FPI Regulations

1. What Are FPIs?

Foreign Portfolio Investors (FPIs) are overseas entities that invest in Indian securities but don't seek active management control. They include foreign mutual funds, pension funds, sovereign wealth funds, hedge funds, and insurance companies. FPIs are distinct from FDIs (Foreign Direct Investors), who seek management control.

2. Categories of FPIs

SEBI classifies FPIs into three categories based on risk and regulatory compliance:

Category	Description	KYC Requirements
Category I	Government entities, central banks, supranationals	Minimal (lowest risk)
Category II	Regulated entities like mutual funds, pension funds, insurance companies	Standard
Category III	Unregulated entities, trusts, individuals, family offices	Enhanced (highest risk)

3. Registration and Compliance

FPIs must register with SEBI through a Designated Depository Participant (DDP) — typically a major custodian bank. Requirements include:

• Proof of regulatory status in home jurisdiction
• Beneficial ownership disclosure (up to the natural person level for Category III)
• Compliance with KYC norms and FATCA/CRS requirements
• Appointment of a local custodian and compliance officer

4. Investment Limits

FPIs face several investment limits:

• Aggregate FPI limit in a company: Typically 24% of paid-up capital (can be raised to sectoral caps via board resolution)
• Single FPI limit: No single FPI can hold more than 10% of a company's equity
• Government securities: Separate limits for G-Sec and State Development Loans
• Corporate bonds: Limits exist but are generally not binding

5. FPI Flows and Market Impact

FPIs are the single largest source of foreign capital into Indian equities. Their flows drive market direction:

• FPI buying: ₹10,000+ crore monthly inflows typically push Nifty higher
• FPI selling: Outflows create sustained selling pressure, especially in large-caps
• Sector preference: FPIs favor financials, IT, and consumer staples

Retail investors can track FPI flows through NSDL/CDSL data released daily.

6. Taxation of FPIs

FPIs are subject to:

• Short-term capital gains (STCG): 15% if securities held < 1 year
• Long-term capital gains (LTCG): 10% above ₹1 lakh exemption if held ≥ 1 year
• Dividend tax: Subject to withholding tax as per tax treaties
• Securities Transaction Tax (STT): Paid on all trades

Many FPIs route investments through Mauritius, Singapore, or Netherlands to benefit from tax treaties, though treaty benefits have been narrowed under BEPS and MLI frameworks.

7. Recent Regulatory Changes

• Beneficial ownership: Enhanced disclosure requirements to prevent opaque structures
• Tax treaty changes: Limitation of Benefits (LOB) clauses tightened
• Debt investment: FPIs must hold G-Secs to maturity in certain categories (Voluntary Retention Route)