This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Here she discusses the Foreign Portfolio Investors.


Earlier, not every foreign investor could go through the FDI/FII route considering the thresholds, stringent norms and criteria. Therefore, retail investors would invest in India through sub-accounts under Foreign Institutional Investors. FII would buy securities in India on behalf of them and issue them promissory notes.

Later, SEBI introduced the concept of Qualified Foreign Investor under which a foreign investor could directly invest in the Indian market subject to compliances.

Furthermore, SEBI introduced the concept of Foreign Portfolio Investors, regulated by SEBI (Foreign Portfolio Investors) Regulations, 2011, which encompasses the FII, QFI, and sub-accounts under one category.

Who is a Foreign Portfolio Investor

Section 2(h) of the FPI regulations define FPI as a person who satisfies the eligibility criteria as prescribed by Regulation 4 and has been registered under Chapter II. FII and QFI holding a valid certificate of registration for the block of three years for which fees have been paid are deemed to be FPI.

In simple words, Foreign Portfolio Investors are foreign investors who invest in Indian securities, not more than 10% and satisfy the criteria laid down by the regulations.

FPI allows the investors to purchase stocks or other financial assets in the Indian securities market and FPI does not provide the investor with direct ownership of financial assets.

It is pertinent to understand the definitions of different citizen statuses for the purpose of further read of the article.

Resident of India

  • According to Section 2(v) of the Foreign Exchange Management Act, a person residing in India for more than 182 days during the preceding financial year is considered to be a resident of India. This does not apply to persons staying out of India for carrying business or vocation or employment.
  • A person who has come or stays in India other than a person who has come to take employment, carrying business or vocation in India is considered to be a resident of India.
  • A body corporate registered or incorporated in India.
  • Office, branch or agency in India owned or controlled either by a person resident outside India or by a person resident in India.

Person of Indian Origin

Section 2 (xii) of Citizenship Act, 1995, defines Person of Indian Origin which includes a citizen of any country other than Bangladesh or Pakistan if he at any time held Indian Passport or he or either of his parents or any of his grandparents were a citizen of India by virtue of Indian Constitution or the Citizenship Act or the person is a spouse of an Indian Citizen or a person of the above-mentioned people.

Overseas Citizen of India

Indian government does not permit multiple citizenships, no person can hold citizenship of another country along with an Indian Citizenship simultaneously. People who couldn’t register themselves as citizens of India at the time of independence and commencement of the Indian Constitution as they didn’t live in the mainland could later register themselves under OCI subject to certain conditions.

Investments by Non-resident Indians or Overseas Citizen of India

  • The contribution of single NRI or OCI or Resident Indian cannot exceed more than 25% of the total contribution in the corpus of the applicant or existing FPI.
  • Aggregate contribution of NRI or OCI or Resident Indian cannot exceed more than 50% of the total contribution in the corpus of the applicant or existing FPI.
  • Resident Indians contribute through the Liberalized Remittance Scheme (LRS). (LRS)  was established by the Reserve Bank of India to permit citizens of India to transfer funds abroad for permitted current or capital account transaction. Resident Indians can contribute to global funds whose Indian exposure is less than 50%.
  • No restrictions are imposed on the NRI/OCI/RI to manage offshore funds registered with SEBI, subject to few conditions.
  • FPI can be controlled by Investment Managers who are controlled or owned by NRO, OCI, RI. A non-investing FPI can be directly or indirectly owned or controlled by an NRI, OCI or RI.

Eligibility Criteria for FPI

International Associations

  • The International Organization of Securities Commissions is the international body that was established to bring together the world’s securities regulators.
  • Moreover, it is recognized as a global standard setter in the sector of securities. In order to get registered as an FPI in India, the security market regulator of the resident country of the applicant has to be a signatory in the Multilateral Memorandum of Understanding in the Commission.
  • SEBI has signed Bilateral Memorandum of Understanding with securities regulators of other countries for the sake of enhancing cooperation and for enforcement purposes.
  • This MOU facilitates mutual assistance and enables better supervisory function on the regulations related to the securities.
  • If the applicant does not belong to a country which satisfies the above condition then it should nonetheless be a signatory to bilateral Memorandum of Understanding with SEBI.
  • If the applicant is a bank, it has to be a resident of a country whose central bank is a member of Bank for International Settlements.

Other criteria

  • The resident of a country which is recognized by the Financial Action Task Force as a jurisdiction that is deficient in combating money laundering and financing terrorism and has not made adequate progress in taking measures for it.
  • The applicant has to be legally permitted to invest in securities outside of the country by the Articles of Association or other documents.
  • The applicant is fit and proper in accordance with the criteria exclusively mentioned in Schedule II of SEBI (Intermediaries) Regulations, 2008.
  • The applicant can be asked to furnish more information, clarification or even appear before designated depository participant or the board for personal representation if needed.

Where can an FPI Invest?

