Foreign Portfolio Investor
Also written FPI · Foreign Portfolio Investor (FPI)
An 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.
In plain language
A Foreign Portfolio Investor (FPI) is, in the workbook's words, "an entity established or incorporated outside India that proposes to make investments in India". Picture a Norwegian pension fund buying Indian shares and bonds. Or a US university endowment doing the same.
FPIs register under the SEBI (Foreign Portfolio Investors) Regulations, 2019. These rules sort them into Category I and Category II. The category matters a lot in day-to-day work. It decides how the FPI is treated:
- As an institution. It then settles through a custodian, which holds and settles securities on its behalf. Its margin is due on T+1, one trading day after the trade.
- As an ordinary non-institutional client. Its margin is then collected upfront.
Margin here is the money a broker must collect to cover the risk of a trade.
How it works
Categories (Chapter 2, section 2.2)
| Category | Examples in the workbook |
|---|---|
| Category I | Governments and government-related investors (central banks, sovereign wealth funds, multilateral organisations); entities at least 75% owned by them; pension and university funds; appropriately regulated entities (insurers, banks, AMCs, portfolio managers, broker-dealers and others); entities from FATF member countries with conditions |
| Category II | Appropriately regulated funds not eligible for Category I; endowments and foundations; charitable organisations; corporate bodies; family offices; individuals |
Category II FPIs that are corporate bodies, individuals or family offices are treated as non-institutional.
Onboarding (Chapter 3). SEBI's Master Circular dated May 30, 2024 requires every FPI applicant to submit a Common Application Form (CAF) and "Annexure to CAF". A circular of November 12, 2024 simplified FPI registration. An FPI may use the E-PAN issued by CBDT for KYC.
Settlement and margins (Chapters 4 and 5)
- Institutional investors include Category I and II FPIs other than corporate bodies, individuals and family offices. They must settle through a custodian using a Custodial Participant (CP) code, processed through STP.
- Their trades are margined on T+1, collected from the custodian after confirmation. Category II FPIs that are corporate bodies, individuals or family offices are margined upfront.
- For those Category II FPIs, INST allocation is allowed only to related FPIs.
- No day trading by institutional investors; obligations are grossed at custodian level. Short selling is allowed, naked short selling is not.
- Net settlement of cash and F&O on stock derivative expiry is not available to any category of FPI, because institutional cash-market transactions must be backed by delivery.
- Exchanges and clearing corporations monitor position limits for FPIs in derivatives.
A worked example
Trade sizes and prices are illustrative.
Two FPIs buy shares of the same company through Indian brokers on Monday (T).
Fund A, a Category I pension fund buys 1,00,000 shares at Rs 400 = Rs 4,00,00,000.
- Order is entered with Fund A's CP code; its custodian confirms by 7:30 a.m. on T+1.
- Margin is not collected upfront; it is collected on T+1 from the custodian after confirmation.
- On the same day Fund A also sells 60,000 shares it already holds at Rs 402 = Rs 2,41,20,000. Because institutional obligations are grossed and day trading is not allowed, the sale does not square off the purchase: Fund A pays Rs 4 crore for 1,00,000 shares and separately delivers 60,000 shares for Rs 2,41,20,000.
Family Office B, a Category II FPI buys 50,000 shares at Rs 400 = Rs 2,00,00,000.
- As a family office it is treated as non-institutional and is margined upfront, like any retail client.
Why NISM asks about it
FPIs run through Chapter 1 (participants in primary and secondary markets), Chapter 2 (section 2.2, investor categories and the 2019 Regulations' Category I/II table), Chapter 3 (CAF registration and E-PAN for KYC), Chapter 4 (margining of institutional trades on T+1 and position limits) and Chapter 5 (section 5.6.1, custodial settlement and INST codes, and the exclusion from net settlement of cash and F&O). The favourite exam angle is the carve-out: which Category II FPIs lose institutional treatment.
Common exam traps
- Not every FPI is an institution. Category II corporate bodies, individuals and family offices are non-institutional and margined upfront.
