Foreign Portfolio Investment is one of the largest type of capital flows into India. Foreign capital is a generic term indicating different types of investable money into the country. They comprise of investment type fund flows like FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment), loans like External Commercial Borrowings, concessional loans like external assistance, funds raised by Indian entities in foreign stock exchanges like Depository Receipts etc.
FPI policy in India
The government has brought a well-designed FPI policy that starts from defining FPI, identifying different type of investors under FPI, setting investment limit in companies and government securities, classifying them in terms of their risk profile etc. All these together we can call the FPI policy.
Most important type of investment by FPI is in shares or equities. Here, we have to differentiate it from FDI because both FPI and FDI are equity capital ie., they are expressed as percentage of shares owned by investor in a company. For example, 49% FDI, 51% FDI, 100% FDI etc. indicate percentage of shareholding by a foreign direct investor in an Indian company.
According to the present FPI policy, investment up to 10% shareholding by a single foreign investor in an Indian firm is FPI. More than 10% shareholding will be considered as FDI. This differentiation between FDI and FPI is needed for regulatory purposes.