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Things to know before investing via Foreign Portfolio Investment (FPI) Route in India

Vikalp Mishra

| Updated: Jan 28, 2020 | Category: Foreign Portfolio Investment

Foreign Portfolio Investment (FPI) is an investment in securities including shares, government bonds, corporate bonds, convertible securities, infrastructure securities and other financial assets by a person outside his country. These non-residents invest in these securities are commonly known as Foreign Portfolio Investors. Foreign Portfolio Investment is the easiest mode of investment in a foreign countries economy for retail investors looking for a quick return and high liquidity.

What is the difference between Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI)?

Who is a Foreign Portfolio Investor?

Foreign Portfolio Investment (FPI) is one of the major routes for foreign investment inflow in Indian economy along with FDI, ECB and NRI-PIS. Foreign investors wishing to make onshore investments in Indian Capital through FPI route are collectively called Foreign Portfolio Investors to simplify compliance requirements and have uniform guidelines.  

Foreign Portfolio Investor includes:

  • Qualified Foreign Investors (QFIs),
  • Foreign Institutional Investors (FIIs) and
  • Sub Accounts

What is the Foreign Portfolio Investment framework in India?

Foreign investors who wish to invest in Indian securities and the capital market need to obtain Foreign Portfolio Investor (FPI) license in India as per SEBI (Foreign Portfolio Investors) Regulations, 2014

The license is granted by a local custodian, in its local capacity as DDP (Designated Depository Participant) on behalf of the capital market regulator, the Securities and Exchange Board of India (SEBI) based on its risk profile in any one of the following three categories:

FPI Category Type of Entity
Category I (Sovereign and International Entities) Government and Government Agencies, Central Banks, Sovereign Wealth Funds, International or Multilateral Organizations/Agencies
Category II (Regulated Entities) Assets Management Companies, Investment Portfolio Managers, Swap Dealers, Broker-Dealers, Broad-based investment funds such as Mutual-funds and Investment trusts.
Category III (Unregulated Entities) It includes investors not covered under Category I & II such as Non-broad-based funds, Hedge funds, family offices, pension funds, university funds, individuals etc.

To boost foreign investments in India SEBI issued revised FPI regulations, referred as, SEBI (FPI) Regulations, 2019 on 23 September, 2019, replacing earlier SEBI (FPI) Regulations, 2014 in its attempt to rationalize and simplify the FPI (Foreign Portfolio Investment) regime.

What is the impact of new SEBI (FPI) Regulations, 2019?

The new regulations have been drafted based on the recommendation of a committee headed by former RBI deputy governor H R Khan. The sigfnificant impact of SEBI easing the regulatory framework for foreign portfolio investors under new regulation can be understood from the following changes that came into effect along with the 2019 regulation. These changes include:

SEBI (FPI) Regulations

These changes can be understood in detail as follows:

  1. Re-Categorization for FPIs

Under the newly amended SEBI (FPI) Regulations, 2019, two categories remain instead of three as previously. Category I has been expanded to include certain regulated funds previously registered under Category II while Category III has been abolished completely and its entities moved to Category II.

Simplifying the categories has heavily eased the KYC requirements, exempted applicability of Indirect Share Transfer provisions and allowed higher position limits in derivatives.

  • Removal of Broad-Based Criteria

Previously Category II registration required fulfillment of Broad-Based Criteria which has been removed in the new regime. This, apart from giving relief to newly established funds, serves dual advantage for existing funds

  • First, Non-Broad Funds of The Financial Action Task Force (FATF) countries which are regulated have become eligible for Category II registration, and
  • Secondly, no more declarations/undertakings or other compliance obligations regarding Broad-Based fund is required hence easing the registration procedure.
Removal of Broad-Based Criteria
  • Restriction of ODI (Offshore Derivative Instruments) to Category-I FPIs

Offshore Derivative Instruments include Participatory Notes (P-Notes), Total Return Swaps and such instruments.

