DMPQ-What is FPI (Foreign portfolio investment) ? discuss it’s impact, risks and rewards in India.

. Foreign Portfolio Investment (FPI) consists of securities and other financial assets held by investors in another country.  The investors do not obtain direct ownership of a company’s assets and thus no direct management of a company. In other words, the ingress of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, some time for speculations, can also be regarded as the foreign portfolio investment.

The heavy inflow of FPI can provide Indian economy a non-debt creating source of foreign investment. It also reduces the pressure of foreign exchange gap. The FPI has an added advantage of the flow of resources into the capital-scant countries like India. It reduces their cost of capital, increases investment conclusively, raising their output percentage. FPI can also act as a catalyst for overall development of stock market performance of India. The lower cost of capital and a booming share market can encourage new equity issues in India. (e.g. CCD).

Due to its complex federal system of government, bureaucratic obstacles and arbitrary interventions in the market, investors might face high risk investing in India. Particular risks arise from the unequal playing field between ordinary private investors and state owned enterprises or well-connected family mergers. They might also be caused due to the labour laws that prevent efficient firms from growing and inefficient firms from restructuring, and land laws that can tie up land intensive projects for years.

But that was all in the past. In recent years, significant reforms are done by the government. They include new insolvency and bankruptcy laws. The different tiers of government have ambitious investment programmes and even intractable issues like land reforms are being advanced in some states. Government initiated certain steps like taxation bracket, KYC norms, land arbitration, ease of doing business ,ease of governance will definitely attract FPI in coming years.

 

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