Foreign Portfolio Investments: The Backbone of Indian Economy

Many Indian companies are worried about the slowing economy and are cutting down on costs as a measure. The recruitment has also reduced showing low interest in expansion at this point in time. If the situation continues this way, the economy of India will see a huge fall resulting in unemployment and poverty. One technique to improve this economic slowdown is to facilitate investments from outside India.

What is FPI?

Foreign Investment Portfolio (FPI) refers to securities and other financial assets held by foreign investors. Such investment does not provide direct ownership of a company’s assets to the investor. Instead, the investors hold passive ownership, i.e. the investment remains relatively liquid based on the volatility of the market. FPI along with Foreign Direct Investment (FDI) are the two important modes of funding for most economies.

Foreign Portfolio Investment is part of a country’s capital account and is shown on its balance of payments (BOP). FPI holdings include stocks, bonds, mutual funds, ADRs, and exchange-traded funds.

Why does Indian Economy need FPIs?

Companies must raise investment when they do not have sufficient funds to sustain the operations. When there is a limitation on the domestically available investors, companies look forward to receiving foreign investment in the form of FPIs. The advantages of FPI are:

• The investor can earn returns from the investment.
• He can make a profit on the investment based on the current exchange rate between the currencies.

In order to prevent the mishandling of foreign money, the government has laid out certain rules and regulations. These regulations are updated and modified as and when necessary.

Also Read: Government and policymakers left with concerns as FPIs continue selling

What does the Budget say about Foreign Investment?

The Budget 2019 announced by the Finance Minister Nirmala Sitharaman made the following proposals:

• To ensure a harmonised and hassle-free investment experience, the government has proposed to streamline the existing Know Your Customer (KYC) norms for FPIs. This is an effort towards making FPIs more investor-friendly without compromising the integrity of cross-border capital flows.
• The Finance Minister stated that the major means of attracting cross-border investment is the availability of investable stocks. Therefore, she introduced the idea of increasing the statutory limit from 24% to sectoral foreign investment limit. It also provides the concerned corporates with the freedom to lower the threshold as required.
• FPIs are now allowed to purchase listed debt securities issued by Real Estate Investment Trusts (ReITs) and Infrastructure Investment Trusts (InvITs).
• The investments of FPIs in debt securities, issued by Infrastructure Debt Fund – Non-Bank Finance Companies (NBFC), are now allowed to be transferred or sold to a domestic investor within the lock-in period.
• In order to boost non-resident Indians’ (NRI) investment in the Indian market, the NRI portfolio investment scheme would be merged with FPI route.

Effects of the Budget on Indian Economy

The Budget updates on FPI regulations have both positive and negative effects on investors. A few of them are:

• The proposal to make KYC norms mandatory may create a negative effect. Not all FPI entities are ready to directly identify themselves as investors.
• The Budget has proposed an effective tax rate of 39% for a taxable income from Rs.2 crore to Rs.5 crore and 42.74% for a taxable income above Rs.5 crore. These tax rates are applicable to foreign portfolio investors as about 40% of FPIs either individuals, trusts, or other small entities. The requirement to pay higher taxes would result in these FPIs losing interest in investments.
• As a means of escaping from higher tax rates, these individuals/small entities may try to get into a corporate structure. Under the laws of General Anti-Avoidance Rules, they may be penalised for showing themselves as a corporate structure only for the sake of tax avoidance.
• FPIs can invest in debt securities of ReITs and InvITs in addition to the existing products. This brings in more bandwidth for foreign investments in India.
• The merger of NRI portfolio investment scheme with that of FPI eases the process of NRIs investing in equities. This move is expected to bring in more equity-oriented funds into the Indian economy.

As per the current economic situation, the Indian economy needs stimulus to keep up the growth rate and maintain a balance. Investment from foreign portfolios is an essential source of funds to attain better economic stability.

In return, these investors will make money. However, the proposals made in the Budget may not be entirely favourable. It is necessary to wait for the Finance Ministry to amend the regulations such that foreign funds can flow to the country without being withheld.