On January 2012, in an attempt to increase foreign investments into India, the Indian Ministry of Finance sweetened the pot by allowing foreign nationals who qualify as Qualified Foreign Investors (QFIs) to invest directly in Indian equity markets. To qualify as a QFI, the investor should be an individual, a group or association that is a resident of a foreign country compliant with the Financial Action Task Force,1 which is a global body to boost national and international policies to counter terror funding and money laundering, or any country that is a signatory to The International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding.

This optional investment route is intended to reduce the regulatory restrictions on Foreign Institutional Investors (FIIs) or their sub-accounts, which require registration with the Securities Exchange Board of India (SEBI) to invest in India. India first opened its doors to QFIs on August 9, 2011 when QFIs were permitted to invest only in Indian mutual funds and gain indirect access to Indian equity markets. Since January 2012, QFIs are given direct access to the Indian equity markets provided that they use a SEBI-registered Qualified Depository Participant2 (QDP) to make their investments.

Some salient features of a QFI investment under the new regime are:

  • QFIs can invest through the Portfolio Investment Scheme (PIS), which was originally open only to non-resident Indians (NRIs). PIS permits foreign investors to trade in shares or fully (or mandatorily) convertible debentures of Indian companies on the Indian Stock Exchanges, provided such trades are executed through QDPs.
  • The individual investment limit for QFIs is 5 percent of the paid-up capital of the Indian company and the aggregate investment limit is 10 percent of the paid-up capital of the Indian company. These limits are over and above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India.
  • QDPs are required to ensure that QFIs meet all Know Your Customer (KYC) requirements, tax deduction and other regulatory requirements, as per the relevant regulations issued by SEBI or other Indian regulators from time to time.

This investment route is not without its challenges. The biggest deterrent for investing through this route is that QFIs will have some tax responsibilities in India. In particular, QFIs will need to acquire a PAN number (tax identification number) in India, file tax returns in India, respond to the Indian Tax Authorities if they have any questions and pay Indian taxes applicable to the returns on their investments. Also, QFIs will be required to obtain a certificate of an Indian Chartered Accountant (Form 15CB) to remit money from India.

Another major challenge is the responsibilities placed on QDPs with respect to income-tax compliance by the QFIs. The current understanding is that a QDP, as representative assesse, will be held responsible for any tax demands against a QFI should a QFI not meet its obligations. This burden is making QDPs reluctant to act as representative assesses of QFIs without a significant fee.


The QFI route is intended to be more enticing and less burdensome than the FII and sub-account route due to the elimination of many registration requirements. However, since there are still many uncertainties around the Indian tax obligations of foreign investors using this route and the role of QDPs, Indian regulators still have some work to do before this route yields the results everyone originally hoped it would.