Unlocking India's Capital Markets: Investment Opportunities for Foreign Portfolio Investors (FPIs)

India’s fast-growing economy and maturing financial markets have created a fertile ground for foreign capital. For global investors looking to diversify portfolios and tap into the India growth story, Foreign Portfolio Investment (FPI) offers an efficient and regulated route. With evolving policies under FEMA, guidance from SEBI and oversight by the RBI, the FPI framework has become increasingly attractive.

Who Are Foreign Portfolio Investors?

A Foreign Portfolio Investor refers to an entity registered with SEBI to invest in Indian securities, such as shares, bonds, and mutual funds, without taking controlling interest. FPIs are distinct from Foreign Direct Investors (FDIs), as they focus on liquid, traded instruments rather than long-term ownership or control.

Since the FEMA (Non-Debt Instruments) Rules, 2019 came into effect, FPIs have gained more clarity and flexibility in structuring their investments in India.

Key Investment Routes Available to FPIs

1. Equity Investments

FPIs can invest in:

• Listed or to-be-listed equity shares of Indian companies

• Convertible debentures

• Preference shares

• Share warrants (as per SEBI norms)

Such investments must be made on a repatriable basis and are subject to sectoral and overall limits.

2. Debt and Hybrid Instruments

FPIs are also allowed to invest in:

• Non-convertible debentures

• Government securities and treasury bills

• Units of REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts)

• Category III Alternative Investment Funds (AIFs)

These routes diversify exposure and allow participation in India’s infrastructure and real estate boom.

3. Indian Depository Receipts (IDRs)

Foreign companies issuing IDRs on Indian exchanges provide another vehicle for FPIs to diversify geographically, within the Indian regulatory framework.

Investment Limits: Individual vs. Aggregate

To ensure balanced foreign ownership, regulatory caps are placed on FPI investments.

Limit Type	Description	Example (₹100 Cr Capital)
Individual Limit	A single FPI or investor group cannot exceed 10% of the paid-up equity capital.	₹10 crore
Aggregate Limit	All FPIs collectively cannot exceed 24% (default cap) unless raised to sectoral cap.	₹24 crore (can go higher)

Note: Since April 1, 2020, companies may increase the 24% aggregate limit to the sectoral FDI cap (up to 100% in some sectors) by passing:

• A Board resolution

• A Special resolution by shareholders

This alignment with FDI policy makes India's capital markets more accessible and scalable for foreign investors.

Trading in Derivatives and Short Selling

FPIs are permitted to trade in exchange-traded derivatives—equity futures, options, and index products—provided they comply with SEBI’s prescribed margin and position limits.

Additionally, short selling and securities lending/borrowing are allowed under specific frameworks, contributing to market liquidity and efficiency.

Investing via Public Offers and Private Placements

FPIs may participate in:

• Public offers, where the issue price must not be lower than the price for residents

• Private placements, subject to valuation norms:

  • Price must comply with SEBI’s pricing guidelines, or

  • Be certified under international valuation methods by a SEBI-registered professional

This ensures transparency and fair pricing in primary market access.

What If Investment Limits Are Breached?

Mistakenly breaching limits doesn’t lead to automatic penalties if corrected promptly. Here’s the procedure:

• Divest excess holdings within 5 trading days, or

• If not divested, entire investment is reclassified as FDI, and further FPI investment is restricted in that company.

The FPI (through its custodian) must notify:

• The company, and

• The depositories, within 7 trading days of the breach.

  
  

Special Case: Government Entities and Clubbing Rules

Investments by foreign government agencies and related entities are clubbed together for applying the 10% individual cap—unless exempted via:

• A bilateral treaty

• A Central Government order

This rule prevents excessive concentration of sovereign ownership in Indian companies.

Additional Guidelines to Note

• Partly Paid Shares: Must be fully paid within 12 months. At least 25% of the amount must be received upfront.

• Share Warrants: 25% consideration upfront; remainder within 18 months.

• Optionality Clauses: Allowed, but subject to a 1-year lock-in or sector-specific rules. No assured exit price is permitted.

  
  

Why FPIs Should Consider India

Here are some compelling stats and reasons:

• India attracted $40 billion in FPI inflows in FY2023, reflecting strong investor confidence.

• The NSE and BSE are among the largest exchanges globally by number of trades.

• Sectoral caps have been liberalized—100% FDI allowed in sectors like insurance intermediaries, telecom infrastructure, and single-brand retail.

• Regulatory reforms have made onboarding, compliance, and repatriation smoother and faster than ever.

Conclusion

India presents a compelling case for foreign portfolio investors looking for a mix of growth, stability, and diversification. With clear rules under the FEMA (Non-Debt Instruments) Rules, 2019, and regulatory support from RBI and SEBI, the FPI regime is modern, transparent, and investor-friendly.

For FPIs, success lies in understanding regulatory thresholds, complying with pricing norms, and staying updated on sectoral caps. With careful planning and guidance, India can be a rewarding destination in your global investment portfolio.