Comprehensive Guide to Foreign Portfolio Investment in Indian Companies

Table of Contents

1. FPI Investment in Indian Companies
2. Avenues for Investment by Foreign Portfolio Investor (FPI)
3. Purchase or sale of securities other than equity instruments by FPIs
4. Mode of payment for purchases and remittance of sale proceeds
5. Transfer of equity instruments of an Indian company by FPI
6. RBI Instructions on Mode of payment, Remittance of sale proceeds and reporting
7. Reporting Requirements specified by RBI

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1. FPI Investment in Indian Companies

The foreign direct investment in companies is made where foreign investor is taking part in management of Indian company in which he is investing or controlling Indian company.

The Foreign Portfolio Investor is interested in investing in Indian company only for purposes of investment and not for control purposes.

“Foreign portfolio investment” means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company – Rule 2(t) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.20 of FDI Policy dated 15-10-2020.

FPI (Foreign Portfolio Investor) – “FPI” or “Foreign Portfolio Investor” means a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 – Rule 2(u) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.20 of FDI Policy dated 15-10-2020.

Listed Indian company – “Listed Indian company” means an Indian company which has any of its equity instruments or debt instruments listed on a recognised stock exchange in India and the expression “unlisted Indian company” shall be construed accordingly – Rule 2(ag) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.34 of FDI Policy dated 15-10-2020.

Unit – “Unit” means a beneficial interest of an investor in an investment vehicle – rule 2(aq) of FEM (Non-debt Instruments) Rules, 2019 and para 2.1.52 of FDI Policy dated 15-10-2020.

2. Avenues for Investment by Foreign Portfolio Investor (FPI)

A FPI may make investments as under –

A FPI may purchase or sell equity instruments of an Indian company which is listed or to be listed on a recognised stock exchange in India, and/or may purchase or sell securities other than equity instruments, in the manner and subject to the terms and conditions specified in Schedule II of FEM (Non-debt Instruments) Rules, 2019.

Investment and trading in exchange traded derivate contracts – FPI may trade or invest in all exchange traded derivative contracts approved by Securities and Exchange Board of India from time to time subject to the limits specified by the Securities and Exchange Board of India and the conditions prescribed in Schedule II of FEM (Non-debt Instruments) Rules, 2019 – Rule 10(1) of FEM (Non-debt Instruments) Rules, 2019.

Sale or purchase of IDR – A FPI may purchase, hold, or sell Indian Depository Receipts (IDRs) of companies resident outside India and issued in the Indian capital market, in the manner and subject to the terms and conditions as prescribed in Schedule X of FEM (Non-debt Instruments) Rules, 2019 – Rule 10(2) of FEM (Non-debt Instruments) Rules, 2019.

2.1 Purchase or sale of equity instruments by Foreign Portfolio Investors

Para (1)(a) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 and Annexure 8 of FDI Policy dated 15-10-2020, provides as follows.

A FPI may purchase or sell equity instruments of an Indian company listed or to be listed on a recognised stock exchange in India subject to the following conditions –

Investment limit upto 31-3-2020 was 24% – The total holding by each FPI or an investor group, shall be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10% of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company and the total holdings of all FPIs put together, including any other direct and indirect foreign investments in the Indian company by FPIs permitted under these rules, shall not exceed 24 per cent of paid-up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or share warrants. The said limit of 10% and 24% shall be called the individual and aggregate limit, respectively – Para (1)(a)(i) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 – words in italics inserted w.r.e.f. 17-10-2019.

Investment limit of FPI from 1-4-2020 is same as sectoral cap – With effect from the 1^st April, 2020, the aggregate limit shall be the sectoral caps applicable to the Indian company as laid out in paragraph 3(b) of Schedule I of FEM (Non-debt Instruments) Rules, 2019, with respect to its paid-up equity capital on a fully diluted basis or such same sectoral cap percentage of paid up value of each series of debentures or preference shares or share warrants.

The aggregate limit of 24% may be increased by the Indian company concerned up to the sectoral cap/statutory ceiling, as applicable, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively – proviso to para (1)(a)(i) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 inserted w.r.e.f. 17-10-2019.

The aggregate limit as provided above may be decreased by the Indian company concerned to a lower threshold limit of 24% or 49% or 74% as deemed fit, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31^st March, 2020.

The Indian company which has decreased its aggregate limit to 24% or 49% or 74%, may increase such aggregate limit to 49% or 74% or the sectoral cap or statutory ceiling respectively as deemed fit, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively. However, once the aggregate limit has been increased to a higher threshold, the Indian company cannot reduce the same to a lower threshold.

The aggregate limit with respect to an Indian company in a sector where FDI is prohibited shall be 24% w.e.f. 1-4-2020 – Para (1)(a)(ii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 and clause (i) of Annexure 8 of FDI Policy dated 15-10-2020.

