An overseas entity that registers with SEBI is the statutory regulator of India's securities market, with the legal duty to protect investors and to promote and regulate that market. Read the full meaning of SEBI through a designated depository participant, and then buys Indian shares, bonds and similar securities to earn returns without taking control of the companies, is called a foreign portfolio investor (FPI). Such investors follow SEBI rules and the foreign exchange requirements of the RBI.
The FII and FPI meaning overlaps to a large extent. Foreign institutional investors (FIIs) were the older name for these investors. Under the SEBI (Foreign Portfolio Investors) Regulations, 2014, later replaced by the 2019 Regulations, FIIs, their sub-accounts and qualified foreign investors (QFIs) were merged into one class. FPI is the term used in the rules, while FII continues to be used in market conversation.
Registration and the 10% limit
The regulations place FPIs in two categories. Category I covers low risk investors such as government related bodies, while Category II covers medium risk investors.
One FPI, together with its investor group, is allowed to hold up to 10% of the fully diluted paid up equity of an Indian company. An investor group means several FPI entities with common ownership of more than 50% or common control, and the group is treated as one investor.
For a company with paid up equity worth Rs 1,000 crore, the limit for one FPI and its group is Rs 100 crore.
A holding above the limit is treated as FDI, and a joint framework of SEBI and RBI exists for converting such a holding. The aggregate limit for FPIs is now the sectoral cap of the company.
Why the label matters, and FII vs FPI
Reports on foreign buying and selling in the Indian market are commonly based on FPI data, so investors who follow such reports come across the term very often.
The ownership limit separates portfolio money from FDI, and the total foreign investment in a company, FDI and FPI together, cannot go above the ceiling fixed for its sector.
Many individuals still use FII and FPI as if they are two different kinds of investors. FII and FPI are no longer two different investor types. FII is the old term, and FPI is the one used in the regulations.