Foreign Portfolio Investment

There is no dearth of investment out there in India and the Foreign Portfolio Investment is one of the unique ones that you need to know about.

Explaining Foreign portfolio investment in its simplest form,  it could be considered as a 'stairway' or 'path' for non residential citizens, sometimes according to various rules Non resident India or even for foreign entities to avail the vivid investment opportunities that the Indian Financial market has to offer.

A wide array of options are being provided to foreign citizens to enhance their portfolios. Investments come in the form of government bonds, stocks of many kinds, corporate bonds, securities relating to infrastructure, convertible securities and so more which contribute to the fabric of Indian society.

As per legal texts and legislations that are existent currently, a "Foreign Portfolio Investor" or a FPI is a citizen of foreign origin that indulges in the act of investing in the Indian financial market.

FPI has been, since time immemorial, been regulated by the SEBI regulations of 2014 and the fun fact is, it has been created with FPI's in mind. The SEBI regulations have mandated that foreign investors will have to mandatorily register themselves with SEBI prior to indulging in capital investments to enhance their investment portfolio.

Eligibility

There are certain eligibility criteria that investors have to follow before they indulge in investment activities. The eligibility criteria are as follows:

• The investor must not be a current resident of India

• Even though they are not a resident of India, they should be a resident of a country that's a signatory to a bilateral memorandum of Understanding with SEBI. Alternatively, in the event that the first scenario does not work out, they should be a resident of a country wherein the securities market regulator has signed the International Organization of Securities Commission’s Multilateral MOU.

• They should not be citizens or residents of a country that has been identified in any public statement issued by the Financial Action Task as a:

i). Any jurisdiction wherein the strategic anti-money laundering policies are deficient and combating the financing of terrorism exists.

ii). any jurisdiction that has not endeavoured to make sufficient progress in the address of any deficiencies or is not willing to commit to the creation of an action plan along with the FATF to tackle the existing deficiencies.

• In the event the applicant is a Bank, it should make sure that the residing country's central banking is a member of the Bank for International Settlements(BIS)

• The investor should not be a Non-resident Indian as per the definition provided under the Citizenship Amendment Act, 2019. However in certain cases, an Indian Resident, Non-resident Indian or even an Overseas citizen of India could be eligible which would be dependent on the views and requirements of the board.

• The investor must be legally permitted to invest in the securities of a country outside his/her own.

• In the event that the investor is a corporate entity, a trust, etc. (i.e. any person who's a non-existent legal entity) should be authorised as per their Memorandum of Association and Article of Association or any form of equivalent document.

• The background check should contain sufficient experience in the investing field, a great track record, should display professional competence, be financially sound and upkeep fairness and integrity in matters of investments.

• The investor should be someone who fits into the description of a fit and proper person as per the criteria that have been mentioned in Schedule II of the SEBI (Intermediaries) Regulations, 2008.

category

Foreign Investment Portfolio - Does it have a variety of categories?

There are 3 categories in the Foreign Portfolio Investment space. They are divided as follows:

Category 1:

This category usually consists of various government institutions, sovereign funds, and International as well as central banks as well. The detailed list is as follows:

1. Foreign Central Banks, Government Agencies, Sovereign Wealth Funds, International and multilateral Organisations and agencies come under the foreign investors wing under category 1

2. Pension funds and University funds

3. regulated entities such as insurance or reinsurance entities, banks, AMCs, investment advisory firms, portfolio managers and management firms, brokers and other entities similar to this come under the category.

4. Entities that are affiliated with the FATF member countries.

Category 2:

The second category includes a collection of different asset management entities as well as pension funds. They are as follows:

• Regulated funds that are not included within the 1st category.

• Endowments and foundations.

• Charitable organisations

• Corporate bodies of any kind

• Family offices and individuals

• SEBI Registered or regulated entities investing on behalf of clients

Category 3:

Category 3 is the final category and it consists of:

• All alternative foreign investors not eligible under Category 1 and II such as the endowments, charitable societies/trust

• Corporate bodies and trusts

• Individuals and family offices.

Benefits

Diversified Portfolio:

As an investor, it's always a good idea to keep your portfolio diversified. Foreign portfolio investment provides an easy avenue to diversify portfolios at an international level. This is done by an investor to maintain a risk-adjusted return, ultimately done to generate revenue and tackle unforeseen events.

Revenue generation at an international level:

An increased inflow of credit can be experienced by investors sometimes in foreign countries and hence, foreign portfolio investment can aid in having leverage and generating a higher return on equity investments.

Varying risk return options:

In a new economic landscape investors who seek huge returns, might face risk as well. However, emerging markets could offer unique 'risk-return’ profiles.

Increases liquidity in domestic markets:

At certain points in time the market becomes liquid, thereby turning into deeper and broader factions and this initiates the start of more financing of investments. In the realm of saving, investors will be assured that their portfolio can be managed or finance securities could be sold quickly to gain access to savings in this type of market.

Promoting the expansion of equity markets:

Rapid expansion along with the possibility of a competitive environment for financing potentially leads to the market rewarding superior performance, prospects and corporate governance. As the markets expand, the market liquidity and functionality develop to new horizons thereby rendering equity price value relevant for investors.

Risk

High volatility:

Some financial markets which are comparatively small, are riskier than others. Taking into consideration a real-world example, the Deutscher Aktienindex is a stock market with 30 major German companies trading for the top position in the Frankfurt Stock Exchange. This kind of market has and will have more volatility compared to larger markets.

