Strategic Management and Corporate Finance · Foreign Funding - Institutions

Foreign Portfolio Investment (FPI): Rules, Categories and 10% Limit

Q: What is the main difference between FDI and FPI?

FDI is a lasting investment, often with a say in management. FPI is a portfolio holding in listed securities with no control, and it can be sold easily. In exam answers, use 10% as the dividing line: a single FPI must hold below 10%. They also follow different routes and different schedules of the FEMA rules.

Q: How many categories of FPI are there under the 2019 Regulations?

There are two categories: Category I and Category II. Category I covers lower-risk investors such as government-related bodies, pension funds and regulated entities. Category II covers every other eligible investor.

Q: How do you register as an FPI in India?

You apply through a Designated Depository Participant, submitting the application form, KYC documents and declarations. The DDP checks them and grants registration on behalf of SEBI. After registration, you operate through a custodian and a demat and bank account in India.

Q: What happens if an FPI reaches 10% or more in an Indian company?

The single FPI limit of below 10% is breached. The FPI must divest the excess or reclassify the holding as FDI within the prescribed time (commonly stated as five trading days). Reclassification as FDI is possible only if the FPI complies with the FDI policy, sectoral conditions and FEMA/NDI Rules, including the required approvals and reporting.

Updated 11 October 2026 · Fact-checked

Foreign Portfolio Investment (FPI) is investment by non-resident investors, registered with SEBI through a Designated Depository Participant, in Indian listed securities without seeking control. A single FPI, with its investor group, must hold below 10% of a company's fully diluted paid-up equity. A holding of 10% or more breaches the limit. Solve questions by classifying the investor, then testing the limit.

Understand Foreign Portfolio Investment (FPI)

Foreign investors can put money into India in two broad ways. One is Foreign Direct Investment (FDI): a long-term stake, usually with a say in management. The other is Foreign Portfolio Investment (FPI): buying shares, bonds and similar securities mainly to earn returns, without wanting control.

FPI is regulated on two fronts. SEBI regulates who may invest and how, under the SEBI (Foreign Portfolio Investors) Regulations, 2019. The foreign exchange side is governed by FEMA and the rules made under it, with RBI setting limits for debt. The 2019 Regulations replaced the 2014 Regulations.

Every FPI must first register. You do not apply to SEBI directly. You apply through a Designated Depository Participant (DDP), which is a bank or depository participant approved by SEBI. The DDP checks the application and grants registration on SEBI's behalf. Under the 2019 Regulations, an FPI falls into one of two categories.

Category I: lower-risk investors, such as government and government-related bodies (central banks, sovereign wealth funds, multilateral organisations), pension funds, university funds and appropriately regulated entities like banks, insurers, asset managers and portfolio managers.
Category II: all other eligible investors, such as other regulated funds, corporate bodies, family offices, endowments and individuals.

The key control on FPI is the investment limit. A single FPI together with its investor group must hold below 10% of the total paid-up equity capital of an Indian company on a fully diluted basis. A holding of 10% or more breaches the limit. Total FPI holding in a company is also bound by the sectoral cap or statutory limit for that sector. If the limit is breached, the FPI must divest the excess or reclassify the holding as FDI within the time prescribed (commonly stated as five trading days; confirm the current period before you quote it). Reclassification as FDI is possible only if the FPI complies with the FDI policy, the sectoral conditions and the FEMA/NDI Rules, including the approvals and reporting they require.

FPIs may invest in listed or to-be-listed equity shares, debentures and warrants, units of domestic mutual funds, government securities and similar instruments, within the limits set by SEBI and RBI. FPI money is called 'hot money' because it can leave quickly, which is why regulators watch it closely.

