Foreign portfolio investment regulations are a set of rules and guidelines put in place by a country’s government or regulatory authority to govern the investment of foreign individuals or entities in the country’s financial markets. These regulations are designed to protect the
interests of both the foreign investors and the host country’s economy. The primary objective of foreign portfolio investment regulations is to encourage foreign investment in a country’s financial markets while ensuring that such investments do not pose a threat to the stability and security of the country’s economy. The regulations typically cover areas such as the types of securities that foreign investors are allowed to invest in, the amount of investment allowed, the reporting and disclosure requirements, and the taxation of foreign portfolio investments.
FOREIGN PORTFOLIO INVESTMENT
Foreign Portfolio Investment (FPI) refers to investments made by non-resident entities or individuals in the securities market of a foreign country. FPI typically involves investing in financial instruments such as stocks, bonds, and other debt securities. Foreign portfolio investors can be institutional investors such as mutual funds, pension funds, hedge funds, and sovereign wealth funds, or individual investors. These investors are not interested in taking a controlling stake in the company but are primarily focused on earning returns on their investments through capital gains and dividends. However, FPI can also pose some risks, such as currency risk, market volatility, and sudden capital outflows, which can cause significant disruptions to the economy. Therefore, governments typically regulate FPI to ensure that it is properly monitored and regulated to promote economic stability and growth.
FOREIGN PORTFOLIO INVESTMENT IN INDIA
Foreign Portfolio Investment refers to the holding of Financial Assets and Securities by investors in other country outside of the investor’s own country. It is the investment by non-residents in India by the way of securities including:
– Government bonds
– Convertible securities etc.
Group of investors who invest in these securities are known a Foreign Portfolio Investors they include:
– Asset management companies
– Mutual funds
REGULATORY FRAMEWORK FOR FOREIGN PORTFOLIO INVESTMENT IN INDIA
1. Securities and Exchange Board of India and Reserve Bank of India
– Foreign Portfolio Investment (FPI) regulations in India are governed by both the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). While SEBI regulates the entry and operation of FPIs in Indian securities markets, the RBI regulates the inflow and outflow of foreign exchange related to FPIs. Here are some of the key FPI regulations by RBI in India.
– Eligible Investors:
• To invest in Indian financial markets, foreign investors need to be registered with the SEBI as a Foreign Portfolio Investor.
• As of March 2021, there were around 11,000 registered Foreign Portfolio Investors (FPIs) in India.
• The total number of registered Non-Resident Indians (NRIs) investing in the Indian markets was around 3 million as of 2020.
• Non-resident entities such as foreign companies, foreign institutional investors, and foreign individuals are eligible to invest in Indian securities markets as FPIs.
• Non-resident Indians (NRIs) are eligible to invest in Indian securities markets as per the regulations prescribed by the RBI.
– Investment Limits:
• Investors are restricted from investing in sectors like real estate and agriculture,unless they have obtained specific permission from the government.
• There are certain limits on the amount of investment that foreign investors can makein Indian companies. These limits are periodically revised by the government.
• The overall foreign investment limit in Indian companies is currently set at 74%,subject to certain sectoral limits.
• FPIs are allowed to invest up to 100% of the paid-up capital of an Indian company,subject to sectoral limits.
• The total investment by FPIs in Indian equity and debt markets was around $22.6 billion as of April 2021.
– Investment Instruments:
• As of April 2021, FPIs held around 23% of the total market capitalization of the Indian stock market.
• FPIs are allowed to invest in Indian equity shares subject to a ceiling of 24% of the paid-up capital of the company.
• NRIs can invest up to 5% of the total paid-up capital in Indian companies.
– KYC Requirements:
• Investors need to follow the “know your customer” (KYC) norms, which require them to provide identification documents, bank account details, and other information to SEBI.
• FPIs are required to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) norms prescribed by the RBI.
• FPIs are required to register with the designated depository participant (DDP) before investing in Indian securities.
• SEBI requires foreign investors to undergo KYC procedures to ensure their authenticity and prevent fraudulent activities.
