In News

• Foreign investors have pulled out close to Rs. 6,000 crores so far from the Indian stock markets in January 2019.

Explained

• Even as the foreign portfolio investors have been making an exit from Indian markets amid concerns over global growth and pulled out a net of Rs 5,879 crore from the Indian equities in January 2019, the domestic institutional investors seem to be playing the counterbalance with fresh investments of over Rs 3,105 crore in the same period
• Market experts say that the strong DII participation is a result of a strong monthly inflow of funds into mutual fund schemes over the last four to five years which has strengthened the DII participation in the market.
• Unlike in the past, the strong inflow of funds into mutual funds gives them the power to act as a domestic counterbalance to FPI outflow. Earlier when FPIs pulled out funds, markets used to fall sharply as DIIs were not strong enough to provide support to the market, however, now the domestic fund flow into MFs is helping them act as a counterbalancing force. It also helps arrest a sharp fall in the markets when FPIs leave India and that’s good for the overall stability of the market,
• A look into the fund flow by FPI and DIIs into Indian equities over the last 10-years shows a sharp contrast in investment pattern. In the seven-year period between January 2008 and December 2014 the FPIs pumped in a net of Rs 5 lakh crore into Indian equities, whereas the DII pulled out a net of over Rs 55,000 crore from the markets.
• By contrast, over the last four calendar years between January 2015 and December 2018 while FPIs have invested a net of Rs 56,000 crore, the DIIs pumped in a net of Rs 3.04 lakh crore.

Foreign Portfolio Investment

• The term FPI was defined to align the nomenclature of categorizing investments of foreign investors in line with international practice. FPI stands for those investors who hold a short-term view on the company, in contrast to Foreign Direct Investors (FDI).
• FPIs generally participate through the stock markets and gets in and out of a particular stock at much faster frequencies. Short term view is associated often with lower stake in companies. Hence, globally FPIs are defined as those who hold less than 10% in a company.
• In India, the hitherto existing closest possible definition to an FPI was Foreign Institutional Investor.

Features of FPI

• Portfolio Investment by any single investor or investor group cannot exceed 10% of the equity of an Indian company, beyond which it will now be treated as FDI.
• FPIs are not allowed to invest in unlisted shares. In respect of those securities, where FPIs are not allowed to invest no fresh purchase shall be allowed as FPI. They can only sell their existing investments in such securities.
• However, an exception has been made by permitting them to invest in unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector, where ‘infrastructure’ is defined in terms of the extant External Commercial Borrowings (ECB) guidelines;
• FPIs are permitted to invest in Government Securities with a minimum residual maturity of one year. However, FPIs have been prohibited from investing in T-Bills. FPI can invest in privately placed bonds if it is listed within 15 day.