On January 7, 2014, the Securities and Exchange Board of India (SEBI) issued the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. These regulations created a new class of Foreign Portfolio Investors (FPIs) and amended certain key rules and procedures applicable to foreign investors. On January 22, 2014, the Central Board of Direct Taxes (CBDT) announced that FPIs would attract the same tax rate as foreign institutional investors (FIIs), which effectively harmonized the tax rate applicable to foreign investors in Indian capital markets.


Before the new regulations were notified, tax rates were not uniform for all foreign investors in India. FIIs, a category of foreign investors that included governments, pension funds, asset management firms and their sub-accounts, attracted a lower tax rate than qualified foreign investors (QFIs). QFIs, a category of investors that included individuals, did not have to register with SEBI and were subject to certain investment restrictions and withholding taxes. Furthermore, government registration of foreign entities and approval for them to invest in India’s capital markets were time-limited and ranged from one to five years.


The new regulations have created a new category of investors, and the announcement by the CBDT will result in a uniform tax rate being applied to all FPIs, regardless of whether it is an FII or a QFI. The FPI class of investor brings together the categories mentioned above under one harmonized taxation regime. Going forward, categories will be based on risk profiles. For example, governments and government-related investors are deemed to present the lowest risk, accordingly, they would be category I investors; pension funds, university funds and regulated broad-based funds would qualify for category II; and all other FPIs would fall into category III. Certain “know your client” rules and registration procedures vary in complexity according to the category into which a prospective FPI falls. The Indian government has also allowed permanent registration of FPIs, a departure from the time-limited registration process that was in place until now.


The prevailing sentiment in response to the announcement is positive, with a number of media outlets emphasizing the benefits of the new regime. Thanks to the uniform tax regime, QFIs may ultimately see their tax burden shrink as they apply the lower FII rates to their portfolio of investments. The fact that the rates are now uniform will create greater certainty and predictability for foreign investors in Indian capital markets with regard to their tax planning. QFIs will likely now be eligible for concessional tax rates in respect of, inter alia, capital gains earned on off-market transactions in securities, such as buy-back and open offers in equity shares.

Procedural improvements were also made in favour of foreign investors. Simplified “know-your-client” and registration procedures based on investor category will reduce the administrative burden associated with investing in Indian capital markets. As well, permanent registration may prove more conducive to investors focused on long-term investments.

However, there have been some criticisms of the new regulations, principally with respect to the negative impact they may have on the incentives for non-resident Indians (NRIs) to invest in their home country and inflows of capital from hedge funds. In addition, custodians (called designated depository participants) would have to clarify how to conduct their due diligence under the new regime. The prospect of having to request an onerous amount of information from their clients in order to satisfy the new rules may ultimately defeat SEBI’s attempt to streamline the process.


  • The taxation of foreign investors will now be more uniform, and non-FII portfolio investors may see their tax rate fall as a result of the reforms.
  • The procedural aspects of investing in Indian markets may become more streamlined, but new challenges for designated depository participants may partially counteract efficiency gains.
  • Permanent registration of FPIs will likely facilitate taking long-term positions and reduce recurring administrative efforts and expenditures.

Majid Charania