Impact of SEBI Regulations on Foreign Portfolio & Direct Investments in India

Evaluating the Impact of SEBI Regulations on Foreign Portfolio and Direct Investments in India: A Comprehensive Analysis”

Abstract-

Foreign investments[1] in the Indian securities market are governed by Securities and Exchange Board of India while the administration and facilitation of foreign investments flow into India determines significantly both FDI and FPI. The significance of these regulations can be judged by the fact that these don’t only regulate FDI and FII but also play a great role in maintaining the stability along with transparency of Indian financial systems. This paper’s following abstract demonstrates the dynamics of the SEBI regulatory regime in light of FDI and FPI in India and illustrates the relationship between regulations and investment behaviour.

As such, such regulations are aimed at attracting long term funds to invest in the country’s main driving industries through the promise of stability coupled with a non-changing regulatory framework. Such cases include the regulations provided by SEBI on due diligence to be conducted and the standards laid down before foreign entities undertake direct investment in Indian firms. This is one such a measure where FDI is to ensure it comes with the required finance with experienced and technological advancement to foster more growth and innovation amongst the domestic industry players. On the other hand, in SEBI’s approach to monitor FPI, priority will be given to Market integrity and protection to retail investors.

Furthermore, in general, SEBI divided FPI[2]s into three asymmetrical categories in terms of the risk associated with their established investments and the primary regulation and supervision obligatory for them. In addition, it has eased the procedure of registration and compliance to enable foreign traders to invest easily in India’s equity and debt securities markets. These facilitations have lead to more FPI flows, the key to a more depth and more liquid financial markets in India. Besides, SEBI from time to time revises its regulatory framework as a way of aiming at international best practice and condition prevailing in the emerging markets. Among the reforms that have been recently introduced are the related party transaction regulation and insider trading regulation that improve market equity and investors’ confidence.

Finally, SEBI laws have very emphatic say on the prospects of the structure of the foreign investment in India. The right mix of opening up the markets and an appropriate level of supervision has assisted SEBI in effectively serving its purpose of safeguarding neither only domestic, but also the foreign investor too and, therefore, enhancing the legal position of India as a destination of investment globally.

Explanation of legislation Established by SEBI (Securities and Exchange Board of India)

India’s Securities and Exchange Board of India[3] supervises and manages the securities market within its boundaries. As a non-statutory body in 1988, SEBI’s development was completed in 1992 when it received statutory power. The intention behind its inception focused on investor protection fostering just trade practices and monitoring the securities market to address unethical actions. The main office of SEBI is located in Mumbai and runs regional branches throughout the nation aimed at maintaining efficient securities markets.

The Development of SEBI arose from Essential historical situations.

Prior to the creation of SEBI in 1988 the Capital Issues (Control) Act of 1947[4] governed India’s securities market. At that juncture, the market was not transparent as it frequently experienced manipulation and unfair practices detracting from investor trust. With the emergence of new financial instruments and the expansion of firms wanting to collect capital the financial markets became more challenging.

A significant purpose of SEBI[5] was to design a regulatory policy that addressed the growing challenges presented by the securities market. As the Indian economy opened in the 1980s the securities market surged and there surfaced increasing worries regarding the necessity for a focused organization to manage the growing intricacies of financial instruments and market activities. The formation of SEBI represented an important answer to promote clarity and efficiency in the Indian securities market.

SEBI Functions[6] Via a Specific Organizational System.

SEBI runs through a specified organizational system made up of a chairman and a board of directors. Members of the SEBI board come from different industries such as the government and the Reserve Bank of India (RBI), as well as specialists in the securities sector. By maintaining a hierarchical design that facilitates proper decision-making processes SEBI manages all regulatory and growth-related tasks effectively.

1. Chairman: The Chairman of SEBI receives an appointment from the Government of India and exercises great power over decisions and regulatory measures. Within SEBI the Chairman manages operations and possesses large authority.

2. Members of the Board: The board of SEBI includes a number of different members. Two representatives from the Finance Ministry were consulted. An appointee came from the RBI. Seven SEBI officials and five members from the securities market make up the board. The regulatory body was established by the government of India to oversee and regulate the country’s securities market. SEBI was officially established in 1988 as a non-statutory body and later given statutory powers through the SEBI Act of 1992. Its formation was motivated by the need to protect the interests of investors, promote fair trade practices, and regulate the securities market to prevent malpractices and financial fraud. SEBI is headquartered in Mumbai, Maharashtra, and operates through regional offices across the country, with the primary goal of ensuring the smooth functioning of India’s securities markets.

Objectives & Functions of SEBI

SEBI was created with several key objectives[7], which revolve around investor protection, market regulation, and the promotion of fair practices within the financial market. Its core objectives can be summarized as follows:

1. Investor Protection[8]: SEBI aims to protect the interests of investors by ensuring transparency and preventing malpractices such as insider trading, price manipulation, and fraudulent activities in the securities market. It also ensures that companies provide accurate and timely disclosures to investors.

2. Market Regulation: SEBI regulates the securities market to ensure that it operates efficiently, and fairly, and adheres to the rule of law. This includes setting standards for market intermediaries such as stock exchanges, brokers, mutual funds, and other entities.

3. Development of the Securities Market: SEBI plays a critical role in the development and modernization of India’s securities market. It introduces reforms and new technologies to enhance market efficiency, promote financial literacy among investors, and ensure that the Indian market keeps pace with global developments.

4. Preventing Malpractices: To curb unethical and illegal activities, SEBI has implemented strict rules and guidelines for market participants. It monitors and investigates suspicious activities to prevent any malpractices that may harm the interests of investors or undermine market integrity.

5. Promoting Fair Trading Practices: SEBI works towards ensuring that all market participants, including investors, issuers, and intermediaries, engage in fair trade practices. This helps to maintain the confidence of investors and promotes a healthy investment climate.

Historical Background[9] & Need for SEBI

Before SEBI’s establishment, India’s securities markets were regulated by the Capital Issues (Control) Act of 1947, which provided the government with control over securities market activity. However, the market at the time lacked transparency, and there were frequent cases of market manipulation and unfair practices, which led to a loss of investor confidence. Moreover, the financial markets were becoming increasingly complex with the introduction of new financial instruments and the growth of companies seeking to raise capital.

One of the key reasons behind SEBI’s formation was to create a regulatory framework that could cope with the evolving demands of the securities market. During the 1980s, as the Indian economy started to open up, the securities market experienced significant growth, and there were growing concerns about the need for a specialized body to oversee and regulate the increasing complexity of financial instruments and market operations. SEBI’s creation was, therefore, a necessary response to ensure the development of a transparent and efficient securities market in India.

India’s economy has been shaped by both FDI and FPI in recent years. For several decades, both these two types of involuntary international capital inflows have helped to finance infrastructure upgrades, new industries, and new markets. Nevertheless, the history of FDI and FPI in India is not severable from the history of India’s economic policy and liberalization and globalization process.

