India has experienced a significant outflow of funds in the recent times coupled with weakening currency. In this swift era of globalization, Foreign Portfolio Investors (FPIs) have emerged as a game changer, providing capital, experiences, and opportunities to economies around the world. FPI refers to overseas investors investing into Indian financial assets. Entire investments are passively held by all the investors. Furthermore, because of the strong performance of Indian stocks, shares or equities constitute the most significant investment category for FPIs.

FPIs are not looking to seize control of a company; their primary goal is to earn capital appreciation. The world’s largest and fastest-growing economies receive investments via the FPI route. Major companies worldwide leverage FPIs for various purposes, allowing them to make profits. It involves the allocation of financial resources across borders by individuals, institutions, or entities. This type of investment has an essential effect on global capital flows, impacting economies around the world and contributing to the diversification of investment portfolios. Understanding Foreign Portfolio Investment is critical to comprehending the dynamics of the interconnected global financial system.

Related Read: Foreign Portfolio Investment in India: Eligibility and Regulations

India is seeing a surge in Foreign Portfolio Investment with daily net investments reaching significant levels in the hundreds of millions of dollars. As of 28 March 2024, 10,880 FPIs are registered in India. As per a report highlighting daily trends in Foreign Portfolio Investments, the gross purchase and sale in equities are Rs. 19,964.98 crores and Rs. 15,922.48 crores respectively. The gross purchase and sale in debt (including debt VRR) stand at Rs. 4,078.13 crores and 2,800.82 crores respectively. In FY 2023-24 (till 28th March 2024), FPI Net Investments stood at Rs. 3,39,066 crores.

Permitted Investment Avenues for Foreign Portfolio Investors

FPIs are permitted to make investment in the following securities:  

  1. Listed Equity or to be Listed Equity 
  2. Exchange Traded Derivatives (Index, stock, currency) 
  3. Units of Mutual Funds 
  4. Units of REITs or InvITs 
  5. Units of Category III Alternative Investment Funds (‘AIFs’) 
  6. Government Bonds/Government Securities 
  7. Corporate Bonds 
  8. Listed/ Unlisted Non-Convertible Debentures 
  9. Security Receipts (SRs) and Pass-Through Certificates (PTCs) issued by Asset Reconstruction Companies 

Laws And Regulations for Foreign Portfolio Investment in India 

The Securities and Exchange Board of India (SEBI) primarily regulates Foreign Portfolio Investment in India. SEBI has introduced new regulations for FPI, called SEBI (Foreign Portfolio Investors) Regulations, 2019, which replace the old 2014 Regulations. Furthermore, Income-tax Act of 1961 lays down the entire framework for FPIs taxation in India.

Eligibility Criteria to Register as an Foreign Portfolio Investor

Eligibility Criteria for FPI 
1.  Person not a           

  • resident of India  
  • NRI 
  • overseas citizen of India 
2.  Should be legally permitted to invest in securities outside his country. 
3.  If the applicant is a bank, it should be resident of a country whose central bank is a member of the Bank for International Settlements (BIS) 
4.  Should be a fit and proper person 
5.  Should not be resident of a country identified in the public statement of Financial Action Task Force (FATF) as 

  • A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply,
    or 
  • A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies 
6.  Should be a resident of a country which is a signatory to bilateral Memorandum of Understanding with SEBI or a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding 
7.  In case of a corporate, trust, etc. (i.e. any person which is not an individual) should be authorized by its Memorandum of Association (MOA) & Articles of Association (AoA) 

The applicant can also be incorporated or established in the International Financial Services Centre (IFSC). 

Categories of Foreign Portfolio Investor

An Foreign Portfolio Investor can obtain an FPI registration under SEBI regulations in one of the following categories.