Key rules to remember

Single FPI limit: Holding of one FPI + its investor group < 10% of total paid-up equity capital (fully diluted); a holding of 10% or more breaches the limit; On a breach, the FPI must divest the excess or reclassify the holding as FDI within the time prescribed (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy, sectoral conditions and FEMA/NDI Rules, including approvals and reporting, are complied with.
Holding percentage: FPI holding % = (Shares held by FPI and investor group ÷ Fully diluted paid-up equity shares) × 100; Always include shares held by entities in the same investor group, those under common ownership or control.
Aggregate FPI limit: Total FPI holding in a company ≤ sectoral cap or statutory ceiling applicable to that sector; A company may reduce its aggregate FPI limit to a lower threshold by a board resolution followed by a special resolution of shareholders, as per the prescribed procedure. Check the sector's own cap.
FDI versus FPI test: Below 10% and no control = FPI; 10% or more = breach of the FPI limit, so divest the excess or, if the FDI conditions are met, reclassify as FDI; Use 10% as the dividing line in exam answers. FDI is governed by FEMA Schedule I of the NDI Rules, 2019 and FPI by Schedule II.
Registration route: Application → Designated Depository Participant → registration as Category I or Category II; The DDP grants registration on behalf of SEBI. Registration is not for a fixed term, but it can be suspended or cancelled.

How to solve Foreign Portfolio Investment (FPI) questions

Use this order for any FPI question, whether it is theory, a case or a small calculation.

1Identify what is asked: registration, category, limit, or comparison with FDI. This decides the structure of your answer.
2Classify the investor. Check whether it is a government body, a pension fund, a regulated fund, or a corporate or individual. Place it in Category I or Category II and give the reason.
3State the registration route: application through a Designated Depository Participant under the SEBI (FPI) Regulations, 2019, with SEBI's permission granted via the DDP.
4Compute the holding. Add the shares of the investor group, divide by fully diluted paid-up equity, and compare with 10%.
5Check the aggregate limit for the company or sector, where the facts give one.
6Apply the consequence. If the holding reaches 10% or more, the limit is breached. The investor must divest the excess or reclassify the holding as FDI within the time prescribed (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy, sectoral conditions and FEMA/NDI Rules are complied with, including the required approvals and reporting.
7Conclude in one clear line: permitted, permitted with conditions, or not permitted, and say what the investor should do.

Quickest way: Three-check method for FPI cases

When to use it: Use this when time is short and the question gives facts about an investor and a holding.

Who: name the investor type and write Category I or Category II.
How much: holding % = group shares ÷ fully diluted equity, compared with 10%.
So what: under 10% means FPI continues. At 10% or more, the limit is breached: divest the excess or reclassify as FDI within the prescribed time (commonly stated as five trading days), and reclassify only if the FDI conditions are met.
Write the provision first, then the facts, then the conclusion, in three short paragraphs.

Common mistakes in Foreign Portfolio Investment (FPI)

Writing that FPI has three categories (I, II and III).
Older material and the 2014 Regulations had three categories, and students mix the two.
Fix: For the June 2027 session, write that the SEBI (FPI) Regulations, 2019 have two categories, I and II. Mention Category III only if the question asks about the change from 2014.
Calling any foreign investment of 10% or more 'FPI with a penalty'.
Students remember the 10% number but not its consequence.
Fix: Say that reaching 10% or more breaches the limit. The FPI must divest the excess or reclassify the holding as FDI within the prescribed time (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy, sectoral conditions and FEMA/NDI Rules, including approvals and reporting, are complied with.
Counting only the shares held in the investor's own name.
Students ignore the investor group concept.
Fix: Add shares held by all entities under common ownership or control, then test the total against 10%.
Saying the FPI registers directly with SEBI.
Students assume SEBI is the front desk because it is the regulator.
Fix: State that the application goes through a Designated Depository Participant, which grants registration on SEBI's behalf.
Treating the difference between FDI and FPI as only a matter of amount.
The 10% line is easy to remember, so students stop there.
Fix: Add purpose and nature: FDI is a lasting interest, often with control or management say. FPI is a portfolio holding of listed securities, easy to exit. Also mention the different routes and FEMA schedules.
Stating that FPIs can freely buy unlisted equity or invest without limits.
Students think 'foreign' means unrestricted.
Fix: Say FPIs invest mainly in listed or to-be-listed securities and government securities within SEBI and RBI limits, and always subject to sectoral caps.

Worked examples

Example 1

Aarav Global Fund, a registered FPI, holds 15,00,000 shares of Kaveri Textiles Ltd, whose fully diluted paid-up equity is 2,00,00,000 shares. It buys another 8,00,000 shares on the exchange. Advise whether the limit is breached and what must be done.