The new regulation has restricted the use of ODIs to Category-I registered FPIs only. Hence regulated funds which are not from FATF member countries and not registered in India under Category-I FPI have been prohibited from issuing/subscribing ODIs. This includes various funds from Cayman Island, Mauritius and Taiwan.

  • Eliminated ‘Opaque Structure Removal’ Mandate

Under previous regulation designated depository participants (DDPs) were supposed to ensure that FPIs did not have “opaque structure”. This condition has been removed to prevent unnecessary regulatory requirements and simplify compliance framework as ‘SEBI KYC circular issued on 21 September 2018’ already ensured that FPIs provideinfo ontheir beneficial owners – be it on ownership or control basis.

  • International Financial Services Centre (IIFC) can register as FPI

Investment managers who want to invest in India through FPI route can do so to benefit from direct and indirect tax incentives available to IFSC entities

  • Revised Registration Fee

FPIs (Foreign Portfolio Investors) registering with SEBI need to pay a one-time registration fee for a validity of 3 years. The revised structure is as follows

Revised Registration Fee

Foreign Portfolio Investors registered after 23rd September 2019 (date when the new regulation came into effect) have to pay as per revised fee structure.

Other Amendments

  • Registration of Foreign Central Banks as FPIs: Foreign Central Banks can now directly register themselves as FPI in India. They don’t need to be resident of a country whose Central Bank is BIS (Bank for International Settlement) member. This change aims to attract more overseas funds.
  • Offshore Mutual Funds to be FPIs: Existingoffshorefundswhichhave been established by Indian mutual fund houses have been instructed to register themselves as FPIs by the end of March 22, 2020.
  • Surrender of Registration: FPI is deemed to have surrendered its registration to SEBI if
    • FPI doesn’t pay the requisite fee to SEBI after expiration of 3 years post-registration, or
    • Does not hold any securities or cash balance

Designated Depository Participant (DDP) will proceed to implement the surrender of registration after obtaining the SEBI approval in such cases.

What is process to file for registration as Foreign Portfolio Investor (FPI)?

Step 1: Appointment of Tax Advisor and Domestic Custodian

Both of the appointments should be made such that the appointed entities are recognized by the market regulator (SEBI). Domestic Custodian works as custodian of the securities traded in by the investing entity.

Step 2: Application to DDP/Local Custodian

A Designated Depository Participant (DDP) has to be chosen to get registered as FPI. One needs to fill Form A and file the same before the chosen DDP along with the prescribed fees.

Step 3: Evaluation of the Application

Once the application is received by the Securities and Exchange Board or the designated depository participant they can ask for appearance or production of documents for clarification or further information collection. In case of any dissatisfaction in respect of the content the application might be rejected, however not before the applicant is given an opportunity to represent and explain its case.

Step 4: Acceptance of Application

Once the DDP is satisfied with the content of the application, it grants the certificate of registration, after collecting the prescribed fee, as provided under ‘Form B of First Schedule’. Post which the application if forwarded to SEBI, which disposes of the application within 30 days of receiving it. If any further information is furnished, then the period is counted from that date.

Step 5: Post Registration Requirements

Once registration is granted, FPI has to appoint a ‘designated bank’ (authorized by RBI), a trading member – to execute trades, a clearing member – for confirmation of trades and a compliance officer – for taking care of compliances issued by the Board (SEBI) or the Central Government.

Conclusion

Foreign Portfolio Investment is one the most accessible routes for small and retail investors living outside India, to invest in India and take benefit from its economic growth. Indian market also capitalizes on this influx of fund and hence it is beneficial for economy too. Keeping this aspect in mind the Government of India through the market regulatory body SEBI has made the process of investment via FPI route easier and more streamlined. The regulatory framework is now more investment friendly and offers various advantages to any foreign individual/entity investing as Foreign Portfolio Investor in India.

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Vikalp Mishra

Vikalp is NLU graduate from Patiala (Punjab) and has a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. He specializes in Corporate Law, IPR and has fair share of litigation practice under his belt. Other facets of him are voracious reader, health freak and avid traveler. To him content writing comes naturally in effort to simplify the law for general public/reader.

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