Qualified Foreign Investors (QFIs)

Author:–P.Naga Sudha Reddy

The present article provides a brief information on the requirements,different regulations, rules and limitation regarding the investments by Qualified Foreign Investors (QFIs)in Indian Equity Market given by RBI and SEBI .

Qualified Foreign Investors (QFIs) Investments in Indian Equity Market: An Overview


In India Foreign Capital inflows have significantly grown in importance over the years. These flows are influenced by substantial domestic fundamentals and buoyant yields reflecting full-bodied corporate sector performance. The Foreign investments are made in India through foreign direct investments, portfolio investments, venture capital investments & others.

In the present arrangement relating to foreign portfolio investments, only Foreign Institutional Investors FIIs/sub-accounts registered with SEBI and Non Resident Indians (NRIs) are allowed to directly invest in Indian equity market. In this arrangement, a huge number of Qualified Foreign Investors (QFIs), in particular, most of the diversified individual foreign nationals who are desirous in investing do not have direct access to invest in Indian equity market. The non-availability of direct route has caused difficulty to many QFIs to invest in Indian equity market.

In 2010, U K Sinha committee Made recommendations to bring about disintermediation of the capital markets and to provide direct access to foreign investors, through mutual funds. As a first step , QFIs have been permitted direct access to Indian Mutual Funds schemes pursuant to the Budget announcement 2011-12. As a next step, The Ministry of Finance Ministry on January 1, 2012 permitted QFIs to invest directly into the Indian equities markets , in order to broaden the class of investors, to attract more foreign funds as well as to reduce market volatility and to deepen the Indian capital market.

Meaning and Definition of QFI-:

As per the initial circulars, a QFI meant any person that

• Is not a Resident of India or not a SEBI(Securities Board Of India) registered Foreign Institutional Investor (FII)/Sub Account /Foreign Venture Capital Investor(FVCI);

• Is a resident of a country other than India, which is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF and is signatory to International Organization of Securities Commission’s (‘IOSCOs’) Multilateral Memorandum of Understanding or a signatory of a bilateral MOU with SEBI.

The Securities and Exchange Board of India SEBI, in consultation with Government of India and Reserve Bank of India later decided to amend its earlier provisions with respect to Foreign Investor in mutual funds and equity share markets. As per the new definition, resident of a country that is a member of a group which is a member of FATF will also be eligible to be considered as QFI. Therefore, all the residents of the 6 member countries of the Gulf Cooperation Council and the 27 member countries of the European Commission would now be eligible to be considered as QFI.

For this purpose, the term “Person” has the same meaning under Section 2(31) of the Income Tax Act, 1961 (ITA) as well as the Foreign Exchange Management Act (FEMA) 1999. As per this definition, Individuals, Partnership Firms, Hindu undivided family, Companies, Trusts, Association of Persons and Body of Individuals fall within the purview of “Person”. Therefore, technically, any of these entities are entitled to invest as QFIs subject to fulfillment of other conditions.

Types of investments that can be made by QFI-

Investments by QFI are primarily of the following types:

 Equity shares

 Rupee denominated units of equity schemes of domestic Mutual Funds(MFs)

 Domestic Mutual fund debt schemes in infrastructure debt

 Debt securities

Qualified Foreign Investors (QFIs) in Listed equity share investments:

The Foreign Investors who are Qualified i.e., the QFIs are allowed to purchase on repatriation basis equity shares of Indian companies’ subject the following terms and conditions:

a) QFIs shall be permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on in equity shares of Indian companies which are offered to public and in India recognized stock exchanges in India in terms of the relevant and applicable SEBI guidelines/regulations.

b) QFIs shall also acquire equity shares by way of bonus shares, rights shares or equity shares on account of stock split / consolidation or equity shares on account of merger, demerger or any such corporate actions relating to investment limits.


A Depository Participant (DP) is basically an agent of the depository. They can be called as the intermediaries between the investors and the depository. The relationship between the depository and the depository participants DPs is governed by an agreement made between the two under the Depositories Act. In legal sense, a DP is an entity who is registered with SEBI and under the sub section 1A of Section 12 of the SEBI Act.

SEBI’s parameters for DP in order to qualify for doing business with QFI

These are the following parameters to be fulfilled by registered DP under SEBI for becoming a “Qualified Depositary Participant”

 DP should have a available means of Rs. 500 million or more

 It shall be either a clearing bank or clearing member of any of the clearing corporations

 It shall have appropriate arrangements for receipt and payment of money with a assigned Authorised Dealer (AD) of Category – I bank

 It shall also demonstrate about the systems and procedures it has which have to be complied with the FATF Standards, Prevention of Money Laundering Act (PMLA), other Rules and circulars issued from time to time by SEBI.

 Also it shall obtain a prior approval from SEBI before the commencement of its activities relating to opening of dematerialized accounts by QFIs and shall ensure that QFIs meet all the requirements, as per the relevant rules and regulations issued by SEBI from time to time.

 QFIs shall pay money through normal banking channel in any permitted currency (i.e., the currency which is freely convertible) directly to the single rupee pool bank account of the DP maintained with an Assigned Authroised Dealer of category – I bank. On receipt of instructions from QFI, DP shall carry out the transactions relating to purchase and sale of equity).


QFIs can sell their equity shares which are acquired by way of sale in the following ways:

a) through recognized brokers on recognized stock exchanges in India; or

b) In an open offer in accordance with the SEBI (Delisting of Securities) Guidelines, 2009; or

c) In an open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or

d) By the way of buyback of shares by a listed Indian company in accordance with the SEBI (Buyback) Regulations, 1998.


The procedure of sale is done in the following manner:

1. With receipt of instruction from QFI which contains the name of the company and /or ISIN, number of equity shares as well as name of the stock broker, the DPs shall intend an order for sale of equity shares only after verifying availability of such equity shares in Demat account of that QFI.

2. Such investment limit shall be applicable to each class of equity shares having separate & distinct ISIN.

3. A fresh purchase shall be allowed only with the prior approval of the depositories. Such validity of the approval shall be only for the next trading day .

4. The total Investment made through QFI route and FDI route shall not exceed 5% of paid up equity capital of the Company at any point of time.

Mode of payment / repatriation

• A non-interest bearing separate single rupee pool bank account would be maintained by the DP with an AD Category- I bank in India for QFI investments under this scheme.

• The DP will purchase equity at the instruction of the respective QFIs within five working days (including the date of credit of funds to the single rupee pool bank account by way of foreign inward remittances through normal banking channels) failing which the funds would be immediately repatriated back to the QFI’s designated overseas bank account.

• The sale proceeds of the equity shares will also be received in this single rupee pool bank account of the DP and shall be repatriated to the designated overseas bank account of the QFI within five working days of having been received in the single rupee pool bank account of the DP.

• Within the prescribed five working days, if the QFI instructs, the sale proceeds of the existing investment can also be utilized for fresh purchases of equity shares under this scheme,

• Dividends paid on equity shares can either be directly remitted to the designated overseas bank accounts of the QFIs or credited to the single rupee pool bank account.

• In case of crediting to the single rupee pool bank account the dividends so paid shall be remitted to the designated overseas bank accounts of the QFIs within five working days .

• Such dividend payments can be used for fresh purchases of equity shares under this scheme, within these five working days, if so instructed by the QFI.

Demat accounts –

QFIs would be allowed to open a Demat account with a DP in India for investment in equity shares under this scheme. However, the QFIs are not allowed to open any bank account in India.

Limits –

The individual investment limits for the QFIs shall be 5% of the paid up capital of an Indian company where as for aggregate investment limits it is 10%. The prescribed limits shall be over and above the limits of FII and NRI investment limits under the Portfolio Investment Scheme for foreign investment in India. In addition to it wherever there are composite sectoral caps under the extant FDI policy, the limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps. The burden of monitoring and compliance of these limits shall remain jointly and severally with respect to QFIs, DPs and the respective Indian companies which receive such investment.