- Institutional FPIs are margined on T+1, not T+0, and the margin comes from the custodian.
- No FPI of any category gets net settlement of cash and F&O obligations on stock derivative expiry.
- Institutional obligations are grossed, so there is no intraday square-off benefit.
- Short selling is permitted; naked short selling is not.
- Regulations year is 2019, and the master circular for registration is dated May 30, 2024.
Where this is taught
- Series III-A · Chapter 11: SEBI (Foreign Portfolio Investors) Regulations, 2019introduced here
- Series VI · Chapter 12: Foreign Portfolio Investors(FPI)introduced here
- Series X-B · Chapter 10: Taxation of Debt Productsintroduced here
- Series VII · Chapter 2: Market Participants in the Securities Marketintroduced here
- Series III-C · Chapter 11: SEBI (Foreign Portfolio Investors) Regulations, 2019introduced here
Related terms
- Net Settlement of cash and F&OSEBI's mechanism, from November 30, 2022, of netting cash-segment obligations with physical-settlement obligations of expiring stock derivatives into one settlement.
- Straight Through ProcessingElectronic processing of a trade in one pass from deal to final settlement through a single system, without manual re-entry; mandatory for institutional trades since 2004.
- FATFThe intergovernmental body founded in 1989 that writes the global AML/CFT standards — the 40 Recommendations plus IX Special Recommendations — and grey-lists or black-lists countries that fail them.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- Custodial participantA client allowed to trade through several trading members while clearing and settling through a single clearing member, identified by a unique CP code; its CM must confirm the trades.
- 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.
- Tax Residency CertificateThe certificate a non-resident investor obtains from its home tax authority to claim benefits under a Double Taxation Avoidance Agreement — without it, Indian domestic rates apply.
- Liberalised Remittance SchemeThe RBI facility letting a resident individual remit up to USD 250,000 per financial year abroad for any permissible current or capital account transaction, including investment in offshore funds.
- Downstream InvestmentAn investment by an Indian investment vehicle in a domestic company. For a Category III AIF it is indirect foreign investment only if its sponsor or manager is not Indian owned and controlled.
- Person resident in IndiaFEMA's definition of residence under section 2(v) — broadly a person normally residing in India for more than 182 days in the preceding financial year, plus Indian-registered bodies and certain offices.
- FDIForeign capital that comes into a country in active form, where the investing entity participates in decision making and drives the business, as opposed to passive portfolio investment.
- SWAGAT-FISingle Window Automatic and Generalised Access for Trusted Foreign Investor: government and government-related investors and public retail funds, freed from the FPI aggregate 50% NRI/OCI/RI limit.
- Qualified Foreign InvestorA sub-category of Foreign Portfolio Investor, open to foreign individuals or associations from an FATF-member and IOSCO MMOU-signatory country, investing through a demat or Unit Confirmation Receipt route.
- FPI participation in commoditiesHow foreign money reached Indian commodity derivatives — hedging by eligible foreign entities from October 2018, the FPI route without underlying exposure from 2022, and direct market access from May 2023.
- FDI RouteThe route for strategic foreign investment into India: at least 10% of an investee company's post-investment fully diluted paid-up capital, under the DPIIT's FDI policy and RBI's NDI Rules.
- FPI RouteThe route for non-resident portfolio investment: not more than 10% of a listed Indian company's post-investment fully diluted paid-up capital, by investors registered with SEBI under the FPI Regulations, 2019.
- Trade allocationThe back-office process of splitting a single institutional order — entered with the CP code "INST" — across the client's various sub-schemes or portfolios, based on deal sheets from the front office.
- INST tradeA trade entered with the placeholder Custodial Participant code "INST" for an institutional client, later allocated by the back office to the client's actual sub-schemes within a fixed time window.
- Gross settlementA settlement method where transactions in a security are not netted: a member's security pay-in equals cumulative sell quantity and pay-out equals cumulative buy quantity, trade by trade.
- Foreign Portfolio InvestmentInvestment 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.