Foreign institutional investors, NRIs and overseas corporate bodies

1. Foreign institutional investors

Portfolio investment by foreign institutions was permitted from September 1992 under Government guidelines, as part of liberalisation, and regulated by the SEBI (Foreign Institutional Investors) Regulations, 1995. FIIs were pension funds, mutual funds, insurance companies, investment trusts, university funds, endowments and asset managers registered with SEBI, investing in listed shares, debt and derivatives. Their sub-accounts invested on behalf of clients. Many invested through Mauritius to use the India–Mauritius tax treaty. In Union of India v. Azadi Bachao Andolan, 2003 INSC 526, (2004) 10 SCC 1, the Supreme Court upheld the CBDT circular under which a Mauritian tax residence certificate was sufficient evidence of residence for the treaty, holding that treaty shopping by itself was not illegal. The treaty was amended in 2016 to tax capital gains on shares acquired from 1 April 2017 at source.

2. From FII to FPI

In 2014 the FII, sub-account and qualified foreign investor categories were merged into a single class of foreign portfolio investors under the SEBI (Foreign Portfolio Investors) Regulations, 2014, now replaced by the SEBI (Foreign Portfolio Investors) Regulations, 2019.

• Registration is granted on SEBI's behalf by a designated depository participant.
• Categories: Category I (government and related investors, regulated entities such as banks, pension funds, insurers and regulated funds from appropriately regulated jurisdictions) and Category II (all others, such as unregulated funds, family offices and individuals), with lighter know-your-customer norms for Category I.
• Limits: a single FPI, or an investor group, must hold less than 10 per cent of the total paid-up equity of a company. If it crosses 10 per cent, it must divest within the time allowed or the whole holding is reclassified as FDI. The aggregate limit for all FPIs in a company is the sectoral cap applicable to the company (since 1 April 2020).
• FPIs may also invest in government securities and corporate bonds within limits set by the RBI, including the Fully Accessible Route for specified government bonds.
• Non-resident Indians and OCIs may be constituents of an FPI within limits, and may hold greater shares in FPIs based in an International Financial Services Centre.

Significance and concerns. Portfolio flows deepen the stock market, improve liquidity and price discovery, lower the cost of capital and bring institutional discipline to corporate governance. But they are volatile: sudden outflows weaken the rupee and markets, as in 2008 and 2013. That is why policy distinguishes them from FDI and caps them.

3. Non-resident Indians

An NRI is an individual resident outside India who is a citizen of India. An Overseas Citizen of India cardholder (registered under section 7A of the Citizenship Act, 1955) is a foreign national of Indian origin; for investment purposes OCIs are generally treated on par with NRIs.

• On repatriation basis (Schedule III of the Non-debt Instruments Rules): purchase of listed shares through a stock exchange under the Portfolio Investment Scheme, routed through a designated authorised dealer bank. An individual NRI or OCI may hold up to 5 per cent of a listed company, and all NRIs and OCIs together up to 10 per cent, which the company may raise to 24 per cent by a special resolution. NRIs may also invest under the general FDI route.
• On non-repatriation basis (Schedule IV): investment in shares, units, LLPs and firms without the right to take the money out; it is treated as domestic investment and does not count against foreign caps.
• Property: NRIs and OCIs may acquire immovable property in India other than agricultural land, plantation property and farm houses.
• Bank accounts: NRE (Non-Resident External) rupee accounts, freely repatriable and tax-free in interest; FCNR(B) foreign currency term deposits; and NRO (Non-Resident Ordinary) accounts for income earned in India, repatriable within limits, under the FEMA (Deposit) Regulations, 2016.
• Sectoral concessions: in some sectors NRIs get more generous treatment than other foreign investors, for example 100 per cent in scheduled air transport under the automatic route, where other foreign investors are limited to 49 per cent under that route.

4. Significance of NRI investment for international trade

• Remittances: India is the world's largest recipient of remittances, which finance a large part of the merchandise trade deficit and support the current account.
• Stable foreign exchange: NRI deposits have been a source of funds in crises, as with the Resurgent India Bonds (1998) and India Millennium Deposits (2000).
• Trade networks: diaspora businesses act as importers, distributors and buyers of Indian goods (food products, textiles, pharmaceuticals) and as links to markets and suppliers.
• Investment and entrepreneurship: capital, technology and management experience returned to India, particularly in information technology and start-ups.
• Services trade: the diaspora is part of India's export of software and professional services.
• Confidence: diaspora investment often comes first, signalling opportunity to other foreign investors.

5. Overseas corporate bodies

An OCB was a company, partnership firm, society or other corporate body owned directly or indirectly to the extent of at least 60 per cent by NRIs, including overseas trusts in which at least 60 per cent of the beneficial interest was held by NRIs. To attract diaspora capital, OCBs were given the same concessions as NRIs from the 1980s, including portfolio investment and real estate.

The concessions were misused. After the stock market irregularities of 2001, the Joint Parliamentary Committee found that some OCBs were vehicles for routing domestic money and manipulating share prices. The RBI withdrew the facilities, and the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies) Regulations, 2003 derecognised OCBs as a class of investor with effect from 16 September 2003. Existing investments could be held and sold, but no fresh investment could be made under the OCB concessions. An entity that was an OCB may now invest only as an ordinary foreign entity under the FDI rules, with the approval required for such cases, and only if it is not under the adverse notice of the RBI or SEBI.

How this is examined

For an FII note: definition, entry in 1992, the 1995 Regulations, the change to FPIs in 2014 and 2019, the 10 per cent rule, and significance and volatility. For NRI investment: definition, repatriation and non-repatriation routes, limits, accounts, and the significance points in section 4 (the January 2026 essay wants those last). For OCBs: definition with the 60 per cent test, why they were favoured, why they were derecognised, and the 2003 date.