Indian capital markets Foreign Portfolio Investor FPI SEBI FPI Regulations 2019 FII QFI Designated Depository Participant Section 196D FPI tax

Foreign Portfolio Investor (FPI)

From WebNotes, a public knowledge base. Last updated 16 May 2026. Reading time ~17 min.

A Foreign Portfolio Investor (FPI) is the principal regulatory category under SEBI for offshore institutional investors seeking to participate in Indian securities markets. The FPI framework is governed by the SEBI (Foreign Portfolio Investors) Regulations 2019 (the FPI Regulations 2019), which consolidated and replaced the earlier 2014 FPI Regulations along with the historical Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) regimes that had operated prior to the unified FPI framework.

The FPI Regulations 2019 establish the framework under which non-Indian-resident investors can:

Register with SEBI through a Designated Depository Participant (DDP) acting as the principal interface for FPI onboarding.
Invest in equity, equity-related instruments, debt instruments, and select hybrid instruments listed on Indian stock exchanges.
Use the standard market-infrastructure (NSE , BSE , NSE Clearing , ICCL , NSDL , CDSL ) for trade execution, clearing, and settlement.
Operate under the cross-border foreign-exchange framework established by the Foreign Exchange Management Act 1999 (FEMA) and the FEMA Non-Debt Instruments Rules 2019.

FPIs are the principal vehicle through which foreign institutional capital participates in Indian capital markets. As of 2026, FPI assets under custody in Indian equity exceed Rs 70 lakh crore (approximately USD 850 billion), with substantial additional allocations to Indian debt markets. The major FPI categories by country of origin include the United States, Mauritius (which had a historically large position driven by the India-Mauritius DTAA, now substantially reduced post-2017), Singapore, Luxembourg (substantial debt-fund-vehicle position), and increasingly the UAE through GIFT City IFSC-routed structures.

The contemporary FPI framework operates under three principal regulatory layers:

SEBI FPI Regulations 2019: The eligibility, registration, and operational framework.
FEMA NDI Rules 2019: The foreign-exchange permission for non-debt-instrument investment under FEMA .
Income Tax Act 1961: The tax-treatment framework, including the FPI-specific tax provisions in Section 196D and the broader capital gains tax and Section 112A /Section 111A frameworks.

History

Pre-1992 framework: closed Indian capital markets

Prior to the 1992 economic liberalisation, the Indian capital markets were substantially closed to foreign institutional investors. Limited foreign investment occurred through:

Foreign direct investment (FDI) under sectoral approvals.
Limited corporate-bond investment by select foreign banks.
Foreign-currency convertible bonds (FCCBs) issued by Indian companies abroad.

The closed-market framework was inconsistent with the broader 1991 to 1992 economic-liberalisation thrust and was identified as an early reform priority.

1992 FII framework

The Foreign Institutional Investor (FII) framework was introduced by SEBI in September 1992, allowing eligible foreign institutional investors to register with SEBI and invest in Indian listed securities. The 1992 framework had:

Defined eligible FII categories (foreign mutual funds, pension funds, university endowments, sovereign wealth funds, insurance companies, and select other institutional categories).
Registration with SEBI through a documented application process.
Sub-account structure for FIIs to operate multiple investment vehicles.
Investment limits (initially 5 per cent per stock per FII, with aggregate FII limits per company).

The FII framework was transformative for Indian capital markets, driving substantial inflows from 1993 onwards as global institutional investors built India allocations.

2011 QFI framework

The Qualified Foreign Investor (QFI) framework was introduced in 2011 as a parallel route allowing non-institutional foreign investors (high-net-worth individuals, foreign retail mutual funds) to invest in Indian equity. The QFI framework was designed to broaden the foreign-investor base beyond the FII institutional category.

The QFI framework had limited uptake and operated alongside the FII framework through 2013 to 2014.

2014 FPI consolidation

The SEBI Foreign Portfolio Investors Regulations 2014 consolidated the FII and QFI regimes into a unified Foreign Portfolio Investor (FPI) framework. The 2014 framework:

Combined FII and QFI categories into three FPI categories (I, II, III).
Introduced the Designated Depository Participant (DDP) as the principal interface for FPI registration.
Streamlined the registration process to a single application through the DDP.
Standardised the eligibility criteria across the institutional and non-institutional investor categories.

The 2014 consolidation was a significant operational simplification that reduced the regulatory friction for cross-border investors.

2019 FPI Regulations refresh

The SEBI (Foreign Portfolio Investors) Regulations 2019 replaced the 2014 framework with a refreshed rule-set incorporating:

Simplified two-category FPI structure (Category I, Category II) replacing the earlier three categories.
Enhanced eligibility criteria for the higher-priority Category I.
Streamlined operational requirements for FPI custodians and clearing members.
Aligned the framework with the FEMA NDI Rules 2019 consolidation.
Updated the disclosure and reporting framework.

