Foreign Portfolio Investment
Investment by a person resident outside India in an Indian company that stays under 10% of paid-up capital — above that, the same holding counts as Foreign Direct Investment instead.
In plain language
A foreign investor buying into an Indian company can do it two ways. A small stake is treated differently from a large, controlling one.
Foreign Portfolio Investment, or FPI, is the smaller kind. A person resident outside India makes it when the investment stays under a fixed share of the company. Above that share, the same money is instead treated as Foreign Direct Investment, a different and more strategic category.
FPIs buy and sell listed Indian shares mainly on the stock exchanges, the same way a domestic investor would, rather than taking an active role in running the company.
How it works
FEMA regulations define Foreign Portfolio Investment as investment by a person resident outside India in capital instruments where the holding is less than 10% of the post-issue paid-up equity capital of a listed Indian company, on a fully diluted basis — or less than 10% of the paid-up value of any one series of capital instruments. Cross the 10% mark, and the same holding is reclassified as Foreign Direct Investment instead.
The purchase and sale of capital instruments of a listed Indian company on a recognised stock exchange by FPIs is permitted under directions in Annex 2 of the Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017.
A worked example
A US-based fund buys shares of an Indian listed company, taking its holding to 9.5% of the company's fully diluted paid-up equity capital. That stake is Foreign Portfolio Investment — a portfolio bet on the company's shares, traded like any other listed security.
If the same fund later buys more shares and its holding crosses 10%, the entire investment is reclassified as Foreign Direct Investment, not just the portion above the threshold, changing the regulatory regime that applies to it.
Why NISM asks about it
Chapter 18 (Key Regulations), section 18.8.1, quotes the FEMA definition of Foreign Portfolio Investment directly, distinguishing it from Foreign Direct Investment by the 10% threshold. Expect a question testing the 10% cut-off itself, or one asking a candidate to classify a given foreign shareholding as FPI or FDI.
Common exam traps
- The threshold is 10% of paid-up equity capital on a fully diluted basis — not 10% of voting rights or market value on a given day, and not a round number chosen loosely.
- Crossing 10% reclassifies the whole holding, not just the incremental purchase, from FPI to FDI.
- FPI is regulated under FEMA, a foreign-exchange law, not under the SEBI Act directly, even though SEBI separately registers and regulates FPIs as market intermediaries.
Check yourself
1.Under the FEMA framework, Foreign Portfolio Investment is an investment by a person resident outside India in capital instruments amounting to:
- a)Less than 10 per cent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company
- b)More than 10 per cent of the paid-up capital of any Indian company
- c)Exactly 25 per cent of the paid-up capital of a listed Indian company
- d)Any investment in an unlisted Indian company
Show the answer
Answer: (a) Less than 10 per cent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company
"Foreign Portfolio Investment" is any investment made by a person resident outside India in capital instruments where such investment is (a) LESS THAN 10 PERCENT of the post issue paid-up equity capital ON A FULLY DILUTED BASIS of a LISTED Indian company, or (b) LESS THAN 10 PERCENT of the paid up value of each series of capital instruments of a listed Indian company. Ten per cent or more is Foreign Direct Investment, and a person resident outside India may hold foreign investment either as FDI or as FPI in any particular Indian company.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Foreign Portfolio InvestorAn entity established or incorporated outside India that proposes to invest in India, registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019 as Category I or II.
- Category-I FPIThe first of the two classes of Foreign Portfolio Investor under SEBI's 2019 FPI Regulations: governments and related investors, pension and university funds, and appropriately regulated entities and funds.
- Designated Depository ParticipantA SEBI-approved custodian and DP, also an AD Category-1 bank, that registers Foreign Portfolio Investors on SEBI's behalf after due diligence - and must be the same entity as the FPI's custodian.
- PINS accountThe designated bank account through which an NRI's or PIO's purchases and sales of listed Indian securities must be routed, and through which the bank reports those investments to the RBI.
- RepatriationTaking investment proceeds out of India in foreign currency — permitted without limit where the money came in as foreign currency, and capped at USD 1 million a financial year from an NRO account.
- Reasons for not investing overseasThe five reasons the workbook gives, beyond simple unfamiliarity, why Indian investors under-invest in overseas securities — lack of knowledge, legal restrictions, cost of access, tax conflicts and lack of expert advice.