Can Foreign Portfolio Investment (FPI) boost Indian Economy

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MBA Aspirants are expected to know and understand the current scenario of economic conditions of Indian market. This general awareness will help you in GD/WAT and PI.
 
Read: Can Foreign Portfolio Investment (FPI) boost Indian Economy? 
 
Foreign Portfolio Investments, also known as FPIs, refer to securities and other financial assets passively held by foreign investors. Here, investors have no direct ownership of financial assets and hence, there is no direct management of a company. FPIs are highly popular among investors who are not keen on managing firms abroad. 
 
Some people mistake FPI for Foreign Direct Investment (FDI) even though the differences between the two types of investment are stark. In FPI, there is no active involvement of the investors in the management of a company whereas in FDI, the investors are involved in the management of a company and have control over its ownership. 
 
In many ways, FPI is similar to purchasing investments that are domestic in nature. Essentially, investors will analyze the financial condition of the entity that is issuing investments and calculate the potential for investments to generate returns over a period of time. In addition, they will consider the events that could have a negative impact on the growth potential of the investments. 
 
An FPI helps an investor to generate a decent amount of return in a relatively short time; however, the investor has to pay close attention to the conditions in the foreign exchange market as minor fluctuations can have a huge impact on his returns. There are two advantages of FPIs – not only can an investor earn returns from the upward movement of the investment but he can also make money from the current rate of exchange between the two currencies involved. 
 
A high-level panel has been set up by the Indian government to restructure the foreign investment regime in the country and this committee is being led by the Secretary of the Department of Economic Affairs, Arvind Mayaram. Recently, this committee suggested classifying investments above 10% in a company’s equity as FDI and those below 10% as FPI. 
 
The committee is hoping that this suggestion will be incorporated into the interim budget on February 17, 2014. The committee is likely to make recommendations regarding the distinction between FDIs and FPIs to simplify things for companies. According to the panel, the default cap for FPIs will continue to be 24%. 
 
In January 2014, the Securities and Exchange Board of India came up with new regulations with regard to FPIs. The board put forth these new regulations in an attempt to ease the registration process and operating framework for foreign entities planning to invest in Indian capital markets. Under the new norms, FPIs have been divided into three categories based on their risk profile and ‘Know Your Customer’ requirements. 
 
Category I FPIs are lowest risk entities, including foreign governments and government related foreign investors. Category II FPIs are appropriately regulated broad based funds, appropriately regulated entities, broad based funds whose investment manager is appropriately regulated, pension funds, university funds, and university related endowments. And Category III FPIs include all others that are not eligible under Category I and Category II.
 
The Indian government is doing everything within its means to attract investors and increase the inflow of funds into India. It is hoped that these efforts of the government will bear fruit quickly and lead India out of its economic woes.
 
  
 
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