Avoid these mistakes while booking FD
-
In summary
- What FPI means: Foreign investors can participate in Indian capital markets without taking a controlling or strategic interest in an Indian company.
- 10% threshold: An FPI or investor group generally needs to remain below the applicable 10% equity holding threshold for FPI treatment.
- Two categories: SEBI classifies FPIs broadly into Category I and Category II, based on the investor's nature, regulatory status and jurisdiction.
- Investment options: FPIs may access eligible equity, debt, government securities, mutual funds and other permitted market instruments, subject to applicable conditions.
- Taxation: Income earned by FPIs in India is subject to the applicable provisions of the Income-tax Act, including Section 115AD for specified income of foreign institutional investors and FPIs.
What is Foreign Portfolio Investment (FPI)?
-
Foreign Portfolio Investment refers to investments made by eligible non-resident investors in financial securities in another country. In India, the FPI framework enables foreign investors to participate in the country's capital markets without establishing a direct business presence or acquiring a controlling interest in an Indian company.
The framework is administered primarily through the Securities and Exchange Board of India (SEBI), with foreign exchange aspects governed under the applicable provisions of the Foreign Exchange Management Act (FEMA) and related RBI regulations.
The FPI framework consolidated earlier categories of foreign portfolio investors, including Foreign Institutional Investors (FIIs), sub-accounts and Qualified Foreign Investors (QFIs), into a unified regulatory structure.
Key characteristics of FPI
Passive investment:
FPI generally focuses on financial returns from securities rather than obtaining operational control over the investee company.Market-linked liquidity:
Listed securities can generally be bought and sold through recognised market mechanisms, subject to applicable trading and settlement rules.10% holding threshold:
The FPI framework uses a 10% threshold for determining when certain foreign portfolio holdings are treated differently. An investment crossing the applicable threshold may have to be dealt with under the foreign direct investment framework. The precise treatment depends on the applicable FEMA and foreign investment rules.
What are Category I and Category II FPIs?
-
What are Category I and Category II FPIs?
SEBI divides eligible foreign portfolio investors into Category I and Category II. The classification is based on factors such as the nature of the investor, regulatory status and jurisdiction.
Parameter Category I FPI Category II FPI Typical investors Government and government-related investors, central banks, sovereign wealth funds, specified pension or university funds and appropriately regulated entities Other eligible investors, including certain regulated funds, endowments, foundations, charitable organisations, corporate bodies, family offices and individuals Regulatory profile Generally includes investors meeting specified regulatory and jurisdictional conditions Covers eligible investors that do not qualify under Category I KYC requirements Subject to applicable KYC and beneficial ownership requirements, with certain regulatory exemptions depending on the investor Subject to applicable KYC and beneficial ownership requirements Examples Sovereign wealth funds, central banks and qualifying regulated funds Family offices, corporate bodies and qualifying individuals SEBI's FPI framework specifically identifies government-related investors, appropriately regulated entities and certain entities from FATF member jurisdictions within Category I, while Category II includes eligible entities such as family offices, corporate bodies and individuals that do not qualify for Category I.
The category does not by itself determine whether an investment will generate a profit or loss. It primarily establishes the regulatory treatment and compliance framework applicable to the investor.
-
Conclusion
Foreign portfolio investment provides international exposure through shares, bonds, funds, ETFs, and permitted derivatives. It offers diversification and liquidity without giving investors direct management control over foreign companies. However, FPI remains exposed to market movements, currency changes, taxation, regulation, and geopolitical developments. India regulates FPIs through SEBI, foreign exchange rules, investment limits, and disclosure requirements. Investors should verify eligibility, costs, taxation, liquidity, and risk before investing in another country’s financial markets.
Calculate your expected investment returns with the help of our investment calculators
Investment Calculator Fixed Deposit Calculator Provident Fund Calculator PPF Calculator Recurring Deposit Calculator Gratuity Calculator Sukanya Samriddhi Yojana Calculator
What is the difference between FPI and FDI?
