Recent changes in investment laws have been made by the Securities and Exchange Board of India (“SEBI”), which regulates capital markets, in order to incentivise foreign portfolio investors (“FPIs”) to increase their investments in India. SEBI has enabled the Government to determine additional countries, other than Financial Action Task Force (“FATF”) member countries, where FPIs can register under less onerous conditions. Recognising the importance of Mauritius as a key conduit of FPI investment into India, the Government has permitted eligible Mauritian FPIs to register under the more beneficial category of Category I FPI.

Eligibility and Registration of Foreign Portfolio Investors

Overseas entities who buy, sell or deal in Indian securities are required to register as a FPI with SEBI. There are broadly 2 categories of registration and this is regulated by the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 (“FPI Regulations”). “Category I FPIs” constitute: (i) Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investors; (ii) pension funds and university funds; (iii) appropriately regulated entities such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker dealers and swap dealers; and (iv) entities from FATF member countries which are: (a) appropriately regulated funds; (b) unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI; or (c) university related endowments of such universities in existence for more than 5 years. Entities whose investment manager is from a FATF member country and is registered as a Category I FPI and 75% owned by entities set out in (ii), (iii) and (iv) above can also register as Category I FPIs.

“Category II FPIs” constitute (i) appropriately regulated funds not eligible as Category I FPIs; (ii) endowments and foundations; (iii) charitable organisations; (iv) corporate bodies; (v) family offices; (vi) individuals; (vii) appropriately regulated entities investing on behalf of their client in accordance with SEBI regulations; and (viii) unregulated funds as limited partnership and trusts.

In April 2020 SEBI amended the FPI Regulations to expand Category I FPIs to include entities “from any country specified by the Central Government by an order or by way of an agreement or treaty with other sovereign Governments”. This is significant since it allows Government to now determine the countries from which entities can register as Category I FPIs and invest in the Indian securities market. This will enable the Government to tie this into foreign exchange inflows, industry submissions made, political and foreign trade discussions. This amendment clears up some uncertainty faced by investors after the FPI Regulations replaced the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2014 (“2014 Regulations”), reducing the number of FPI categories from 3 to 2. As a result, Category II FPIs from FATF countries were treated as Category I FPIs and Category II FPIs from non-FATF countries remained as Category II FPIs along with category III FPIs.

Following this, the Financial Markets Division, Department of Economic Affairs of the Ministry of Finance, Government of India has specified Mauritius as an eligible country. Mauritius is reportedly the second largest source of foreign investments in India by way of FPIs and accounted for Rs. 4.37 lakh crores (USD 5.7 trillion) worth of investments in 2019. Currently, around 20% of FPI investments from Mauritius are from Category I FPIs. The addition of Mauritius follows senior level discussions between SEBI and the Mauritius Financial Services Commission and is a welcome move to ease the flow of capital from Mauritius into India at a time where in the current global crisis, this matters. In addition, countries such as Bahrain, Oman, Qatar, Kuwait, and the UAE are not FATF members, but yet have deep pools of capital that could be used to invest into Indian securities

There are many resulting benefits from registration as a Category I FPI. Firstly, there is a lower compliance burden with simpler know-your-customer (“KYC”) norms and documentation requirements such as not requiring proof of identity of ultimate beneficial owners and the frequency of these obligations – Category II FPIs from high risk jurisdictions are required to do KYC reviews annually whereas Category I FPIs are reviewed every 3 years. Secondly, Category I FPIs have higher position limits in stock and stock index derivative contracts and currency derivatives. Thirdly, offshore derivative instruments can only be issued by Category I FPIs and only to persons eligible to register as Category I FPIs.

Under section 9 of the Income Tax Act 1961 (“IT Act”) gains from transfer of shares or interests in an entity outside India is taxable in India, if the entity’s Indian assets are (i) 50% or more of its total assets and (ii) more than Rs. 10 crore in value. These indirect transfer provisions were introduced in 2012 following the landmark judgement when Vodafone Group plc indirectly acquired Hutchinson Essar Limited via acquisition of an overseas company’s shares and the exemption for certain FPIs was introduced in 2017. From 1 April 2020 as set out in the Finance Act 2020 the exemption continues for the new and enlarged Category I FPIs. Taxability of Category II FPIs are taxable to indirect transfer provisions. This is a significant incentive for eligible Mauritian entities to register as a Category I FPI.


We believe that this change will boost FPI capital inflow in India and enable more existing entities to retain their Category I FPI registration or obtain such a registration. The indirect transfer provisions not being applicable for Category I FPI will continue to apply for largely unregulated entities who also continue to be subject to higher compliance requirements. However since the indirect transfer provisions are exempt for Category I FPIs, and considerable institutional money comes through these entities which are regulated entities offshore, the FPI Amendment will boost institutional investor investment through Mauritian Category I FPIs.

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