Note on Securities and Exchange Board of India (Foreign Portfolio Investments), 2014

Capitalised terms used herein and not defined otherwise shall have the meaning as ascribed to such terms under the Regulations.

(1)   The Securities and Exchange Board of India (“SEBI”) on January 7, 2014 notified the much awaited and talked about Foreign Portfolio Investments Regulations. This move by SEBI has been taken to create a single regulatory regime to regulate foreign portfolio investments.  The instant Regulations bring all Foreign Institutional Investors, Qualified Institutional Investors (“QFI”) and Sub Accounts under the one head of Foreign Portfolio Investments (“FPI”).

(2)   SEBI has brought forward simpler entry norms whereby Authorised Dealers Class I registered with the Reserve Bank of India (“RBI”) have been given the task of registereing the incoming prospective FPIs as well as granting certificates of registration to the erstwhile QFIs, FIIs and Sub Accounts. Moving towards the global approach to promote the Know Your Client (“KYC”) regime, FPIs also need to go through the KYC. This would prompt more transparency in the accountability and smooth governance as well.

(3)   Moreover FPIs have been divided under 3 categories depending on the risk that they pose while investing in the country’s Capital Markets (Annexure A). Hence there are also different conditions attached to the registration of FPI depending on the category it belongs to.


(1)   For the time being SEBI has relaxed the registration process of the ongoing FIIs and Sub Accounts where they have deemed to be FPIs for a period of 3 years. However they have to paying conversion fees of US$ 1000 through electronic means before the expiry of their registration. The move is an attempt at promoting the easy accessibility to Indian Capital Market by the Foreign Investors.

(2)   Whereas in contrast, QFIs are given a time frame of one (1) year from date of notification of the Regulations to trade in securities until it obtains a FPI registration.

(3)   However for prospective fresh investors who wish to invest in the Indian Capital Markets they have to apply to the Authorised Dealer in the Form A annexed in First Schedule of the Regulation wherein they have to specify personal identification documents such as copy of passport, photograph etc.

(4)   Fresh FPIs belonging to category II and III have to pay fees of US$ 3000 and US$ 300 respectively to avail the status of a FPI. Category I FPIs belonging to privileged class and having least amount of risk involved have been given a greater incentive by exempting them of the registration fees.

(5)   An additional task attached with the depository participant is that onus now lies on them to collect the renewal fees for the registration every 3 years.

(6)   There are instances where many FPIs have a common beneficial owner and hence in order to create concrete systems, SEBI has decided to only exempt only one FPI from the registration fees and the other FPIs have to pay a registration amount of US$ 3000. Unless anything said to the contrary Multinational/ International bodies enjoying special status shall be exempted.


(1)   The applicant is not a resident in India;

(2)   The applicant should be a resident of a country whose security market regulator is a  signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Board;

(3)   If the applicant is a bank then the central bank of the country should be a member of Bank of International Settlements;

(4)   The applicant is not resident in a country identified in the public statement of Financial Action Task Force as:

a)      Having weak anti money laundering laws and has lacunae in curbing the menace of terrorism financing activities.

b)      Having deficiencies in addressing the shortcomings of the financial system and has not committed itself to an action plan developed with the Financial Action Task Force to address the shortcomings

(5)   The governing clauses of the company as well as the laws of the country should also authorise the applicant to invest in securities outside the country on its own behalf or on behalf of others.

(6)   The applicant should have acquired substantial goodwill in the market.



The depository participant shall grant the certificate in Form B as prescribed under the Regulations and collect fees which shall be remitted to SEBI. A time frame has been set at 30 days for issuance of the certificate by the depository participant.

However the depository participant has been vested with the right to reject an application where it finds that the information provided in false, misleading or inadequate. Application having certain deficiencies shall be granted additional time to remove such deficiencies.

In cases of rejection the applicant being intimated about the rejection has the right to send an application for reconsideration to SEBI within a period of 30 days. The SEBI is vested with the sole right and discretion with regard to the suspension and cancellation of a FPI. A FPI may apply for surrendering the certificate to a depository participant which may be subject to conditions imposed by the depository participant as prescribed by SEBI.



In furtherance to the aforementioned conditions a prospective FPI shall comply with various other restrictions as laid down in Regulation 11 of the instant Regulations.