FDI in Pre-1991 India:

During this period, policies relating to Foreign Direct Investment[10] are reported to have been very restrictive. Therefore, the government policy that emerged in Nigeria was selective and FDI was permitted only in the strategic sectors like Defence and mining and some manufacturing sectors. It became a host of a number of challenges such as licensing problems, restrictions in ownership, and limited abilities to transfer profits. Two landmark cases during this period demonstrate India’s restrictive approach towards FDI[11]

Coca-Cola and IBM Exit[12]: In 1977 Indian government under FERA compelled foreign companies to dilute their equity holding in their Indian JV Partners to forty percent. Foreign MULTINATIONAL businesses such as Coca-Cola and IBM had to pull out of the Indian market rather than obey to this regulation; this shows the REGULATORY attitudes of hostility to FOREIGN BUSINESS at that time.

FPI in Pre-1991 India:

Foreign Portfolio Investment especially was not very common before 1991 basically because of India’s close knit financial policies. The financial markets in India were deeper regulated, and the international investors were locked out from the domestic markets for securities. The capital market of India from 1990 to 2000 was relatively ill-developed although the major participants were government and financial institutions and foreign participation was limited. Globally, there was also low confidence in India’s financial market among investors.

Downfall of Economy and Liberalization (1991)

The change of the trend of FDI and FPI in India was in 1991 when the Indian economy experienced a critical balance of payment crises. India’s government was forced to surrender its gold stock in order to prevent the country’s foreign exchange crisis[13]. To avoid this the Indian government under the Prime Minister P.V. Narasimha Rao and the Financial secretary Dr. Manmohan Singh launched liberalization finances. During the later part of the 1980 s, another major liberalization was initiated that heralded the change from a completely controlled structure of the Indian economy.

FDI Expansion (2000–2020)

Key developments in FDI during this period include:

Further Sectoral Liberalization: B to sectors such as retail, Insurance, aviation and defense all of which had previously been opened to only limited FDI. This included extending the automatic approval system policy to permit 100 per cent foreign ownership in some sectors.

Infrastructure Investments: Capital intensive investments into the various development fields including the construction of roads, ports and power stations was popular among foreign investors.

Information Technology and Services: A gross ration emerged in the area of Information technology and services facilities that attracted sizeable amount of FDI where many MNCs including IBM, Microsoft, Google identified India as key player in IT.

FPI Expansion (2000–2020)

The investment flows remained high in 2000s due to better economic indicators such as increase in P/E ratio of Indian Stock Exchange[14], and positive government policies. Indian equity markets were dominated by FII and the operations of FPI were instrumental in the integration of Indian Financial markets. Key trends during this period include:

Increased Market Participation: FPIs emerged as an important force in Indian capital markets and they showed an increase in the proportionate share of market capitalization.

Regulatory Reforms: SEBI and the RBI made various changes to lure FPI in India, including the ease in the registration procedures and increasing debt market that recognizes FPIs in a broad range of financial instruments.

The Present Day (2020 and Beyond)

The FDI inflow in India has continued to remain on an upward trajectory Which has provided a solid nod to the optimism on FDI[15]. The Government of India said that the preliminary estimate of FDI into India for FY, 2023 reached USD 71 billion and as per the UNCTAD World Investment Report, India continues to be the top choice for investors worldwide. AH justifiably dominated the top five investing countries during the period from April 2023 to September 2023 which were Singapore, Mauritius, Japan, United States and The Netherlands and services, construction, computer software and hardware, non-conventional energy and sea transport as the principal sectors.

Subsequently, FDI and FPI have remained active components in India’s economic plan and vision in the recent past years. The government has continuously tried to encourage FDI and it is the major approach including initiative such as “Make in India”[16] started in the year 2014 with an intention to boost up manufacturing and other related sectors. The source has also changed to areas that are believed to have the prospect for future FDI flows such as e-commerce, fintech and the renewable energy sectors.

For FPI, India continues to be favorable destination due to its gigantic economy in the making, splendid performance of its stock exchanges, and enhancing policy environment. However, FPI inflows reflects volatility because it depends on the global market and sentiment of those investors.

Modes of Investment

The Foreign Direct Investment Information on India[17]

FDI is defined as investment by a non-resident party into equity linked instruments of an Indian company. This can happen in two ways: It can be obtained (i) through direct investment in an unlisted Indian company or indirectly by acquiring an interest of 10 % or more in the total paid up capital of a listed Indian company. FDI is one of the most prevalent and critical forms of entry of foreign investment into India and offers enormous potential for growth – economically, in terms of employment, and development.

The legal structure for FDI in India is covered in the Consolidated FDI Policy[18]. This policy is developed and is in the control of the Department for Promotion of Industry and Internal Trade; DPIIT, which falls under the Ministry of Commerce and Industry. The policy verbally defines the regulation, laws, and guidelines governing market entries by foreign investors in a number of sectors within the India economy. Depending on the nature of the investment, FDI can be routed through one of two mechanisms: the automatic route or the approval route.

Automatic Route and Approval Route are components of the Business Approval Process.

The automatic route[19] need not approval from the government or any regulatory authority before any investment can be made by the foreign investors. Many sectors prefer this route more as it abolishes complications relating to investments and accelerates access of foreign capital in the country. In some sectors the automatic approval percentage for FDI is almost 100% therefore completely owned firms or businesses through foreign investors can be made without referring to the higher authorities.

Nevertheless, some sectors permit foreign investments only after being reviewed and approved by the government which is the approval route. In such. Instances, the proposal for investment needs to be routed through the concerned ministry, DPIIT, the FIPB which then reviews the entire proposal depending on the strategic relevance of the sector and the revenue that it is likely to generate.

The specified route to follow when investing in any country depends on the concentration of the industry in which the foreign investor intends to invest, specifically the percentage of shares they want to own. However, in sectors such as information technology, manufacture and single brand retail FDI, India permits 100 per cent FDI through automatic route only, while in some others there are caps or stipulations in terms of FDI permitted. There are certain sectoral restrictions that mean that, for example, in defense, media or telecommunications industries, foreign investors cannot own more than a certain percentage of the company.

Groups with Limitations and Bans

While India offers most types of industries investment opportunities from foreign investors, the following industries are considered to be more sensitive to FDI. For instance, in the insurance sector the foreign investment is restricted in terms of ownership where foreign investor can own up to 74% of the business[20]. In the same way venture in aviation sector, the foreign investors can invest without any restrictions up to 49% of a domestic airline of the total amount under automatic approval route, while anything above this limit would require government of India approval.

Some industries are strictly restricted from accessing FDI, this means that the foreign investors cannot invest in the industries at all. These are the Lottery Business, Trading in Transferable Development Rights (TDRs), and Real Estate Business (other than a particular activity involving the development of integrated townships, construction of built-up residential or commercial premises, roads, bridges, Real Estate Investment Trusts). Real estate development has been left out of this ban, thus boosting FDI into India fast-growing construction and infrastructure industries very vital for the growing urban centers and housing needs.

Any foreign investor interested in investing in India for the first time needs to determine which route – automatic or approval-route – and the sectoral ceiling applies to his/her investment proposed. It is important at this step to ensure that the investment is well compliant with the laws of the India to prevent some forms of legal crossroads.

