Foreign Portfolio Investments (FPIs)

Foreign Portfolio Investments (FPIs) enable foreign entities to invest in India’s financial assets, such as equity shares, corporate bonds, and derivatives, without acquiring significant ownership or management control. While FPIs offer significant opportunities in India’s burgeoning economy, they are governed by a multifaceted legal and regulatory framework requiring strategic navigation to mitigate risks.

Legal Framework Governing FPIs in India

1. Foreign Exchange Management Act, 1999 (FEMA):
   • FEMA governs foreign exchange transactions and ensures FPIs comply with India’s macroeconomic policies.
   • The Reserve Bank of India (RBI) oversees operational guidelines for FPIs under FEMA.
2. SEBI (Foreign Portfolio Investors) Regulations, 2019:
   • These regulations provide the framework for registration, operational limits, and compliance for FPIs.
   • FPIs are categorized as:
     • Category I: Low-risk entities such as government or central banks.
     • Category II: Moderate-risk entities like regulated funds and charitable organizations.
     • Category III: High-risk entities, including high-net-worth individuals (HNIs).
3. Securities Contracts (Regulation) Act, 1956 (SCRA):
   • Governs trading activities of FPIs in Indian securities markets.
4. Income Tax Act, 1961:
   • Governs tax liabilities on capital gains, dividends, and interest income from FPI investments.
5. Prevention of Money Laundering Act, 2002 (PMLA):
   • Mandates strict compliance with KYC and anti-money laundering (AML) measures to ensure clean investment practices.
6. Companies Act, 2013:
   • Ensures corporate governance and disclosure compliance for FPIs investing in Indian companies.
7. Double Taxation Avoidance Agreements (DTAAs):
   • Treaties with various countries provide favourable tax treatments for FPIs, reducing dual tax liabilities.

Challenges Faced by FPIs in India

Regulatory and Compliance Challenges

1. Registration and Categorization:
   • Registration under SEBI’s FPI Regulations involves detailed documentation and categorization, affecting compliance obligations.
2. Sectoral Restrictions and Investment Caps:
   • Certain sectors are prohibited or have specific investment caps, such as defence, telecom, and media.
   • Aggregate FPI investment in listed Indian companies is capped at 24%, extendable with shareholder approval.
3. Taxation and Disputes:
   • Ambiguities in interpreting DTAAs often lead to disputes over taxation.
   • Differential treatment of long-term and short-term capital gains adds to complexity.
4. KYC and AML Compliance:
   • Stringent KYC norms under PMLA can lead to operational delays.
5. Currency Risk and Hedging:
   • FPIs face exposure to currency volatility and must comply with RBI regulations for hedging instruments.

Judicial and Quasi-Judicial Challenges

1. Commercial Disputes:
   • Breach of investment terms, contract enforcement, or shareholder disputes may lead to commercial litigation under the Commercial Courts Act, 2015.
2. Regulatory Investigations:
   • SEBI, RBI, or Enforcement Directorate (ED) may initiate probes for alleged violations of market, tax, or foreign exchange laws.
3. Criminal Trials for White-Collar Offenses:
   • Allegations such as:
     • Insider Trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015.
     • Money Laundering under PMLA for suspicious transaction routing.
     • Tax Evasion under the Income Tax Act for structuring investments to avoid tax liabilities.
     • Foreign Exchange Violations under FEMA for unauthorized transactions.
4. Quasi-Judicial Adjudications:
   • Cases before SEBI for market violations or Income Tax Appellate Tribunal (ITAT) for tax-related disputes.

How Duke & Baron Assists FPIs

Pre-Investment Advisory

1. Strategic Structuring:
   • Advising on structuring investments to comply with FEMA, SEBI, and sectoral regulations.
   • Utilizing DTAAs to minimize tax exposure and maximize profitability.
2. Due Diligence:
   • Conducting thorough due diligence to identify financial, legal, and compliance risks in potential investee companies.
3. Registration and Approvals:
   • Facilitating SEBI registration and obtaining necessary sectoral approvals from regulators.

Compliance and Governance

1. Ongoing Compliance Management:
   • Handling periodic filings, disclosures, and reporting under SEBI and RBI guidelines.
   • Monitoring investment caps and issuing alerts to prevent breaches.
2. Corporate Governance Support:
   • Ensuring compliance with board composition, shareholder agreements, and disclosure norms under the Companies Act.
3. Tax Advisory:
   • Structuring investments for tax efficiency and representing clients in tax disputes involving capital gains, DTAAs, or transfer pricing.

Litigation and Dispute Resolution

1. Representation in Judicial Processes:
   • Defending clients in commercial disputes before commercial courts and arbitration tribunals.
   • Representing FPIs in criminal trials for insider trading, money laundering, or tax evasion.
2. Representation in Quasi-Judicial Processes:
   • Advocating before SEBI, RBI, ED, or ITAT for regulatory disputes or adjudication proceedings.
   • Preparing responses to show-cause notices and appearing in regulatory hearings.
3. White-Collar Criminal Defense:
   • Offering robust defence in cases involving complex financial frauds or cross-border money laundering allegations.

Post-Investment and Exit Strategy

1. Risk Management:
   • Advising on currency hedging, portfolio diversification, and risk mitigation strategies.
2. Repatriation of Funds:
   • Ensuring seamless repatriation of profits, dividends, and principal investments by complying with FEMA and RBI norms.
3. Crisis Management:
   • Providing immediate legal support during investigations, audits, or enforcement actions.

Why Duke & Baron?

Expertise Across Domains:

• Our integrated team of corporate advocates, in-house counsels, and company secretaries collaborate with taxation experts, business strategists, and stock market specialists to deliver holistic solutions.

Proactive Approach:

• We prioritize preemptive compliance and strategic planning to minimize risks and ensure seamless operations for FPIs.

Litigation Excellence:

• With a strong litigation team, we adeptly handle complex judicial and quasi-judicial matters, ensuring our clients are effectively represented.

Client-Centric Solutions:

• Tailored legal and strategic advisory ensures our clients’ investments align with their goals while adhering to India’s regulatory landscape.

By choosing Duke & Baron, FPIs gain a trusted partner capable of navigating the complexities of India’s financial, regulatory, and judicial frameworks. We protect their interests, ensure compliance, and provide robust advocacy whenever challenges arise.