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Foreign Portfolio Investors (FPIs)

January 27, 2024
Securities

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Context (IE): Last year in May, the Securities and Exchange Board of India (SEBI) released a consultation paper suggesting increased disclosures from certain Foreign Portfolio Investors (FPIs).
The suggested regulations aim to improve transparency by:
- Thoroughly identifying the actual ownership of an entity within a holding.
- Providing a clear depiction of economic interests in the holding.

Why did SEBI request additional disclosures from FPIs?

Sebi highlighted that certain FPIs hold a significant portion of their equity in a single company or corporate group.
This concentrated investment raises concerns that promoters or other investors might use FPI routes to bypass regulatory requirements such as,
- Firstly, to prevent potential evasion of Minimum Public Shareholding (MPS) requirements.
- Secondly, to avoid the misuse of the FPI route in bypassing the requirements outlined in Press Note 3 (updated April 2020).

Public shareholding, or the shares held by the public for a listed entity, must be at least 25% to continue being listed.

Press Note 3/PN3

The central government amended the FDI policy vide Press Note 3 in April 2020.
It required an entity sharing a land border with India, or where the beneficial owner is based out of any such country, can invest(FDI) only via the government route.
- It may happen the FPI entity is located in country with which India does not share a land border.
- Still, the investor in the FPI (or the beneficial owner of the FPI) might be a citizen and/or residing in such a country.
- Proposed regulations in both cases would be able to trace such ownership & economic interest.

FPIs required to comply

High-risk FPIs holding more than 50% of their equity asset under management (AUM) in a single corporate group would have to make additional disclosures.
High-risk FPIs with an overall holding in the Indian equity market of over Rs 25,000 crore.
Non-compliance would result in the invalidation of the FPI’s registration. Consequently, these FPIs would need to cease operations within six months.

Asset under management: It is the total market value of all the financial assets that an individual or financial institution (mutual fund, venture capital firm, or depository institution) controls, typically on behalf of a client.

FPIs exempted

Sovereign wealth funds (SWFs).
Listed companies on certain global exchanges.
Public retail funds.
Other regulated pooled investment vehicles with diversified global holdings.

Foreign Portfolio Investment (FPIs)

It refers to the purchase of securities and other financial assets by investors from another country.
FPI holdings may consist of stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
Unlike direct ownership, FPI involves passive ownership, granting investors no control over ventures, property, or direct stakes in companies.
Investments made by Non-Resident Indians (NRIs) are not categorized as FPI.
Foreign Portfolio Investment (FPI) has emerged as a significant source of capital for Indian companies in recent years.
- In 2021, FPIs have invested more than $26 billion in Indian equities and $14 billion in debt instruments.
Regulatory framework governing FPI in India
- The Foreign Exchange Management Act, 1999.
- SEBI’s regulations on foreign institutional investors (FIIs).

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