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This article is written by S A Rishikesh, from the Institute of Legal Studies, Shri Ramswaroop Memorial University, Lucknow. This article highlights the new changes brought in the foreign portfolio investment by the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019. 


The Securities and Exchange Board of India (SEBI) was established on April 12, 1992. The main objective of the SEBI was to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto, while also protecting the interest of the investors in securities. On March 26, 2018, SEBI constituted a working group under the chairmanship of Mr. H R Khan. He is a retired deputy governor of the Reserve Bank of India (RBI). The working group had to: 

  1. Advise SEBI on redrafting and simplification of the Securities and Exchange Board of India (Foreign Portfolio Investor) Regulation, 2014.
  2. Advise SEBI to incorporate various circulars and operation guidelines issued by SEBI every now and then within the regulation itself, to the extent possible.
  3. To advise SEBI on other issues related to foreign portfolio investors.

The committee placed its report before SEBI on May 24, 2019; it was published on the SEBI website open for public comments until June 14, 2019. Taking into account the working group’s recommendation and public comments, the SEBI notified the Securities and Exchange Board of India (Foreign Portfolio Investor) Regulations, 2019 on September 23, 2019. This new regulation invalidated the former Securities and Exchange Board of India (Foreign Portfolio Investor) Regulation, 2014.

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Foreign Portfolio Investor (FPI)

Capital is very essential for the economic growth of a country and the number of funds required cannot be generated alone from within the country, therefore, the countries advertise themselves as products to attract more and more foreign investment. There are three ways in which a foreign investor can invest in India and they are: Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII).

Foreign Portfolio Investment is a direct investment in financial assets such as stocks, bonds, securities of a company located in another country. It depends relatively on the volatility of the market. Foreign portfolio investors are the classes of investors who are not in the management and day-to-day business of the company, unlike FDI. In simple terms, FPI is the holding of financial assets and securities by an investor on foreign soil. Investment in securities on the stock exchange of a foreign country or under the global depository receipt mechanism is an example of foreign portfolio investment. 

FPI investments in India are regulated and are being monitored by the Ministry of Finance and Income Tax Department under the Government of India. They do so with the help of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).

Key changes brought by the regulations of 2019

Re-categorization of foreign portfolio investor categories

Previously, the investors were divided into three categories. The first category of investors was considered low-risk investors because they consisted of heavily regulated entities such as the government and government-related investors. The second category was of medium risk investors it was less regulated as compared to the first category. The last category was the high-risk category of investors because it was the least regulated of them all. But the new regulation categorised them into just two categories. 

The first category consists

A. Investment by the foreign governments and the government-related investors. The example includes central banks, international organisations and agencies, and entities that are 75% owned by the government or government-related investor, directly or indirectly. 

B. University funds and pension funds.

C. Approximately regulated entities, some examples of these are broker-dealers and swap dealers, portfolio managers, investment advisors, investment managers, asset management companies, insurance operations entities and banks.

An appropriately regulated entity means an entity that is regulated by the securities market regulator or the banking regulator of home jurisdiction or otherwise, in the same capacity in which it proposes to make investments in India. 

D. Entities that are from the member countries of the Financial Action Task Force (FATF):

I. Approximately regulated funds; 

II. Unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI;

III. University-related endowments of such universities that have been in existence for more than 5 years.

E. An entity:

I. Whose investment manager is from the FATF member country and such an investment manager is registered as a Category I FPI;

II. At least 75 percent of which is owned, directly or indirectly by another entity, eligible under sub-clause (ii), (iii) and (iv) of clause (a) of this Regulation and such an eligible entity is from a FATF member country.

Financial Action Task Force (FATF) jurisdiction

It is an international intergovernmental task force. It sets international standards for the member countries to prevent financial illegal activities like money laundering, and terror financing. FATF is also a policy-making body, setting global standards to stop illicit finance. It works to generate the necessary political will and help nations bring in national legislative reforms and regulatory reforms to stop financial illegal activities. 

The jurisdiction of FATF is its members and the organisations that have consented to work together in the form of a single task force towards a common objective laid out in the FATF mandate. As of January 2021, the FATF has 39 members out of which there are 37 countries and two regional organisations the European Commission and the Gulf Cooperation Council

The second category consists

  1. Appropriately regulated funds not eligible as Category I FPI;
  2. Endowments and foundations;
  3. Charitable organizations;
  4. Corporate bodies;
  5. Family offices;
  6. Individuals;
  7. Appropriately regulated entities investing on behalf of their client, as per the conditions specified by the Board from time to time;
  8. Unregulated funds in the form of limited partnerships and trusts.

