What is FPI?

FPI stands for Foreign Portfolio Investor. These are investors from other countries who buy securities in India's financial markets, like stocks, bonds, and other financial instruments. They typically hold these investments for a shorter term and aim for capital appreciation or income generation.

Regulatory Framework.

The Securities and Exchange Board of India (SEBI) is the securities market regulator in India. It has issued the SEBI (Foreign Portfolio Investors) Regulations, 2019, and operational guidelines which govern foreign portfolio investors (FPIs)

Eligibility criteria for registering as an FPI

01. The applicant should not be resident in India or a non-resident Indian.

02. The applicant should be a resident of a country:

• whose securities market regulator is a signatory to the International Organization of Securities Commissions’ (IOSCO’s) Multilateral MOU or a signatory to the bilateral MOU with SEBI

• whose central bank is a member of the Bank for International Settlements • against whom the Financial Action Task Force (FATF) has not issued any warnings.

03. The applicant can also be incorporated or established in the International Financial Services Centre (IFSC).

Overview of categories of FPIs

Category I

• Foreign governments and government-related investors.

• International and multilateral organizations.

• Pension and university funds.

• Banks, brokers, asset managers and other appropriately regulated entities. • Other entities where the investment manager is from a FATF member country and registered as a Category I FPI.

• Entities that are at least 75% owned by a Category I FPI.

Category II

• Regulated funds from a non-FATF member country.

• Endowments, foundations and charitable organizations.

• Corporate bodies, family offices, individuals and unregulated funds in the form of limited partnerships and trusts.

• Appropriately regulated entities investing on behalf of clients.

Permitted investment avenues for FPIs

Equity and other securities

• Listed shares or ‘to be listed’ shares.

• Exchange-traded derivatives (stock, index, currency, commodity).

• Units of mutual funds.

• Indian depositary receipts.

• Units of Real Estate Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Category III Alternative Investment Funds (AIFs).

Debt instruments

• Dated government securities and treasury bills

• Listed and unlisted non-convertible debentures (NCDs), commercial papers

• Units of specified debt-oriented mutual funds

• Securitized debt instruments and security receipts

• Listed non-convertible/redeemable preference shares

• Rupee-denominated bonds/units issued by infrastructure debt funds

• Municipal bonds

• Debt securities issued by REITs and InvITs

Tax framework for FPIs

Securities Transaction Tax (STT) STT is required to be paid in respect of dealings in Indian securities purchased or sold on Indian stock exchanges. The STT levy is collected by the respective stock exchange at the time of trade. STT rates are as follows:

Taxable securities transaction

STT rate Payable by Purchase or sale of equity shares 0.1 %- Purchaser and seller

Sale of futures 0.0125 % -Seller

Sale of options 0.0625 % -Seller

Sale of options, where exercised 0.125 % -Purchaser

Sale of a unit of equity-oriented fund to the mutual fund 0.001 % -Seller

Income tax

• Any security held by an FPI is treated as a ‘capital asset’. Thus, any income arising from the transfer of such security by an FPI is in the nature of ‘capital gains’.

• FPIs may earn the following streams of income:– capital gains, i.e. income on transfer of capital assets– ‘income from other sources’ such as dividend income and interest income.

• FPIs are required to compute the tax liability on income in Indian rupees and are obligated to discharge taxes on income prior to repatriation of proceeds out of India.

Overview of tax rates

Long-term capital gains: 10%.

Short-term capital gains: 15% or 30%.

Held for not more than 36 months– Income in respect of securities – includes dividends and interest: 20%.

Opportunities in GIFT IFSC

GIFT IFSC is a specialized hub, strategically designed to cater to clients venturing into cross border financial activities. It offers a comprehensive suite of financial services coupled with world-class infrastructure facilities and highly skilled workforce.

• The IFSC assumes a pivotal role in the global finance landscape by ensuring regulatory adherence, providing tax advantages and enabling ease of doing business.

• The current ecosystem spans the entire spectrum of financial services, encompassing banking, capital markets, insurance, fund management, global distribution of financial products, and other ancillary services.

• In a forward-looking approach, initiatives are underway to facilitate direct listing of Indian securities on IFSC stock exchanges.

• Entities establishing a presence in the GIFT IFSC benefit from preferential direct and indirect tax treatment, complemented by state subsidies.

Benefits for Category III AIFs in GIFT IFSC (IFSC AIF)

Tax is paid at fund level, i.e. taxes to be paid by the IFSC AIF. FPI tax principles will apply and investments are treated as capital assets.

• IFSCA AIF can avail exemption from tax on income from: –transfer of securities (other than shares of an Indian company), including debt, derivatives, offshore securities, mutual funds and securities listed on IFSC –securities issued by a non-resident (not being a permanent establishment) with no accrual of income in India –securitization trust chargeable under the head ‘PGBP’.

• Any income received by investors from the IFSC AIF or on transfer of units of such AIF is exempt in the hands of the investors.

• Overseas transfer provisions are not applicable if the IFSC AIF is registered as a Category I FPI under the SEBI (Foreign Portfolio Investors) Regulations, 2019.