The 2019 framework is the contemporary FPI regulatory framework.

Post-2017 Mauritius re-routing

The India-Mauritius DTAA (Double Taxation Avoidance Agreement) amendments that took effect from 1 April 2017 substantively reduced the historical Mauritius-route advantage for FPI capital gains taxation. The amendments introduced a phased withdrawal of the capital-gains-exemption that had made Mauritius the dominant FPI domicile.

Post-2017, FPI capital flows rebalanced across multiple jurisdictions:

Substantial movement to direct Indian-tax-resident investment.
Increased use of Singapore (which retains a more favourable DTAA position).
Growing use of GIFT City IFSC-based structures.
Continued (but reduced) Mauritius-based FPI activity.

The Mauritius re-routing has been one of the principal structural changes in the FPI ecosystem since the 2017 DTAA amendments.

FPI categorisation

Category I FPIs

Category I is the highest-priority FPI category, with relatively streamlined registration and operational requirements. Category I FPIs include:

Government-related entities: Sovereign wealth funds, central banks, government-affiliated funds.
Pension and insurance funds: Public-sector pension funds, insurance companies regulated in their home jurisdictions.
University endowments and foundations regulated in their home jurisdictions.
Foreign mutual funds and similar pooled vehicles regulated in their home jurisdictions.
Bank-affiliated investment vehicles regulated in their home jurisdictions.

Category I FPIs are presumed to be lower-risk from an investor-protection perspective and have:

Shorter documentation requirements during onboarding.
Higher investment-limit ceilings.
Reduced KYC re-verification frequency.
Easier change-of-name and structure-change procedures.

Category II FPIs

Category II captures the remaining FPI categories not falling within Category I:

Endowments and foundations not regulated in their home jurisdictions.
Charitable trusts.
Family offices.
Individual investors (high-net-worth individuals from approved jurisdictions).
Other institutional investors not falling within Category I.

Category II FPIs face:

More extensive documentation requirements during onboarding.
Lower investment-limit ceilings.
More frequent KYC re-verification.
Additional disclosure requirements during operational changes.

Eligibility jurisdictions

FPIs must be domiciled in a jurisdiction that:

Has signed a Memorandum of Understanding (MoU) with SEBI.
Is a member of the International Organization of Securities Commissions (IOSCO).
Is not in the FATF “Call for Action” list (high-risk jurisdictions for money laundering).

The eligible-jurisdiction list is published by SEBI and is updated periodically based on global regulatory cooperation arrangements.

Registration framework

Designated Depository Participant (DDP)

A Designated Depository Participant (DDP) is a SEBI-approved entity (typically a custodian bank or specialised institutional firm) that:

Receives FPI registration applications from prospective FPIs.
Conducts due diligence on the FPI’s eligibility and KYC.
Submits the application to SEBI for issuance of the FPI Certificate of Registration.
Maintains ongoing custody of the FPI’s Indian securities.
Provides operational support for FPI trading, settlement, and reporting.

Major DDPs in India include the custody divisions of HDFC Bank, Citibank, JPMorgan, Standard Chartered, ICICI Bank, Deutsche Bank, and HSBC. The DDP-FPI relationship is the principal commercial arrangement underlying the operational delivery of FPI services.

Registration process

The FPI registration process:

Initial application: FPI submits the application form to the DDP, including supporting documents on the FPI’s regulatory status, beneficial ownership, KYC, and operational structure.
Due diligence: The DDP conducts due diligence on the FPI’s eligibility and documentation completeness.
Application to SEBI: The DDP submits the application to SEBI through the SEBI Intermediary Portal (SI Portal).
SEBI review: SEBI reviews the application and seeks clarifications or additional documents as needed.
Certificate of Registration: SEBI issues the FPI Certificate of Registration on satisfactory completion of the review.

The typical processing timeline is 4 to 8 weeks, varying by FPI category, jurisdiction, and documentation completeness.

PAN and tax identification

Each FPI must obtain a Permanent Account Number (PAN) for tax-identification purposes. The PAN is the gateway to:

Income-tax filing obligations (where applicable).
TDS deduction by the custodian on capital-gains-realisation events.
Annual Information Statement (AIS) reporting to the FPI’s home jurisdiction (through tax-information-exchange agreements).
FATCA/CRS compliance reporting.

Permitted investments

FPIs are permitted to invest in:

Listed equity shares of Indian companies (including IPO and FPO subscriptions).
Convertible debentures of listed companies.
Warrants on listed equity shares.
Equity-linked debentures.
Mutual fund units (limited categories).
AIF units (Category I and Category II AIF, subject to AIF eligibility).
REITs and InvITs.

