The Securities and Exchange Board of India (SEBI), following its Board approval on 30 April 2024, introduced a framework enabling Foreign Portfolio Investors (FPIs) established in the GIFT City International Financial Services Centre (IFSC) to accept up to 100 per cent of their corpus from Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Indian individuals. The International Financial Services Centre Authority (IFSCA) issued its implementing circular on 2 May 2024, laying down eligibility criteria and Know Your Customer parameters for such FPIs.
Background
Under the existing regulatory architecture, the SEBI (Foreign Portfolio Investors) Regulations, 2019 imposed strict concentration limits on NRI and OCI participation in FPI structures. A single NRI or OCI investor could not hold 25 per cent or more of the corpus of an FPI, and the aggregate NRI/OCI contribution was capped below 50 per cent. These restrictions were originally designed to prevent round-tripping of Indian capital through offshore structures and to maintain transparency regarding the beneficial ownership of FPI vehicles.
However, these caps also had the unintended consequence of deterring NRI capital from flowing through regulated FPI channels, pushing such investments into less transparent routes. The GIFT City IFSC — India's designated international financial centre located in Gujarat — offered a controlled environment where enhanced participation could be permitted with appropriate safeguards.
Key Provisions
The new framework introduces the following changes:
Removal of contribution caps: FPIs registered and operating out of GIFT City IFSC are now permitted to accept investments from NRIs, OCIs, and Resident Indians up to 100 per cent of their corpus. The earlier thresholds of 25 per cent (individual) and 50 per cent (aggregate) no longer apply to IFSC-based FPIs.
Enhanced due diligence: To mitigate risks associated with concentrated ownership, the framework mandates enhanced due diligence on the beneficial ownership and source of funds for all NRI/OCI/RI contributors. Designated Depository Participants (DDPs) must conduct additional verification beyond standard KYC requirements.
IFSCA eligibility criteria: The IFSCA circular of 2 May 2024 specifies the eligibility parameters for fund managers and FPI vehicles seeking to operate under this liberalised regime, including minimum track record requirements and compliance with the IFSCA (Fund Management) Regulations, 2022.
Streamlined registration: GIFT City-based FPIs meeting the prescribed criteria can obtain registration through an expedited process, reducing the time-to-market for NRI-focused fund structures.
Implications for Practitioners
This regulatory shift presents a significant opportunity for fund managers, wealth advisors, and legal practitioners advising NRI clients. The GIFT City route now offers a fully regulated channel for NRIs to access Indian capital markets through pooled investment vehicles, potentially displacing less transparent investment routes such as participatory notes and multi-layered offshore structures.
For fund formation lawyers, the new framework necessitates a careful review of existing FPI structures to assess whether re-domiciling to GIFT City offers commercial advantages. The enhanced due diligence requirements, while proportionate, will increase compliance costs and documentation obligations for DDPs.
Practitioners should note that while the framework is operational for GIFT City-based FPIs, it does not extend to FPIs registered outside the IFSC. The dual-track regulatory approach — restrictive caps for non-IFSC FPIs and liberalised norms for IFSC-based FPIs — creates an intentional incentive to channel NRI capital through India's own financial centre, a strategic policy objective that extends beyond securities regulation.