Background
The Foreign Portfolio Investor (“FPI”) regime is a key entry route for foreign investors seeking to invest in Indian stocks and bonds. Currently, FPIs are subject to various know your customer (“KYC”) obligations, including disclosure of group companies and beneficial ownership and stringent monitoring of equity investment limits. Breaches of these trigger penalties and additional disclosure requirements. Our detailed analysis is available here.
However, considering these stringent norms may not be relevant when investing only in Indian Government Bonds (“IGB”), the Securities and Exchange Board of India (“SEBI”), via its Consultation Paper dated May 13, 2025,[1] has proposed the creation of a new category of FPI, known as “IGB-FPI”. This would apply to FPIs investing only in IGBs and enjoy various relaxations in the onboarding process and regulatory compliances.
Key Relaxations Proposed for IGB-FPIs
Investor group requirements:
Currently, an FPI must furnish details of its investor group, which is collectively subject to various investment limits, such as 10 per cent limit in case of equity instruments, concentration limits in case of debt instruments, etc. However, as these restrictions are not relevant when investing in IGBs, SEBI has proposed exempting FPIs investing only in IGBs from the requirement to furnish investor group details.
FPIs with RI/NRI/OCI constituents:
- Currently, contribution of a single Non-Resident Indian (“NRI”)/Overseas Citizen of India (“OCI”)/Resident Indian (“RI”) to the corpus of FPI applicant is restricted to 25 per cent, whereas the aggregate contribution of all NRIs/OCIs/RIs is restricted to 50 per cent. Moreover, NRIs, OCIs, and RIs are prohibited from being in control of the FPI.
- These restrictions mainly aim to address concerns regarding NRIs/OCIs/RIs using the FPI route by to indirectly acquire control/voting rights in Indian companies, thereby bypassing applicable takeover/minimum public shareholding norms. However, since such concerns do not apply when investing only in IGBs, SEBI has proposed that these restrictions in relation toNRIs/OCIs/RIs constituents, should not apply to FPIs investing only in IGBs.
Rationalising periodic KYC:
- IGBs are primarily traded through the Reserve Bank of India’s (“RBI”) Negotiated Dealing System – Order Matching (“NDS-OM”) platform and cleared through the Clearing Corporation of India Limited (“CCIL”). Accordingly, investment in IGBs via NDS-OM does not require opening trading and demat accounts and obtaining a custodial participant code, which is required for investment in securities market..
- Therefore, SEBI has proposed revising the requirement for periodic review of an FPI’s KYC from once in 1 year/3 years, depending on risk categorisation, to once in 2 years/8years/10 years for high-/medium-/low-risk customers, respectively, to align with the RBI’s requirements.
Transition between regular FPI and IGB-FPI:
Regular FPIs may transition to IGB-FPI after divesting all its holdings, except those permitted for IGB-FPIs, and closing their demat and trading accounts. Similarly, IGB-FPIs may also transition to regular FPI by making appropriate declarations and complying with incrementally applicable regulatory requirements.
Conclusion
These proposed relaxations are a welcome step that, if implemented, would simplify and streamline the FPI application process for foreign investors proposing to invest only in IGBs for exposure to the Indian rupee/rupee interest rate and not wishing to participate in the securities or corporate bond markets. These reforms would also further drive foreign investment and liquidity in the government bond market.
Moreover, while the restrictions in the aforementioned #3(a) do not apply to FPIs investing in mutual funds, broader relaxations to FPI norms, similar to those proposed for IGB-FPIs, could be considered for FPIs investing passively in the Indian securities market, such as in mutual funds or as limited partners (LPs) in Indian funds. This could further encourage foreign investment in India’s asset/wealth management space.
[1] SEBI’s Consultation Paper on proposal to facilitate relaxation in regulatory compliances for FPI applicants investing only in Indian Government Bonds, dated May 13, 2025 (here).