by: ankur shukla

Foreign Portfolio Investment

The Foreign Exchange Management Act 2000 defines Foreign

Portfolio Investment as buying and selling of shares, convertible debentures of Indian companies, and units of

domestic mutual funds at any of the Indian stock exchanges

It is the passive holding of securities such as foreign stocks, bonds, or other financial assets ,none of which entails active management or control of the securities issues by the investor

Start of portfolio investment

In 1992, India opened up its economy and allowed foreign portfolio

investment in its domestic stock market

Since then ,FPI has emerged as a major source of private capital

inflow in this country

India is more dependent upon FPI than FDI as a source of foreign investment.

During 1992 -2005 more than 50 percent of foreign investment in India came from FPI.

Benefits of FPI
Inflow of FPI can provide a developing non debt creating

source of foreign investment.

FPI can induce financial resources to flow from capital

abundant countries, where expected returns are low, to capital scarce countries where expected returns are high.
FPI affects the economy through its various linkage effects

via the domestic capital market.

 Foreign Organization set up to invest in India

GDRs/ADRs

Raising money from abroad through issue of shares abroad

Offshore Funds

Funds raised outside India to be invested here

Factors affecting Portfolio Investment

Tax rates on interest or dividends

Interest rates Exchange rates P.I is the part of capital account on BOP

Regulations Regarding Portfolio Investments by NRIs/PIO

Non Resident Indian (NRIs) and Persons of Indian Origin (PIOs) can
purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme.

For this purpose, the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment.

All sale/purchase transactions are to be routed through the designated branch.

An NRI or a PIO can purchase shares up to 5% of the paid up capital of an

Indian company. All NRIs/PIOs taken together cannot purchase more than 10% of the paid up value of the company.

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This limit can be increased by the Indian company to 24% by

passing a General Body resolution).

The sale proceeds of the repatriable investments can be

credited to the NRE/NRO etc. accounts of the NRI/PIO

whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.

The sale of shares will be subject to payment of applicable taxes.