Sunday, 30 March 2014


Earlier Regime

Foreign portfolio investments in India were permissible through foreign institutional investors (FIIs) and were regulated under SEBI (Foreign Institutional Investor) Regulations, 1995 (“FII Regulations”) and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000, as amended from time to time. FIIs includes asset management companies, pension funds, mutual funds, and investment trusts as nominee companies, incorporated / institutional portfolio managers or their power of attorney holders, university funds, endowment foundations, charitable trusts and charitable societies.

Non- Resident Indians (NRIs) and Persons of Indian Origin (PIOs) could also purchase or sell shares/ fully and mandatorily convertible debentures of Indian companies on the stock exchanges under the Portfolio Investment Scheme. For this purpose, the NRI/ PIO were required to apply to a designated branch of a bank, which deals in portfolio investment. All sale/ purchase transactions by an NRI/PIO were to be routed through the designated branch.

Recent Developments
SEBI has notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”) effective from January 7, 2014, pursuant to which any foreign investors proposing to make portfolio investments in India will be regulated under the FPI Regulations. On notification of the FPI Regulations, the FII Regulations stand repealed and corresponding circulars stand rescinded. However, all existing FIIs, sub accounts and QFIs foreign who hold a valid certificate of registration shall be deemed to be a FPI till the expiry of the block of three years for which fees have been paid under the FII Regulations.

Salient features of the FPI Regulations are as follows:

1.       A foreign investor, meeting the eligibility criteria under the FPI Regulations, is required to foremost register itself under the FPI Regulations under one of the following categories before making any investments under the Regulations:

(a)     Category I, which includes Government and Government related investors;

(b)     Category II, which includes (i) appropriately regulated broad based funds; (ii) appropriately regulated persons such as banks, portfolio managers; (iii) broad based funds whose investment manager is appropriately regulated; (iii) university and pension funds; and (iv) university related endowments already registered with SEBI.

(c)     Category III, which includes all other investors not falling under Category I or Category II.

2.       A foreign investor is eligible for registration as a FPI if such person (as per the Income Tax Act, 1961):

(a)     is not resident in India (as per the Income Tax Act, 1961);

(b)     is resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the SEBI;

(c)     being a bank, is a resident of a country whose central bank is a member of Bank for International Settlements;

(d)     is not resident in a country identified in the public statement of Financial Action Task Force as: (i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply;  or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies;

(e)     is not a non-resident Indian (as per the Income Tax Act, 1961);

(f)       is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business;

(g)     is authorized by its memorandum of association and articles of association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients;

(h)     has sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity;

(i)       is a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008;

(j)       if the grant of certificate to such person is in the interest of the development of the securities market; and

(k)     fulfils any other criteria specified by SEBI from time to time.

3.       An application needs to be made in Form A with designated depository participant (as defined under the Regulations which includes scheduled banks) (“DDP”) for registration as a foreign portfolio investor (“FPI”). The registration granted by a DDP is permanent, unless cancelled by SEBI or surrendered by the FPI.

4.       After registration, an FPI can make investments in the securities (primary and secondary markets), including shares, listed or to be listed on a recognised stock exchange.

5.       The shares acquired by an FPI are to be held in dematerialized form only. Further, an FPI is required to appoint a bank for opening of foreign currency denominated account and special non-resident rupee account prior to making investments under the Regulations.

6.       Investments by a single FPI or an investor group must not exceed 10% of the total issued capital of an investee company.

7.       During the transition period, all existing FIIs & sub accounts can continue to buy, sell or otherwise deal in securities till the validity of their existing registration. However, all existing QFIs can continue to buy, sell or otherwise deal in securities only for a period of one year from the date of notification of the FPI regulations (i.e. 7 January 2015). In the meanwhile, they may obtain FPI registration under the FPI Regulations.

8.       FPIs are required to abide by the provisions of the FPI Regulations, circulars issued thereunder and any other terms and conditions specified by SEBI from time to time. These would include the prescribed code of conduct, investment restrictions generally and specific to certain securities, maintenance of books and accounts, appointment of compliance officer, etc.

9.       FPI are permitted to invest in the following securities in India:

a)       Securities in the primary and secondary markets (subject to additional conditions) including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India;

b)       Units of schemes floated by domestic mutual funds, whether listed or not;

c)       Units of schemes floated by a collective investment scheme;

d)       Derivatives traded on a recognized stock exchange;

e)       Treasury bills and dated government securities;

f)         Commercial papers issued by an Indian company;

g)       Rupee denominated credit enhanced bonds;

h)       Security receipts issued by asset reconstruction companies;

i)         Perpetual debt instruments and debt capital instruments, as specified by RBI from time to time;

j)         Listed and unlisted non-convertible debentures / bonds issued by an Indian company in the infrastructure sector, where ‘infrastructure’ is defined in terms of the extant ECB guidelines;

k)       Non-convertible debentures or bonds issued by NBFCs categorized as ‘Infrastructure Finance Companies’ by RBI Rupee denominated bonds or units issued by infrastructure debt funds, Indian depository receipts; and

l)         Such other instruments specified by SEBI from time to time. 

10.    FPIs (except Category-III FPIs) are allowed to issue, or otherwise deal in offshore derivative instruments[1] (ODIs), directly or indirectly, subject to following conditions:

(a)     such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority; and
(b)     such ODIs are issued after compliance with KYC norms;

Any investment made as ODIs issued under the FII Regulations will be deemed to have been made under the corresponding provision of the FPI Regulations.


The FPI Regulations appear to provide a uniform guideline for various categories of foreign portfolio investors like FIIs and their sub-accounts, QFIs including PIOs.

So far as the Foreign Direct Investment Policy of India (“FDI Policy”) is concerned, foreign investment in India by long term investors registered with SEBI such as Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks on repatriation basis in Government securities and non-convertible debentures (NCDs) / bonds issued by an Indian company is recently recognised and regulated as in case of FIIs. However, a comprehensive amendment in the FDI Policy recognising investments by FPIs in all permitted securities as per the FPI Regulations is yet to be brought in.

[1] Offshore derivative instrument means any instrument, by whatever name called, which is issued overseas by a foreign portfolio investor against securities held by it that are listed or proposed to be listed on any recognised stock exchange in India, as its underlying

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