Foreign investors shall invest only in the following securities:-

a)      Securities in the primary and secondary markets which might include shares, debentures, warrants of companies which are listed or to be listed in any recognised stock exchange.

b)      Schemes floated by domestic mutual funds whether listed or not listed.

c)      Schemes floated by collective investment schemes.

d)      Derivatives traded on a recognized stock exchange.

e)      Treasury bills and dated government securities.

f)       Commercial papers issued by an Indian company.

g)      Rupee denominated credit enhanced bonds.

h)      Security receipts issued by asset reconstruction companies.

i)        Perpetual debt instruments and debt capital instruments, as specified by the RBI.

j)        Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector.

k)      Non-convertible debentures or bonds issued by NBFCs categorized as Infrastructure Finance Companies by the RBI.

l)        Rupee denominated bonds or units issued by infrastructure debt funds.

m)    Indian depository receipts



Where a FII or a sub account, prior to commencement of The Regulations, holding equity shares in a company whose shares are not listed and however continues to hold such shares after initial public offering and listing thereof, such shares held by the FII or a sub account shall be subject to lock-in for the same period, if any, as is applicable to shares held by a foreign direct investor which is positioned in a parallel position, under the policy of the Government of India relating to foreign direct investment for the time being in force.

A FPI intending to invest in Secondary Market shall trade in the securities in India only on the basis of taking and giving delivery of securities purchased or sold. However FPIs have been sanctioned to trade in securities such as derivates listed on a recognised stock exchange, short selling transactions, transaction which is entered into with the merchant banker.

Further the Regulations mandate that no transactions in a stock market shall be carried forward.


>  The aforementioned transactions should be done through a broker registered with SEBI.

While there is a class of transactions which could take place without the help of a broker:-

a)      Government securities and such other securities falling under the supervision and control of the Reserve Bank of India.

b)      Sale of securities in response to a letter of offer sent by an acquirer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

c)      Sale of securities in response to an offer made by any promoter or acquirer in accordance with the SEBI (Delisting of Equity shares) Regulations, 2009.

d)      Sale of securities, in accordance with the SEBI (Buy-back of securities) Regulations, 1998.

e)      Divestment of securities in response to an offer by Indian companies.

f)       Transaction of securities with respect to disinvestment of shares offered by the Central

g)      Government or any State Government.

h)      Transaction in securities pursuant to any agreement entered into with a merchant banker.


>  In cases where a FPI purchases equity shares of a company, the Regulations maintain a 10% cap on the total issued capital of a company.

>  An important which needs to be taken note of is that a FPI shall only transact in securities in the dematerialised form


No FPI shall deal in offshore derivative instruments unless such instruments are issued to persons adequately regulated by foreign regulatory authorities and only after compliance of the Know your clients norms. Further unregulated broad based funds that fall under the Category II of FPIs by virtue of their investment manager being appropriately regulated shall not deal with offshore derivative instruments. Such further issue of securities by a FPI shall be conducted only if the persons are adequately regulated by a foreign authority. There must be complete and full disclosures of terms and conditions of offshore derivative instruments which are proposed to be listed in any recognised stock exchange.

On the 12th of January, 2014 SEBI has tightened norms for participatory notes or P notes which fall under the head of offshore derivative instruments. SEBI has excluded the issuance of P notes for Category III FPIs.


>  Obtaining a Permanent Account Number from the Income Tax Department.

>  Undertaking to be provided declaring their submission to the Indian laws to the depository participant.

>  Engagement of a designated depository participant for availing its services.

>  Appointment of custodian of securities which shall report daily to the depository participant and SEBI.

>  Appointment of branch of a Bank for opening up of a foreign currency account.

>  Appointment of a compliance officer.






Category I

Category II

Category III

Government and Government related investors such as Central Banks, Governmental Agencies, Sovereign Wealth Funds, International/ Multilateral Organizations/Agencies. a)     Appropriately regulated broad based pooled funds.

b)    Appropriately regulated entities such as Banks and other Financial Institutions.

c)     Appropriately regulated broad based funds whose investment manager is appropriately regulated and is registered on behalf of SEBI by the designated depository participant as Category II foreign portfolio investor.

d)    University Funds and Pension Funds

e)     University related Endowments already registered with SEBI as FII/Sub Account

All other FPIs not eligible under Category I and II such as Endowments, Charitable Societies/Trust, Foundations, Corporate Bodies, Trusts, Individuals, Family Offices.