Investor group of FPI – The limit of investment is for each FPI of investor group of FPI.

In case, two or more FPI’s including foreign Governments/their related entities are having common ownership, directly or indirectly, of more than 50% or common control, all such FPI’s shall be treated as forming part of an investor group. Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner – Explanation to Para (1)(a)(ii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019.

Sectoral cap – “Sectoral cap” means the maximum investment including both foreign investment on a repatriation basis by persons resident outside India in equity instruments of a company or the capital of a LLP, as the case may be, and indirect foreign investment, unless provided otherwise. This shall be the composite limit for the Indian investee entity.

Explanation:

(i) FCCBs and DRs having underlying of instruments being in the nature of debt shall not be included in the sectoral cap;

(ii) any equity holding by a person resident outside India resulting from conversion of any debt instrument under any arrangement shall be reckoned under the sectoral cap – Rule 2(am) of FEM (Non-debt Instruments) Rules, 2019.

2.2 If investment increases the limit, FPI should sale excess or investment will be treated as FDI

The FPIs investing in breach of the prescribed limit shall have the option of divesting their holdings within five trading days from the date of settlement of the trades causing the breach. In case the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor group shall be considered as investment under Foreign Direct Investment (FDI) and the FPI and its investor group shall not make further portfolio investment in the company concerned. The FPI, through its designated custodian, shall bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records, within seven trading days from the date of settlement of the trades causing the breach. The divestment of holdings by the FPI and the reclassification of FPI investment as FDI shall be subject to further conditions, if any, specified by Securities and Exchange Board of India and the Reserve Bank in this regard. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale or conversion to FDI within the prescribed time, shall not be reckoned as a contravention under these rules- Para (1)(a)(iii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 substituted w.e.f. 27-4-2020.

Earlier provision – The FPIs investing in breach of the prescribed limit shall have the option of divesting their holdings within 5 trading days from the date of settlement of the trades causing the breach. In case the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor group shall be considered as investment under Foreign Direct Investment (FDI) and the FPI and its investor group shall not make further portfolio investment in the company concerned. The FPI, through its designated custodian, shall bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records, within 7 trading days from the date of settlement of the trades causing the breach. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale or conversion to FDI within the prescribed time, shall not be reckoned as a contravention under FEM (Non-debt Instruments) Rules, 2019 – Para (1)(a)(iii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 as existing upto 27-4-2020.

2.3 Clubbing if investment made by foreign Government Agencies

The investment by foreign Government agencies shall be clubbed with the investment by the foreign Government or its related entities for the purpose of calculation of 10 per cent limit for FPI investments in a single company, if they form part of an investor group. However, certain foreign Government agencies and its related entities may be exempt from such clubbing requirements and other investment conditions either by way of an agreement or treaty with other sovereign governments or by an order of the Central Government – Para (1)(a)(iv) of Schedule II of FEM (Non-debt Instruments) Rules, 2019.

2.4 Purchase of equity instruments by FPI through public offer or private placement

A FPI may purchase equity instruments of an Indian company through public offer or private placement, subject to the individual and aggregate limits specified. The conditions, as specified in para (1)(a)(v) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 are as follows:

(A) In case of public offer, the price of the shares to be issued should not be less than the price at which shares are issued to residents, and

(B) In case of issue by private placement, the price should not be less than-

(a) the price arrived in terms of guidelines issued by the Securities and Exchange Board of India, or

(b) the fair price worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis, duly certified by a Merchant Banker or Chartered Accountant or a practicing Cost Accountant, as applicable, registered with the Securities and Exchange Board of India.

2.5 Short selling and lending/borrowing of securities by FPI

A FPI may, undertake short selling as well as lending and borrowing of securities subject to such conditions as may be stipulated by the Reserve Bank and the Securities and Exchange Board of India from time to time – Para (1)(a)(vi) of Schedule II of FEM (Non-debt Instruments) Rules, 2019.

2.6 Investments by FPI subject to conditions specified by RBI and SEBI

Investments made by FPI shall be subject to the limits and margin requirements specified by the Reserve Bank or the Securities and Exchange Board of India as well as the stipulations regarding collateral securities as specified by the Reserve Bank from time to time – Para (1)(a)(vii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019.

3. Purchase or sale of securities other than equity instruments by FPIs

Para (1)(b) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 states as follows:

(i) A FPI may purchase units of domestic mutual funds or Category III Alternative Investment Fund (AIF) or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50% in equity instruments on repatriation basis subject to the terms and conditions specified by the Securities and Exchange Board of India and the Reserve Bank.

(ii) An FPI may purchase units of REITs and InVITs on repatriation basis subject to the terms and conditions specified by the Securities and Exchange Board of India.

