Chapter 11: SEBI (Foreign Portfolio Investors) Regulations, 2019

Foreign portfolio investment is a primary channel for foreign capital in Indian financial markets. The SEBI (Foreign Portfolio Investors) Regulations, 2019 consolidated previous foreign institutional investor regimes into a streamlined two-category framework.

The Two FPI Categories

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|                        FPI CATEGORIZATION FRAMEWORK                               |
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| CATEGORY I (Lowest Risk / Sovereign / Well-Regulated Public Vehicles):            |
| - Sovereign Wealth Funds (SWFs), Central Banks, Foreign Governments               |
| - Pension Funds, University Endowments, Sovereign-controlled entities             |
| - Well-regulated mutual funds, insurance/reinsurance firms from FATF jurisdictions|
|                                                                                   |
| CATEGORY II (Standard Risk / Private Vehicles / Commercial Corporates):           |
| - Appropriately regulated corporate entities, trusts, and family offices          |
| - Regulated investment managers, brokerages, and hedge funds                      |
| - High-Net-Worth Individuals (HNIs) and family trusts                             |
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Eligibility Criteria (Regulation 4)

An applicant is eligible for FPI registration only if:

1. It is a non-resident of India;
2. It is a resident of a country whose securities market regulator is a signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU) or a bilateral MoU with SEBI;
3. If an individual, is not a resident of a country flagged on the FATF public statement (anti-money laundering deficiencies);
4. The applicant and its beneficial owners meet the Fit and Proper Person criteria under Schedule II of the Intermediaries Regulations.

The Common Application Form (CAF)

Foreign investors register through a unified Common Application Form (CAF) that handles:

• Registration as an FPI with SEBI;
• Issuance of Permanent Account Number (PAN) by the Income Tax Department;
• Opening of a bank account (Foreign Currency / Special Non-Resident Rupee - SNRR account) with an Authorized Dealer bank;
• Opening of a demat account and custodial account with a Depository Participant.

Under the FPI regulations, SEBI delegates the day-to-day registration and compliance monitoring of FPIs to Designated Depository Participants (DDPs).

Eligibility Criteria for DDPs

A DDP must be a registered Depository Participant and Custodian of Securities, possessing:

• A minimum net worth of ₹50 Crores;
• Adequate computational systems, global communications capacity, and operational staff;
• Robust internal controls and compliance procedures.

Statutory Duties of a DDP

• Registration Authority: The DDP processes the FPI application, verifies KYC documents, checks ultimate beneficial ownership down to the natural person, and grants the Certificate of Registration on behalf of SEBI.
• Tax Clearance: Monitors capital repatriation, coordinates withholding tax deductions, and files statutory certifications with tax authorities.
• Reporting to SEBI & Depositories: Reports foreign investor data, changes in material information, and daily investment limits.

FPI investments are subject to strict corporate ownership caps to preserve domestic ownership thresholds.

Investment Ceilings and Clubbing Rules

1. Single Investor / Investor Group Limit: Total investment by an individual FPI, or multiple FPIs belonging to the same investor group, cannot exceed ten percent (10%) of the total paid-up equity capital of a company on a fully diluted basis.
2. Breach of 10% Limit: If an FPI crosses 10%, it must divest the excess holding within five (5) trading days. If not divested, its entire holding is automatically reclassified as Foreign Direct Investment (FDI), subjecting it to FDI lock-ins, sectoral conditionalities, and reporting rules.
3. Aggregate FPI Sectoral Cap: The aggregate limit for all FPI investments in an Indian company is set at the sectoral cap applicable to that industry under the Foreign Exchange Management Act (FEMA).

Offshore Derivative Instruments (ODIs / P-Notes)

ODIs (popularly known as Participatory Notes or P-Notes) are overseas financial contracts issued by registered FPIs against underlying Indian securities.

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|               OFFSHORE DERIVATIVE INSTRUMENTS (ODI) RESTRICTIONS                  |
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|  * ELIGIBILITY: Can only be issued to entities eligible for Category I FPI        |
|  * OPAQUE STRUCTURE BAN: Cannot issue to entities with opaque multi-tier structures|
|  * FULL BO DISCLOSURE: Unmasked natural person beneficial owners must be disclosed |
|  * DERIVATIVE HEDGING ONLY: ODIs cannot be issued for naked speculative derivative|
|    positions; must be backed by cash shares or fully hedged exchange positions     |
|  * MONTHLY REPORTING: Detailed subscriber filings submitted to SEBI by 10th       |
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The operational lifecycle of an FPI requires continuous coordination between the foreign investor, Designated Depository Participant (DDP), Custodian, and Indian tax authorities.

Operational Lifecycle of Foreign Portfolio Investments

1. Account Setup & Remittance: FPI opens a Special Non-Resident Rupee (SNRR) bank account and a Foreign Currency account with an Authorized Dealer bank. Funds are remitted through formal banking channels.
2. Custodial Clearing: All FPI trades must be settled through a registered Custodian of Securities. The custodian confirms trades with clearing corporations on T-day / T+1 before clearing cut-offs.
3. Centralized Foreign Ownership Monitoring System: Depositories (NSDL and CDSL) operate an integrated system tracking aggregate FPI holdings in every listed company against applicable sectoral caps.
   • When aggregate FPI holding approaches within 3% of the permissible limit, the scrip is placed under a regulatory "Red Flag / Warning" alert.
   • Once the limit is breached, foreign purchases are blocked on stock exchange trading terminals until domestic disinvestment restores headroom.

Tax Compliance & DTAA Verification

• FPIs are subject to Indian capital gains tax under the Income Tax Act, 1961 (Short-Term Capital Gains - STCG and Long-Term Capital Gains - LTCG).
• Where an FPI seeks treaty benefits under a Double Taxation Avoidance Agreement (DTAA), the DDP and custodian must verify the validity of the foreign entity's Tax Residency Certificate (TRC) and Form 10F before executing dividend distributions or capital remittances.