Categories of FPI 
Category I  Category II 
1.  Government and Government related investor(s) or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government investor(s)  1.  Not eligible as category I FPIs 

  
2.  Pension Funds and University Funds  2.  Endowments and foundations 
3.  Appropriately regulated entities such as insurance or re-insurance entities, banks, asset management companies, investment managers, investment managers, investment advisors, portfolio managers, brokers dealers and swap dealers  3.  Charitable organizations 

  
4.  Entities form FATF member countries  4.  Family offices 
5.  An entity whose investment is from an FATF member country and registered as a category I FPI  5.  Individuals 
      6.  Appropriately regulated entities investing on behalf of clients, that meet the conditions specified by the SEBI 
      7.  Unregulated funds in the form of limited partnerships and trusts 

Key Operational Aspects to be Considered While Incorporating Foreign Portfolio Investor

The FPI needs to consider the following operational aspect:

  1. Appointment of a legal representative: To obtain FPI registration under SEBI regulations.  
  2. Appointment of a domestic custodian: Domestic custodian provide custodial services such as banking and demat facilities for the securities. Custodian is entity registered with the SEBI.  
  3. Appointment of Tax Advisor: To comply with the tax and legal obligations. A tax advisor helps in maintaining records, issuing certificate for remittance of the funds, handling annual tax filing and representation before income tax authorities if required.

Taxation of Foreign Portfolio Investor in India as per Income Tax Act, 1961

Any security held by an FPI is treated as a capital asset. From a tax perspective, as per the Income-tax Act, 1961 (the Act) income earned by FPIs can be broadly categorized as follows:  

  1. Gains from the transfer of securities will be characterized as capital gains 
  2. Interest and dividend income characterized as income from other sources 

The tax rates applicable to an FPI are summarized below:

Sr. No.  Nature of Income  Tax Rate as per the Act 

1.  

 Dividends declared, distributed, or paid by an Indian company   20% 

2.  

 Dividend declared, distributed, or paid by a REIT and InvIT  Exempt* / 10% 

3.  

 Interest on securities (other than REIT and InvIT)  20% 

4.  

 Interest on REIT and InvIT  5% 

5.

 Income in respect of securities (other than interest)  20% 

6.

 Short-term capital gains on the transfer of securities being equity shares or units of equity-oriented mutual funds that are subject to Securities Transaction Tax (STT)  15% 

7. 

 Other short-term capital gains (i.e., off-market transactions in respect of securities being equity shares; or bonds, debentures, derivatives, whether subject to STT or not)  30% 

8. 

 Long-term capital gains on the transfer of securities being equity shares or units of equity-oriented mutual funds, where the acquisition and transfer are subject to STT  10% 

9. 

 Other long-term capital gains (i.e., off-market transactions in respect of securities being equity shares; or bonds, debentures, derivatives, whether subject to STT or not)  10% 

10. 

 Any other Income  40% 

*subject to fulfilment of certain conditions 

The above-indicated indicated-ates are exclusive of surcharge (at applicable rates) and education cess (4%), wherever applicable is leviable. These rates are subject to the applicability of respective country’s Double Taxation Avoidance Agreement (DTAA) entered with India. 

Tax Compliances by FPI Under the Income Tax Act, 1961

  1. Obtaining a Permanent Account Number (akin to a Tax Identification Number) in India. 
  2. Filing of Form 10F in India in case FPI is availing treaty benefits. 
  3. In case the FPI is remitting the income and capital investment out of India, it needs to discharge the tax liability based on the nature of income either through withholding or self-assessment. The FPI is required to obtain a tax clearance certificate from its tax advisor (mostly a Chartered Accountant) to remit the funds.  
  4. FPIs need to file an annual tax return electronically through a Digital Signature Certificate (DSC) after the end of each financial year. 

Conclusion

India’s FPI regime has attracted a diverse array of global investors. The rising levels of FPI showcase growing investor confidence in the Indian market. Along with ensuring capital inflow, it also brings diversified investment avenues, global experience and new opportunities. As the country continues to enhance regulatory frameworks, the prospects for FPI remain bright. This promises gradual progress where India becomes a more integrated part of the global financial system.

Why Choose InCorp Advisory?

Our team of professionals has expertise in advising and structuring under the FPI route. We specialize in the computation of tax liability in respect of income earned on securities considering provisions of the Indian Income Tax Act and the treaty along with applicability of multi-lateral Instruments. 

Our services also include:

  • Coordination with the custodian for obtaining information on periodic transactions and maintaining necessary records of the same. 
  • Issuance of certificate for repatriation of funds out of India as per the requirements of the Income Tax Act and RBI guidelines. 
  • Preparing and filing Annual Income Tax Return 
  • Appearing before the tax authorities in any proceedings. 

To learn more about our services, you can write to us at info@incorpadvisory.in or reach out to us at (+91) 77380 66622. 

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