FPI and FDI differ mainly in their investment structure, purpose and regulatory treatment. FPI generally represents investment in financial securities without seeking direct control, whereas FDI involves a direct investment interest in an Indian business.
| Parameter | FPI | FDI |
|---|---|---|
| Primary purpose | Financial investment and portfolio returns | Long-term business or strategic investment |
| Typical investment | Shares, debt securities and other permitted market instruments | Equity or other instruments representing direct investment in an Indian business |
| 10% threshold | Applicable foreign portfolio investment holdings generally remain below the prescribed threshold | Holdings meeting the applicable threshold may fall within the FDI framework |
| Management control | Generally does not involve direct operational control | May involve significant influence or control |
| Liquidity | Listed securities can generally be traded through market mechanisms | Direct investments can be less liquid |
| Regulatory route | SEBI FPI registration and applicable FEMA/RBI requirements | FDI rules, sectoral conditions and applicable approval or reporting requirements |
FPI vs FDI: three important differences
1. Investment objective
FPI is primarily associated with investment in financial assets. FDI is generally associated with establishing or acquiring a direct economic interest in an Indian business.
2. Level of involvement
An FPI does not ordinarily seek operational control over the investee company. An FDI investor may have a greater strategic or managerial interest, depending on the investment structure.
3. Regulatory framework
FPI registration and investment activity are governed through the SEBI framework along with applicable FEMA/RBI provisions. FDI is governed through India's foreign investment framework, including sector-specific conditions and applicable government approval requirements.
Which instruments can FPIs invest in India?
The instruments available to an FPI depend on the applicable SEBI and RBI framework and the conditions attached to each investment route.
Common permitted investment avenues include:
- Equity shares: Eligible listed securities and securities offered through permitted primary-market routes.
- Corporate debt: Eligible bonds, non-convertible debentures and other permitted debt instruments.
- Government securities: Eligible government securities and Treasury Bills.
- Mutual funds: Units of eligible domestic mutual fund schemes.
- REITs and InvITs: Units of permitted Real Estate Investment Trusts and Infrastructure Investment Trusts.
- Derivatives: Eligible exchange-traded derivatives, subject to applicable regulations and position limits.
RBI regulations have historically provided FPIs access to instruments including government securities, Treasury Bills, corporate bonds, commercial paper and units of domestic mutual funds, subject to the prevailing regulatory conditions.
Debt investment conditions can change through RBI circulars and directions. For example, RBI has issued specific directions concerning FPI investment limits in debt securities and related instruments.
How is FPI income taxed in India?
Tax treatment for FPIs depends on the type of income, security, holding period, applicable statutory provisions and, where relevant, the provisions of an applicable tax treaty.
Section 115AD of the Income-tax Act, 1961 contains specific provisions concerning income of certain foreign institutional investors and FPIs. Capital gains, dividends and interest can be subject to different tax rules.
Capital gains
Capital gains taxation depends on the nature of the security and whether the gain qualifies as short-term or long-term under the applicable provisions.
For listed equity shares and specified equity-oriented instruments on which the required Securities Transaction Tax conditions are met, special capital gains provisions can apply. Other securities may be subject to different holding-period rules and tax rates.
The applicable rate should therefore be checked based on:
- Type of security
- Date of acquisition and transfer
- Holding period
- Whether STT conditions are satisfied
- Applicable section of the Income-tax Act
- Surcharge and health and education cess
- Whether a tax treaty provides a beneficial rate
Dividend and interest income
Dividend and interest income received by an FPI can also be taxable in India, with the applicable rate depending on the nature of income, statutory provisions and relevant treaty benefits.
DTAA benefits
A foreign investor resident in a country that has a Double Taxation Avoidance Agreement (DTAA) with India may, subject to the treaty and applicable conditions, claim treaty benefits.
This generally requires satisfying the relevant eligibility and documentation requirements, which may include a Tax Residency Certificate (TRC) and prescribed tax forms.
Because tax provisions can change, FPIs should refer to the applicable provisions for the relevant assessment year rather than relying on a single headline tax rate. The Income-tax Department's current forms continue to specifically provide for reporting of FII/FPI capital gains under the relevant provisions.
Check out different FD Rates
How does FPI affect Indian financial markets?
FPI flows can influence Indian equity, debt and currency markets because foreign investors represent a significant source of cross-border capital.
