- The Foreign Portfolio Investor (FPI) category was introduced to streamline and simplify various foreign portfolio investment routes. FPIs include Foreign Institutional Investors (FIIs), Sub-Accounts, and Qualified Foreign Investors (QFIs). The unified FPI Regime, implemented in 2014, aimed at creating a more straightforward regulatory framework.
Investment Options for FPIs (Since 2018):
- FPIs are permitted to invest in various financial instruments, including corporate bonds, Central Government securities (G-secs), treasury bills, and State Development Loans (SDLs), without any minimum residual maturity requirement. This flexibility enhances investment opportunities for FPIs in the Indian market.
Foreign Portfolio Investor (FPI):
Introduction:
Foreign Portfolio Investor (FPI) is a category of investors comprising Foreign Institutional Investors (FIIs), Sub-Accounts, and Qualified Foreign Investors (QFIs). This class of investors plays a crucial role in the Indian financial markets, and the FPI regime was introduced to simplify and streamline the regulatory framework governing foreign portfolio investments.
Key Developments:
- K. M. Chandrasekhar Committee:
- In 2012, SEBI constituted the K. M. Chandrasekhar committee to rationalize and harmonize various foreign portfolio investment routes. The committee’s recommendations aimed at establishing a unified and simple regulatory framework.
- Introduction of FPI Regime (2014):
- Based on the Chandrasekhar Committee’s report, the new FPI Regime came into effect in 2014. This regime consolidated FIIs, Sub-Accounts, and QFIs into a single category known as Foreign Portfolio Investors.
- Flexibility in Investment Options (Since 2018):
- Since 2018, FPIs have been granted permission to invest in various financial instruments, including corporate bonds, Central Government securities (G-secs), treasury bills, and State Development Loans (SDLs), without any minimum residual maturity requirement. This provides FPIs with increased flexibility in their investment choices.
Foreign Institutional Investor (FIIs):
- Definition:
- Foreign Institutional Investor (FII) refers to an institution established or incorporated outside India that intends to make investments in securities within the country. This category includes entities such as mutual funds.
- Registration with SEBI:
- FIIs need to be registered with the Securities and Exchange Board of India (SEBI) to participate in the Indian capital markets. Registration is a prerequisite for FIIs to engage in investment activities.
- Investment Scope:
- FIIs can participate in both primary and secondary capital markets in India through the Portfolio Investment Scheme (PIS). The ceiling for overall investment by FIIs varies from company to company.
Difference Between FDI and FPI:
- Nature of Investment:
- Foreign Direct Investment (FDI) involves setting up firms to produce goods and services, representing a direct institutional involvement. FPI, on the other hand, involves the purchase of financial assets for profit.
- Stake Percentage:
- To differentiate between FDI and FPI, a broad principle was established. If an investor holds a stake of 10 percent or less in a company, it is treated as FPI. If the stake exceeds 10 percent, it is treated as FDI.
- Participation of FIIs in Indian Markets:
- Participatory Notes (PNs) were used by FIIs for investments. However, SEBI imposed conditions on PNs, and it encouraged FIIs to register directly with SEBI and invest in Indian markets.
SEBI’s Regulatory Measures:
- SEBI’s regulatory actions, including the imposition of conditions on PNs and encouraging direct registration of FIIs, aimed at ensuring the quality and cleanliness of flows into Indian stock and forex markets. The registration process led to a significant number of FIIs registering with SEBI.
These measures align with SEBI’s objective of promoting a transparent and robust regulatory environment for foreign investors participating in Indian financial markets.
Clearing House:
A clearing house is a crucial component of financial markets, responsible for managing and facilitating the clearing and settlement of trades executed on stock exchanges. Here are key aspects related to clearing houses:
- Function:
- A clearing house performs various functions, including registering, monitoring, matching, and guaranteeing the trades of its members. It acts as an intermediary, stepping in between the buyer and the seller in the trading process.
- Novation:
- The central counterparty (clearing house) engages in a process called “novation.” This involves the clearing house becoming the buyer to every seller and the seller to every buyer, thereby guaranteeing the settlement of trades.
- Guarantee of Settlement:
- By acting as a guarantor, the clearing house ensures the completion of the settlement process. In case of default by a buyer or a seller, the clearing house has mechanisms in place to address such situations, including the use of funds for guaranteeing trades.
- Clearing Corporations:
- Clearing houses are often organized as clearing corporations. Examples include the National Securities Clearing Corporation Ltd. (NSCCL), Indian Clearing Corporation Ltd. (ICCL), and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL). These entities clear and settle trades in various securities and financial instruments traded on stock exchanges.
- Oversight and Regulation:
- Clearing Corporations play a systemic role in securities markets, and they are designated as Market Infrastructure Institutions for oversight. Regulatory bodies, such as the Securities and Exchange Board of India (SEBI), oversee their operations. Clearing Corporations adhere to rules and regulations based on international standards, such as the International Organisation of Securities Commissions’ (IOSCO) Principles.
- Systemic Importance:
- Due to their critical role in ensuring the integrity and efficiency of the financial system, clearing houses are considered of systemic importance. Their proper functioning is essential for maintaining market stability.
- Funds Maintenance:
- Clearing corporations maintain funds to support the guaranteeing of trades, settlement processes, and to address any defaults that may occur. These funds act as a financial cushion to manage risks associated with trading activities.
- International Standards:
- Clearing houses follow international standards and best practices to align with global expectations. This ensures consistency and compatibility with the broader international financial ecosystem.
In summary, clearing houses, particularly in the form of clearing corporations, play a vital role in the post-trade processes of financial markets. Their functions contribute to the overall efficiency, transparency, and stability of the securities market.
FAQs
1. What is a Foreign Portfolio Investor (FPI)?
- A Foreign Portfolio Investor (FPI) is an entity that invests in the financial markets of a country, such as stocks, bonds, and other financial assets, but does not actively participate in the management of the companies it invests in. FPIs include foreign institutional investors (FIIs), qualified foreign investors (QFIs), and other entities registered with the Securities and Exchange Board of India (SEBI) in India.
2. How does an FPI differ from a Foreign Direct Investor (FDI)?
- While both FPI and FDI involve foreign investment, they differ in terms of investment objectives and involvement in the invested company. FPI involves passive investments in financial assets like stocks and bonds and does not involve significant control or management of the invested company. In contrast, FDI involves a long-term investment in a foreign business with the intent of establishing a lasting interest and significant control over the company’s operations.
3. What are the benefits of FPIs for a country’s economy?
- FPIs can bring several benefits to a country’s economy, including increased liquidity in financial markets, access to foreign capital, diversification of investment portfolios, and greater efficiency in capital allocation. Additionally, FPI inflows can help stabilize currency exchange rates and provide funds for infrastructure development and economic growth.
4. What are the regulations governing FPI investments?
- FPI investments are subject to regulations set by the regulatory authority of the respective country. In India, for example, FPI investments are regulated by SEBI. These regulations cover eligibility criteria, investment limits, registration requirements, reporting obligations, and compliance standards to ensure transparency, fairness, and stability in the financial markets.
5. What factors influence FPI flows into a country?
- FPI flows into a country are influenced by various factors, including economic growth prospects, political stability, interest rates, currency exchange rates, regulatory environment, market liquidity, and global market conditions. Changes in any of these factors can impact investor sentiment and consequently affect the flow of FPI into or out of a country’s financial markets. Governments often implement policies to attract FPI inflows, such as tax incentives or liberalization of investment regulations.
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