Equity instruments – “Equity instruments” means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company.

Explanation

(i) Equity shares issued in accordance with the provisions of the Companies Act, 2013 shall include equity shares that have been partly paid. “Convertible debentures” means fully, compulsorily and mandatorily convertible debentures. “Preference shares” means fully, compulsorily and mandatorily convertible preference shares. Share Warrants are those issued by an Indian company in accordance with the regulations by the Securities and Exchange Board of India. Equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price

(ii) Partly paid shares that have been issued to a person resident outside India shall be fully called-up within twelve months of such issue or as may be specified by the Reserve Bank from time to time. 25% of the total consideration amount (including share premium, if any) shall be received upfront

(iii) In case of share warrants, at least 25% of the consideration shall be received upfront and the balance amount within eighteen months of the issuance of share warrants – Rule 2(k) of FEM (Non-debt Instruments) Rules, 2019.

4. Mode of payment for purchases and remittance of sale proceeds

The mode of payment and other attendant conditions for remittance of sale or maturity proceeds shall be specified by the Reserve Bank – Para (2) of Schedule II of FEM (Non-debt Instruments) Rules, 2019.

5. Transfer of equity instruments of an Indian company by FPI

A FPI holding equity instruments of an Indian company or units in accordance with these rules, may transfer such equity instruments or units held by him in compliance with the conditions, if any, specified in the Schedules annexed to these rules, subject to the terms and conditions specified therein and by SEBI. Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval. Where the acquisition of equity instruments by FPI under Schedule II has resulted in a breach of the applicable aggregate FPI limits or sectoral limits the provisions of Schedule II(1)(a)(iii) shall apply [This para provides that if aggregate limit is exceeded, this should be brought down within 5 trading days. Otherwise, their investment will be treated as FDI investment].- Rule 11 of FEM (Non-debt Instruments) Rules, 2019 as substituted w.e.f. 27-10-2020.

Earlier provision was as follows – A FPI holding equity instruments of an Indian company or units in accordance with these rules [FEM (Non-debt Instruments) Rules, 2019], may transfer such equity instruments or units held by him in compliance with the conditions, if any, specified in the Schedules annexed to these rules [FEM (Non-debt Instruments) Rules, 2019], subject to the terms and conditions specified therein and by the Securities and Exchange Board of India. Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires the Government approval. Where the acquisition of equity instruments by FPI made under Schedule II of FEM (Non-debt Instruments) Rules, 2019 has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the provisions of para (1)(a)(iii) of Schedule II of FEM (Non-debt Instruments) Rules, 2019 shall apply [This para provides that if aggregate limit is exceeded, this should be brought down within 5 trading days. Otherwise, their investment will be treated as FPI investment] – Rule 11 of FEM (Non-debt Instruments) Rules, 2019 as existing upto 27-10-2020.

6. RBI Instructions on Mode of payment, Remittance of sale proceeds and reporting

Though policy in respect of foreign investment in India is within the jurisdiction of Central Government, RBI is authorised to determine policies and procedures for Mode of payment, Remittance of sale proceeds and reporting requirement. These are explained below.

6.1 Mode of payment by FPI

Table 3.1(II)A of FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 provides that the amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.Unless otherwise specified in these regulations or the relevant Schedules, the foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule II of FEM (Non-debt Instruments) Rules, 2019. [Earlier, the words were as follows – Balances in SNRR account shall not be used for making investment in units of Investment Vehicles other than the units of domestic mutual fund. The foreign currency account and SNRR account shall be used only and exclusively for transactions under the Schedule II of FEM (Non-debt Instruments) Rules, 2019]. [The words in italics inserted w.e.f. 15-6-2020]

6.2 Remittance of sale proceeds outside India

The sale proceeds (net of taxes) of equity instruments and units of REITs, InViTs and domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI. [earlier the words were as follows – The sale proceeds (net of taxes) of equity instruments and units of domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI. The sale proceeds (net of taxes) of units of investment vehicles other than domestic mutual fund may be remitted outside India] – Table 3.1(II)B of FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 amended on 15-6-2020.

7. Reporting Requirements specified by RBI

The reporting requirement for any Investment in India by a person resident outside India are specified in para 4 of FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Unless otherwise specifically stated in RBI regulations, all reporting shall be made through or by an Authorised Dealer bank, as the case may be. In case of delay in submission of reports, late subscription fee is payable as decided by RBI.

The reporting requirements are as follows.

LEC(FII): The Authorised Dealer Category I banks shall report to the Reserve Bank in Form LEC (FII) the purchase/transfer of equity instruments by FPIs on the stock exchanges in India.

Detailed instructions and forms of reporting are given in Part IV of RBI FED Master Direction No. 18/2015-16 dated 1-1-2016 on ‘Reporting’.