Indian financial markets more and more attractive for foreign investors


The Indian investment professionals remain fairly confident that the future of the Indian financial markets look bright in the longer run.

Indian financial markets hold a prominent position in Asia with USD 2.16 trn of equity market capitalisation as of February 20201 and international investment managers have shown very active interest, with some USD 8.1 bn inflow2.
When it comes to market access and associated administrative undertakings, Foreign Portfolio Investors (FPI) often think there is room for improvement. So much, that the Indian financial market authority, the SEBI, took action to make regulatory framework more investors friendly, which resulted in the SEBI (FPI) regulation 2019, which was published in September last year.

Has the SEBI lived up to international investors’ expectations for simplification?

FPIs used to be split in risk categories from 1 (the less risky) to 3. The new regulation deleted the most risky category, 3 and transferred them to categories 1 or 2, according to a number of criteria.

What are the main impacts of these upgrades for FPIs?

  1. KYC provisions for FPIs have been made simpler;
  2. Tax incentives: Indian shares or interest transferred to former category 3 FPIs are now exempt from capital gain taxes;
  3. All FPIs are now eligible to obtain a Qualified Institutional Buyer (QIB) status and can therefore enjoy better access to primary market issuances;
  4. FPIs can also benefit from higher exposure limits to derivatives
  5. FPIs no longer need to justify for a diversified investor base, which used to be required in some cases. Now only the regulation of the FPI matters.
  6. Entities registered in an Indian Financial Services Center can now also apply for an FPI status and benefit from associated advantages;
  7. Opaque structure ban has been waived in counterparty to FPIs reporting on Final Beneficial Owners;
  8. Only Category 1 FPIs will be allowed to issue Offshore Derivatives Instruments, which Category 1 FPIs only will be able to purchase;
  9. FPI Registration fees have been reviewed.

These provisions look promising. Has SEBI (FPI) regulation 2019 truly made FPIs life simpler?

Rajesh H. Gandhi, Partner at Deloitte Haskins & Sells LLP in Mumbai highlights:

"In January 2020, SEBI replaced the former application forms with a consolidated Common Application Form (CAF), which allows foreign investors to digitally file a single application for obtaining FPI registration, tax ID (PAN3), opening bank accounts as well as depository accounts.
The 2019 Regulations have been hugely welcomed by the industry as they have made it easier and quicker for foreign investors to start investing in India, especially for pension funds and regulated funds set up in FATF member countries. This is partly evidenced by the fact that the net FPI investment in Indian equities increased by USD 8.6 bn. during the 5 months from September 2019 to January 2020, whereas the net FPI investment had increased only by USD 226 million in the previous 5 months from April 2019 to August 2019.
Another important change is that the default FPI limit (up to which FPI investments are permitted) in the share capital of an Indian company, has been increased from 24% to the applicable sectoral caps e.g. 49% / 74% / 100%, depending on the nature of business of the Indian company. This change is expected to increase India’s weightage in MSCI and FTSE indices.
Also, the Indian Government recently issued an amendment in the 2019 Regulations to permit FPI applicants from a notified non-FATF member country to qualify for Category I registration. Mauritius is the first country which has already been notified on April 13, 2020. So for now, it advantages Mauritius compared to other non-FATF member countries."

Nicolas Gonzalez, deputy Managing Director, and Abraham George, Head of Business Development of SBI SG, the custodian JV between State Bank of India, the largest public Indian bank, and Societe Generale Securities Services, have seen a concrete impact on their activity:

We are seeing significant flow of foreign funds both through the FPI and FDI routes. Introduction of a common application form (CAF) has consolidated multiple requirements and made it easier and faster for eligible foreign investors to obtain an FPI registration.

Although Indian capital market seems to clearly benefit from this regulatory evolution, the recent global events have taken their toll on Indian markets as Rajesh Gandhi states:


Of course, FPIs pulled out USD 8.5 bn. from Indian markets during February 2020 to mid-April 2020 but that should be attributed mostly to COVID 19.


However, the Indian investment professionals questioned remain fairly confident that the future looks bright in the longer run.




1 Source: Monthly reports of World Federation of Exchanges

2 Figures at end Q3/19, source: CEIC Data

3 Permanent Account Number

Jean-François Marchand SGSS International Country Supervision, Africa & India Societe Generale Securities Services