India: Foreign Portfolio Investments - Government’s Initiatives

Last Updated: 12 August 2013


Ever since India has embraced liberal economic policies by opening up its markets post 1991-92,1 capital inflows generated by foreign direct investment ("FDI") and foreign portfolio investment ("FPI") has proved to be indispensable for the cause of propulsion of economic growth of the country. While FDI is the use of long term capital flows to acquire control over local productive potentials by a foreign enterprise, FPI involves transfer of short term capital funds like shares and bonds without regard to managerial control. Post liberalization, investments through FPIs has been the major source of foreign investments in India.2 However, there has been lack of concretization of any fixed regulatory measure to manage FPIs.

In this backdrop, a working group on foreign investment in India ("WGFI") under the Ministry of Finance was set up on November 9, 2009. The WGFI was headed by the current chairman of SEBI, Mr. U. K. Sinha. The WGFI came out with its report ("Report 1") on July 30, 2010. SEBI, in its Board meeting on October 6, 2012, decided to prepare a draft guideline on the guidance of Report 1 so that necessary regulatory framework could be created based on the guidelines which the aforesaid committee would formulate. Accordingly, in order to implement the board's decision on June 12, 2013, a committee was formed by SEBI3 under the chairmanship of Shri K. M. Chandrasekhar, comprising of representatives from government, RBI and various market participants who came up with a report on the rationalization of investment routes and monitoring of foreign portfolio investments ("Report 2"). The present bulletin provides a close examination and analysis of both these reports which have attempted to chalk out a future roadmap for foreign inflows other than FDI.

1. Analysis of Report 1

The mandate of the WGFI was primarily to reflect on the existing policy on FPIs with a view to encourage foreign investment, to understand the financing needs of the Indian economy through foreign investment and identify specific bottlenecks and hurdles existing in the framework related to FPIs.4 Pursuant to the above mandate, the U.K. Sinha report sought to rationalize the arrangements relating to foreign portfolio investments by FIIs, NRIs and other classes of foreign investors like foreign venture capital investors ("FVCIs") and private equity entity etc. Therefore, it recommended (i) a single window for portfolio investment regulations i.e. FII & sub-accounts of FII5 and (ii) NRI and FVCI to be replaced by qualified foreign investors ("QFIs"). This would be monitored through KYC norms and KYC norms would be enforced only through SEBI regulated qualified depository participants6 ("QDPs"). The QFI route was introduced by the finance ministry as a separate route to encourage investments from those investors who did not qualify as FIIs or NRIs or FVCIs.

The findings and recommendations of Report 1 were primarily based on the premise that an integrated policy on foreign investments would reduce the overall complexity and number of regulations governing inbound investments. However, it had merged NRIs and FVCIs into QFIs in an attempt to achieve a single route of investments. NRIs and FVCIs, being of a different nature, had to be treated as a separate investor class.

Even though QDPs were successfully established under this scheme, QFIs investment turned out to be less than 50 in number which was attributed mainly to the lack of clarity on taxation.7 There were growing concerns over the fact that owing to lack of fixed criteria delineating FDI and FPI, most of the investments made were in the form of FPI, which in the longer run is not desirable owing to their temporary and volatile nature. Portfolio investments in any company made through various routes when clubbed together amounted to as high as 44%8 without being termed as FDI. This was addressed by the Finance minister while presenting the 2013-14 budget and he proposed to follow the international practice and laid down a broad principle where an investor has a stake of 10 % or less in a company, it will be treated as FII and if more, then it will be treated as FDI. The burden of creating necessary regulatory framework was to be borne by SEBI/RBI based on the U.K. Sinha Report. The committee under the chairmanship of Shri K.M. Chandrasekhar was thus constituted to prepare a concrete framework and address the loopholes of Report 1.

2. Recommendations of Report 2

The committee has proposed a new investor route to be formed which would be termed as foreign portfolio investor ("FPI") and will replace by merging all existing FIIs, sub accounts of FIIs and QFIs. Although NRIs and FVCIs, owing to their special nature, were to be considered outside the umbrella of FPI. For FPIs, it has been suggested that the aggregate investment limit will be 24% (which currently is the limit for FIIs) and for NRIs an individual investment limit of 5% and an aggregate investment limit of 10% has been recommended. It was felt by the committee that NRIs and FVCIs should be continued to be viewed as a separate investor class enjoying certain privileges in terms of investment permissions which are not available to other foreign investors.

