Sebi mulls allowing NRIs through FPI route after meeting specific KYC norms

The Securities and Exchange Board of India (Sebi) is looking at including non-resident Indians (NRIs) in the foreign portfolio investors quota. Sources said the regulator had written to the central government, seeking its opinion on this. 

The move could open a new source for foreign inflows into the country, as NRIs are currently not big investors because of regulatory curbs. 

NRIs usually take the mutual fund route. However, this does not allow them to make company-specific investments.

While India, on average, receives NRI remittances of $10-15 billion every year, the total assets owned by NRI investors in Indian equities are less than half a billion dollars, the Sebi data showed. 

The move to include NRI investments was discussed by the Sebi-appointed H R Khan committee on easing of foreign portfolio investment (FPI) rules.


  • NRIs could be allowed to invest under category-II and -III of FPIs

  • At present, there are several curbs on NRI investments in equities

  • Hence, NRI investment in direct equities is minuscule 

  • Move could boost capital flows at a time when the rupee is weakening 

  • NRIs making portfolio investments can do it only through their designated banks

  • Move would require inter-regulatory consultations 

The committee in its interim report said it was examining the recommendations that could be made to the central government and the Reserve Bank of India (RBI) on the matter. Sources say the regulator could allow NRIs meeting specific know your customer (KYC) norms, under category-II and -III FPIs, depending on the nature of the fund. The development comes at a time when the rupee is hitting new lows against the dollar. The domestic currency has depreciated 12 per cent to 72.45 for a dollar. In recent months, Sebi has drawn flak for placing restrictions on NRI investments coming via the FPI route through a circular dated April 10. 

“Easing the investment norms for NRIs has been a long-standing demand since it has potential to attract impressive flows into Indian markets. The current regulatory framework is not favourable for NRI investments. The category-III FPI route anyway allows several unregulated entities to invest in India. Hence, even if the NRI investment is coming from an institution like a family trust, it could be allowed to be a category-III FPI,” said a source.

Although Indian capital market activity is regulated by Sebi, NRI investments coming into the country are administered by the RBI through Foreign Exchange Management Act (Fema). Some of the existing provisions in the Act place NRIs at a disadvantaged position both compared to domestic investors and foreign portfolio investors.

“Further liberalisation of NRI investment norms would be welcome as India would be able to tap into a large pool of investments. However, the process will need inter-regulatory consultations since it touches upon domains of the RBI, tax department, etc. Rather than placing blanket curbs, it is better to allow investments and improve surveillance on money flow,” said Tejesh Chitlangi, partner, IC Universal Legal.

According to the Fema regulations, NRIs can make portfolio investments only through the designated branch of the bank where their account is registered. This is comparatively a rigid system since all the other classes of investors sell and purchase shares through their brokers. The investment limits are also very low since an NRI cannot hold more than 5 per cent stake in a single company and all the NRIs put together cannot own more than 10 per cent in the company.

In comparison, a foreign portfolio investor can own up to 10 per cent in a company through the route and in most of the sectors 100 per cent foreign portfolio investor investments are also allowed. Further, NRIs are only allowed to trade on a delivery basis, curtailing their freedom to leverage bets on derivatives and other hybrid products.

NRI regulations have been kept tight, keeping in view the money laundering concerns.

Experts say the H R Khan committee could look at a lot of legacy issues in the FPI regime including NRI participation. The committee in an interim report submitted to Sebi on Saturday suggested numerous relaxations to the regime. This includes allowing NRIs to own non-controlling stake up to 25 per cent in an FPI.

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