The principal investment vehicle for most FPIs is listed Indian equity, with derivatives positions (futures and options on listed equity and indices) supporting hedging and speculative-positioning strategies.

Debt instruments

FPIs are permitted to invest in:

Government securities (G-Secs) within prescribed limits.
State development loans (SDLs).
Listed corporate bonds.
Treasury bills.
Commercial paper.

The debt-FPI category has grown substantially through the 2010s and 2020s, driven by:

Index inclusion of Indian government bonds in major emerging-market debt indices (notably the JPMorgan Government Bond Index for Emerging Markets, post-2024).
Growing yield differential between Indian government bonds and developed-market sovereign bonds.
Increased depth and liquidity in the Indian debt market.

Derivatives

FPIs can trade in:

Equity futures and options on NSE and BSE .
Index futures and options (NIFTY 50 , Sensex , Bank Nifty, FinNifty).
Currency derivatives (USDINR, EURINR, GBPINR, JPYINR).
Interest-rate derivatives where applicable.

The derivative-trading activity is subject to position limits and margin requirements set by NSE Clearing and ICCL , and the resulting business income is taxable under the F&O taxation framework or as capital gains depending on the specific facts.

Excluded investments

FPIs are not permitted to invest in:

Unlisted equity shares (which fall under FDI rules).
Shares of certain prohibited-sector companies (e.g., chit funds, certain real-estate-related companies).
Shares carrying voting rights beyond certain thresholds (preserving the FPI portfolio-investment characterisation).

Tax framework

Capital gains tax

FPI capital gains on listed equity are taxed under the standard capital gains framework :

Short-term capital gains (held below 12 months): Section 111A at 20% (post-2024 amendment, up from 15%).
Long-term capital gains (held 12 months or more): Section 112A at 12.5% above Rs 1.25 lakh annual exemption (post-2024 amendment, up from 10% above Rs 1 lakh).

Both rates apply with the requirement that Securities Transaction Tax has been paid on the relevant transactions.

Section 196D special TDS

Section 196D of the Income Tax Act provides a special TDS framework for FPI income:

TDS deducted by the custodian at the time of capital-gains realisation.
Rate is the applicable Section 111A or Section 112A rate, with potential treaty relief under applicable DTAA.
The TDS is final (or creditable, depending on the FPI’s situation and treaty position).

The Section 196D framework provides operational simplicity for FPIs by avoiding the need for separate tax-filing in most cases.

DTAA treaty relief

FPIs domiciled in jurisdictions with which India has a DTAA may claim treaty relief on capital gains. The applicable DTAA articles vary by jurisdiction:

Mauritius: Post-2017 amendments substantially eliminated the historical capital-gains-exemption.
Singapore: Post-2017 amendments aligned the Singapore-DTAA position with Mauritius, with some residual benefits.
Netherlands, Luxembourg, Ireland, UAE: Different DTAA positions providing varying degrees of relief.
United States, United Kingdom: No comprehensive capital-gains-exemption in the DTAAs.

The DTAA position is a principal driver of FPI jurisdiction choice and structural design.

GAAR and beneficial ownership

The General Anti-Avoidance Rule (GAAR) under Sections 95 to 102 of the Income Tax Act applies to FPI arrangements that lack commercial substance or are primarily structured to obtain a tax benefit. FPI arrangements must demonstrate:

Commercial substance: Real economic activity in the FPI’s home jurisdiction.
Beneficial ownership: True beneficial ownership of the income by the entity claiming treaty relief.
Non-tax-avoidance purpose: The arrangement is not principally designed for tax avoidance.

The GAAR framework has been progressively applied to FPI structures since 2017, with various rulings on the substance-and-purpose tests.

Operational framework

Custodian and clearing

FPIs operate through:

Custodian bank (typically the same entity as the DDP): Holds the FPI’s securities in custody and provides settlement-instruction services.
Clearing member: Handles trade clearing on NSE Clearing and ICCL for the FPI’s transactions.
Trading broker: Executes trades on behalf of the FPI (some FPIs use multiple brokers).

The custodian-clearing-broker chain is the operational infrastructure underlying every FPI trade. The custodian relationships are typically long-term commercial arrangements with the principal global custodian banks.

KYC and ongoing compliance

FPIs are subject to ongoing KYC and compliance requirements:

Annual KYC re-verification (frequency varies by category).
Reporting of beneficial ownership changes.
Notification of structural changes (name, manager, regulatory status).
AML compliance and reporting through the custodian.

Position limits

FPIs face position limits:

Aggregate FPI limit per company: Typically 49 per cent (or sector-specific lower caps for prohibited sectors).
Individual FPI limit: Generally below 10 per cent per company.
Derivative position limits: Specific limits on equity and index derivative positions.
Debt-segment limits: Aggregate FPI limits on government bonds and corporate bonds.

