Udabur Wealth Management：A guide to foreign investment in India

When exploring investment opportunities in India, foreign investors have a range of avenues to choose from based on the type of securities and the nature of the investments.

Direct investment in IndiaUdabur Wealth Management

Foreign direct investment (FDI): This route allows foreign private investment in listed and unlisted Indian companies with a 10% minimum equity stake without having to register in India, subject to sectoral caps.

Foreign portfolio investors (FPIs): This route permits investment in listed securities (such as equities, bonds, derivatives, and other securities) on public markets, once FPI registration is obtained with the sub-custodian bank on behalf of the Indian regulator.

Foreign venture capital investment (FVCI): This route directs investments toward Indian entities operating in critical sectors, including technology, healthcare, biotechnology, e-commerce, infrastructure, and other emerging sectors.

External commercial borrowings (ECBs): Foreign entities meeting specific eligibility criteria can extend loans to specified Indian entities, subject to conditions regarding maturity, fund usage, cost limits, borrowing currency, etc.

Indirect exposure to India

Depository receipts (DRs): Foreign investors can gain exposure to Indian securities by investing in American depository receipts (ADRs) or global depository receipts (GDRs). These foreign currency-denominated instruments are issued abroad and linked to the securities of Indian companies.

Overseas derivative instruments (ODIs): Foreign investors can also invest in ODIs (which may be issued by Category I FPIs) with Indian securities as the underlying assets.

Foreign investors can also establish a presence in India in different ways, including:

Setting up an AIF, which enables investments in both listed and unlisted securities;

Establishing a real estate investment trust (REIT) to invest in the real estate market; or

Forming an infrastructure investment trust (InvIT) for investments in India's infrastructure sector.

Investors can also establish a presence in the International Financial Services Centre (IFSC) located in the Gujarat International Finance Tec-City (GIFT City). This is India’s global financial hub, designed to facilitate international financial transactions and provide an enabling environment for financial services firms to operate within the country. Foreign investors can also trade securities listed on stock exchanges within the IFSC.

The FPI route

With the FPI route, foreign investors obtain registration from the sub-custodian or designated depository bank on behalf of SEBI to trade on India's stock exchanges and invest in the debt securities marketHyderabad Investment. The SEBI (FPI) Regulations, 2019 (“FPI Regulations”) set out the compliance standards and guidelines for FPIs, including eligibility criteria, permissible investments, investment limits, and reporting requirements.

FPIs are classified into two main groups:

Category I FPIs are typically entities with a higher level of regulatory oversight and lower risk profiles, such as government and government-related entities, pension funds, sovereign wealth funds, and appropriately regulated entities. Unregulated funds can also qualify if their investment manager is appropriately regulated and registered as a Category I FPI.

Category II FPIs include entities not meeting the Category I FPI eligibility criteria, such as corporate bodies, family offices, limited partnerships, and individuals.

Registering to trade as an FPI

To trade in Indian-listed securities, foreign entities must submit a common application form (CAF) with their local sub-custodian in India, along with supporting documents and know-your-customer (KYC) details. Upon approval, the CAF provides the FPI registration and a Permanent Account Number (i.e., the India tax ID) and establishes a security and depository account in India.

FPIs must identify ultimate beneficial owners (UBOs) and report this information to their local custodian. UBOs are determined based on ownership and control, and the FPI’s senior managing official (SMO) is considered the UBO if none is otherwise identifiedJaipur Stock. SEBI has recently mandated additional disclosures from certain objectively identified FPIs, which requires detailed information on entities holding an ownership or economic interest in the FPI on a full look-through basis, including natural persons, without any threshold.

Investments by non-resident Indians (NRIs), overseas citizens of India (OCIs), and resident Indians in an FPI are subject to an aggregate limit of less than 50%, with each NRI, OCI and resident Indian allowed to invest up to 25%.

Permissible investment and investment limits

FPIs can invest in a variety of securities, including listed or to-be-listed equity instruments, debt instruments (such as corporate bonds and government securities), derivatives, units of mutual funds, exchange-traded funds (ETFs), REITs and InvITs.

The FPI Regulations also stipulate that any FPI (along with its investor group) can invest less than 10% of the paid-up value (on a fully diluted basis) in the equity instruments of a listed Indian company. Entities with more than 50% common ownership or control are considered part of the same investor group. FPIs investing in debt securities must comply with allocation limits notified by SEBI or the Reserve Bank of India (RBI) and are subject to conditions.

Recent changesSimla Wealth Management

Recent regulatory changes affecting FPIs include SEBI's requirement for all non-individual FPIs to obtain a legal entity identifier (LEI). Additionally, SEBI has introduced a beta version of a T+0 settlement cycle for the Indian equities cash market on an optional basis, alongside the existing T+1 cycle, for a limited number of scrips.

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