By March 30, 2014 December 20th, 2019 No Comments
Earlier Regime
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.
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
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notification of the FPI Regulations, the FII Regulations stand repealed and corresponding
circulars stand rescinded.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:
I, which includes Government and Government related investors;
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
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):
not resident in India (as per the Income Tax Act, 1961);
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;
a bank, is a resident of a country whose central bank is a member of Bank for
International Settlements;
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;
not a non-resident Indian (as per the Income Tax Act, 1961);
legally permitted to invest in securities outside the country of its
incorporation or establishment or place of business;
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;
sufficient experience, good track record, is professionally competent,
financially sound and has a generally good reputation of fairness and
a fit and proper person based on the criteria specified in Schedule II of the SEBI
(Intermediaries) Regulations, 2008;
the grant of certificate to such person is in the interest of the development of
the securities market; and
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;
papers issued by an Indian company;
g)       Rupee denominated credit
enhanced bonds;
h)       Security receipts issued by
asset reconstruction companies;
debt instruments and debt capital instruments, as specified by RBI from time to
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
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:
ODIs are issued only to persons who are regulated by an appropriate foreign
regulatory authority; and
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.

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

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