s (FPIs) and s (FDIs) are two key channels through which foreign capital enters India. While both support economic growth, they differ significantly in terms of ownership, investment horizon, capital mobility. Here’s how FPIs and FDIs differ from each other and how they impact the markets.
How FPIs differ from FDIs
Explaining the difference in nature of their investments, Abhishek Kumar, SEBI RIA, Founder- SahajMoney, says. “FDI is a committed capital as its used to build factories, buy stake in or acquire businesses and stays invested for years or decades. Due to this design the flight of this capital is difficult.”
“On the other hand FPI is financial capital and is hot money as it used to buys stocks and bonds in stakes below 10%, plays no role in running businesses, and can enter or exit through the stock exchange in a single trading session”
Nature of investment:
FPI: Investment in financial securities such as stocks, bonds, ETFs and other market instruments.
FDI: Investment in physical assets, businesses and long-term projects.
Investor intent:
FPI: Focuses on earning financial returns from market movements.
FDI: Aims for long-term ownership, strategic expansion and business growth.
Stake limit:
FPI: Usually involves less than 10% ownership of a company’s post-issue capital.
FDI: Typically involves 10% or more ownership of post-issue capital.
Role in business:
FPI: Passive investment with no role in day-to-day operations.
FDI: Active involvement with influence over business decisions and management.
Investment horizon:
FPI: Short to medium-term investment.
FDI: Long-term commitment, often spanning years or decades.
Entry & exit:
FPI: Easier entry and exit through stock exchanges due to higher liquidity.
FDI: More complex exit process due to business ownership and regulatory requirements.
Regulation:
FPI: Governed by SEBI’s FPI Regulations and RBI guidelines.
FDI: Governed by RBI and DPIIT under the FEMA framework.
Entry routes:
FPI: Requires SEBI registration through designated channels.
FDI: Allowed through automatic route or government approval route.
How FDIs and FPIs impact the markets?
The key difference between FDIs and FPIs lie in the stickiness of capital, which is why they impact the financial markets differently, say Kumar
- FPI flows show up immediately in index levels, currency movements and bond yields which is why FPI selling makes headlines.
- Whereas FDI rarely moves the index on any given day and is used to build the underlying economy that markets ultimately price.
“So when FPIs sell, it reflects a shift in relative attractiveness or global risk appetite not a verdict on India’s long term story which is visible in FDI which continues to commit capital on the ground.”