Press Note 3 (2020) – An Important Change to FDI Regulation[21]

In April 2020, the Indian government made a major change to the FDI policy when it issued Press Note 3. This amendment was passed in a bid to check those nearby countries which have a border with India in terms of investment. The backdrop for this amendment was to stop vulture acquisitions of Indian companies and this needed to be considered in the light of the New Normal/New World brought about by COVID 19.

Based on the Press Note 3[22], any direct investment through subscription of new shares or acquisition of shares indirectly from any company incorporated in a country having border with India is come under automatic route and would require prior government approval. This rule is regardless of the size of the investment capital, and this means that the investment as small as it can be from a neighbouring country is highly likely to be scrutinized by the government.

The neighbours countries to India are Afghanistan, Bangladesh, Bhutan, China (including Hong Kong), Myanmar, Nepal, Pakistan. Any investment from any of these countries or an investment in an entity where beneficial owner of the investment resides or is a citizen of these bordering countries now comes under the approval category. As it was said, no threshold of ownership has been set in the Press Note defining the concept of beneficial ownership; this means that even if there is no direct ownership or control/influence by these countries, certain interest of these countries might demand the approval of Indian government.

This policy change was considered as a defensive mechanism with a view to ward off the strategic assets located in India by the investors having their roots in the neighboring countries during the time of economic downturn[23]. The Press Note also applies to the sectors in which earlier FDI was permissible under the automatic route, thus raising the threshold of scrutiny for investments from these countries. Therefore, the potential investors have not only to be informed about the scope and purpose of sectoral caps but also to confirm the conformities of their investment with the requirements of Press Note 3 before making relevant decisions.

The Impact of FDI in India[24]

Years of liberalisation of FDI has had a major influence on the economy of India. The recent measures taken by the Indian Government to liberalize the Indian economy and the policies to attract foreign direct investment have brought huge amount of foreign capital in India which has motivated the country to grow in most of the sectors. Through the manufacturing industrial development exercise, FDI has been very crucial in pushing the expansion, technology transfers and job opportunities.

Some of the sectors that have benefited the most from FDI inflows include[25]

Manufacturing: Its analysis has revealed that FDI has had a conspicuous impact of developing India’s manufacturing industry particularly in the areas of automobile industry , cement industry and telecommunications industry. The ‘Make in India’ program to be started in2014 was targeted to converge India to a manufacturing power by inviting home and foreign investments. For this reason, favourable sectors to FDI include automobiles, electronics, textile, and pharmaceuticals, among others that have received increased boost.

Telecommunications: The telecom sector in India has attracted big FDI and due to this India’s infrastructure, the network’s coverage, and communication prices have also been boosted. Currently, players like Vodafone, Telenor and others have staked great amounts in telecommunication market of India, making it one of the large telecommunication markets of the world.

Information Technology and Services: India too has attracted sizeable FDI in the IT and services business, especially ITES/BPO, software, and outsourcing industries. Big GIANTS like Google, IBM, Microsofts and many more have started their big units in this country enhancing the sector.

Retail: In the context of India’s retail business, FDI has remained a focal discussion mainly on multi-brand retail. Entry through single-brand retailing is allowed through the automatic route for 100 percent FDI, but the government has taken a cautious approach towards multi-brand retailing where upto 51 percent FDI is permitted through the approval route. Walmart and IKEA are some of the large international players, who have embarked on the retail FDI in the country, given the increasing market size.

Real Estate and Infrastructure: Other sectors that has received FDI inflows include the real estate and infrastructure sectors which has contributed to the establishment housing projects, commercial and infrastructure projects such as highways and metro. International investors have had significant interest in REIT, which is evident to be an effective vehicle of investing in India’s real estates.

Foreign Portfolio Investment (FPI) in India[26]

Foreign Portfolio Investment (FPI) refers to investment made by the residents of one country in the securities of another nation which is India in this case. FPI is different from Foreign Direct Investment (FDI), where by the foreign investors own a large block of the company and can ultimately interfere with the management, FPI involves small purchase of the company securities for a short period of time. Under Indian laws FPI happens when an overseas investor acquires more than ten percent of the paid up capital of an Indian company with an active trading on the Indian stock exchanges. Such investment is usually made with the aim of obtaining returns on investment and not for controlling the affairs and management of the firm.

The two forms of investment are quite similar, the only major difference being the size and the purpose of the investment. This is usually done with the notion of having a long-term Seat on the board of the company and also on the management. On the other hand, FPI is just interested in quick speculative gains from stock price increases, dividends or interest on debt securities, and the investor often has no wish to manage the business of the company. This is why FPIs tend to be seen as more short-term in their orientation than FDIs which are stridently more long-term in their nature.

The Current System of Regulatory Framework For FPI In India

FPIs[27] in India are within the legal protection and therefore the implementation of the capital markets’ regulatory framework is clearly comprehensive in order to protect investors and maintain market integrity. There are two regulators in India for FPIs, which include the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Reserve Bank of India (RBI): The RBI is also involved in controlling the amount of capital movement coming into India. It is thus tasked with the role of monitoring FPIs to ensure that they observe the legal provisions on foreign exchange policy in India as well as oversee that the Foreign investments upset the Indian economy. The RBI also regulates the level of foreign investment in the two markets; equity and debt to maintain market stability.

Securities and Exchange Board of India (SEBI): SEBI is the statutory body concentrating primarily on the regulation of securities market in India. Regulating FPIs are done through SEBI (Foreign Portfolio Investors) Regulations, 2019. According to these Regulations, a person desirous of investing in the securities markets of India is required to obtain the registration as FPI from SEBI and have certain qualification criteria. SEBI’s functions are to regulate FPIs’ activities within India and it is responsible for FPI’s registration, conduct and behavior.

FPI Eligibility and its registration[28]

FPI is a method of investment in India through which foreign investors are first registered and inoculated with certain criteria. The SEBI FPI Regulations, 2019 establishes these criterion to enable only eligible and credible investors to invest in the India market. The regulations are meant to protect against market manipulation, protect investors and guarantee that foreign investment adds stability to the financial markets.

The eligibility criteria for FPIs include the following:

Legal status: The investor can only be a company or a partnership firm or a trust that is incorporated in a country of the applicable securities market regulated by an appropriate authority.

Financial soundness: The investor should be financially solvent, and s/he should not have engaged in such practices as fraud like money laundering, manipulation of the stock market and the like.

Fit and proper person: To be qualified as an FPI, the entity must pass a litmus test of being a fit and proper person as per the SEBI regulation, this in essence implies that the entity has a clean litigation history in matters of financial dealings and business ethics.

On becoming an FPI, an investor is eligible to participate in the equity markets, the debt markets and such other securities as may be allowed by SEBI and RBI regulations.

Listing of Investment Option under FPI in India

FPIs can invest in a variety of financial instruments in India[29], including:

Equity Shares: FPIs can invest only in the listed Indian securities and in order to invest in an equity share of the Indian comp any, FPIs are allowed to have direct investment up to 10% of the paid up capital of the Indian Company. This is the primary form of FPI and it helps the foreign investors to have an access to invest in the Indian equity markets for stocks appreciation, and dividend income.

