Some issues surrounding FII investments in India

By Rajat Sethi and Radhika Iyer, S&R Associates
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Indian regulations have generally recognized that the objectives of foreign direct investment (FDI) are different from “portfolio investment”; in the latter case, investors do not expect to influence the management of an enterprise. Consistent with this rationale, foreign corporations, funds or individuals that meet the criteria for a foreign institutional investor (FII) or a sub-account, and that register with the Securities and Exchange Board of India (SEBI), are allowed to invest in securities of an Indian company under the portfolio investment scheme (PIS), subject to certain specified ceilings.

India opened the doors to FIIs under the PIS in 1992. Since then, the rules and regulations governing such investments in India have evolved to keep up with changing requirements. Yet, there is lack of clarity on certain basic issues surrounding such investments.

Unlisted companies

The SEBI (Foreign Institutional Investors) Regulations, 1995, as amended (SEBI regulations), set out the framework for investment by FIIs in Indian companies. In addition, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, as amended (FEMA regulations), recognize that FIIs may invest in securities of Indian companies under the PIS (which is distinct from the FDI scheme under the FEMA regulations).

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Rajat Sethi is a partner and Radhika Iyer is an associate at S&R Associates, a law firm based in New Delhi and Mumbai. They can be contacted at rsethi@snrlaw.in and riyer@snrlaw.in.

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