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. Who are Foreign Portfolio Investors? 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. Eligibility of a Foreign Portfolio Investor To become a foreign portfolio investor in India, the individual or entity must fulfil the following eligibility conditions: They must be a person not resident in India;They must be a resident of a country whose securities market regulator has signed the IOSCO’s Multilateral Memorandum of Understanding or the bilateral Memorandum of Understanding with SEBI;When the applicant is a bank, it must be a resident of a country whose central bank is a member of Bank for International Settlements;They must not be a resident in a country identified in the public statement of Financial Action Task Force ( FATF) as,A jurisdiction that has strategic deficiencies relating to Anti-Money Laundering or Combating the Financing of Terrorism to which counter measures apply; orA jurisdiction that has not made adequate progress to address these deficiencies or formulate an action plan for the same;They must be legally permitted to invest in securities outside their country of incorporation, establishment or place of business;The applicant’s Memorandum of Association and Articles of Association, similar documents or agreements must permit them to invest on their own or a client’s behalf;They must have adequate experience, good track record, professionally competent, financial stability and good reputation; andThey must be a fit & proper person as per SEBI's criteria. Categories of Foreign Portfolio Investors in India 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 Foreign Portfolio Investor Category I now includes the following: Government, central banks, sovereign wealth funds, international or multilateral organisations, and entities with 75% of ownership by such entities;Pension funds and university funds;Insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker-dealers and swap dealers;Entities from the Financial Action Task Force (FATF) member countries which are–appropriately regulated funds;unregulated funds managed by an IM regulated and registered as a Category I FPI;Endowments of a university that have existed for more than five years;Entities managed by a manager registered as a Category I foreign portfolio investor, which is also from the Financial Action Task Force member country, or an entity in which any such eligible entity has 75% of direct or indirect ownership. Category II Foreign Portfolio Investor Category II includes the following: Appropriately regulated funds which not eligible under Category-I;Endowments and foundations;Charitable organisations;Corporate bodies;Family offices;Individuals;Appropriately regulated entities that invest on their client’s behalf; andUnregulated funds in the nature of limited partnerships and trusts; Here, appropriately regulated entities include FPIs incorporated or set up in an International Financial Services Centre. Securities in which Foreign Portfolio Investors can invest in India Foreign portfolio investors can only invest in the following assets: Shares, debentures and warrants that are listed or will be listed on a recognised stock exchange.Units of domestic mutual funds schemes.Units of schemes floated by a collective investment scheme.Derivatives traded on a recognised stock exchange.Indian Depository Receipts.Dated Government Securities.Commercial Papers issued by an Indian company.Rupee denominated Credit Enhanced Bonds.Security Receipts issued by an asset reconstruction company.Perpetual Debt instruments and debt capital instruments notified by the RBI.Non-convertible debentures or bonds issued by an Indian company in the infrastructure sector, or by an infrastructure finance company (NBFC).Rupee denominated bonds or units issued by infrastructure debt funds.Any other instruments notified by the SEBI.Equity, interest rate or currency futures & options. Process through which Foreign Portfolio Investors Can Invest in India A foreign portfolio investor needs to take the following steps to invest in India: Appointment of Designated Depository Participant 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. Tax Compliance 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. Indian Bank Account and Depository Account 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. Annual Compliance The FPI also needs to file their income tax return every financial year for their dividend, interest and capital gains. Conclusion 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.