The Alternative Investment Fund (AIF) varies from the regular traditional investments such as s...
India has become one of the most rapidly developing nations and a preferred investment hub in the world. The country’s growth predictions, attractive government initiatives and welcoming laws attract foreign investors for their medium- and long-term investments. Indian laws provide various investment routes, and one such route is Foreign Portfolio Investment. In this guide, we’ll look at how foreign portfolio investors can invest in India.
To understand the meaning of foreign portfolio investors, it is essential to understand the meaning of Foreign Portfolio Investment (FPI).
Foreign Portfolio Investment is when a foreign resident acquires financial assets in India. Individuals or entities that invest in India through these assets are called Foreign Portfolio Investors. These assets include stocks, fixed deposits, mutual funds, etc. Investors do not have direct ownership of these assets and instead, they get passive ownership.
FPI was introduced under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations). However, these regulations were replaced by the SEBI (FPI) Regulations, 2019. Foreign portfolio investors can invest in India as per the limit allowed for each sector by the government.
FPI is one of the most preferred tools for portfolio diversification. Investors also receive higher returns due to the high level of risks involved in FPI. Further, foreign portfolio investment provides higher liquidity to the investors as the sale or purchase of such assets is easier as compared to foreign direct investment. Only eligible foreign portfolio investors can invest in India after receiving the necessary registrations and paying the requisite fees.
To become a foreign portfolio investor in India, the individual or entity must fulfil the following eligibility conditions:
Prior to the 2019 Regulations, there were three categories of FPI based on their risk profile. However, as per the new regulations, FPIs in India fall under two categories. Category I and II have been merged, and Category III has been changed to Category II.
The revised FPI categories are as follows:
Category I now includes the following:
Category II includes the following:
Here, appropriately regulated entities include FPIs incorporated or set up in an International Financial Services Centre.
Foreign portfolio investors can only invest in the following assets:
A foreign portfolio investor needs to take the following steps to invest in India:
The investor first needs to apply to a Designated Depository Participant (DDP) or Custodian for registration. A DDP is a SEBI-registered entity that carries out the activity of providing custodial services for an investor’s securities. The investor must submit their application through Form A along with their KYC details and supporting documents. The investor also needs to pay the category-wise registration fees applicable to them along with their application.
The 2019 Regulations also revised the FPI registration fees. Now, Category I FPIs need to pay USD 3000 instead of nil fees, and Category II FPIs need to pay USD 300 instead of USD 3000. Further, international agencies like the World Bank and other eligible institutions that have immunity or privileges do not need to pay such registration fees. Additionally, the registration certificate is valid for three years, after which the FPI needs to repay the registration fees.
The foreign portfolio investor must also appoint a Chartered Accountant to obtain PAN, tax registration, etc. The CA will also perform functions like maintaining investment records, issuing certificates for funds repatriation, and representing the investor before tax authorities.
The investor must then open a bank account with a designated bank in India. The DDP can then open a Custody and Depository Account. Only one account is allowed per person/entity.
The FPI also needs to file their income tax return every financial year for their dividend, interest and capital gains.
FPI is a significant investment tool as it boosts liquidity and bolsters the country’s stock market. Foreign portfolio investors can invest in India through a hassle-free way and gain higher returns.
Enterslice has a team of experienced professionals that excels in FPI. We provide end-to-end assistance in choosing and structuring FPI routes, assessing tax liabilities on FPI income, representing before tax authorities, and other advisory services.