Foreign Portfolio Investments

Introduction

Foreign Portfolio Investment consists of foreign securities and financial assets held by investors outside their home country. In the Indian context, Foreign Portfolio Investment refers to investments made by persons resident outside India in capital instruments, provided such investments are:

• Less than 10 percent of the post-issue paid-up equity capital of a listed Indian company on a fully diluted basis, or
• Less than 10 percent of the paid-up value of each series of capital instruments of a listed Indian company.

These investments typically include a mix of financial assets like fixed deposits, stocks, and mutual funds. Foreign Portfolio Investors (FPI) keep their investments passively and are not involved in the day-to-day operations of the companies they invest in.

A key factor attracting FPIs to invest through this route is the attractive growth rates offered by emerging economies, which often exhibit higher growth potential compared to the investor’s home country.

Regulations and Categories

In the second half of 2019, the Securities and Exchange Board of India (SEBI) introduced the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“2019 Regulations”). These regulations simplified and reassigned categories for FPIs.

Categories

• Category I FPI: Includes central banks, sovereign wealth funds, international or multilateral organizations, entities controlled or at least 75% directly or indirectly owned by such government, government-related investors, pension funds, and university funds.
• Category II FPI: Includes investors not eligible under Category I, such as appropriately regulated funds, endowments, charitable organizations, corporate bodies, family offices, individuals, appropriately regulated entities investing on behalf of their clients, and unregulated funds in the form of limited partnerships and trusts.

Eligibility and Common Application Form

To be eligible for FPI registration, the applicant must meet the following criteria:

• The applicant must not be a resident Indian, Non-Resident Indian (NRI), or Overseas Citizen of India (OCI), unless specified by SEBI.
• The applicant must be a resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a bilateral Memorandum of Understanding with SEBI.
• For banks, the applicant must be from a country whose central bank is a member of the Bank for International Settlements.
• The applicant or its underlying investors contributing 25% or more must not be on the Sanctions List of the United Nations Security Council or be from a jurisdiction with strategic deficiencies as identified by the Financial Action Task Force (FATF).
• The applicant must be a fit and proper person based on criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
• Additional criteria specified by SEBI from time to time.

Common Application Form (CAF)

The CAF streamlines the process of obtaining approvals by acting as a single-window clearance. It integrates interactions with all Indian regulators for FPI registration, PAN application, and KYC formalities.

Requirements for CAF:

• KYC Information: Details such as name, date of incorporation, country of incorporation, address, income details, ultimate beneficial owners, and proof of identity and address.
• FPI Registration: Category of FPI registration, details of investment managers, compliance officers, custodians, FATCA/CRS declaration, and details of the home country regulator (if applicable).
• Additional Information for PAN: PAN number if applicable, legal status, assessing officer details, registration number, proof of address and identity, and whether the FPI is listed.
• Depository and Bank Account Opening: Request for opening a special non-resident Indian rupee account, mode of operation, and authorization of the depository participant.
• Declaration and Undertaking: Complete and true documentation regarding the declaration and confirmation to Annexure A, including assurance of holding only one PAN in India.

Benefits of Foreign Portfolio Investment

• Portfolio Diversification: Allows investors to expand their portfolio internationally to achieve higher risk-adjusted returns.
• International Credit: Provides leverage by accessing increased credit in foreign markets.
• Markets with Different Risk-Return Characteristics: Emerging markets offer varied risk-return profiles, allowing for higher returns.
• Liquidity of Domestic Capital Markets: Enhances the ability to manage or sell financial securities quickly, increasing market depth and breadth.
• Promotes Development of Equity Markets: Improves market efficiency and rewards performance, prospects, and corporate governance.

Risks of Foreign Portfolio Investment

• Jurisdictional Risk: Changes in laws or financial crimes in the foreign country can affect returns and increase risk.
• Financial Assets: Includes equities, bonds, and derivative instruments influenced by high returns and risk reduction through diversification.
• Policies: Requires a robust financial system to manage risks and allocate capital efficiently, with rigorous regulation of volatile foreign portfolio investments.