It has also attempted to classify FPIs and FDIs according to the global standards by proposing that single overseas investments by any single investor or group of investors that exceeds 10% in the equity of a company to be classified as FDI and those less than 10% as FPI. Report 2 has succeeded in delineating the border between FPI and FDI. As compared to Report 1 where the boundary remained unclear, this report surely intends to lower the cap where FPI transcends into the horizon of FDI by marking 10% as the critical line. The 10% threshold is also the standard OECD rule and will bring India at par with policies of Brazil, South Korea etc. The act of delimiting to 10% will surely reduce excessive portfolio investments which are volatile in nature and prevent FIIs from their propensity of withdrawing at the hint of slightest alarm as we are witnessing in the current debt-ridden Indian economic scenario. It will also increase FDIs which are more permanent and long term in nature. Also this would prevent an FPI investor from taking the benefits of larger shareholding without qualifying as an FDI.

Further, the committee has recommended for categorization of FPIs into 3 categories with low risk FPIs (like government and government related entities) being subjected to less scrutiny while moderate (regulated entities like banks, asset management companies and broad based funds) high risk FPIs (all FPIs which do not belong to moderate or low risk category) being subjected to greater scrutiny. As regards procedural aspects, registration was again kept simple with the committee recommending that prior direct registration of FIIs and sub accounts with SEBI to be dispensed with. All KYC details are to be handled by SEBI regulated QDPs (qualification of QDP to be prescribed by SEBI only) and KYC data to be handled in a risk based approach based on which stronger registration requirements would be imposed. Similarly, issuance of offshore derivative instruments/participatory notes and their acceptance would be dependent on the category of FPI being disallowed for high risk FPIs.

The committee has again treaded on the lines of U.K. Sinha report with respect to the procedural aspects by keeping the registration procedure and compliance measures simple; and now it has even been eased it further for NRIs. The object of the KYC approach is to carve out a pragmatic approach which will increase the sense of security in the market and make portfolio investments more reliable than before.


In order to implement its proposals effectively, the committee had suggested amendments to be made to a number of legislations like: (i) FII regulations prescribed by SEBI and QFI framework prescribed by SEBI and the RBI would need to be repealed and replaced by a new framework for FPIs; (ii) FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, notably Regulations 5 (2), 5(6), 7A, 8 and Schedule 2, 5, 8 and other related provisions would have to be amended and replaced to prescribe the permissible caps and investment levels applicable to foreign portfolio investor; (iii) Necessary amendments in FEMA to replace references to FIIs with FPIs; (iv) Necessary amendments to PML Rules; (v) Necessary amendments in Income Tax Act, 1961; (vi) General permission granted by RBI to FIIs dated December 17, 2003; (vii) Government guidelines dated September 14, 1992; (viii) RBI's foreign exchange management framework; (ix) Consolidated FDI Policy dated April 5, 2013; (x) SEBI (ICDR) Regulations, 2009; and (xi) SEBI (SAST) Regulations, 2011.

In the alternative, it had suggested that a clause may be introduced in the aforesaid legislations stating that the term FII shall mean FPI registered with Designated Depository Participants. SEBI in its Board Meeting on June 25, 2013 has accepted the recommendations of the committee and while accepting the recommendations of the committee, the Board has decided that the recommendations concerning SEBI would be implemented by SEBI and the other recommendations would be recommended to the government of India for implementation. Till then, we have our fingers crossed.

This bulletin is prepared by Satish Padhi (under the supervision of Rohitaashv Sinha, Associate), a 4th year law student of National Law University, Odisha.


1 Report of the P.V Narasimhan Rao Committee in 1991 led to major Economic Reforms.

2 (last visited on July 18th, 2013).

3 SEBI is the regulator with the mandate to protect the interest of investors and to promote the development of the securities and to promote the development of the securities market. See the Long Title of the Securities and Exchange Board of India Act, 1992.

4 See the Terms of Reference provided to WGFI by the Ministry of finance on November 19, 2009.

5 The phrase "sub-account‟ has been defined in SEBI (FIIs) Regulations, 1995 as any person resident outside India, on whose behalf investments are proposed to be made in India by a foreign institutional investor and who is registered as a sub-account under these regulations. A sub-account could be a broad based fund, foreign corporate, foreign individual or university fund or charitable societies who are eligible to register as a foreign institutional investor.

6 QDPs would have higher capital requirements and would need to pass a detailed fitness test administered by SEBI.

7 India's Taxation Regime keeps getting altered every year through the Finance Act passed in the respective year. Also, we follow source based taxation rather than resident based taxation.

8 (FII-24%, NRI-10%, FVCI-10%).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions