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NISM-Series-VI: Depository Operations · Foreign Portfolio Investors (FPI)

Compliance, Monitoring and Taxation of FPIs for NISM Depository Operations

Updated 11 October 2026 · Fact-checked

FPI compliance means an FPI keeps its registration valid, reports through its custodian and DDP, discloses its beneficial owners and stays within investment limits. SEBI can act on violations. Tax is mainly under section 115AD: capital gains and other income are taxed at special rates, subject to treaty benefits. Learn who does what, and the limits.

Understand Compliance, Monitoring and Taxation of FPIs

A Foreign Portfolio Investor (FPI) is registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019. Registration is not the end of the process. The FPI must keep meeting conditions for as long as it invests in India. SEBI, the Designated Depository Participant (DDP), the custodian and the depositories each watch a part of this.

The DDP is the first point of contact. It registers the FPI on behalf of SEBI and checks that the FPI keeps meeting eligibility conditions. The custodian holds the FPI's securities and reports its holdings and transactions. The depositories (NSDL and CDSL) use that data to monitor investment limits.

Beneficial owner (BO) disclosure is about looking through the FPI's structure to the natural persons who ultimately own or control it. The test follows the Prevention of Money Laundering rules and SEBI circulars. The FPI must give BO details at registration and must update them when they change. SEBI has also set extra disclosure for large FPIs, for example those with very high equity holdings in India or a heavy concentration in one corporate group. For these, ultimate natural persons must be shown at a more granular level.

Limits are a key monitoring point. A single FPI, with its investor group, can hold less than 10% of the total paid-up equity capital of a company. A holding of 10% or more is a breach. All FPIs together can hold up to the sectoral or statutory cap. If an FPI crosses the single-FPI limit, it must divest the excess within five trading days from the date of settlement of the trades that caused the breach. The other route is to seek reclassification of the holding as foreign direct investment. That is not automatic. It needs the investee company's consent and compliance with FDI conditions such as the sectoral cap, entry route and pricing guidelines.

Penalties for violations are decided by SEBI. They can include warnings, suspension or cancellation of registration, and action under the SEBI Act. FPI registration stays valid until SEBI suspends or cancels it or the FPI surrenders it, subject to payment of the prescribed fees.

Tax: Section 115AD of the Income-tax Act sets special tax rules for FPIs on income from securities. Capital gains and other securities income are taxed at rates different from those for residents. Tax is usually collected through withholding by the payer or the custodian. An FPI can claim relief under a tax treaty if it meets the conditions, such as proof of tax residency. Rates change with the Finance Act, so always match them to the rate given in your current NISM workbook.

Key formulas to remember

Single FPI investment limit
Single FPI (with investor group) holding < 10% of a company's total paid-up equity capital
A holding of 10% or more is a breach. If breached, divest the excess within 5 trading days of settlement of the breaching trades. Alternatively, seek reclassification as FDI, which needs the company's consent and compliance with FDI conditions.
Aggregate FPI limit
All FPIs together ≤ sectoral or statutory cap for that company
Depositories monitor this using custodian data.
Who does what
DDP = registers and oversees the FPI; Custodian = holds securities and reports; Depository = monitors limits; SEBI = enforces and penalises
Exam questions often ask you to match the task to the right party.
Beneficial owner
BO = natural person who ultimately owns or controls the FPI
Look through companies, trusts and partnerships up to a natural person.
Registration validity
FPI registration is valid until suspended or cancelled by SEBI or surrendered by the FPI, subject to payment of the prescribed fees
There is no fixed renewal cycle to memorise, but SEBI can suspend or cancel the registration.
FPI tax provision
Section 115AD: special tax rates on FPI income from securities
Treaty relief is possible if conditions are met. Check current rates in your workbook.

How to solve Compliance, Monitoring and Taxation of FPIs questions

Most questions on this topic ask who is responsible, what the limit or consequence is, or how income is taxed. Use this method to cut to the right option.

  1. 1Identify the question type: compliance duty, monitoring role, beneficial owner disclosure, penalty or tax.
  2. 2For role questions, name the party first: DDP, custodian, depository or SEBI. Then match it to the task.
  3. 3For limit questions, write down the figure and the cure: less than 10% for a single FPI (10% or more is a breach), divest the excess within five trading days of settlement of the breaching trades, or seek reclassification as FDI with the company's consent and subject to FDI conditions.
  4. 4For beneficial owner questions, think of a natural person who ultimately owns or controls, and remember the duty to update changes.
  5. 5For penalty questions, remember that SEBI decides the action. The range includes warnings, suspension and cancellation.
  6. 6For tax questions, link them to section 115AD and treaty relief. If a rate is asked, use the rate in your current workbook.
  7. 7Reject options with absolute words such as always, never or only when the rule has conditions.
  8. 8Check the final option against the exact wording before you mark it.

Quickest way: Role-match and limit-check shortcut

When to use it: Use it for one-line MCQs when you have under a minute per question.

  1. Spot the key word: DDP, custodian, depository, SEBI, BO, limit, penalty or tax.
  2. DDP means registration and oversight. Custodian means safekeeping and reporting. Depository means limit monitoring. SEBI means enforcement.
  3. Limit means below 10% for a single FPI (10% or more is a breach), divest within five trading days of settlement, or FDI reclassification with the company's consent.
  4. Tax means section 115AD plus treaty relief.
  5. Eliminate the two weakest options, then choose between the rest.

Common mistakes in Compliance, Monitoring and Taxation of FPIs

  • Saying the depository registers the FPI.

    Both DDPs and depositories sound similar and are linked to demat.

    Fix: Remember that the DDP registers the FPI on behalf of SEBI. The depository only monitors limits.

  • Treating the single-FPI limit of below 10% as a limit for all FPIs together.

    Both limits relate to percentage of paid-up capital.

    Fix: The below-10% limit applies to one FPI with its investor group, and a holding of 10% or more is a breach. The combined limit is the sectoral or statutory cap.

  • Saying an FPI that breaches the limit is automatically penalised and loses registration.

    Students overstate the consequence.

    Fix: The standard cure is to divest the excess within five trading days of settlement of the breaching trades. Reclassification as FDI is an alternative, but it is not automatic. It needs the company's consent and compliance with FDI conditions. Penalties are SEBI's decision.

  • Thinking the beneficial owner is the company or entity that holds the shares.

    The word owner suggests the registered holder.

    Fix: A beneficial owner is a natural person at the end of the ownership or control chain.

  • Mixing FPI taxation with resident investor rules.

    Resident tax rules are better known.

    Fix: Link FPI income to section 115AD and treaty relief. Use the rates in the workbook.

Worked examples

Example 1

Which of the following monitors compliance with FPI investment limits using data supplied by custodians?

A. The depositories
B. The issuer company's auditor
C. The stock exchange clearing member
D. The FPI's beneficial owner

Show the solution
  1. The question asks about limit monitoring based on custodian data.
  2. Custodians report FPI holdings and transactions. The depositories use this data to monitor limits.
  3. The auditor, clearing member and beneficial owner have no role in limit monitoring.

Answer: A. The depositories

Example 2

An FPI's holding in a company reaches or exceeds 10% of the paid-up equity capital, which breaches the single-FPI limit of below 10%. What must happen?

A. Nothing, as only the aggregate limit matters
B. The FPI's registration lapses automatically on the same day
C. The FPI must divest the excess within five trading days of settlement of the breaching trades, or seek reclassification as FDI with the company's consent and subject to FDI conditions
D. The company must buy back the excess shares at once

Show the solution
  1. The single-FPI limit is below 10% of paid-up equity capital for a single FPI together with its investor group. A holding of 10% or more is therefore a breach.
  2. The rule on breach is not an automatic lapse. The FPI must divest the excess within five trading days from the date of settlement of the trades that caused the breach. It may instead seek reclassification as FDI, which needs the company's consent and compliance with FDI conditions.
  3. Option A ignores the single-FPI limit. Option B overstates the consequence. Option D puts the duty on the company, which is wrong.

Answer: C. The FPI must divest the excess within five trading days of settlement of the breaching trades, or seek reclassification as FDI with the company's consent and subject to FDI conditions

Exam tips

  • Match tasks to parties: DDP registers and oversees, custodian holds and reports, depository monitors limits, SEBI enforces.
  • Memorise the numbers: less than 10% for a single FPI (10% or more is a breach), and five trading days from settlement of the breaching trades to divest. Remember that registration stays valid until SEBI suspends or cancels it or the FPI surrenders it, subject to payment of the prescribed fees.
  • For tax questions, anchor on section 115AD and treaty relief. Rates change, so use the workbook's rates.
  • In Series VI, a wrong answer costs 25% of the marks of the question, so avoid blind guesses. Guess only when you can eliminate options.

Practice questions from Foreign Portfolio Investors (FPI)

Compliance, Monitoring and Taxation of FPIs: frequently asked questions

Who is a beneficial owner of an FPI?

A beneficial owner is the natural person who ultimately owns or controls the FPI. The FPI must disclose such persons at registration and update the details when they change. Large FPIs face extra disclosure under SEBI's framework.

Who monitors FPI compliance in India?

The DDP oversees the FPI on behalf of SEBI. Custodians report holdings and the depositories monitor investment limits. SEBI enforces the rules and decides penalties.

How are FPIs taxed on capital gains in India?

FPI income from securities falls under section 115AD of the Income-tax Act, with special rates for capital gains and other income. Rates change with the Finance Act, so check your workbook. Treaty relief may be available if conditions are met.

What happens if an FPI breaches the single-FPI investment limit?

It must divest the excess within five trading days from the date of settlement of the trades that caused the breach. It may instead seek reclassification as foreign direct investment, which needs the investee company's consent and compliance with FDI conditions. SEBI can also take action for violations of the regulations.