Foreign Portfolio Investment (FPI):
- FPI involves investors purchasing various financial assets in foreign countries, including stocks, bonds, mutual funds, derivatives, and fixed deposits.
- Purpose: Primarily used to invest in foreign stock markets for quick returns.
Regulation in India:
- Regulated by SEBI.
- Includes Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs).
Advantages:
- Enables portfolio diversification across international markets.
- Allows investors to profit from favorable exchange rate differences by investing in stronger foreign currencies.
Foreign Direct Investment (FDI)
- It is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.
- It is an ownership stake in a foreign company or project made by an investor, company, or government from another country.
- FDI is a key element in international economic integration because it creates stable and long-lasting links between economies.
FPI Vs FDI
| Aspect | Foreign Portfolio Investment (FPI) in India | Foreign Direct Investment (FDI) in India |
| Type of Investment | Investment in financial instruments like stocks and bonds | Investment in sectors such as manufacturing, services, etc. |
| Control | No control over Indian companies | Ownership and operational control in Indian businesses |
| Investment Horizon | Typically short-term, driven by quick returns | Long-term, aimed at stable market presence |
| Capital Requirement | Relatively smaller amounts | Significant capital investment |
| Technology Transfer | Does not involve technology or expertise transfer | Often includes technology, skills, and knowledge transfer |
| Regulation Authority | Regulated by SEBI (Securities and Exchange Board of India) | Regulated by DIPP (Department for Promotion of Industry and Internal Trade) and RBI (Reserve Bank of India) |
| Approval Process | Easier entry, fewer regulatory approvals | Requires approval from regulatory bodies depending on sector (automatic or government route) |
| Economic Impact | Limited impact on long-term economic growth | Creates jobs, boosts infrastructure, and supports economic growth |
| Key Sectors | Predominantly in financial markets (e.g., equity markets) | Involves sectors like manufacturing, IT, retail, and infrastructure |
| Example of Investors | Individual investors, hedge funds | Multinational corporations, foreign governments, large institutions |
In India, FPI offers more flexibility and is typically used for short-term investments in stock markets, while FDI is seen as a major contributor to economic development, requiring higher regulation and approval to ensure stable, long-term growth.