Non-Convertible Debentures (NCDs): Companies which are listed in India are also allowed for investments in non-convertible debentures (NCDs). NCDs are debt securities through which the issuer cannot offer the holders the option of converting them into equity. These are cost funded by firms to obtain funds from the public in exchange for a fixed number of interest payments. FPIs are interested in NCDs as they allow for stable return without so much of the risk that is associated with equities.

Government Securities (G-Secs): FPIs can also invest on government bonds or securities which may take more safer way than equities. Government of India floats loan through term bonds for financing its various segment projects and these bonds guarantee fixed returns. These securities are purchased by FPIs when these investors is in search of relative stability and lower risk.

Corporate Bonds: Other eligible securities include government securities and there are also corporate bonds, which are debt securities offered by corporations. Corporate bonds are generally issued at a slightly higher interest than government securities, but they bear more risk since the stability of the issuing company defines the security of the bond.

FPI Limits and Restrictions[30]

Due to certain underlying issues which could be disturbed by volatile foreign capital, the Indian government and its regulators have placed few restrictions and limits on FPI investment. These structural guidelines are intended to facilitate foreign sources of funding together with maintaining integrity in regards to Indian companies being majority owned, and by extension, controlled, by locals.

Equity Investment Limit[31]: As it has been highlighted before, FPI investor can only invest in a listed company by possessing less than ten percent of equity shares. Even when an FPI’s investment exceeds the above threshold in a particular industry, the investment is not considered as a portfolio investment but as an FDI. Such a clear demarcation is important because FDI and FPI are treated differently in the provision of regulations; while FDI comes with more specific regulations and more rigidity.

Sectoral Caps: Like FDI, there are restrictions on the amount of foreign investment that can be received in some sectors. FPIs are free to invest in most sectors but sectors including defence, media, and banking still have the sectoral caps in the Indian economy. These caps limit the overall volume of foreign investment that can be invested into these highly sensitive sectors to avert absolutism.

Debt Investment Limit: Also, FPIs are restricted by the quantum of investment that they can make into India’s debt markets. The RBI intervenes and announces ceilings on the FPI in government and corporate bonds so that the debt markets do not-deviate and that the government always has a handle on the total foreign liability levels. These have become implementable policies to prevent a sharp rise in foreign investment in Indian debt markets, which is volatile.

Foreign Institutional Investors Vs External Commercial borrowings or ECB[32]

As for the FPIs, though they are allowed to invest in the NCDs, the ECB is another way through which the foreigners can provide the credit to the Indian firms. ECBS provide opportunities to Indian companies to take immediate loans from the foreign lenders for capital requirements. But there are differences in compliance which envisages that ECBs are more rigid and require much closer scrutiny than FPIs. This is because ECBs have a considerable impact on companies’ debt-equity configuration of a firm and overall advantage. Further, ECBs entail a longer maturity profile and are more costly than those in the form of FPI where investments are made debt securities.

Companies, especially foreign investors, always choose FPI rather than ECBs, if they are interested to invest in debt instruments including debt securities as the former has more liberal conditions and fewer regulations[33]. Yet, for the long-term finance, ECBs are still preferred instruments for the Indian firms, especially in infrastructure, telecommunication and power sector.

Need-essence of FPI for further growth of India’s economy

FPI holds a central position in financing the Indian capital markets and in the Indian economy as well. They help in attracting foreign investor funds, the key necessity to fund infrastructure development, expansion of existing firms, and encourage innovativeness. FPIs give an added liquidity to the stock and the bond market through which it becomes easier for Indian companies to tap the market through floos or bonds.

Also, FPI helps to improve market efficiency by enhancing competition as well as recommending on good corporate governance. The greater the amount of international players venturing into the Indian markets, the greater is the pressurized increase in management standards and reporting standards of the companies as a way of attracting the international investors.

Global investors also measure the confidence they have in the Indian economy through the FPIs. Whenever the foreign portfolio investors express their interest in investing in Indian stock and bonds, it indicates that investment is an attractive option in India, and this will increase the international status of the country.

Functions Of SEBI As Regards To Posting Of Disclosure Norms for FDI and FPI in India.

Currently, the regulator of the securities market is The Securities and Exchange Board of India (SEBI, established in 1992)[34]. They are of great importance in the provision of investor and market integrity, as well as to promote the efficiency of the capital markets. Some of its main functions are to formulate and implement rules of disclosure for foreign investors which refers mainly to the FDI and FPI.

FDI and FPI are two important forms of foreign investments in India that played and continue to play a tremendous role for the growth and development of India’s industries and generation of employment. However, it is imperative to observe that such investments’ scale and form require not only providing foreign investors with incentives but also maintaining legal certainty for business. The Rules on disclosure issued by SEBI hold central responsibility for the provision of transparency, risk management and investor and overall Indian economy protection. The role of SEBI with respect to disclosure requirements and FDI/FPI operations to be outlined further below:

1. Understanding FDI and FPI in the Indian Context[35]

Foreign Direct Investment (FDI)[36] refers to the investment where a foreign party has an interest in an Indian company for more than a strategic interest  and operate differently and are regulated by distinct frameworks:

(FDI) involves long-term investments by a foreign entity or individual in an Indian company. The purpose of FDI is generally to obtain a lasting interest and control in the management of the firm. This type of investment is structural in some ways and pertains to committing investment to facilities in India including manufacturing plants, infrastructure or branches. FDIs are in general termed to be more stable and advantageous to the Indian economy since they provide capital, technology, management knowledge and employment.• Foreign Portfolio Investment (FPI) however means the acquisition of an interest in securities like stock, bonds, or other securities with a view to holding them as investments in a company located in India by a non-resident person’s Direct Investment (FDI) involves long-term investments by a foreign entity or individual in an Indian company. The objective of FDI is typically to establish a lasting interest and significant influence in the operations of the company. This form of investment is strategic in nature, often involving the establishment of a physical presence in India, such as factories, infrastructure, or subsidiaries. FDIs are generally considered more stable and beneficial for the Indian economy as they bring in not just capital but also technology, management practices, and employment opportunities.

1. Foreign Portfolio Investment (FPI),[37] on the other hand, refers to the purchase of securities such as shares, bonds, or other financial assets by a foreign entity or individual in an Indian company. As opposed to FDI investors, FPI investors are not interested in the sustained control of the organization. Such investments are normally short term and motivated by financial contribution and not an actual active engagement. Therefore FPIs are more fluctuating, harmonized with the oscillations in the global financial markets.

Film investment and film production investment are two different concepts and the two are regulated differently as well. Though FDI is administered by DPIIT, FPI is mainly governed by SEBI with SEBI disclosure norms applying to both forms of investment.