Shifting Legal Landscape:

Foreign countries may undergo drastic changes in their legislative structure thereby materially impacting returns on investment. Several countries struggle to bring into control financial crimes that are relevant in society such as money laundering which is a risk factor for the investor.

Compliances

As there are for any assets, there are compliance requirements for FPIs as well.

As mentioned at the beginning, SEBI overlooks compliance with respect to the Foreign Portfolio investment and hence, has laid down a plethora of compliance formation focusing on their investment in the Indian financial markets. Hence, an FPI is mandated to register and obtain a licence from SEBI as per the regulations set by it and only then can they freely invest capital in the financial markets.

In addition to the compliance registration mentioned above, there's also a mandatory requirement for opening of separate bank accounts and depository accounts for amassing securities in the name of the FPIs.

Furthermore, when discussing categories, FPI categories 2 and 3 would be required to be transparent about the details pertaining to the executive of the company and furnish such documents as requested by the regulators. The information pertaining to the executive is pertinent as it's integral to identify the individuals as an FPI's beneficial owners. Finally, the local custodians of the FPIs should be provided pertinent information about the beneficial owners as well.

Rounding up all the information it's understood that an FPI can exercise their power in investing in transferable securities of the likes of preference shares, derivatives of mutual funds, bonds and so much more. The one thing to focus on however is that the securities being invested in must be registered in India.

There are however a few limitation that need to be noted. An FPI is only allowed to invest in equities that are listed and the investment must not exceed 10%. Furthermore, when investment involves private sector banks, the limit is set to 5%.

It is to be noted that if these entities invest more than 10% in banks, they will be treated as foreign Direct Investment and will now come under the compliance radar of the Reserve Bank of India.

Procedure

• After an applicant eligibility has been confirmed, the applicant must move forward with their application by filing FORM A, a prescribed fee and relevant documents as required. This process is being executed in order to apply for the designated depository participants.

• After submission of the registration application, the SEBI and Designated depository participants will take over from here. After the application has been received by these regulators, they will cordially inform the application regarding further clarification pertaining to some documents. In addition, they may also request applicants to visit the

• Alternatively, the application might also be rejected stating the submission of unsatisfactory fact providing to the regulators that he/she is ineligible. However, this is not the end, as all applicants would be given a chance to present before SEBI to clarify the details.

• The process for applying might be complicated but after the screen process is over and if the DDP that all conditions in the application file are met to the satisfaction, they will be granting Form B, a certificate of registration which is clearly mentioned in the First schedule. The applicants will receive the certificate of registration after submission of the prescribed fees and ensuingly equivalent remittance has been made to the board.

• Once the certificate of registration has been granted to the applicant, their investment activities will come under the purview of SEBI. However, the permanent validity of the application could only be suspended or cancelled by SEBI themselves or the applicant themselves could suspend it for any specific reason.

Documents

• The applicant's details, resident country and detailed profile documents must be submitted.

• Proof of eligibility in consonance with the norms of SEBI

• Business information that's considered pertinent towards the application

• If the applicant is a company, the Memorandum of Association and Article of Association are mandatorily to be submitted

• Relevant documents must be submitted that's been requested by SEBI or any Designated Depository Participant.

• KYC details of directors

• Form 49 AA

Fees

By Regulation 3 and Regulation 7(3), the applicant is supposed to pay the prescribed fee for registering as an FPI. The fee is as follows:

• Category I - $3000

• Category II - $300

 Can the Registration certificate be suspended?

If it can be granted, it can also be rescinded. Any certificate that's been granted towards an FPI could be cancelled for several reasons. The following reasons could be causes for the suspension of the certificate:

As per regulation 9(1) of the FP regulation, 2019, an application will be valid until and unless rejection has been done by the DDP or has been suspended by the applicant themselves.

If the stipulated fees have not been [paid by the FPI, then the application is deemed to have been surrendered by the applicant.

The FPI themselves can surrender the certificate through a special request.

Access

Foreign Portfolio Investors have an array of investment opportunities to choose from in several categories. They are as follows:

Equity:

• Shares or Debentures that have been listed or that are to be listed.

• Certain units of domestic mutual fund schemes

• Similar collective investment schemes

• Specific derivatives are traders on a recognised stock exchange.

• Indian Depository Receipts or IDRs

• Instruments that are permitted from time to time.

Debt:

• Government securities of various kinds

• Indian Company issues commercial papers

• Rupee denominated credit enhanced bonds

• Security Receipts that have been issued by Asset Reconstruction Companies.

• Reserve Bank Mandated instruments such as perpetual debt instruments and debt capital instruments.

• Indian company issued Non-convertible Debentures and Bonds specifically for the infrastructure sector or the same form of securities issued by NBFCs set apart for infrastructure finance companies by the Reserve Bank of India.

• Instruments specified by the SEBI from time to time.

• Rupee-denominated bonds or units that have been issued by Infrastructure Debt Funds

Derivatives:

An investor can venture into the market and invest in:

• Equity Futures and Options

• Interest rate futures and options

• Currency Futures and Options

Final Note:

Foreign entities are needed for a nation as the inflow of funds accelerates growth at a rapid pace. When the market expands, there are several returns for people's foreign portfolio investments.

Start the registration process today with Adviso. Few efforts, quick procedure and assistance guaranteed.

Get registered today, and be market-ready the next day.