Foreign Portfolio Investment is holding financial assets in a country other than in the investor’s own country. It is an investment in mutual funds, bonds and securities (stocks, American Depositary Receipts, or Global Depository Receipts) of companies headquartered outside the investor’s nation. The transaction of foreign securities occurs at an organized formal securities exchange or through an over-the-counter market transaction. Foreign portfolio investment is becoming a means of portfolio diversification. The portfolio is a collection of financial assets and investments owned by an individual, a financial institution or an investment firm. Financial assets include valuables ranging from stocks, funds, derivatives property, cash equivalents, bonds, etc. In India SEBI regulates the activities involve in investment. It sets the eligibility criteria, limits the amount that can be invested and categorizes the type of investments.
Categories for Foreign Portfolio Investors (FPI)
The Foreign Portfolio Investors in India are divided into Three Categories:
Category I foreign portfolio investor: Government and investors related to Government which includes central banks, Governmental agencies, wealth funds and international or multilateral organizations or agencies.
Category II: In this category FPI like appropriately regulated Mutual Funds, Investment trusts, insurance/reinsurance companies, banks, asset management companies, investment managers/ advisors, portfolio managers, university funds and pension funds etc.
Category III: All those investors that do not fall under Category I and II foreign portfolios investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
Every Foreign Portfolio Investor is required to obtain Registration for FPI with Designated Depository Participant (DDP) on Behalf of SEBI.
SEBI (Foreign Portfolio Investors) Regulations 2014 (“2014 Regulations”) have provided certain exemptions from registration to foreign institutional investors and qualified foreign investors. 2019 Regulations have scrapped some of these exemptions and it has made a mandate that every person dealing in securities as FPI to mandatorily acquire a registration certificate from the Designated Depository Participant. Further, existing offshore funds set up by Indian mutual funds existing offshore have to register themselves as FPIs by March 22, 2020. In 2014 Regulations eligibility for FIP license was only given to those central banks which are members of the Bank of International Settlement. Whereas through the 2019 regulations, SEBI in order to attract more investors recognized non-BIS registered central banks as eligible for FPI license. Under the FPI 2014 Regulations, a fund should not be registered as an FPI if it fails to qualify the broad-based criteria. A fund qualified as a broad-based fund if it had at least 20 investors with no investor holding more than 49% shares of the fund. 2019 Regulations have scrapped away with this requirement.
The 2019 Regulations provide that FPIs set up in the International Financial Services Centre (“IFSC”) are required to satisfy the jurisdiction criteria under Regulation 4 for registering as an FPI. An entity set up in an IFSC is qualified to be registered as an FPI even though that entity would be a domestic entity.
Investment limit: The FPI regulations regulate and provide for a threshold on the total investment incurred by each company by the FPI including its investor group. The FPI Regulation of 2014 had set the investment threshold of 10 per cent of the issued capital of the company. Under the 2019 Regulations, the threshold has now been changed to 10 per cent of the ‘fully diluted paid-up equity capital of a company.
Classification of Category I
Under the 2014 FPI Regulations, FPIs were divided into 3 categories under which easier compliance norms for Category-I FPIs were given and the strictest for Category-III FPIs. Under the new framework of 2019 Regulations, SEBI decided to reduce the total number of categories and to re-categorize into two categories, Category I and Category II FPIs.
Companies that issue shares and securities would be registered under the stock exchange. An Indian company that wishes to register its securities on the stock exchange would have to abide by the rules established by the Securities Exchange Board of India (SEBI). An investor who wants to indulge themselves with Foreign Portfolio Investment has to make an application and obtain a certificate of registration from the respective board. The offshore fund which falls under the purview of an Asset Management Company is required to make an application under Foreign Portfolio Investor Registration. The offshore fund is required to secure such registration within a period of 180 days.
Under the SEBI (FPI) regulations, 2019 any applicant would have to liaise with the Designated Depository Participant (DDP) for making such an application for foreign portfolio investor registration. A DDP can be defined as a person or an institution who has been approved by the board under Chapter III of the 2019 regulations. In order to take different forms into consideration for registering under FPI, the DDP would act as a negotiator between the applicant and the board.
Procedure to get registration
1. Appoint a legal representative:
Legal representatives are required in India to fill out the forms and do the paperwork as required by the regulatory authorities. The role of a legal representative can be performed by any financial institution regulated by the Reserve Bank of India. It is important to choose DDP to get registered as FPI.
2. Appoint a Tax adviser:
A tax advisor will help the investor to comply with all Tax obligations that will arise from your activities in India. It is very much required for the investor to know about the tax obligations on him for the smooth running of functions. The tax adviser advises whether the tax involved is reasonable or not.
3. Appoint a Domestic Custodian:
Appointing a domestic custodian before making any investments in India is a very important step. A domestic Custodian can be any entity registered according to the norms set by SEBI to carry on the activity of providing custodial services in respect of securities.
4. Appoint a designated Bank:
After the registration is done under an FPI it is important to appoint a Designated Bank. The Designated Bank has a duty to open and maintain a foreign currency account and/or a Non-Resident Special Rupee Account. Designated Bank means any bank in India which has been given permission by the Reserve Bank of India to act as a banker to FPIs.
5. Appoint a trading member:
A Trading member has the duty to execute trades for the FPI. An FPI can have multiple TM’s.
6. Appoint a clearing member:
The clearing member does the confirmation of trades. Clearing through a single clearing member.
7. Appointment of a Compliance Officer
Every FPI is required to appoint a compliance officer who shall be responsible for looking after the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by the Board or the Central Government.
Impact of Foreign Portfolio Investment
Globalization has turned the world into a small village. The integration of economies of the world has led to the free flow of ideas, resources, people, and funds. Speaking of funds there is an enormous need for foreign investment in developing countries like India. India lacks funds, it has low infrastructural facilities and a huge population, keeping in mind these factors Foreign Portfolio Investment is a boon to the Indian Economy. It provides the investors with required profits, a huge market, labour at a cheap cost and so on. The capital account of India’s Balance of Payment consists of both FDI and FPI. FPI is one of the major sources of foreign capital in India. India requires this foreign capital for its growth and development. An inflow of foreign capital helps in removing a deficit in the balance of payment. Foreign investment has the ability to meet the gap in management, entrepreneurship, technology and skill. The developing countries need these resources that are transferred to the local country through various training programmes. Further, foreign companies bring with them advanced technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.
Integration of the economies of the world has started a new era of setting and broadening business in different countries through Foreign Direct Investment and Foreign Portfolio Investment. These investments have acted as a boon for the development of those countries where investment is made. To regulate such activities of investment laws are required to safeguard the rights of target countries. FPI Regulation of 2019 has widened the scope of investment and also eliminated certain limits on investors that earlier prevailed. For a developing country like India, foreign capital is a much-needed thing to develop its economy. India is making efforts to keep its economy open to the world yet protected from completely vanquishing its true nature.
- www.sebi.gov.in › legal › regulations SEBI | Securities and Exchange Board of India (Foreign fastlegal.in › academy › securities-law Foreign Portfolio Investor (FPI) Registration In India
This article is written by Rishita Vekta, B.A.LLB(H) 2nd Year, from Lloyd Law College, Greater Noida U.P.