2. SEBI’s Part Playing in Disclosure Requirements for FPI[38]

FPIs are foreign institutional investors investing in Indian securities markets” as per the SEBI (Foreign Portfolio Investors) Regulations, 2019. SEBI needs these investors to follow standard disclosure standards to increase transparency and to stop any form of manipulation that may have gestation inside India.

a. FPI Registration and Disclosure[39]

Each FPI intending to invest in Indian markets must first obtain SEBI registration via a recognized DDP. During the registration process, SEBI mandates FPIs to disclose information related to their:

Ownership structure: Public limited companies must state information about their ultimate beneficial owner and any information relating to the entity that has a controlling interest. This disclosure is specifically relevant to avoid complex structures which can be abused for aims of money laundering or manipulation of financial markets.

• Source of funds: SEBI also has insisted on the source of the funds that firms apply to invest in the country with a view of blocking any source of funds that may be found to have come from an unlawful activity.
• Nature of the entity: This information includes the legal structure of FPI as a mutual fund, pension fund, bank, among others; country of origin and the regulatory environment of the FPI in the home country.

Through these disclosure requirements, SEBI is trying to limit the entry of only credible and honest foreign investor in the Indian market. This helps to eliminate possibility of people engaging in market abuse and thus enhances investors confidence.

b. Policies and Regulation of Duty of Continuous Disclosure for Foreign Portfolio Investors

After FPI registration the continuous disclosure obligations are applied to FPIs whereby the FPIs are to report any changes in parameters inclusive of ownership, beneficial control and significant market activities. Some of the key aspects of SEBI’s[40] continuous disclosure requirements for FPIs include:

• Disclosure of substantial ownership: Under the regulation of SEBI, FPIs are required to declare their shareholding if it cross a specific percentage in a India incorporated company. Business entities involve FPIs must inform SEBI and the stock exchanges once its investment crosses 5 percent of the paid up capital of a company. This has the effect of increasing transparency based on the market and rules out possibility of ensured and concealed controlling stakes.
• Changes in beneficial ownership[41]: FPIs are also required to notify theper any alterations in the public beneficial ownership as well. This rule has such an important significance to avoid the abuse of the legal entity rights to camouflage the investors’ identity in order to avoid implementation of the stringent legal provisions for fraudulent activities.
• Quarterly reporting: FPIs are also need to submit their quarterly returns on their investments, portfolios holdings and where there are changes of ownership or control. Such a continuous disclosure helps SEBI and the market players to have ideas concerning the activities of foreign investments.

3. Effect of SEBI‘s disclosure requirement on FPI

Key disclosure requirements that SEBI came up with would ensure that FPIs are conducting their operations in a certain way in India. Some of the key impacts include:

• Increased transparency and market confidence: The compliance with elaborate disclosure standards helps SEBI improve the Indian securities market transparency. This curbs cases of conspiracy to fix prices, trading while in possession of price sensitive information and other evil practices that lack integrity that is crucial for local and international investors.
• Mitigation of systemic risks: These FPIs are usually short term investors and more often than not, they are quick speculators. SEBI makes disclosure requirements practical to lessen system risks, because large-scale portfolio shifts or ownership alterations are reported. This allows the regulators to intervene where necessary, to correct anomalies that are likely to affect the market.
• Encouragement of stable investments: This effort by SEBI towards transparency in turn helps the FPIs make more long – term investments based fundamental analysis and are less likely to make short – term speculative trades. For the Indian economy, this is advantageous because long gestation industries which require continuous inflow of capital can be financed from the foreign capital.

4. The Third Press Note of 2020 and Its implications for FPIs

One such change was the Press Note 3 released by the Government of India in 2020. This policy amendment demanded previous government clearance for investments by the companies operating in the countries having geographical neighbours with India, including China. This change was mainly brought about by difficulties in manage hostile takeovers and the issue of protecting security of some countries.

Originally the FPIs sourced from the border-sharing countries were put for more rigorous test, coupled by some new disclosure regs on the ultimate beneficial owners. This policy has a good influence on FPI flow where investors from China has seen high reductions This shows the SEBI attempts to balance foreign investment with country interest.

The role of SEBI in disclosure requirements for FDI.

While SEBI’s presence is more profound in FPIs, it has a major influence on FDI when a company or an entity invests directly in other firms, in case of listed firms that are engaged in public offers. While DPIIT sets the FDI regulation, SEBI monitors the disclosure regulation to conform with, for the control and disclosure of FDI where companies with enhanced foreign stakes presumably compromise directorial control of the Indian corporate.

Disclosure in the event of FDI in Listed Companies

If FDI is done through acquisition of stake in a listed Indian company SEBI require disclosure under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 also known as takeover regulation. SECG is aimed to safeguard the interest of the minority shareholders and also provide the provisions that need to be followed to effect a change of control largely.

Key disclosure requirements under the Takeover Code include:

• Triggering thresholds for public offers: He notes that pursuant to the Listed Companies and Takeovers Regulations 2003, an investor whether local or foreign must make an open offer to other shareholders once they hold 25% or more of the voting rights in a listed company. This will help minority shareholders to get an opportunity of exiting if they are not ready to continue being investors under new owners.
• Disclosures for substantial acquisitions: Every threshold crossing transaction in a listed entity requires the acquirer to hold 5% or more of shares or voting rights in the listed entity must be reported to SEBI and the Stock Exchange. This happens even where the acquisition is short of the 25% rights triggered a public offer threshold, thus making it difficult for foreign investors to build large stakes secretly.
• Disclosure of changes in control: Where a foreign investor gains control either directly or indirectly over any listed Indian company, the change is mandatory to disclose to SEBI, the Company, and the Stock Exchanges. It helps the market to know when there is a new or change in owners control of the company.

Analysing the Effects of SEBI’s Disclosure Requirement on FDI

SEBI’s disclosure norms for FDI transactions in listed companies have several important implications:

• Protection of minority shareholders: The Takeover Code requires that SEBI get disclosure for different acquisition to safeguard the interests of the small shareholders. The need to make a public offer is useful to them since they can use it to shop themselves out of the company on reasonable terms.
• Prevention of hostile takeovers: In their effort to make acquisitions transparent and prevent foreign investors from acquiring significant stakes in the underlying firms gradually without other investors’ consent, SECI requires public listed firms to disclose any acquisition proposals involving the foreign investors amounting to over twenty five percent of assets or profits. It minimizes the possibilities of unwanted acquisitions and keeps any such actions very open and above board.
• Promotion of fair market practices: SEBI’s disclosure regulation makes the centralized market fair so that all investors in the market obtain accurate and up-to-date information as regards to the foreign acquisitions. This comes in handy to control market emulation and enhance fairness in investor bearing.

Market Abuse to be prevented through Disclosures, this paper turns the search light towards SEBI.

This paper examines the market abuse prevention role played by SEBI disclosure requirements in FDI and FPI. Thus, by means of demanding foreign investors produce key information regarding ownership, fund source, and substantial transactions, SEBI effectively minimizes schemes such as insider trading, market manipulation, and money laundering.

Furthermore for foreign investments’ tracking, SEBI is in alliance with other regulatory authorities such as the Reserve Bank of India (RBI) and the Enforcement Directorate (ED) regarding India AML / KYC guidelines. This integrated approach helps to guarantee that foreign investments are directed towards fulfilling the potential of the Indian economy’s development with maximal transparency and integrity.

