In this article, Sachin Vats of RGNUL discusses Foreign Portfolio Investors Regime.

India is one of the fastest growing economies of the world. The maximum percentage of Indian population is youth which makes it a vibrant country full of opportunities. The young demographic profile and innovative minds at work attract the investors from the global world.

There are many economic reforms done by the Indian Government in last two decades to make India a favourite among the global investing communities. The foreign investors are getting attracted with deregulation and opening of the Indian market.

There are two different avenues for Indian companies to raise their debt directly from non-residents. They can either go for External Commercial Borrowing (ECB) regime to avail foreign currency denominated borrowing or they can opt for Foreign Portfolio Investment (FPI) to issue rupee denominated bonds.

What is Foreign Portfolio Investment

The Investment done by the non-residents in Indian securities such as shares, government bonds, corporate bonds, convertible securities, infrastructure securities, etc. The class of investors who make investment in these securities are known as Foreign Portfolio Investors. The Foreign Portfolio Investment is induced by the differences in equity price scenario, bond yield, growth prospects, interest rate, dividends or rate of return on capital in India’s financial assets.

The Securities and Exchange Board of India recently specified the criteria for Foreign Portfolio Investment according to which any equity investment by non-residents which is less than or equal to 10% of capital in a company is Portfolio Investment while above 10% investment will be regarded as Foreign Direct Investment.

A foreign investor cannot invest more than 10% of the paid up capital of the Indian Company. All the Foreign Portfolio Investment taken together cannot acquire more than 24% of the paid up capital of an Indian Company.  The regulations issued by the Securities and Exchange Board of India do not allow the Foreign Portfolio Investors to invest in unlisted shares as investment in the unlisted entities will be regarded as Foreign Direct Investment (FDI).

Who are Foreign Portfolio Investors

The Foreign Portfolio Investors includes investment groups of Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) and sub accounts, etc. The Non-Residents Indians are not included in the Foreign Portfolio Investment. The Securities and Exchange Board of India issued a guideline and it was specified by the Reserve Bank of India that Foreign Portfolio Investors include Asset Management Companies, Banks, Pension Funds, Mutual Funds and Investment Trusts as nominee companies, Incorporated or Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Charitable Trusts and Charitable Societies, Sovereign Wealth Funds. These all are regulated as Foreign Portfolio Investors.

According to the Securities and Exchange Board of India, FII is an institution which has been established or incorporated outside India which proposes to make investments in India in securities. It should be registered under the SEBI (Foreign Institutional Investors) Regulations, 1995. It includes a pension fund, mutual fund, investment fund, insurance company or a reinsurance company.

The Qualified Foreign Investor is an individual, group or association which is a resident in a foreign country and compliant with the Financial Action Task Force standard. It must be signatory to the International Organisation of Securities Commission. The foreign investment in the share market is dominated by the Foreign Institutional Investors because of their larger size which make them capable to invest on large scale than the Qualified Foreign Investors who are small investors and individuals.

Data of total Foreign Portfolio Investment done from 2004    

** till 24 June, 2017

Foreign Portfolio Regime Features

The investment under FPI is done in Equity, Debt and Derivatives. A single investor or an investor group cannot invest in portfolio more than 10% of the equity of a company in India. The existing Qualified Foreign Investors are allowed to deal with the securities either it is buying or selling only upto one year from the date of notification of the FPI regulations. They have to register themselves with the FPI the mean time.

The Non-Residents Indians and the Foreign Venture Capital Investors are not taken under the purview of the FPI. There is important role of Depository Designated Participants (DDP) who are authorised by the Securities and Exchange Board of India (SEBI). The DDPs register the FPI on behalf of the SEBI according to the prescribed norms of the SEBI and the due diligence norms.

The DDPs are authorised by the Reserve Bank of India or the Category-1 Bank. They may also be authorised by the Depository Participants or a Custodian of Securities who are registered with the Securities and Exchange Board of India.

Categories of FPI  

There are three different categories of Foreign Portfolio Investment in India. It is based on the risk based approach towards customer identity verification (KYC). it has been divided into low risk, moderate risk and high risk.

The First Category consist of Government and Government related foreign investors. These include Foreign Central Banks, Government Agencies, Sovereign Wealth Funds. The International and Multinational Organisations are also put under first category.

The Second Category includes regulated broad based funds such as Mutual Funds, Investment Trusts, Insurance companies. Banks, Asset Management Companies, Investment Advisors and Managers, Portfolio Managers and other regulated entities are the constituent of this category. Broad based Funds, University Funds and Pension Funds whose investment is appropriately regulated also face moderate risk.

The remaining foreign investors not eligible under category 1 and 2 such as Endowments, Charitable Societies or Trusts, Foundations. Corporate Bodies, Trusts, Individuals, Family Offices come under the third category where there is a high risk.

Eligibility Criteria for Foreign Portfolio Investors

The Foreign Portfolio Investors has to satisfy certain prescribed norms and conditions then only the Designated Depository Participants will accept application for granting certificate of registration as a foreign portfolio investment. The following conditions are required,

• The applicant is a person not resident in India.
• The applicant is resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Board.
• The applicant being a bank, is a resident of a country whose central bank is a member of Bank for International Settlements.
• The applicant is not resident in a country identified in the public statement of Financial Action Task Force as:

(i) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply or

(ii) A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

• The applicant is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business.
• The applicant is authorized by its Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients.
• The applicant has sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity.
• The grant of certificate to the applicant is in the interest of the development of the securities market.
• The applicant is a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
• Any other criteria specified by the Board from time to time.  

Conclusion

The Indian companies raise their debt from non-residents through different avenues. The capital account transaction between a resident and non-resident are regulated by the Reserve Bank of India (RBI) which is the primary regulator in India for Foreign Exchange Transactions. The investments into the capital markets by foreign portfolio investors are also regulated by the Securities and Exchange Board of India (SEBI) which regulates the Capital Market in India. The recent changes done in the area of taxation laws and ease in registration requirements will surely boost the portfolio investments in India.