Tax implications

At present, there are no specific provisions in the Indian Income Tax Act, 1971 relating to QFIs. The primary reason for this is that the Government has finalized its guidelines and also issued the SEBI circular only recently. It is likely that in the next Finance Act, there would be some amendments in the IT Act relating to QFIs. In the meantime, one would need to apply the normal provisions contained in the ITA to the income earned by QFIs from the investments made in Indian mutual funds and equities. while doing so, there is a need to check whether the QFI is entitled to the benefit of any Double Tax Avoidance Agreement (DTAA) signed by India with such country. If it is so then the QFI is entitled to take appeal to the provisions of the DTAA or the domestic law whichever is more beneficial. As per the Income Tax laws in india, the taxation of the income earned by a QFI is considered as Income from dividend declared by Indian companies.


Dividend distributed by Indian companies and received by the shareholders is exempt in the latter’s hands as per section 10(34) of the ITA. Simultaneously, the companies are liable to pay dividend distribution tax as per section 115O of the ITA at the rate of 15% of the dividend. In addition to the base tax, Surcharge & Education Cess as applicable are also payable. Qfis are also subjected to Securities transaction Tax (STT) when there is income from sale or transfer of shares of Indian companies, takes place within the meaning contained in the Income Tax Act 1961.

Duty of Depositary Participants in terms of tax compliances

The DPs would be responsible for the tax deduction at source(TDS), if any on account of income accrued in the form of profits or gains or dividends or any other income received by QFI before making any reinvestment/ repurchase or repatriation/remittance.

Limitations on QFIs

The QFI investments are subjected to certain limitations:

1. The investment by QFI would be subjected to an individual investment limit of 5% of the paid-up capital of the Indian company and aggregate investment limit of 10%.

2. QFI can open only one demat account with any one of the DPs. Selling and buying of equity shares is done only through that DP.

3. Coming to joint accounts, every holder shall individually meet the requirements prescribed specifically for QFIs.

4. QFIs investment will be taxed at the same rate as the Indian investors, which means Qualified DP deduct TDS at the short term rate for QFIs at the time of remittance of the sales proceeds.


• QFIs are not eligible to subscribe to any Systematic Investments or Transfer or Withdrawal plans.

• They can subscribe to or redeem only to their units.

• Units held by QFIs by way of Usable Capital Receipts and Demat holding are neither transferable nor tradable.

• QFIs are not allowed to do off shore transfers of securities.

• The investments bought cannot be pledged or placed in lien and they should be free from encumbrances.

• QFIs cannot engage in activities like lending and borrowing of any kinds of funds or securities.


1. QFIs are allowed to receive shares arising from amalgamation, Demerger, or any such corporate actions, subjected to certain investment limit.

2. They are also allowed to offer the acquired equity shares in open offers, delisting and buybacks.

3. They are eligible for dividends.


However, there are few disadvantages in the QFI route. It has failed to take of due a number of reasons:

1. The route is filled with uncertainty and ambiguity.

2. No clarity on various aspects like on whom the entire responsibility had placed by SEBI for ensuring compliance with the regulations and laws regarding the qualified depository participants (“QDP”).

3. The QDP’s were varying of how to comply with the ill-chosen administrative responsibilities imposed on them by the SEBI

4. The route has received a high Critical assessment from the market, that the QFI route was practically never exercised by any of the foreign investors


Though the QFI route had been introduced with the intention of increasing the level of foreign investments in India markets, the route never took off and remained unutilized. It is expected that the government makes more flexible and certain laws which brings a relaxation in the QFI regime and encourages the foreign investors to invest in India. The idea of this scheme is to widen the class of investors, to deepen the Indian capital market by reducing market volatility, besides increasing foreign inflows into the country.