Regulatory Framework for FDI

FDI is controlled by FEMA and rules and policies provided by DPIIT. However, SEBI plays a crucial role, particularly when foreign entities acquire stakes in listed companies:

1. Takeover Regulations: Foreign investors under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 any acquisition which touches 5% of the total shares of an Indian company, has to be reported. If they get to own 25% or more of the minority shareholders stock they have to float an open offer and this way they would have acted fairly.

2. Regulatory Oversight: Thus, SEBI works in cooperation with the RBI and other regulatory authorities in relation to surveillance of FDI transactions compliance with the domestic legislation and the applicable international norms.

Latest regulations or Amendments done by SEBI

These innovative measures and amendment have been implemented by SEBI in recent years to shore up the legislation and increasing investors’ access to information. Some notable developments include:

1. SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment), 2023[42]

This was the amendment that brought independent changes which helped to strengthen corporate governance mechanism in the listed companies. It requires that every top 1000 listed companies has demanded that the Chairperson of the Board must be an independent director; the move intended at eliminating conflict of interest situations. Furthermore, it stresses the call to provide more information about related parties transactions and to pay more attention to the decision-making process.

2. SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2021: Third Amendment[43]

This regulation aimed at un-complicating the structure for the offering of capital by companies through public issue, preferential Issue and institutional placing. The key changes are the simplification of disclosure obligations and granting the issuers more possibilities to determine the price of preferential issues. The goal is to facilitate access to the funds for the corporations as well as provide reasonable level of disclosure to investors.

3. SEBI (Foreign Portfolio Investors)(Second Amendment) Regulations, 2023[44]

In 2023, SEBI altered the FPI regulation, majorly concerning enhancing the standard of neo-organizational actions for foreign portfolio investors. It was proposed to include a new classification of FPIs to address the issue of operating high-risk companies more efficiently. This step is also being taken to avoid other exposures linked to ambiguous structures and to make sure that FPIs follow closer know-your-client or KYC guidelines.

4. SEBI Circular: Social Media Surveillance and Market Manipulation-Tier II (May 2021)[45]

SEBI has also stepped up efforts to curb insider trading as well as manoeuvring on social media platforms. The regulator has applied complex methodologies that help detect suspicious trading flows and has already acted against companies that attempt to artificially inflate stock prices using posts on social networks.

These regulations are in part due to SEBI’s pre-emptive measures in enhancing corporate transparency and investors’ welfare as well as its ability to respond to changing market environments.

5. Periodic Analysis of SEBI Regulation on FPI: Indian Investment Perspective[46]

The SEBI – Securities and Exchange Board of India exercises significant influence on Management of FPI in India. In many laws and rules and other changes, SEBI therefore works to establish investment transparency, stability and efficiency. In light of the SEBI regulations, the extent and kind of FPI investment, and the segmentation of sector-wise tendencies, can be analyzed and distinguished. Each of these dimensions is discussed in much detail below.

Comparing the Volume and Type of FPIs Before and After the Regulation

The volume and nature of FPIs in India have evolved due to SEBI regulations:

• Volume of Investments: The inflow of FPIs increased significantly after the SEBI made changes to its regulation in 2019 through the SEBI (Foreign Portfolio Investors) Regulations, 2019 hence the improved investor confidence. The reforms targeted at enhancing the ease of registration of FPIs and offering information on investment restrictions has drawn both institutional as well as other categories of FPIs.
• Nature of Investments: The nature of FPIs has thus changed from basically hot money as defined by short-term investments to long-term strategic investments. Increasing transparency level and compliance with due diligences made FPIs more cautious and aimed at investing high fundamental stocks.
• Diverse Investment Strategies: These regulations have assisted SEBI in opening up a plethora of options for investment among FPIs. They are now reviewing various classes of securities, with more and more focus on equity, debt and hybrid securities thus achieving better diversification.

Sector-Wise Analysis of FPI Tremors because of SEBI Policies

The impact of SEBI regulations on FPIs can also be analyzed from a sector-wise perspective:

• Information Technology (IT): The IT sector in particular has been luring large FPI flows due to India’s status as a favoured IT outsourcing destination. The regulation has also favoured transparency and disclosure brought by SEBI which has in turn enhanced the confidence among the foreign investors in this sector.
• Pharmaceuticals and Healthcare: Relative to the other sectors, more FPI is in this sector as the demand for healthcare and chemicals specifically pharma products has grown drastically after COVID-19. SEBI has established friendly environment to invest into the companies which focused on research and development thereby leading to the increased capital investment.
• Financial Services: The sector that has benefited most through FPI is the financial services fraction as SEBI regulation has maintained superiority and openness. Global review has beneficiated the hike in volume of FDI in banks, NBFCs, and insurance firms, owing to the confidence of investors.
• Consumer Goods: There is interest in consumer goods sector by FPIs because of the growth that is likely to be realized in the given sector. SEBI regulation on disclosure and governance practices has made foreigners sit up for this sector; subsequently, more investment in the established as well as an emerging consumer brands link.
• Renewable Energy: After increasing focus on renewable energy and development of sustainable structures in India, this particular sector has received substantial investors’ attention from FPIs. The regulation framework by SEBI towards green investment has aligned capital flow towards instances of solar, wind and other forms of renewable energy.
• Infrastructure: The infrastructure sector has been progressively gaining its appeal to the FPIs on the back of government promotion and SEBI regulation of infrastructure investment trusts (InvITs). The current legal and regulatory conditions have fostered sustainable investment in infrastructures.

Impact of SEBI Regulation on Foreign Direct Investment (FDI)

There has been a considerable policy alteration whereby SEBI has a central role in determining the FDI framework of India. Though FDI is majorly covered by DPIIT and FEMA, SEBI rules also extensively influence the ways foreign investors participate in Indian markets especially in corporate level, though the issue of buying listed companies. This paper looks at the ways in which SEBI supports or hinders FDI and the impact of certain measures on FDI, and lessons from major sectors regulated by SEBI plays the role of a regulator that works to monitor the activities of foreign investors in Indian firms. Its role encompasses several aspects:

Facilitating FDI: SEBI helps FDI because it creates a clear legal structure that allows foreign investors to invest in firms with an equity stake on the stock exchange. The disclosure requirements are legal provisions since SEBI puts into force certain restraints that make the foreign investors in possession of certain important information concerning companies, thus creating confidence and inviting investment. For example, the mandatory compliance of companies’ mandatory disclosure of information about their performance and financial status allows the foreign investors to make correct investment decisions.

Takeover Regulations: SEBI’s Substantial Acquisition of Shares and Takeovers Regulation compel foreign investors seeking to own a large stake in an organization based in India to formally offer the residual shareholders an opportunity. This requirement safeguards minority investors as well as provides fair grounds in the market and demanding atmosphere, making more favourable conditions for foreign investors.

Sectoral Restrictions: The listed companies are regulated by SEBI, but DPIIT collaborates with the SEBI to enforce restriction or cap on the FDI depending on the sectors. Thus, to both allow foreign investment and at the same time protect sensitive sectors such as defence and telecommunication; this approach has been used.

