FOREIGN PORTFOLIO INVESTMENTS IN INDIA

INTRODUCTION
In economics, foreign portfolio investment is the entry of funds into a country where
foreigners deposit money in a country's bank or make purchases in the country’s stock and
bond markets, sometimes for speculation.

For example: Purchase of stocks by Ram (Indian) in Barcelona.

FPI does not provide the investor with direct ownership of financial assets, and thus no direct
management of a company.

It is relatively liquid, depending on the volatility of the market invested in.

It involves short-term positions in financial assets of international markets, and is similar to

investing in domestic securities.

Thus, in short, FPI allows investors to take part in the profitability of firms operating abroad
without having to directly manage their operations. This is a similar concept to trading
domestically: most investors do not have the capital or expertise required to personally run
the firms that they invest in.

EMERGENCE OF FPI IN INDIA

 In 1992, India opened up its economy and allowed foreign portfolio investment in its
domestic stock market
 Since then ,FPI has emerged as a major source of private capital inflow in this country
 India is more dependent upon FPI than FDI as a source of foreign investment.
 During 1992 -2005 more than 50% of foreign investment in India came from FPI.

FOREIGN PORTFOLIO INVESTMENTS

Foreign
Portfolio
Investment

FII GDRs/ADRs Offshore Funds

FII: Investments made by foreign institutions like pension funds, foreign mutual funds etc. in
the financial markets.

GDRs and ADRs: They are instruments which signify the purchase of share of Indian
companies by foreign investors or American investors respectively

Off-shore funds: The schemes of mutual funds that are launched in the foreign country

FOREIGN PORTFOLIO INVESTMENTS RULES AND

REGULATIONS (IN INDIA)
In order to harmonize the various available routes for foreign portfolio investment in India,
the Indian securities market regulator i.e. Securities Exchange Board of India ("SEBI") has
introduced a new class of foreign investors in India known as the Foreign Portfolio Investors
("FPIs"). This class has been formed by merging the existing classes of investors through
which portfolio investments were previously made in India namely

1. Foreign Institutional Investors ("FIIs"),

THE ELIGIBILITY CRITERIA FOR APPLICANT SEEKING FII REGISTRATION

 Applicant should have track record, professional competence, financial soundness,

experience, general reputation of fairness and integrity;

 The applicant should be regulated by an appropriate foreign regulatory authority in

the same capacity/category where registration is sought from SEBI.

 Registration with authorities, which are responsible for incorporation, is not adequate
to qualify as Foreign Institutional Investor.

 The applicant is required to have the permission under the provisions of the Foreign
Exchange Management Act, 1999 from the Reserve Bank of India.

 Applicant must be legally permitted to invest in securities outside the country or its
in-corporation / establishment.

 The applicant must be a "fit and proper" person.

 The applicant has to appoint a local custodian and enter into an agreement with the
custodian. Besides it also has to appoint a designated bank to route its transactions.

 Payment of registration fee of US $ 5,000.001

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REGULATIONS REGARDING PORTFOLIO INVESTMENTS BY FII’S

(Acc. To Notification No. FEMA 20 /2000-RB dated 3rd May 2000 )

 RBI has granted permission to SEBI registered (FIIs) invest in India under Portfolio
investment scheme.

 Investment by individual FIIs cannot exceed 10% of paid up capital of the total paid-
up equity capital or 10% (ten per cent) of the paid-up value of each series of
convertible debentures issued by an Indian company.

 All FIIs and their sub-accounts taken together cannot acquire more than 24% of the
paid up equity capital or paid up value of each series of convertible debentures.2

PORTFOLIO INVESTMENT SCHEMES

 Non Resident Indians being Indian citizens as also Foreign citizens of Indian origin
[ PIO ] can purchase shares and /or debentures of Indian companies listed on a
recognised stock-exchange through a member thereof under the "Portfolio Investment
Scheme". This facility is available both on repatriation as also on non-repatriation
basis.  .