• The KYC process involves collecting information about the investor’s identity, residence, and source of funds. SEBI also mandates regular updates to the KYC information.
• FPIs are required to appoint a designated custodian for their investments in India.
• FPIs must submit a monthly report on their investments in Indian securities to the designated depository participant, while NRIs and QFIs must report theirinvestments on a quarterly basis.
• As of March 2021, SEBI had cancelled the registration of around 2,000 FPIs for noncompliance with regulations.
• Foreign investors are subject to various taxes on their investments in India, such as capital gains tax and withholding tax. The government periodically revises tax regulations to attract foreign investment.
• The withholding tax on equity investments by FPIs was reduced from 20% to 10%in 2020.
• The tax rate for FPIs investing in corporate bonds and government securities ranges from 5% to 20%.
– Monitoring and Enforcement:
• They are required to monitor and report their investments and transactions to SEBI.
• The RBI can take enforcement actions against FPIs for non-compliance with regulations, including imposing fines and cancellation of registration.
• SEBI regularly monitors foreign portfolio investments in India to ensure compliance with the regulations and prevent fraudulent activities.
• SEBI has the power to impose penalties and take other enforcement actions against non-compliant investors.
• SEBI’s Market Surveillance System (MSS) is used to monitor market activities and take action against fraudulent activities.
In summary, SEBI regulations on foreign portfolio investment in India have resulted in significant foreign investment in the Indian financial markets. The regulations ensure compliance with legal and regulatory requirements while promoting transparency and
preventing fraudulent activities.
2. Foreign Exchange Management Act, 1999
– The FEMA regulates all foreign exchange transactions, including foreign portfolio investment in India. The regulations are aimed at facilitating foreign investments in the Indian economy while ensuring transparency and preventing money laundering and other illicit activities.
• Any non-resident entity or individual, including foreign institutional investors (FIIs), foreign portfolio investors (FPIs), and qualified foreign investors (QFIs), can invest in Indian securities subject to certain eligibility criteria.
• The entities must be registered with the Securities and Exchange Board of India (SEBI) to invest in the Indian securities market.
– Investment Limits:
• The overall limit for foreign portfolio investment in Indian companies is currently set at 74% of the paid-up capital, subject to certain sectoral limits.
• The foreign portfolio investment limit in Indian debt securities is currently set at $30 billion for FPIs, subject to certain conditions.
– Investment Instruments:
• Non-resident entities can invest in Indian securities, including equity shares,debentures, and warrants, subject to certain limits.
• FPIs can invest in Indian mutual funds, subject to certain limits and guidelines issued by SEBI.
– Reporting and Compliance Requirements:
• Non-resident investors must comply with KYC and other regulatory requirements to invest in Indian securities.
• The non-resident entities are required to obtain a unique identification number (UIN) from the designated depository participant (DDP) to invest in Indian securities.
• The non-resident entities must also report their investments to the DDP and SEBI in a prescribed format and time frame.
• FEMA provides for penal provisions for non-compliance with the regulations, including fines and imprisonment.
• The Reserve Bank of India (RBI) is the regulatory authority for enforcing FEMA regulations related to foreign portfolio investment.
In summary, the FEMA regulations related to foreign portfolio investment aim to facilitate foreign investments in the Indian economy while ensuring compliance with regulatory and legal requirements. The regulations provide for eligibility criteria, investment limits, reporting and compliance requirements, and enforcement provisions to promote transparency and prevent money laundering and other illicit activities.
In conclusion, foreign portfolio investment (FPI) regulations in India are an essential aspect of the country’s economic policy framework. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have put in place a comprehensive regulatory framework that aims to promote transparency, prevent money laundering, and ensure compliance with legal and regulatory requirements.
The FPI regulations provide for investment limits, reporting and compliance requirements, and enforcement provisions, which promote transparency and prevent illicit activities in the financial markets. The regulations have been updated periodically to address emerging
challenges and opportunities in the global economic landscape.
Associate Intern at Aggarwals & Associates, Mohali