Foreign Portfolio Investment

Investment Limits on Foreign Portfolio Investors

The Foreign Portfolio Investors are required to get themselves registered for carrying the activity of investment. The Foreign Portfolio investors are generally an investor who buys foreign financial assets. It includes an array of financial assets such as stocks, fixed deposits, and Mutual funds. The purpose behind investing in the foreign markets is to diversify the portfolio and receive a return on investments. In order to regulate the investment process, the SEBI has imposed certain investment limits and conditions as per the master circular on Foreign Portfolio Investors (FPI), Designated Depository Participants (DDP) and Eligible Foreign Investors. The investment conditions on Foreign Portfolio Investors are imposed by e way of investment limits. The investment limits are further divided into two groups: Investors Group Level and Individual group level. The present article will discuss such investment limits and the relevant provision covered under the said circular.

Monitoring Of Investment at the Group Level

The investment limit at the group level is monitored in the following ways:

1. Multiple Foreign Portfolio Invetsors are of the same investor group: The investment limits of all FPIs shall be similar as applicable to a single FPI. Further, the individual registered as FPI and their relatives who are also registered as FPI must also be considered for the investor group.
2. Different FPIs belonging to the same investor group but are serviced by different custodians: In such a situation, the custodians are required to report such holdings of the FPI to both depositories. After that, the depositories will combine the investment of the FPIs and make sure that the total holdings must not be more than 10% of the total paid-up equity capital in a listed company on a fully diluted basis.
3. Exemption for certain entities: The World Bank Group^[1], IBRD, IDA, MIGA and IFC are exempted from clubbing the investment limits for the purpose of application below the 10% limit for FPI investments in a single company.
4. Investment by a foreign government with different Beneficial Owners: Theinvestmentsof foreign entitiesshall not beclubbed if the foreign entities have different Beneficial Owners.
5. Investment by Foreign Government agencies clubbed by the foreign government: The investment for such clubbing shall be used for the calculation 10% limit for FPI limits in a single company. However, such clubbing requirements and investment conditions can be exempted if there is an agreement or treaty with other sovereign governments.

Monitoring of limit by depositories: The monitoring of limits for the investor group is done by the depositories in the following ways:

1. The depositories are required to monitor the aggregate investment limits of the FPI group daily at the end of the day based on DEMAT holdings data.
2. The depositories must implement a mechanism to maintain the details of the FPI group received from the DDP.
3. The depositories shall report the details of such FPIs to the SEBI if there is a breach of investment limits.
4. The depositories may provide information on the aggregate holdings to the FPIs forming part of an investor group for making investment decisions.

Monitoring Of Investment at the Individual Level

To facilitate compliance with investment limits, the architecture of the system has been explained as under:

1. Housing System: The system for monitoring foreign investment limits in listed Indian Companies must be implemented and housed at the depositories.

2. Designated Depository: The Indian company shall appoint a designated depository to minimise the investment limits. The designated depository will act as a lead depository, and the other depository will act as a feed depository.

3. Company Master: The Indian company must appoint one depository as its designated depository for monitoring the investment limit. The stock exchanges are required to provide the following data on the paid-up equity capital to the Depository participant through an interface:

1. Company Identification Number
2. Name
3. Date of Incorporation
4. PAN Number
5. Applicable Sector
6. Applicable Sectoral Gap
7. The permissible aggregate limit for investment limits by FPIs
8. Permissible Aggregate Limit for investment by NRIs
9. Details of shares held by Foreign Portfolio Invetsor, NRIs and other foreign investors in DEMAT or physical form
10. Details of indirect foreign investment
11. ISI-wise details of the downstream investment in other Indian Companies

The above information shall be stored in a company master database. Further, in case of any corporate action, the modification shall be promptly reflected in the company database, and the change in the investment limit shall be conveyed to the Designated Depository.

4. Trade Reporting: Thecustodians shall report the trades of their FPI clients to the depositories on a T+1 basis, and the data on it shall remain the basis for calculating FPI investments or holdings in Indian Companies. On the other hand, the AD banks must report the transactions of their NRI clients to the depositories.

5. Red Flag Alert: There shall be Red Flag Alertwhenever the investment limits of the NRI or FPI go below 3% or less than 3%. This shall be done in the following ways:

Aggregate NRI investment limit in the company:

1. The system will calculate the percentage of NRI holdings in the company and the investment headroom available at the end of the day.
2. A red flag should be activated for the company if the headroom is below 3% or below 3% of the aggregate NRI limit.
3. After which, the depository and exchanges shall display the available investment headroom for the companies against which a red flag has been activated on their respective websites.
4. The data on the available headroom shall be regularly updateddaily at the end of the day until the red flag is activated.

Aggregate FPI investment limit of the company

1. The system will calculate the percentage of FPI holdings in the company and the investment headroom available at the end of the day.
2. A red flag will be activated if the investment headroom is 3% or below 3% of the aggregate investment FPI limit.
3. After which, the depositories and exchanges shall display the available investment headroom for all the companies on their websites.
4. The data on the available investment headroom shall be updated at the end of the day daily against the company for which the red flag is activated.

                Sectoral Cap of the Company

1. The total foreign investment in the company shall be calculated by adding Aggregate NRI investment, aggregate FPI Investment and other foreign investments as provided in the company master.
2. A red flag will be activated if total foreign investment is 3% or below 3% of the sectoral cap.
3. After which, the depositories and the exchanges shall display the available headroom on their websites.
4. The data on the available headroom shall be updated at the end of the day daily till the red flag is activated.

