Foreign Portfolio Investment
In just under a week in June, the quantum of foreign flows into the equity market has surpassed that of any other month in the current calendar year. Foreign portfolio investors (FPIs) bought shares worth ₹20,814 crore in just five trading sessions in the current month.
- This is the highest in any month of 2020, with the previous high registered in May at ₹14,569 crore.
- The current rally has seen money flow into sectors like automobiles, private banks and pharmaceuticals as there is continued hope of the worst being left behind.
What is Foreign Portfolio Investment?
- Foreign Portfolio Investment or FPI refers to the investment made in the financial assets of an enterprise, based in one country, by the foreign investors.
- In other words, FPI involves the purchase of securities that can be easily bought or sold.
- The intent with FPI is generally to invest money into another country’s stock market with the hope of generating a quick return.
- Such an investment is made with the aim of making short term financial gain and not for obtaining significant control over managerial operations of the enterprise.
- These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise which does not necessarily represent a long-term interest.
What is Foreign Direct Investment?
- Foreign direct investment or FDI pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country.
- Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.
- In other words, FDI connotes a cross-border investment, by a resident or a company domiciled in a country, to a company based in another country, with an objective of establishing a lasting interest in the economy.
- The investment may result in the transfers of funds, resources, technical know-how, strategies, etc.
- There are several ways of making FDI i.e. creating a joint venture or through merger and acquisition or by establishing a subsidiary company. The investor company has a substantial amount of influence and control over the investee company. Moreover, if the investor company obtains 10% or more ownership of equity shares, then voting rights are granted along with the participation in the management. For example, Walmart acquiring 77% stake in India’s biggest online retailer, Flipkart, is an FDI investment.
Key differences between FDI and FPI
- With FDI, investors are able to exert control over their investments and are typically actively involved in the management of the companies they invest in. Conversely, in FPI the degree of control is less as the investors obtain only ownership right. Therefore, they do not get a say in how their investments pan out because they’re not actively involved in the management or operations of the companies that they’re invested in.
- One of the most important distinctions between portfolio and direct investment to have emerged in the era of globalisation is that portfolio investment can be much more volatile. Changes in the investment environment in a country can lead to swift changes in portfolio investment. In contrast, FDI is more difficult to pull out or sell off as it implies a controlling stake in a business, and often connotes ownership of physical assets such as equipment, buildings and real estate.
- FDI investors invest in financial and non-financial assets like resources, technical know-how along with securities. This is contrary to FPI, where investors invest only in financial assets.
- For an economy as a whole, FDI creates productive assets by investing in factories, machinery & skill and superior technology. In that sense, FDI brings in long-term capital for an economy. FPI doesn’t aid productive asset creation directly. It is just a financial investment. The FPI investment pours funds generally into capital or bond markets for a short period of time, usually enough to make profits. Its destination period is small and its funds are generally considered short term capital.
|Active Investment||Passive Investment|
|Direct Investment||Indirect investment|
|Long term capital||Short Term capital|
|Invests in financial & non-financial assets||Invests only in financial assets|
|Ownership and managerial control||Only ownership|
|Entry & exit barriers exist||Entry & exit very easy|