FPI Current Affairs - 2019
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The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in Corporate Bonds.
Why the limit was imposed and why it is being withdrawn?
During the review of the FPI investment in corporate debt in April 2018, the limit was introduced to incentivize the FPIs to maintain a portfolio of assets. But the market feedback suggested contrary. The market feedback suggested that foreign portfolio investors (FPIs) have been constrained by this stipulation.
As a result, to encourage a wider spectrum of investors to access the Indian corporate debt market, RBI has decided to withdraw the 20% limit on investments by FPIs in Corporate Bonds.
Foreign portfolio investment (FPI)
FPI consists of securities and other financial assets passively held by foreign investors. FPI does not provide the investor with direct ownership of financial assets. In India, FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans (SDLs) and corporate bonds, but with certain restrictions and limits. FPI is part of countries capital account and is listed on its balance of payments (BOP).
Differences between FPI and FDI
FPI allows the investor to purchase stocks, bonds or other financial assets in a foreign country and the investor does not actively manage investments or companies that issue investment. Also, the investor does not have control over securities or business.
Whereas in FDI, the investor has a direct business interest in the entity into which the investment is made. The investor controls his monetary investments and actively manages the company into which the investments are made. FPI is more liquid and less risky than FDI.
On 19 August the Bombay Stock Exchange (BSE) has extended the direct market access facility (DMA) to foreign portfolio investors (FPI).
Henceforth, the foreign investors will have direct access to the exchange trading system in Indian stock market without any manual interventions of the broker.
Earlier FPI had to conduct stock exchange trading in BSE through the broker who used to manually place the orders on their behalf.
According to SEBI regulations FPI seeking to avail DMA facility would not have to enter into a separate ‘broker- client agreement’ and it would be replaced by a simpler ‘terms and conditions’ document.
- Henceforth the broker have to specifically authorize their clients and have to provide a technologically secure DMA system to their FPI clients.
- They are obliged to maintain client KYC records relating to exchange trading and have to maintain client margins in a separate bank account and also have to send settlement updates to the client including delivery/payment schedules.
- This step by BSE will provide FPI clients a direct control over their orders, now they can execute orders faster, secure and in transparent manner.
- It will increase liquidity in stock exchange market and will have lower impact costs for large orders.
- The FPI clients can now audit trails in better way and can use hedging and arbitrage opportunities through the use of decision support tools i.e. algorithms for trading in better way
Bombay Stock Exchange is the oldest stock exchange in Asia formed by eight native stock brokers association in 1875 located at Dala street, Mumbai.
It got temporary approval by Bombay government in 1927 and permanent approval by Indian Government on 31 Aug 1957.
Today it is 10th largest stock market in the world by market capitalization at $1.7 trillion and has more than 5,000 companies listed in it.