 By virtue of these Regulations, only individual NRIs are permitted to invest in shares
and / or convertible debentures of Indian company carrying on almost any kind of
business in India barring a few cases.

 Earlier, an Overseas Corporate Body (OCB) was also permitted to make portfolio
investments but the Reserve Bank of India has, since , prohibited OCBs to make any
further investments under the said Scheme. 

 Eligible investor: An NRI Individual.

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2. Qualified Foreign Investors ("QFIs")

QFIs shall include individuals, groups or associations, Resident in a country that is a member
of Financial Action Task Force (FATF) or a country that is a member of a group which is a
member of FATF and resident in a country that is a signatory to IOSCO’s MMOU (Appendix
A Signatories) or a signatory of a bilateral MOU with Securities and Exchange Board of
India (SEBI). QFIs do not include FIIs/Sub accounts/ Foreign Venture Capital Investor3

3. Sub-accounts of the FIIs.

Sub-account includes those foreign corporates, foreign individuals, and institutions, funds or
portfolios established or incorporated outside India on whose behalf investments are
proposed to be made in India by a FII.4

Previously portfolio investment was governed under different laws i.e. the SEBI (Foreign
Institutional Investors) Regulations, 1995 for FIIs and their sub-accounts and SEBI circulars
dated August 09, 2011 and January 13, 2012 governing QFIs, which are now repealed under
the SEBI (Foreign Portfolio Investors) Regulations ("FPI Regulations") that govern FPIs.

SEBI has, thus, intended to simplify the overall operation of making foreign portfolio
investments in India. To govern FPIs, SEBI introduced the FPI Regulations by a notification
dated January 7, 2014.

FOREIGN PORTFOLIO INVESTORS

REGISTRATION BASED ON CLASSIFICATION

Under FPI Regulation 5 the following three categories of FPIs have been created on the basis
of associated risks -

(a). Category I - Includes foreign investors related with the government such as central banks,
government agencies, sovereign wealth funds.

(b). Category II - Includes regulated entities like banks, assets management companies,
investment managers etc. and broad-based funds, which may be regulated such as mutual
funds, investment trusts etc. or non-regulated.

(c). Category III - Includes investors, which are not covered under categories I and II.5

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  The registration requirements are progressively difficult depending on the category
under which the investor falls with easiest formalities for category I investors.

 Unlike the previous situation wherein the QFIs, FIIs and their sub-accounts were
required to register with SEBI for 1-5 years initially to operate, FPIs registration is
carried out by SEBI designated depository participants ("DDPs") on permanent basis
unless suspended or cancelled.

REGISTERED FOREIGN PORTFOLIO INVESTOR (“RFPIs”)

 A Registered Foreign Portfolio Investor (RFPI) means a person registered in

accordance with the provisions of Securities Exchange Board of India (SEBI)
(Foreign Portfolio Investors) Regulations, 2014, as amended from time to time.

 A registered Foreign Portfolio Investor (RFPI) may purchase shares or convertible

debentures of an Indian company under the Foreign Portfolio Investment (FPI)
Scheme subject to the terms and conditions specified in Schedule 2A and the
limits and margin requirements prescribed by RBI/ SEBI as well as the
stipulations regarding collateral securities as specified by the Reserve Bank from
time to time.

 RFPI may sell shares or convertible debentures so acquired

 in open offer  in accordance with the SEBI Regulations, 2011 (Substantial
Acquisition of Shares and Takeovers); or
 in an open offer in accordance with the SEBI Regulations, 2009 (Delisting
of Equity shares); or
 through buyback of shares by a listed Indian company in accordance with
the SEBI Regulations, 1998 (Buy-back of securities)6

 RFPI may also acquire shares or convertible debentures

in any bid for, or acquisition of, securities in response to an offer for
disinvestment of shares made by the Central Government or any State
Government;
or
in any transaction in securities pursuant to an agreement entered into with
merchant banker in the process of market making or subscribing to unsubscribed
portion of the issue in accordance with Securities and Exchange Board of India
Regulations, 2009 (Issue of Capital and Disclosure Requirements).