When foreign capital enters Indian markets, it can increase demand for eligible securities. Conversely, large-scale selling can increase market supply and contribute to price movements.
However, FPI flows are only one factor affecting market prices. Domestic institutional investment, retail participation, corporate earnings, interest rates, inflation, currency movements, global market conditions and economic data can also influence Indian financial markets.
FPI activity can therefore affect:
- Equity prices: Large purchases or sales can influence demand and supply.
- Currency markets: Cross-border capital flows can affect foreign-exchange demand and supply.
- Bond markets: FPI participation can influence demand for eligible debt securities.
- Market volatility: Rapid changes in foreign flows can contribute to short-term market movements.
The effect is not necessarily uniform across all securities or market periods.
How can foreign entities register as FPIs in India?
Foreign entities seeking FPI registration generally need to complete registration and compliance requirements through a Designated Depository Participant (DDP).
A simplified process is as follows:
1. Select a DDP
The foreign investor approaches an eligible SEBI-authorised DDP to begin the registration process.
2. Submit the required application
The applicant provides the prescribed application and supporting documents covering its legal structure, jurisdiction, regulatory status and other relevant information.
3. Complete KYC and beneficial ownership checks
The DDP conducts the required KYC and beneficial ownership verification. The level of disclosure depends on the applicant's structure and applicable regulatory provisions.
4. Obtain FPI registration
After completing the applicable due diligence and regulatory requirements, the DDP processes the FPI registration.
5. Complete operational setup
The investor then completes the required banking, custody, demat and trading arrangements before commencing investment activity.
SEBI's FPI framework provides for the registration mechanism and classification of eligible investors, while related operational requirements are implemented through the DDP and other market intermediaries.
What are the risks associated with FPI?
FPI provides foreign investors access to Indian capital markets, but the investments remain exposed to market and cross-border risks.
Key risks include:
- Market risk: Equity and other market-linked securities can fluctuate in value.
- Currency risk: Changes in the Indian Rupee against the investor's home currency can affect returns.
- Interest-rate risk: Changes in domestic and global interest rates can affect debt securities and equity valuations.
- Regulatory risk: Changes to foreign investment, taxation, securities or exchange-control regulations can affect investment structures.
- Liquidity risk: Some securities may have lower trading liquidity than major listed equities.
- Geopolitical and global economic risk: International events can influence foreign investment flows and market sentiment.
A foreign investor therefore needs to consider both the underlying security and the additional risks associated with cross-border investing.
Fixed Deposit variants
Get ROI up to
7.75% p.a.
Senior citizen
Starting with just Rs. 15,000
Get ROI up to
7.40% p.a.
Age below 60 years
Starting with just Rs. 15,000
Get ROI up to
7.40% p.a.
Minor
Starting with just Rs. 15,000
Get ROI up to
7.40% p.a.
HUF
Starting with just Rs. 15,000
Get ROI up to
7.40% p.a.
Sole proprietor
Starting with just Rs. 15,000
Locate to your nearest FD branch
Related Articles
Frequently Asked Questions
Overview
Can an individual foreign citizen register as an FPI in India?
Yes. Individuals can fall within Category II FPI, subject to meeting the applicable eligibility, jurisdiction, KYC and other regulatory requirements. SEBI's framework specifically includes individuals among Category II FPIs.
What is the maximum investment limit for a single FPI in an Indian company?
The applicable FPI framework uses a 10% threshold for individual FPI or investor-group holdings in an Indian company. The precise calculation and consequences of crossing the threshold are governed by the prevailing SEBI and FEMA provisions.
Are FPIs permitted to invest in unlisted corporate shares?
FPI investment in equity securities is subject to the instruments and routes permitted under the prevailing foreign investment framework. Unlisted equity investment is generally dealt with under the FDI framework rather than the ordinary FPI route. However, eligible FPIs may invest in certain permitted unlisted debt instruments subject to applicable conditions.
How do FPI flows affect the Indian Rupee and stock markets?
Large FPI purchases can increase demand for Indian securities and foreign-exchange transactions, while substantial selling can have the opposite effect. The actual impact depends on the size and direction of flows and broader domestic and global market conditions.
Disclaimer
1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (BAJAJ FINANCE) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.
2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.