Category-II FPI

Category II is defined by what it is not. Any foreign portfolio investor that is not eligible for Category I is in Category II. The rules then give examples. These include corporate bodies, family offices and individuals. They also include endowments, foundations and charities. Regulated funds that do not qualify for Category I are here too. So are unregulated funds set up as limited partnerships or trusts.

These investors register and invest the same way as Category I. They go through a Designated Depository Participant. They use the Common Application Form. They must meet the same general eligibility rules. The only thing that changes is the category they are placed in.

From Chapter 12, "Category II foreign portfolio investor" includes all investors not eligible under Category I, such as:

An applicant incorporated or established in an IFSC is deemed appropriately regulated.

Common eligibility for any FPI (section 12.2): the applicant is not a resident Indian, not an NRI or OCI; its regulator is a signatory to the IOSCO MMoU (Appendix A) or a bilateral MoU with SEBI; a bank applicant is from a country whose central bank is a BIS member; the applicant, and investors contributing 25% or more of its corpus or identified by control, are not on the UN Security Council sanctions list and not resident in an FATF-flagged jurisdiction; and it is fit and proper. Clauses (a), (d) and (e) do not apply to IFSC applicants.

Resident Indian constituents. NRIs, OCIs or resident Indian individuals may be constituents subject to SEBI conditions. For an IFSC-regulated AIF applicant, a resident Indian non-individual sponsor or manager may contribute up to 2.5% of corpus or US$ 7,50,000, whichever is lower, for Category I/II AIFs, and 5% or US$ 1.5 million, whichever is lower, for Category III AIFs.

Registration is through a DDP, which must also be the FPI's custodian.

Illustrative applicants; the rules are the workbook's.

Case 1. A Singapore-based family office wants to buy Indian listed shares. Family offices are Category II. It applies through a DDP using the Common Application Form.

Case 2. A foreign trading company (a corporate body) - Category II.

Case 3. A US charitable foundation - Category II (endowments/foundations and charitable organisations).

Case 4. An unregulated fund set up as a limited partnership whose manager is not registered as Category I - Category II. (With a regulated Category I-registered manager accepting responsibility, it could qualify for Category I.)

Case 5 - AIF constituent limit. An AIF set up in an IFSC applies as an FPI with an Indian company as sponsor. It is a Category III AIF with a corpus of US$ 20 million. The Indian sponsor may contribute up to the lower of 5% x US$ 20 million = US$ 1 million and US$ 1.5 million - so US$ 1 million.

Case 6. An investor holding 30% of a Category II applicant's corpus appears on the UN Security Council sanctions list. The applicant fails eligibility, since the test covers contributors of 25% or more.

Chapter 12 (Foreign Portfolio Investors, 2% weightage) sets out both categories and the common eligibility criteria; its review questions test category placement and whether a resident Indian can be an FPI. The most common trap is placing individuals, family offices or corporate bodies in Category I.

• Category II is residual - anyone not eligible for Category I.
• Individuals, family offices and corporate bodies are Category II.
• A regulated fund can still be Category II if it does not meet Category I conditions.
• 25% or more of corpus is the threshold for the sanctions/FATF look-through on underlying investors.
• Resident Indian non-individual contribution in an IFSC AIF applicant: lower of 2.5% or US$ 7,50,000 (Category I/II AIF); lower of 5% or US$ 1.5 million (Category III AIF).
• IFSC applicants are deemed appropriately regulated and are exempt from clauses (a), (d) and (e).