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Understanding Foreign Portfolio Investment (FPI) and How It Differs from Foreign Direct Investment (FDI)

  • Writer: tax comply
    tax comply
  • 6 days ago
  • 4 min read

India’s position as a global investment destination continues to strengthen, driven by sustained economic growth, regulatory reforms, and a transparent investment framework. Foreign investors looking to participate in India’s growth story have two primary routes: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). While both bring in foreign capital, they differ significantly in terms of structure, intent, and regulatory compliance.


What is Foreign Portfolio Investment (FPI)?

Foreign Portfolio Investment (FPI) refers to investments made by individuals or entities outside India into Indian financial instruments, primarily equity shares, without gaining substantial control over the management or operations of the investee company.


Under Rule 2(t) of the FEMA (Non-Debt Instruments) Rules, 2019, FPI is defined as any investment made by a person resident outside India in the equity instruments of a listed Indian company, provided that such investment does not exceed 10% of the post-issue paid-up share capital on a fully diluted basis or 10% of the paid-up value of each series of equity instruments.


For instance, if ABC Ltd. has a fully diluted paid-up capital of ₹1,000 crores, any foreign investment up to ₹100 crores would be treated as FPI. Investments exceeding this limit would either need to be reduced or be reclassified as FDI, subject to applicable conditions.

Who is a Foreign Portfolio Investor?

A Foreign Portfolio Investor (FPI) is an individual or institution registered under the SEBI (FPI) Regulations, 2014. These entities are treated as intermediaries under the Securities and Exchange Board of India (SEBI) Act and are required to comply with various regulatory requirements regarding registration, KYC norms, and reporting.

FPIs include foreign mutual funds, pension funds, banks, sovereign wealth funds, and other eligible institutions that seek to invest in India through stock exchanges or other approved channels.

Investment Avenues under FPI

Foreign Portfolio Investors can invest in a wide range of financial instruments, including:

  • Listed equity shares and equity-related instruments

  • Exchange-traded derivatives

  • Units of mutual funds, REITs, and InvITs

  • Indian Depository Receipts (IDRs)

  • Public or private placements that comply with SEBI pricing guidelines

These investments are subject to specific caps:

  • Individual cap: An FPI cannot hold more than 10% of the paid-up equity capital of a company.

  • Aggregate cap: Total FPI holdings in a company cannot exceed 24% of the paid-up capital, unless raised to the sectoral limit with board and shareholder approval.

Transfer and Compliance Regulations

FPIs may transfer their investments in accordance with SEBI rules and sectoral restrictions. For sectors requiring prior Government approval, such approval must be obtained for any acquisition or transfer of equity instruments.

In case of breach of prescribed limits, the investment must be either divested to fall within the permissible threshold or converted into FDI, which entails complying with all FDI-related regulations.

Mode of Payment and Remittance

Investments under the FPI route must be made through inward remittances using banking channels, or via funds held in a Special Non-Resident Rupee (SNRR) account or foreign currency account maintained in accordance with the FEMA (Deposit) Regulations, 2016.

Sale proceeds (net of taxes) may be repatriated abroad or retained in the foreign currency/SNRR account of the FPI, as permitted by the Reserve Bank of India (RBI).

Reporting Obligations

All FPI transactions must be reported by Authorised Dealer Category-I Banks to the RBI using Form LEC (FII). These reports include purchases and transfers of equity instruments made through recognized stock exchanges.

Delays in reporting may result in the imposition of late submission fees or penalties as prescribed by the RBI.

How FPI Differs from FDI

Although both FPI and FDI involve foreign capital inflows, they differ substantially in terms of purpose, investment limits, and regulatory treatment. The following table highlights the key differences:

Aspect

Foreign Direct Investment (FDI)

Foreign Portfolio Investment (FPI)

Nature of Investment

Long-term, strategic investment with business interest

Short to medium-term financial investment

Investment Threshold

10% or more of the equity capital of a company

Less than 10% of the equity capital of a listed company

Control and Influence

Involves management control or significant influence

No management rights or control

Investor Profile

Foreign corporations, joint ventures, institutional investors

Institutional investors, mutual funds, pension funds, sovereign funds

Registration Requirement

Not required with SEBI; FDI is routed through RBI

Mandatory registration with SEBI as an FPI

Applicable Regulators

Department for Promotion of Industry and Internal Trade (DPIIT) + RBI

Securities and Exchange Board of India (SEBI) + RBI

Eligible Instruments

Equity shares, compulsorily convertible debentures, preference shares

Listed shares, mutual funds, REITs, InvITs, exchange-traded derivatives

Compliance and Reporting

Forms FC-GPR (issue), FC-TRS (transfer) through RBI-registered AD banks

Form LEC (FII) through Authorised Dealer Banks

Exit Options

Through IPO, share buybacks, stake sales

Through stock exchanges or off-market transactions

Risk and Return Profile

Higher risk due to strategic involvement, but potential for higher returns

Market-dependent returns; relatively more liquid but volatile

Conversion from FPI to FDI

In certain cases, an investment initially made under the FPI route may exceed the 10% threshold. In such situations, the investment must either be divested within a specified timeframe or converted into FDI, which requires full compliance with the FDI Policy and FEMA regulations, including sectoral caps, approval routes, and pricing norms.

Conclusion

Foreign Direct Investment and Foreign Portfolio Investment represent two fundamentally distinct pathways for foreign capital to enter India. While FDI is suited for investors with a long-term strategic interest in the Indian economy, FPI is more appropriate for those seeking exposure to Indian markets without direct involvement in business operations.


Understanding the regulatory boundaries, investment limits, and procedural requirements of both FPI and FDI is critical for foreign investors, Indian companies, and compliance professionals alike. With the right strategic guidance, these investment routes can be effectively utilized to support India’s economic development while offering attractive returns to global investors.



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