Wednesday, 9 September 2020

Analysis on Foreign Portfolio Investor under NDI Rules, 2019


The Finance Act, 2015 amended Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and section 47 (Power of RBI to make regulations) of the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments have the effect of altering the powers of the Central Government and Reserve Bank of India (RBI).

In terms of  amended provisions of FEMA, the Central Government has made Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") on October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which provides for reporting requirements in relation to any investment made under the NDI Rules.

The foreign investments allowed to be received from different types of investors including Foreign Portfolio Investors registered with the SEBI under SEBI (FPI) Regulations, 2014

In this article we have encapsulated provisions dealing with investment by Foreign Portfolio Investors under the NDI rules.  

Acquisition of equity instruments/other securities/units by FPI

“FPI” or “Foreign Portfolio Investor” means a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

Under Rule 10 read with Schedule II of NDI Rules permit FPIs to invest in listed entities in equity instruments as well as other identified securities. The provisions regulating the investment by FPI have been captured under Chapter IV of NDI Rules which inter-alia prescribed that FPI may:

  1. Purchase equity instruments of an Indian company which is listed or to be listed on a recognised Stok exchange.
  2. Purchase units of domestic mutual funds or Category III Alternative Investment Fund or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50 percent in equity instruments on repatriation basis subject to the terms and conditions specified by the SEBI and the Reserve Bank.
  3. Trade or invest in all exchange traded derivative contracts approved by SEBI from time to time subject to the limits specified by SEBI and in compliance of conditions prescribed in Schedule II of NDI Rules.
  4. Purchase, hold, or sell Indian Depository Receipts (IDRs) of companies’ resident outside India and issued in the Indian capital market, in the manner and subject to the terms and conditions as prescribed in Schedule X of the NDI Rules.
  5. Purchase equity instruments of an Indian company through public offer or private placement, subject to prescribed limit and in compliance of pricing conditions as prescribed under Schedule II.

Permitted Aggregate Holding by a FPIs

The pertinent change in NDI Rules, regulating investment by FPIs is that the default aggregate investment limits in an Indian company is the applicable sectoral cap, as laid out in Schedule I. Unlike the erstwhile the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, where the aggregate limit of FPI was upto 24%, with the company being provided the option of enhancing the limits to the applicable sectoral cap.

Ø  Until March 31,2020 the total holdings of all FPIs put together (including any other direct and indirect foreign investments in the Indian Company permitted under the NDI Rules) in an Indian Company is not permitted to exceed 24% of the paid up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or share warrants (except if the ceiling has been raised to sectoral cap or statutory ceiling by the board or shareholders of the company).This is in line with the framework that was prescribed under FEMA.

Ø   Under the NDI Rules, from April 01, 2020 the aggregate limit will automatically be deemed to be the sectoral cap as contained in the NDI Rules without the requirement to pass any board or shareholders resolutions. The aggregate limit can be decreased by the Indian company to a lower limit of 24%, 49% or 74% as deemed fit, with the approval of its board and shareholders (by way of a special resolution) before March 31,2020.Similarly, where an Indian company has decreased its aggregate limit as mentioned above ,it may increase such aggregate limit to 49% or 74% or the sectoral cap or statutory ceiling as deemed fit, with the approval of its board or shareholders(by way of a special resolution).However, once the aggregate limit has been increased the Indian company cannot reduce it to a lower threshold.

Purchase or sale of securities other than equity instruments by FPIs

FPI can now invest in:

  1. Units of domestic mutual funds Category III Alternative Investment Funds offshore fund for which no objection is issued under the SEBI (Mutual Fund) Regulations, 1996 and which in turn invests more than 50% in equity instruments on repatriation basis. 
  2. Units of real estate investment trusts and infrastructure investment trusts on repatriation basis subject to the terms and conditions specified by SEBI.

Transfer of equity instruments of an Indian company by FPI (Automatic route)

FPI may transfer equity instrument/s of Indian company or unit in compliance of conditions as prescribed by SEBI and those as specified in the schedules under NDI Rules. However, the government approval would be required in case:

  •  Transfer of equity instruments of company engaged in a sector which requires the Government approval.
  • Acquisition of equity instruments by FPI made under Schedule II of these rules has resulted in a breach of the applicable aggregate FPI limits or sectoral limits.

Closing Note:

  • In case, two or more FPI’s including foreign Governments/their related entities are having common ownership, directly or indirectly, of more than fifty percent or common control, all such FPI’s shall be treated as forming part of an investor group. Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
  • If FPI’s investment breach the prescribed limits as discussed above, FPI shall have an option to of divesting their holdings within 5 trading days from the date of settlement of the trades causing the breach, failing which the entire investment by FPI and its investor group would be considered as the FDI and they will not be allowed to make investment in concerned entity as a FPI.
  • The FPI, through its designated custodian, shall bring the same to the notice of the     depositories as well as the concerned company for effecting necessary changes in their records, within -seven trading days from the date of settlement of the trades causing the breach .
  • In case of breach of investment limits by an FPI, the divestment of holdings by the FPI and the reclassification of FPI investment as foreign direct investment shall be subject to further conditions, if any, specified by the Securities and Exchange Board of India and RBI, in this regard.

This Article has been Compiled by Deepika Sharma (Senior Associate)


The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.


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