While presenting the Budget for 1992-93, the Finance Minister Dr. Manmohan Singh had announced a decision to allow reputed foreign investors, such as Pension Funds etc., to invest in India capital market. To operationalise this policy announcement, it has become necessary to evolve guidelines for such investments by Foreign Institutional Investors (FIIs).
The following guidelines have been formulated in this regard.

(1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) and non-discretionary portfolio management services) would be welcome to make investments under these guidelines.
(2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary markets, including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. These would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government may even like to add further categories of securities later from time to time.
(3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of India (SEBI), the nodal regulatory agency for securities markets, before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India, in accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of a FII will be treated as separate FIIs for registration, and may seek separate registration with SEBI.
(4) Since there are foreign exchange controls also in force, for various permissions under exchange control, along with their application for initial registration, FIIs shall also file with SEBI another application addressed to RBI for seeking various permissions under FERA, in a format that would be specified by RBI for this purpose. RBI's general permission would be obtained by SEBI before granting initial registration and RBI's FERA permission together by SEBI, under a single window approach.
(5) For granting registration to the FII, SEBI shall take into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria that may be considered by SEBI to be relevant. Besides , FII seeking initial registration with SEBI shall be required to hold a registration from the Securities Commission, or the regulatory organisation for the stock market in the country of domicile/incorporation of the FII.
(6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA to the FII will also hold good for five years. Both will be renewable for similar five year periods later on.
(7) RBI's general permission under FERA would enable the registered FII to buy, sell and realise capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest on all recognised stock exchanges through a designated bank branch, and to appoint a domestic Custodian for custody of investments held.
(8) This General Permission from RBI shall also enable the FII to:
(a) Open foreign currency denominated accounts in a designated bank. (There can even be more than one account in the same bank branch each designated in different foreign currencies, if it is so required by FII for its operational purposes);
(b) Open a special non-resident rupee account to which could be credited all receipts from the capital inflows, sale proceeds of shares, dividends and interests;
(c) Transfer sums from the foreign currency accounts to the rupee account and vice-versa, at the market rate of exchange;
(d) Make investments in the securities in India out of the balances in the rupee account;
(e) Transfer repatriable (after tax) proceeds from the rupee account to the foreign currency account(s);
(f) repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and any compensation received towards sale/renouncement of rights offerings of shares subject to the designated branch of a bank/the custodian being authorised to deduct with holding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange;
(g) register FII's holdings without any further clearance under FERA.
(9) There would be no restriction on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also ,there would be no lock-in-period prescribed for the purposes of such investments made by FIIs. It is expected that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments.
(10) Portfolio investments in primary or secondary markets will be subject to a ceiling of 30% of issued share capital for the total holdings of all registered FIIs, in any one company. The ceiling would apply to all holdings taking into account the conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII in any company would also be subject to a ceiling of 10% of total issued capital. For this purpose, the holdings of an FII group will be counted as holdings of a single FII.
(11) The maximum holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, will also include NRI corporate and non-corporate investments, but will not include the following:
(a) Foreign investments under financial collaborations (direct foreign investments), which are permitted upto 51% in all priority areas.
(b) Investments by FIIs through the following alternative routes:
(i) offshore single/regional funds;
(ii) Global Depository Receipts;
(iii) Euro convertibles
(12) Disinvestment will be allowed only through stock exchange in India, including the OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where available.
(13) All secondary market operations would be only through the recognised intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected not to engage in any short selling in securities and to take delivery of purchased and give delivery of sold securities.
(14) A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of Securities and for confirmation of transactions in Securities, settlement of purchase and sale, and for information reporting. Such custodian shall establish separate accounts for detailing on a daily basis the investment capital utilisation and securities held by each FII for which it is acting as custodian. The custodian will report to the RBI and SEBI semi-annually as part of its disclosure and reporting guidelines.
(15) The RBI shall make available to the designated bank branches a list of companies where no investment will be allowed on the basis of the upper prescribed ceiling of 30% having been reached under the portfolio investment scheme.
(16) Reserve Bank of India may at any time request by an order a registered FII to submit information regarding the records of utilisation of the inward remittances of investment capital and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at any time conduct a direct inspection of the records and accounting books of a registered FII.
(17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more) capital gains.

Source: Press Note dated 14th Sept. 1992 of
Department of Economic Affairs,
(Investment Division),
Ministry of Finance