India’s masterclass in winning over Foreign Portfolio Investors

Foreign investors have played a vital role in the growth of India’s capital markets in the past two decades, cementing the country’s reputation as one of the world’s most attractive investment destinations.

These inflows of foreign capital have helped to drive India’s GDP to nearly USD 2.8 trillion in 2020 according to the World Bank – making it one of the biggest emerging market economies.

When clients ask me what’s behind this rise, I cite the following factors. The most important is that India has had a strong, stable and investor-friendly policy for more than five years. In addition, technological innovations have boosted capital markets, and the securities market has benefited from reform initiatives that have created an efficient and robust market infrastructure. This has expanded investment opportunities by offering new products while also protecting investors’ interests and ensuring better market safety for all stakeholders.

An increasingly attractive destination for foreign investment

This mix of policy, necessity and technology has made trading and investing in India much easier. The government and regulators have in essence responded to Foreign Portfolio Investors (FPIs) prior concerns over factors that make investing in capital markets much simpler.

A prime example occurred in 2019, when the Securities and Exchange Board of India (SEBI), the market regulator, followed the recommendations of its working group and issued a new set of regulations—the SEBI (Foreign Portfolio Investors) Regulations, 2019 — replacing the 2014 rules.

The revised regulations consolidated a number of guidelines and circulars, and refreshed and updated the regulatory regime for FPIs in areas such as registrations, classifications and investment conditions.

At the same time, SEBI has made it easier to do business in India by simplifying and rationalising the regulatory framework for FPIs in terms of operational constraints and compliance requirements, and drafting new operating guidelines. All of this has made the country more attractive to FPIs.

A plethora of improvements

One of the key changes was the decision to merge the three FPI categories into two. As a result, a foreign investor must register either in:

  • Category-I: This is for government and government-related investors, pension and university funds, appropriately regulated entities such as insurance and reinsurance firms, banks, asset management companies, investment managers and investment advisers, portfolio managers, broker dealers and swap dealers, entities from Financial Action Task Force member (FATF) member countries, and so on.
  • Category-II: This is for appropriately regulated funds that are not eligible as Category-I FPIs, including endowments and foundations, charitable organisations, corporate bodies, family offices, individuals, unregulated funds in the form of limited partnerships and trusts, and entities from non-FATF member countries.

In addition, it is now easier to onboard FPI clients, with a Common Application Form (CAF) from the government’s National Securities Depository Limited (NSDL) simplifying Know your client (KYC) requirements.

FPIs also benefit from single-window clearance for a number of tasks, including being allotted a permanent account number (PAN) Indian tax ID, opening bank accounts, and setting up a so-called “demat” account (the dematerialised account that holds securities in an electronic form). Faster FPI registration and account-opening timelines allow portfolio investors to attain trade-readiness more quickly.

Other improvements include:

  • The introduction of interoperability. Clearing members must designate a clearing corporation through which all trades are settled irrespective of the exchange on which they were executed. The result is greater operational flexibility in areas like netting trades across exchanges and cross-utilising margins.
  • Foreign exchange dealing is far easier, with Real-Time Gross Settlement (RTGS) now available 24/7.

Shining India

This range of large and small steps designed to ease foreign participation has seen India climb to 63rd place out of 190 nations in the World Bank’s Ease of Doing Business 2020 report – up from 142nd place in 2014. It’s also seen the country secure investment from jurisdictions such as the US, the UK, Singapore, Mauritius and Luxembourg, and has helped to propel the number of registered FPIs above 10,000 as of January 2021. Today, India can boast that:

  • FPI total Assets under Custody (AuC) with custodians in India reached USD 573 billion in January 2021 out of a total AuC of USD 1.75 trillion;
  • FPI inflows into equities in this current financial year (which runs to March 31) have reached USD 36 billion, the highest on record since 2013;[1]
  • FPI inflows improved in quality too, with Category-I FPIs increasing their share to 95% of total equity assets as at the end of February 2021; at the end of December 2019, that figure was 87%.[2]

The decision to raise the aggregate FPI investment limit in Indian companies from 24% to much higher caps for individual sectors, like railways, insurance and defence, is another catalyst. This has increased the weight of Indian securities in major equity indices, which has mobilised large passive and active equity flows into the capital markets.

And looking ahead, the World Bank and the IMF expect India’s economy will grow more than 10% for the 2021-22 fiscal year, and a number of international research bodies predict that the country will remain an attractive destination for future investment.

Source: SEBI Bulletin

GIFT City: A new beginning?

On top of these advances, India has built its first international financial services centre (IFSC): Gujarat International Finance Tec-City (known as Gift City) is designed to meet the needs of inbound and outbound international financial services, and comprises a central business hub with state-of-the-art infrastructure.

By way of further boosting India’s “Ease of Doing Business” initiative, SEBI allows FPIs that are already registered to trade on the IFSC bourses, with no new registration required to operate through Gift City. In addition, the government offers special tax incentives for FPIs that choose Gift City as a location.

In summary, India has taken enormous efforts in recent years to be seen as an attractive long-term investment destination – and those efforts are paying off, as the numbers show. With reliability and policy stability, I’m confident that India will remain a leading destination for foreign investment.

[1] Reserve Bank of India. See: RBI Bulletin March 2021 (p37) at

[2] Ibid, p37.