Foreign Portfolio Investment

Foreign Portfolio Investment is any investment made by a Person Resident Outside India (‘PROI’) in capital instruments where such investment is either less than 10 per cent of the post issue paid-up equity capital on fully diluted basis of a listed Indian Company or is less than 10 per cent of the paid up value of each series of capital instrument of a listed Indian Company.[1]Foreign Portfolio Investment involves purchase of securities by a Foreign Portfolio Investor (‘FPI’) as regulated by the Securities and Exchange Board of India (FPI) Regulation, 2014. The number of FPIs has substantially risen since the implementation of these regulations and presently there are 9,226 FPIs registered in India.

The Regulations laid down a lenient regime for FPI investment by way of its seven amendments, the latest being the Securities and Exchange Board of India (Foreign Portfolio Investors) (Second Amendment) Regulations, 2018. As a result a FPI is now permitted to trade in equities, equity derivatives, Government Securities (‘G-Secs’), Debt Instruments, Interest rate derivatives amongst others.

A Person resident outside India can hold foreign investment in any particular Indian company either as Foreign Direct Investment (‘FDI’) or as Foreign Portfolio Investment.


A person can hold Foreign Portfolio Investment only after registering himself/ itself as FPI with the Designated Depository Participant (‘DPP’). The certificate granted by DPP is permanent unless it is suspended or cancelled by Securities and Exchange Board of India (‘SEBI’) or surrendered by the FPI.

A FPI cannot be an Indian resident and must resident of a country whose securities market regulator is signatory to the Multilateral Memorandum of Understanding or to Bilateral Memorandum of Understanding with the Board. If the Applicant investor is a bank, must be resident of a country whose central bank is member of Bank for International Settlements.

The DPP is vested with duty to ensure that the applicant is legally permitted to invest in securities outside the country of incorporation/establishment/place of business, is authorized by its Memorandum of Association or Articles of Association or any equivalent document to invest on its own behalf or on behalf of its clients.

In addition, FPI must fulfil criteria laid down in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008

The FPI Regulations have classified Investors based on Risk, the details can be understood from the following table


(Low Risk)

Government, Government related investors (Central Banks, Governmental Agencies, Sovereign Wealth Funds, International/ Multilateral Organizations/Agencies) NIL Can issue Offshore Direct Investment (‘ODI’)

(Moderate Risk)

a. appropriately regulated broad based funds – Mutual Funds, Investment Trusts, Insurance/Reinsurance Companies,

b. appropriately regulated persons – Banks, Asset Management Companies, Investment Managers/Advisors, Portfolio Managers, Broker dealers and Swap Dealers

c. broad based funds not appropriately regulated with appropriately regulated investment manager registered as Category II FPI

d. University funds and pension funds, university related endowments

USD 3000

(for every three years)

Can issue ODI except for un regulated broad based funds

(High Risk)

Investors ineligible under Category I and II such as:

Endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices

USD 300 Cannot issue ODI


FPIs can invest exclusively in shares, debentures, warrants of companies (whether listed or to be listed in India) through primary and secondary markets. Further they can purchase units of schemes floated by collective investment scheme. In addition, FPIs can invest in derivatives traded on a recognized stock exchange.

FPIs can invest in debt securities on repatriation basis, in

(i) dated G-Secs, (ii) rupee denominated credit enhanced bonds, (iii) Security Receipts issued by Asset Reconstruction Companies, (iv) Perpetual debt instruments and debt capital instruments as specified by the Reserve Bank of India (‘RBI’) from time to time, (v) listed and unlisted Non-Convertible Debentures (‘NCDs’)/Bonds issued by Indian Companies in infrastructure sector (infrastructure defined in terms of ECB Guidelines), (vi)  NCDs or bonds issued by Non-Banking Financial Companies categorized as Infrastructure Finance Companies (‘NBFC-IFC’), (vii) Rupee denominated bonds or units issued by Infrastructure debt funds, (viii) Indian Depository Receipts (‘IDR’), (ix) unlisted NCDs or Bonds issued by an Indian Company subject to Guidelines issued by the Ministry of Corporate Affairs, (x) Securitized debt instruments (including a. any certificate issued by a special Purpose Vehicle (‘SPV’) set up for securitization of asset/s with banks, financial institutions or NBFCs as originators and b. any certificate or instrument issued and listed in terms of the Securities and Exchange Board of India (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008.

Subsequent to the notification of SEBI (FPI) Regulations, 2014 the definition of Qualified Institutional Buyer (‘QIB’) has been amended in the SEBI (ICDR) Regulations to include Category I and II FPIs thus opening up more avenues of investment


The Foreign Exchange Management Act, 1999 (‘FEMA’) read with the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (‘TISPRO’) lay down the limits and regulate the transfer or issue of security to FPIs

It makes way for Foreign Portfolio investment through automatic mode where the same is up to 40% of the paid-up equity capital on a fully diluted basis or the sectoral/ statutory cap, whichever is lower, if such investment does not result in transfer of ownership or control of the company to PROI.