Who can be a foreign portfolio investor?

  1. The new regulation put an end to the uncertainty concerning non-resident Indians, overseas citizens of India and resident Indians if they can hold a stake in an FPI. The 2019 regulation permits non-resident Indians, overseas citizens of India and resident Indians to be foreign portfolio investors if they can meet the conditions specified by the SEBI. 

The new regulation has made it very clear that Resident Indian (RI) can not be a foreign portfolio investor unless its contribution is made through the Liberalised Remittance Scheme (LRS) subject to the applicant’s Indian exposure is less than 50 percent. The Non-Resident Indians (NRI’s) and Overseas Citizens of India (OCI’s) can be foreign portfolio investors but their contribution should be less than 25 percent and 50 percent respectively of the total contribution. 

Resident Indian, non-resident Indian and overseas citizen of India cannot take the control of applicant unless the applicant is an offshore fund for which a ‘No Objection Certificate (NOC)’ has been issued by the SEBI under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

2. The applicant (other than the government or the government-related investor, resident of a country approved by the government of India) has to be a resident of a country whose securities market regulator is a  signatory of the International Organisation of Securities Commissions Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information or has a bilateral Memorandum of Understanding signed with the SEBI.  

3. A bank (other than the central bank), that is a resident of a country whose central bank is a member of the Bank for International Settlements

4. The applicant or any of his investors contributing 25 percent or more should not be a member of the sanctions list as notified by the United Nations Security Council from time to time and should not be a resident of a country whose name is reflected in the FATF list of high-risk countries.

5. The person should be eligible and should fulfil all the criteria as mentioned in the Schedule II of the SEBI (Intermediaries) Regulations, 2008.

6. Any other criteria as specified by the SEBI from time to time.

Opaque Structures

Before this regulation, making portfolio investments in India was not allowed to the FBI’s having an opaque structure. An opaque structure is defined as: “(i) protected cell company, segregated cell company or equivalent, where the details of the ultimate beneficial owners are not accessible or where the beneficial owners are ring-fenced from each other or where the beneficial owners are ring-fenced with regard to enforcement, or (ii) where the applicant or its investor(s) identified on basis of the threshold for identification of beneficial owner have issued any bearer shares or maintain any outstanding bearer shares”.

The 2019 regulation has done away with the concept of opaque structure. But the law on the identification of the beneficial owner has been made more strict as per the recommendation of the H R Khan committee. 

Broad-based criteria

A very significant change from the 1995 regulation is that the requirement of funds to be broad-based does not find any mention in the new 2019 regulation. This is a big step as the rules in the previous regulations were considered complicated and confusing by many potential investors, there is a hope that it will attract new investors and this change will benefit the market. 

Offshore Derivative Instruments (ODI)

The new regulation defines ODI as an instrument, by whatever name called, which is issued overseas by a foreign portfolio investor against securities held by it in India, as it is underlying.

Former regulation specified that ODI’s could be subscribed only by FPI that is regulated by an appropriate foreign regulatory authority and after agreeing to know your client (KYC) norms. The 2019 regulation has removed the ‘regulated by an appropriate foreign regulatory authority’ clause and has permitted the issuance of ODI’s by category one FPI and issuance of ODI’s to persons eligible for registration as category one FPI.  

Investment avenues and the process of disinvestment

The FPI regulations 2019, provide a list wherein FPI can invest in securities. Their specific list of debt securities provided in the earlier regulation has been removed in this one. FPI can invest in any debt security as notified by the Reserve Bank of India (RBI) now and then.

An FPI is required to have a valid registration in case he is holding securities or derivatives in India.  In case the registration is not valid the FPI has one year from the date of publication of the regulation to sell their securities or wind up their open position in derivatives.


As of now, the FPI Regulations 2019 have come to simplify the process for FPI and its compliance. Removing the restriction on the opaque structures and doing away with the requirement of funds to be broad-based are welcome steps. The simplification of FPI categories, just pinning it down to two will encourage new investors to come forward. It can be said that the new regulations provide a stable legal environment to the investors. 

SEBI has gone out of its comfort zone making some bold decisions to make India more attractive to investors. How effective will it be, this will be the answer that will be discussed in the future. Like every regulation, issues will certainly pop up in this too because of the ever-changing dynamic nature of the market.


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