Regulation-Wise Effects on FDI Inflows

The impact of specific SEBI regulations on FDI inflows can be observed through the following aspects:

Regulatory Clarity: New legislation, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations have spelled out the guidelines to acquisitions and foreign investors have been able to decipher their responsibilities easily. This has helped enhance the clarity of FDI flows for investors who no longer fumble while trying to decipher the ever-changing dynamics of the regulatory systems.

Increased Transparency: The enhance corporate governance and disclosure norms set by SEBI have also improved disclosed of operation of companies in India. Appropriate governing standard enhances the attractiveness of companies, thus leading to the overall FDI inflows.

Streamlined Processes: Changes to the SEBI regulation have mostly found ways of simplifying the procedures that surround foreign investments. For instance, elimination of certain compliance burdens has helped in fastening up the investment process; foreign investors regard India as a suitable Investment Destination for FDI.

Impact of Press Note 3 (2020): This regulation, that impose prior government approval for investments from countries having border with India, has made the atmosphere more complex for investors. Despite the visions it sought to achieve within the framework of national security, it has discouraged investment from some neighbouring countries.

Different categiesry of FPI

FPI is defined as those investments that are made in securities of foreign companies, bonds or in any other equivalent. In contrast FPI is less akin to Foreign Direct Investment FDI which implies ownership of more than 50 per cent of the voting stock of a business, FPI is more liquid and is associated with the outright ownership of financial securities. Most of the countries in the world have classified FPIs into different types or rather classes in relation to the investor, the risk level and the investment aim. Here’s a detailed explanation of the common FPI categories (specifically in India’s regulatory context, though applicable globally):

Category:[47] I Foreign Portfolio Investor (FPI)• This category is considered of low risk by most supervisory and regulatory bodies. Sets like stocks, bonds, or other securities in a foreign country. Unlike Foreign Direct Investment (FDI), which involves controlling ownership of a business, FPI is more liquid and involves passive holdings of financial securities. In most countries, FPIs are categorized into different classes or categories depending on the nature of the investor, risk profile, and purpose of the investment. Here’s a detailed explanation of the common FPI categories (specifically in India’s regulatory context, though applicable globally):

Category 1[48] Foreign Portfolio Investor (FPI)

Type of Investors:

This category is considered the least risky by regulatory authorities. They also comprise of institutional investors as well as other related government entities.

Examples:

1. Governmental and Central Banks: Government related organizations which include, sovereign wealth funds, government related institutions and central banks.

2. Multilateral Organizations: In general, institutions such as the International Monetary Fund or the World Bank that may invest in foreign markets.

3. Pension Funds and Endowments: Normally such a large and long term fund involve pension fund or university endowment funds that have a lowered risk investment strategy.

Including Foreign Portfolio Investor (FPI) which is categorized as category 2. This is a mid-risk category, which have lower regulatory oversight than those of Category 1 FPIs and may not be backed by sovereigns but are important players in financial markets. rolling ownership of a business, FPI is more liquid and involves passive holdings of financial securities. In most countries, FPIs are categorized into different classes or categories depending on the nature of the investor, risk profile, and purpose of the investment. Here’s a detailed explanation of the common FPI categories (specifically in India’s regulatory context, though applicable globally):

Category 2 Foreign Portfolio Investor (FPI)

Type of Investors:

• This is a middle-risk category and includes entities that are not as highly regulated or do not have the sovereign backing of Category 1 FPIs but are still significant financial market participants.

Examples:

1. Regulated Institutions: Private sector banks, mutual funds, insurance houses and Asset management companies which are under some or the other regulatory bodies but are not governmental organisations.

2. University Funds and Charitable Institutions: Such as non-profit organizations or large educational institutions who engage in international invest.

3. Fund Managers and Hedge Funds: These entities are in charge of significant amount of money but they do not always operate in rather risk shy way as pension funds or governmental institutions.

FPI means third category foreign portfolio investor

This class of investors is regarded as being most risky among all the FPI classes in this category., bonds, or other securities in a foreign country. Unlike Foreign Direct Investment (FDI), which involves controlling ownership of a business, FPI is more liquid and involves passive holdings of financial securities. In most countries, FPIs are categorized into different classes or categories depending on the nature of the investor, risk profile, and purpose of the investment. Here’s a detailed explanation of the common FPI categories (specifically in India’s regulatory context, though applicable globally):

Category 3 Foreign Portfolio Investor (FPI)

Type of Investors:

• This category consists of investors perceived to be the highest risk among FPI classes. It has players who bear limited regulatory scrutiny and do not squarely fit into the traditional incorporated business model.

Examples:

1. Unregulated Funds: Companies and other related parties that may not be bound to domestic regulations of hedge funds and the like.

2. Private Investors: Businessmen who do not operate under the auspices of the business world such as high-net-worth individuals (HNWI’s) and or private traders who use their own money to trade in foreign markets.

3. Proprietary Funds: Large business entities which operate their own funds and that invest on their own account and often gamble.

Importance in Global Markets

The FPIs categorization enables the SEBI and other hosts country’s regulators to determine the threat or the danger that these foreign investors bring in to the locality and ascertain also that the investments made by the FPIs are beneficial for the country. For investors, the category into which they fall defines the level of access that an investor has to certain financial products besides the compliance rules that needs to be adhered to.

Open display of inward FDI in Major Sectors & Role of SEBI Policies –

A comparative Analysis:

To illustrate the impact of SEBI regulations on FDI, we can examine case studies in major sectors where foreign investments have surged or been restricted:

Telecommunications Sector: The year 2019 witnessed a lot of global telecom giants participating in funding telecommunications organizations in India like – Reliance Jio. I found that SEBI regulations governing open offers and corporate governance had a significant part to play in preventing investor scepticism. Though the sector has been having stricter FDI norms, the conditions were pretty clear with enabling regulations facilitating good magnitude of investments without much risks involved.

Pharmaceuticals Sector: Another sector where the FDI has filled in because of Sebi is the pharmaceuticals sector. Sanofi and Pfizer are some of the big pharma organizations that have invested in manufacturing in India due mainly to the capability to churn out high-quality products. SEBI’s rules on related-party transactions facilitate ensuring the investors interact with companies which have sound governance structures hence promoting investment.

E-commerce Sector: In the recent past, the sector has attracted considerable FDI from other countries and well-established international firms such as Amazon and Walmart. Disclosures and corporate governance requirements set by SEBI, have added to investor confidence, although FDI has flooded this fast growing sector. Also, the regulation of access to e-commerce companies by SEBI in relation to foreign institutional investments is effective.

Renewable Energy: The Indian government has shown tremendous interest in the renewable energy sector that is why such investments have grown significantly. Banking sector players such as Adani Green Energy and Brookfield Renewable Partners are among the companies that have thrived due to SEBI’s favourable actions that enhance corporate transparency and long-term investment. The organisation has also seen foreign investment inflow through its approvals to green bonds and renewable energy InvITs.