Show the solution

Current holding = 15,00,000 ÷ 2,00,00,000 × 100 = 7.5%, which is below 10%.
Holding after purchase = 15,00,000 + 8,00,000 = 23,00,000 shares.
New percentage = 23,00,000 ÷ 2,00,00,000 × 100 = 11.5%.
The single FPI limit requires the holding to stay below 10%. 10% of 2,00,00,000 is 20,00,000 shares, so the holding must be fewer than 20,00,000 shares.
The holding is 23,00,000 shares, so the limit is breached. It must be brought below 20,00,000 shares, so the fund must sell more than 3,00,000 shares (at least 3,00,001) to get below 10%.
Consequence: within the prescribed time (commonly stated as five trading days), Aarav Global Fund must divest the excess by selling at least 3,00,001 shares, or reclassify the holding as FDI. Reclassification is possible only if the sector's FDI policy, the sectoral conditions and the FEMA/NDI Rules are complied with, including the required approvals and reporting.

Answer: The limit is breached because the holding becomes 11.5%. The fund must divest the excess, by selling at least 3,00,001 shares, or reclassify the holding as FDI within the prescribed time (commonly stated as five trading days). Reclassification as FDI is possible only if the FDI policy for Kaveri Textiles' sector, sectoral conditions and FEMA/NDI Rules are complied with.

Example 2

A government-owned pension fund from a foreign country wishes to invest in listed Indian company shares. Explain in which category it would be registered and how it would obtain registration.

Show the solution

Provision: the SEBI (Foreign Portfolio Investors) Regulations, 2019 divide FPIs into Category I and Category II.
Analysis: Category I includes government and government-related investors and pension funds, because they are regarded as lower risk and are regulated or backed by a government.
The fund fits this description, so it would be classified as Category I, subject to meeting the eligibility conditions in the Regulations.
Registration route: the fund applies through a Designated Depository Participant, with the required application form, KYC documents and declarations. The DDP verifies them and grants registration on behalf of SEBI.
After registration, the fund can invest in listed or to-be-listed equity, within the 10% single-FPI limit and the sectoral cap, and must follow reporting and KYC rules.

Answer: The fund would be registered as a Category I FPI. It applies through a Designated Depository Participant, which grants registration for SEBI. It must then keep each holding below 10% of a company's fully diluted paid-up equity and within sectoral caps.

Exam tips

Write the legal source in the first line: SEBI (Foreign Portfolio Investors) Regulations, 2019, with FEMA and RBI rules for the foreign exchange side.
For 'difference between FDI and FPI' questions, give at least five points: nature, purpose, control, 10% line, stability, instruments and the governing regime. Use a two-column layout if the space allows.
In case questions, show the percentage computation line by line. Marks go for method even if a figure slips.
Do not quote exact fees, timelines or sectoral caps you are not sure of. Say 'as prescribed' and focus on the rule and its consequence.
End each answer with a practical conclusion: what the investor or the company should do next.

Practice questions from Foreign Funding - Institutions

Foreign Portfolio Investment (FPI) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Foreign Portfolio Investment (FPI): frequently asked questions

What is the main difference between FDI and FPI?

FDI is a lasting investment, often with a say in management. FPI is a portfolio holding in listed securities with no control, and it can be sold easily. In exam answers, use 10% as the dividing line: a single FPI must hold below 10%. They also follow different routes and different schedules of the FEMA rules.

How many categories of FPI are there under the 2019 Regulations?

There are two categories: Category I and Category II. Category I covers lower-risk investors such as government-related bodies, pension funds and regulated entities. Category II covers every other eligible investor.

How do you register as an FPI in India?

You apply through a Designated Depository Participant, submitting the application form, KYC documents and declarations. The DDP checks them and grants registration on behalf of SEBI. After registration, you operate through a custodian and a demat and bank account in India.

What happens if an FPI reaches 10% or more in an Indian company?

The single FPI limit of below 10% is breached. The FPI must divest the excess or reclassify the holding as FDI within the prescribed time (commonly stated as five trading days). Reclassification as FDI is possible only if the FPI complies with the FDI policy, sectoral conditions and FEMA/NDI Rules, including the required approvals and reporting.