The position-limit framework is monitored by NSDL and CDSL in coordination with the clearing corporations.

Recent developments

JPMorgan EM Bond Index inclusion (2024)

In September 2023 JPMorgan announced the inclusion of Indian government bonds in its Government Bond Index for Emerging Markets (GBI-EM), with phased inclusion commencing June 2024. The inclusion has driven substantial FPI debt-segment inflows in 2024 and 2025, with index-tracking institutional capital flowing into Indian government bonds.

The bond-index inclusion was a long-pending structural milestone that had been a focus of Indian-debt-market reform efforts through the 2010s and 2020s.

Mauritius DTAA amendments and treaty restructuring

The April 2024 protocol to the India-Mauritius DTAA introduced principal-purpose-test provisions that further tighten the treaty position for Mauritius-domiciled FPIs. The amendments have driven continued movement of FPI capital away from Mauritius-based structures.

GIFT City IFSC and FPI structures

The International Financial Services Centres Authority (IFSCA) at GIFT City has progressively developed FPI-related products and services, including:

IFSC-located FPI custodian and clearing facilities.
Tax-neutral fund structures for cross-border investors.
USD-denominated trading infrastructure complementing the rupee-denominated mainland market.

The GIFT City IFSC has emerged as an alternative jurisdiction for FPI structuring, competing with the traditional Mauritius/Singapore/Luxembourg/UAE alternatives.

Single-Window Application and Common Application Form

SEBI in 2023 to 2024 progressively streamlined the FPI registration process through:

The Common Application Form for FPI, RBI, and tax-related onboarding documentation.
The Single Window Application portal for cross-regulator coordination.
Reduced documentation requirements for re-registrations and structural changes.

The streamlining has reduced the typical onboarding timeline from 4 to 8 weeks (pre-2023) to 2 to 4 weeks (post-streamlining).

Beneficial Ownership disclosure framework

SEBI in 2024 enhanced the beneficial-ownership disclosure framework for FPIs, requiring detailed disclosure of:

Ultimate beneficial owners.
Investment-decision-making structures.
Cross-border ownership chains.

The enhanced disclosure was driven by post-Adani-related-investigation concerns about opaque FPI ownership structures and aligned with international FATF recommendations on beneficial ownership.

Criticism and debates

Mauritius transitional arrangements

The phased withdrawal of Mauritius DTAA capital-gains-exemption (post-2017) was criticised by Mauritius-based FPIs and Mauritius-domiciled fund managers as producing operational disruption. The transitional arrangements were considered insufficient by some commentators, though the disruption was ultimately managed without systemic stress.

Capital-flow volatility

FPI capital flows can be substantially volatile, with large inflows during risk-on periods and substantial outflows during risk-off events (e.g., 2008 global financial crisis, 2020 COVID-19 onset, 2022 Russia-Ukraine conflict onset). The volatility produces concerns about the macroeconomic stability implications of FPI-heavy capital structures.

Tax-treaty shopping

FPI structures involving treaty-shopping (selecting jurisdictions principally for tax benefit rather than commercial substance) have been a long-standing concern. The post-2017 DTAA amendments and the GAAR framework have substantially reduced the scope for pure treaty-shopping, but residual concerns persist.

Beneficial-ownership transparency

The opacity of FPI beneficial-ownership structures has been criticised, particularly after the 2023 Adani-related investigations raised concerns about offshore-Indian-promoter-related FPI investments. The 2024 enhanced disclosure framework partially addresses these concerns.

Operational concentration in few DDPs

The DDP function is concentrated in a relatively small number of global custodian banks. The concentration produces operational-resilience concerns and pricing-power dynamics in the FPI custodian market. Industry submissions have suggested encouraging broader DDP competition.

References

SEBI (Foreign Portfolio Investors) Regulations 2019, Securities and Exchange Board of India.
SEBI (Foreign Portfolio Investors) Regulations 2014 (superseded), Securities and Exchange Board of India.
FEMA (Non-Debt Instruments) Rules 2019, Department of Economic Affairs.
Income Tax Act, 1961, Section 196D, Section 111A, Section 112A, Sections 95 to 102 (GAAR).
Finance (No. 2) Act, 2024, amendments to Section 111A and Section 112A.
India-Mauritius DTAA, including the 2016 Protocol and the 2024 Protocol amendments.
India-Singapore DTAA, including the 2017 Protocol.
SEBI Master Circular on Foreign Portfolio Investors, Securities and Exchange Board of India.
JPMorgan Government Bond Index for Emerging Markets (GBI-EM), inclusion announcement September 2023.
International Organization of Securities Commissions (IOSCO), Memoranda of Understanding with SEBI.

Reviewed and published by

WebNotes Editorial Team

The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

Last reviewed: 16 May 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.