The study investigates the anion exchange mechanism between the ad-atoms of arsenic and phosphorus followed by their inter-diffusion processes, in InAsP/InP hetero-structures grown by metal organic vapor phase epitaxy technique. The energetics and kinetics of the ad-atoms like arsenic and phosphorus are governed by the growth conditions. It has been found that the percolation of arsenic and phosphorus in the epilayer depends on various factors, such as gas-phase diffusion coefficients, surface reaction rates, misfit strain energy, bond energy, segregations, and the presence of defects and dislocations. Effects of anion exchange mechanisms on generating local crystal potential states that originated due to the local crystal bonding environment are further investigated. The magnitude of these local potential states strongly depends on the strain states associated with the layer thickness. If the difference between the potential minima is small (< 25 meV), it leads to distinct “S” shaped temperature-dependent luminescence/absorption spectra. In contrast, a large difference gives rise to two distinctive luminescence/absorption peaks. Thus, by controlling the strain states associated with the energetics and kinetics of ad-atoms like arsenic/phosphorus and layer thickness, such “S” shaped behavior can be controlled.