About Foreign Portfolio Investment (FPI)
- Foreign Portfolio Investment (FPI) refers to investments made by foreign entities in financial assets such as stocks, bonds, and other securities of a country. It is distinct from Foreign Direct Investment (FDI), as it does not involve acquiring control over a business.
Key Characteristics of FPI:
- Passive investment: Investors do not participate in the management of the company.
- Short-term focus: Aims for capital appreciation rather than long-term strategic interests.
- Enhances market liquidity: Provides capital flow into financial markets, increasing efficiency and investment potential.
- Sensitive to market sentiments: FPI is highly volatile, as investors can quickly withdraw funds in response to economic or political instability.
FPI Policy in India:
- A foreign investor can hold up to 10% of the total paid-up capital of an Indian company without being classified as an FDI.
- If the holding exceeds 10%, it is reclassified as Foreign Direct Investment (FDI).
- Regulated by SEBI, ensuring compliance with financial laws.
Foreign Institutional Investors (FIIs) vs. FPIs
Foreign Institutional Investors (FIIs) are a subset of FPIs and include large investment entities such as:
- Mutual Funds
- Pension Funds
- Insurance Companies
- Hedge Funds
Unlike individual FPI investors, FIIs typically adopt a more structured and strategic investment approach. However, all FIIs are considered FPIs, but not all FPIs are FIIs.
Key Differences Between FPI and FDI
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Dimension
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Foreign Direct Investment (FDI)
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Foreign Portfolio Investment (FPI)
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Control & involvement
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Investors actively manage the business
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No direct involvement in management
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Investment type
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Involves physical business investment (e.g., factories, offices)
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Involves financial asset purchase (e.g., stocks, bonds)
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Liquidity & exit
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Difficult to exit, as it requires selling business assets
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Easier to withdraw, as securities are highly liquid
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Duration
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Long-term commitment
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Short-term speculative investment
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Capital flow
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Flows into the primary market
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Flows into the secondary market
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Impact on Economy
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Boosts economic growth, employment, and innovation
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Primarily provides liquidity to financial markets
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About Alternative Investment Funds (AIFs)
- Alternative Investment Funds (AIFs) are privately pooled investment vehicles that gather capital from investors—both domestic and foreign—for specialized investments that differ from conventional investment instruments like mutual funds.
Key Features of AIFs
- Regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
- Can be structured as a company, trust, or Limited Liability Partnership (LLP).
- Typically cater to high-net-worth individuals (HNIs) and institutional investors due to the high investment threshold.
Categories of AIFs
- Category I AIFs (Investment in Priority Sectors)
- Focus on sectors that are considered socially or economically beneficial by the government and regulators.
- Includes venture capital funds, angel funds, SME funds, social venture funds, and infrastructure funds.
- Category II AIFs (Diversified Investment Strategies)
- Covers investment vehicles that do not fall under Category I or III.
- These funds do not use leverage beyond operational needs.
- Includes real estate funds, debt funds, private equity funds, and distressed asset funds.
- Category III AIFs (High-Risk, High-Return Investments)
- Employ complex trading strategies and leverage, including investments in listed or unlisted derivatives.
- Examples include hedge funds and Private Investment in Public Equity (PIPE) funds.
- Unlike Category I and II AIFs, which are close-ended with a minimum tenure of three years, Category III AIFs can be open-ended or close-ended.