As mentioned earlier, FPIs can invest in the Indian securities market. A list of securities are mentioned below;

  • A Foreign Portfolio Investor can invest in shares, debentures, and warrants of companies both listed and unlisted.
  • Hybrid instruments like non-convertible debentures.
  • Units of the scheme by domestic mutual fund whether it is recognized or not by the stock exchange.
  • Collective Investment Scheme
  • Derivatives
  • Treasury Bills are the instrument of short term borrowing by the Government and are issued as promissory notes under the discount. FPI can invest in treasury bills and government securities.
  • Commercial Papers issued by the Indian company
  • Rupee-denominated credit enhanced bonds
  • An asset reconstruction company is a type of financial institution that buys the debtors of the bank at a price and attempts to recover those debts by it. An FPI can invest in security receipts issued by asset reconstruction companies.
  • Indian Depository Receipts
  • Perpetual debt instruments and debt capital instruments. A perpetual bond is fixed income security with no maturity date.
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  • Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector
  • Non-convertible debentures or bonds issued by Non-Banking Financial Companies categorized as Infrastructure Finance Companies‘(IFC) by the Reserve Bank of India.
  • Rupee-denominated bonds or units issued by infrastructure debt funds.
  • Certificates or instruments issued by a Special Purpose Vehicle set up for securitization of assets in Banks, NBFC and financial institutes.

Securitized Debt Instrument

  • FPI can invest in debt instrument including any certificate or instrument issued by a Special Purpose Vehicle set-up for securitization of asset/s with banks, financial institutions or non-banking financial institutions as originators; and any certificate or instrument issued.


  • NSE International Financial Service Center is a fully owned subsidiary company of NSE.
  • An FPIs are eligible to invest in an IFSC without providing for any additional documentation or requiring any prior approval.
  • Moreover, the FPIs need not have a physical presence in the IFSC.
  • FPIs can transact on the IFSC stock exchanges provided they keep clear segregation of funds and securities.

Rules in relation to investments

  • Transaction in the securities have to be implemented by the deliveries of Securities
  • Transactions are not allowed to be carried forward.
  • The transaction of business in securities by an FPI has to be through a broker registered by the Board.
  • An FPI can hold or deliver securities only in dematerialized form.
  • An FPI whether single or in the group cannot invest more than 10 % in the equity shares of the total issued capital of the company.

Intermediaries involved in Foreign Portfolio Investment

Designated Depository Participant

  • It is the responsibility of the Designated Depository Participant to grant registration to the Foreign Portfolio Investors and conduct due diligence if they are conducting activities in accordance to the regulations and other notifications that are issued by SEBI from time to time and report the same to SEBI on a timely basis.
  • DDP have to make sure whether the FPI is not holding investing more than 10% of the paid capital of the Investee Company. If the investment crosses 10% then it has to follow mechanisms to bring back the holding to the stipulated investment.
  • In case of default by an FPI, it is the responsibility of  DDP to report it to the SEBI. The FPI regulations also state regulations and eligibility criteria for DDP.

Designated Bank

A Foreign Portfolio Investor has to open a foreign currency denominated account and special non-resident rupee account before investing in India.  

Compliance Officer

FPI has to appoint a compliance officer who can monitor the compliances put forward by the Act, rules, regulations, guidelines, notification, and instructions by the designated depository participant. However, an individual FPI is responsible for monitoring his own compliances.


  • FPIs are taxed on gains from transfer of securities as capital gains tax, income, and interest from dividend as income from other sources.
  • By the virtue of Section 115AD of the Income Tax Act, the Long term capital gain on transfer of equity shares is taxed 10% if it exceeds Rs. 1 lakh rupees.
  • There is no tax implication on the dividend distributed
  • Taxation on Short-term capital gains on transfer of securities that are subject to Securities Transaction Tax is 15%.
  • The taxation under the  category of ‘any other income’ is 40%

Know Your Client Norms

  • The norms established under circular dated April 10, 2018, passed by SEBI were relaxed on comments received by the public and interim recommendations of the working group.
  • The circular stated that the identification and verification of Beneficial Ownership as stated in the Prevention of Money Laundering (Maintenance of Record) Rules, 2005 would apply to FPI for determining the eligibility criteria and for the purpose of KYC.
  • Vide the next circular, SEBI stated that the Beneficial Ownership criteria in PMLA (Maintenance of Records) Rules, 2005, is to be made applicable only for the purpose of KYC and not for determining the eligibility of FPIs as well as the clubbing of investment should not be done on the basis of the beneficial owner.

Investor friendly facilities for FPI

  • SEBI and the government have been working to promote FPI in India. This is reflected through investor-friendly facilities that have been introduced.
  • Recently, the RBI met 40 FPIs to gauge investor interest in domestic fixed income and debt securities.
  • In the past, the FPI dealt with cumbersome filing procedure as they had to approach banks, intermediaries. With a view to enhancing operational flexibility a single application form for registration was introduced for the FPI.
  • The Central Bank in consultation with the government and SEBI has drafted a special route for FPI known as the Voluntary Retention Route (VRR). The proposed VRR scheme envisages long term and stable overseas portfolio investment in Indian debt markets, unlike the present investments where the FPI pull-offs are sudden.

Pull-offs by the FPI

  • Investors in the secondary market have an advantage of pulling out investments when the market is facing crisis and apparently, the market has witnessed this phenomenon. To put it other way, investments by FPIs can be highly volatile and fickle.
  • The FPI pulled out over Rs. 9,300 crores from the Indian market in the 2017-2018 and were bearish long the year. According to the experts, the prime reasons behind the pull off were as follows;
  1. Monetary tightening by the global banks shrunk the global pool of surplus that could be invested.
  2. Clamp-down on inflows through low-tax jurisdiction.
  3. Considering India’s external imbalance rupee is one of the most vulnerable currencies. ( Read the story here)


Recently, after much deliberation, RBI lifted the cap for the FPI investing in the corporate bonds. (See here), likewise, it looks forward to increasing the limit in (G-Sec) Government Securities. India is taking measures, several relaxations and cap lifts being a part of them to attract long term and stable Foreign Portfolio Investors.


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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