Attracting FIIs & FPIs - balance regulations with ease of doing business

India's record GST collections and rising domestic investments highlight economic resilience, while SEBI's evolving FPI norms aim to balance transparency, compliance, and investor confidence

India's GST collections in April 2025 peaked an all-time high of Rs 2.37 trillion, up 12.6 per cent YoY, showing a buoyant state of economy. This surge marks the highest monthly GST mop-up ever. Indian stock benchmarks Sensex and Nifty 50 rose also over 0.5 per cent on May 5. This is despite all the recent challenges, ranging from a potential slowdown to the Trump Tariff effect, exhibiting inherent strength and resilience of the country’s economy. 

 

A recent development in the Indian markets also indicates how much they have evolved. According to data compiled by a research firm primeinfobase.com, Domestic Institutional Investors (DIIs) hold more Indian stocks than Foreign Institutional Investors (FIIs) for the first time. As of March 31, 2025, DIIs held a record 17.62 per cent stake, surpassing FIIs at 17.22 per cent, according to the above data.

 

 

While this is significant, one must also recognize the role of FIIs in the growth of markets. These investors provide essential foreign capital to deepen the capital markets. FIIs, a subset of FPIs, include large foreign institutions such as mutual funds and pension funds registered with the Sebi, investing in Indian securities. Their role is crucial in market development and economic integration, with  inflows of $20 billion annually in recent past. Among Asian economies, only Japan has been ahead of India, attracting $30 billion, with South Korea a distant third, with $9 billion.

A journey of two decades

Historically, FPIs and FIIs have been instrumental in strengthening Indian markets, particularly during 1990s and early 2000s. This period marked a significant increase in foreign investment, with FPIs and FIIs scaling market growth through substantial equity and debt investments. Their inflows drove bull runs with investor sentiments during economic reforms, although volatile at times. Such investments have played a key role in enhancing market liquidity and integrating India into the international financial system, especially during India’s economic reforms. 

Regulating FPIs – scope for improvement

Sebi’s regulatory framework for FPIs and FIIs is designed to ensure market integrity, protect investors, and facilitate smooth operations. It categorizes FPIs into three levels based on risk. Recent updates, such as merging FIIs and Qualified Foreign Investors (QFIs) into the FPI category, aim to simplify registration and reduce compliance burdens, as outlined in Sebi’s operational guidelines. While these efforts are commendable, there are occasional challenges, particularly in KYC (Know Your Customer) verification. It is undoubtedly crucial to prevent money laundering and ensuring regulatory compliance, yet sometimes poses bottlenecks. 

 

It is true that Sebi has relaxed, though also tightened, FPI “Know Your Customer” norms in recent years based on the prevailing market situation. In July 2023, it made Legal Entity Identifiers (LEIs) mandatory for all non-individual FPIs, requiring existing funds to update LEIs within six months or face a blocked account. In August 2023, Sebi began requiring “full look-through” disclosure of ultimate beneficial owners for large FPIs. An updated Sebi Master Circular (May 2024) consolidated all FPI KYC/AML rules. In April this year, Sebi eased some of the compliance burden by doubling the Rs 25,000 crore threshold to ₹50,000 crore. 

 

In response to some of the recent changes, FPIs have cited various practical difficulties. Under the regulations, certain FPIs must trace complex ownership chains. This may be complex for a global fund with many intermediaries. Similarly, they may face limitations in sharing data because data privacy laws abroad (for instance, the GDPR, etc.) can restrict sharing personal information. Short deadlines for reporting and submission compound the burden. As per a detailed 2023 representation to Sebi, it was brought out that certain public-retail funds may struggle to meet the prescribed ownership disclosures and urged exemptions. 

 

In short, while Sebi’s regulations aim to stipulate guardrails for compliance with global and domestic laws, of course maintaining India’s attractiveness as an investment destination, there remains scope to achieve a finesse and delicate balance in the architecture. For instance, Sebi’s initiatives, like periodic consultations with stakeholders and efforts to align KYC processes with global standards, can help streamline compliance obligations. Thus, while overall FPI flows will remain driven by the larger macro factors, a streamlined KYC regime can add a layer of regulatory certainty that some investors watch closely.

 

As the Indian markets scale new heights, FPIs and FIIs will remain vital for economic growth. They have contributed to market development and provided liquidity. Sebi’s regulatory framework, no doubt, is essential, but KYC challenges must also be discussed and addressed periodically to balance regulation and ease of business. Recent amendments show that continuous consultative refinement is essential to ensure that India remains a top destination for foreign investment, supporting economic integration and growth.

 

(Dhanendra Kumar has been India’s Executive Director at World Bank and First Chairman of CCI. He is currently Chairman of Competition Advisory Services India LLP (COMPAD). 

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These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper.