INTRODUCTION:

Foreign Portfolio Investment consists of foreign securities and foreign financial assets held by investors in countries other than their home country. In the Indian context, Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post issue paid up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company. It involves a mixture of financial assets like fixed deposits, stocks, and mutual funds. All Foreign Portfolio Investors (“FPI”) keep their investments passively with them and are not actively involved in the day to day business operations of the companies they invest in. Foreign Portfolio Investment consists of foreign securities and foreign financial assets held by investors in countries other than their home country. In the Indian context, Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post issue paid up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company. It involves a mixture of financial assets like fixed deposits, stocks, and mutual funds. All Foreign Portfolio Investors (“FPI”) keep their investments passively with them and are not actively involved in the day to day business operations of the companies they invest in.

A major factor that influences FPIs to route their investments through the foreign portfolio investment route is attractive growth rate it offers. Emerging economies which show the ability for growth, i.e., higher than the investor’s country are likely to see a high level of participation by foreign investors.

As per a notification in the second half of 2019, the Securities and Exchange Board of India (“SEBI”) has promulgated the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“2019 Regulations”) wherein, inter-alia, it has sought to reassign the categories and simplify norms. As per the 2019 Regulations, FPIs are now divided under two categories as opposed to three categories under the erstwhile regulations.

CATEGORIES

Central banks, sovereign wealth funds, international or multilateral organizations or agencies, including entities controlled or at least holding 75 per cent directly or indirectly owned by such government and government related investor, pension, and university funds etc fall under the Category I FPIs.
Category II FPI shall include all the investors that are not eligible under Category I foreign portfolio investors such as appropriately regulated funds not eligible as Category I FPI, endowments and foundation, charitable organizations, corporate bodies, family offices , individuals, appropriately regulated entities investing on behalf of their client and unregulated funds in the form of limited partnership and trust. not eligible under Category?

I ELIGIBILITY AND COMMON APPLICATION FORM:

The following eligibility criterion must be fulfilled by the applicant for FPI registration:

• Applicant must not be a resident Indian.
• The applicant must not also be a Non-Resident Indian (“NRI”) or an Overseas Citizen of India (“OCI”).
• A Resident Indian, NRI or OCI can be eligible provided they meet the conditions specified by SEBI from time to time.
• The applicant must be a resident of the country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Page 4 of 28 Memorandum of Understanding or a signatory to the bilateral Memorandum of Understanding with SEBI.
• The applicant being a bank must be a resident of a country whose central bank is a member of Bank for International Settlements.
• The applicant or its underlying investors contributing twenty five per cent or more in the corpus of the applicant or identified on the basis of control, shall not be the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and shall not be a resident in the 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 must be 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.

Common Application Form (“CAF”):

The introduction of the CAF, which acts as a single window clearance, has eliminated the vast, time consuming process of making separate applications with different regulators for obtaining approvals. With this consolidated form, an end to end single window entry to the Indian securities market has been made possible by seamlessly integrating the interactions with all Indian regulators.

FPI who seek to invest into India shall mandatorily make an application for grant of a certificate by a designated depository participant. For the purpose of the application, a CAF has been introduced which along with the FPI registration also serves as an application for Permanent Account Number (“PAN”), and carrying out of Know Your Customer (“KYC”) formalities for opening of bank and demat accounts in India.

Requirement CAF are as follows:

• KYC information:
  • Details such as name, date of incorporation, country of incorporation, address for communication, income details, etc.
  • Details regarding ultimate beneficial owners (end natural persons) of the FPI
  • Details of documents submitted as proof of identity and proof of address
• FPI registration:
  • Category under which FPI registration is sought, details of investment managers and compliance officers, global and local custodians, FATCA/ CRS declaration, details of home country regulator (if applicable) etc.
  • Details of DDP, custodian of securities, disciplinary history of the FPI
  • Common foreign investor group information (for clubbing of investment limits)
• Additional information for obtaining PAN:
  • The PAN number needs to be mentioned If the applicant already holds a valid PAN.
  • Details such as legal status, assessing officer, registration number, proof of address, proof of identity, whether FPI is listed, etc., are necessary If the applicant does not hold a valid PAN
  • Additional information applicable only for individuals.
  • Depository and bank account opening:
    • Details required are request to open special non resident Indian rupee account, mode of operation, authorization of the depository participant to open the depository account .
    • This part is only applicable for investing FPI.
  • Declaration and undertaking:
  • Documents and annexures should be complete and true regarding declaration that the information/ details provided in the CAF.
  • The declaration and undertaking require the FPI applicant to confirm to Annexure A.
  • Declaration for not holding more than one PAN in India.
  
  

  BENEFITS OF FOREIGN PORTFOLIO INVESTMENT:

  The following are some of the benefits of foreign portfolio investment:

  • Portfolio diversification:
    • An investor would diversify their investment portfolio to achieve a higher risk adjusted return, which is ultimately done to help generate more gains. Foreign portfolio investment provides investors with an easy opportunity to expand their portfolio internationally.
  • International credit:
    • The investors utilize more leverage by generating more returns on their equity investment with an access to an increased amount of credit in foreign countries.
  • Markets with different risk return characteristics:
    • Emerging markets can offer investors a different risk return profile by willing to take higher risk for seeking greater returns.
  • Liquidity of domestic capital markets:
    • Savers can invest with the belief that they will be able to manage their portfolio or sell their financial securities quickly if they need access to their savings. As markets become more liquid, they become deeper and broader, and a wider range of investments can be financed.
  • Promotes the development of equity markets:
    • As the market’s liquidity and functionality develop, equity prices will become value beneficial for investors, ultimately driving market efficiency. Increased competition for financing will lead to the market rewarding great performance, prospects, and corporate governance

  RISKS OF FOREIGN PORTFOLIO INVESTMENT:

  The following are some of the risks faced by FPI

  • Jurisdictional risk:
    • Investing in foreign country the result for jurisdictional risk increases. For example, if the country that the investor has invested in drastically changes its law, it could exponentially affect the returns of the investor.
      Moreover, many countries struggle with financial crime, such as money laundering which increases the jurisdictional risk faced by the investor.
  • Financial Assets for Foreign Portfolio Investments:
    • The securities can be purchased for many reasons. However, foreign portfolio investment is influenced by high rates of return and reduction of risk through geographic diversification. The financial assets that can be bought through foreign portfolio investment include equities, bonds, and derivative instruments.
  • Policies for Foreign Portfolio Investment:
    • The financial system must be capable of identifying and mitigating risks for prudent and efficient allocation of foreign or domestic capital flows. Foreign portfolio investment is inherently volatile, and rigorously regulated financial markets which needs to manage the risk effectively.