Advisory Services
Audit
Consulting
ESG Advisory
RBI Registration
SEBI Registration
IRDA Registration
FEMA Advisory
Compliances
IBC Services
VCFO Services
Growing
Developing
ME-1
ME-2
EU-1
EU-2
SE
Others
Select Your Location
Foreign Portfolio Investors (FPIs) are persons registered with the Securities Exchange Board of India (SEBI) who act as an intermediary to make investments in financial assets in India on behalf of Foreign Investors. Whereas an Alternate Investment Fund (AIF) is an investment vehicle that pools private funds from foreign as well as domestic investors. The AIFs make investments as per the defined investment policy and prevalent regulations. As per the SEBI (Alternative Investment Fund) Regulations of 2012, there are three categories of AIFs. Category I invests majorly in venture capital funds, Category II invests majorly in debt funds and Category III invests only in listed equities and hedge funds.
Table of Contents
The RBI has reviewed the norms of FPI investments in the debt market vide circular no. 01 dated 19th April 2022 and provides a limit that not more than 50% of the securities can be allotted in a single debt issuance. In addition to this, no investment in a single corporate bond shall exceed 20% of an FPI’s corporate debt portfolio and an overall portfolio level of short-term investments should not exceed 20% of the total investment. The popularity of FPIs investing in AIFs gained momentum after the issue of this circular by RBI placing restrictions on investments.
The SEBI has allowed FPIs to invest in Category III AIF. Category III AIF usually invest in hedge funds and primarily in listed or unlisted securities, derivatives and complex or structured products. Up to 25% of the stakes can be invested in category III AIF. This move will promote investment in Indian Securities markets via FPI Route by AIFs set up in International Financial Services Centres (IFSCs).
As per Regulation 21 (1) of the Securities Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019[1], FPIs are allowed to invest in Category III AIF subject to such terms and conditions as prescribed by SEBI from time to time.
As the Indian securities market regulator i.e. SEBI has tightened the debt investment rules for offshore entities, the demand for AIF has increased. The debt limits of FPIs were also getting exhausted quickly so the FPIs started considering the AIF structure. Now, Foreign Portfolio Investors are investing in FPIs via AIF Route to make debt investments in India. FPIs via the AIF route exempt offshore investors from the restrictions imposed by the Reserve Bank of India and promotes flexibility to participate in several types of private debt instruments. For investors who have significant exposure in the Indian debt portfolio, long-term FPIs via the AIF route act as a good alternative as the investors have the option to either invest in a scheme of AIF managed by an Indian manager or establish their own AIF. FPIs via the AIF route are also beneficial from the tax perspective as these investments can be routed via category II AIF which enjoys tax ‘pass-through’ status wherein the tax liability is borne by the investor instead of the fund to avoid any leakage. The restrictions were introduced to stall the potential violation of the new RBI norms. Pursuant to the introduction of these restrictions, the consultants and legal experts advice clients to establish a Special Purpose Vehicle (SPV) through AIFs to participate in any debt instrument.
AIFs are Indian entities so any money that is pooled by them is treated as domestic capital if the AIF is owned and controlled by an Indian Manager. In addition, AIFs have less regulatory requirements as they deal with sophisticated and high-net-worth individuals. This ensures lesser investment restrictions, especially in the debt segment. AIFs cater to wealthy investors and the minimum investment required is Rs. 1 crore for a minimum of 3 years. As retail or small-scale investors are not eligible to invest in this fund, the restrictions are liberal. AIFs are also not subject to sectoral restrictions like in mutual funds.
The introduction of FPIs via the AIF route is relatively a new concept. It is huge potential for growth with the passage of time. This move has been taken by the regulatory authority to develop the corporate bond market and encourage further investments in the debt market. As discussed, FPIs via Category I and II AIFs will benefit from the tax pass-through status accorded to these two categories of AIFs. All in all the move to invest in FPIs via the AIF route is a welcome step.
Also Read: What is Foreign Portfolio Investment (FPI) in India?
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
In the recent past, India has seen burgeoning demand for internet and smartphones. The rapid ri...
The Securities and Exchange Board of India (SEBI), the capital markets regulator, has recommend...
The objective of the enactment of the Prevention of Money-laundering Act, 2002, i.e. PMLA (the...
Tax planning is a continuing effort and a management strategy for ensuring the minimization of...
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Infrastructure and real estate have been regarded as India's "sunshine sector" since the turn o...
On 22nd May 2023, the Central Board of Direct Taxes (CBDT)[1] issued a new circular under secti...
Anyone can have different sources of income. With globalization and the opening up of economies...
The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and cl...
In India, Non-Banking Financial Companies are subject to certain restrictions from taking publi...
Are you human?: 5 + 2 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
Foreign Portfolio Investment (FPI) means investment in foreign financial assets like fixed deposits, stocks, mutual...
07 Apr, 2023
Foreign Venture Capital (VC) is an essential source of funding seed capital for start-up ventures and significant t...
23 Mar, 2019
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!