Based on the K. M. Chandrasekhar Committee Report, SEBI has instituted a new class of foreign investors to put in place an easier registration process and operating framework for overseas entities seeking to invest in Indian capital markets. The SEBI (Foreign Portfolio Investors) Regulations, 2014 notified on 7 January, 2014, replaces the existing regulations on FIIs and provides that erstwhile portfolio investment categories FIIs, sub-accounts and QFIs would now be categorised as a single investor class i.e. FPIs.

An applicant is now required to approach designated depository participants, not SEBI, for being registered as an FPI. Existing custodians of securities and qualified depositary participants will be deemed to be DDPs subject to payment of fees to SEBI. SEBI has also laid down eligibility criteria for registration as a DDP which requires an applicant to be a registered depositary participant, registered custodian of securities, and a bank. In addition, a global bank regulated in its home jurisdiction may also apply for registration as a DDP. The DDPs will have extensive responsibilities of ensuring compliance by FPIs, determining the eligibility of FPI applicants, adequate and timely disclosures to the SEBI, determining beneficial ownership of FPIs, etc.

Existing FIIs and QFIs may continue to buy, sell or otherwise deal in securities until the respective deadlines mentioned in the Regulations. However, such FIIs and QFIs have to acquire FPI certification to continue their operations beyond the deadlines mentioned.
Under the new regulations, FPIs have been divided into three categories based on their risk profile. Category I would comprise of low risk entities including government and government related investors, Category II would comprise of appropriately regulated broad-based funds, other appropriately regulated entities, broad-based funds which are not appropriately regulated but whose investment manager is appropriately regulated, university funds, university related endowments, pension funds etc. Category III would be a residual category for investors who do not fall under Categories I and II.

Upon the receipt of a certificate of registration, the FPI can deal in all securities in which FIIs had previously traded. Further, the Regulations also provide that FPIs shall only invest in listed or to be listed securities. FPIs will be permanently registered unless suspended or cancelled by SEBI or surrendered by the FPI.

The investment limit of FPIs has been capped at ten percent of the total issued capital of an investee company and if the ultimate beneficial owner(s) invest through multiple entities, these entities would be treated as part of the same investor group and their combined shareholding is considered for determining compliance with the investment limit.

Furthermore, the Regulations have tightened the conditions for the issuance of offshore derivatives instruments by foreign units. Category III and broad based funds under Category II, which are not appropriately regulated but whose investment manager is appropriately regulated, are not permitted to issue offshore derivatives instruments. This has raised a concern that, investment through P-Notes, which until now was the preferred route for overseas HNIs and hedge funds for taking exposure to Indian securities, may get bottlenecked.