FPI Route

Not every foreign investor wants to own a meaningful piece of an Indian company. Many want a diversified portfolio of listed shares they can buy and sell. The FPI route is built for them.

The workbook describes it as one of three inbound foreign investment routes apart from investing through an AIF — FDI, FPI and FVCI. The Foreign Portfolio Investment (FPI) route "is available to non-resident investors wherein the size of such investment shall not be more than 10% of the post-investment fully diluted paid-up capital of the listed Indian investee company".

The 10% line is what separates it from FDI, which requires an investment of not less than 10%. FDI is strategic; FPI is portfolio.

Conditions (section 4.2.6):

• Size: not more than 10% of the post-investment fully diluted paid-up capital of the listed Indian company.
• Where: in listed companies on the stock market, or through private placements and other available routes.
• Registration first: FPIs need to be registered with SEBI prior to commencing investment activity, under the SEBI (Foreign Portfolio Investors) Regulations, 2019. The registration provides the rules and regulations to be followed for FPI activity.
• Who: FPIs can be institutional or non-institutional investors.
• FEMA side: the modalities for FPI investment are covered in RBI's Master Directions and the NDI Rules.

The three routes side by side.

Background. After FEMA came into force on 1 June 2000, SEBI introduced foreign investment in capital markets and in venture capital, now dealt with under the separate FPI and FVCI regulations. The introduction and liberalisation of FDI and FPI increased foreign exchange flows to India, and reserves rose substantially.

Foreign investment in AIF units is a separate matter. Foreign investors may purchase or redeem units of a Category I or Category II AIF under the automatic route or the approval route under the NDI Rules — that is investment in an Indian investment vehicle, not portfolio investment in a listed company.

Illustrative figures. A Canadian pension fund is registered with SEBI as an FPI. It wants exposure to a listed Indian specialty chemicals company whose post-issue fully diluted paid-up capital will be 50 crore shares.

At 9%, the pension fund is a portfolio investor. It follows the SEBI FPI Regulations and the FEMA modalities in the Master Directions and NDI Rules.

If it wanted the 12% position, it would be making an investment of the size the FDI route is for — not less than 10% — and the FDI policy's framework of sectoral caps, entry routes and pricing regulations would be the relevant one.

Separately, the same pension fund commits Rs 150 crore to an Indian Category II AIF. That is foreign investment in the units of an investment vehicle, under the NDI Rules' automatic or approval route — not use of its FPI registration.

Chapter 4 (Regulatory Framework — Indian Context) sets out the FPI route at 4.2.6 alongside the FDI and FVCI routes, with its history at 4.2.1 and foreign investment in AIF units at 4.2.7. Expect questions on the 10% limit and which way it runs, on whether the target must be listed, and on the regulations under which FPIs register.

• FPI: not more than 10%. FDI: not less than 10%. Both on post-investment fully diluted paid-up capital.
• FPI is for listed Indian companies — including through private placements and other available routes, not only on-market purchases.
• SEBI registration comes before investment, under the SEBI (Foreign Portfolio Investors) Regulations, 2019. FVCI registration is under the 2000 regulations.
• FPIs can be institutional or non-institutional.
• RBI's Master Directions and NDI Rules govern the FEMA modalities; SEBI registration governs the activity.
• Investing in AIF units is not the FPI route. Foreign investors buy Category I or II AIF units under the automatic or approval route under the NDI Rules.