Purchase/ Sale of Capital instruments of Listed Companies

The total holding by each FPI or investor group cannot exceed ten per cent of the total paid-up equity capital on a fully diluted basis, cannot exceed ten per cent of the paid-up value of each series of debentures or preference shares or warrants by an Indian company AND the total holdings of all FPIs put together should not exceed 24 per cent of paid-up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or warrants. The aggregate limit of twenty four per cent may be increased by the Indian Company up to the sectoral or statutory ceiling applicable with the approval of its Board of Directors and its General Body through resolution and special resolution respectively.

If the holding of FPI exceeds the prescribed ten percent individual limits, the total investments made by the FPI will be reclassified as Foreign Direct Investment (‘FDI’) and subject to the stricter regulations applicable to FDI. However in order to calculate the ceiling, investments made by the FPI through off-shore funds, Global Depository Receipts (‘GDR’) and Euro Convertible Bonds.

For investment in G-Secs, the instrument must have a minimum residual maturity of three years Dated G-Secs require no lock-in period and are freely alienable to domestic investors. FPIs can also utilize the coupons received on their existing investments and such investments will be outside the applicable limit for investments in G-Secs

Investment by all eligible investors in Perpetual Debt instruments shall not exceed an aggregate ceiling of forty nine percent of each issue and investment by a single FPI shall not exceed the limit of ten percent of each issue and subject to these limits, Tier I Capital and Debt Capital instruments as Upper Tier II Capital are included

NCDs/Bonds issued by Indian Companies must have a minimum residual maturity of three years. No lock in period has been provided and FPI can sell these to domestic investors. If however, the NCD/ bonds issued to the FPI are not listed within fifteen days of issuance, the FPI shall immediately dispose of these bonds either by sale to third party or sale to the issuer and the terms of offer to FPI should contain such a clause. FPI investment is permitted in unlisted NCD/Bonds subject to residual maturity of three years and end-use restriction on investment in real estate business, capital market and purchase of land.

FPI can invest in Security Receipts (‘SR’)issued by Asset Reconstruction Companies (‘ARC’) and Securitization Companies up to 100% of each tranche in SRs issued by ARCs subject to the Securitization and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002. The restriction on investment with less than three year residual maturity are not applicable in this regard and such investment should be within the FPI limits on corporate bonds prescribed by the Reserve Bank of India. Investment by FPI in unlisted corporate debt securities and securitized debt instruments shall not exceed investment limits prescribed for corporate bonds from time to time.

Finally, FPI can acquire NCD/Bonds which are under default either fully or partly in the repayment of principal on maturity or principal instalment in the case of amortizing bond. The revised maturity period of such NCD or Bond, restructured based on negotiations with the issuing Indian company, should be three years or more. The FPI should disclose to the Debenture Trustees the terms of the offer made to the existing debenture holders/ beneficial owners from whom the bonds are being acquired. Such investment should be within overall limit prescribed for corporate debt from time to time.

Valuation Norms:

 While investing, FPIs must comply to the individual and aggregate limits and in case of public offer, the price of shares to be issues has to be if not higher, at par with the price at which shares are issued to residents and in case of issue by private placement, the price cannot be lesser than the price arrived at in terms of SEBI Guidelines or the fair price worked out by any internationally accepted pricing methodology for valuation of shares on arms’ length basis certified by SEBI registered Merchant Banker of Chartered Accountant as applicable.


Where the PROI is a FPI and the acquisition of capital instruments is in breach of the applicable aggregate FPI limits or sectoral limits, the FPI would be liable to sell such capital instruments within five trading days after the settlement to a person resident in India who is eligible to hold such instrument.


FPI are permitted to repatriate their capital on payment of required taxes. Taxable income earned by FPI falls into two types first arising as a result of the transfer of securities and characterized as Capital gains and second arising from dividends and interest income characterized as income from other sources. The Government with an aim to promote FPI investment provides for a concessional regime. A Foreign Portfolio Investment is taxable on firstly, interest on securities, secondly, income in respect of securities other than interest, thirdly, short-term capital gains on transfer of securities, fourthly, other short term capital gains, fifthly, long-term capital gains and finally, for any other income. Minimum Alternate Tax is not applicable to FPI unless they have a permanent establishment in India or they are required to be registered in India under prevailing Company Law provisions. General Anti-Avoidance Rules

[1] Master Direction – foreign Investment in India RBI/FED/2017-18/60  Updated as on April 06, 2018 Fooreign Exchange Management Act, 1999 read with the Foreign Exchange Management (Transfer or Issue of A security by person resident Outside India) Regulations, 2017.

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