What are the Characteristics of Foreign Portfolio Investments?

FOREIGN PORTFOLIO INVESTMENTS (FPI) :
FPI represents international investments in financial assets / instruments which are traded
on stock exchanges. Such investments are by intention short term in nature and do not
represent any intention to participate in the management of the target company. Such
investments are made to exploit short term trading opportunities to make quick capital
gains / profits in foreign countries.
Characteristics of FPI :
1. The primary intention is not to control a foreign business enterprise but to gain from
profit making opportunities available in foreign markets.
2. FPI is represented by monetary flows from individuals, mutual funds, portfolio
management companies, pension funds, equity funds etc.
3. Due to the short term nature of such investments the fund flows are less predictable.
This may result in volatility in both the foreign exchange and capital markets.
4. There is no interface between the management and the foreign investor. The
transactions represent a change in ownership of existing equity from one investor to
another. It has no impact on the balance sheet of the company.
5. Conventionally, all such investments represent secondary market transactions.
However, regulators may permit investments through the primary market with
quantitative restrictions.
6. FPI transactions result in replacement of an existing investor. Thus they do not
directly contribute to economic growth. However, the greater demand for shares of
the target company increases their market price leading to a higher PE Ratio. This
helps the target company to raise capital at lower cost.