 The individual and aggregate investment limits for the RFPIs shall be below 10%
(per cent) or 24% (per cent) respectively of the total paid-up equity capital or 10%

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 (per cent) or 24% (per cent) respectively of the paid-up value of each series of
convertible debentures issued by an Indian company.

 RFPI shall be eligible to open a Special Non-Resident Rupee (SNRR) account and
a foreign currency account with Authorized Dealer bank and to transfer sums from
foreign currency account to SNRR account at the prevailing market rate for
making genuine investments in securities. The Authorized Dealer bank may
transfer repatriable proceeds (after payment of applicable taxes) from SNRR
account to foreign currency account ;

PROCEDURE TO BE FOLLOWED BY INVESTORS WHILE INVESTING

 REGISTERATION PROCESS

1. Apply to a DDP (designated depository participant) for FPI registration under

one of the 3 categories

2. Documents to be submitted with FPI application:

a. Duly filled and signed Form-A

b. SEBI registration fee & conversion fee (if applicable)

c. Declarations and undertakings of updated material changes, non

opaque structure etc.

d. Obtaining registration certificate, formation certificate etc.

e. The bank applicant has to forward the details to SEBI. DDP

communicates the approval/rejection of application within 30 days to
the applicant and to SEBI.

 APPOINTING A COMPLIANCE OFFICER: the same needs to be appointed to

comply with the FPI regulations

 APPOINT A CPA: a CPA needs to be appointed in India so as to meet the PAN card
and tax related obligations

 Foreign Portfolio Investors have to be given the same tax status as that of an FII
INSTRUMENTS AVAILABLE FOR INVESTMENT AND PRESCRIBED LIMIT

 FPIs can invest in instruments-

 Listed or to be listed shares,

 Government securities,
 Units of mutual funds or collective investment schemes,
 Treasury bills,
 Corporate debts.
 Indian depository receipts.

 For foreign corporates and foreign individuals, the investment limit now stands
increased from 5 to 10% of a company's total issued capital. Also, investment in
equity shares which was previously permissible up to 10% of a company's total issued
capital is now restricted to below 10%.

 FPI Regulation 22 has brought a major change relating to issuance of Offshore

Derivative Instruments ("ODIs"). ODIs are significant because they allow foreign
investors, such as high net worth individuals and hedge funds based overseas, to
invest in the Indian market without being registered with the SEBI. Now, only FPIs,
which are regulated and also fall under Category I or II can issue ODIs.7

 With the ease in registration requirements and clarity on taxation being brought in for
FPIs, the new FPI regime is likely to boost portfolio investments in India by foreign
investors. Granting of permanent registrations to FPIs shall not require them to
approach the DDPs time and again for the same, thus, providing them a more
supportive environment for investment in India. Meanwhile, with the delegation of
work to DDPs, SEBI can now focus on more important issues at hand requiring its
attention and perform its regulatory role more effectively.

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GDR/ADR
 Stands for American Depository Receipts/Global Depository Receipts

 ADR/GDR provides a path for Indian companies to get listed in foreign stock
exchanges indirectly.

 If an Indian company wants to get listed in foreign stock exchange indirectly then it
have to deposit its shares and securities in a bank of foreign country whose stock
exchange the company wants to list in.

 The receipts are issued by the bank against these securities which are then sold to the
residents of that country.

 The receipts are also listed in the stock exchange of that country which are available
for buy and sell on the stock exchange like other instruments.

 The prices of these receipts are also determined by supply and demands in the market.

 The receipts traded in American market are termed as American Depository Receipts
and the receipts traded in any other country (except America) are called as Global
Depository Receipts.

OFFSHORE FUNDS
• An offshore fund refers to a mutual fund that invests its assets abroad and not
in domicile country.

• Offshore funds offer investors access to international markets and major

exchanges.