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Foreign Portfolio Investment

Saurav Lohia Saurav Lohia | Updated

FEMA (Foreign Exchange Management act) 2000 defines foreign portfolio investment as buying and selling of shares, convertible debentures, of Indian companies and units of domestic mutual funds at any of the Indian stock exchanges.

It is the indirect holding of securities such as foreign stocks, bonds or other financial assets, none of which entails active management or control of the securities issued by an investor.

How foreign portfolio investment benefits the real sector of the economy:

  • The flow of FPI can provide a developing non-debt creating source of foreign investment.

  • FPI can induce financial resources to flow from capital- abundant countries, where returns are low, to capital scare countries where expected returns are high.

  • FPI affects the economy through its various linkage effects via to domestic capital market.

(FPI) means a person who satisfies the eligibility criteria prescribed under regulation IV and has been registered under chapter III of this regulation, which shall be supposed to be an intermediary in terms of the provisions of the act.

According to economics, foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country's bank or make purchases in the country’s stock and bond markets, sometimes for speculation.

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No person shall buy, sell or otherwise deal in securities as a foreign investor unless it has obtained a certificate granted by designated depository participant on behalf of the board.

Provided that any foreign institutional investor or qualified foreign investor who holds a valid certificate of the regulation shall be deemed to be a foreign portfolio investor till the expiry of the block of three years for which fees have been paid as per the securities and exchange board of India (foreign institutional investors) regulation 1995.

Foreign Portfolio Investment does not have direct control over the securities or businesses. This means that Foreign Portfolio Investment tends to be more liquid and less risky than Foreign Direct Investment (FDI). FPI (Foreign portfolio investments) also tend to have a shorter time frame for returns than foreign direct investments.

Foreign Portfolio Investments gives investors a larger credit base because they are able to access credit in the foreign countries that they have large amounts of investment in. Profits from the Exchange rates: If an investor has an FPI in a foreign country with a stronger currency than their own country the difference in exchange rates between the two countries can benefit the investor Access to a larger market. Example, the market is much more competitive in the United States of America than in other less developed economies. Investors can take advantage of the less competitive markets internationally by using these foreign portfolio investments.

Eligibility criteria of Foreign Portfolio Investor:

If an applicant satisfies the following condition then the designated depository participant shall consider an application for registration as Foreign Portfolio Investor:

  1. An applicant is a person non-resident in India.

  2. The applicant is resident of a country whose securities market regulator is a signatory to an international organization of securities commission’s multilateral memorandum of understanding (appendix signatories) or a signatory to bilateral. Memorandum of understanding with the board.

  3. The applicant is a bank, is a resident of a country whose central bank is a member of a bank for international settlements.

  4. The applicant is not resident in a country identified in public statement of the financial action task force as:

  • A jurisdiction having a strategic Anti-money laundering or combating the financing of terrorism deficiencies to which countermeasures apply or

  • A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to the action plan developed with the financial action task force to address the deficiencies.

  1. The applicant is not a non-resident Indian,

  2. The applicant is legally permitted to invest in the securities outside of the country of its incorporation or establishment or place of business

  3. The applicant is authorized by MOA or AOA or the agreements to invest on its own behalf of its client.

  4. The applicant has sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity.

  5. The grant of a certificate to the applicant is in the interest of the development of the securities market,

  6. The applicant is a fit and proper person based on criteria specified.

  7. Any other criteria specified by board time to time.

Categories of Foreign Portfolio Investment

Category I: This shall include

Government and Government related investors such as central banks, governmental agencies, sovereign wealth funds, and international or multilateral organizations or agencies.

Category II: This shall include

  • Appropriately regulated broad-based funds such as mutual funds, investment trusts, insurance/reinsurance company

  • An appropriately regulated person such as banks, asset management companies, investment managers/advisors, portfolio managers

  • Board based funds that are not appropriately regulated.

  • University funds or pension funds

  • University-related endowments already registered with SEBI as FIIs or sub-accounts

Category III: This shall include

all the other not eligible under category I and II foreign portfolio investors such as endowments, charitable societies, charitable trust, foundation, corporate bodies, trusts, individual and family offices.

Suspension, cancellation or surrender of the certificate

  1. Subject to compliance with the provisions of the act, these regulations and the circulars issued thereunder, the registration granted by the designated depository participant on behalf of the board under these regulations shall be permanent unless suspended or canceled by the board or surrendered by the foreign portfolio investor.

  2. Suspension and cancellation of registration granted by the board under these regulations shall be dealt with in the manner as provided in chapter V of the securities and exchange board of India (intermediaries) regulation, 2008.

  3. Any foreign portfolio investor desirous of giving up its activity and surrendering the certificate of registration may make a request for such surrender to the designated depository participant who shall accept the surrender of registration after obtaining approval from the board to do so.

  4. While accepting the surrender of registration under sub-regulation (3), the designated depository participant may impose such conditions as may be specified by the board and such person shall comply with such conditions.

A foreign portfolio investor shall invest only in following securities, namely:

  • Share, debentures, warrants of the company listed or to be listed on recognized stock exchange in India.

  • Unit schemes floated by domestic mutual funds, whether listed on the recognized stock exchange of India.

  • Units of schemes by the collective investment scheme.

  • Derivatives traded on recognized stock exchange.

  • Treasury bill and dated government securities.

  • Commercial papers issued by an Indian company.

  • Rupee-denominated credit enhanced bonds.

  • Securities receipts issued by assets Reconstruction Company.

  • Perpetual debt instruments and debt capital instruments as specified by Reserve Bank of India.

  • Listed and unlisted non-convertible bonds/ debentures issued by an Indian company in the infrastructure sector.

  • Non-convertible debentures or bonds issued by a non-banking financial company.

  • Indian depository receipt

Such other instrument specified by board time to time.

Our Expert team will draft & file the application with the RBI & follows-up with Reserve Bank of India. For more information contact our customer care on +91 7558 640 644 or info@corpseed.com.
 

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