6. Breach of Investment Limits: The depositories are required to inform the breach of the exchange if the investment goes beyond the limit. Further, foreign investors are required to divest their excess holding within 5 trading days from the date of trade settlement by selling shares only to domestic investors. The exchange will issue the necessary circulars or notifications on their websites and shall stop all the purchases by:

1. FPIs, if the FPI limit is breached
2. NRIs, if the NRI limit is breached
3. All foreign Investors, if the sectoral gap is breached.

7. Disinvestment Method: Theproportionate disinvestment methodology should be followed for the disinvestment of the excess shares to bring the investment in a company within the permissible limits.Under this method, the disinvestment of the breached quantity must be uniformly distributed across all foreign investors or FPIs or NRIs, which are net buyers of the shares of the scrip on the day of the breach. The depositories shall issue necessary instructions to the custodian and AD banks of FPI and NRI for disinvestment of the excess holding within 5 trading days of the date of the settlement trade. Further, the original FPI is required to continue disinvestment even if foreign shareholding comes within the permissible limit during the period of disinvestment on account of sale by another FPI or other group.

8. Failure to disinvest within 5 Trading Days: The matter shall be referred to the SEBI if the FPI who has breached the investment limit has failed to disinvest within 5 trading days.

Corporate Debt Investment Limits

The FPI corporate debt investment is subject to Corporate Debt Investment Limits (CDIL). The following conditions are to be applicable for the CDIL:

1. The CDIL should be available on tap by the foreign investors for investment until the overall investment reaches 95% of the CDIL.

2. In case the overall investment of FPI exceeds 95 %, in that case, the following procedure is to be followed:

1. The depositories should direct the custodians to stop all the purchases of FPI in Corporate Debt Securities.
2. The depositories will then inform the exchange with regard to the unutilised debt limits for the purpose of the auction.
3. Upon receiving the information, the exchange will conduct an auction for the unutilised debt limits on the second trading day from the date of receiving the intimation from the depositories.
4. The auction shall be held only if the free limit is more than or equal to INR 100 Cr; however, if the free limit remains less than 100 Cr. For 15 consecutive trading days then, an auction shall be conducted on the 16^th day to allocate the free limits.
5. After the auction for the corporate debt limits, the FPIs will have a utilisation period of 10 Trading days within which they have to invest.
6. Upon the sale or redemption of debt securities, the FPI will be given a re-investment period of 2 trading days.
7. The single FPI or FPI investor group could only bid for up to 10 % of the being auctioned.

3. The subsequent auction would occur after 12 trading days of the previous auction.

4. After the debt limit falls to 92 %, the auction mechanism shall be discontinued, and the limits will once again be available for investment on tap.

Position Limits Available to FPIs

The position limits available to FPIs are divided into different parts discussed below:

Stock derivative

The position limits available to FPI for stock derivative contracts are:

1. FPI Category-I: 20 % of the Market Wide Position Limit
2. FPI Category-II: 10 % of the Market wide position limit
3. Individuals, family offices and corporates: 5% of the market Wide Position Limits

Stock Index Derivative

The position limits available to FPI for stock index derivative contracts are:

a. FPI Category-I: Rs 500 Crore or 15% of the total open interests of the market in index futures, whichever is higher. Further, the exposure in the equity index derivatives is subject to the following limits:

1. Short Positions in index derivatives do not exceed the FPI’s stock holding.
2. Long positions in index derivatives do not exceed the FPIs’ cash holding, government securities, and T bills.

b. FPI Category-II: The position limit shall be as under:

1. Rs 300 crore or 10% of open interest, whichever is higher
2. Rs 100 Crore or 5% of open interest under the sub-category of individuals, corporates and family offices, which is higher

Exchange Traded Interest Rate Futures (IRF)

The position limits for category –I & II FPI are:

1. Limit of Rs 5000 crore on an aggregate basis to FPIs for taking a long position in IRFs. The limit will be calculated as follows:

• For each IRF instrument, the position of FPIs with a net long position will be aggregated, whereas the FPIs with a net short position in the instrument will not be calculated.
• The FPI cannot acquire a net long position of more than Rs 1800 crore at any point in time.

2. The limits prescribed for investment by FPIs in government securities shall be only utilised for such securities. It shall not be adjusted to calculate a utilisation limit above the limit of 5000 crores.

3. The position limit for FPI with respect to all contracts will be:

FPI category	Category	8-11 years of Maturity Period	4-8 &11-15 years of Maturity Period
Category I & II ( other than individuals, corporates and family offices)	Trading Member Level	INR 12 billion or 10% of open interest, whichever is higher	INR 6 billion or 10 % of open interest, whichever is higher
Category-II	Client Level

4. The stock exchange must put in place the necessary mechanism for monitoring and enforcing the FPI limits in IRFs.

5. The stock exchange shall display on its website, the aggregate net long position in IRF of all FPIs combined together. 

6. The stock exchanges must put in place a mechanism to get alerts on the limit of 90% is utilised. Further, the exchange shall publish on its website the available limit daily.

7. The FPI whose investment caused the breach of the threshold limit is required to square off their excess positions within 5 trading days or b the expiry of the contract, whichever is earlier.

Conclusion

The Foreign Portfolio Investors must invest in accordance with the investment limits specified above. The investment limits enable the monitoring of investments undertaken by the FPI and enable the designated depository to scrutinise the excess holdings of the FPI. Further, in case of a breach of the investments limit, the excess holding will be auctioned so that the investments come under the permissible limits.

Read Our Article: How Foreign Portfolio Investors can Invest in India?