit due to high liquidity of securities |
| Duration | Long-term commitment | Short-term and often speculative |
| Capital flow | Direct investment in productive assets | Mainly flows into secondary financial markets |
| Economic impact | Drives growth, employment, and innovation | Primarily boosts financial market liquidity |
Alternative Investment Funds (AIFs)
AIFs are privately pooled investment vehicles that collect capital from domestic and international investors for specialized investments that differ from traditional instruments like mutual funds.
Key Features of AIFs
- Regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
- Can be set up as a company, trust, or Limited Liability Partnership (LLP).
- Primarily designed for high-net-worth individuals (HNIs) and institutional investors due to higher investment thresholds.
Categories of AIFs
- Category I AIFs: Invest in priority sectors that have social or economic benefits, including venture capital funds, angel funds, SME funds, social venture funds, and infrastructure funds.
- Category II AIFs: Encompass investment vehicles not classified under Category I or III, such as real estate funds, debt funds, private equity funds, and distressed asset funds. They do not use leverage beyond operational needs.
- Category III AIFs: Engage in high-risk, high-return investments using complex trading strategies and leverage, including listed and unlisted derivatives. Examples include hedge funds and Private Investment in Public Equity (PIPE) funds. Unlike Categories I and II, which are close-ended with a minimum tenure of three years, Category III AIFs can be open-ended or close-ended.