Based on the implications of SEBI regulations we present below some of the main difficulties that foreign investors face on this aspect. Despite SEBI putting in place the various regulations on FPI and FDI, foreign investors face several difficulties. These difficulties can be a legal or perhaps bureaucratic problem or even a question of compliance, in addition to bud this investors’ perception regarding SEBI. The following section specifically discusses the constrains that exist within the investment environment and the implications for the investment climate in India.

Key Barriers to Entry for FPIs and FDIs

Regulatory Complexity: Another major weakness that has been realized by the foreign investors is high_void regulatory environment. The conditions related to SEBI regulations, FEMA and DPIIT guidelines may create confusion. These layers of regulation really complicate things for investors and stakeholders all in all and more often than not it slows down decision making and investment mechanisms.

Changing Regulations: SEBI is always making changes to its regulations to ensure its keep up with the changing market and investors. Although such flexibility has its advantages, it gives certain vagueness to the foreign investors who may be barely able to follow the changes. Policy surprises are not favorable to investment attractiveness as potential investment can be discouraged by perceived risk, as exemplified by Press Note 3 (2020).

Sectoral Caps and Restrictions: Some sectors in India trigger restrictions regarding daha ownership to a specified limit that may reduce investment for FPI and FDIs. For instance, foreign ownership in the defense and the Telecommunication sector is highly regulated. These caps can inhibit the settlement of the foreign investors in these areas hence missing excellent chances of synergy in these sectors.

Taxation Issues: Other extra-trade issues which foreign investors encounter include tax issues for instance; withholding taxes on dividends and capital gains. Foreign investors must deal with increased complexity of tax treaties and change in tax policies that causes additional burdens. Such issues as tax double jeopardy, as well as other tax related uncertainties pose a blockage to foreign investors in India.

Policy Reform Proposals for SEBI

As India grows and more aggressively competes for Investment across the globe, SEBI has to improve the current laws to support FPI, FDI. The two measures have received significant consideration since the future development of the stock market depends on the increasing investor confidence and the flow of foreign capital. Here are several policy recommendations aimed at improving SEBI’s regulatory approach:

Business Benefits of a Regulatory Project

Simplification of Compliance Requirements: The compliance mechanisms for global players should be revisited by SEBI and a set of simpler norms finalized. Any effort to ease registration and reporting requirements can be considered as effective means for decreasing the overall burden to FPIs and FDIs and help them to manage their activity in India. A possibility to extend the online portal that would include all the regulations and approvals would improve the effectiveness and clarity scrutinized.

Clear Guidelines and Definitions: Legal uncertainties can be reduced by providing clear definitions and boundaries about ownership structures, and beneficial ownership alongside the setting up of the limits to foreign investment. Currently, besides the legal texts and guidelines, it is necessary to provide more specific and detailed answers to frequently asked questions and additional guidance notes which could help foreign investors to comprehend their responsibilities and related legal restraints in a better manner.

Improving Transparency and Share of Voice

Regular Engagement with Stakeholders: Industry associations, the SEBI, and market participants should consider bringing matters to the attention of SEBI at least once in a year, as provided by SEBI (Foreign Portfolio Investors) Regulations, 2014. Perhaps holding annual investor meetings or seminars will allow the free flow of ideas and give the regulators an opportunity to hear more from the investors.

Transparency in Policy Changes: Maintaining visibility into the different rules that may be set and ensuring that when there is a shift this is communicated clearly with enough time to give a heads up to investors can be very helpful. It should therefore consider always coming up with draft for public comments before coming up with changes which would enable stakeholders to provide input on the likely ramifications.

Balance of Investor Protection and Market Liberalization

Revisiting Sectoral Caps and Restrictions: SEBI should also collaborate with the DPIIT towards assessing the sectoral caps on FDI in the country. Where there is a need for restraint for security or for holding certain strategic asset, a desirable audit could show possible areas where the country could offer more liberal environment for FDI in sectors that stand ready for the liberal change.

Encouraging Long-Term Investments: SEBI can encourage long term ‘hold’ from the FPIs and FDIs by granting them tax incentives/exemptions or by supporting them by giving them less burdensome compliance requirements for a longer investment horizon of say, five years and above. This move would enhance stability in the market and be of great support to the long term economic growth.

Use of technology in the Regulation

Utilizing FinTech Solutions: Integration of FinTech services should be the next strategic direction for SEBI to implement in the area of regulation and monitoring. For ownership records and transaction tracking, then, blockchain technology could increase transparency and decrease compliance costs for foreign investors.

Data Analytics for Monitoring: The ability to adopt data analytical tools in the monitoring of the foreign investment and the various trends in the market will help SEBI to be able to prevent the various risks which are within the markets. This way would assist the SEBI in exercising supervision of the markets without pinning investors with undesirable burdens.

An Evaluation of a Proactive Regulatory Culture

Flexibility in Regulation: To that end, SEBI must take an active role to regulate the markets while at the same time keep the markets under its jurisdiction competitive in a global investment market. This involves embracing new forms of investment structures and approaches but must have needed measures put in place.

Benchmarking Against Global Standards: Regarding this, SEBI can make use of benchmarking to its corresponding markets and the overall global regulatory models. Discussing with other financial regulators and international organizations can be helpful to SEBI in order to be clear about current situation in India and to develop the necessary changes to coordination with the others and, therefore, improve the investment climate in the country.

Conclusion

Overall, the given study identifies facilitative and challenging effects of SEBI regulations on FPI and FDI in India. The measures put in place by SEBI in the recent past have gone a long way in improving transparency, good corporate governance and investor confidence – particularly the foreign investors. Nevertheless, some issues such as regulatory issues, compliance costs and regulations as well as barriers arising from sectors of the economy may act as a push back to potential investments. Investor protection and market liberalisation, on the one hand, need to be achieved without compromising the other goal. With Indian officials seeking to expand the foreign investments in the nation’s economy, SEBI has to adapt to its role as a better coordinator of the processes, a clearer provider of the guidelines and an active participant in discussions with the stakeholders of the market. If these challenges are tackled and the investment climate improved then SEBI can go a long way in marketing India as an investors’ destination of choice. Finally, constructive rethinking of the regulation coupled with the never ending discussions and development will be the key for increase of FPI and FDI for the sustainable development of India and it’s economic growth.

This paper is authored by Mr. Palash Jain, a fourth-year Student pursuing a BA. LL.B. (H) at the School of Law, UPES, Dehradun, and Mr. Paras Agnihotri , a fourth-year Student pursuing a BBA. LL.B. (H) at the School of Law, UPES, Dehradun.

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[44] https://www.sebi.gov.in/legal/regulations/aug-2023/securities-and-exchange-board-of-india-foreign-portfolio-investors-second-amendment-regulations-2023_75198.html

[45] https://www.sebi.gov.in/legal/master-circulars/mar-2021/master-circular-on-surveillance-of-securities-market_49354.html

[46] https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2018/1515989011412_1.pdf

[47] https://www.sebi.gov.in/sebi_data/commondocs/nov-2019/Operational%20Guidelines%20for%20FPIs,%20DDPs%20and%20EFIs%20revised_p.pdf

[48] https://groww.in/p/foreign-portfolio-investment