Context:
Offshore investors seeking to buy less than 10% equity in listed Indian companies through off-market transactions (like preferential allotments or secondary deals) are facing rejections from banks. Banks insist such investments require the investor to be Sebi-registered Foreign Portfolio Investors (FPIs), even for sub-10% holdings.
Market Trades and Off-market Transactions
- Market Trades- Trades placed through the stock exchange. They are executed through a broker/exchange (NSE/BSE), cleared by the depositories (NSDL/CDSL), and settled through a Clearing Corporation (CC).
- Off-Market Trades- Trade settlement between two parties, the transferor (entity which transfers the share) and transferee (entity that receives the shares) without the involvement of an exchange or a CC. It is a way of transferring ownership of securities. Here, the transferor submits a signed Delivery Instruction Slip (DIS) to their Depository Participant (DP) requesting a transfer of the mentioned securities to the transferee.
Regulatory Confusion: FDI vs. FPI
- As per NDI (Non-Debt Instruments) Rules,
- ≥10% holding = FDI (governed by RBI)
- <10% = Foreign Portfolio Investment (FPI, governed by Sebi)
- However, the term “foreign portfolio investment” in Rule 2(t) applies broadly to any non-resident—not just registered FPIs
- This has led to divergent interpretations:
- Conservative banks reject sub-10% investment unless investor is an FPI
- Liberal banks allow non-FPI foreign investors to buy <10% without FDI documentation like FC-GPR
Implications for Foreign Investment in India
- Single-digit stake buyers reluctant to seek FPI registration due to cost and complexity
- Inconsistent bank interpretations create hurdles for foreign inflows
- Sebi’s upcoming proposal to allow direct stock purchases by foreigners (similar to NRIs) may address part of the problem
FDI-FPI Classification Rigidity
- If an FPI exceeds 10% stake, entire holding reclassified as FDI
- Even after reducing the stake below 10%, it’s still considered FDI
- This rigidity reflects jurisdictional turf issues between RBI (FDI) and Sebi (FPI), limiting investor flexibility
